Taxpayers May Be Entitled To Refunds of Federal Excise Taxes Paid On
Long Distance Telephone Service
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For more than a century, users of telephone service have been subject
to a Federal Excise Tax on telephone service. Originally enacted in 1898
as a temporary measure to finance the Spanish-American War, the excise tax
on telephone service has never been repealed (although it almost was eliminated
in 2000). The current tax rate is three percent and is applicable to “local
telephone service,” “toll telephone service,” and “teletypewriter exchange
service.” However, a series of recent court cases, including a May 10, 2005
ruling by the United States Court of Appeals for the Eleventh Circuit, has
left in doubt whether the Federal Excise Tax remains applicable to “ toll
telephone service” (commonly referred to as long distance service). Because
of changes in how long distance service is provided since the time that
the current law was written, the statutory definition of “toll telephone
service” no longer fits with the manner in which such service is provided.
Thus, clients may be entitled to refunds of Federal Excise Tax amounts paid
on toll telephone service.
“Toll Telephone Service” Under the Internal Revenue Code
Section 4252(b) of the Internal Revenue Code defines “toll telephone
(1) a telephonic quality communication for which (A) there is a toll
charge which varies in amount with the distance and elapsed transmission
time of each individual communication and (B) the charge is paid within
the United States, and
(2) a service which entitles the subscriber, upon payment of a periodic
charge (determined as a flat amount or upon the basis of total elapsed
transmission time), to the privilege of an unlimited number of telephonic
communications to or from all or a substantial portion of the persons
having telephone or radio telephone stations in a specified area which
is outside the local telephone system area in which the station provided
with this service is located.
|"Despite the fact that the telecommunications
industry is radically different than it was in 1965, the definition
of toll telephone service was never amended to reflect those changes."
The problematic part of the “toll telephone service” definition is the
reference to “distance” in subsection (1). The statutory definition of “toll
telephone service” was enacted in 1965. At that time, telecommunications
markets, including the long distance market, had not yet been opened to
competition, and all toll service was provided by the American Telephone
& Telegraph Company (AT&T), jointly with the nation’s local telephone companies
(including the Bell companies which AT&T owned, and the so-called “independent”
companies). AT&T’s pricing structure for toll service included charges which
varied depending on the duration of the call and with the distance which
the call traveled (e.g., a five minute call between New York and Los Angeles
was more expensive than a five minute call between New York and Washington,
Despite the fact that the telecommunications industry is radically different
than it was in 1965, the definition of toll telephone service was never
amended to reflect those changes. Over the past decade, the long distance
industry has moved away from distance sensitive pricing. Today, providers
of toll service utilize “postalized” rate structures – the per minute price
of an interstate call is the same to all out-of-state locations (for example,
“call anywhere for $0.05 per minute!”). Although intrastate rates often
differ from interstate rates, they too do not vary based on distance. With
the exception of calls to Mexico (where there are still rate bands based
on distance), all international calls between the U.S. and foreign points
are subject to postalized rates which do not vary with distance on either
the U.S. or foreign end.
Taxpayer Challenges to the Excise Tax on Telephone Toll Service
Several years ago, taxpayers began to question whether the Federal Excise
Tax was applicable to toll services where the rates did not vary with distance.
Refund claims were filed with the IRS, none of which were granted. Following
those denials, civil lawsuits against the government were filed in various
federal courts. With one exception, every court which considered the question
concluded that the Federal Excise Tax was not applicable to toll service
where the rates did not vary with distance. The one exception was the U.S.
District Court for the Southern District of Florida in a case brought by
American Bankers Insurance Group, Inc. That court accepted the Government’s
argument that the word “and” (“varies in amount with the distance and elapsed
transmission time”) was ambiguous and concluded that the word “and” should
be given a disjunctive meaning rather than a conjunctive meaning (effectively
converting the word “and” to “and/or”). The court ruled against American
Bankers Insurance Group which appealed the ruling to the Eleventh Circuit.
In its May 10 opinion in American Bankers Insurance Group, Inc. v.
United States (Case No. 04-10720), the Court of Appeals reversed the
District Court and stated that the statutory language is subject to the
plain meaning rule. Quoting from a recent Supreme Court case, the appeals
court stated that, in construing a statute, “[t]he preeminent canon of statutory
interpretation requires us to presume that the legislature says in a statute
what it means and means in a statute what it says.” In other words, “and”
means “and.” “And” does not mean “and/or.”
In finding the language of Internal Revenue Code Section 4252(b) to be
unambiguous, the Eleventh Circuit reached the same conclusion as did four
U.S. District Courts and the Court of Federal Claims (twice) in cases involving
the telephone excise tax’s applicability to telephone toll service where
the rates do not depend on distance. Significantly, the Eleventh Circuit
opinion is the first court of appeals ruling which has addressed the question.
As recently as August 2004, the IRS announced that it would continue
to assess and collect the telephone excise tax on toll telephone service,
notwithstanding the litigation challenging the law. At that time, the IRS
took comfort in the fact that even though most of the courts which had considered
the issue had concluded that the tax is not applicable to non-distance-based
toll service, one court did agree with the IRS. Now that one court has been
What Happens Now
It is possible that Congress could enact corrective legislation removing
the reference to distance in the toll service definition. However, such
legislation seems unlikely. In 2000, Congress passed a bill which would
have eliminated the Federal Excise Tax on telephone service as part of a
larger budget bill. However, that bill was vetoed by President Clinton for
unrelated reasons. Earlier this month, Rep. Gary Miller (R-CA) introduced
in Congress a bill which would repeal the excise tax. Whether or not that
bill passes, legislative sentiment seems to favor abolishing the 107 year
old tax, not fixing it. It is possible that other federal circuit courts
of appeal might reach contrary conclusions to that of the Eleventh Circuit.
It is also possible (although highly unlikely) that the government will
ask the Supreme Court to review the Eleventh Circuit ruling and that the
Supreme Court will agree to hear the case.
Telephone Excise Taxpayers Should Consider Seeking Refunds
|"Consumers of long distance telephone
service should consider filing claims with the IRS seeking refund
of taxes paid on toll telephone service."
Consumers of long distance telephone service should consider filing claims
with the IRS seeking refund of taxes paid on toll telephone service. At
this point, it is not known whether the IRS will change its refund policy
in light of the recent court of appeals decision, but even if the IRS chooses
to “stick to its guns” and continues to deny refund claims, seeking refund
and being denied is a necessary condition precedent to going to court to
challenge the IRS denial.
The right to refund is not unlimited. There is a three year statute of
limitations on refund claims with the IRS. Thus, taxpayers may not claim
refunds for Federal Excise Tax paid before May 2002 (assuming that refund
claims are filed immediately). Also, IRS refund procedures require that
claims be thoroughly documented. Records of payments – preferably photocopies
of invoices – must be attached to any refund claims. For companies who have
not saved their telephone bill records for the past three years, it is possible
that your vendors will be able to provide copies of bills to you.
This firm would be pleased to assist clients in preparing and filing
refund claims with the IRS and initiating legal actions in appropriate courts
to recover previously-paid excise taxes on toll telephone services.
This Alert was written by
Mitchell Brecher in the Washington, DC office.
Please contact Mr. Brecher at 202.331.3152 or your Greenberg Traurig liaison
if you have any questions regarding the subject matter of this Alert.
© 2005 Greenberg Traurig
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This GT ALERT is issued for informational purposes only and is not intended
to be construed or used as general legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our clients’
individual legal needs.