Eleventh Circuit Ruling on the Federal Communications Excise Tax May Mean Refund Opportunities for Businesses

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July 28, 2005

The Internal Revenue Code imposes a 3 percent communications excise tax on certain telephone services; this tax is ordinarily added to your bill by your long distance provider and then remitted to the IRS. The Eleventh Circuit U.S. Court of Appeals in American Bankers Ins. Group v. United States recently held that flatrate long distance service is not subject to the excise tax, contrary to the contentions of the IRS. Although the IRS has stated that taxpayers should continue to pay the excise tax on flat-rate long distance, telecommunications customers in the 11th Circuit (Alabama, Georgia and Florida) may wish to file protective refund claims promptly in order to preserve their rights upon a possible concession by the IRS or an eventual U.S. Supreme Court ruling.

Between October 1, 1998, and March 31, 2002, American Bankers Insurance Group (“ABIG”) purchased interstate, international, and intrastate long distance service from AT&T. ABIG paid uniform toll rates for both interstate and intrastate long distance service and toll rates for international service that varied according to the country to which the call was placed. AT&T dutifully collected the federal excise tax from ABIG pursuant to IRC section 4251 and remitted those taxes to the IRS. After the IRS did not respond to ABIG's refund claims, the claims were deemed denied and ABIG brought suit in the Southern District of Florida seeking a refund of over $360,000 in tax plus interest. The district court upheld the denial of the refund.

On appeal, the Eleventh Circuit reversed, agreeing with the taxpayer that section 4252(b)(1) requires both distance and duration as predicates for charges for toll telephone service to which the excise tax should be applied. The rates paid by ABIG varied based on jurisdictions or political units but not by distance per se. The Court also rejected several other arguments advanced by the Service, citing two recent U.S. Court of Federal Claims rulings that also declared the tax inapplicable in these circumstances. The IRS has lost on this issue in every case where it has been tried, which now includes cases before the 11th Circuit, the Court of Federal Claims, and four U.S. district courts.

An IRS spokesman, however, stated recently that they will likely seek a contrary ruling on the issue in another circuit because of the $5.8 billion in revenue the excise tax brings in annually. Congressional intervention is also a possibility. In the meantime, telecommunications customers in the Eleventh Circuit should evaluate their telecommunications rate plans as soon as possible, since the normal three year statute of limitations on filing refund claims, I.R.C. § 6511, is ticking by the month. (Note that the return filed by the telephone company is considered to have been filed by the service user for purposes of calculating the three-year period.)

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Telecommunications services that involve a flat monthly rate for unlimited longdistance calls, as opposed to a long-distance rate based on mileage or minutes, are probably still subject to the tax, even in the Eleventh Circuit.

Affected companies should promptly review the past 36 months of long-distance telephone charges to determine whether those charges were on a per-minute basis-- regardless of distance--and if so, whether filing a protective refund claim with the IRS will be cost-effective. Remember that if the IRS does not respond to your refund claim within 6 months of filing, then the claim is deemed denied and you must file suit in the appropriate U.S. district court within two years thereafter in order to preserve your rights. Hopefully, however, the issue will be resolved within that time frame. If you have any questions involving this issue, please contact Bruce Ely at (205) 521-8366 or [email protected] or Matt Houser at (205) 521-8681 or [email protected]. 

IRS Circular 230 Notice:  To ensure compliance with IRS requirements, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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