Prepaid telephone cards.

The 3% excise tax on prepaid telephone cards, the tax treatment of which was clarified by the taxpayer Relief Act of 1997 (TRA '97), is effective for cards sold after Oct. 31, 1997.

The TRA '97 added Sec. 4251 (d) to clarify the proper tax base for such cards and when the tax is to be collected. The TRA '97 Conference Report clarifies that the base to which the communications excise tax applies is the retail value of the prepaid telephone card. This was explained with respect to two types of cards.

The first type of prepaid telephone card is a "dollar value card." With such cards, the final customer purchases a card or account that allows him to use $X worth of telephone service provided by err underlying telecommunications carrier. The 3% communications excise tax on dollar value cards applies to the value X, and must be collected and remitted to the IRS when the prepaid telephone card is sold by a telecommunications carrier to a person who is not a telecommunications carrier. Thus, the tax would be collected by the company (whether a long distance service provider or a reseller of phone services) that sells the cards to a retail store or gas station, etc. After the tax is collected, it must be deposited with the Service and a quarterly Form 720, Quarterly Federal Excise Tax Return, must be filed.

The second type of prepaid telephone card is a "unit card" or a "minute card."

With such a card, the final customer purchases a card or account that allows him to use number of units or minutes of telephone service provided by an underlying telecommunications carrier. The tax applicable to such cards is based on the retail value of the telephone service offered to a consumer; the TRA '97 grants Treasury regulatory authority to determine the appropriate retail value.

Presently, the Federal Communications Commission generally requires telecommunications carriers to file a tariff listing the prices of their various service offerings. including the price of units or minutes offered via prepaid telephone cards. The TRA '97 provides that the 3% communications excise tax will apply to the number of units or minutes multiplied by their tariffed price when the prepaid telephone card is sold by a telecommunications carrier to a person who is not a telecommunications carrier. Not all prepaid telephone cards may have an underlying tariff that applies to that particular card. In such cases, it was intended that tariffs for comparable telephone service be applied if applicable.

The tax also applies to prepayments for long-distance service made to Communications service providers as part of a joint venture credit card or other marketing arrangement.

FROM F. MICHAEL DELL, WASHINGTON, D.C.