Does Connecticut sales tax apply when a store sells a prepaid long-distance phone card, and does it apply when a customer later uses the card to make calls?

Plain-English summary

A convenience-store chain wanted to sell prepaid long-distance phone cards. Each "unit" equaled one minute of domestic long-distance service; cards came in 15, 30, and 60 units. The store bought units for 20 cents and sold them for 25–30 cents; a separate telecommunications provider actually carried the calls. A customer dialed an 800 number and a validation code, the provider routed and timed the call, told the caller how many units were used and left, and generated a normal call-detail record (origin, destination, time). The store asked: is any of this subject to Connecticut sales tax — the sale of the card, the use of the card, or both?

DRS gave a two-part answer.

Selling the card is not taxable. A prepaid phone card is a "cash equivalent" — the same category as gift certificates, vouchers, and trading stamps. Under Bulletin 24 (rev. 1/90), issued after the Connecticut Supreme Court's decision in Dine Out Tonight Club, Inc. v. Department of Revenue Services (1989), selling a cash equivalent is not taxable, because its true object is the intangible right to buy property or a service later. So selling the phone card is not a taxable sale of tangible personal property under § 12-407(2)(a). (Whatever you later redeem the cash equivalent for is taxed if that item or service is taxable — valued in money under § 12-407(8).)

Using the card to make calls can be taxable. The redemption here is telecommunications service, which is taxable under § 12-407(2)(k). Connecticut's situs rule (§ 12-407a) decides which calls are taxed:

• Call originates and terminates in Connecticut → taxable.
• Call originates in Connecticut, terminates out of state, charged to a Connecticut customer → taxable (the caller is "charged" at the Connecticut location the call is made from).
• Call originates out of state, terminates in Connecticut → not taxable, because it isn't charged to a Connecticut number, customer, account, or instrument (the caller is on a phone outside Connecticut).

The tax is computed on the full price of the telecommunications service that would have been paid without the card, and the telecommunications provider must collect it by debiting the tax from the units remaining on the card and remitting it to DRS at the time of the call.

What this means for you

Retailers selling prepaid or stored-value cards

Selling a prepaid phone card (or a gift card or voucher) is not a taxable sale — you're selling a cash equivalent, an intangible future right, not taxable goods. Don't charge sales tax at the point you sell the card. The tax, if any, attaches to what the customer later redeems it for.

Telecommunications providers

The tax lands on you when the card is redeemed for a taxable call. You compute it on the full service price, debit it from the card's remaining units, and remit it. Build the situs logic into your rating: tax Connecticut-origin calls (in-state or to out-of-state), but not calls that merely terminate in Connecticut from an out-of-state phone.

The "sell it vs. use it" split is the key idea

One product, two tax moments. The sale of the stored value is tax-free; the taxability of the redemption depends entirely on what's being bought and where. That framework — from Bulletin 24 and Dine Out Tonight Club — applies well beyond phone cards.

Important currency caveat

This is a 1995 ruling. Telecommunications sourcing and prepaid-calling rules have been overhauled since then (including later federal and multistate mobile/telecom sourcing regimes). Treat the concept (cash equivalent vs. taxable redemption) as durable, but verify the current mechanics before relying on the specific origin/termination rules described here.

Common questions

Q: Do I charge sales tax when I sell a prepaid phone card?
A: No. A phone card is a cash equivalent, like a gift certificate. Selling it is the sale of an intangible future right, not taxable tangible personal property, so no sales tax is due at the point of sale.

Q: Is the phone service itself taxed?
A: Yes, when the card is used for a taxable call. Telecommunications service is taxable under § 12-407(2)(k), and the provider collects the tax by debiting it from the card's remaining units.

Q: Which calls are taxable?
A: Under § 12-407a, calls that originate and terminate in Connecticut, and calls that originate in Connecticut and terminate out of state, are taxable. A call that originates outside Connecticut and terminates inside it is not taxable, because it isn't charged to a Connecticut customer.

Q: Who remits the tax — the store or the phone company?
A: The telecommunications provider. It calculates the tax on the full service price, debits it from the units on the card, and remits it to DRS at the time of the call.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-407(2)(a) (sale of tangible personal property)
• Conn. Gen. Stat. § 12-407(2)(k) (sale of telecommunications services)
• Conn. Gen. Stat. § 12-407(8) (sales price valued in money, whether received in money or otherwise)
• Conn. Gen. Stat. § 12-407a (situs rules for taxing telecommunications services — origination/termination and where charged)

Case and guidance cited:

• Dine Out Tonight Club, Inc. v. Department of Revenue Services, 210 Conn. 567 (1989) (cash-equivalent true-object analysis)
• Bulletin 24 (rev. 1/90) (sale of a cash equivalent — voucher, gift certificate, trading stamp — is not taxable; redemption is taxed if the item/service is taxable)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 95-10

Original ruling text

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