Did IDOR classify a carrier's prepaid home-phone plans as taxable prepaid calling arrangements instead of telecommunications services?

Plain-English summary

A home-phone carrier asked IDOR to approve its prepaid service packages as "prepaid telephone calling arrangements." Customers paid in advance for days, months, calls, minutes, and add-on features, and service stopped when the purchased amount was consumed.

IDOR refused to classify the plans in a GIL. It explained that a qualifying prepaid calling arrangement was treated as tangible personal property subject to Retailers' Occupation and Use Taxes and applicable local occupation taxes.

Plans outside the statutory definition were subject to Telecommunications Excise Tax. In particular, paying recurring monthly charges in advance under an existing subscription plan did not transform the service into a prepaid telephone calling arrangement.

Common questions

Did IDOR approve the carrier's requested classification? No.

Were all prepaid payments treated as taxable property? No. The statutory arrangement requirements had to be met.

Did advance payment on a subscription change its classification? No.

Citations and references

• 35 ILCS 120/2 and 120/2-27
• 35 ILCS 630/2 through 630/4
• 86 Ill. Adm. Code 495

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2013/st-13-0009.pdf

Original ruling text

ST 13-0009-GIL 02/05/2013 MISCELLANEOUS
This letter discusses “prepaid telephone calling arrangements”. See 35 ILCS 120/2-7.
(This is a GIL.)
February 5, 2013
Dear:
This letter is in response to your letter dated December 26, 2012, in which you request information.
The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are issued by the
Department in response to specific taxpayer inquiries concerning the application of a tax statute or
rule to a particular fact situation. A PLR is binding on the Department, but only as to the taxpayer
who is the subject of the request for ruling and only to the extent the facts recited in the PLR are
correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in the
Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information Letter
(“GIL”) is to direct taxpayers to Department regulations or other sources of information regarding the
topic about which they have inquired. A GIL is not a statement of Department policy and is not
binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website at
www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to your
inquiry.
The nature of your inquiry and the information you have provided require that we respond with a GIL.
In your letter you have stated and made inquiry as follows:
COMPANY is a Competitive Local Exchange Carrier (CLEC) offering prepaid calling
arrangement for home phone services to end users. The company respectively
petitions the Illinois Department of Revenue to classify COMPANY as a “Prepaid
Telephone Calling Arrangements” company based on the following:

1. COMPANY is registered as a prepay company with the Illinois Department
   of Revenue.
2. Our customers are not required to pass a personal credit check or sign a
   binding contractual agreement to receive prepaid home phone service
   from COMPANY.
3. COMPANY offers various types of prepay home phone service plans. The
   customer is allowed to prepay for home phone services calling time by
   purchasing one of the following service packages:
   A. Total number of days of services
   B. Full month of service
   C. Total amount of calls
   D. Specific amount of long distance minutes with their local plan
4. The customer is allowed to prepay for add-on calling features (For
   example, caller id and call waiting, etc.) or have specific calling features
   included in a prepaid package.
5. Upon receiving the customer’s prepayment for home phone service,
   COMPANY manually programs our access codes to reflect the time and
   amount of services pre-purchased. After the information is successfully
   programmed, the customer can begin to use all available service options
   that have been paid for in advance.

ST 13-0009-GIL
February 5, 2013
Page 2

6. Once the prepaid calling time has expired or has been completely
   consumed, no further service is provided unless purchased, replenished
   or recharged.
   Therefore, COMPANY request classification as a “prepaid telephone calling
   arrangements company,” based upon section 2-27 of the Retailers’ Occupation Tax Act,
   35 ILCS 120/2-27, where prepaid calling arrangement is defined as follows:
   “Prepaid telephone calling arrangements” mean the right to exclusively
   purchase telephone or telecommunications services that must be paid for
   in advance and enable the origination of one or more intrastate, interstate,
   or international telephone calls or other telecommunications using an
   access number, an authorization code, or both, whether manually or
   electronically dialed, for which payment to a retailer must be made in
   advance, provided that, unless recharged, no further service is provided
   once that prepaid amount of service has been consumed. Prepaid
   telephone calling arrangements include the recharge of a prepaid calling
   arrangement. For purposes of this Section, “recharge” means the
   purchase of additional prepaid telephone or telecommunications services
   whether or not the purchaser acquires a different access number or
   authorization code. For purposes of this Section, “telecommunications”
   means that term as defined in Section 2 of the Telecommunications
   Excise Tax Act. “Prepaid telephone calling arrangement” does not include
   an arrangement whereby the service provider reflects the amount of the
   purchase as a credit on an account for a customer under an existing
   subscription plan.
   COMPANY believes that it meets the “Prepaid telephone calling arrangements”
   requirements in accordance to 35 ILCS 120/2-27. COMPANY will use its business
   classification to ensure the proper taxes are rendered to the Illinois Department of
   Revenue. Please approve the company’s request to receive the “Prepaid telephone
   calling arrangements” business classification. If you have any questions, you may
   reach me at X.
   DEPARTMENT’S RESPONSE:
   We cannot provide you with an opinion on the types of arrangements you describe in the context of a
   General Information Letter.
   The Telecommunications Excise Tax Act (“Act”) imposes a tax on the act or privilege of originating or
   receiving intrastate or interstate telecommunications by persons in Illinois at the rate of 7% of the
   gross charges for such telecommunications purchased at retail from retailers by such persons. See
   35 ILCS 630/3 & 4 and 86 Ill. Adm. Code 495. The Act defines gross charges as including amounts
   paid for the act or privilege of originating or receiving telecommunications in this State and for all
   services and equipment provided in connection therewith by retailers. 35 ILCS 630/2(a).
   Beginning January 1, 2001, prepaid telephone calling arrangements are considered tangible personal
   property subject to the tax imposed under the Retailers’ Occupation Tax Act, regardless of the form in

ST 13-0009-GIL
February 5, 2013
Page 3
which those arrangements may be embodied, transmitted, or fixed by any method now known or
hereafter developed. 35 ILCS 120/2. The Retailers' Occupation Tax Act imposes a tax upon persons
engaged in this State in the business of selling tangible personal property to purchasers for use or
consumption at a rate of 6.25%. Under the Use Tax Act, a tax is imposed upon the privilege of using
in this State tangible personal property purchased at retail from a retailer. The Use Tax Act applies
when tangible personal property is purchased anywhere at retail. In essence, the retailer collects the
Use Tax from the customer to reimburse it for the Retailers’ Occupation Tax paid by it to the State.
Prepaid telephone calling arrangements are also subject to retailers’ occupation taxes imposed by
units of local government.
"Prepaid telephone calling arrangements" mean the right to exclusively purchase telephone or
telecommunications services that must be paid for in advance and enable the origination of one or
more telephone calls or other telecommunications using an access number, an authorization code, or
both, whether manually or electronically dialed, for which payment to a retailer must be made in
advance, provided that, unless recharged, no further service is provided once that prepaid amount of
service has been consumed. Prepaid telephone calling arrangements include the recharge of a
prepaid calling arrangement. "Prepaid telephone calling arrangement" does not include an
arrangement whereby the service provider reflects the amount of the purchase as a credit on an
account for a customer under an existing subscription plan. 35 ILCS 120/2-27.
Prepaid telephone plans that do not meet the definition of a “prepaid telephone calling arrangement”
are taxed under the Telecommunications Excise Tax. Paying in advance recurring monthly charges
for telecommunications services obtained under a subscription plan does not convert
telecommunications services into a prepaid telephone calling arrangement.
I hope this information is helpful. If you require additional information, please visit our website at
www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

Richard S. Wolters
Associate Counsel