Are prepaid cards sold at retail that let a customer download ringtones, wallpaper, and games to a cellphone taxed at the time the card is sold?

Plain-English summary

David E. Werth, CPA asked the Department about a retail client selling "prepaid mobile cards" that give the buyer a set number of download credits, redeemable with a third-party provider for ringtones, wallpaper, and games on a cellphone (via text message or the internet, using a PIN on the receipt). The retailer books part of each sale as its own commission and owes the rest to the third-party provider, paid weekly.

The Department treated these cards like ordinary gift certificates: buying a gift certificate that can later be redeemed for unspecified goods or services isn't itself a taxable transaction — the taxable "sale" happens later, when the certificate is actually presented and exchanged for the goods or service, and tax applies only to whatever taxable item is ultimately delivered. Applying that logic here, the retailer's sale of the prepaid mobile card itself is not subject to sales tax. Instead, when a customer redeems a credit, the third-party provider that actually delivers the ringtone, wallpaper, or game is the one responsible for collecting and remitting any sales tax due on that product or service.

The Department added an important caveat: this analysis assumes the third-party provider is NOT a telephone service provider and that the cards can't be used to buy actual telephone service. If a card were instead treated as a "prepaid telephone calling service" (a right to buy telecommunication services paid for in advance), it would be taxed differently, under § 1105(b)(1)(D)'s specific tax on such services.

What this means for you

Retailers selling prepaid download cards, gift cards, or similar redeemable credit

Selling the card itself is generally not a taxable event — it's treated the same way as selling a gift certificate. Sales tax liability shifts to whoever actually fulfills the redemption (the third-party content provider here), on whatever taxable product or service is ultimately delivered.

Third-party content and app providers who fulfill redemptions

If you're the one actually delivering the downloaded ringtone, wallpaper, game, or other digital product when a customer redeems a prepaid card or credit, you (not the retailer who sold the card) are responsible for collecting and remitting any sales tax due on that delivery.

Accountants and tax professionals

Watch the telecom carve-out closely: this ruling's conclusion is expressly conditioned on the third-party provider NOT being a telephone service provider and the cards NOT being usable for actual telephone service. If either of those facts changes, the specific "prepaid telephone calling service" tax under § 1105(b)(1)(D) would apply instead, with its own separate sourcing and taxability rules.

Common questions

Q: Is selling a prepaid card for cellphone ringtone/wallpaper downloads taxable at the point of sale?
A: No. Like a gift certificate, selling the card itself isn't a taxable transaction. Tax applies only later, when a customer actually redeems a credit for a taxable product.

Q: Who collects the sales tax when a customer redeems the card?
A: The third-party provider that actually delivers the ringtone, wallpaper, or game to the customer is responsible for collecting and remitting any sales tax due on that product, not the retailer who originally sold the card.

Q: Does this analysis apply to prepaid phone cards too?
A: Not necessarily. This opinion is expressly premised on the cards NOT being usable for telephone service and the redeeming provider NOT being a telephone company. Genuine prepaid telephone calling services are taxed separately under § 1105(b)(1)(D).

Q: Can another retailer rely on this exact ruling?
A: No. This Advisory Opinion binds the Department only as to the facts David E. Werth, CPA described on behalf of his client. A different card program — especially one touching telephone service — should get its own review.

Citations and references

Statutes:

• Tax Law § 1101(b)(6) (definition of tangible personal property)
• Tax Law § 1101(b)(22) (definition of prepaid telephone calling service)
• Tax Law § 1105(a) (imposition of sales tax on retail sales)
• Tax Law § 1105(b)(1)(D) (tax on prepaid telephone calling service)

Prior opinions cited:

• First Colony Company, Adv Op Comm T&F, March 1, 1999, TSB-A-99(13)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2007.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a07_21s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-07(21)S
Sales Tax
August 27, 2007

Office of Tax Policy Analysis
Taxpayer Guidance Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S061017D

