Disregarding rulings, IRS keeps call tax

The Internal Revenue Service may owe you as much as $50, but don’t hold your breath. Don’t hold the phone.

Every time you make a long-distance telephone call, you pay a 3 percent federal excise tax. You, your parents, your grandparents, your great-grandparents and maybe even your great-great-grandparents have done so all the way back to 1898, when President William McKinley used the revenues to pay for the Spanish-American War.

The tax is as dated as the cavalry horse, but the IRS soldiers on. In 10 of 11 recent court rulings, the agency has been told the telecommunications excise tax should not be imposed on millions of phone calls. Yet the agency refuses to discontinue collecting the tax. It refuses to refund taxes collected as far back as three years – the statutory limit. And it refuses to appeal the many adverse rulings to the U.S. Supreme Court.

The long-distance tax is supposed to be determined by the length of a call and the distance between parties. But many calls, wire and wireless, are billed at a flat rate unaffected by distance or time. The IRS insists flat-rate calls are subject to the tax. The courts overwhelmingly disagree.

The Congressional Budget Office estimates all telecom excise taxes, including that imposed on local calls, will generate $52 billion over the next 10 years. Spokane attorney Roy Berg says cell phone users alone pay $4.5 billion in telecom taxes annually.

Berg says he tuned into the telecom tax issue in 2000, after President Clinton vetoed a bill that would have repealed it. But in researching the tax, Berg discovered that in 1954 exceptions had been carved out for hospitals, common carriers such as trucking companies, and – fessing up here – newsgathering organizations. He went looking for a client that might be a significant beneficiary of a tax appeal. In August 2003, he filed a “seven-figure” claim on behalf of Consolidated Freightways, the Tacoma-based trucking giant whose calls should have been exempt from taxation. Consolidated was in bankruptcy, but management and the trustee approved the lawsuit.

The suit has gone nowhere, however, pending the outcome of a U.S. Circuit Court of Appeals case involving Amtrak, another common carrier appealing the tax. In December, the court ruled for Amtrak. Two other Circuit Courts had already ruled against the IRS in similar but unrelated cases.

The IRS response, even before the Amtrak ruling, was a notice advising telecommunications companies to continue collecting the tax and passing the revenues along to the federal treasury. Also, taxpayer claims for funds already collected would not be processed, pending court appeal. So far, no appeal, and no indication one will be forthcoming.

“The IRS said, ‘We’re not going to pay any of these claims,’ ” says Berg, who adds he will not pursue the Consolidated Freightways claim until the class-action suits are resolved. Consolidated Freightways is now in liquidation.

“I’m inclined to just let the drama unfold,” he says.

The plot thickened last week, when Treasury Secretary John Snow told a House Ways and Means subcommittee that the Bush administration may reconsider its position on the excise tax if the IRS loses a fourth Circuit Court case now pending. The House and Senate are considering bills that would repeal the tax.

So far, not much has happened but, sooner or later, the IRS is going to get the message.


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