Does Utah sales tax apply to the full purchase price of a prepaid telephone calling card sold in Utah, even if the card only allows interstate calls?

Plain-English summary

A telecommunications company that sells prepaid calling cards asked the Tax Commission whether it must collect Utah sales tax on cards that only allow interstate calls, or on the interstate portion of a card's minutes, arguing that Utah Admin. Rule R865-19S-90 ("Rule 90") exempts telephone services and contracts sold exclusively for interstate use.

The Commission held the entire purchase price of a prepaid telephone calling card is taxable in Utah, regardless of whether its minutes are interstate, intrastate, or both — and explained why Rule 90 doesn't help the taxpayer's argument:

• Calling cards are a separate, specifically taxed category. Utah Code Ann. § 59-12-103(1)(m) taxes "amounts paid or charged for prepaid telephone calling cards" directly — this is distinct from § 59-12-103(1)(b), which taxes ordinary telephone service only when it "originates and terminates within the boundaries of this state" (i.e., intrastate). The Legislature drew that interstate/intrastate line explicitly for ordinary telephone service but chose not to write it into the calling-card provision — a deliberate omission, not an oversight, since the Legislature clearly knew how to make that distinction when it wanted to.
• Taxing the card avoids double taxation. Utah Code Ann. § 59-12-104(43) separately exempts the telephone service charged to a prepaid calling card from tax — because the card's purchase price was already taxed up front, taxing the underlying calls too would tax the same value twice.
• Rule 90 doesn't apply to calling cards at all. Before 1998, Utah's rule did lump calling cards together with "service contracts." But in 1998 the Legislature passed SB 211, adding the current § 59-12-103(1)(m) language taxing calling cards by statute, and the Commission removed the old rule language accordingly. Rule 90's title and text now address only "Telephone Service" — not calling cards — so its interstate-exclusive-use exception is irrelevant to the calling-card tax.
• No federal preemption issue was identified. Though the taxpayer hadn't raised federal preemption, the Commission noted it wasn't aware of any federal law that would bar Utah from taxing the cards' full purchase price.

What this means for you

Businesses selling prepaid telephone calling cards in Utah

Collect Utah sales tax on the full purchase price of every calling card sold in Utah, no matter what mix of interstate and intrastate minutes the card provides. Don't rely on Rule 90's interstate-service exception — it doesn't reach calling cards after the 1998 statutory change.

Telecommunications companies selling both cards and traditional service

Remember the fork: ordinary telephone service is taxed only if intrastate (§ 59-12-103(1)(b)), but prepaid calling cards are taxed in full regardless (§ 59-12-103(1)(m)) — and the calls actually placed using a taxed card are separately exempt (§ 59-12-104(43)) so you don't tax the same transaction twice.

Accountants and tax professionals

This ruling is a useful statutory-construction example: when a general provision (telephone service, with its interstate/intrastate carve-out) and a specific provision (calling cards, with no such carve-out) could both apply, the Commission applied the more specific statute and read the general provision's silence on calling cards as deliberate, reinforced by legislative history (the 1998 SB 211 amendment and the Commission's corresponding rule change).

Common questions

Q: If a calling card is sold for interstate-only use, is it exempt like ordinary interstate telephone service would be?
A: No. The interstate/intrastate distinction only applies to ordinary telephone service under § 59-12-103(1)(b); calling cards are taxed in full under the separate § 59-12-103(1)(m), with no such carve-out.

Q: Does Utah tax both the card purchase and the calls made using it?
A: No — only the card's purchase price is taxed. § 59-12-104(43) exempts the telephone service charged to an already-taxed prepaid card, avoiding double taxation.

Q: Does this ruling apply to my business?
A: A private letter ruling binds the Commission only for the taxpayer and facts it addresses. It's useful for understanding the Commission's reasoning, but confirm your own facts with a tax professional.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-12-103(1)(m) (prepaid telephone calling cards)
• Utah Code Ann. § 59-12-103(1)(b) (intrastate telephone service)
• Utah Code Ann. § 59-12-104(43) (exemption for telephone service charged to a prepaid card)
• Utah Admin. Rule R865-19S-90 (Rule 90 — applies only to telephone service, not calling cards)

Legislative history:

• 1998 SB 211 (added current § 59-12-103(1)(m); superseded the prior rule-based treatment of calling cards)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/08-007.pdf

Original ruling text

FINAL DRAFT PRIVATE LETTER RULING

                                       REQUEST LETTER

08-007

May 22, 2008

Utah State Tax Commission
210 North 1950 West
Salt Lake City UT 84134

Re: Private Letter Ruling Request

We are requesting a private letter ruling on behalf of a client. The client is in the
telecommunications business, and will be selling telecommunications time through various
means, including through prepaid cards. The client needs to know whether to collect tax on its
various products.

