"May ALBANY AMSTERDAM ATLANTA BOCA RATON BOSTON CHICAGO DALLAS DELAWARE"
May 2005 ALBANY Taxpayers may be entitled to refunds of Federal Excise Taxes AMSTERDAM paid on long distance telephone service ATLANTA BOCA RATON BOSTON For more than a century, users of telephone transmission time of each individual com- service have been subject to a Federal Excise munication and (B) the charge is paid CHICAGO Tax on telephone service. Originally enacted within the United States, and DALLAS in 1898 as a temporary measure to finance the (2) a ser vice which entitles the subscriber, DELAWARE Spanish-American War, the excise tax on upon payment of a periodic charge (deter- DENVER telephone service has never been repealed mined as a flat amount or upon the (although it almost was eliminated in 2000). FORT LAUDERDALE basis of total elapsed transmission time), The current tax rate is three percent and to the privilege of an unlimited number of HOUSTON is applicable to “local telephone service,” “toll telephonic communications to or from LOS ANGELES telephone service,” and “teletypewriter exchange all or a substantial por tion of the per- service.” However, a series of recent court LAS VEGAS sons having telephone or radio tele- cases, including a May 10, 2005 ruling by the phone stations in a specified area which MIAMI United States Court of Appeals for the Eleventh MILAN 1 Circuit, has left in doubt whether the Federal Excise Tax remains applicable to “ toll telephone NEW JERSEY Despite the fact that the service” (commonly referred to as long dis- NEW YORK telecommunications industry is radically tance service). Because of changes in how long different than it was in 1965,the definition ORANGE COUNTY distance service is provided since the time of toll telephone service was never that the current law was written, the statuto- ORLANDO amended to reflect those changes. ry definition of “toll telephone service” no PHILADELPHIA longer fits with the manner in which such serv- PHOENIX ice is provided. Thus, clients may be entitled to is outside the local telephone system 1 refunds of Federal Excise Tax amounts paid on ROME area in which the station provided with toll telephone service. SILICON VALLEY this ser vice is located. “Toll Telephone Service” Under the TALLAHASSEE The problematic par t of the “toll telephone Internal Revenue Code ser vice” definition is the reference to “dis- TOKYO 2 Section 4252(b) of the Internal Revenue tance” in subsection (1).The statutory defini- TYSONS CORNER Code defines “toll telephone service” as: tion of “toll telephone ser vice” was enacted WASHINGTON , DC in 1965. At that time, telecommunications (1) a telephonic quality communication for markets, including the long distance market, WEST PALM BEACH which (A) there is a toll charge which varies had not yet been opened to competition, ZURICH in amount with the distance and elapsed and all toll ser vice was provided by the www.gtlaw.com 1 Strategic Alliance: Studio Santa Maria in Milan and Rome 2 Greenberg Traurig Office/Strategic Alliance: Hayabusa Kokusai Law Offices in Tokyo. American Telephone & Telegraph Company with the IRS, none of which were granted. (AT&T), jointly with the nation’s local telephone Following those denials, civil lawsuits against companies (including the Bell companies the government were filed in various federal which AT&T owned, and the so-called “inde- cour ts. With one exception, ever y cour t pendent” companies). AT&T’s pricing struc- which considered the question concluded ture for toll ser vice included charges which that the Federal Excise Tax was not applicable varied depending on the duration of the call to toll ser vice where the rates did not var y Consumers of long and with the distance which the call traveled with distance. The one exception was the U.S. distance telephone (e.g., a five minute call between New Yor k District Cour t for the Southern District of service should consider and Los Angeles was more expensive than Florida in a case brought by American filing claims with the a five minute call between New York and Bankers Insurance Group, Inc. That cour t Washington, D.C.). accepted the Government’s argument that IRS seeking refund of the word “and” (“varies in amount with the taxes paid on toll Despite the fact that the telecommunications distance and elapsed transmission time”) was industr y is radically different than it was in telephone service. ambiguous and concluded that the word 1965, the definition of toll telephone ser vice “and” should be given a disjunctive meaning was never amended to reflect those changes. rather than a conjunctive meaning (effec- Over the past decade, the long distance tively conver ting the word “and” to “and/or”). industr y has moved away from distance sensi- The cour t ruled against American Bankers tive pricing. Today, providers of toll ser vice Insurance Group which appealed the ruling to utilize “postalized” rate structures – the per the Eleventh Circuit. minute price of an interstate