North Carolina Cellphone Company Required to Collect Sales Tax on Sale of Right to Purchase Pre-Paid Cell Service
The North Carolina General Court of Justice, Superior Court Division determined that Wireless Center of NC, Inc. (“Wireless Center”) was required to remit and collect sales tax on products known as Real Time Replenishments (“RTRs”). North Carolina Dep’t of Rev. v. Wireless Ctr. of NC Inc., Case No. 22 CVS 7036 (Gen. Ct. of Justice, Sup. Ct. Div., June 2, 2023).
The Facts: Wireless Center sells phone equipment, products, and services as an independent contractor with Boost Mobile (“Boost”). Among the products sold by Wireless Center are RTRs. Purchasing RTRs does not automatically activate a customer’s cellular service; rather, RTRs add value to a customer’s Boost account which may be used to activate or extend one of Boost’s prepaid plans or to purchase other products and services. Wireless Center did not collect sales tax on the sale of RTRs during the audit period.
The Decision: Wireless Center argued that because RTRs may be used to purchase an array of goods and services from Boost, they are gift cards and should be taxed at the point of use rather than at the point of sale.
Under the relevant statute, sales of prepaid wireless calling service (“PWCS”) are subject to sales tax. PWCS is defined as “a right that . . . [a]uthorizes the purchase” of wireless service. The Court found that by purchasing an RTR in any amount, “a customer has paid in advance for the right to later purchase wireless service in that predetermined amount. Whether a customer proceeds to purchase wireless service is immaterial because the right to purchase was already acquired.” (Emphasis in original.) The court found that the “right to purchase” was acquired when the customer bought the RTR.
The Court further determined that the fact that Boost revised its business model during the audit period to allegedly collect tax upon the use rather than the sale of RTRs (the period following the change in business model is referred to as “Period II”) did not remove RTRs from the definition of PWCS and the North Carolina Office of Administrative Hearings finding that RTRs were not PWCS during Period II was erroneous.
As for Wireless Center’s argument that tax liability was satisfied during Period II, the Court found that in the absence of records establishing such satisfaction, Wireless Center was unable to overcome the presumption that the tax assessment was correct.
This update is one in a series of updates written for the June 2023 edition of The BR State + Local Tax Spotlight.