Federal Excise Tax on Telecommunication Long Distance Services
On May 25th, 2006, the Internal Revenue Service agreed to stop collecting the Federal Excise Tax on Long Distance based calls and, in doing so, would adhere to the five U.S. circuit court decisions that ruled current long distance telephone services are not subject to the tax defined and imposed by Internal Revenue Code Sections 4251 and 4252.
String of Cases Rejecting Government Stance
Federal cases in the Second, Third, Sixth, Seventh, and District of Columbia circuits, all of which were decided against the government, held that a telephonic communication for which there is a toll charge varying due to elapsed transmission time and not distance is not a taxable toll telephone service as defined in code Section 4252(b)(1). As a result, amounts paid for time-only service are not subject to the tax imposed by §4251 and the government will no longer litigate the issue.
In late January 2004, a District Court in Florida ruled in favor of the Government in American Bankers Insurance Group, Inc. (“ABIG”) v. United States. The court found that the term “and” was ambiguous, and held that it should be interpreted to mean “and/or” in light of the legislative history and intent of the statute. May 10th 2005 the Eleventh Circuit Court of Appeals has overturned this decision and entered a judgment in favor of the Taxpayer. The IRS did not request review before the US Supreme Court and the Court of Appeals in September 2005 mandated the IRS to refund the tax to ABIG.
Further, February 13, 2004 the United States District Court for the Northern District of Ohio found for the taxpayer in OfficeMax, Inc. v. United States. The OfficeMax court had no difficulty discerning the plain meaning of the statute: “This Court respectfully disagrees with the conclusion of the ABIG court . . . . Although the present-day Congress might wish to tax long-distance service as it is currently charged (i.e., on the basis of elapsed transmission time only), this Court believes the relevant inquiry is what Congress intended when it amended the statute in 1965.” On November 2, 2005 the US Court of Appeals for the sixth Circuit upheld the OfficeMax decision. The IRS can request review before the US Supreme Court.
On September 16, 2004, the U.S. District Court for the Southern District of New York joined the Northern District of Ohio when it issued an opinion and order in Fortis v. U.S. granting summary judgment in favor of the taxpayer (except for certain inbound calling types, where the court needed more information). After reviewing the ABIG and OfficeMax decisions, Judge Koeltl wrote:
This Court agrees with the Office Max court that the meaning of the provision is plain: the amount of toll charge must depend on both the distance and elapsed time of the call.” The court found no reason to set aside the plain meaning of the statutory language because “there is no language in [the statute] or its legislative history to support the Government’s claim that the overriding purpose of the statute was to tax all long-distance service in perpetuity.
The opinion noted: “The recent emergence of service that falls outside of the current definitions does not justify abandoning the statute’s plain and original meaning. Updating the statute is not the Court’s role, especially when doing so would require reading the term ‘distance’ out of the statute.” Four days later, on September 20, 2004 Judge Rosemary M. Collyer of the U.S. District Court for the District of Columbia handed the government another defeat in National Railroad Passenger Corporation (Amtrak) v. U.S. Recently, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit, in December 2005 upheld the Amtrak case.
Additional Successful wins by the Taxpayer include: Reese Brothers, Inc.v. US (November 30, 2004), Honeywell International Inc. v. US Ct of Claims (February 18, 2005), America Online Inc. (AOL) v. US Ct of Federal Claims (March 30, 2005), Hewlett-Packard v. US US District Court (August 5, 2005) ninth circuit – CA.
The Court of Appeals for the Sixth Circuit March 30, 2006 denied the government's request for an en banc rehearing on the federal excise tax issue (OfficeMax Inc. v. United States, 6th Cir., No. 04-4009, 3/30/06).
A Treasury spokesman stated on April 3 2006 that the department was assessing the issue in the wake of the ruling and expected official action in the near future.
Treasury Secretary Snow said Feb. 15 that the outcome of the March 2006 OfficeMax ruling could spur the government to concede its position on enforcement of the excise tax on service. Under questioning by Rep. Jim Ramstad (R-Minn.) at a House Ways and Means Committee hearing on the fiscal 2007 budget, the secretary cited the pending OfficeMax case and said, "should the judges come down in alignment with the prior three circuit courts, I think the handwriting will be on the wall."
When Secretary Snow was asked if that would be the end of the tax, Snow replied, "I would think that the time to bring that to an end would be upon us." The IRS Formally conceded on this issue on May 25, 2006.