The Supreme Court of Missouri recently held that TracFone, a Miami-based telecommunications company, was not entitled to claim a statutory sales tax exemption relating to retail sales “in commerce.” TracFone purchased “air time” from national carriers for resale. The “air time” and a TracFone handset were sold to Missouri residents in prepaid packages. All handsets were shipped to Missouri from outside the state. All amounts paid to TracFone from Missouri residents were received by TracFone in Florida. TracFone owned no cell towers in Missouri.
For the years in dispute, TracFone collected, reported, and remitted sales tax to Missouri on the sale of their handsets and “air time” to Missouri residents. TracFone later filed refund claims contending that the company was entitled to an exemption from sales tax based on transactions “in commerce.” TracFone did not request the full amount of sales tax paid as a refund, however. TracFone’s position was that it was actually subject to use tax, the use tax rate being lower than the sales tax rate in Missouri.
The crux of the case was whether the sale of the handsets and “air time” qualified for the “in commerce” sales tax exemption. TracFone argued that the exemption applied equally to sales of tangible personal property and services. By contrast, the Department of Revenue (Department) maintained that the “in commerce” exemption had always been interpreted to apply solely to sales of tangible personal property. The Department’s position was that since the sales tax exemption did not apply, any discussion of the complementary use tax was moot.
The Supreme Court of Missouri, sitting en banc, agreed with the Department. The court held that the true characterization of relevant transactions was that TracFone was selling access to a telecommunications service. In arriving at this conclusion, the court employed the age-old “true object” test. According to the court, the sale of handsets and “air time” was incidental to the “true object” of the transactions – the sale of a service. Because the “in commerce” exemption only applied to sales of tangible personal property, the sales tax exemption was held not to apply.
A curious aspect of this case relates to whether TracFone had sales tax nexus with Missouri as a threshold matter. The court alluded to this issue in its ruling. However, before the Missouri Administrative Hearings Commission, TracFone made clear that it was not disputing sales tax nexus in the case.