[Federal Register Volume 65, Number 5 (Friday, January 7, 2000)]
[Rules and Regulations]
[Pages 1056-1059]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-56]



[[Page 1056]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 49 and 602

[TD 8855]
RIN 1545-AV63


Communications Excise Tax; Prepaid Telephone Cards

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations

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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 
Sec. 49.4251-4(f).

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

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    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

[[Page 1057]]

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:


Sec. 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

[[Page 1058]]

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

[[Page 1059]]

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  x  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 Sec. 602.101, paragraph (b) is amended by adding an 
entry in numerical order to the table to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where 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.
[FR Doc. 00-56 Filed 1-6-00; 8:45 am]
BILLING CODE 4830-01-U