Saturday, March 26, 2005

The IRS continues to lose telephone tax cases -- "inbound 800" phone service joins outbound long-distance calls as being ruled tax-free.

A fifth federal court has now ruled that long-distance phone calls as commonly billed today are not subject the telephone excise tax. This time the result was a $1.25 million tax refund awarded to the company seeking it. (Honeywell International, Inc. v. U.S., No. 03-1915T, Court of Claims.)

As has been explained here before, the issue boils down to the fact that the decades old provisions in the Tax Code that impose the telephone excise tax define a taxable long-distance call as one that is billed individually by both time and distance. But in today's world many if not most calls are billed otherwise -- flat rate per month, time but not distance, negotiated rate, and so on.

The IRS has argued that this shouldn't matter, Congress intended to tax all phone calls. But the five courts have all instructed the IRS that the law means what it says and says what it means -- and that Congress must update the law if it really intends to tax all calls.

Industry experts say $6 billion in tax refunds could be at stake, for businesses of all sizes and individuals too. More extensive legal analysis, legal citations for all the cases, and advice about how to protect a refund claim regarding your own phone bill without actually incurring the cost and effort of suing the IRS, have been given in a prior post.

Now, in addition and for the first time, a court has ruled "inbound 800" service to be tax free too, for the same basic reason. With "inbound 800" service a business pays for calls it receives. (Of course, these days such service utilizes numbers other than "800".) Here too the court ruled that the Tax Code's definition of taxable phone service is obsolete and did not match the taxpayer's.

In particular the court said that the Code's definition of taxable service was written to apply to 1980s-type AT&T "WATS" service that allowed unlimited inbound phone calls within a given geographical area, charging a flat rate or by total elapsed transmission time. However here the company's inbound 800 service billed per individual call, and thus didn't fit the description of calls made subject to tax by the Code -- so the calls are free from the telephone tax. (Fortis, Inc. v. United States; No. 03 Civ. 5137(JGK), D.C., S.D. New York. 2/14/05)

Well, that's a simplified blog description of a holding that runs on a bunch of pages about some very complex phone company billing practices. So if you are interested in this for real you should consult with a professional about it.

If you make a refund claim as Fortis did don't expect the IRS to pay it right away, or soon -- it will be appealing this case just like it's appealing the decisions against it on outbound long-distance calls.

But by making "protective" refund claims you can preserve your right to claim tax refunds three years back, keeping the statute of limitations from running out on them. Then you can wait and let the big companies fight it out with the IRS in court -- and if they win, the day may come when you get your piece of that $6 billion.

UPDATE: This issue is now beginning to get some attention from Congress...

March 21, 2005

The Honorable John W. Snow
Secretary of the Treasury
15th and Pennsylvania Ave., NW
Washington, D.C. 20220

Dear John:

As you are probably aware, the IRS has been settling or losing a series of cases brought by telephone customers seeking refunds of their Federal Excise Tax (FET) payments. Many of these customers have successfully argued that the anachronism known as the FET no longer applies to the telecommunications services they actually use today, despite the best efforts of the IRS bureaucracy to keep this beast alive.

This discriminatory tax is an anachronism for two reasons: First, it was originally enacted in 1898 to fund the Spanish-American War and was considered at the time to be a type of luxury tax. With more telephones than people in the United States today, the FET now represents the polar opposite of a luxury tax, and merely serves to raise prices on consumers.

Second, the definitions of taxable services in the statute, last updated in 1965, describe services that are rapidly vanishing from the American marketplace. Fewer and fewer customers are paying for long distance calling based on time and distance. Similarly, stand-alone local telephone services are rapidly losing appeal to customers buying bundles of communications services for a flat rate.

I encourage you to order the IRS staff to provide relief for the millions of consumers who should not be paying a tax on services they aren't buying. Moreover, if you were to come to the conclusion that this 1898 tax does not apply to any 2005 services, you could expect an enthusiastic reaction from numerous lawmakers, not to mention millions of consumers.

Christopher Cox
Homeland Security Committee