Final regs. on excise tax treatment of prepaid telephone cards.

• Author: Culp, David P.
• Position: IRS regulations

The IRS recently issued Regs. Sec. 49.4251-4, dealing with the application to prepaid telephone cards (phonecards) of the Sec. 4251 3% Federal excise tax. The tax is imposed on amounts paid for communications services, which include "local telephone service" and "toll telephone service." The excise tax is generally paid by the person paying for services, and is to be collected and remitted to the Service by the person receiving payment for the services.

Phonecards are the physical embodiment of a right to a certain amount of communications services from a particular communications service provider. A card can represent the right to a certain number of minutes of service, or a certain dollar-value of service whose rate can depend on time of day, location, distance and duration of a call. The amount for which the services are sold by the carrier bears no particular relationship to the retail price of the card, and it may go through one or more wholesalers before it is sold at retail.

The phonecard industry expanded rapidly in the early 1990s, raising many issues about how the Federal excise tax should be paid and collected. Sec. 4251(d) was enacted in 1997 to provide some definite rules, effective for amounts paid on or after Nov. 1, 1997, with no inference intended as to the proper tax treatment of such cards under prior law:

* When communications services are acquired by use of a prepaid telephone card, the tax is treated as paid at the time the card is transferred by a telecommunications carrier to any person who is not such a carrier (Sec. 4251(d)(1)(B)). Thus, the telecommunications carrier would be responsible to collect the tax on that transfer and remit and report it to the IRS.

* The "face amount" of the card is treated as the amount paid for the communications service and, thus, the amount subject to the 3% tax (Sec. 4251(d)(1)(A)). The face amount is not necessarily the amount paid for the card by the user or any intermediary. The statute left it up to regulations to determine the "face amount" of a card without a stated dollar amount of use.

Regs. Sec. 49.4251-4 is effective for cards transferred by carriers on or after April 1, 2000 (although taxpayers may apply the regulations earlier). Sec. 4251 (d) applies only to cards that permit the holder to obtain a fixed amount of communications services by means of a code (such as a PIN) or other access device provided by the carrier and to pay for those services in advance. Thus, a...