Businesses Fight IRS on Phone Taxes
Businesses and individuals continue to pay hundreds of millions of dollars in taxes each year on some long-distance telephone calls even though three federal courts say the levy is invalid.
Companies have convinced the appeals courts that the 3% excise tax on local, long-distance and wireless calls does not apply to some current long-distance billing plans. The tax dates to 1898, when telephones were a luxury and lawmakers needed money to help pay for the Spanish-American War.
The government can expect to collect $52 billion over the coming decade from all telephone excise taxes, according to a recent report from the Congressional Budget Office. The report said there was a “significant likelihood” that the Internal Revenue Service would continue losing in court and eventually stop collecting the tax on some long-distance calls.
While cases work through the courts, the IRS says it still is instructing telephone companies to collect the tax.
After losing in the U.S. 11th Circuit Court of Appeals, the IRS issued a notice stating that it would continue to assess and collect the tax. After losing in the 6th Circuit, the IRS asked all judges on that court to hear the appeal. The IRS also lost in the U.S. Court of Appeals for the District of Columbia Circuit.
The agency has not asked the Supreme Court to consider the issue.
If the tax is terminated, the government could owe three years of refunds to individuals and businesses that request them, the budget office said. The law gives them a three-year window of opportunity to claim a refund.
For most people, a 3% tax on long-distance calls amounts to very little. The average household telecommunications bill, including taxes, totaled $114 a month in 2003, including $16 for long-distance calls, according to a Federal Communications Commission report.
For businesses with high telephone usage or a toll-free line, however, the tax bill can be high. Companies have found it worth the time and expense to seek tax refunds in court.
“You’ve got to have an enormous amount of usage to make it worthwhile,” said Stephen Rosen, a lawyer with Levine, Blaszak, Block & Boothby. The Washington telecommunications law firm has represented several companies pursuing refunds.
Since its origin, the tax has been repealed and reinstated. Rates have fluctuated over time.
The parts now under debate were written in 1965. One company, AT&T; Corp., held a monopoly on long-distance telephone service and lawmakers targeted the tax to calls billed according to the distance and length of a call.
Times have changed and so have billing plans, which often now ignore distance. Large companies say that means the tax no longer applies.
The government says the law always intended to tax long-distance calls and remains in force. The IRS said it would not comment while cases continued to wind through the courts. Treasury Secretary John W. Snow said the government might have to reevaluate its position after the next ruling from the 6th Circuit.
Telecommunication companies, which collect the tax from their customers and pass it along to the government, say they are stuck in the middle.
“It’s time for the IRS to admit defeat and stop enforcing the illegal application of this tax,” said Allison Remsen, spokeswoman for the United States Telecom Assn., which represents 1,200 local, long-distance, wireless, Internet and cable television companies. “Also, it’s time for Congress to step in to permanently and completely repeal this outdated levy.”
Shortly after the IRS announced it would keep collecting the tax despite losing in the courts, law firm Baker & McKenzie filed suit in the U.S. Court of Federal Claims on behalf of RadioShack Corp. and an unnamed class of businesses and individuals buying long-distance service that is billed without regard to distance.
“To go hire a lawyer is going to cost more than the refund,” said A. Duane Webber, a lawyer with Baker & McKenzie. “Just the first hour is going to cost more than your typical refund.”
Webber said that even if taxpayers didn’t get refunds, the suit would have served its purpose if it succeeded in forcing the IRS to stop collecting the tax.
Chimicles & Tikellis, a law firm in Pennsylvania, filed a class-action suit in the Court of Federal Claims this month. The suit seeks to halt tax collections and secure refunds for taxpayers who have not applied for them, lawyer Nicholas Chimicles said.
