IRS levies phone tax you may not owe

/ Source: The Associated Press

Businesses and individuals continue to pay hundreds of millions of dollars in taxes each year on some long-distance telephone calls even though three federal courts say the levy is invalid.

Companies have convinced the appeals courts that the 3 percent excise tax on local, long-distance and wireless calls does not apply to some current long-distance billing plans.

The tax dates to 1898, when telephones were a luxury and lawmakers needed money to help pay for the Spanish-American War.

The government can expect to collect $52 billion over the coming decade from all telephone excise taxes, according to a recent report from the Congressional Budget Office.

The report said there is a "significant likelihood" the Internal Revenue Service will continue losing in court and eventually stop collecting the tax on some long-distance calls.

While cases work through the courts, the IRS says it still is instructing telephone companies to keep collecting the tax.

After losing in the 11th U.S. Circuit Court of Appeals, the IRS issued a notice stating the it would continue to assess and collect the tax. After losing in the 6th Circuit, the IRS asked all judges on that court to hear the appeal. The IRS also lost in the U.S. Court of Appeals for the District of Columbia Circuit.

The agency has not asked the Supreme Court to consider the issue.

If the tax is terminated, the government could owe three years of refunds to businesses and individuals who request them, the budget office said. The law gives them a three-year window of opportunity to claim a refund.

For most people, a 3 percent tax on long-distance calls amounts to very little. The average household telecommunications bill, including taxes, totaled $114 a month in 2003, including $16 for long-distance, according to a Federal Communications Commission report.

For businesses with high telephone usage or a toll-free line, the tax bill can be high. Companies have found it worth the time and expense to seek tax refunds in court.

"You've got to have an enormous amount of usage to make it worthwhile," said Stephen Rosen, a lawyer with Levine, Blaszak, Block & Boothby. The Washington telecommunications law firm has represented several companies pursuing refunds.

Since its origin, the tax has been repealed and reinstated. Rates have fluctuated over time.

The parts now under debate were written in 1965. One company, AT&T, held a monopoly on long-distance telephone service and lawmakers targeted the tax to calls billed according to the distance and length of a call.

Times have changed and so have billing plans, which often now ignore distance. Large companies say that means the tax no longer applies.

The government says the law always intended to tax long-distance calls and remains in force. The IRS said it would not comment while cases continue to wind through the courts. Treasury Secretary John Snow said the government may have to re-evaluate its position after the next ruling from the 6th Circuit.

Telecommunication companies, which collect the tax from their customers and pass it along to the government, say they are stuck in the middle.

"It's time for the IRS to admit defeat and stop enforcing the illegal application of this tax," said Allison Remsen, spokeswoman for the United States Telecom Association, which represents 1,200 local, long-distance, wireless, Internet and cable television companies. "Also, it's time for Congress to step in to permanently and completely repeal this outdated levy."

Shortly after the IRS announced it would keep collecting the tax despite losing in the courts, the law firm Baker & McKenzie filed suit in the U.S. Court of Federal Claims on behalf of RadioShack and an unnamed class of businesses and individuals buying long-distance service that is billed without regard to distance.

"To go hire a lawyer is going to cost more than the refund. Just the first hour is going to cost more than your typical refund," said A. Duane Webber, a lawyer with Baker & McKenzie.

Webber said that even if taxpayers do not get refunds, the suit will have served its purpose if it succeeds in forcing the IRS to stop collecting the tax.

Chimicles & Tikellis, a class action law firm in Pennsylvania, filed a class-action suit in the Court of Federal Claims this month. The suit seeks to halt tax collections and secure refunds for taxpayers who have not applied for them, lawyer Nicholas Chimicles said.

Jack Miles, a lawyer with Kelley, Drye & Warren who said he has spent 11 years representing businesses pursuing refunds, said a class-action case should not lead consumers to expect an IRS refund check.

Tax laws lay out specific procedures for refund applications that require individuals and businesses to first pay the tax, then ask for a refund and await an IRS response.

"The IRS requires everyone to go through a lot of hoops before getting any refund," Miles said.