Communications Excise Tax; Prepaid Telephone Cards

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 49 and 602 [TD 8855] RIN 1545-
AV63

TITLE: Communications Excise Tax; Prepaid Telephone Cards

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations relating to the
application of the communications excise tax to prepaid telephone
cards (PTCs). The regulations implement certain changes made by the
Taxpayer Relief Act of 1997. They affect certain telecommunications
carriers, resellers, and purchasers of PTCs.

DATES: Effective Dates: These regulations are effective January 7,
2000.

Applicability Dates: For the date of applicability, see
�49.4251-4(f).

FOR FURTHER INFORMATION CONTACT: Bernard H. Weberman (202) 622-3130
(not a toll-free number).

SUPPLEMENTARY INFORMATION: Paperwork Reduction A t The collection of
information contained in these final regulations has been approved
by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C. 3507) under control number
1545-1628. Responses to this collection of information are required
to obtain a tax benefit.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.

The estimated average burden per respondent is 0.25 hour. The
estimated average annual burden per recordkeeper is 1.2 hours.

Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service , Attn: IRS Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224, and to the Office of Management and Budget ,
Attn: Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Washington, DC 20503.

Books or records relating to this collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.

Background

On December 17, 1998, a notice of proposed rulemaking
(REG-118620-97) was published in the Federal Register (63 FR 69585).
Three written comments were received but no hearing was held because
no requests to speak were received. The proposed regulations are
adopted as revised by this Treasury decision.

The principal concerns of the commenters related to the rules for
determining the face amount of an untariffed unit card transferred
to a transferee reseller. The proposed regulations provide that the
face amount can be determined by reference to actual retail sales by
the carrier, by reference to the price at which the PTC is sold to
the transferee reseller, or by reference to the minutes of domestic
communications service provided by the PTC. One commenter requested
additional explanation of the basis for these rules. Another
suggested that in many situations, particularly in the case of high-
denomination (for example, multi-hour) PTCs, none of the proposed
methods for determining the face amount will accurately reflect the
true retail value of the PTC. This commenter also suggested that if
a carrier can substantiate the actual retail price of a PTC it
should have the option of treating that price as the face amount.

The final regulations modify the rules relating to untariffed unit
cards in three respects. First, they clarify that when the face
amount is determined by reference to actual retail sales by the
carrier, the retail sales taken into account are sales of PTCs that
provide the same type and amount of communications service. The
final regulations also modify the markup percentage used when the
face amount is determined by reference to the price at which the
carrier sells the PTC to the transferee reseller. The proposed
regulations apply a markup of 65 percent. Under the final
regulations, the markup is reduced to 35 percent to correspond more
closely to markups in the retail sector generally. Lastly, the final
regulations modify the rule for determining the face amount by
reference to the minutes of domestic communications service provided
by the PTC. The proposed regulations provide that the face amount
may be determined by multiplying the number of minutes by a flat
$0.30 per-minute rate. As noted in the comments, however, a high-
denomination PTC generally provides lower cost service on a per-
minute basis than an otherwise equivalent low- denomination PTC.
Accordingly, the final regulations provide that the per-minute rate
used to determine face amount is reduced from $0.30 per minute to
$0.20 per minute as the amount of domestic communications service
provided by a PTC increases from 40 to 240 minutes.

For sales to transferee resellers, the final regulations do not
permit carriers that can substantiate the actual retail price of a
PTC to use that price as the face amount.

The IRS and Treasury Department believe that the modifications to
the methods for determining face amount address concerns that the
prescribed methods may overstate the face amount. Moreover, a system
based on the actual retail sale price when the retail sale is made
by a person other than the carrier could prove very difficult for
the IRS to administer because of the difficulty of verifying the
prices at which PTCs are sold by large numbers of small retailers
that may have acquired the PTCs indirectly through one or more
transferee resellers.

Commenters also suggested that state and local taxes should be
excluded from the face amount even if they are not separately
stated. In general, the comments propose an exclusion based on the
average amount of state and local taxes imposed on the carrier's
PTCs. These suggestions were not adopted. Section 4254(c) excludes
from the section 4251 tax base only those state and local taxes that
are imposed on the sale or furnishing of communications services and
that are separately stated in the bill.

