July 14, 1982
You represent a company ("Company") that designs, installs, and supervises the installation of cable television distribution systems for cable television franchisees. You inquire about the Massachusetts sales and use tax treatment of the Company's cable system contracts.
Ordinarily, the cable systems consist largely of aerial coaxial cables hooked to a "strand" (i.e., a steel cable) which is affixed to existing utility poles. In some instances, portions of a system are buried in underground utility rights-of-way. Every system requires the installation of electronic equipment in addition to the cables themselves.
The Company's contracts with franchisees fall into the following four categories:
(1) General contracts, under which the Company installs the system according to the franchisee's plans and specifications, and sometimes supplies strand and pole-line hardware, but the franchisee supplies the coaxial cable and other electronic equipment.
(2) Turnkey contracts, under which the Company designs a system itself, purchases all the materials and equipment to be used in the system, installs the system, and turns it over to the franchisee in operational condition.
(3) Supervision contracts, under which the Company provides materials and equipment to the franchisee and supervises installation of the system, but the franchisee itself actually installs the system.
(4) Agreements which you characterize as contracts for "engineering services and system design," and which entail the transfer of no tangible personal property other than reports or blueprints embodying the results of engineering or design services.
In the first three types of contract, the Company bills franchisees at rates that are based on feet or miles of cable or strand installed and units of hardware or equipment installed. The rates represent the cost to the Company of materials and equipment it purchases for use in such contracts, as well as the cost of installation or supervision labor and profit.
Massachusetts General Laws Chapter 64H, Section 2 imposes an excise on sales at retail of tangible personal property; "sale at retail" is defined in Section 1(13) as a sale of tangible personal property for any purpose other than resale in the regular course of business.
"Sales" do not include the furnishing of written or printed information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons (G.L. c. 64H, s. 1(12)(f)).
Sales of materials, tools and fuel, or any substitute therefor, which are consumed and used directly and exclusively in the operation of commercial radio broadcasting or television transmission are exempt from tax; this exemption applies only to materials, tools and fuel the normal useful life of which is less than one year or the cost of which is allowable as an ordinary and necessary business expense for federal income tax purposes (G.L. c. 64H, s. 6(r)). Also exempt are sales of machinery, or replacement parts thereof, used directly and exclusively in the operation of commercial radio broadcasting or television transmission (G.L. c. 64H, s. 6(s)).
The amount charged for labor or services rendered in installing or applying property is not part of the sales price on which the sales tax is based (G.L. c. 64H, s. 1(14)(c)(iii)).
Based on the foregoing, it is ruled that:
1. Sales of coaxial cables and any other electrical lines that directly carry a television signal are subject to tax unless their normal useful life is less than one year or their cost is allowable as an ordinary and necessary business expense for federal income tax purposes.
2. Sales of machinery (such as amplifiers that boost and maintain signal levels) used directly and exclusively in cable television transmission are exempt from tax.
3. Sales of materials, tools and fuel, and machinery and replacement parts, other than those items described as exempt in rulings 1 and 2 above, are subject to tax. (Such property is hereinafter referred to as non-exempt property).
4. The Company is the consumer of the materials and equipment it uses in the general and turnkey contracts; it must pay the Massachusetts sales or use tax when it purchases or uses non-exempt property in Massachusetts in connection with such contracts.
5. If the Company imposes a single charge under the supervision contracts, the charge is subject to tax. Separately-stated charges for exempt property and for labor or services rendered in supervising the installation of property under the supervision contracts are not subject to tax if they are set in good faith.
6. Charges imposed by the Company under contracts in which it provides engineering and design services but transfers no tangible personal property other than written engineering and design reports embodying the results of engineering and design work are not subject to tax. You do not supply sufficient information to support a determination whether such charges are subject to tax where blueprints are transferred.
Very truly yours,
/s/L. Joyce Hampers
L. Joyce Hampers
Commissioner of Revenue