NEW YORK-A new Internal Revenue Service regulation to implement a 3-percent federal excise tax on prepaid calling cards and services went into effect Jan. 7.
Known as T.D. 8855, it implements a provision of the Taxpayer Relief Act of 1997 that extended the communications excise, or sales, tax to prepaid telecommunications cards and services. The intent of the federal law is to base the tax on the retail face value of the prepaid calling card or service.
The statute and the new regulation implementing it consider the face value as paid and therefore taxable once the prepaid card or service is transferred by any telecommunications provider to any person or entity that is not a carrier.
The regulation applies to “a prepaid telephone card or similar arrangement that permits its holder to obtain a fixed amount of communications services by means of a code, such as a personal identification number or other access device provided by the carrier, and to pay for those services in advance.”
To determine the face value, the IRS regulation permits three options. The first reference point is at actual retail sales by the carrier of prepaid telephone cards or services “that provide the same type and amount of communications service.”
The second is the wholesale price at which the carrier sells the prepaid services to a reseller, plus an automatic markup of 35 percent “to correspond more closely to markups in the retail sector generally.” In the final regulation, the federal agency lowered the markup from the 65 percent it originally had proposed.
The third method of determining face value involves multiplying the number of calling minutes on the card or the service by a flat rate of 20 cents each. The IRS lowered the multiplier from its earlier proposal of 30 cents to reflect the fact that “a high-denomination [prepaid telephone card] generally provides lower cost service on a per-minute basis than an otherwise equivalent low-denomination PTC.”
However, the IRS stood firm in its original intention to include in the federally taxable base of prepaid cards and services any state and local taxes included in their face value, unless these levies are separately stated on the card or for the service.
The federal agency also rejected suggestions it permit carriers that can substantiate the actual price of a PTC to use that price as the face value. These were offered to head off the possibility of federal taxation on an unrealistically inflated value.
In issuing its final regulation, the IRS said the three methods for determining face value “address concerns that the prescribed methods may overstate the face amount.
“Moreover, a system based on the actual retail sale price when the retail sale is made by a person other than a carrier could prove very difficult for the IRS to administer.”
Under the regulation, the telecommunications carrier is responsible for collecting and paying 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 must collect and remit the tax.
