How does Texas tax prepaid telephone calling cards, and what changed when S.B. 862 reclassified them as tangible personal property effective September 1, 1997?

Plain-English summary

This letter corrects an earlier July 18, 1997 letter's stated effective date for a major change in how Texas taxes prepaid telephone calling cards: the correct effective date is September 1, 1997, not October 1, 1997 as originally written. The underlying substance carries over from the July letter, which is reproduced in full.

Before the change (current law as of the July letter): selling a prepaid calling card was treated as selling a taxable telecommunications service. Texas taxes telecommunications services if the call both originates in Texas and is billed to a Texas number/address; state tax plus local tax applies to intrastate calls, while only the 6.25% state tax applies to interstate calls. Providers had two ways to handle sales tax on the cards: (1) track actual card use and remit tax on calls that actually originate in Texas (with card language disclosing this, and retailers not collecting tax at sale), or (2) tax the full purchase price at sale, with the customer presumed to call from Texas if the card was bought in Texas (an out-of-state customer could give an exemption certificate instead). Either way, telecommunications providers also owed a quarterly Telecommunications Infrastructure Fund (TIF) assessment on their taxable receipts from the cards.

After the change (effective 9/1/1997): prepaid calling cards are treated as a sale of tangible personal property, not a telecommunications service. Cards sold and delivered in Texas are subject to sales tax as goods; a retailer buying cards for resale can use a resale certificate; sales delivered to another state are not subject to Texas tax at all (regardless of where calls are later made); and — because the sale is no longer classified as a telecommunications service — no TIF assessment applies. The letter also covers filing mechanics (monthly reports if state tax exceeds $1,500/quarter, otherwise quarterly; reports due the 20th of the following month; TIF due by month-end following the quarter, under the old regime) and confirms there's no minimum dollar threshold for reporting, since Texas's limited occasional-sale exemption doesn't apply to a business regularly selling taxable items.

What this means for you

Telecommunications companies and retailers selling prepaid phone cards

Since September 1, 1997, prepaid calling cards are taxed as tangible personal property, not telecom services: tax the sale itself (not usage), use resale certificates for wholesale/retail chains, and don't collect Texas tax on cards delivered out of state. And forget about the TIF assessment on card sales entirely — it stopped applying to cards in 1997, and the whole TIF program was later abolished in 2008.

Accountants and tax professionals

If a client has old paperwork or advice from the 1997 transition period, treat any reference to card-usage tracking, the "current law" two-method system, or ongoing TIF liability on card sales as fully superseded — both by the 1997 reclassification itself and by the 2008 repeal of the TIF program.

Common questions

Q: When did prepaid calling cards start being taxed as goods instead of telecom services?
A: September 1, 1997 (S.B. 862) — this letter corrects an earlier, incorrectly stated October 1, 1997 date.

Q: Do I owe Texas tax on a prepaid card sold and shipped to a customer in another state?
A: No, under the amended law effective 9/1/1997, sales delivered into another state aren't subject to Texas tax.

Q: Does the TIF assessment still apply to anything today?
A: No — the TIF assessment was repealed entirely effective September 1, 2008 by H.B. 735, regardless of how a telecommunications receipt is taxed.

Q: Can another company rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts with a tax professional.

Citations and references

Legislation:

• S.B. 862 (1997) (recharacterized prepaid calling cards as tangible personal property, effective 09/01/1997)

Rules:

• 34 Tex. Admin. Code § 3.286 (seller's and purchaser's responsibilities)

Subsequent law (post-dates this letter):

• H.B. 735, 80th Texas Legislature (2007), repealing the TIF assessment effective 09/01/2008

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9709568L

Original ruling text

Note: This document is also indexed as a TIF document at STAR 9709750L.

ALERT - Statutory change — Effective September 1, 2008, the
Telecommunications Infrastructure Fund (TIF) assessment no
longer applies. House Bill 735, 80th Regular Legislative Session,
repealed the TIF assessment.

September 24, 1997

Dear *****:

I recently wrote you a letter on July 18, 1997, concerning the passage of
Senate Bill 862 and the treatment of telephone-prepaid calling cards as
tangible personal property.

In my letter, I stated that the effective date of the legislation is October 1,
1997. That is incorrect. The effective date is September 1, 1997. I
apologize for the error.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division

July 18, 1997

Dear *****:

Thank you for your June 27, 1997 letter concerning the taxability of telephone
prepaid calling cards.

The Texas Legislature recently passed Senate Bill 862 that changes the
treatment of telephone prepaid calling cards effective October 1, 1997.
Currently, the sale of a telephone prepaid calling card is considered the sale
of a telecommunications service that is taxed as a taxable service under the
sales tax law. In addition to collecting sales tax from customers, providers
of telecommunications services are required to report and remit quarterly a
Telecommunications Infrastructure Fund (TIF) assessment on their receipts from
the sale of telecommunications services that are subject to sale tax. This
includes the sale of telephone prepaid calling cards.

Effective October 1, 1997, the sale of telephone prepaid calling cards will be
considered the sale of tangible personal property rather than the sale of
telecommunications services. This will change how the state and local sales
tax is imposed on the sales and make the receipts no longer subject to the TIF
assessment. Therefore, my response includes information about the current law
and the amended law as of October 1, 1997.

