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Making Sense of Taxes on Prepaid Cell Phone Plans and Airtime

Taxes - Illustration by DonkeyHotey, on FlickrTaxes on prepaid plans can be very confusing. With some providers there are no taxes and with others taxes can be as high as 30%. That makes comparing different providers plans difficult. This post is my attempt to make some sense out of the taxes on prepaid.

There are basically two kinds of taxes that telecom providers can collect on prepaid airtime and plan renewals:

Point of Sale taxes: These taxes are supposed to be collected directly from the customer when they make a purchase. Examples include state and local sales taxes, the e911 fees in some states and cities and California's mobile telephony services (MTS) surcharge.

Brick and mortar retailers are legally obligated to collect all applicable point of sales taxes. With online purchases it gets more complicated. Online Business are only required to collect point of sale taxes in states and localities where they have a physical presence such as an office or equipment like cell towers. AT&T, T-Mobile, Verizon and Sprint have stores, offices and towers in every state where they provide service so they are required to report and pay all applicable point of sale taxes pretty much everywhere. Most of the operator prepaid brands like Boost Mobile and GoPhone collect those taxes from customers in all states. MetroPCS and Cricket are exceptions. For a many years, going back well before their acquisition by T-Mobile and AT&T, MetroPCS and Cricket plan prices have included all taxes and fees. It's my understanding that Metro and Cricket actually pay their customer's point of sale taxes.

Most small MVNOs only have a physical presence in one state and are not required to collect point of sale taxes on online purchases by out of state residents. In most states the customer is supposed to report un-taxed online purchases and pay the tax on them, but I believe that very few do.


Telecom taxes: are corporate business taxes like the Federal USF and some state's e911 taxes. Mobile operators are allowed, but not required, to pass the cost of these taxes on to their customers. They are also allowed to charge customers a recovery fee to cover the cost of meeting certain government requirements. Postpaid operators have traditionally passed all telecom taxes on to consumers and charged cost recovery fees, prepaid operators traditionally have eaten those costs.

What follows is my off the top of the head understanding of which prepaid operators do and don't collect which taxes. This is a work in progress. I haven't personally used all these operators so there are almost certainly errors. Please feel free to offer corrections in the comments.

The list is ordered approximately from the least taxes to the most.

MetroPCS and Cricket pay their customer's taxes and do not charge any taxes on prepaid airtime. They do charge sales taxes on phones.

Lycamobile has conflicting information on their website but according to user reports it doesn't charge taxes in any state including New Jersey where Lycamobile's US offices are located.

Most small MVNOs don't charge telecom taxes and only collect point of sale taxes from customers in the state where the MVNO has its offices. Here are some popular MVNOs that I believe follow this pattern along with the state they are based in: Airvoice (Michigan), Boom Mobile (Oklahoma), Ecomobile (California), FreedomPop (California), H2O (New Jersey), PureTalk USA (Georgia), Selectel (Nebraska), SpeedTalk (California).

Ultra Mobile adds a $1 per month surcharge to all plans for regulatory cost recovery. Ultra is based in California and also collects California MTS from California residents

TracFone brands (TracFone, Safelink, NET10, StraightTalk, Simple Mobile, Page Plus, Total Wireless, Telcel America and GoSmart) charge a 1.5% for the Federal USF and 0.2% for cost recovery plus all applicable state and local point of sale taxes in all states.


AT&T GoPhone, T-Mobile Prepaid, Verizon Prepaid, Boost Mobile and Virgin Mobile charge all applicable state and local point of sale taxes in all states, but do not pass on telecom taxes or charge cost recovery fees.

Republic Wireless, Tello, Project FIChit Chat, TPO, Consumer Cellular and Ting use the postpaid model and pass along all telecom taxes and recovery fees and charge point on sale taxes to customers in all states.These taxes and fees can easily exceed 30% in some states.

For some operators it's possible to avoid paying some or all taxes by buying airtime from online vendors. See our Master List of Reputable Discounted Prepaid Airtime Vendors for some good options. Keep in mind that in most states your are still liable for uncollected taxes on online purchases and are supposed to report and pay them on your state income tax return.

Image: "Taxes - Illustration" (CC BY 2.0) by DonkeyHotey



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48 comments:

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  1. Title typo: "Aittime."

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  2. A real customer service. My heartfelt thanks, really!

