In New York, Communications Excise Tax Now Applies to Locked Cellphones

As most Communications Service Providers (CSPs) know, applying accurate taxes and fees to cellphone bills can get highly complicated in New York.

The state's wireless tax rates are the nation's third highest, with as much as 25% of cellphone bills going toward taxes, fees, and government charges, according to a report from the Tax Foundation. Selected cities, school districts, and certain transit districts are permitted to levy various wireless taxes in addition to state and local sales tax, excise tax, gross receipts tax, taxes to aid schools, and state and local 911 fees.

And now, there's more tax to add to the list:

A new communications excise tax guidance document issued by the New York Department of Taxation and Finance (NYDTF) says cellphones are subject to communications excise tax when they're locked or otherwise tied to a network.

When a customer purchases a cellphone from a provider to use it exclusively on the company's network, the buyer often does so knowing the phone will come with limitations. According to the NYDTF issuing, these hardware sales are now considered ancillary to the service—regardless of whether the phone is billed separately or bundled with the service—and thus must include excise in addition to sales taxes and other fees.

In response to this ruling, CSPs selling locked cellphones with limited functionality to New York customers will need to ensure their tax engines are updated with the proper product category.

This is just one example of how quickly communications tax law can change. There are thousands of tax jurisdictions in America, and each one is working to keep its regulations current with rapidly evolving communications technology. It's critically important for CSPs and the tax engines they use to stay current.