A tax that is not separately stated (because, for example, it is
imposed after the taxable sale of the PTC and its amount is not
known at the time of the sale) does not qualify for this exclusion.
The regulations apply to PTCs transferred by carriers in calendar
quarters beginning after January 7, 2000. Carriers and transferees
may, however, rely on the regulations in determining the tax
treatment of PTCs transferred in quarters beginning on or before
that date.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations. It is
hereby certified that the collection of information in these
regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that the time required to prepare or retain the
notification is minimal and will not have a significant impact on
those small entities that are required to provide notification.
Furthermore, notification is provided only once to each seller.

Accordingly, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to
section 7805(f) of the Internal Revenue Code, the notice of proposed
rulemaking preceding these regulations was submitted to the Chief
Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.

Drafting Information

The principal author of these regulations is Bernard H. Weberman,
Office of Assistant Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the IRS and Treasury
Department participated in their development.

List of Subjects

26 CFR Part 49 Excise taxes, Reporting and recordkeeping
requirements, Telephone, Transportation.

26 CFR Part 602 Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations Accordingly, 26 CFR parts
49 and 602 are amended as follows:

PART 49--FACILITIES AND SERVICES EXCISE TAXES

Paragraph 1. The authority citation for part 49 is revised to read
as follows: Authority: 26 U.S.C. 7805.

Section 49.4251-4 also issued under 26 U.S.C. 4251(d).

Par. 2. Section 49.4251-4 is added to read as follows: �49.4251-4
Prepaid telephone cards.

(a) In general. In the case of communications services acquired by
means of a prepaid telephone card (PTC), the face amount of the PTC
is treated as an amount paid for communications services and that
amount is treated as paid when the PTC is transferred by any carrier
to any person that is not a carrier. This section provides rules for
the application of the section 4251 tax to PTCs.

(b) Definitions. The following definitions apply to this section:
Carrier means a telecommunications carrier as defined in 47 U.S.C.
153.

Comparable PTC means a currently available dollar card or tariffed
unit card (other than a PTC transferred in bulk or under special
circumstances, such as for promotional purposes) that provides the
same type and amount of communications services as the PTC to which
it is being compared.

Dollar card means a PTC the value of which is designated by the
carrier in dollars (even if also designated in units of service),
provided that the designated value is not less than the amount for
which the PTC is expected to be sold to a holder.

Holder means a person that purchases other than for resale.

Prepaid telephone card (PTC) means a card or similar arrangement
that permits its holder to obtain a fixed amount of communications
services by means of a code (such as a personal identification
number (PIN)) or other access device provided by the carrier and to
pay for those services in advance.

Tariff means a schedule of rates and regulations filed by a carrier
with the Federal Communications Commission.

Tariffed unit card means a unit card that is transferred by a
carrier--

(1) To a holder at a price that does not exceed the designated
number of units on the PTC multiplied by the carrier's tariffed
price per unit; or

(2) To a transferee reseller subject to a contractual or other
arrangement under which the price at which the PTC is sold to a
holder will not exceed the designated number of units on the PTC
multiplied by the carrier's tariffed price per unit. Transferee
means the first person that is not a carrier to whom a PTC is
transferred by a carrier.

Transferee reseller means a transferee that purchases a PTC for
resale.

Unit card means a PTC other than a dollar card.

Untariffed unit card means a unit card other than a tariffed unit
card.

(c) Determination of face amount--(1) Dollar card. The face amount
of a dollar card is the designated dollar value.

(2) Tariffed unit card. The face amount of a tariffed unit card is
the designated number of units on the PTC multiplied by the tariffed
price per unit.

(3) Untariffed unit card--(i) Transfer to holder. The face amount of
an untariffed unit card transferred by a carrier to a holder is the
amount for which the carrier sells the PTC to the holder.

(ii) Transfer to transferee reseller--(A) In general. The face
amount of an untariffed unit card transferred by a carrier to a
transferee reseller is at the option of the carrier--

(1) The highest amount for which the carrier sells a PTC that
provides the same type and amount of communications services to a
holder that ordinarily would not be expected to buy more than one
such PTC at a time (if the carrier makes such sales on a regular and
arm's-length basis) or the face amount of a comparable PTC (if the
carrier does not make such sales on a regular and arm's-length
basis);

(2) 135 percent of the amount for which the carrier sells the PTC to
the transferee reseller (including in that amount, in addition to
any sum certain fixed at the time of the sale, any contingent amount
per unit multiplied by the designated number of units on the PTC);
or

(3) If the PTC is of a type that ordinarily is used entirely for
domestic communications service, the maximum number of minutes of
domestic communications service on the PTC multiplied by the
applicable rate.