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  3. Very good info Dennis. Very complete and researched. I am currently with boom mobile and my experience has been great. All taxes included with purchase of monthly plans.

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  4. What about taxes on auto-renewals. I am thinking about signing up for h2o, and live outside New Jersey.

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    1. Auto renewals are online purchases. AFAIK H2O does not charge taxes on online purchases or auto renewals unless you are New Jersey resident.

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    2. As someone who has discussed this with an H2O customer in CA, I agree with Dennis.

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  5. What about services?

    For example Ring Plus will charge all point of sale and MTS taxes here in CA when you top up your account, yet Ring plus will pull from the top up the cost for a swap, port and Number change ultimately taxing you for those services. There is no other way to pay for those particular services.
    I do not believe those services should be taxed and I do not believe Ring Plus should be charging the taxes on Data only purchases as well.

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    1. Hello Dennis, what are your thoughts on the taxing of certain services like those posted above?

      Who would someone contact in CA if they believe they are being incorrectly taxed for certain services?

      Thanks

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    2. "Who would someone contact in CA if they believe they are being incorrectly taxed for certain services?"

      I would take it up with the carrier first. If you don't get much of an answer from them, try the Board of Equalization: https://www.boe.ca.gov/contact/

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    3. AFAIK, services like ports and phone and number changes should not be taxed in California.

      If you complain and the BOE gets involved. The easiest way for RingPlus to comply would probably be to switch to charging those services directly to the customer's card with no tax and only use taxed top ups to pay for overages and monthly plan renewals.

      That would mean that users on free plans who are careful to never get charged overages but do use the phone change etc. services would end up paying more than they do now.

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    4. "The easiest way for RingPlus to comply would probably be to switch to charging those services directly to the customer's card with no tax and only use taxed top ups to pay for overages and monthly plan renewals">

      That is exactly how it should be and the Top Up should be used for overages and monthly plan charges, period. There should be no Top Up or minimum balance requirement for those plans that the monthly plan cost is charged to the CC.
      All plans should have no overages and if the customer need additional min/text/data they should purchase an add-on and that add-on taxed appropriately. This, especially now that R+ has increased their overages to 10c per unit on most plans.

      "That would mean that users on free plans who are careful to never get charged overages but do use the phone change etc. services would end up paying more than they do now.">

      How so? You pay taxes only on what is due? $10 to port $3 for number change and $5 for a swap is highway robbery to begin with.

      With many of the Paid Plans the mo/charge is charged to card, so your Top Up is basically held hostage anyway and in so many cases the top up is held hostage for "so-called" Free versions as well.

      The way they handle the Top Ups and mandatory balance requirements is corrupt and shady to say the least

      Just about everything with this company is shady these days!





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    5. Most RingPlus users have balances because of the minimum top up requirements when activating and changing plans. Currently you can use your balance to cover change, etc. fees. If RingPlus started charging those fees against your credit card you would lose the ability to pay for them with your balance. Unless you incur overages you would have no way of using your balance and would essentially be donating it to RingPlus.

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  6. I believe Consumer Cellular should be listed in your postpaid paragraph.

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  7. I have Lycamobile and I live in CA and no taxes are added. They even give me discount for auto-pay: so the $23 plan costs me $20.96 on auto-pay.

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    1. Interesting. Lycamobile site says they charge 6%. But I guess, like a lot of things Lycamobile claims, it's not true. I'll update the post, thanks for the information.

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    2. I just tested Lyca's website with a NJ address and no sales tax was added up until I had to stop at the last step (credit card information.)

      Also of note is the all caps blurb on http://www.lycamobile.us/en/mts, which gave me the impression they're like Cricket and Metro. Dennis, what do you think?

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    3. Thanks I've edited the post to indicate that Lycamobile does not collect taxes in any state.

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  8. When purchasing prepaid airtime cards that e-mail the pin, just use a zip code with the lowest tax rate.

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    1. Are there a lot of in-state sellers that allow different billing and "shipping" zip codes? Aren't you risking your order getting canceled?

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  9. "When purchasing prepaid airtime cards that e-mail the pin, just use a zip code with the lowest tax rate."

    Good for you. While it might violate the TOS of the company you are purchasing from, giving the wrong zip code in transactions with a private company is not a crime.

    It can be argued, that unless the company is going to physically mail something to you or make service calls to your house, your address is not their business. Strike a blow for privacy!

