If you are a prepaid wireless customer using a major nationwide network, you are probably very familar with purchasing service in the form of a gift card like one of these.

And after making a retail purchase of one of these refill cards, you quickly discover that you are likely paying much more that the face for your service. The extra costs come in the form of sales tax and E911 fees. So, with taxes and fees, what is the true cost of prepaid wireless service (and can we lower it)?

The added costs of prepaid wireless are state (and possibly local) sales tax(es) (unless you live in Delaware, Montana, New Hampshire or Oregon, the states which do not collect sales tax) and a fee for funding state Enhanced 911 services.

Making the retail purchase with cash will cost you the highest premium—because there is nothing in the retail transaction for you (excepting the anonymity that cash transactions provide—which may well be worth the extra cost).

A $60 retail purchase will cost you $65.27 when sales tax and E911 fee are included. That is a premium of 8.8% over the service value.

Used properly (in brief: as a very short-term loan, paid in full each billing cycle, never carrying a balance), a credit card can shift the total cost of prepaid wireless service a bit in your direction. The basic credit card reward (the credit card industry is complex, there are many different benefit offers and you may be able to do better—we'll hold to the earliest models) is 1% of your total purchases back as cash (from a card such as Discover, there are many others). Using a 1% reward credit for the purchase looks like this.

With the cash reward of 1%, the total cost is of the service is reduced to $64.62, a 7.7% premium over the face value of the service. Certainly this is less expensive than the cash price, but not by much (the obvious 1%). Can we do better?

To do better than the credit card reward, we need to know a little about the gift card industry. That little bit you need to know, and it should be self-evident, is that retails who sell gift cards for face value do not pay merchants (in our case wireless service providers) face value. Clearly the retailer is making a profit on gift card sales; the best evidence is that you see gift card racks in nearly every retail outlet—there must be good profits in selling them.

With the extra reward in reduced fuel costs, the total spending for $60 in service is $62.12, a 3.5% premium over face value. We've managed to cut the taxes and fees premium by more than half by combining credit card and fuel rewards when purchasing refill cards from a participating grocery store.

The model for the wholesale club stores (BJ's Wholesale Club, Costco Wholesale or Sam's Club in the United States) is that a annual membership allows you access to reduced pricing on many (often oversized) items. The discount they offer isn't exactly wholesale, and the prepaid wireless refill cards available will vary by location and chain (and will usually be only the large denominations, like most other products in the warehouse store), but the club stores are the most likely to share a portion of that discount with their members.

On average you might expect a 5% discount from the face value of your refill card (but you'll have to visit your club store for details—these discounts don't make their online sales listings). With that size discount, and our calculations of the purchase premium above, we can quickly calculate that we're likely to do better (larger discount), but probably will still be paying a small premium over the face value of the service following those discounts. The numbers are as follows.

With the club store discount from the face value (just about 5%), the resulting premium is just $1.37, or 2.3%. This cost is a bit lower ($0.75) than the full complement of discounts from a grocery store (assuming you can purchase the full discounted fuel volume in one transaction), but you'll need a membership in the wholesale warehouse club—a membership which is upward of $50 annually. Clearly this route is a good choice if you are a club member already, but a seventy-five cent monthly savings will not be paying for your annual membership.

When purchasing wireless refill cards from a retail outlet, you are likely to face sales tax and an E911 fee that will raise your cost of mobile service. Paying with cash is the best option if you value your anonymity over a few dollars (if you truly value your privacy, you had better also be changing SIM cards, and possibly handsets, regularly as well—saving a little money certainly isn't the key motivating factor if anonymity in telecommunications is what you desire). Making retail purchases with a credit card, used properly, will save you a bit on the premium of taxes and fees, but if you'd like to eat into those taxes and fees in a meaningful way, you'll need to seek out a seller who will let you in on some of the gift card discount. Many grocery store chains around the country offer sizable fuel discounts for gift card purchases. This option makes sense if you regularly buy gasoline (not much use for those living in cities where driving often unnecessary). This is the best retail option shy of using a wholesale club membership. If you have a membership, your member discount will be the best route, but the savings you'll realize are unlikely, in and of themselves, to make the club membership a true savings for only your prepaid wireless purchases.