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.

Net neutrality proponents are starting their battle in the Senate with a bill (S-2917) endorsed by Senate Commerce Committee Co-Chmn. Inouye (D-Hawaii). The bill, introduced by Sens. Snowe (R-Me.) and Dorgan (D-N.D.), would bar broadband providers from blocking or degrading Internet content. The bill goes further than a provision in Chmn. Stevens’ (R-Alaska) bill calling for an FCC study on net neutrality.

The draft telecom bill (S-2686) was too hard on cities, Senate Commerce Committee Chmn. Stevens (R-Alaska) said Wed. at the first of 2 hearings on it. Acknowledging as “fair criticism” complaints about the bill’s local franchising provisions, Stevens said those parts of the bill were “put in by others.” Stevens said he takes “credit or blame” for the bill’s handling of net neutrality, but wants more Democratic input before revising the bill.

The Senate Commerce Committee has no immediate plans to mark up an indecency bill that it had previously considered putting on the calendar for this week, Hill sources said. The committee Tues. announced its markup schedule, which didn’t include the bill (S-193), and a spokesman confirmed it wouldn’t be marked up this week.

“It’s time for the IRS to stop collecting this unlawful tax,” USTelecom said in response to a ruling by the 3rd U.S. Appeals Court, Philadelphia, that the telephone excise tax is unlawful. Five federal appeals courts, representing 13 states, now have ruled against the tax on long distance calls. The courts have said the excise tax applies only to long distance services that vary both with transmission time and distance. That means it doesn’t apply to long distance services that are priced by time but not distance, which is the prevalent method now. The IRS has argued the tax actually applies to services that are based either on distance or time, but the courts have said the law applies excise tax only to services that vary by both factors. The 3rd Circuit ruled Tues. on a case involving Reese Bros., a company that purchased long distance services at fixed per- min. rates without any distance charges. The company had sought a refund from the IRS for $319,496 in excise taxes and, when the IRS didn’t respond, it filed suit. When a lower court ruled in favor of the company, the IRS appealed. “The question presented in this appeal is whether the federal communications excise tax… applies to long distance telephone services that are priced based on a fixed per- minute, non-distance sensitive rate,” the court said: “Based on the plain language and structure of the statute, we conclude that it does not.”

USTelecom and Qwest urged the FCC to eliminate remaining Open Network Architecture (ONA) requirements, including the obligation to file ONA reports and post Comparably Efficient Interconnection (CEI) plans on company web sites. The requirements, imposed on former Regional Bell Operating Companies and GTE, are no longer needed “in light of the dramatic evolution of technology [and] highly competitive environment,” the companies said in a May 1 filing. “Elimination of outdated regulatory requirements” such as these “is one of the fundamental purposes of the Paperwork Reduction Act,” they said. The requirements date back to the 1980s and were imposed as a way of protecting competitors when the FCC decided the Bells could offer information services. The FCC originally required the Bells to provide “information” services through fully separate affiliates and then in 1986 permitted them to integrate these enhanced services with telecom services subject to non-structural safeguards and the ONI/CEI requirements. “The concern was that the companies would use existing market power in local exchange services to obtain a competitive advantage in information services markets by improperly allocating to their regulated core businesses costs that would be properly attributed to their competitive ventures and by discriminating against rival, unaffiliated ISPs… in favor of their own information services,” the companies said. The concerns no longer exist, they said.

The FCC should crack down on access charge “avoidance schemes” by acting on pending petitions in 2 dockets, said USTelecom and 211 of its small and midsized members in a letter sent Wed. to the Commission. Such schemes “are frustrating comprehensive intercarrier compensation reform and threatening local exchange carriers’ ability to maintain existing networks as they invest in broadband deployment, particularly in rural areas,” the letter said: “Conduct at issue in these two dockets is taking investment funds away from the LECs building the broadband networks on which VoIP and other Internet services ride and giving it to companies that are merely seeking to arbitrage regulatory asymmetries rather than deploy better networks.” USTelecom asked the FCC to: (1) Grant AT&T’s petition in WC Doc. 05-276 for a ruling letting it recover access charge revenue on calls that originate and terminate on the PSTN but “traverse an IP-based network at some intermediate part of the call flow.” (2) Grant Frontier’s petition in the same docket seeking payment for Feature Group A call services it provides for origination of long distance voice communications. (3) Deny VarTec’s petition in that docket seeking FCC “assistance in its effort to escape liability for knowingly routing voice communications access traffic through third-party providers that refuse to pay for the terminating access services on that traffic.” (4) Deny Grande Communications’ petition in WC Doc. 05-283 “seeking Commission blessing for a proposed call laundering scheme that would re-label traffic to, in effect, unlawfully obtain and resell terminating access services at reciprocal compensation rates.” USTelecom said its members “face nonpayment and underpayment for terminating access services they are obliged to provide… and they are not obtaining relief through litigation… which would be costly and time-consuming in any event.”

Rural telcos want a wider contribution base for the universal service fund, plus support for broadband deployment, according to Wed testimony before the House Subcommittee on Rural Enterprises. Groups lauded the approach in a bill (HR-5072) by Reps. Terry (R-Neb.) and Boucher (D-Va.) that would require all 2-way voice services to contribute, create a fund for broadband deployment in unserved areas and put a limit on the fund’s growth.

The FCC voted Wed. to keep a May 14, 2007 deadline for CALEA compliance by VoIP and broadband access providers. USTelecom had asked for an extension. The CALEA Act requires network providers to develop capabilities and standards designed to give law enforcement agencies access to networks.

DoJ and the Dept. of Homeland Security asked the FCC not to require that carriers dispose of customer calling and other records after a specified date, arguing that customer proprietary network information (CPNI) is used in “virtually every federal, state, and local investigation of consequence.” Meanwhile, an industry source said, the FTC is poised to announce enforcement actions against 5 companies for selling phone records.