Telephone federal excise tax

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The Telephone federal excise tax is a statutory Federal Excise Tax imposed under the Internal Revenue Code in the United States under 26 U.S.C. § 4251 on amounts paid for certain "communications services." The tax was to be imposed on the person paying for the communications services (such as a customer of a telephone company), but under 26 U.S.C. § 4291 is collected from the customer by the "person receiving any payment for facilities or services" on which the tax is imposed (i.e., is collected by the telephone company, which files a quarterly Form 720 excise return and forwards the tax to the Internal Revenue Service).

1 History
2 Controversy
3 Effective partial repeal
4 Credits against Federal income tax
5 Notes
6 See also
7 External links

[edit] History

The federal excise tax on toll telephone services was enacted in 1898 to help fund the Spanish-American war. Telephone service, considered to be a luxury at the time, was targeted for taxation by Congress, as they wanted to impact only the most affluent of taxpayers. The tax was to be charged on time and distance-sensitive telecom usage. [1]

The general excise tax has so far cost consumers about $300 billion, says the Congressional Research Service. The entire Spanish-American War cost only about $6 billion, adjusted for inflation. [2]

Until the middle of 2006, the tax was collected by telephone companies with respect to local and long-distance telephone services. Collection of the tax on most long-distance service was then halted due to a controversy that erupted over the wording of the law and the way telephone service is billed today.

[edit] Controversy

On May 10, 2005 The American Bankers Insurance Group won an important in the fight against the excise tax, when the United States Court of Appeals for the 11th Circuit reversed the decision of the United States District Court for the Southern District of Florida, which erroneously held that the services that ABIG purchased from AT&T were taxable. [3]

This was one of several U.S. Court of Appeals cases that the IRS lost in as many districts on the same issue. The IRS threw in the towel only after losing several of such cases, and winning none (at the Appeals level or higher).

[edit] Effective partial repeal

On the 25th of May of 2006, the Internal Revenue Service (IRS) issued IRS Notice 2006-50, 2006 I.R.B. 25, which states in part:

[ . . . ] the Internal Revenue Service will follow the holdings of Am. Bankers Ins. Group v. United States, 408 F.3d 1328 (11th Cir. 2005) (ABIG); OfficeMax, Inc. v. United States, 428 F.3d 583 (6th Cir. 2005); Nat'l R.R. Passenger Corp. v. United States, 431 F.3d 374 (D.C. Cir. 2005) (Amtrak); Fortis v. United States, 2006 U.S. App. LEXIS 10749 (2d Cir. Apr. 27, 2006); and Reese Bros. v. United States, 2006 U.S. App. LEXIS 11468 (3d Cir. May 9, 2006). These cases hold that a telephonic communication for which there is a toll charge that varies with elapsed transmission time and not distance (time-only service) is not taxable toll telephone service as defined in §4252(b)(1) of the Internal Revenue Code. As a result, amounts paid for time-only service are not subject to the tax imposed by §4251. Accordingly, the government will no longer litigate this issue [ . . . . ]

The IRS also provided the following definitions in Notice 2006-50:

Bundled service (non-taxable):

Bundled service is local and long distance service provided under a plan that does not separately state the charge for the local telephone service. Bundled service includes, for example, Voice over Internet Protocol service, prepaid telephone cards, and plans that provide both local and long distance service for either a flat monthly fee or a charge that varies with the elapsed transmission time for which the service is used. Telecommunications companies provide bundled service for both landline and wireless (cellular) service.

Long distance service (non-taxable):

Long distance service is telephonic quality communication with persons whose telephones are outside the local telephone system of the caller.

Local-only service (continues to be taxable):

Local-only service is local telephone service, as defined in §4252(a), provided under a plan that does not include long distance telephone service or that separately states the charge for local service on its bill to customers. The term also includes services and facilities provided in connection with service described in the preceding sentence even though these services and facilities may also be used with long distance service. See, for example, Rev. Rul. 72-537, 1972-2 C.B. 574 (telephone amplifier); Rev. Rul. 73-171, 1973-1 C.B. 445 (automatic call distributing equipment); and Rev. Rul. 73-269, 1973-1 C.B. 444 (special telephone).

IRS Notice 2006-50 also states (in part):

Collectors [e.g., telephone companies] are directed to cease collecting and paying over tax under §4251 on nontaxable service that is billed after July 31, 2006, and are not required to report to the IRS any refusal by their customers to pay any tax on nontaxable service that is billed after May 25, 2006. Collectors should not pay over to the IRS any tax on nontaxable service that is billed after July 31, 2006. [ . . . . ] [T]he IRS will deny all taxpayer requests for refund of tax on nontaxable service that was billed after July 31, 2006. All such requests should be directed to the collector [e.g., to the telephone company]. In addition, collectors may repay to taxpayers the tax on nontaxable service that was billed before August 1, 2006, but are not required to repay such tax. [ . . . ] Collectors must continue to collect and pay over tax under §4251 on amounts paid for local only service.

This action effectively repealed the tax for all but "local-only service" as defined in IRS Notice 2006-50.^[1]

Treasury Secretary John Snow stated in a prepared release, "Today is a good day for American taxpayers; it marks the beginning of the end of an outdated, antiquated tax that has survived a century beyond its original purpose, and by now should have been ancient history." Snow also called on Congress "to terminate the remainder of this antique tax by repealing the excise tax on local service as well." [4]

[edit] Credits against Federal income tax

According to the Internal Revenue Service, individuals and other entities including non-profit organizations and businesses will be able to receive a credit for the unlawfully collected tax when they file their 2006 Federal income tax returns. Certain persons who paid the long-distance tax on service billed after Feb. 28, 2003 but before Aug. 1, 2006 are eligible for the credit.

The IRS is offering two methods for computing the amount of the credit:

Consumers may elect a pre-determined credit, based on the number of dependents claimed on their returns. The amounts of the credit will range from $30 to $60 and be $30 for a person filing a return with one exemption, $40 for two exemptions, $50 for three exemptions and $60 for four or more exemptions.

Consumers and other entities may instead elect to itemize the deduction based on the actual amount of tax paid. This would require one to locate and examine forty-one months of telephone bills to determine the proper credit amount to seek.

The IRS is still attempting to determine what it considers to be a fair amount that business entities will be permitted to claim as a standardized deduction. In all cases, interest will be paid on refunds. [5] [6] [7]

The credit may be claimed on the year 2006 Form 1040, line 71. Some taxpayers may have to include a Form 8913 with the return to claim the credit.^[2]

[edit] Notes

^ The term effectively repealed is used here, as the statute itself (section 4251) has not been repealed. (As a general rule, a U.S. Federal statute can be repealed only by another statute subsequently enacted by the U.S. Congress.) The "effective partial repeal" of the telephone excise tax consists only of a change in the enforcement policy of the the Internal Revenue Service, to conform to the court decisions indicating which services are taxable under the statute.
^ Internal Revenue Service, 2006 Instructions for Form 1040, page 60.