Did sales or use tax apply when prepaid phone cards were distributed to members or political contributors in return for dues or contributions?

Plain-English summary

A business planned to help membership organizations and political campaigns distribute prepaid phone cards. A member might pay $100 in dues and receive a $20 card, or a campaign contributor might receive a card printed with the candidate's photograph and slogan. The business would earn a commission on cards distributed.

Staff counsel did not treat the debit card as tangible personal property sold for its physical form. The card was an indication or token of prepaid telephone-service value, comparable to a gift certificate evidencing an intangible right.

Accordingly, no sales or use tax was due based on the sale of the prepaid card to the business's client or its later distribution to members or contributors in return for payment.

The physical card still had a consumer. The letter said the person who first sold it as an indication of prepaid value would generally be the consumer, with sales or use tax applying to the card sold to that person.

The conclusion was limited to sales and use tax. Emergency-telephone surcharges, Public Utilities Commission taxes, and local taxes or fees could still apply to the telephone service.

What this means for you

Membership organizations and campaigns

The source treated the card as stored service value even when branded and distributed in connection with dues or contributions.

Prepaid-card businesses

Identify who first turns the physical card into the token of prepaid value; that party was generally the consumer under the letter.

Accountants and tax professionals

Separate sales and use tax on the card from telecommunications surcharges and other state or local charges on the underlying service.

Common questions

Q: Was the prepaid card itself taxable tangible property?

A: Not when sold or used as an indication of its prepaid telephone-service value.

Q: Did distribution for dues or contributions change the answer?

A: No, under the scenarios described.

Q: Who was treated as consumer of the physical card?

A: Generally, the person who first sold it as an indication of prepaid value.

Q: Did the opinion eliminate all taxes on the phone service?

A: No. It expressly identified possible surcharges and other state or local taxes.

Citations and references

• California Revenue and Taxation Code §§ 6051, 6201, and 6401
• California Civil Code § 1656.1
• Business Taxes Law Guide Annotation 280.0580
• Emergency Telephone Users Surcharge Law, identified in the source
• Counsel's July 19, 1995 letter to Gary Jugum — proposed facts and question quoted; letter, attachments, client identity, and legal analysis not reproduced in the official PDF
• Consultants, membership organizations, $100 dues and $20 card, political committees, $100 contribution threshold, branded cards, client commissions, telephone-service seller, members, and contributors — proposed facts supplied; consulting and card agreements, card specimens, service terms, dues and contribution records, commission schedule and payments, transaction records, and tax records not reproduced in the official PDF
• Official Annotation 280.0777's membership scenario, prepaid-value indicia, first-seller consumer, and no-sales-or-use-tax summary — annotation omits the political-contribution example, client commission, surcharge enclosure, PUC and local-tax cautions, and supplies no additional transaction record
• Possible later card sale or distribution, surcharge or other-tax determination, return filing, audit, assessment, payment, refund claim, appeal, or other agency action — not supplied in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 280.0777
• Original supporting opinion: 280.0777 PDF

Original ruling text

280.0777

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 324-2637
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento

August 17, 1995

────────
BURTON W. OLIVER
Executive Director

Mr. --- A. B----- & --XXX --- ---, Suite XXXX
--- ---, CA XXXXX
Re:

Unidentified Taxpayer;
Prepaid Telephone Cards

Dear Mr. B---s:
This is in response to your July 19, 1995 letter to Assistant Chief Counsel Gary Jugum regarding the application of tax on prepaid telephone cards. You state: “We represent a for-profit business entity that provides consulting services and business products to various customers. The business proposes to retain various consultants who would seek out and find other entities that would be interested in promoting the prepaid phone card in various promotional ways. For example, the consultant could arrange with a membership organization to have the membership organization solicit its ongoing members, or potential new members, to pay membership dues each year. In return for paying a certain level of dues, for example $100, the member would receive a $20 prepaid telephone card. The prepaid telephone card can be printed with the logo or special message of the sponsoring organization. In another example, a candidate running for office could have his or her committee solicit potential contributors for contributions and, in return for receiving a contribution of $100 or more, return a prepaid telephone card worth $20 to the contributor. The card could have the photograph and slogan of the candidate on it.

Mr. P--- A. B---

-2-

August 17, 1995
280.0777

“....
“Our for-profit business entity would receive a commission on each prepaid telephone card that would be distributed to potential members or contributors of a particular entity.” You ask: “Is this type of transaction subject to sales tax, either when the cards are purchased from the telephone service that may be selling in such cards, or when the cards are distributed to potential members or contributors upon receipt of a payment from them?” Discussion California imposes a sales tax on a retailer's gross receipts from the retail sale of tangible personal property inside this state unless the sale is exempt from taxation by statute. (Rev. & Tax. Code § 6051.) This tax is imposed on the retailer who may collect reimbursement from the customer if the contract of sale so provides. (Civ. Code § 1656.1.) When sales tax does not apply, use tax is imposed on the sales price of property purchased from a retailer for the storage, use, or other consumption of that property in California. (Rev. & Tax. Code §§ 6201, 6401.) We do not consider sales of debit cards to be sales of tangible personal property within the meaning of the Sales and Use Tax Law. Instead, the debit cards are indicia of their prepaid value. The owner of the card acquires the card as a token of value. (See e.g., Business Taxes Law Guide Annot. 280.0580 (1/25/61) (a gift certificate is evidence of an intangible right and is not subject to tax).) The sale or use of a phone debit card as an indicia of its prepaid value is not subject to sales or use tax. (Generally, the person who first sells the card as an indicia of its prepaid value would be the consumer of the card, and sales or use tax would apply to the sale of the card to that person.) Thus, no sales or use tax is due based on the sale of such a debit card to your client or upon distribution of the cards to potential members or contributors upon receipt of payment from them. Please note that there may be other taxes or surcharges (unrelated to sales or use taxes) imposed with respect to the telephone service provided in connection with the debit card. In that regard, I enclose a copy of the Emergency Telephone Users Surcharge Law. If you have any questions regarding the application of that surcharge, you may direct your inquiry to Mr. Lawrence A. Augusta, Assistant Chief Counsel, State Board of Equalization, 450 N Street MIC:82, P. O. Box 942879, Sacramento, CA 94279-0082, Telephone: (916) 445-6493. The California Public Utilities Commission may also administer taxes imposed with respect to such telephone service. You may contact the PUC at 505 Van Ness Avenue, San Francisco, CA 94102-3298, Telephone: (415) 703-1282. In addition, local jurisdictions may also impose taxes or fees with respect to such services.

Mr. P--- A. B---

-3-

August 17, 1995
280.0777

If you have further questions regarding the application of the Sales and Use Tax Law, feel free to write again. Sincerely,

Warren L. Astleford
Staff Counsel
WLA:cl

Enclosure
cc:

--- --- District Administrator