DALLAS – An administrative law judge in Texas has recently concurred with the Federal Communications Commission (FCC) and at least one prior U.S. District Court ruling regarding the tax status of prepaid calling cards.
In a recently published administrative ruling released in January, an administrative law judge ruled that prepaid calling cards sold in Texas should be viewed as a telecommunication service and not an intangible product, which the Internal Revenue Service (IRS) defines as any “property that has value but cannot be seen or touched.”
While the cards in and of themselves do not provide the service directly, they allow for use of local exchange telecommunication services or exchange access services tied into the federally regulated telecommunications network. They accomplish this by acting as a physical store of an intangible pre-purchased value that is transferred via a PIN or other similar feature to a local access point when it is used.
Eric Stein, a tax expert with the noted global tax services firm Ryan, told the Southeast Texas Record that “[f]or Texas franchise tax purposes, services are not intangibles. A service is generally considered work done or performed for another, while an intangible is generally an asset that has no ‘material being’ but has a monetary value. A calling card is a pre-payment for telecommunication services to be rendered.”
The court’s decision is important because it affects the tax status of the calling cards. According to Ryan, the prepaid calling cards sold are used 99 percent of the time to call numbers outside of the United States.
While one would be left with the impression that this fact would leave Texas garnering only 1 percent of eligible tax revenues, with the FCC collecting the other 99 percent, Stein and Adina Christian (another tax expert with Ryan) report that this is may not really be the case.
“If the cards had been used to make intrastate calls, then the revenue would have been sourced to Texas. Also, if the cards had been determined to be intangibles and had been sold to vendors outside of Texas, then the revenue would not have been sourced to Texas,” Stein said.
If the judge had ruled that the cards were not service-based but a consumer good, than Texas would have collected 50 percent of the revenues. This would have occurred because federal law allows for revenues gained from goods to go to a state if the vendor and consumer are both domiciled in that same state. Half of the prepaid card vendors and consumers covered by this decision reside in the state of Texas.
In 2010, the U.S. District Court for the Northern District of Texas ruled in Southwestern Bell Telephone Co.et al v IDT Telecom Inc. et al. that the plaintiffs could seek relief from the defendants because prepaid calling cards, such as the ones being sold by them, was seen by the FCC as the selling of telecommunications services.
“Accordingly, the critical inquiry is not whether a party offers a calling card service,” the court stated, “but rather if the party provides a telecommunications service. Reviewing the 2006 FCC Order, the [FCC] previously has found that these same access charge obligations apply to basic prepaid calling cards and prepaid calling cards with unsolicited advertising. Thus, the FCC also includes basic prepaid calling cards as telecommunications providers.”
“Until the sales tax law was amended to specifically provide that sales of prepaid calling cards are sales of personal property, the Comptroller treated prepaid calling cards as telecommunications services for sales tax purposes," Stein said. "Also, under the sales tax law, certain prepaid calling cards are excluded from the special provision, and those cards are treated as telecommunications services for sales tax purposes.”