(B) Applicable rate. The applicable rate under paragraph (c)(3)(ii)
(A)(3) of this section with respect to a PTC is $0.30 reduced (but
not below $0.20) by $0.01 for each full 20 minutes by which the
maximum number of minutes of domestic communications service on the
PTC exceeds 40 minutes.

(C) Sales not at arm's length. In the case of a transfer of an
untariffed unit card by a carrier to a transferee reseller otherwise
than through an arm's-length transaction, the fair market retail
value of the PTC shall be substituted for the amount determined in
paragraph (c)(3)(ii)(A)(2) of this section.

(4) Exclusion. The amount of any state or local tax imposed on the
furnishing or sale of communications services that is separately
stated in the bill or on the face of the PTC and the amount of any
section 4251 tax separately stated in the bill or on the face of the
PTC are disregarded in determining, for purposes of this paragraph
(c), the amount for which a PTC is sold.

(d) Liability for tax--(1) In general. Under section 4251(d), the
section 4251(a) tax is imposed on the transfer of a PTC by a carrier
to a transferee. The person liable for the tax is the transferee.
Except as provided in paragraph (d)(2) of this section, the person
responsible for collecting the tax is the carrier transferring the
PTC to the transferee. If a holder purchases a PTC from a transferee
reseller, the amount the holder pays for the PTC is not treated as
an amount paid for communications services and thus tax is not
imposed on that payment.

(2) Effect of statement that purchaser is a carrier--(i) On
transferor. A carrier that transfers a PTC to a purchaser is not
responsible for collecting the tax if, at the time of transfer, the
transferor carrier has received written notification from the
purchaser that the purchaser is a carrier, and the transferor has no
reason to believe otherwise. The notification to be provided by the
purchaser is a statement, signed under penalties of perjury by a
person with authority to bind the purchaser, that the purchaser is a
carrier (as defined in paragraph (b) of this section). The statement
is not required to take any particular form.

(ii) On purchaser. If a purchaser that is not a carrier provides the
notification described in paragraph (d)(2)(i) of this section to the
carrier that transfers a PTC, the purchaser remains liable for the
tax imposed on the transfer of the PTC.

(3) Exemptions. Any exemptions available under section 4253 apply to
the transfer of a PTC from a carrier to a holder. Section 4253 does
not apply to the transfer of a PTC from a carrier to a transferee
reseller.

(e) Examples. The following examples illustrate the provisions of
this section: Example 1. Unit card; sold to individual. (i) On May
1, 2000, A, a carrier, sells a card it calls a prepaid telephone
card at A's retail store to P, an individual, for P's use in making
telephone calls. A provides P with a PIN. The value of the card is
not denominated in dollars, but the face of the card is marked 30
minutes. The sales price is $9. A tariff has not been filed for the
minutes on the card. The toll telephone service acquired by
purchasing the card will be obtained by entering the PIN and the
telephone number to be called.

(ii) Because P purchased from a carrier other than for resale, P is
a holder. The card provides its holder, P, with a fixed amount of
communications services (30 minutes of toll telephone service) to be
obtained by means of a PIN, for which P pays in advance of obtaining
service; therefore, the card is a PTC. Because the value of the PTC
is not designated in dollars and a tariff has not been filed for the
minutes on the PTC, the PTC is an untariffed unit card. Because it
is transferred by the carrier to the holder, the face amount is the
sales price ($9).

(iii) The card is a PTC; thus, under section 4251(d), the face
amount is treated as an amount paid for communications services and
that amount is treated as paid when the PTC is transferred from A to
P. Accordingly, at the time of transfer, P is liable for the 3
percent tax imposed by section 4251(a). The amount of the tax is
$0.27 (3% x the $9 face amount). Thus, the total paid by P is $9.27,
the $9 sales price plus $0.27 tax. A is responsible for collecting
the tax from P.

Example 2. Unit card; given to individual. (i) The facts are the
same as in

Example 1, except that instead of selling a card, A gives a 30
minute card to P.

(ii) Although the card provides P with a fixed amount of
communications services (30 minutes of toll telephone service) to be
obtained by means of a PIN, P does not pay for the service.
Therefore, the card is not a PTC, even though it is called a prepaid
telephone card by A.

(iii) Because the card is not a PTC, section 4251(d) does not apply.

Furthermore, no tax is imposed by section 4251(a) because no amount
is paid for the communications services.

