A Taxing Situation
Posted: 06/2000
A Taxing Situation
IRS, State Collection Methods Become Clearer
By Gary T. Rhodus
While clarity is appearing in the application, there
is a fundamental lack of appreciation for what the changes mean to the prepaid service provider. The service provider will be relieved of tax liability
in only a few cases. More often than not, the change will be in the way the liability
is determined.nyone involved in the sale of prepaid telephone calling cards (PTCs) is aware of the controversy that has swirled for years regarding how they should be taxed. At the federal level, they could be taxed by the federal excise tax. At the state and local levels, sales taxes could be imposed at the “point-of-sale” (POS) or on usage.
At last, we are seeing with some clarity (albeit in some cases without understanding) how the Internal Revenue Service expects the 3 percent federal excise tax to be imposed. And, during the last few years, the industry’s clear desire and lobbying for point-of-sale taxation has resulted in success. Thirty states now impose state and local sales taxes at the point of sale (See chart, page 59).
While clarity is appearing in the application, there is a fundamental lack of appreciation for what the changes mean to the prepaid service provider. The service provider will be relieved of tax liability in only a few cases. More often than not, the change will be in the way the liability is determined.
For instance, while POS has afforded some cases the opportunity to “transfer” tax collection downstream to the retailer, few vendors understand or appreciate that POS in and of itself, affects only sales and use taxes, not necessarily other taxes and fees imposed on telecom services. They also fail to understand that the PTC service provider is the retailer in at least four situations. Additionally, POS taxation applies differently in some cases to prepaid wireless and local services (dial tone) than to prepaid long distance, and differently for traditional local service providers and prepaid local service providers, and sometimes applies only to PTCs that are sold “exclusively” for the provision of telecom services.
POS Affects Only
Sales and Use Taxes
As most everyone knows, a plethora of taxes and fees can be imposed upon the sale or provision of telecom services in any jurisdiction. These take the form of sales taxes, gross receipts taxes, state or local utility taxes, telecom excise taxes, business and occupation taxes, 911 fees, state and local infrastructure maintenance fees, and others.
Each tax or fee is imposed under separate sections of state and local laws or enabling statutes. Therefore, an alteration to one does not change the application or the method of imposition of other taxes and fees without the inclusion of specific language.
Case in point: Effective July 1, 1999, Florida changed the application of its “telecommunication sales tax” from usage to point of sale. However, as noted in separate and subsequent administrative rulings and letters (see Florida Department of Revenue Tax Information Publication No. 99A01-18 [June 30, 1998] and No. 00A01-03 [January 24, 2000]), the change did not apply to the Florida Gross Receipts Tax imposed on telecommunication service providers. The change also had no impact on the usage-based calculation of Florida’s Municipality Utility Taxes.
Moreover, retailers must charge sales tax on sales of PTCs at the special “telecom” rate of 7 percent rather than the standard rate of 6 percent imposed on other sales of tangible personal property, and they must report the tax on the telecom line of the tax return. What has resulted in Florida and other jurisdictions is the worst of all worlds, usage-based and point-of-sale-based taxes.
PTC Service Providers
Are Often Retailers
The PTC service provider will be a retailer in at least four situations, and it still will have tax collection and remittance responsibilities in POS states. The four situations are the following:
Recharge. All states that have redefined PTC sales from telephone service to tangible personal property also have defined the “recharge” of a PTC to be a new sale of tangible personal property.
Typically in these states, the tax situs (where tax is due) is defined as the “ship to” address of where the card(s) will be sent or, the billing address of the credit card to which the charge is billed.
In other words, if a card is recharged for a customer with a ship-to address or credit card billing address in Texas, the appropriate Texas state and local taxes that are due on the sale of tangible personal property at that location should be imposed.
This has significant implications for a vendor’s order-entry system and the need to identify and calculate the tax due for inclusion on the credit card charge. Failure to do so exposes the vendor to future tax, penalty and interest assessment on unbilled taxes. It also results in the continuation of the unlevel playing field everyone expected from the move to POS application.
Direct sale to a promotional buyer. In these situations, under sales and use tax law, the promotional buyer is considered the end-user consumer. For state and local purposes, the tax base in most cases will be the actual amount the promotional buyer pays. For federal excise tax purposes, the base will be the face or retail value, depending on whether the card was a dollar or unit denominated card.
