Communications Excise Taxes

Communications Excise Taxes

February 01, 2005

Communications excise taxes may not apply to yet another type of phone service.

The US government collects a 3% excise tax on “amounts paid for communications services.” The tax was originally enacted more than 100 years ago to help fund the Spanish- American War and, although it has been updated, the words in the statute are badly outdated to a point where the IRS is having trouble collecting it on many current forms of communications services. On November 30, a federal district court in Pennsylvania delivered the latest blow. A company called Reese Brothers bought long-distance phone services from three long-distance carriers: MCI, Quest and LCI. The phone companies collected federal excise taxes on top of the fees they charged. Reese Brothers sued the IRS for the money back on grounds that its type of phone service is not described in the excise tax statute.

The excise tax applies, among other things, to “toll telephone service,” which is defined as telephone calls for which the phone company charges based on the “distance and elapsed transmission time for each individual communication.”

Phone companies in the US have abandoned mileage bands and now treat the entire US as a single band. Thus, charges for interstate calls no longer vary by distance. The statute says to be taxable, the charges must be linked both to distance and elapsed time.

Perhaps taking its cue from former President Clinton, the IRS argued that when the statute says “and,” it really means “or.” The court declined to go along. The case is Reese Brothers v. United States. However, the IRS won a similar case in a federal district court in Florida last January. That case is American Bankers Insurance Group v. US.

The agency said in a notice last August that it intends to continue taxing long-distance calls, but there are questions about whether the IRS can expand the scope of the tax administratively or whether Congress must rewrite the underlying statute.

Keith Martin