WASHINGTON-The pesky tax on talking may finally be headed for the door-more than a century after it was established to pay for the Spanish-American War.
It is not the legislative process that is finally killing it, but rather the judiciary, which consistently has ruled in favor of taxpayers challenging the 3-percent excise tax on telecommunications.
The government must decide by early September whether to appeal a decision by the U.S. Court of Appeals for the 11th Circuit that said the tax was assessed on calling plans illegally because the charges are not time and distance sensitive.
While none of the parties protesting the tax are actual wireless customers, the 11th Circuit’s decision could have a dramatic impact on wireless consumers in Alabama, Florida and Georgia who have signed up for all-you-can-eat plans.
The Internal Revenue Service has said it still expects telecom carriers to assess and collect the tax on all telecommunications, but refused to comment on its plans going forward.
In the meantime, several wireless carriers have requested refunds on behalf of their customers. This is the first step in the litigation process.
If the government decides to pass on an appeal to the U.S. Supreme Court, the 11th Circuit decision becomes the law of the land for the three states.
Oral argument was held recently in a similar case in the U.S. Court of Appeals for the 6th Circuit-Kentucky, Michigan, Ohio and Tennessee. It is unclear when this decision will be released.
The government may be waiting for a decision from the 6th Circuit to see if there is a circuit split. Traditionally, the Supreme Court considers only cases where the circuits have reached differing conclusions.
The IRS believes the tax on talking is legal due to language adopted in 1965 that said calls made through the wide area telecommunications service system can be taxed.
The 11th Circuit did not say that assessing the tax on local calls is illegal, so wireless carriers would have to find a way to differentiate between local and long-distance services for impacted consumers-not an easy task. To pay its universal-service obligation (ironically assessed only on long-distance calls), the wireless industry uses a safe-harbor percentage of all revenues-set at 28.5 percent today.
The wireless industry told the IRS earlier this year that it did not believe it should be charged the federal-excise tax on telecommunications.
The wireless industry “respectfully requests guidance that wireless voice applications providing regional, national or multinational calling, that are not billed based on time and distance, are not taxable communications services. The definitions added by the 1965 act clearly contemplate that the universe of taxable services is divided into two discrete categories, local and toll. Because the definition of local telephone service expressly excludes toll telephone service, it is clear that, to be taxable, a service must fall within either the definition of local telephone service or the definition of toll telephone service. By definition, a service cannot fall into both categories,” said KPMG L.L.P. on behalf of Cingular Wireless L.L.C., Verizon Wireless and T-Mobile USA Inc. “Modern wireless service offerings do not fit within either of these two defined categories of taxable service.”
While the telecom industry waits for the courts to act, it continues to press Congress to eliminate the tax. Bills are now pending in the House and Senate to repeal the tax.
The wireless industry has lobbied unsuccessfully to kill the tax since the late 1990s, coming close in the waning days of the Clinton administration when both houses of Congress passed versions of legislation. Despite industry and legislative backing for the tax’s elimination, it’s a tough sell because the tax is not earmarked and can be said to be used to reduce the federal deficit. Last year, there was even consideration of increasing the tax to 4 percent.
