Sales, Use and International Tax Activity Update - June 2009

Utah Asks, "Are Pre-Paid Phone Cards a Telephony Service?"

A taxpayer had requested a private letter ruling on the application of Utah sales and use tax on the sale of its various products. The company was in the telecommunications business and would be selling telecommunications time through various means including prepaid cards. The prepaid telephone calling cards could be composed of interstate-only minutes, a combination of interstate-only and intrastate-only minutes, or dual interstate-or-intrastate minutes. The customer asked two questions:

1. Whether the sale in Utah of a prepaid telephone calling card that technologically and legally allows only interstate calls would be subject to Utah sales tax?
2. Whether Utah sales tax would be imposed on the full purchase price of the prepaid telephone calling card itself or imposed on the purchase price of the calling card’s minutes based on their interstate and/or intrastate character? In other words, the intrastate allotment of minutes would be subject to tax, while the interstate portion would not.

Under Utah Code 59-12-103(1)(m) prepaid telephone calling cards are taxable. The use of the term “cards” suggests that the cards themselves, rather than the underlying telephone services, are subject to Utah sales tax. The tax obligation is incurred when the card is purchased. At the time of purchase, the purchase price for a taxable transaction is known and can be easily determined. Section 59-12-103(1)(m), however is silent as to the tax treatment of the intrastate versus interstate minutes; in other words, there was no distinction made between the intrastate and interstate minutes. However, the Legislature made the distinction under Utah Code 59-12-103(1)(b) which states that tax is imposed on “telephone service…that originates and terminates within the boundaries of this state”.

Comparing the language of the two Code sections, it appeared that the Legislature considered this distinction for telephone service, but chose not to apply a similar distinction to prepaid telephone calling cards. Furthermore, double taxation would result if the cards were taxed on their purchase and on the telephone services later provided. Utah Code section 59-12-104(43) supports this position by exempting from sales tax “sales of telephone service charged to a prepaid telephone calling card…”

The Commission concluded after analyzing the text and history of Code sections 59-12-103 and 59-12-104 and Administrative Rule R865-19S-90 that the sale in Utah of a prepaid telephone calling card that technologically and legally only allows interstate calls would be subject to Utah sales tax on the full purchase price of the card itself, regardless of the character or nature of interstate and/or intrastate calls. Although the ruling request letter did not question whether federal preemption applied, the Commission was not aware of any federal legislation that would preempt Utah from taxing the cards’ full purchase price.

(Utah Private Letter ruling 08-007, Utah State Tax Commission, 8/28/08)

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