The South Carolina Department of Revenue (the “Department”) issued guidance earlier this month, in South Carolina Revenue Ruling 17-2, to update a comprehensive discussion concerning how communication services are taxed. Up until this point, taxpayers have relied on piecemeal interpretations from the Department through advisory opinions, audits, or informal advice. Although the recent guidance is meant to be comprehensive, the Department has noted that as communication technology expands, it will review new communication services on a case-by-case basis.
Generally speaking, sales and use tax is applied to the gross proceeds of sales made by persons engaged in or carrying on the business of selling tangible personal property at retail. The South Carolina legislature defines “tangible personal property” to include “services and intangibles, including communications . . ..”
In addition to the general application of South Carolina sales and use tax referenced above, the tax is applied to, among other things, the “gross proceeds accruing or proceeding from the charges for the ways or means for the transmission of the voice or messages, including the charges for use of equipment furnished by the seller or supplier of the ways or means for the transmission of the voice or messages.” On the other hand, if services are bundled together and sold as a package – i.e. not itemized – consisting of services and/or property treated differently for sales and use tax, the full sales price is subject to tax unless the service provider can prove what portion of the sale is not subject to tax, as identified in its financial records kept in the regular course of business.
Many of the terms used in the provision above are not defined by the South Carolina Code; therefore, the Department has interpreted the provision to literally mean that “the total amount of money derived, exclusive of deductions, from a commercial venture and accruing or proceeding from charges for the manner, method or instruments” used to send a voice signal, or messages is subject to sales and use tax. Furthermore, the Department uses a definition of “communications” including “a means of communicating, especially a system of sending and receiving messages, such as mail, telephone and television.” Based on these definitions, the Department takes the position that the phrase “charges for the ways or means of communication” includes charges for access to, or use of, a communication system (the manner, method, or instruments for sending or receiving a voice signal, or messages), whether the charge is based on a fee per a specific amount of time or per transmission. For example, the Department has taxed communication services such as telephone, paging, answering, cable television, satellite programming (including, but not limited to emergency communication and television, radio, music or other programming) fax transmission, voice mail messaging, email, and database access transmission, just to name a few. Nevertheless, South Carolina law also provides several exemptions and exclusions from sales and use tax on charges for, or related to these services.
Prior to SC Rev. Rul. 17-2, the most recent guidance issued by the Department was Revenue Ruling 16-5, addressing the application of sales and use tax to streaming television, movies, music and other similar content. Under the Department’s interpretation, streaming television programs, movies, and music using the internet “is no different from cable and satellite transmission of television programs, movies, music and other similar content, all of which are taxable communications services.” The Department’s interpretation in Rev. Rul. 16-5 provides a glimpse into its methodology when determining the application of sales and use tax statutes to new technologies.
As alluded to the above, the evolution of communications technology is moving at a rapid pace and is uncertain at that. For businesses on the forefront of offering communications services, it is important now more than ever to consider, when developing these technologies, how the Department will view the transmission of, and charges related to new service offerings.
