IRS Ends Long Distance Telephone Excise Tax
The IRS threw in the towel Thurs. on a long legal battle over the 3% long distance excise tax, saying it no longer will collect the federal tax and will issue an estimated $15 billion in refunds for the past 3 years. The agency said it’s “conceding” the legal dispute over the tax, which it called it an “antique tax,” and encouraged Congress to end the remaining excise tax on local phone service. The phone excise tax started over 100 years ago to finance the Spanish American War.
Sign up for a free preview to unlock the rest of this article
Timely, relevant coverage of court proceedings and agency rulings involving tariffs, classification, valuation, origin and antidumping and countervailing duties. Each day, Trade Law Daily subscribers receive a daily headline email, in-depth PDF edition and access to all relevant documents via our trade law source document library and website.
The action came after 5 federal appeals courts ruled against the IRS in disputes over whether the definition of the tax applies to modern long distance service. The courts ruled the tax applies only to long distance services that vary both with transmission time and distance. That means it doesn’t apply to services that are priced by time but not distance, which is the prevalent method now, the courts decided. The disputes have centered on long distance service because of the definitional question, which didn’t apply to local service.
The IRS said taxpayers will be able to apply for refunds on their 2006 tax forms, filed in 2007. The agency is planning to develop a standard refund amount to make it easier for consumers to file the claims. Companies will have to file claims based on the actual amount of tax paid, using a new form under development, and consumers can claim actual taxes too if they wish.
Sen. Schumer (D-N.Y.) said repealing the tax, which applies to both wireline and wireless long distance services, could result refunds of more than $644 million to N.Y. customers alone. House Speaker Hastert (R-Ill.) called the Treasury Dept. decision “a long fought victory to free American taxpayers from a tax that was first levied a century ago.”
Telecom customers should see a “noticeable difference” on their phone bills as a result of the end of the excise tax, said BellSouth Vp Herschel Abbott. Large enterprise customers with high volumes of long distance calls are positioned to benefit the most from the IRS action, Medley Global Advisors said. However, “it remains to be seen whether carriers… will pass on this tax reduction” to customers, Medley said in a report: “Before anyone touts this decision as a big win for customers, investors should wait to see how the industry responds.”
The IRS estimated the govt. will see about $29 billion less in tax receipts over the next 5 years as a result of the decision. Dropping the local portion of the tax would cost the govt. about $1.8 billion over 5 years, the IRS said.
Attorney Hank Levine, who represented many of the plaintiffs in the lawsuits, said the legal battles began when the IRS wouldn’t honor corporations’ applications for excise tax refunds. The IRS told the companies they would have to sue, “so we did,” he said. Levine said the effort took 5 years and he suspects some onlookers questioned whether it was worth the trouble. “Now everyone says it’s obvious the IRS had to stop collecting the tax, so I guess it was worth it,” Levine said. One uncertainty is whether companies that have already filed for refunds will have to refile using the new form, he said.
Among companies that filed suits were insurance company Fortis, Honeywell, telemarketer Reese Bros., OfficeMax and Amtrak. DoJ announced Thurs. it would no longer pursue such litigation involving the long distance excise tax. Most of the appeals court cases resulted from the govt. challenging lower court decisions. “It is more than past time that consumers not be penalized for simply using [phone] services,” said USTelecom Pres. Walter McCormick. “The Spanish American War ended successfully a long time ago and now, after a rough ride for consumers, so has the battle over the federal excise tax,” said CTIA Pres. Steve Largent.