Is a retailer's sale of an AT&T prepaid Internet service card -- and a refill card for an existing prepaid account -- subject to Utah sales tax?

Plain-English summary

A retail drug store chain asked whether it needed to charge Utah sales tax on two products: an AT&T prepaid Internet service card (bundled with a Start-Up CD needed to first connect) and a refill card that adds more prepaid minutes to an existing account (no CD included, since the account is already set up). Customers pay any telephone-line connection charges separately through their telecom carrier.

The Commission ruled both nontaxable. Internet service is not "telephone service" as defined in Utah Code Ann. § 59-12-102(34)(c), which the Legislature expressly carved Internet service out of. Applying the true-object test, the Commission treated the object of the transaction as the nontaxable Internet service the purchaser is entitled to -- not the physical card itself -- so selling the card is really selling nontaxable service.

The Commission specifically distinguished this from prepaid telephone calling cards, which Utah taxes by statute (cited in the letter as Utah Code Ann. § 59-1-103(1)(m)): that taxing provision is specific to phone cards and doesn't reach Internet service cards, and the Legislature's separate carve-out of Internet service from "telephone service" reinforced that there was no intent to tax it, prepaid or not.

The bundled Start-Up CD didn't change the outcome. If sold separately, that CD would be taxable "canned computer software" under Utah Admin. Rule R865-19S-92. But because its cost is folded into the price of the nontaxable Internet service card, the Commission treated it as incidental to the nontaxable sale rather than separately taxable.

One caveat the Commission flagged on its own initiative: even though the consumer-facing sale is nontaxable, the physical card and CD themselves are tangible personal property, and someone in the supply chain -- AT&T or the retailer, depending on how their marketing agreement allocates who "consumes" those items -- owes tax on that underlying tangible property. The Commission assumed AT&T is the consumer of the cards/CDs in producing the service, but flagged the possibility that the retailer's arrangement with AT&T could shift that liability.

What this means for you

Retailers selling prepaid Internet access products

You generally don't need to charge Utah sales tax on prepaid Internet service cards or their refill cards, even when a startup CD or other incidental physical item is bundled into the price. But confirm with your supplier which party is treated as the "consumer" of the physical cards/media under your marketing agreement -- that determines who owes tax on the tangible property itself, separate from the (nontaxable) service sale to the end customer.

Retailers selling prepaid telephone calling cards

Don't assume the same nontaxable treatment applies -- Utah specifically taxes prepaid telephone calling cards by statute, unlike Internet service cards.

Accountants and tax professionals

This is a useful true-object-test illustration distinguishing Internet access (nontaxable service, § 59-12-102(34)(c) carve-out) from telecommunications (taxable), plus a clean "incidental bundled item doesn't create separate tax" holding for the Start-Up CD contrasted against Rule R865-19S-92's default taxation of canned software sold on its own.

Common questions

Q: Do I need to charge Utah sales tax on a prepaid Internet access card?
A: No, under this ruling -- the object of the sale is nontaxable Internet service, distinguished by statute from taxable telephone service.

Q: What about prepaid telephone calling cards?
A: Those are taxable in Utah by specific statute, unlike Internet service cards -- don't extend this ruling's nontaxable treatment to phone cards.

Q: Does bundling a software CD with the card create taxable software sale?
A: Not when the CD's cost is folded into the price of the nontaxable Internet service card -- it's treated as incidental. A CD sold separately would be taxable canned software.

Q: Who owes tax on the physical cards and CDs themselves?
A: Someone in the supply chain does, as tangible personal property -- typically the vendor considered the "consumer" of those items in producing the service. The Commission assumed that was AT&T here but flagged that a different marketing-agreement structure could shift it to the retailer.

Q: Can I rely on this ruling for my own prepaid service product?
A: Not automatically -- it binds the Commission only for the taxpayer and facts presented (an AT&T-branded Internet service card sold through this retailer). A different service structure or bundling arrangement could change the analysis.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-12-102(34)(c) (defines taxable "telephone service," excluding Internet service)
• Utah Code Ann. § 59-1-103(1)(m) (as cited in the letter) (taxes prepaid telephone calling cards)
• Utah Admin. Rule R865-19S-92 (canned computer software is taxable)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/02-029.pdf

Original ruling text

REQUEST
LETTER

Response 1/14/03

02-029

NAME

ADDRESS

The COMPANY, a retail drug store chain, requests a written opinion as to the sales taxability to our customers on the purchases of the following items:

1. AT&T Prepaid Internet Service � a prepaid card that the consumer purchases for a specified amount of internet access time. This card comes with a Start-Up CD, which needs to be loaded initially on the computer to gain access to the service. There is no monthly fee. However, the consumer is still subject to any related charges and taxes for use of the telephone line to connect to the service. These charges are billed separately by the telecommunications carrier.

2. AT&T Prepaid Internet Service Refill Card � a prepaid card that consumer's purchase to add additional minutes to their "already established" prepaid internet service account. This product is similar to the above item, except that there is no Start-Up CD.

Please find attached additional detailed information regarding this "prepaid card." This information was taken directly from AT&T's website.

Thank you for your assistance in this matter. If you have any questions please feel free to contact me at PHONE.

RESPONSE
LETTER

January 14, 2003

NAME

ADDRESS

RE: Private Letter Ruling � Sale of AT&T Prepaid Internet Service Cards

Dear NAME,

We have received your request for a private letter ruling concerning COMPANY'S sale of AT&T prepaid Internet service cards. The sale of Internet service is not considered a taxable �telephone service� as defined in Utah Code Ann. �59-12-102(34)(c) and, accordingly, is not taxable. When a prepaid Internet service card is sold, the Commission considers the object of that transaction not to be the card itself but the Internet service to which the purchaser is entitled. As the purchase of the card represents the purchase of nontaxable Internet service, the purchase of the card is nontaxable.

We distinguish the sale of a prepaid Internet service card from the sale of a prepaid telephone calling card, the latter of which is taxable under Utah Code Ann. �59-1-103(1)(m). First, the language imposing a tax on the sale of prepaid telephone calling cards is specific and does not refer to sales of prepaid Internet service cards. Also, the Legislature has specifically distinguished nontaxable Internet service from taxable �telephone service� in Section 59-12-102(34)(c). For these reasons, the Commission does not find a legislative intent to tax Internet service, whether the service is paid for at the time it is received or prepaid by purchasing the Internet service cards at issue.

You mention that the prepaid Internet service card comes with a Start-Up CD that must first be downloaded on the purchaser�s computer before accessing the prepaid Internet service. Were this CD to be sold separately, it would be considered canned computer software and, thus, taxable under Utah Admin. Rule R865-19S-92. However, when the CD is included in the price of the prepaid Internet service card, we would not consider it to be separately taxable, but rather to be incidental to the nontaxable purchase of the prepaid Internet service card.

Although we have determined the sale of the prepaid Internet service card to be a nontaxable sale of services, the tangible personal property that is used in providing this service, i.e., the card and the Start-Up CD, is taxable to either AT&T or COMPANY. While we assume these items are consumed by AT&T in producing the nontaxable prepaid Internet service card, we raise this issue in case COMPANY and AT&T have structured their marketing agreement so that COMPANY is considered the consumer of these items.

Please contact us if you need other information.

For the Commission,

Marc B. Johnson

Commissioner

02-029