Utah code section 59-12-103(1)(b) and (m) impose sales tax on “telephone service…that
originates and terminates within the boundaries of this state,” and on “amounts paid or charged
for prepaid telephone calling cards.”

Tax Commission rule R865-19S-90(A)(2) in turn provides that “[p] repaid telephone services or
service contracts are presumed to be used for intrastate telephone services unless the service
contact is sold exclusively for use in interstate communications.” (Emphasis added.)

Under these provisions, (1) a prepaid calling card sold in Utah for $20.00 that authorizes 1000
telephone minutes (interstate or intrastate) would presumably be subject to Utah sales tax, and
(2) a service contract that is sold in Utah exclusively for use in interstate communications would
presumably not be subject to sales tax. The issues our client would like clarity on are follows:

  1.      If the client sells a $20 prepaid calling card in Utah that technologically and legally
          only allows interstate calls to be made, is the $20 charge for such a card subject to
          Utah sale tax?
  2.      If the client sells a prepaid calling card in Utah that allows both interstate and
          intrastate calls to be made, then sells $30 worth of minutes on that card that
          technologically and legally can be used for interstate calls, is that $30 charge subject
          to Utah sales tax? (The purchase of the card itself, the purchase of dual interstate and
          intrastate minutes, and the purchase of intrastate-only minutes would presumably be
          sales taxable.)

Page 2

If the answer to either question is yes, please explain what distinguishes a non-taxable interstate
prepaid “service contract” from a taxable interstate prepaid calling card, or taxable interstate
prepaid minutes on a calling card.

The seeming internet of Rule 90, which makes logical sense, is that any prepaid
telecommunications contract, card, minutes, or other medium that is sold exclusively for use in
interstate communications is not subject to Utah sales tax.

NAME

Page 3

                                   RESPONSE LETTER

                                            August 28, 2008

NAME
ADDRESS

Re: Private Letter Ruling Request 08-007—Prepaid Telephone Calling Cards

Gentlemen:

    You have asked whether your client’s company is required under Utah law to collect sales

tax on certain activities. You have described your client as a telecommunication business that
will be selling telephone services through various means, including prepaid telephone calling
cards. The prepaid telephone calling cards may be composed of interstate-only minutes, a
combination of interstate-only and intrastate-only minutes, or dual interstate-or-intrastate
minutes.

    You specifically cite Utah Admin. Code R865-19S-90 (“Rule 90”), as the basis for your

conclusion, citing the provision “that ‘[p]repaid telephone services or service contracts are
presumed to be used for intrastate telephone services unless the service contact is sold
exclusively for use in interstate communications.’ (Emphasis added.)”

    Before beginning our analysis, we point out that your reference to Rule 90 must be

considered within the context of the history of the rule. Implicit in your statement is the
assumption that calling cards are functionally equivalent to prepaid telephone services or service
contracts. Prior to 1998, however, the rule specifically included prepaid calling cards along with
the separate term of “service contracts” within in the definition of “Intrastate,” which is the
specific section you cited in your request. In 1998 the State Legislature passed SB 211, which
introduced the current language, now found under Utah Code Ann. § 59-12-103(1)(m). It is that
statute which imposes a tax on calling cards. As a result of this legislation, the Tax Commission
removed the corresponding language from the rule. Accordingly, the cite from our rule, which
you referenced, is not relevant to your request or analysis.

     With this clarification, we will address your concerns in more detail.

Issues

     The two issues you identified for purposes of this private letter ruling are:

1. Whether the sale in Utah of a prepaid telephone calling card that technologically and
   legally only allows interstate calls would be subject to Utah sales tax.

Page 4

2. Whether Utah sales tax would be imposed on the full purchase price of the prepaid
   telephone calling card itself or imposed on the purchase price of the calling card’s
   minutes based on their interstate and/or intrastate character. That is, whether the
   intrastate allotment of the minutes would be subject to tax, while the interstate portion
   would not.

