Ruling 95-10, Sales and Use Taxes / Telecommunications Services / Prepaid Long Distance Telephone Calls

FACTS:

A company that owns and operates a chain of convenience stores (the "Company") plans to sell units of long distance service provided by a telecommunications service provider (the "Telecommunications Provider"). Each unit, which costs the Company twenty cents, will equal one minute of domestic long distance telephone service, and will be represented by a card with a value of 15, 30 or 60 units (a "phone card"). As orders are placed through the Company's phone card distributor, the Company will pay the Telecommunications Provider for the prepaid long distance telecommunications services associated with each order. Customers (the "Users") purchase the phone cards at one of the Company's convenience stores, at a charge of twenty-five or thirty cents per unit. No personal information from a User is required when purchasing a phone card. Users will redeem the phone cards through use of an "800" number and a validation code to access the Telecommunications Provider's telecommunications equipment through which the call is routed and rated and the call details are recorded. The Telecommunications Provider monitors the length of each call and, upon completion of the call, informs the User about the number of units used and remaining on the card. The Telecommunications Provider generates a call detail record of each call (consisting of the call's origin, destination and time), in the same manner as if the call had been made on a pay telephone using a standard "calling card." The Telecommunications Provider sends the call detail records to another company to be processed as if the calls were being billed instead of debited, calculating and remitting state taxes as required.

ISSUE:

Whether the sale of prepaid long distance telephone cards is taxable under either Conn. Gen. Stat. §12-407(2)(a) as the sale of tangible personal property or Conn. Gen. Stat. §12-407(2)(k) as the sale of telecommunications services.

DISCUSSION:

Following Dine Out Tonight Club, Inc. v. Dept. of Revenue Services, 210 Conn. 567 (1989), Bulletin 24 (rev. 1/90) was issued by the Department, indicating that the sale of a "cash equivalent" (such as a voucher, gift certificate or trading stamp) is not taxable because its true object is the sale of the intangible right to purchase tangible personal property or a service in the future. However, purchases made by redeeming such a cash equivalent are taxable if the property or service being purchased is taxable, based on the sales price of such property or service "valued in money, whether received in money or otherwise" (Conn. Gen. Stat. §12-407(8)). A prepaid phone card operates in a manner similar to the cash equivalents discussed in Bulletin 24, in that all or a portion of the purchase price of an item or service to be purchased in the future is prepaid. Therefore, a phone card is also a cash equivalent subject to the rules set forth in the Bulletin.

The general rule for imposing tax on telecommunications services is described in Conn. Gen. Stat. §12-407a. Such services are taxable when a call (1) both originates and terminates in Connecticut; (2) originates in Connecticut and terminates outside Connecticut and is charged to a telephone number, customer or account located in Connecticut or to the account of any transmission instrument in Connecticut; or (3) originates outside Connecticut and terminates within Connecticut and is charged to a telephone number, customer or account located in Connecticut or to the account of any transmission instrument in Connecticut.

The rules for taxing the sale of cash equivalents and telecommunications services combine to require that, while no tax is due on the sale of the prepaid phone cards, tax is due on the telecommunications services when a phone card is used to make a call both originating and terminating in Connecticut or originating in Connecticut and terminating outside Connecticut. In the latter case, the call is "charged" to the User (the customer) at the location from which the User makes the call. (It follows that calls originating outside Connecticut and terminating in Connecticut made with a prepaid phone card are not subject to tax, since they are not charged to a customer located in Connecticut.) The tax, based on the full sales price of the telecommunications service that would have been paid without the use of a prepaid phone card, must be remitted by the Telecommunications Provider at the time the call is made, and should be "charged" to the User by debiting the amount of tax from the prepaid units remaining on the User's card. Tax is not due on prepaid telecommunications services where a call originates outside Connecticut and terminates in Connecticut, because the requirement that the call is charged to a telephone number, customer or account located in Connecticut or to the account of any transmission instrument in Connecticut is not met when a call is made by a User on a telephone outside Connecticut using a prepaid phone card.

RULING:

Although the sale of the prepaid phone cards at the Company's stores is not taxable under Conn. Gen. Stat. §12-407(2)(a) as the sale of tangible personal property, the telecommunications services rendered when such cards are used to make calls either originating and terminating within Connecticut or originating within Connecticut and terminating outside Connecticut are subject to tax under Conn. Gen. Stat. §12-407(2)(k). Tax must be included in the Telecommunications Provider's calculation of the amount to be debited from the phone card, and must be remitted to the Department by the Telecommunications Provider.

LEGAL DIVISION

Issued August 10, 1995