The need to determine the applicable rate and to include it on an invoice or bill becomes apparent if the vendor wants to avoid exposure upon audit.
Vending machine sales. In POS states where the PTC has been defined as the sale of tangible personal property, vending machine sales to the purchaser of the card are retail sales, and therefore, are subject to tax in the jurisdiction where the machine is located and at that location’s rates.
Since taxes typically cannot be added to the amounts collected at a vending machine, they normally are treated (but not always) as included in the sales price. In these cases, they can be “backed out” of the gross receipts of the machine collections prior to calculation and remittance of actual tax due. However, since each state that imposes a sales tax has special statute sections to govern vending machine sales, a PTC vendor would be well advised to become familiar with the tax rates and laws applicable where the machines are located.
Any sale made without the appropriate exemption certificate. Under sales and use tax laws, every sale of tangible personal property is defined as a retail sale until proven otherwise. Proof that a sale is not a retail sale is determined by the presence or absence of a resale or other applicable exemption certificate. Failure to obtain the necessary certificate exposes the PTC vendor to the risk of being unable to prove to an auditor that the sale was for resale. Absent the exemption certificates, an auditor could impose tax, penalty and interest. The auditor also could suggest the vendor file a refund claim for the tax assessed if the vendor can prove the sales were for resale.
The point is that POS sales tax application has not relieved PTC vendors from sales tax liability. It only has changed the way they must compute their liability. Most importantly, vendors should recognize the impact on billing and order-entry systems, and the need to determine tax situs and tax rates to impose on their retail sales.
Different
Strokes for Different Folks
Aside from the fact that POS taxation can result in different tax treatment for prepaid local services and traditional local services, at least one case exists (and presumably more) where a tax must be applied differently on prepaid wireless services than on prepaid toll.
Again look to Florida and its change to POS application of telecom sales tax on PTC sales. Since county discretionary sales taxes do not apply to long-distance service sales, no county discretionary sales tax is due on sales of prepaid long-distance service.
However, county discretionary sales taxes do apply to sales of local service, which include mobile and wireless services, and thus apply to the sale of prepaid wireless and local services (see Florida Tax Information Bulletin No. 00A01-03 [January 24, 2000].
POS sales tax application is derived from statutorily changing the definition of the sale of a PTC from the sale of telephone service to the sale of tangible personal property. As a result, it is probable that certain taxes and fees imposed uniquely on telecommunications services might not be applicable to the sale of prepaid local services such as 911, utility user and universal lifeline. Conversely, sellers of prepaid local services, which are defined as the sale of tangible personal property, might not qualify for sale for resale exemption from taxes on their underlying purchases since they are not reselling telephone service. This potential result, while not anticipated, demonstrates the failure of POS application to level the playing field.
Obtaining different tax results from the sale of identical or similar services based on the method of payment is unique in sales tax theories.
In a little known and often overlooked section of some POS application statutes is the requirement that POS application is afforded only to PTCs sold for use “exclusively” in obtaining telecommunication services.
Apparently this means that if it were a “multi-use” card by which other types of nontelecommunication products or services can be obtained, POS application would not be in order.
In this case, the card has become effectively a “debit card,” which means all taxes presumably would be due based upon what product or service ultimately is purchased.
While this may seem unusual, it is in concert with typical sales tax application on purchases made with gift certificates and traditional debit cards. When purchases are made, the tax is applied when the certificate or debit transaction takes place, and it is based on what was purchased and where.
Playing Field Still Lopsided
While POS application in some cases has resulted in reduced tax responsibility for PTC service providers, that reduction comes only on sales made to wholesalers, distributors or retailers who provide proper exemption certificates.
POS application has not resulted in removing the PTC service provider from state and local tax collection responsibility or removing them from the ranks of retailers. It only has changed the way in which the vendor’s liabilities must be determined and calculated, and it has resulted in the need to obtain, maintain and administer numerous exemption certificates not previously required. Moreover, POS application has not leveled the playing field. It has resulted in disparate tax treatment of certain services based on the manner in which they are paid for; has increased billing costs by necessitating the need for expensive and complex tax rate software; and has generally increased the vendor’s potential exposure.
Gary T.
Rhodus, CMI, is president and CEO of Atlantax Systems Inc. He can be reached at grhodus@atlantax.com.
