Under RR 97-23, was buying a prepaid telephone calling card taxable, and when did tax apply to calls made with it?

Plain-English summary

South Carolina Revenue Ruling 97-23 said the retail purchase of a prepaid telephone calling card was not itself subject to sales tax. The card represented an intangible evidence of debt—a future right to receive telephone service—rather than a current sale of taxable tangible personal property.

The taxable event occurred when the customer used the card and exchanged that right for telephone service. Under the rules stated in 1997, local telephone calls made in South Carolina were taxable, while long-distance and international calls originating in South Carolina were exempt.

The provider of a local call generally owed the 5 percent tax described in the ruling. For a customer-owned coin-operated telephone, or COCOT, the ruling instead said the tax on local service was due when the COCOT provider purchased that service from the local exchange company.

The Department compared the card to a gift certificate or traveler's check: exchanging money for the instrument was not the taxable transfer, but redemption for the underlying taxable product or service could be.

Later Department communications rulings distinguish retail prepaid wireless calling arrangements from other prepaid telephone calling cards and direct readers to RR 04-4 for the latter category. That later framework should be checked before applying this 1997 ruling.

Common questions

Q: Did a convenience store collect sales tax when it sold the calling card? Not under RR 97-23. The initial card sale was an exchange for an intangible future right.

Q: Were local calls made with the card taxable? Yes. The ruling treated use of the card for local South Carolina calls as the taxable telephone-service transaction.

Q: Were long-distance and international calls taxable? No under the exemption and classifications stated in the ruling.

Q: Who paid tax for a COCOT local call? The ruling said tax was due when the COCOT provider bought local service from the local exchange company.

Citations and references

• S.C. Code Ann. §§ 12-36-910 and 12-36-60 (sales tax and telephone service as tangible personal property)
• S.C. Code Ann. § 12-36-100 (sale and purchase)
• S.C. Code Ann. § 12-36-2120(11) (long-distance telephone-call exemption stated in the ruling)
• S.C. Code Ann. § 12-36-110(1)(k) (COCOT purchase of local service)
• SC Private Letter Ruling #90-8 (travel-points analogy cited by the ruling)
• SC Revenue Rulings #06-8 and #17-2 (later communications guides directing readers to RR #04-4 for certain prepaid calling cards)

Subject

Telephone Calling Cards

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR97-23.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214

SC REVENUE RULING #97-23

SUBJECT:

Telephone Calling Cards
(Sales Tax)

EFFECTIVE DATE:

Applies to all periods open under the statute.

SUPERSEDES:

All previous documents and any oral directives in conflict herewith.

REFERENCES:

S. C. Code Ann. Section 12-36-2120 (Supp. 1996)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 1996)
SC Revenue Procedure #97-8

SCOPE:

A Revenue Ruling is the Department of Revenue’s official advisory
opinion of how laws administered by the Department are to be applied to
a specific issue or a specific set of facts, and is provided as guidance for
all persons or a particular group. It is valid and remains in effect until
superseded or modified by a change in the statute or regulations or a
subsequent court decision, Revenue Ruling or Revenue Procedure.

Question:
Is the sale of a prepaid telephone calling card for use in making local, long distance, or
international telephone calls subject to South Carolina sales tax?
Conclusion:
The sale of a prepaid telephone calling card for use in making local, long distance, or
international telephone calls is not subject to sales tax since this transaction is not a sale of
tangible personal property. The transaction is merely the exchange of money for an intangible
evidence of debt - a future right to telephone service.
The taxable transaction takes place when the telephone calling card is used. South Carolina
imposes a sales tax on local telephone calls made in South Carolina. Since South Carolina
exempts from sales tax any charges for long distance telephone calls, the provider of long
distance or international telephone calls originating in South Carolina is not liable for sales tax
on the use of a prepaid telephone calling card.
The provider of the local telephone call is liable for the 5% sales tax on local calls made with the
calling card. If, however, the provider is a customer owned coin-operated telephone (COCOT)
provider, the sales tax on the local call is due when the COCOT purchases the local service from
the local exchange companies pursuant to Code Section 12-36-110(1)(k).

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Facts:
Telephone calling cards are sold by telephone companies, convenience stores, and other retail
outlets. The purchaser buys a calling card that may be used to make local, long distance, or
international calls. Depending on the calling card, the purchaser can use the card for calls which
cost a certain amount or for a predetermined number of minutes. A telecommunications company
will provide the local or long distance service. The question has arisen as to whether the sale of
prepaid calling cards, or the subsequent use by the cardholder, is a sale of tangible personal
property subject to South Carolina sales tax.
Discussion:
Code Section 12-36-910(A) imposes a 5% sales tax on every person engaged in the business of
selling tangible personal property in South Carolina at retail.
The terms “sale” and “purchase” are defined in Code Section 12-36-100 as “any transfer,
exchange, or barter, conditional or otherwise, of tangible personal property for a consideration...”
The term “tangible personal property” is defined in Code Section 12-36-60 and includes
telephone and other services and intangibles, but does not include evidences of debt.
Although the term “consideration” is not defined in the statute, the Department has reviewed the
meaning of the term in an analogous situation concerning hotel travel points that could be
purchased and redeemed at various resort facilities for accommodations, meals, green fees, and
the like. In SC Private Letter Ruling #90-8, the Department determined that consideration is not
limited to a money consideration and concluded that the transfer of tangible personal property or
accommodations takes place when the travel points are redeemed.
Other similar nontaxable transactions include the sale of gift certificates or traveler’s checks.
The taxable transaction occurs at the time the gift certificate or traveler’s check is redeemed.
Based upon the above, the purchase of the telephone calling card is not a taxable transaction
since the transaction is merely an exchange of money for an evidence of debt - an intangible
future right to telephone service. The taxable transfer of tangible personal property takes place
when the calling card is used since the purchaser is exchanging a future right to telephone
service for the telephone service (defined by Code Section 12-36-60 to be tangible personal
property and subject to taxation under Code Section 12-36-910(B)(3).) The use of the calling
card for long distance or international calls is not subject to South Carolina sales tax since South
Carolina exempts any charges for long distance telephone calls pursuant to Code Section 12-362120(11). The use of the calling card for local calls, however, is not exempt from South
Carolina=s 5% sales tax.
SOUTH CAROLINA DEPARTMENT OF REVENUE
s/Burnet R. Maybank III
Burnet R. Maybank III, Director
, 1997
December 29
Columbia, South Carolina

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