Wrangling for a Refund
It’s been about a decade since long-distance carriers began flat-rating their per-minute toll charges instead of charging according to mileage bands. But only recently have many network managers begun to realize that this move should have changed the way the carriers apply taxes.
Several dozen Fortune 500 corporations have filed requests with the Internal Revenue Service for refunds of the 3% federal excise tax on toll telephone service. Their argument: Under the law, the tax applies only to calls whose prices vary by time and distance. And hardly any interstate calls vary by distance now – a call from Chicago to Cincinnati costs the same as a call from Chicago to San Diego.
While the IRS officially disagrees with this argument and has often dithered with these requests, a federal court in Cleveland has ruled in favor of these types of refunds and might force the IRS’ hand. In February the court issued a ruling that, if upheld on appeal, will force the government to refund more than $380,000 to OfficeMax because of excise taxes improperly collected since 1999 on the retailer’s MCI long-distance bills.
The court ruling might spur similar refund requests from a range of corporate customers, especially because the stakes are huge. In 2002, the most recent reporting year, the U.S. government collected up to an estimated $2.51 billion from the federal excise tax on toll telephone service. By making claims that go back three years – the statute of limitations for this type of tax refund – companies in one fell swoop could recover up to 9% of their current-year spending on such long-distance tolls.
In a 1965 law that reformed the system of excise tax collection, Congress defined “toll telephone service” to mean “a telephonic quality communication for which there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication.” Without distance sensitivity, the tax no longer appears to apply.
Arguably, the federal excise tax was flawed from the beginning. In general, excise taxes are levies the government placed on non-essential goods. The telephone excise tax began in 1898 as a measure to help pay for the Spanish-American War. But telephone calls were a novelty then, so the charge was in effect a “luxury tax.”
With the 1965 Excise Tax Reduction Act, Congress tried to eliminate the tax on numerous goods and services. Congress reduced the telephone tax from as high as 10% to 3%, but a further scheduled phase-out to zero was repeatedly postponed in budget negotiations, and the 3% rate was made permanent in 1990.
So how do you get a refund for the 3% tax that has stayed in effect ever since then? Prepare for possible frustration along the way, because there are complications:
• The biggest problem is that the IRS officially denies that refunds are due. In a 1979 internal ruling on which it still relies, the IRS said it doesn’t believe a call actually must be mileage-rated to qualify as a transaction whose prices “vary in amount with the distance and elapsed transmission time” of the call. The agency says that the legislative history of the 1965 bill indicates that Congress meant to cover the type of flat-rate phone calls placed today, and there are judges who agree on this point. Nevertheless, the IRS did settle some of the early refund claims that arose from users after carriers went to non-mileage-sensitive tolls for 30 to 40 cents on the dollar, but isn’t doing so now that the issue is going to court.
While OfficeMax prevailed in Cleveland, the federal court in Miami in January ruled against the American Bankers Insurance Group for a similar $288,000 refund claim on calls placed with AT&T. The difference between the two rulings is whether the word “and” in the phrase “vary in amount with the distance and elapsed transmission time” means “and,” as the court in Cleveland said it did, or means “or” as the court in Miami found.
Other courts might find other reasons to rule against refunds. The government has argued that there is an implicit distance sensitivity built into the fact that intrastate calls tend to cost a different amount (often more) than interstate calls. Refund advocates say this is a vestige of telecom regulation, where different authorities govern intrastate vs. interstate calls, and if there were a rational relationship between distance and charges, the shorter-mileage (intrastate) call would always cost less.
• You can’t go back to the mid-1990s to make your refund claim. The most common claim is for three years’ worth of excise tax to match the statute of limitations. Accurate bill-keeping is at a premium to document a claim, and the IRS asks for the earliest and latest dates of the “event” in question.
• Data traffic is generally not charged an excise tax, but wireless traffic is. Just because wireless calls aren’t distance-related doesn’t mean you can claim a tax refund. Another section of the 1965 law covered taxes on bucket-of-minutes billing plans. At the time this referred to so-called WATS lines – progressive fees for calling specific concentric circles of mileage ranges from your origination point – but today describe the typical wireless plan.
Residential customers theoretically could apply for wireline toll telephone refunds, but there’s a Catch-22. Realistically, the only affordable way to do so would be via a class-action lawsuit, and class actions are barred for tax refund matters.
Fight for your Rights
Corporate customers do have a number of advantages over the IRS in this fight. While future court rulings can’t be predicted, tax-law principles generally hold that the “plain meaning” of statutes shouldn’t be bent if they favor the taxpayer, as the Cleveland court noted.
Moreover, the whole point of the 1965 law was to eventually cut out the tax entirely, so arguments based on its “legislative history” are inherently unstable. More court rulings are likely to influence the rate at which the IRS acts on refund requests before they go to litigation.
The best approach, while each federal court jurisdiction takes its turn at the issue, might be to get in line at the IRS with your own refund request. Get the IRS’s refund request form here.