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Comcast Equipment Taxability: Buys Must be Parsed For Purpose

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Cable provider Comcast of South Jersey, Inc. and thirteen affiliates (collectively, “Comcast”) was assessed and penalized by the New Jersey Division of Taxation for not paying Use Tax on its purchases of electronic equipment – converters and remote controls – which facilitate providing broadcast services to its customers. Comcast believed the hardware to be tax-exempt per N.J. Stat. § 54:32B-8.13(e), which excludes “Sales of machinery, apparatus or equipment ... to a provider of cable/satellite television program services ... for use or consumption directly and primarily in the production or transmission of radio or television information.” The Taxation Division refuted this tax-negating characterization, claiming that the primary purpose of a converter is to enhance security (that is, to act as an anti-theft measure), and that remote controls “did not transmit television information.” In the end, each side proved half right and half wrong. (COMCAST OF SOUTH JERSEY, INC., ET AL., Plaintiffs, v. DIRECTOR, DIVISION OF TAXATION, Defendant; DOCKET NUMBERS: 001153-2004, &c., TAX COURT OF NEW JERSEY, 27 N.J. Tax 79; 2013 N.J. Tax LEXIS 6)

A primer in electronics is helpful here. (Tax law often demands expertise in a surprising breadth of disciplines!) Converters (naturally enough) convert electronic signals generated by content originators (CBS, The Weather Channel) from the frequency at which the programming is transmitted to the frequency of the customer’s channel setting for that station; they then re-transmit the signal (through cable) to the tv. This is not, however, a converters’ sole purpose; others include decrypting the broadcaster’s proprietary signal, which is scrambled to make it useless to anyone attempting to obtain pay-television without paying; providing a “Channel Guide” of viewing options; and enabling parental control to “block” unwanted channels or programs (e.g., because inappropriate for children). Remote controls, by contrast, send infrared signals across the room to tell converters to perform actions – “change the channel” or “lower the volume,” say. Such commands can also be entered manually without the remote, which duplicates inputs on the converter and set.

The case dragged out inordinately (concerning events commencing over sixteen years ago!), even for this notoriously torpid process. The controverted purchases were made between July 1997 and June 2001; were flagged by an audit commenced in September 2001; produced Use Tax “work papers” served in August 2002; and Notices of Assessment issued against the cableco in July 2003. Comcast challenged the audit’s findings before the Division of Taxation’s Conference and Appeals Branch, but on December 11, 2003, the Director’s Final Determination was upheld. Comcast filed its Complaint with the NJ Tax Court on March 8, 2004, and the DoT Answered May 10th.

Meanwhile, a proceeding against another Jersey cable provider, RCN, came to have bearing on Comcast when, in May 2007, the Tax Court held that RCN’s purchase of converters was entitled to the very exemption sought here. That “collateral” judgment led to mutual reassessment of the case’s merits and to negotiation of a partial Stipulation of Settlement, under which Comcast made payment to the DoT in October 2008 per computations submitted by the Director on September 19, 2008. Next came what the Court calls “an additional two-year period of contentious discovery,” then a trial to resolve unaddressed questions and differences in the cases’ particulars.

One difference became a major issue in Comcast. The RCN matter legitimated converter exemption, but didn’t address statutory language requiring that, in order to qualify, converter use need be “directly and primarily” transmission related (since RCN’s converters had no other purpose). Ultimately: “This court finds that the exemption can be available to devices with multiple functions as long as the primary purpose and function of the device was the transmission of television information. The court finds that a converter’s non-transmission functions ... were secondary and incidental to the transmission function. ... The Director’s argument that these other functions (particularly the security function) were primary to the transmission function of a converter is illogical. The use being ‘secured’ by the converter was the transmission itself. The transmission function must be the primary function of the converter as it was the basis for the need and use of the other functions ... Accordingly, this court finds that the converters were exempt.”

Remotes demanded a separate calculus: What is the nature of the signal passing through them? Comcast’s own Vice President of Digital Television provided damning testimony that put the kibosh on exemption: “The remote control can’t tune anything. The remote control simply sends a signal to the [converter] so it can then tune, convert and transmit the signal to the television.” The court concluded that “remotes were essentially functional interface devices and by definition were not used directly and primarily in the transmission of television information. Remotes communicated by infrared signal, and neither television information nor cable signals passed through the remote. Remotes, while convenient and arguably necessary, were not part of the transmission process.”

The case’s ancillary questions – assessing penalties, late fees, awards of litigation costs – were summarily resolved; however, one surprising aspect of the reporting in Comcast was the complete absence of monetary information: not a single dollar-amount in controversy is mentioned anywhere in the Tax Court’s record! With apologies – this dispute was decided entirely on principle, not principal.

About the Author: Marc Palmer Kram is a Senior Tax Analyst at Wolters Kluwer Tax & Accounting US, where he performs quality control and troubleshooting on the vast taxability database supporting its best-in-class CCH tax-compliance software, and then sometimes writes about what he finds. Learn more about him by visiting his author bio page. Learn more about Wolters Kluwer at WoltersKluwer.com and SalesTax.com.

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