On October 17, 2006, the Department of Taxation and Finance received a Petition for
Advisory Opinion from David E. Werth, CPA, Tronconi Segarra & Associates, LLP, 6390 Main
Street, Williamsville, New York 14221.
The issue raised by Petitioner, David E. Werth, CPA, is whether sales of prepaid cards
that entitle the purchaser to download ringtones, wallpaper, and games to a cellphone are subject
to New York State sales and use tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner’s client (Retailer) is engaged in retail operations in the state of New York. One
of the products Retailer offers for sale is advertised as a “prepaid mobile card.” Each prepaid
mobile card provides the purchaser with a distinct number of download credits, and each card is
sold for a designated dollar amount. At the time of sale, the customer selects a card to purchase
based on the number of download credits the customer intends to use. Each credit may be
redeemed with a third-party provider to download various types of ringtones, wallpaper, and
games for use on a cellphone.
At the time of purchase, Retailer gives the customer a receipt that identifies the third­
party provider and provides a Personal Identification Number (PIN) and instructions for
redeeming the credit for the desired download. Using the PIN provided on the receipt, the
purchaser can redeem the credit for the download by either sending a cellphone text message to
the provider or downloading the content via the Internet.
For the sales of prepaid mobile cards, Retailer records a portion of the sales proceeds as
commission revenue on its books and records, and the remaining amount is shown as a liability
to the provider which is paid to the provider weekly.
Applicable law and regulations
Section 1101(b) of the Tax Law provides, in part:
When used in this article for the purposes of the taxes imposed by subdivisions
(a), (b), (c) and (d) of section eleven hundred five and by section eleven hundred ten, the
following terms shall mean:
*

*

*

-2­
TSB-A-07(21)S
Sales Tax
August 27, 2007

(6) Tangible personal property. Corporeal personal property of any nature.
However, except for purposes of the tax imposed by subdivision (b) of section eleven
hundred five, such term shall not include gas, electricity, refrigeration and steam. Such
term shall also include pre-written computer software, whether sold as part of a package,
as a separate component, or otherwise, and regardless of the medium by means of which
such software is conveyed to a purchaser....
*

*

*

(22) “Prepaid telephone calling service” means the right to exclusively purchase
telecommunication services, that must be paid for in advance and enable the origination
of one or more intrastate, interstate or international telephone calls using an access
number (such as a toll free network access number) and/or authorization code, whether
manually or electronically dialed, for which payment to a vendor must be made in
advance, whether or not that right is represented by the transfer by the vendor to the
purchaser of an item of tangible personal property. In no event shall a credit card
constitute a prepaid telephone calling service. If the sale or recharge of a prepaid
telephone calling service does not take place at the vendor’s place of business, it shall be
conclusively determined to take place at the purchaser’s shipping address or, if there is no
item shipped, at the purchaser’s billing address or the location associated with the
purchaser’s mobile telephone number.
Section 1105 of the Tax Law provides, in part:
Imposition of sales tax. On and after June first, nineteen hundred seventy-one,
there is hereby imposed and there shall be paid a tax . . . upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
(b)(1) The receipts from every sale, other than sales for resale, of the following: .
. . . (D) a prepaid telephone calling service.
Opinion
Retailer sells prepaid mobile cards that allow the holder to download ringtones,
wallpaper, and games to mobile telephones. Ultimately, the downloaded ringtones, wallpaper,
and games are provided to the holder of the card by a third-party provider.
The prepaid mobile cards are similar in nature to gift certificates. The purchase of a gift
certificate that entitles the holder to present the certificate in full or part payment (up to the stated
dollar value for the certificate) for the purchase of unspecified goods and services at some future
date is not generally considered to be a taxable transaction under section 1105 of the Tax Law at

-3­
TSB-A-07(21)S
Sales Tax
August 27, 2007
the time the certificate itself is purchased. See First Colony Company, Adv Op Comm T&F,
March 1, 1999, TSB-A-99(13)S. Rather a sale occurs at the time and place the certificate is
presented in exchange for the delivery of property or services and sales tax is due only on the
taxable property and/or services that are purchased. Therefore, sales by Retailer of prepaid
mobile cards as described in this Opinion are not subject to sales tax.
When the customer redeems the prepaid mobile card to access the download of a product
or service, the third-party provider redeeming the card and delivering the product or service as
directed by the holder of the card will be responsible for collecting and remitting any sales tax
that may be due on the product or service.
It is assumed for the purposes of this Opinion that the third-party provider is not a
telephone service provider and that the cards may not be used to purchase telephone service. If
these prepaid mobile cards were to be considered part of a prepaid telephone calling service, the
provisions for sales tax imposed on prepaid telephone calling services under section
1105(b)(1)(D) of the Tax Law would apply.

DATED: August 27, 2007

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Taxpayer Guidance Division

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the
person or entity fully and accurately describes all relevant facts. An
Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion.