Government ends long-distance phone excise tax dispute.

• Author: Keenan, John R.

On May 26, 2006, Treasury announced its concession in the legal dispute over the Federal excise tax on long-distance telephone service. The IRS also announced its decision to stop collecting the tax and to issue refunds of tax paid on long-distance service over the past three years. These announcements came after the U.S. recently lost, in rapid succession, three more appeals in cases involving the validity of the tax. On March 30, 2006, the Sixth Circuit denied the government's motion for an en banc rehearing in OfficeMax, Inc., 428 F3d 583 (6th Cir. 2005). The government filed its motion after the Sixth Circuit affirmed a district court decision and held that the taxpayer's long-distance telephone service charges must vary by both time and distance to be taxable under Sec. 4252(b)(1).

On April 27, 2006, the government suffered defeat in the Second Circuit; the judges devoted only two paragraphs to their opinion in Fortis, Inc., No. 05-2518 (2d Cir. 2006). Less than two weeks later, on May 9, 2006, the Third Circuit handed down its decision in Reese Brothers Inc., No. 05-2135 (3d Cir. 2006), discussing fully, and rejecting, all of the government's arguments. In total, the government lost five appellate decisions on this issue, which fueled speculation, for some time, that it would abandon further litigation.

Statutory Overview

Sec. 4251 imposes a 3% excise tax on certain communications services. The tax is paid by the person paying for the services (Sec. 425 1(a)(2)) and is collected by the person receiving payment for them (Sec. 4291). Communications services subject to the tax are local telephone service, toll telephone service or teletypewriter exchange service; see Sec. 4251.

Local telephone service is defined as access to a local telephone system and the privilege of telephonic-quality communication with substantially all persons having telephone or radio telephone stations in that system, as well as any service or facility provided in connection with local telephone service; see Sec. 4252(a). However, local telephone service does not include a service that can be categorized as toll telephone service or private communications service; see Sec. 4252(a).

There are two types of services that fall within the definition of toll telephone service. The first is a telephonic-quality communication for which there is a toll charge, which varies in amount with the distance and elapsed transmission time of each individual communication, and the...