Telephone Users

Telephone Users

April 01, 2005

TELEPHONE USERS continue to win lawsuits against the US government asking for refunds of excise taxes they paid on phone service.

In one of the latest cases, Fortis, Inc., a large diversified utility holding company that owns utilities primarily in Canada and the Caribbean, persuaded a US district court in New York in February that it should not have had to pay excise taxes on amounts the phone company charges it for 800 numbers that its customers can use to call Fortis toll free.

The US government collects a 3% 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 The tax was originally enacted more than 100 years ago to help fund the Spanish-American War and, although it has been updated, the words in the statute are badly outdated to a point where the Internal Revenue Service is having trouble collecting taxes on many current forms of communications services.

The tax applies, among other things, to “toll telephone service,” which is defined as including WATS-line type service where the user of the WATS line is charged a “periodic charge (determined as a flat amount on upon the basis of total elapsed transmission time)” for an unlimited number of phone calls to or from callers outside the local area.

Fortis is billed for its 800 number by the number of calls it receives. The court said the service could not be taxed because the company is not charged a flat rate or on the basis of time elapsed. The case is Fortis, Inc. v. United States.

Four days later, Honeywell International also won a decision in the US claims court ordering the government to refund taxes that Honeywell paid on regular long-distance telephone service from AT&T, MCI and Sprint. Honeywell is billed by the duration of each call. The US tax code says regular long-distance service is taxable when the phone charges are based on the “distance and elapsed transmission time for each individual communication.” The key word is “and.” The IRS argued the statute should be read as if the word were “or.” The claims court disagreed.

The government is losing large dollar claims from phone customers seeking tax refunds. If the government wants to keep collecting these taxes, Congress should update the statute.

Keith Martin