    I always enter 90210 when web sites always unnecessarily ask me for zip codes. But in situations like yours, it would be best to enter a zip code from a place that steals less from people than California.

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    1. So which zip codes (states) have the very lowest tax collected as CA is quite high no matter the city or zip code.

      Just curious if anyone can provide lowest tax collected by state & zip as a reference.

      Thanks

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    2. Prepaid mobile fees by state, as of early 2016, are @

      http://povertymobile.com/prepaid-wireless-e911-fees-2016-update/

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  10. Dennis, you may want to confirm with US Mobile. Here is what shows up on my bill: (at least in Washington state) charges the Federal Universal Service Fund Fee. ($0.09)

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  11. The Federal Universal Service Fund Fee is usually charged as a percentage of the total bill. The percentage varies between operators. Can you say what your total bill was we can determine what percentage US Mobile is using

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  12. Is this requirement to pay sales tax even on out of state purchases just for cellular services or is it for all purchases? Imagine I purchase a doohikke from ebay or Amazon, am I supposed to calculate my state's tax and then report that and pay that myself?

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    1. Check with your state's tax agency. Here in California the requirement to pay sales tax on online purchases applies to all purchases subject to sales tax. It's a line item on the state individual income tax return.

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    2. The sales tax you must pay on out-of-state purchases is called a "use tax". Wikipedia has a good explanation.

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    3. I'd be willing to bet 90% of the CA tax returns have zero use tax reported and paid.

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    4. I'd be willing to bet that it's more like 99% or more have zero Use Tax reported. Most people have no idea, and of those that do I imagine that nearly all think: "F... that".

      Even if they're willing to actually pay the amount, who the Hell wants to go through the trouble of tracking it?

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  13. Does Project Fi tax as a postpaid plan?

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  14. What states have the lowest sales tax on prepaid refills?

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    1. I'm not sure if it's still true, but I believe that at on time there were no taxes on airtime in Florida, Nevada and New Hampshire.

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    2. The following states have no sales tax (on anything):

      - Delaware
      - Montana
      - New Hampshire
      - Oregon

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    3. So if a new customer to boost mobile in Tennesee asks for a new phone number with any of those 4 states with no sales taxes based on area code then their $50 per month plan with autopay lowering it to $45 per month and then with boost dealz lowers it down further to $40 then would there be a final monthly bill of $40 since there is no sales tax?

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  15. T-Mobile has eliminated separate taxes and fees on its postpaid plans. The price of T-Mobile 1 did not go up, and they currently offer 4 lines for $160 total. This sounds like a good deal, esp. for folks in CA that want unlimited everything.
    You also get $10 back/line if you use less than 2GB mobile data in a month.

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  16. Well researched and conveyed article. Thank you!
    I would rather pay taxes and fees for stellar customer service than none at all and get a clueless rep that believes they are doing you some huge favor and sounding like they have a gun pointed at their head.

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  17. Fantastic information - much appreciated Dennis.

    Thank you!

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  18. Wow taxes on prepaid service has gotten way out of hand these days, especially in California. I'm a AT&T GoPhone user ($60 plan) and last year 2016 was the inaugural year of the dreaded tax on my service. Last year's total was $63.68 and now this year it's $66.08. Whisky Tango Foxtrot over!!!

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  19. Great article and very helpful. However things change and it appears that Pure Talk USA has started charging the telecom fees/taxxes. They reversed this for me this month, as I had no notice of the change, but now that I have, it will apply next month and going forward. The increase is about 10.75.

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  20. My Pure Talk account just renewed on the first. No additional fees indicated so far.

    Dale

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    Replies
    1. It may be specific to the state you are in. What's your state?

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    2. I was wondering the same thing. In my case it's Michigan.

      Dale

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  21. I was told that if I don't change my monthly plan, I am grandfathered in to a tax free situation. If I change plans, I will be treated as a new customer and will be charged the fees. I may want to move from the 600 min/mo to the unlimited talk & text. This is unacceptable as Pure Talk is at $24 and Air Voice charges $20...20% AND the fees? I will be porting out to Air Voice Wireless.

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  22. Might want to remove RingPlus from the list as they're no longer in business.

    Also, can confirm that Tello is another MVNO that charges all state/local sales and use taxes plus telecom taxes and recovery fees. (No complaints here, the combined charge is less than being charged an all-inclusive amount.)

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