NEW YORK-Written comments are due March 17 on a proposed Internal Revenue Service
regulation to implement a 3-percent federal excise tax on prepaid calling cards and services.
The proposed
regulation, No. 118620-97, is intended to implement a provision of the Taxpayer Relief Act of 1997 that extended the
communications excise, or sales, tax to prepaid telecommunications services.
The proposed IRS rules would carry
out the intent of the federal law to base the tax on the retail face value of the prepaid calling card or service, regardless
of whether a carrier sells it to a reseller at a retail or wholesale price.
However, under the proposed regulations, any
state and local taxes included in the face value of prepaid cards and services would be excluded from the federally
taxable base.
The statute considers the face value as paid and therefore taxable once the card is transferred by any
telecommunications services provider to any person or entity that is not a carrier. The carrier is responsible for
collecting the 3-percent excise tax unless the prepaid cards or services it sells are to another carrier. In the latter case,
the carrier purchasing the prepaid cards or services would be responsible for collecting the tax.
The IRS proposals
would allow carriers originating the sale of prepaid cards and services to rely on written notification from the buyer that
the buyer is not, in fact, another carrier. However, this good faith test would not remove excise tax collection
responsibility from the carrier that is the first link in the prepaid sales chain should the buyer turn out to be another
carrier, despite written notification to the contrary.
The IRS proposals in REG-118620-97 do not address the issue
of how to tax multiple-purpose prepaid services cards that retail customers can use to purchase both
telecommunications and other types of goods and services not subject to the 3-percent excise tax on
telecommunications.
The IRS also has requested comments and suggestions about how to deal with this sticky
wicket.
A public hearing on the proposed regulations is scheduled for May 5.
