Introduction: The purpose of this TIR is to announce a statutory change in the application of sales tax to prepaid calling arrangements effective April 1, 2003. General Laws Chapter 64H, § 1 has been amended to add the following definition of Prepaid Calling Arrangement: "the right to exclusively purchase telecommunications services, that shall be paid for in advance and enables the origination of the calls using an access number or authorization code, whether manually or electronically dialed." Prepaid calling cards are sold by some retail vendors such as convenience stores and drug stores, as well as by telecommunications vendors. This TIR revokes and replaces DOR Directive

96-1 for sales of prepaid calling arrangements on or after April 1, 2003. However, the rules in DD 96-1 continue to apply to any unused minutes which remain available for use after April 1, 2003 pursuant to prepaid calling arrangements originally sold prior to April 1, 2003.

Summary: DD 96-1 generally provided that prepaid calling services were taxable when the retail customer used the prepaid card to make a telephone call. Tax was to be collected and remitted by the telecommunications provider based on the origination point of the call. Following the effective date of the statutory change discussed in TIR 03-5, prepaid calling cards and recharges will be taxed at the point of sale to the retail customer and not when they are used to make a telephone call. This is an administratively simpler approach now being followed by many other states.

Collection of Sales Tax by Retail Vendor on Sales of Prepaid Calling Cards: Effective April 1, 2003, retail vendors registered in Massachusetts must collect sales tax at the time a prepaid calling card or prepaid calling arrangement is sold calculated at five percent of the sales price of the calling card. If a prepaid calling card is shipped to the retail customer the sale is deemed a retail sale in Massachusetts if the customer's shipping address is in Massachusetts. Generally, the gross receipts from the sales of prepaid calling cards or prepaid calling arrangements should be reported with sales of taxable property on Form ST-9. However, vendors otherwise required to report sales of taxable telecommunications services on Form STS should report sales of prepaid calling arrangements on Form STS.

Sales Tax on "Recharges" of Prepaid Calling Cards: Some prepaid calling cards or prepaid calling arrangements can be "recharged" when the retail customer has consumed the telecommunication services initially purchased without the transfer of an additional tangible card. Generally, in such a transaction the retail customer places a telephone call to an "800" number to purchase additional long distance time and pays the sales price of the additional telecommunications services purchased by credit card. Recharges that do not involve the transfer of additional tangible personal property are deemed sold in Massachusetts if the customer's billing address is in Massachusetts. If the recharge is associated with a mobile phone, the recharge is deemed to be sold in Massachusetts if the place of primary use of the mobile phone is in Massachusetts. See the federal Mobile Telecommunications Sourcing Act, 4 U.S.C. §§ 116-126, incorporated into the Massachusetts General Laws by Chapter 186 of the Acts of 2002. Also see TIR 02-18, Section II. Vendors selling recharges of prepaid calling cards or prepaid calling arrangements are required to keep records of the billing addresses of their retail customers. See 830 CMR 62C.25.1. If the retail customer pays for the recharge using a credit or debit card, the applicable billing address is the address associated with that credit card or debit card.

Discussion of Law: Massachusetts imposes an excise upon all retail sales of tangible personal property and telecommunications services in Massachusetts unless otherwise exempt. Telecommunications services are defined as "any transmission of messages or information by electronic or similar means, between or among points by wire, cable, fiberoptics, laser, microwave, radio, satellite or similar facilities but not including cable television." The excise is imposed at the rate of five percent of the sales price of the property or telecommunications sold. G.L. c. 64H, §§ 1, 2.

With respect to interstate telecommunications services, a retail sale is generally deemed to occur within Massachusetts if the call either originates or is received at a location in Massachusetts and the services are charged to a service address in Massachusetts or paid for in Massachusetts. Interstate and intrastate mobile telecommunications services are deemed to be provided by the retail customer's home service provider and are retail sales in Massachusetts if the customer's place of primary use is located in Massachusetts. The place of primary use is generally the residential street address or primary business address of the retail customer. See G.L. c. 64H, § 1, as amended by chapter 186 of the Acts of 2002, definitions of "sale at retail" and "place of primary use."

Chapter 469 of the Acts of 2002 further amended the definition of "sale at retail" by inserting the following: "In the case of the sale or recharge of prepaid calling arrangements, the sale or recharge of such arrangements shall be deemed to be within the commonwealth if the transfer for consideration physically takes place at a retail establishment in the commonwealth. In the absence of such physical transfer for consideration at a retail establishment, the sale or recharge shall be deemed a retail sale within the commonwealth if the customer's shipping address is in the commonwealth, or if there is no item shipped, if the customer's billing address or the location associated with the customer's mobile telephone number, as applicable, is in the commonwealth. . . . (I)n the case of prepaid calling arrangements, the sale shall be deemed to occur on the date of the transfer for consideration." As the result of this change, sales tax will be imposed on prepaid calling arrangements at the point of sale rather than on a per call basis.

Chapter 9 of the Acts of 2003, Section 8, added the following sentence to the definition of "sale at retail": "For purposes of reporting the sale or recharge of prepaid calling arrangements, the sale or recharge of such arrangements shall be deemed a taxable sale of tangible personal property unless the vendor is otherwise required to report sales of telecommunications services." The effect of this corrective legislation is to permit vendors required to file a return for sales of tangible personal property on Form ST-9 to report sales of prepaid calling arrangements with their other taxable sales on Form ST-9. Telecommunications vendors required to file a return for sales of taxable services on Form STS should report sales of prepaid calling arrangements on Form STS.

Prepaid calling cards or prepaid calling arrangements that are distributed in Massachusetts without charge as part of a promotional program are subject to sales or use tax when purchased by the party distributing them. See, generally, 830 CMR 64H.1.4(1).

/s/ Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue

AL:ERM:ecl
148533v3

April 3, 2003

TIR 03-5