call is the same to all out-of-state locations (for example, “call In its May 10 opinion in American Bankers anywhere for $0.05 per minute!”). Although Insurance Group, Inc. v. United States (Case No. intrastate rates often differ from interstate 04-10720), the Cour t of Appeals reversed the rates, they too do not var y based on distance. District Cour t and stated that the statutor y With the exception of calls to Mexico (where language is subject to the plain meaning rule. there are still rate bands based on distance), Quoting from a recent Supreme Cour t case, all international calls between the U.S. and the appeals cour t stated that, in construing foreign points are subject to postalized rates a statute, “[t]he preeminent canon of statu- which do not var y with distance on either the tor y interpretation requires us to presume U.S. or foreign end. that the legislature says in a statute what it means and means in a statute what it says.” In Taxpayer Challenges to the Excise Tax other words, “and” means “and.” “And” does on Telephone Toll Service not mean “and/or.” Several years ago, taxpayers began to ques- In finding the language of Internal Revenue tion whether the Federal Excise Tax was appli- Code Section 4252(b) to be unambiguous, the cable to toll ser vices where the rates did not Eleventh Circuit reached the same conclusion var y with distance. Refund claims were filed Taxpayers may be entitled to refunds of Federal Excise Taxes paid on long distance telephone service Page 2 as did four U.S. District Courts and the Court will ask the Supreme Cour t to review the of Federal Claims (twice) in cases involving Eleventh Circuit ruling and that the Supreme the telephone excise tax’s applicability to Cour t will agree to hear the case. telephone toll ser vice where the rates do not Telephone Excise Taxpayers Should depend on distance. Significantly, the Eleventh Consider Seeking Refunds Circuit opinion is the first cour t of appeals ruling which has addressed the question. Consumers of long distance telephone ser v- ice should consider filing claims with the IRS As recently as August 2004, the IRS announced seeking refund of taxes paid on toll telephone that it would continue to assess and collect service. At this point, it is not known whether the telephone excise tax on toll telephone the IRS will change its refund policy in light ser vice, notwithstanding the litigation chal- of the recent cour t of appeals decision, but lenging the law. At that time, the IRS took even if the IRS chooses to “stick to its guns” comfor t in the fact that even though most of and continues to deny refund claims, seeking the cour ts which had considered the issue refund and being denied is a necessar y had concluded that the tax is not applicable condition precedent to going to cour t to to non-distance-based toll ser vice, one cour t challenge the IRS denial. did agree with the IRS. Now that one cour t has been reversed. The right to refund is not unlimited. There is a three year statute of limitations on refund What Happens Now claims with the IRS. Thus, taxpayers may not It is possible that Congress could enact cor- claim refunds for Federal Excise Tax paid before rective legislation removing the reference to May 2002 (assuming that refund claims are distance in the toll service definition. However, filed immediately). Also, IRS refund procedures such legislation seems unlikely. In 2000, Congress require that claims be thoroughly documented. passed a bill which would have eliminated the Records of payments – preferably photocopies Federal Excise Tax on telephone ser vice as of invoices – must be attached to any refund par t of a larger budget bill. However, that bill claims. For companies who have not saved their was vetoed by President Clinton for unrelated telephone bill records for the past three reasons. Earlier this month, Rep. Gary Miller years, it is possible that your vendors will be (R-CA) introduced in Congress a bill which able to provide copies of bills to you. would repeal the excise tax. Whether or not This firm would be pleased to assist clients in that bill passes, legislative sentiment seems to preparing and filing refund claims with the IRS favor abolishing the 107 year old tax, not fixing and initiating legal actions in appropriate it. It is possible that other federal circuit cour ts cour ts to recover previously-paid excise taxes of appeal might reach contrar y conclusions to on toll telephone services. that of the Eleventh Circuit. It is also possible (although highly unlikely) that the government Taxpayers may be entitled to refunds of Federal Excise Taxes paid on long distance telephone service Page 3 This Alert was written by Mitchell Brecher in the Washington, DC office. PRACTICE AREAS Please contact Mr. Brecher at 202.331.3152 or your Greenberg Traurig ADA, Accessibility, Building and liaison if you have any questions regarding the subject matter of this Alert. 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