Did prepaid home-phone packages qualify as prepaid telephone calling arrangements taxed as tangible personal property rather than telecommunications?

Plain-English summary

A competitive local exchange carrier sold home-phone packages that customers paid for in advance by days of service, a full month, number of calls, or long-distance minutes. Customers could also prepay for calling features, and service stopped when the purchased time or amount was used unless the customer recharged.

IDOR declined a private ruling but said a prepaid call package like the one described generally qualifies as a prepaid telephone calling arrangement. Since 2001, Illinois has treated qualifying prepaid calling arrangements as tangible personal property subject to Retailers' Occupation and Use Taxes, including applicable local retailers' occupation taxes, rather than Telecommunications Excise Tax.

The distinction is not simply advance payment. A recurring monthly charge paid in advance under an existing subscription plan does not become a prepaid telephone calling arrangement and remains within telecommunications-tax rules.

Common questions

Does service have to stop when the prepaid amount is used? Yes, unless the arrangement is recharged.

Is every monthly phone bill paid in advance a prepaid calling arrangement? No. Existing subscription-plan credits are excluded from the definition.

Citations and references

• 35 ILCS 120/2 and 2-27
• 35 ILCS 630/2, 3, and 4
• 35 ILCS 636/5-10 and 5-15
• 86 Ill. Adm. Code 495.100(c)

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-13-0053.pdf

Original ruling text

ST 13-0053-GIL 09/11/2013 MISCELLANEOUS
This letter discusses “prepaid telephone calling arrangements” and prepaid calling plans.
See 35 ILCS 120/2-7. (This is a GIL.)

September 11, 2013
Dear Xxxxx:
This letter is in response to your letter dated April 25, 2013, 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:
Pursuant to 2 Ill. Adm. Code 1200.110, COMPANY (‘COMPANY’) respectively
petitions the Illinois Department of Revenue (IDOR) for a private letter ruling to
classify COMPANY as a ‘Prepaid Telephone Calling Arrangements’ company.
General Information
1.

COMPANY is the taxpayer making a request for a private letter ruling.

2.

This petition for a PLR is not requested in regards to hypothetical or
alternative proposed transactions. The PLR is requested to the extent that
it is the actual business practice of COMPANY. COMPANY began
transacting business in the manner described below on or about September
1, 2011.

3.

COMPANY is not currently under audit by the IDOR.

4.

COMPANY is not currently engaged in litigation with the IDOR with
regard to this or any other tax matter.

5.

To the best knowledge of COMPANY, the IDOR has not previously ruled
regarding this matter for the company. Neither COMPANY nor its tax
representative submitted a request for a private letter ruling of the same or
similar issue to the IDOR.

6.

COMPANY requests that certain information be deleted from the PLR
prior to dissemination to others. COMPANY requests the deletion of its
name, the name of its representative or officer, address and telephone
number.

7.

COMPANY determines that there are no authorities contrary to its views
and it is unable to locate such authority.

Tax Period at Issue
July 2012 to present.
Statement of Material Facts
COMPANY is a Competitive Local Exchange Carrier (CLEC) offering prepaid
calling arrangements for home phone services to its 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 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.
B.
C.
D.

4.

Total number of days of services
Full month of service
Total amount of calls
Specific amount of long distance minutes with their local plan

The customers are allowed to prepay or add-on calling features (For
example, caller id and call waiting, etc.) or have specific calling features
included in a prepaid call 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.

6.

Once the prepaid calling time has expired or has been completely
consumed, no further service is provided unless purchased, replenished or
recharged.

