N.Y. Appeals Court Ruling is 4th to Condemn Excise Tax
The 2nd U.S. Appeals Court, N.Y. became the 4th circuit court to condemn the telephone excise tax, in a ruling Thurs. against the federal govt. The court, affirming a district court ruling, said insurance giant Fortis is entitled to a refund of the tax on phone services.
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Judge David Trager affirmed the decision by U.S. Dist. Court, N.Y.C. as “thorough and well-reasoned opinions.” The 6th, 11th and D.C. circuit courts have reached the same conclusion “for substantially the same reasons,” he wrote for an appeals panel. Telephone services such as Fortis’ are not taxable under federal law, the court said.
“The 2nd Circuit decision affirms what 3 other circuit courts have already found -- the collection of the federal tax is unlawful,” said USTelecom Vp David Cohen: “It’s time for the government to resolve this issue and stop enforcing the illegal application of the telephone excise tax.”
The decision comes as the Bush Administration weighs whether to repeal the tax (CD April 17 p5). “The government is at the point of being embarrassed,” said lawyer Hank Levine: “The courts have said: ‘Please give up and go home.'” The govt. has to decide whether to repeal the tax and give up about $6 billion in annual revenue, according to a recent Congressional Research Service (CRS) report on the tax.
Opponents of repeal point to the revenue loss and the “simplicity of the tax and its high compliance rate,” the CRS report said. The report suggested that Congress amend the law so all communications services are taxed at the same rate -- “an intermediate option to improve its efficiency.” But without credits or transfers to lower-income taxpayers, the tax wouldn’t be fair, it said.
The tax is considered regressive. And it’s applies to both local and long-distance service, which are increasingly hard to separate with many companies’ sales packages. Resolving the problem isn’t simple. There’s the question of rebates if the tax is declared illegal, or structuring a new tax. Meanwhile, the govt. is still dealing with “hundreds” of claims for refunds for taxes paid that are claimed to have been illegally collected, Levine said.
CRS suggested the govt. repeal the tax on toll and wireless services while retaining it on local service. This option would be more efficient economically, although more regressive, the report said. Economic efficiency would be improved because local services are a necessity and people wouldn’t change behavior in response to the tax. “Lower- income taxpayers will encounter the same tax liability as high-income taxpayers,” the report said. At the same time, the tax liability wouldn’t depend on consumption of long- distance services.
“How telecom companies respond to changes in the tax law will likely have a significant effect on the overall efficiency and equity of a retooled telephone excise tax regime,” the report said. A measure before Congress to repeal the tax was offered by Sen. Santorum (R-Pa.) (S-1321) with 15 co-sponsors, and its companion in the House (HR-1898) was sponsored by Rep. Miller (R-Cal.).