Prepaid Calling Cards Are Telecommunication Services Under Texas Franchise Tax

DALLAS, Jan. 11, 2017 /PRNewswire/ -- A Texas administrative law judge held that prepaid calling cards should be treated as telecommunication services, not intangibles for Texas franchise tax purposes. In Hearing Number 111,864, the taxpayer ("Taxpayer") entered into agreements with vendors who purchased access to various telecommunication networks. The vendors created the plastic calling cards and marketing materials that the Taxpayer sold to retail stores. When the cards were activated, the vendors invoiced the Taxpayer and provided the Taxpayer card activation reports and a database of the countries called.

Texas's franchise tax is a tax on a taxpayer's "margin," which is apportioned based on a taxpayer's Texas receipts divided by the taxpayer's receipts from its entire business. Texas receipts include revenue from services performed in Texas and sales of intangibles when the purchaser's legal domicile is in Texas. Further, revenue from telecommunication services is sourced to Texas if the calls both originate and terminate in Texas.

Based on the information provided to the Taxpayer by its vendors, 99% of the calling cards were used to call other countries. On the other hand, more than 50% of the Taxpayer's customers, the retail stores, were domiciled in Texas. Consequently, if the calling cards were considered telecommunications services, the Taxpayer's Texas receipts from the calling cards would be 1%. Conversely, i the calling cards were classified as intangibles, the Taxpayer's Texas receipts from the calling cards would be more than 50%.

Finding that the revenue from the calling cards should be considered revenue from telecommunications service, the judge noted that the North American Industry Classification System (NAICS) classifies prepaid calling cards as telecommunication services. In addition, the judge observed that, until the sales tax law was changed to specifically provide otherwise, the Comptroller considered prepaid calling cards to be telecommunication services. Therefore, the revenue from sales of prepaid calling cards was treated as Texas receipts when the calls originated and terminated in Texas.

About Ryan
Ryan is an award-winning global tax services firm, with the largest indirect and property tax practices in North America and the seventh largest corporate tax practice in the United States. With global headquarters in Dallas, Texas, the Firm provides a comprehensive range of state, local, federal, and international tax advisory and consulting services on a multi-jurisdictional basis, including audit defense, tax recovery, credits and incentives, tax process improvement and automation, tax appeals, tax compliance, and strategic planning. Ryan is a five-time recipient of the International Service Excellence Award from the Customer Service Institute of America (CSIA) for its commitment to world-class client service. Empowered by the dynamic myRyan work environment, which is widely recognized as the most innovative in the tax services industry, Ryan's multi-disciplinary team of more than 2,100 professionals and associates serves over 12,000 clients in more than 40 countries, including many of the world's most prominent Global 5000 companies. More information about Ryan can be found at ryan.com.

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Ryan
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Adina Christian
Director
Ryan
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SOURCE Ryan

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