Pertinent Law and Regulations
Due to its prepay business classification, COMPANY is required to remit Illinois
Sales and Use Tax pursuant to the Retailer’s Occupation Tax (35 ILCS § 120/1 et
seq.) and Service Occupation Tax (35 ILCS § 115/1 et seq.) and the Service Use
Tax (35 ILCS § 110/1 et seq.) and the Use Tax (35 ILCS § 105/1 et seq.),
specifically:
Section 2 of the Retailers' Occupation Tax Act, 35 ILCS 120/2, states:
A tax is imposed upon persons engaged in the business of selling at
retail tangible personal property, including computer software, and
including photographs, negatives, and positives that are the product
of photoprocessing, but not including products of photoprocessing
produced for use in motion pictures for public commercial
exhibition. Beginning January 1, 2001, prepaid telephone calling
arrangements shall be considered tangible personal property
subject to the tax imposed under this Act regardless of the form in
which those arrangements may be embodied, transmitted, or fixed
by any method now known or hereafter developed.’
Section 2-27 of the Retailers' Occupation Tax Act, 35 ILCS 120/2-27 defines
‘prepaid calling arrangements 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 meets the definition of ‘prepaid calling arrangements’ and is not
subject to remit the Telecommunication Excise Tax, pursuant to sections 86 Ill.
Adm. Code 495, 35 ILCS 630/3 and 4, which states:
...Beginning (on and after) January 1, 2001, prepaid telephone
calling arrangements shall not be considered telecommunications
subject to the Telecommunications Excise Tax...
Requested Ruling
COMPANY request a private letter ruling to classify COMPANY as a ‘prepaid
telephone calling arrangements company,’ pursuant to section 2-27 of the
Retailers' Occupation Tax Act, 35 ILCS 120/2-27. COMPANY believes that it
meets the definition of ‘Prepaid telephone calling arrangements’ 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.
Request for a Conference
COMPANY respectfully request a telephone conference to discuss this matter, if
the IDOR believes such a discussion may be helpful or if the Illinois Department
of Revenue may otherwise intend to render a ruling contrary to COMPANY’s
position. If you have any questions, you may reach me at XXX-XXX-XXXX.

DEPARTMENT’S RESPONSE:
The Department’s regulation “Public Information, Rulemaking and Organization”
provides that “[w]hether to issue a private letter ruling in response to a letter ruling request is
within the discretion of the Department. The Department will respond to all requests for private
letter rulings either by issuance of a ruling or by a letter explaining that the request for ruling will
not be honored.” 2 Ill. Adm. Code 1200.110(a)(4). The Department declines to issue a Private
Letter Ruling. Although we are not providing you with a Private Letter Ruling, we hope the
following general information will be of assistance.
Telecommunications Excise Tax Act

The Illinois Telecommunications Excise Tax 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. 35 ILCS 630/3 and 4. The Simplified Municipal Telecommunications Tax Act
allows municipalities to impose a tax on the act or privilege of originating in such municipality
or receiving in such municipality intrastate or interstate telecommunications by persons in
Illinois at a rate not to exceed 6% for municipalities with a population of less than 500,000, and
at a rate not to exceed 7% for municipalities with a population of 500,000 or more, of the gross
charges for such telecommunications purchased at retail from retailers by such persons. 35 ILCS
636/5-10 and 5-15.
“Telecommunications,” in addition to the meaning ordinarily and popularly ascribed to it,
includes, without limitation, messages or information transmitted through use of local, toll and
wide area telephone service; private line services; channel services; telegraph services;
teletypewriter; computer exchange services; cellular mobile telecommunications service;
specialized mobile radio; stationary two way radio; paging service; or any other form of mobile
and portable one-way or two-way communications; or any other transmission of messages or
information by electronic or similar means, between or among points by wire, cable, fiber-optics,
laser, microwave, radio, satellite or similar facilities. “Telecommunications” do not include
“value added services in which computer processing applications are used to act on the form,
content, code and protocol of the information for purposes other than transmission.” See 35 ILCS
630/2(a) and 2(c). If telecommunications retailers provide these services, the charges for each
service must be disaggregated and separately stated from telecommunications charges in the
books and records of the retailers. If these charges are not thus disaggregated, the entire charge
is taxable as a sale of telecommunications.
“Gross charges” means the amount paid for the act or privilege of originating or receiving
telecommunications in this State and for all services and equipment provided in connection
herewith by a retailer, valued in money whether paid in money or otherwise, including cash,
credits, services and property of every kind or nature, and shall be determined without any
deduction on account of the cost of such telecommunications, the cost of materials used, labor or
service costs or any other expense whatsoever. “Gross charges” do not include “charges for the
storage of data or information for subsequent retrieval or the processing of data or information
intended to change its form or content.” See 86 Ill. Adm. Code 495.100(c)
Prepaid Calling Arrangements
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 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.
Generally, a prepaid call package such as the one you have described, qualifies as a
prepaid calling arrangement and is subject to tax imposed under the Retailers’ Occupation Tax
Act.
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
RSW:msk