TELEPHONE COMPANIES provide a service rather than sell a product, a Kansas court said.

The distinction is important because most states collect sales taxes on equipment purchased for business
use, but not on equipment that will be used to manufacture “tangible personal property.”

The question which is it also comes up in the power industry.

Five telephone companies sued in Kansas to get back sales taxes paid on telephone switches, computers and other equipment used to provide phone service in the state on grounds that the equipment is used to
manufacture a product — phone calls — and phone calls are no different from electricity, which the state acknowledges is “tangible personal property,” because calls are basically transmission of electrical impulses.

The Kansas supreme court disagreed. It also said it saw no violation of the “equal protection clause” of the US constitution by treating power companies and phone companies differently.

The case is In re Sprint Communications Company, L.P. The court released its decision on December 17.