Question 1) Under what circumstances, if any, will the sale and/or use of
prepaid calling cards in the State of Florida subject us to sales and/or use
taxes?

Current Law: Texas imposes sales tax on telecommunications services if the
call both originates from Texas and is billed to a telephone number or billing
or service address within Texas. State sales tax and applicable local sales
tax is imposed on taxable long-distance intrastate calls. On taxable
long-distance interstate calls, only the 6.25% state sales tax is imposed.

Our current policy regarding telephone prepaid calling cards is to allow
telecommunications providers to handle the sales tax on telephone prepaid
calling cards in one of two ways:

1. The telecommunications provider may track the actual use of the card
   when the calls are made and remit the applicable state and local taxes on any
   calls that originate in Texas. In that case, the provider needs to have
   language on the card that clearly shows the provider will be responsible for
   the remittance of Texas taxes when the calls are made. Retailers selling the
   cards would then not be required to collect sales tax when the cards are sold.
   The telecommunications provider would be required to pay the TIF assessment on
   the taxable receipts tracked for the use of the card.

2. If the telecommunications provider cannot or will not track the actual use
   of the card and properly remit Texas tax, then the full purchase price of the
   card is taxable as the sale of prepaid telecommunications services. A retailer
   purchasing the card for resale may give a properly completed resale
   certificate instead of paying sales tax. The retailer selling the card to the
   ultimate customer is required to collect and remit applicable state and local
   sales tax on a card sold in Texas. The customer will be presumed to call from
   Texas if the card is purchased in Texas. However, a retailer may accept a
   properly completed exemption certificate from an out-of-state customer stating
   that the prepaid calls will originate from outside Texas. The retailer selling
   the card to the ultimate customer would be required to pay the TIF assessment
   on the taxable receipts for the sale of the card.

Amended Law: Telephone prepaid calling cards sold on or after October 1, 1997,
will be treated as the sale of tangible personal property. Cards sold in Texas
would be subject to sales tax. A resale certificate may be given by persons
purchasing the cards for resale. You would not be responsible for collecting
sales tax on cards sold and delivered into another state. No TIF assessment
would be due on the sale of telephone prepaid calling cards.

Question 2) If sales of prepaid calling cards are taxable, who will be liable
for the tax? Does the tax apply to our sale of prepaid calling cards, or to
the third party service provider who provides the actual phone call?

Current Law: This depends on which one of the two methods for remitting sales
tax on telephone prepaid cards is used. See the response to question one
above.

Amended Law: The retailer selling the cards to the ultimate customer in Texas.
See the response to question one above.

Question 3) How should we apportion the amounts of taxes owed to your state?
Should we determine it by the calls made from your state, calls made and
received in your state or the cards sold in your state? Further, when should
we pay those taxes?

Current Law: This depends on which one of the two methods for remitting sales
tax on telephone prepaid cards is used. See the response to question one
above.

Amended Law: The sales tax is collected on the telephone prepaid cards sold in
Texas to the ultimate customers making the calls. Sales to Texas retailers who
purchase the cards for resale are exempt if you are given a properly completed
resale certificate for your records.

Due Dates: A taxpayer must file monthly sales tax reports if the amount of
state tax due will exceed $1,500 each quarter. Otherwise, the taxpayer will
file quarterly sales tax reports. Sales tax reports are due the 20th of the
month following the end of the reporting period (month or quarter). The TIF
assessment is paid quarterly and is due by the end of the month following the
end of the quarter. A copy of Rule 3.286 concerning seller's and purchaser's
responsibilities is enclosed. Under separate cover, an application packet with
information about the sales tax has been sent.

Question 4) What is the measure of the tax? Is there a minimum amount that
needs to be sold in your state before taxes should be paid?

Current Law: The total charge to the customer is subject to sales tax.
Whether the tax is computed on the amount charged when the card is used or on
the purchase price of the card depends on which one of the two methods for
remitting sales tax on telephone prepaid cards is used. See the response to
question one above.

The state tax rate is 6.25%. Local tax rates for cities, counties, special
purpose districts, and transit authorities vary and not all local jurisdictions
impose tax on telecommunications services. Under separate cover, a copy of
Texas Sales and Use Tax Rates (96-132) has been sent along with a copy of our
bulletin Jurisdictions Imposing Local Sales Tax on Telecommunications Services
(96-339).

Amended Law: The total charge to the customer for the card is subject to sales
tax.

The state tax rate is 6.25%. Local tax rates for cities, counties, special
purpose districts, and transit authorities vary. You do not need to refer to
publication 96-339 because the cards are taxed as the sale of tangible personal
property rather than as telecommunications services. I have enclosed a copy of
Guidelines for Collecting Local Sales and Use Tax.

Minimum: There is no minimum dollar figure for reporting purposes. Texas has
an occasional sale provision, but it is limited to the sale of one or two
taxable items during any twelve month period. In any case, a person selling
taxable items in the regular course of business could not have an occasional
sale.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division