Taxpayers May Be Entitled To Refunds of Federal Excise Taxes Paid On Long Distance Telephone Service
The Internal Revenue Service may not charge the 3% federal communications excise tax (“FCET”) on flat-rate, non-distance sensitive long-distance telephone service the United States Court of Appeals for the D.C. Circuit ruled last Friday (December 9, 2005), in National Railroad Passenger Corp. v. U.S. (Case No. 03-00431). With its ruling, the D.C. Circuit joined the Second, Sixth and Eleventh circuits in placing limits on the FCET’s reach, and with this defeat many observers expect the IRS to stop litigating these cases. If your company provides flat-rated telephone service, or is a user of such service, you should examine your billing practices or service provider invoices with an eye toward discontinuing collecting or remitting the FCET. There is also the possibility of filing for FCET refunds now.
The FCET has been a feature of U.S. phone bills for more than 100 years. First enacted in 1898 to help finance the Spanish-American War, the FCET defines taxable toll telephone service as a “communication for which there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication.” IRC § 4252(b)(1). This definition, which has been in its present form since 1965, was intended to reach a then-popular long distance service sold by AT&T, for which the rate varied based on mileage bands as well as call duration.
Today, however, distance sensitive long-distance calling plans are an anachronism, and many flat-rated bundled calling plans are not even call-duration sensitive. As a consequence, many taxpayers have sought refunds in recent years, contending that they are not purchasing a taxable service as defined by Congress. And although the IRS has sought to extend the FCET’s reach to the new calling plans, the courts have nearly uniformly rejected the government’s position and held that, in order to fit within the statutory definition, the charge must be based on both time and distance.
Although the reasoning of the court decisions seems unassailable, the IRS, to date, has refused to relent officially. Indeed, the IRS issued a notice just prior to the National Railroad decision directing telecom providers to continue to collect the FCET in those judicial circuits where an appeals court had not yet ruled against the agency. See IRS Notice 2005-79 (Oct. 20, 2005). This policy of “non-acquiescence” is highly unusual, as it leads to a jurisdictionally fragmented national tax policy. With the National Railroad decision from the D.C. Circuit, however, many tax professionals expect that the IRS could relent on its interpretation of § 4252(b)(1), although others believe that the IRS will take the matter all the way to the Supreme Court.
In light of the uncertainty, we believe that it would not be prudent for telecommunications providers to stop collecting the tax just yet, although a case could be made for doing so in those circuits with favorable rulings. Users of telecom services, on the other hand, should file for refunds as soon as possible and could, likewise, consider withholding payments in certain jurisdictions. Clients should consult with counsel before taking any action.