Top NC court offers Revenue Department mixed ruling on prepaid cards

The North Carolina Revenue Department suffered a partial setback Friday at the state’s highest court. Supreme Court justices reversed part of a state Business Court ruling on taxes tied to prepaid cards tied to wireless telephone service.

The dispute involves more than $516,000 in unpaid taxes and penalties.

Revenue officials argued that Wireless Center of NC should have collected sales tax when selling the prepaid cards from 2016 to 2018 at its six stores in Greensboro, Winston-Salem, and Monroe. The company responded that its cards for Boost Mobile products and services should have been treated as gift cards free from sales tax.

A unanimous state Supreme Court ruled Friday that Wireless Center owed taxes during only a portion of the period under discussion.

The Revenue Department treats the cards as a product that provides “real-time replenishments.”

“[T]his tax dispute centers on whether Wireless Center was responsible for collecting and remitting sales tax on Replenishments at the point of sale or whether tax should have been collected when the customer redeemed the Replenishments for Boost’s prepaid wireless service or products,” Justice Allison Riggs explained.

“Importantly, Wireless Center and Boost changed how the Replenishments could be redeemed during the audit period and that change affects our analysis of how the Replenishments should be taxed under the Tax Act,” Riggs continued. “During the first half of the audit period (Period I), Replenishments could only be redeemed for prepaid wireless service. However, during the second half of the audit period (Period II), Replenishments could be redeemed for prepaid wireless service on the Sprint network or for the purchase of products from Boost.”

The Supreme Court agreed with the administrative law judge who originally decided the case in 2022.

“[W]e hold that during Period I of the tax audit, Wireless Center was responsible for collecting and remitting sales tax on its sale of Replenishments,” Riggs explained. “During Period II of the tax audit, we hold that Wireless Center was not responsible for collecting and remitting sales tax on Replenishments at the point of sale; rather, in Period II, Boost was responsible for collecting and remitting sales tax on Replenishments when they were redeemed for prepaid wireless service on the Sprint network or products provided by Boost.”

The case will return to the Office of Administrative Hearings for a recalculation of Wireless Center’s tax liability.

Justice Tamara Barringer agreed with the majority opinion but wrote separately “to emphasize my concern that Wireless Center reached this favorable result despite what appears to be a disregard for good recordkeeping and accounting practices.” Barringer also questioned the Revenue Department’s “decision to pursue both Wireless Center and Boost for the same tax liability.”

“Wireless Center argued that even if it bore responsibility for collecting taxes on Replenishments during Period II, it should not be forced to pay,” Barringer wrote. “This argument was premised on a bald, unsupported assertion that the taxes had already been remitted by Boost.”

“If appropriate accounting records had been kept, Wireless Center would have had documentation affirmatively proving that Boost had, in fact, remitted the taxes,” Barringer’s concurring opinion continued. “However, it is troublesome that Wireless Center did not provide any such records. I am concerned that this strategy is indicative of insufficient accounting and recordkeeping.”

“Wireless Center’s inadequate recordkeeping rendered its tax reporting and remittance unverifiable,” she explained. “Audits verify compliance — the accuracy of tax reporting and remittance. Wireless Center’s apparent lack of records undermined this process. This is unacceptable.”

“It is troublesome that Wireless Center appears to have completely abdicated its tax collection and recordkeeping responsibilities,” Barringer wrote. The company’s partial victory “should not be read as a vindication of Wireless Center’s practices.”

Barringer concluded her opinion with a reference to the Revenue Department’s actions in the tax dispute.

“I do not take lightly an accusation that the Department may be attempting to collect the tax twice, potentially assessing and then levying the full amount owed against both Wireless Center and Boost,” she wrote. “Such double-dipping would of course be impermissible. Although I recognize that ‘[s]tate regulators are not angels,’ it is my hope that the Department, in an attempt to collect the tax just once, is employing a process akin to alternative liability to overcome the dearth of documentation.”

Chief Justice Paul Newby joined Barringer’s concurrence.

“Top NC court offers Revenue Department mixed ruling on prepaid cards” was originally published on www.carolinajournal.com.