Which Virginia tax applied to an unlimited 30-day cellular plan funded directly or with retail-taxed prepaid calling cards?

Subject

Communications and Use Tax and the Retail Sales and Use Tax to cellular sales.

Plain-English summary

Virginia's Communications Sales and Use Tax generally applied to an unlimited 30-day voice and text plan, but not to account dollars loaded through a prepaid calling card that had already been subject to retail sales tax. The provider offered pay-as-you-go voice, messaging, and audio-visual content.

Virginia exempted qualifying prepaid calling services from communications tax, but the statutory definition required service sold in predetermined units or dollars that decreased with use. An unlimited monthly plan did not meet that definition, so direct purchases of the plan were generally subject to communications tax.

Telephone calling cards were subject to Virginia retail sales tax when initially sold. When a customer used a retail-taxed card to open or refill the provider account, the loaded dollars were exempt from communications tax. The provider therefore should not collect communications tax again on those amounts.

The ruling also noted a separate prepaid wireless E-911 fee change effective January 1, 2011; that historical fee rule was distinct from the two tax classifications above.

What this means for you

• "Prepaid" alone does not establish the communications-tax exemption.
• Unlimited service differs from units or dollars that decline with use.
• Track whether account funds came from a calling card already taxed at retail.
• Do not apply communications tax again to qualifying retail-taxed card loads.

Common questions

Why was the unlimited plan not a prepaid calling service?

Its voice and text usage did not reduce predetermined units or dollars.

What tax applied to the calling card sale?

Virginia retail sales and use tax.

Were card-loaded account dollars also subject to communications tax?

No, when the calling card itself had already been subject to retail sales tax.

Citations and references

• Va. Code §§ 58.1-602, 58.1-603, 58.1-647, and 58.1-648(A) and (B).
• 2006 Va. Acts ch. 780.
• 2010 Va. Acts chs. 466 and 566.
• Virginia Guidelines and Rules for the Communications Taxes (Nov. 1, 2006).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-192

Original ruling text

August 26, 2010

Re: Ruling Request: Communications Sales and Use Tax

Retail Sales and Use Tax

Dear *:

This is in response to your letter requesting a ruling on the application of the Communications Sales and Use Tax and the Retail Sales and Use Tax to the unlimited communications services provided by * (the "Taxpayer") to customers via cellular telephones.

FACTS

The Taxpayer provides traditional voice services, text messaging, and access to audio-visual content to its cellular telephone customers on a "pay as you go" basis. One arrangement allows customers unlimited voice calling and text messaging for a period of thirty days for a set prepaid fee. Customers typically pay for this arrangement by having the amount deducted out of an account with the Taxpayer or a bank account. Customers can open or refill the account with the Taxpayer by purchasing prepaid calling cards either from the Taxpayer or from third-party retailers. The Taxpayer or the third-party retailer collects the Virginia Retail Sales and Use Tax on the sale of the prepaid calling cards.

The Taxpayer requests a ruling regarding the application of the Communications Sales and Use Tax and the Retail Sales and Use Tax to these transactions.

DETERMINATION

Effective January 1, 2007, House Bill 568 ( Acts of Assembly 2006, Chapter 780) replaced many of the state and local communications taxes and fees with a centrally administered Communications Sales and Use Tax. On November 1, 2006, the Department of Taxation ("TAX") issued Guidelines and Rules for the Virginia Communications Taxes ("Guidelines") to provide guidance to taxpayers and local governments regarding the new law.

Va. Code § 58.1-648(A) imposes "a sales or use tax on the customers of "communications services." Va. Code § 58.1-647 (broadly defines "communications services" as:

the electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals, including cable services, to a point or between or among points, by or through any electronic, radio, satellite, cable, optical, microwave, or other medium or method now in existence or hereafter devised, regardless of the protocol used for the transmission or conveyance.

The sale or recharge of prepaid calling services are exempted from the Communications Sales and Use Tax pursuant to Va. Code § 58.1-648(B). Va. Code § 58.1-647 defines "prepaid calling service" as the right to access exclusively communications services, which must be paid for in advance and which enables the origination of calls using an access number or authorization code, whether manually or electronically dialed, and that is sold in predetermined units or dollars that decrease in number with use .

In my opinion, a monthly plan that allows unlimited voice calling and text messaging would not meet the definition of a "prepaid calling service" as the communications services are not sold in predetermined units or dollars that decrease in number with use. Accordingly, such transactions are generally subject to the Communications Sales and Use Tax.

Under Va. Code §§ 58.1-602 and 58.11-603, the initial sale of a telephone calling card is subject to the Retail Sales and Use Tax. Va. Code § 58.1-602 also provides that the telephone calling cards shall be exempt from all other state and local utility taxes. The Taxpayer and the third-party retailers are correct to collect the Retail Sales and Use Tax on sales of the prepaid calling cards used to open or refill accounts with the Taxpayer. However, the dollars added to an account with the Taxpayer through the purchase of a calling card that has been subject to the Retail Sales and Use Tax are exempt from the Communications Sales and Use Tax under Va. Code § 58.1-602. Accordingly, the Taxpayer should not collect the Communications Sales and Use Tax from amounts added to an account with the Taxpayer through the initial purchase of a calling card.

Also, you should note that effective January 1, 2011, House Bill 754 ( Acts of Assembly 2010 , Chapter 566) and Senate Bill 441 ( Acts of Assembly 2010, Chapter 466) repeal the current E-911 fee on prepaid wireless service and impose a new prepaid wireless E-911 fee of $0.50 on each retail purchase of prepaid wireless calling service. The fee is collected at the point of sale by retail merchants or the service provider and will be administered by TAX. Each wireless service carrier and reseller will continue to collect a surcharge of $0.75 per month from each of its postpaid customers through its regular billing. This surcharge will continue to be administered by the Wireless E-911 Services Board.

CONCLUSION

The Va. Code sections and regulations cited, along with other reference documents, are available on-line in the Tax Policy (Library section of TAX's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions about this determination, you may contact * in the Office of Tax Policy, Policy Development Division, at ***.

Sincerely,

Craig M. Burns

Acting Tax Commissioner

PD/1-3770102279