12-22-06
About Your Phone Bill...
Many people – myself among them – have excoriated the Bush administration for a tax policy that consists of ladling out seemingly random tax cuts, mostly to people who can readily afford to pay the taxes.
But perversely, they fought for years to maintain another tax that federal courts had regularly ruled illegal. According to Mitchell Brecher, a Washington, D.C., lawyer who has followed the issue, the Internal Revenue Service lost every case tried at the district court level except one, and that ruling was promptly overturned by the federal Eleventh Circuit Court of Appeals. Four other federal appellate courts had already reached the same conclusion.
The tax? It is a 3 percent federal excise tax on long-distance telephone calls. You probably didn’t know it existed, but you have been paying it each month as part of your long-distance telephone bill.
And you have been paying it for a long time. The tax was originally enacted at a 10 percent rate in 1898 to help pay for the Spanish-American War. It was to be phased out in the late 1960s, but instead was kept alive at a lower rate due to the costs of another war: Vietnam.
Flashback
The long-distance excise tax was not always improper. The facts changed, though, and the government failed to acknowledge the change.
When the tax was first enacted in 1898, and still when the law was revised in 1965, local and long-distance telephone service in the United States was essentially a monopoly for AT&T and its regional subsidiaries. (General Telephone and small independent companies served something under 5 percent of the population, mostly in rural areas.) They were The Phone Company, and their haughty attitude was brilliantly satirized by Lily Tomlin’s character, Ernestine the telephone operator.*
Long-distance calls were expensive enough that placing or receiving one was, for most people, an Event. Calls could be placed either station-to-station (that is, you would talk to whoever answered the phone on the other end) or person-to-person, where for a higher price you were not charged unless and until an operator had the specific person you sought on the line.
Most important, long-distance calls were priced based both on time and distance. A call from Chicago to Los Angeles cost more than one to Cincinnati. That was the way it had always been, and the assumption that it always would be is reflected in the law’s 1965 modification, which clarified that the tax was levied upon “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.”
Things changed. Competitive long-distance carriers made inroads, federal courts forced the break up of the old AT&T monopoly, and an exponential increase in computer speed and sophistication made the calling process easily automated. During the 1980s, the now familiar pricing of Xc per minute for calls anywhere in the United States emerged: first for big businesses with their negotiating power, and eventually for all of us.
Reading Lesson
Just read that phrase: “Xc per minute for calls anywhere.” It would seem pretty obvious to most people that this does not vary with distance, and therefore does not come under the excise tax law. The IRS, however, took a convoluted line of reasoning – I won’t bore you with it, since it is nonsense anyway – to conclude that what Congress meant to say was they taxed any and all forms of long-distance calling. And if you didn’t like that idea, they were also ready to claim that because calls to Alaska and Hawaii were at a different rate than calls to the 48 contiguous states, charges varied by distance. No wonder they were laughed out of court.
Money, I suspect, was the real reason that they kept claiming the tax was valid. The Congressional Research Service calculated that the federal telephone excise tax brought in $5.9 billion during fiscal 2005. That dwarfs the $897,000 payout in the last case the IRS lost to a corporate taxpayer (Servicemaster Corporation) before giving up.
Moreover, the delays increased the amount of excise tax collections the government gets to keep. The tax has been improperly collected for, probably, 15 years, but a claim for refund must be made within three years of the tax payment. The Treasury Department waited a year after the last appellate court loss to announce that it would quit collecting the tax and issue refunds. The announcement was made last May, so only taxes collected after Feb. 28, 2003 will be refunded.
Where’s Mine?
Because the excise tax was paid indirectly – you paid your long-distance carrier, and they paid the government – the IRS has no idea who paid how much tax. They also correctly figured that asking 130+ million individual taxpayers to go through 41 months’ worth of phone bills and figure out what they had paid was a non-starter.
Individuals who have the time, and the patience, and the records can do that. For the other 129,999 million taxpayers, the IRS analyzed industry statistics and are offering a flat refund of $30 to $60, depending on how many exemptions are shown on your 2006 tax return.
Businesses, though, must do a calculation and attach a form 8913 to their 2006 returns. You may well be a business for this purpose, as the term includes anyone with combined free-lance and rental income over $25,000. Here, too, a “simplified” formula is provided, based on the ratio of tax in your bill from April, 2006 (the last month tax was collected) to that in your August, 2006 bill.
Don’t have those two monthly bills? Avoid the rush – call your phone service providers (land and mobile) for duplicates now.
And yes, it probably is worthwhile. I just calculated my office’s refund at about $90, and I expect to see many similar refunds among my clients.
*Still-hilarious clips are available on her Web site, LilyTomlin.com.
Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail greg@gregmermel.com.
Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He has also been known to produce theatre.