June 14, 2000

RE: Act 27, Session Laws of Hawaii 2000 (Act 27), Relating to Prepaid Telephone Calling Service.

Act 27 simplifies the taxation of prepaid telephone cards by imposing the general excise tax (GET) on income from prepaid telephone calling services at the point of sale.  Also, imports of prepaid telephone calling services may be subject to the complementary use tax.  Act 27 will become effective on September 1, 2000.

Prior to Act 27, the use of prepaid telephone cards used to purchase telephone services was taxable as follows:  (1) each retail seller of the telephone card realizing commission or other compensation was subject to the GET at the four percent rate on that commission income; and (2) the telecommunications provider was subject to the four percent GET on the apportioned percentage of gross income derived from interstate telecommunications services provided through the use of the telephone cards.  (A provider of intrastate telecommunications services is subject to the Hawaii public service company tax which is in lieu of the GET.)

Under Act 27, the sale or recharge of a prepaid telephone calling service for resale will be taxed as a wholesale sale of tangible personal property.  All other sales of prepaid telephone calling cards will be taxed as retail sales of tangible personal property.

Example:  ABC, a Hawaii telecommunications provider, sells a prepaid telephone card to DEF (distributor/wholesaler) who subsequently sells the card to GHI (dealer/retailer).  Customer buys the card and uses the card to make intrastate calls.  Prior to Act 27, ABC would be subject to the public service company tax for providing intrastate telecommunication services during periods prior to September 1, 2000.  The commission income of both DEF and GHI would be subject to the GET at four percent.  Under Act 27, both ABC and DEF will be subject to the GET at the one-half percent wholesale rate beginning September 1, 2000.  Also, GHI's retail sale will be subject to the GET at the four percent rate.

Forms and other tax information are available at the Department's website at:

On Oahu, forms may be ordered by calling the Department's Forms Request Line at:  808-587-7572.  Persons who are not calling from Oahu, may call:  1-800-222-7572 (toll-free) to receive forms by mail or 808-678-0522 from a fax machine to receive forms by fax.

Director of Taxation

HRS Sections Explained:  HRS Sections 237-13(6)(D), 237-13(9), 237-23(a)(1), and 238-1.