Prepaid telephone cards.

• Author: Dell, F. Michael
• Position: Tax treatment

The 3% excise tax on prepaid telephone cards, the tax treatment of which was clarified by the taxpayer Relief Act of 1997 (TRA '97), is effective for cards sold after Oct. 31, 1997.

The TRA '97 added Sec. 4251 (d) to clarify the proper tax base for such cards and when the tax is to be collected. The TRA '97 Conference Report clarifies that the base to which the communications excise tax applies is the retail value of the prepaid telephone card. This was explained with respect to two types of cards.

The first type of prepaid telephone card is a "dollar value card." With such cards, the final customer purchases a card or account that allows him to use $X worth of telephone service provided by err underlying telecommunications carrier. The 3% communications excise tax on dollar value cards applies to the value X, and must be collected and remitted to the IRS when the prepaid telephone card is sold by a telecommunications carrier to a person who is not a telecommunications carrier. Thus, the tax would be collected by the company (whether a long distance service provider or a reseller of phone services) that sells the cards to a retail store or gas station, etc. After the tax is collected, it must be deposited with the Service and a quarterly Form 720, Quarterly Federal Excise Tax Return, must be filed.

The second type of prepaid telephone card is a "unit card" or a "minute card."

With such a card, the final customer purchases a card or account that allows him to use number of units or...