On Tuesday, the North Carolina Supreme Court heard a case between the state’s Revenue Department and a store that sold pre-paid cards that could be used for cell phone service. More than $516,000 in back taxes and fees are at issue in the lawsuit.
Revenue officials say that Wireless Center of NC should have collected sales tax on the prepaid cards it sold at its six shops in Greensboro, Winston-Salem, and Monroe from 2016 to 2018. The company says that its Boost Mobile gift cards should not have been subject to sales tax because they were used to buy goods and services.
It was in May 2022 that the state’s Office of Administrative Hearings sided with Wireless Center. But in June 2023, the North Carolina Business Court sided with the Revenue Department.
Stanton Geller, the lawyer for Wireless Center, said, “Prepaid cards are a way to add money to a customer’s Boost account.” “it is not mobile phone services in any way, shape, or form.”
“Hopefully it’s clear that customers can spend their money on any goods or services they want,” Geller said. “That includes things that aren’t taxed, like the internet, which is covered by federal law as to whether it’s taxed or not.”
Assistant Attorney General Tania Laporte-Reveron for the Revenue Department said that state law doesn’t take into account how the customer plans to use the credit cards.
As she put it, “the statute is actually on the purchase—not on what the customer plans to do with the internet.” “The sale of this right that lets you buy mobile phone services is what the law taxes.” “This law makes it clear that it is taxed at the point of sale and not at the point of use.”
Justice Richard Dietz asked if the law makes it unclear how the cards should be handled for tax reasons. He said, “Courts wouldn’t want to read a law in a way that makes part of it unconstitutional.”
“If we find any unclear language in the law, you lose,” he told Laporte-Reveron. “The government drops out.” The tax payers win.
Justice Phil Berger Jr. asked why the state law would handle prepaid cards differently than a Visa gift card that could be used to buy the same things.
Justice Tamara Barringer asked if the law meant to tax something that could be used to buy other things that were taxed. Baringer said, “You talked about the intent of the legislature.”
“Are we to believe that the legislature, by allowing the taxation of a right, created a situation where there is a high chance of double taxation, whether they knew it or not and knew that it could be used for different things?”
In 2023, lawyers for Wireless Center said that the company’s prepaid cards shouldn’t have been charged.
Its lawyers wrote in December that once the Prepaid Cards were added to a customer’s Boost Mobile Account, the customer could use the saved value to buy a range of goods and services, some of which were subject to sales tax and some of which were not.
“The Prepaid Cards could be used to buy things like prepaid cell phone service, which is subject to sales tax, and Internet access services, which are not subject to sales tax.”
“The Department’s theory was that the stored value gave the customer the right to buy prepaid wireless calling service, which is subject to sales tax when bought, so the whole amount of the Prepaid Card was subject to sales tax, even though it could have been used to buy things that were not subject to sales tax,” Wireless Center’s state Supreme Court brief went on.
In February, the Revenue Department’s lawyers replied. The prepaid cards are called “real-time replenishments of airtime units” (RTRs) by the people in charge of collecting taxes. The department also talks about “prepaid wireless calling service” laws from the state.
“Wireless Center seems to mix up a customer’s purchase of the ‘right that authorizes purchase of mobile telecommunications service’ with that customer’s use (redemption) of that right,” lawyers for the Revenue Department in the state Justice Department wrote.
This mistake led Wireless Center to believe that RTR is not a taxable item but rather something like a gift card and should be charged as such, at the time of use instead of at the point of sale.
Lawyers for the state said, “The main problem with this premise is that PWCS is taxed at the point of sale instead of the point of use.” “Because RTR is a PWCS, it is taxed correctly at the point of sale, which is when the customer buys the “right” from Wireless Center.”
The Revenue Department sent a brief, and in March, Wireless Center responded to it in law.
The government says that Wireless Center’s Prepaid Cards (or RTRs as they are called by the government) must be “prepaid wireless calling service” (PWCS) since PWCS is subject to sales tax and Wireless Center’s sales must be taxed.
The opinion goes in a circle and avoids the question that the Court is supposed to answer, which is: “Do Prepaid Cards Fit the Plain Language Definition of PWCS?” Lawyers for Wireless Center wrote.
The prepaid wireless service options “have changed significantly” since 2007, when the laws in question were passed by the General Assembly.
“In the years since then, the market and demand for mobile telecommunications services have changed, but the laws have stayed mostly the same,” the lawyers for Wireless Center wrote.
“The Department is set on fitting a round peg (the law) into a square hole (new products and technologies),” even if it means making North Carolinians pay sales tax twice on the same dollar and on purchases that are clearly free.
“Wireless service providers are not changing the “taxable nature” of a product by giving different products to meet customer demand, as the Department says they are doing. Instead, cellular service providers offer goods and services that are not PWCS through originators like cellular Center, the brief said.
“These Prepaid Cards are not PWCS; instead, they add money to a customer’s Boost Mobile account. This money can then be used to buy plans and other non-PWCS or otherwise taxable goods and services.”