Despite the invalidation of communications excise tax, I.R.C. § 4251, by numerous federal courts the IRS is demanding that collection of the tax continue. [1] The three percent communications excise tax was originally imposed in 1898 as a temporary luxury tax to help fund the Spanish-American war. [2] The tax applies to a number of communications services among which is long-distance or “toll telephone” service and is paid by everyone, both individuals and businesses, who makes long-distance calls. [3]

For purposes of the communications excise tax, the IRS defines toll telephone service as “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.” (emphasis added) [4] The IRS contends that the word “and” in the statute should be read as “either,” while those fighting the tax contend that “and” should be read naturally as a conjunctive requiring that the toll charge vary according to both distance and time. [5] Since the tax was first enacted, the billing of long distance service has changed significantly. Many individuals and business now pay a monthly flat fee for long distance service rather than paying a rate based on the distance of the call and its length. [6] Nevertheless, the IRS has continued to enforce the tax. For most individuals the amount of tax paid is very small, but for businesses, it can be a significant amount of money. [7]

A number of businesses have filed suit demanding that the IRS stop collecting the tax and refund monies already paid. The IRS has lost every time. In two cases, the court granted summary judgment finding the IRS’ argument of reading “and” as “either” lacked merit. [8], [9] The potential loss of revenue to the government is significant. If the tax is repealed the government will need to refund three years of payments. [10] By the IRS’ estimation this could result is a nine billion dollar refund to individuals and businesses. [11]

Due to the amount of money at stake the IRS is asking that collection of the tax continue and will not process refund claims while litigation continues. [12] The IRS declined to seek review by the Supreme Court after losing in the 11th Circuit and will soon be facing a class action suit seeking to stop collection of the tax and force the IRS to issue refunds to taxpayers who not requested a refund. [13], [14] It is doubtful that the IRS will capitulate and cease enforcing the tax. As long it is cost effective to fight the suits, the IRS will no doubt keep collecting the tax and pay-off those who sue. However, the upcoming class action may force the IRS to amend the code to reflect the new realities of long-distance billing. Either way this “temporary” tax to fund a war that ended over a hundred years ago will be with us for the foreseeable future.

[1] I.R.S. Notice 2005-79 (Nov. 14, 2005).

[2] Officemax, Inc. v. U.S., 428 F.3d 583, 585 (6th Cir. 2005).

[3] I.R.C. § 4251(b)(1) (2006).

[4] I.R.C. § 4252(b)(1) (2006).

[5] Officemax, 428 F.3d at 584.

[6] Mary Dalrymple, Merchants Fight IRS Over Telephone Taxes, Yahoo, Feb. 19, 2006, http://news.yahoo.com/s/ap/20060219/ap_on_bi_ge/telephone_taxes_1.

[7] Id.

[8] Fortis, Inc. v. U.S., No. 03 Civ. 5137 (JGK), 2005 U.S. Dist. LEXIS 2104 (S.D.N.Y. 2005).

[9] Officemax, 428 F.3d at 600.

[10] Dalrymple, supra, note 6.

[11] Officemax, 428 F.3d at 584.

[12] I.R.S., supra, note 1.

[13] American Bankers Ins. Group v. U.S., 408 F.3d 1328 (11th Cir. 2005).

[14] Dalrymple, supra, note 6.