Tax

IRS Hangs Up on Telephone Tax

The Treasury Department estimates $15 billion in refunds after conceding a legal challenge to so-called Spanish-American War tax.
Marie LeoneMay 25, 2006

Can you hear me now? The Treasury Department announced Thursday that it has given up its fight to keep alive a federal excise tax on long-distance telephone service. As a result, the Internal Revenue Service will issue refunds in 2007.

In aggregate, refunds will total $15 billion for individual and corporate taxpayers, according to Sean Kevelighan, Treasury spokesman for economic and tax policy. However, he told CFO.com that the IRS has not yet estimated how much of that total would go to corporate filers.

Refund claims will cover all excise tax paid on long-distance service in the past three years, and include an interest payment on the refund. The tax imposed was a 3 percent duty on some, but not all, toll calls. Taxpayers can claim refunds on their 2006 tax forms, to be filed in 2007. However, details about how the claims process will work are still undecided, notes Kevelighan, who expects that information to be available later this year.

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Treasury Secretary John Snow hailed the announcement, noting: “Today is a good day for American taxpayers; it marks the beginning of the end of an outdated, antiquated tax that has survived a century beyond its original purpose, and by now should have been ancient history.” In his statement, Snow also called on Congress to repeal the excise tax on local service.

The tax was originally established in 1898 as a luxury tax on wealthy Americans who owned telephones. It was dubbed the “Spanish-American War tax” because it was imposed to help fund that effort.

On April 27, the U.S. Court of Appeals, Second Circuit, upheld the decisions of three other circuit courts that ruled against the IRS when it ruled in favor of plaintiff Fortis, an international financial-services firm with offices in the United States. The other cases — all decided last year — pitted American Bankers Insurance Group, Office Max, and Amtrak against the IRS.

In all the cases, the IRS defense focused on the definition of a “toll charge,” which according to the U.S. tax code is defined as a charge that “varies in amount with the distance and elapsed transmission time.” The IRS claimed that the word “and” in the definition actually meant “or,” and therefore allows the agency to collect taxes. In a word, the quartet of courts disagreed.

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