Example 3. Unit card; adding value. (i) After using the card
described in Example 2, P arranges with A by telephone to have 30
minutes of toll telephone service added to the card. The sales price
is $9. P is told to continue using the PIN provided with the card.

(ii) Because P purchased from a carrier other than for resale, P is
a holder. The arrangement provides its holder, P, with a fixed
amount of communications services (30 minutes of toll telephone
service) to be obtained by means of a PIN, for which P pays in
advance of obtaining service; therefore, the arrangement is a PTC.
Because the value of the PTC is not designated in dollars and a
tariff has not been filed for the minutes on the PTC, the PTC is an
untariffed unit card. Because it is transferred by the carrier to
the holder, the face amount is the sales price ($9).

(iii) The arrangement is a PTC; thus, under section 4251(d), the
face amount is treated as an amount paid for communications services
and that amount is treated as paid when the PTC is transferred from
A to P. Accordingly, at the time of transfer, P is liable for the 3
percent tax imposed by section 4251(a). The amount of the tax is
$0.27 (3% x the $9 face amount). Thus, the total paid by P is $9.27,
the $9 sales price plus $0.27 tax. A is responsible for collecting
the tax from P.

Example 4. Dollar card; sold other than for resale. (i) On May 1,
2000, B, a carrier, sells 100,000 cards it calls prepaid telephone
cards to Q, an auto dealer, for $50,000. Q will give away a card to
each person that visits Q's dealership. B provides Q with a PIN for
each card. The face of each card is marked $3. The toll telephone
service acquired by purchasing the card will be obtained by entering
the PIN and the telephone number to be called.

(ii) Because Q purchased from a carrier other than for resale, Q is
a holder.

Each card provides its holder, Q, with a fixed amount of
communications services ($3 of toll telephone service) to be
obtained by means of a PIN, for which Q pays in advance of obtaining
service; therefore, each card is a PTC even though Q's visitors do
not pay for the cards. The value of each PTC is designated in
dollars; therefore, each PTC is a dollar card. Because the PTC is a
dollar card, the face amount is the designated dollar value ($3).

(iii) The cards are PTCs; thus, under section 4251(d), the face
amount is treated as an amount paid for communications services and
that amount is treated as paid when the PTCs are transferred from B
to Q. Accordingly, at the time of transfer, Q is liable for the 3
percent tax imposed by section 4251(a). The amount of the tax is
$9,000 (3% x the $3 face amount x 100,000 PTCs). Thus, the total
paid by Q is $59,000, the $50,000 sales price plus $9,000 tax. B is
responsible for collecting the tax from Q.

Example 5. Tariffed unit card; sold to transferee reseller. (i) On
May 1, 2000, C, a carrier, sells 1,000 cards it calls prepaid
telephone cards to R, a convenience store owner, for $7,000. C
provides R with a PIN for each card. The value of the cards is not
denominated in dollars, but the face of each card is marked 30
minutes and a tariff of $0.33 per minute has been filed for the
minutes on each card. R agrees that it will sell the cards to
individuals for their own use and at a price that does not exceed
$0.33 per minute. R actually sells the cards for $9 each (that is,
at a price equivalent to $0.30 per minute). The toll telephone
service acquired by purchasing the card will be obtained by entering
the PIN and the telephone number to be called.

(ii) Because R purchased from a carrier for resale, R is a
transferee reseller.

Because R's customers will purchase other than for resale, they will
be holders. Each card sold by R provides its holder, R's customer,
with a fixed amount of communications services (30 minutes of toll
telephone service) to be obtained by means of a PIN provided by the
carrier, for which R's customer pays in advance of obtaining
service; therefore, each card is a PTC. Because the value of each
PTC is not designated in dollars and C sells the PTCs to R subject
to an arrangement under which the price at which the PTCs are sold
to holders will not exceed the designated number of minutes on the
PTC multiplied by C's tariffed price per minute, each PTC is a
tariffed unit card. Because the PTCs are tariffed unit cards, the
face amount of each PTC is $9.90, the designated number of minutes
on the PTC multiplied by the tariffed price per minute (30 x $0.33),
even though the retail sale price of each card is $9.

(iii) The cards are PTCs; thus, under section 4251(d), the face
amount is treated as an amount paid for communications services and
that amount is treated as paid when the PTC is transferred from C to
R. Accordingly, at the time of transfer, R is liable for the 3
percent tax imposed by section 4251(a). The amount of the tax is
$297 (3% x the $9.90 face amount x 1,000 PTCs). Thus, the total paid
by R is $7,297, the $7,000 sales price plus $297 tax. C is
responsible for collecting the tax from R.

