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, if 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.
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