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Court Rules Monthly Fee for Cable TV Converter Boxes Subject to State Sales Tax
2005-1932 and 2005-1933. Time Warner Operations, Inc. v. Wilkins, 2006-Ohio-6210.
Board of Tax Appeals, Nos. 2003-R-1810 and 2003-R-1811. Decision reversed.
Moyer, C.J., Gwin, Pfeifer, Lundberg Stratton and O'Donnell, JJ., concur.
O'Connor and Lanzinger, JJ., dissent.
W. Scott Gwin, J., of the Fifth Appellate District, sitting for Resnick, J.
Opinion: http://www.supremecourtofohio.gov/rod/newpdf/0/2006/2006-Ohio-6210.pdf
(Dec. 13, 2006) The Supreme Court of Ohio has ruled that the separate rental fee charged for a converter box needed to watch most cable television channels and included in the cable television company's monthly customer bills is subject to state sales tax. The case involved Time Warner cable television companies during the period from July 1992 through December 1996.
The 5-2 decision, authored by Justice Paul E. Pfeifer, reversed a ruling by the state Board of Tax Appeals.
The case involved a dispute between the Time Warner cable television companies, which serve many areas of Ohio, and the state tax commissioner. In performing a tax audit of Time Warner's operations from 1992 through 1996, the Ohio Department of Taxation made findings that while the company's charges to its customers for providing cable television service were a public utility not subject to state sales tax, separately stated charges in its monthly customer bills for a printed program guide, set-top converter boxes and remote control units were “retail sales” subject to the sales tax.
Time Warner appealed those findings. The tax commissioner ultimately agreed that the monthly TV guide charge was not taxable, but entered a final determination that the company should have collected sales tax from its customers for the monthly converter box and remote control rental fees included in their bills. The commissioner assessed tax liability to Time Warner for the unpaid taxes on those charges.
Time Warner appealed that assessment to the state Board of Tax Appeals (BTA), which affirmed that the monthly rental fees for remote control units were taxable, but overruled the commissioner on the taxability of the converter box fees. In its decision, the BTA found that a converter box was an essential component for the company to provide cable television reception to its customers, and therefore was sales tax exempt during the audit period. The tax commissioner exercised his right to appeal the BTA's ruling on the converter box issue to the Supreme Court.
In today's decision, the Supreme Court overruled the BTA and affirmed the ruling of the commissioner. Writing for the majority, Justice Pfeifer said that it is presumed that all “sales” transacted in the state are subject to sales tax unless specifically exempted, and held that the rental fees charged by Time Warner for its converter boxes were legally “sales” that did not qualify for the statutory exemption cited by the BTA.
“The converter boxes are clearly tangible personal property,” wrote Justice Pfeifer. “Testimony and exhibits from the BTA hearing establish that Time Warner transferred possession of the converter boxes and gave permission for its customers to use them in return for a monthly fee. These transactions were sales pursuant to R.C. 5739.01(B)(1).”
With regard to the “essential component” exemption applied by the BTA, Justice Pfeifer wrote: “We conclude that the BTA erred when it found that ‘the revenue from the converter boxes is exempt from sales tax.' The exemption cited by the BTA applies to purchases by utility providers as consumers, not to sales by them, and Time Warner has not identified any other relevant exemption.”
Justice Pfeifer was joined in his opinion by Chief Justice Thomas J. Moyer, Justices Evelyn Lundberg Stratton and Terrence O'Donnell, and visiting Judge W. Scott Gwin, who was sitting for Justice Alice Robie Resnick.
Justice Maureen O'Connor entered a dissenting opinion, joined by Justice Judith Ann Lanzinger, in which she pointed out that the converter box was essential for viewing all but basic cable programming. She wrote that, in her view, Time Warner rather than its customers benefited from the use of the converter box because it resulted in consumers paying higher fees for premium service. Justice O'Connor said she would affirm the BTA's judgment that the converter box was an essential component needed to provide a utility service, and therefore the rental fee should not be subject to a separate tax.
Contacts
Cheryl D. Pokorny, 614.466.5967, for
the State Tax Commissioner.
Melvin Weinstein, 614.462.5450, for Time Warner Operations, Inc.
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