Example 6. Unit card; sold to transferee reseller. (i) On May 1,
2000, D, a carrier, sells 10,000 cards it calls prepaid telephone
cards to S, a convenience store owner, for $60,000. D provides S
with a PIN for each card. The value of the cards is not denominated
in dollars, but the face of each card is marked 30 minutes. A tariff
has not been filed for the minutes on each card. S will sell the
cards to individuals for their own use for $9 each. D also sells a
card that provides 30 minutes of the same type of communications
service at its retail store for $9. The toll telephone service
acquired by purchasing the card will be obtained by entering the PIN
and the telephone number to be called.

(ii) Because S purchased from a carrier for resale, S is a
transferee reseller.

Because S's customers will purchase other than for resale, they will
be holders. Each card sold by S provides its holder, S's customer,
with a fixed amount of communications services (30 minutes of toll
telephone service) to be obtained by means of a PIN provided by the
carrier, for which S's customer pays in advance of obtaining
service; therefore, each card is a PTC. Because the value of each
PTC is not designated in dollars and a tariff has not been filed for
the minutes on the PTC, each PTC is an untariffed unit card.

(iii) The PTCs are untariffed unit cards transferred by the carrier
to a transferee reseller. Thus, the face amount is determined under
paragraph (c)(3)(ii) of this section, which permits D to choose from
three alternative methods. Under paragraph (c)(3)(ii)(A)(1) of this
section, the face amount of each PTC would be $9, the highest amount
for which D sells to holders purchasing a single PTC. Alternatively,
under paragraph (c)(3)(ii)(A)(2) of this section, the face amount of
each PTC would be $8.10, computed as follows: 135% x the $60,000
sales price � 10,000 PTCs. Finally, under paragraph (c)(3)(ii)(A)(3)
of this section (assuming the PTCs are of a type that ordinarily is
used entirely for domestic communications services), the face amount
of each PTC would be $9 ($0.30 x 30 minutes).

(iv) The cards are PTCs; thus, under section 4251(d), the face
amount is treated as an amount paid for communications services and
that amount is treated as paid when the PTCs are transferred from D
to S. Accordingly, at the time of transfer, S is liable for the 3
percent tax imposed by section 4251(a). Assuming that D chooses to
determine the face amount as provided in paragraph (c)(3)(ii)(A)(2)
of this section, the amount of the tax is $2,430 (3% x the $8.10
face amount x 10,000 PTCs). Thus, the total paid by S is $62,430,
the $60,000 sales price plus $2,430 tax. D is responsible for
collecting the tax from S.

Example 7. Transfer of card that is not a PTC. (i) On May 1, 2000,
E, a carrier, provides a telephone card to T, an individual, for T's
use in making telephone calls. E provides T with a PIN. The card
provides access to an unlimited amount of communications services. E
charges T $0.25 per minute of service, and bills T monthly for
services used. The communications services acquired by using the
card will be obtained by entering the PIN and the telephone number
to be called.

(ii) Although the communications services will be obtained by means
of a PIN, T does not receive a fixed amount of communications
services. Also, T cannot pay in advance since the amount of T's
payment obligation depends upon the number of minutes used.
Therefore, the card is not a PTC.

(iii) Because the card is not a PTC, section 4251(d) does not apply.
However, the 3 percent tax imposed by section 4251(a) applies to the
amounts paid by T to E for the communications services. Accordingly,
at the time an amount is paid for communications services, T is
liable for tax. E is responsible for collecting the tax from T.

(f) Effective date. This section is applicable with respect to PTCs
transferred by a carrier on or after the first day of the first
calendar quarter beginning after January 7, 2000.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 3. The authority citation for part 602 continues to read as
follows: Authority: 26 U.S.C. 7805.

Par. 4. In �602.101, paragraph (b) is amended by adding an entry in
numerical order to the table to read as follows: �602.101 OMB
Control numbers.

* * * * *

(b) * * *

CFR part or section where Current OMB identified and described
control No.

* * * * *

49.4251-4(d)(2)........................................1545-1628

* * * * *

John M. Dalrymple
Acting Deputy Commissioner of Internal Revenue
Approved: December 13, 1999
Jonathan Talisman
Acting Assistant Secretary of the Treasury

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