REQUEST LETTER

00-043

Response 4/13/01

RE: Sales Tax

I would like an advisory opinion as to whether use tax should be paid on long distance telephone service (both in state and out of state) purchased on the Internet. The Company it is purchased from is COMPANY. The only address I have is ADDRESS. They give you a toll free number to call and then you enter a pin number and then dial the long distance number you wish to reach.

Thank you for your help.

Very truly yours,

NAME

RESPONSE LETTER

April 13, 2001

RE: Advisory Opinion – Taxation of Telephone Service

Dear NAME:

We have received your request for an advisory opinion concerning the taxation of telephone service purchased from NAME), an Internet company. After reviewing its Internet website, we have determined that NAME offers its customers long distance telephone service once they purchase a prepaid calling account. A customer can purchase the prepaid account only over the Internet by using a credit card and, after doing so, receives a PIN number by email. When using the account to make a long distance call, the customer dials a toll-free 800 number, enters the PIN number, then the number he or she is calling. The cost of the call is automatically deducted from the customer’s prepaid account. Once the account balance reaches zero, the PIN number is deactivated and the customer cannot make calls using the COMPANY system unless additional credit is purchased.

To address your question, we must first determine if purchasing telephone service such as that offered by COMPANY is usually deemed a taxable transaction. Utah Code Ann. §59-12-103(1) imposes tax on amounts paid “for prepaid telephone calling cards.” The purchase of a prepaid telephone calling card is viewed not as the purchase of tangible personal property (i.e., the card itself), but as the purchase of the telephone service to which the customer is then entitled. Accordingly, the Commission considers any prepaid telephone account to be subject to taxation, whether its purchase is represented by a card, an Internet account, or some other means. As a result, tax is imposed on the entire purchase price of the prepaid account purchased from COMPANY.

COMPANY does not collect and remit sales tax on its sales to Utah customers. Nevertheless, where a vendor does not collect sales tax and the Utah customer stores, consumes or uses the otherwise taxable item or service in Utah, the customer is required to remit a use tax instead. Accordingly, on a purchase of a prepaid telephone account from COMPANY, the Utah customer should remit the use tax as provided for in Utah Admin. Rule 865-21U-6 (copy enclosed). This rule shows that, for most individuals, the tax should be reported on the personal income tax return. Should you have any questions about computing the amount of the use tax, please contact Taxpayer Services at PHONE.

Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/KC

00-043