Letter to Secretary of the Treasury John Snow.
Date: December 1, 2005.
Re: 3% Excise Tax on Communications.
December 1, 2005
The Honorable John W. Snow
Secretary of the Treasury
3330 Main Treasury Bldg.
1500 Pennsylvania Ave., NW
Washington, DC 20220
Dear Secretary Snow:
We are writing to express our deep concern over the Internal Revenue Service's (IRS) position on the application of the communications excise tax (FET) in the wake of a series of Federal court decisions against the IRS, and to request your assistance in putting an end to the litigation and uncertainty surrounding the issue.
To date there have been six decisions issued by various Federal District Courts, two issued by the Federal Court of Claims and two issued by Circuit Courts of Appeals (most recently by the Sixth Circuit Court of Appeals in OfficeMax Inc. v. United States, Case No. 04-4009 (November 2, 2005)), which have held that FET is not applicable to certain long distance services. Only one court decided this issue in favor of the IRS, and that decision was reversed on appeal earlier this year by the Eleventh Circuit Court of Appeals in American Bankers Insurance Group v. United States, Case No. 04-10720 (May 10, 2005). The government did not appeal the American Bankers case to the Supreme Court and there are currently no decisions upholding the IRS' position.
The Internal Revenue Code provision at issue and analyzed and interpreted by the courts in these cases, Section 4252, defines both taxable "local telephone service" and "toll telephone service". The toll telephone service definition primarily at issue, Section 4252(b)(1), defines taxable toll service as a "communication for which there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication." This definition was intended to describe a long distance service sold by AT&T in 1965, for which the rate varied based on mileage bands as well as call duration; whereas today there are virtually no long-distance services of this type. The courts have uniformly and unequivocally rejected the government's argument and held that, in order to fit within this definition, the charge must be based on both time and distance.
Notwithstanding the complete absence of judicial support for the IRS' position, on October 20, 2005 (after the American Bankers decision became final but before the OfficeMax case was decided), the IRS issued Notice 2005-79. This Notice sets forth that the IRS plans to continue to litigate this issue and, while doing so, will continue to assess and collect the tax from their customers and pay it over to the IRS, pointing out that these customers could preserve their claims of overpayment by filing administrative refund claims with the IRS (although the claims would not be processed while cases were pending in other courts).
Particularly with the latest decision of the Sixth Circuit in OfficeMax, there is clearly an overwhelming consensus among the many courts that have considered this issue that the position being advanced by the IRS is simply wrong. In spite of the fact that the government continues to litigate the cases already pending, it is our understanding that in some instances the IRS Appeals Division has "settled" a number of refund claims on this issue at 100 cents on the dollar, which is a very clear acknowledgement of the weakness of their position. Rather than continuing to litigate this issue, it is time to move on. Not only can better use be made of the IRS' resources, but those of the courts, the service providers and the consumers of these telecommunications services.
Given the government's failure to acquiesce on this issue thus far, we are not optimistic that even its second appellate loss at the Sixth Circuit in OfficeMax will be enough to cause the IRS to abandon its position, without clear direction from you. You can provide much-needed clarity in this matter by doing two things: First, direct the IRS to cease litigating the "time and distance" issue by not seeking certiorari to the Supreme Court in the OfficeMax case and by dismissing all of the other pending cases. Second, direct the IRS to issue clear guidance indicating that it will follow not only the letter but also the spirit of these decisions, such that only communications services that fit squarely and literally within the statutory definitions will be subject to FET. Accordingly, the guidance should provide that the types of communications services which are not subject to tax because they do not satisfy any of the statutory definitions of taxable telephone services include (but are not limited to) long distance services of the type at issue in the OfficeMax and American Bankers cases; long distance services that are sold on the basis of an unlimited number of calls or a bundle of minutes for a flat monthly rate; and "all distance" services, including wireless and VoIP services. The IRS' issuance of broad and inclusive guidance that comprehensively addresses long-distance, wireless and VoIP services will prevent further costly and unnecessary litigation and will limit the amount of tax refunds that the government eventually and inevitably will be required to pay.
We urge your prompt attention to this matter. Thank you in advance for making every effort to serve and protect the interests of all American taxpayers.
CTIA-The Wireless Association(r)
Level 3 Communications
PAETEC Communications, Inc.
Sprint Nextel Corporation
The Coalition of Service Industries
Time Warner Cable
Time Warner Inc.
TracFone Wireless, Inc.
Virgin Mobile USA, LLC