Federal Excise Tax Under The Legal Gun Yet Again

Telecom Policy Report, