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Does your company or any of your clients sell pre-paid calling cards? If so, then you really need to be aware that the Florida Department of Revenue is targeting the industry claiming that the Communication Services Tax is due on pre-paid calling cards - and they are doing it RETROACTIVELY. This could result is huge assessment far exceeding any profit a retailer of prepaid calling cards would make from the sale of these prepaid calling cards.

To break the issue down to the bare bones, simple prepaid calling arrangements are excluded from the Communication Services Tax by statute, instead being subject to the state's sales tax rate. Most retailers of prepaid calling cards are already well equipped to handle the sales tax rates, which is why the exemption was created in the first place. The legislature reasoned that the simple retailers of prepaid calling cards were not equipped to handle the complex rules relating to a tax based on where calls originate or terminate.

The problem is that many such prepaid calling arrangements allow the user to text message, access the internet, video chat, or anything else that their phone can accomplish. The Department of Revenue is taking the position that these other uses fall outside the exemption and want back taxes from the retailers of these cards. Because the Communication Services Tax ("CST") rate can exceed 18% in some parts of the state, the exposure to retailers far exceeds any potential profit the stores were making on the sale of prepaid calling cards.

Once again, the Florida Department of Revenue is reading quirks into the law and completely ignoring the legislative intent behind the statute as well as the federal laws behind the reason for the exemption. The Department of Revenue initiated a shot across the industry's bow by issuing TIP # 12ADM-02, which spells out that our comrades in Tallahassee intend to start subjecting these additional services to the CST and they are doing so on audit, effectively creating a retroactive enforcement. You can find a downloadable copy of the tip at the end of this article.

The problem that the Florida Department of Revenue is going to run into is that some of the calls made by a prepaid calling card may never be subject to tax in Florida under the Communication Services Tax laws - and the simple retainers should not be held responsible for making this determination. For example, if a tourist purchased a prepaid calling card in Orlando, but only used the card after they went back home (out of state), then the entire use of the card would not be subject to the communication services tax according to the US Supreme Court (Goldberg v Sweet , 488 US 252 (Jan. 10, 1989) as well as the federal laws enacting the court's reasoning in this case. How is a gas station attendant supposed to effectively determine whether the calling card can legally be subject to the Communication Services Tax and, heaven forbid, determine the appropriate tax rate (which varies greatly throughout the state). The exemption was put in place strictly because the entire industry and legislature realized that the simple gas stations, grocery stores, and other retailers where not equipped to handle the administrative complexities of the communication services tax. It was determined by all the parties that simply subjecting the calling card itself to sales tax as the sale of tangible personal property was the simplest and least constitutionally offensive way of handling the transactions.

The 'big boys' in the telecommunication industry are aware of the problem and are working with our legislature to provide retroactive relief (but usually only if the taxes have not already been paid). At this point, we are expecting a change in the statute to come about in the next legislative session effectively stopping the overly aggressive policy coming out of the Florida Department of Revenue. Instead of spinning your wheels fighting this issue on audit, you might consider letting the auditor close out the audit then file an administrative protest with a request to hold the protest until the end of the next legislative session. If you have any questions about this administrative assault on the prepaid calling card retail industry, then please do not hesitate to contact our firm. If your company is falling victim to one of these CST audits and you need assistance with the audit or with the protest, then our firm can cost effectively help you through this process.


About the author: Mr. Sutton is a Florida licensed CPA and Attorney and a shareholder in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A. Mr. Sutton's primary practice is Florida sales and use tax controversy. Mr. Sutton worked for in the State and Local Tax department of one of the Big Five accounting firms for a number of years and has been an adjunct professor of law at Stetson University College of Law since 2002 teaching State and Local Tax, Accounting for Lawyers, and Federal Income Tax I. You can read more about Mr. Sutton in his firm bio.


FL TIP # 12ADM-02 - Prepaid Communication Services (March 27, 2012)

© 2012 All rights reserved - James H Sutton Jr