You have also asked us, in the event the answer to either question is “no,” to identify the
distinction between an interstate prepaid “service contract” and a taxable interstate prepaid
calling card.

Analysis

    Under Utah Code Ann. § 59-12-103(1)(m), “prepaid telephone calling cards” are taxable.

This statute imposes a tax on “(m) amounts paid or charged for prepaid telephone calling cards.”
The specific use of the term “cards” strongly suggests that the cards themselves, rather than the
underlying telephone services, are subject to the Utah sales tax. Likewise, the title for
§ 59-12-103 identifies the “Sales and Use Tax Base,” which also suggests that the card itself is
separate and distinct from telephone service as part of the tax base. The tax obligation is
incurred when the card is purchased. At this time, the purchase price for a taxable transaction
identified in the tax base is known and the tax can easily be computed.

    Section 59-12-103(1)(m) is silent as to interstate versus intrastate minutes; the Utah

Legislature did not apply to prepaid telephone calling cards any distinction between intrastate
and interstate minutes. On the other hand, the Utah Legislature did consider such distinction
when it drafted § 59-12-103 because it made a similar distinction in Utah Code Ann. § 59-12-
103(1)(b), which states:

   A tax is imposed on the purchaser as provided in this part for amounts paid or
   charged for the following transactions:
   ...
   (b) amounts paid: (i) to a: (A) telephone service provider regardless of whether
   the telephone service provider is municipally or privately owned . . . (ii) for: (A)
   telephone service . . . that originates and terminates within the boundaries of
   this state . . . (Emphasis added.)

Comparing this with the language of § 59-12-103(1)(m), it appears that the Utah legislature
considered this distinction for telephone service, but chose not to apply a similar distinction to
prepaid telephone calling cards.

    Furthermore, we believe the two subsections would conflict if both applied to prepaid

telephone calling cards. If the cards were taxed on their purchase and on the telephone services
later provided, the cards’ purchasers could potentially be subject to double taxation.
Accordingly, we look to the more specific statute of § 59-12-103(1)(m).

    Utah Code Ann. § 59-12-104(43) supports this position by exempting from sales tax

“sales of telephone service charged to a prepaid telephone calling card . . .” This section

Page 5

exempts from taxation the telephone services relating to prepaid telephone calling cards. We
find this exclusion to be consistent with the specific tax imposition under § 59-12-103(1)(m) on
the purchase price of the cards, without specifying the nature of the underlying telephone
services. Simply put, the more specific prepaid telephone calling cards are statutorily distinct
from the more general telephone services.

     With respect to Rule 90, for reasons cited previously, we find that it is not applicable to

prepaid telephone calling cards; it only provides guidance on telephone services. The very title
of Rule 90 specifically identifies “Telephone Service,” showing the intent to interpret telephone
service as the term is used in § 59-12-103. Because “telephone service” does not affect the
taxability of prepaid telephone calling cards under §§ 59-12-103(1)(m) and 59-12-104(43), the
guidance provided in Rule 90, on which telephone services are taxable, is irrelevant for the cards.
We do recognize that the terms “prepaid telephone services or service contracts” under
Rule 90 might be still confused with calling cards. However, the interpretation you seek is
statutorily impermissible. The Legislature has carved out prepaid calling cards from other
telephone services. Thus, while Rule 90 clarifies interstate and intrastate transmissions and
relates this distinction to prepaid services and contracts, we cannot extend the definition of
prepaid services and contracts provided in the rule beyond the clear statutory meaning of prepaid
telephone calling cards.

Conclusion

    After analyzing the text and history of §§ 59-12-103 and 59-12-104 and Administrative

Rule R865-19S-90, we conclude that the sale in Utah of a prepaid telephone calling card that
technologically and legally only allows interstate calls would be subject to Utah sales tax on the
full purchase price of the card itself, regardless of the character or nature of interstate and/or
intrastate calls. We add, that although your request letter did not question whether federal
preemption applies, we are not aware of any federal legislation that would preempt Utah from
taxing the cards’ full purchase prices.

    Our conclusions are based on the facts as described. Should the facts be different, a

different conclusion may be warranted. If you feel we have misunderstood the facts as you have
presented them, if you have additional facts that may be relevant, or if you have any other
questions, please contact us.

                                          For the Commission,



                                          Marc B. Johnson
                                          Commissioner

MBJ/aln
08-007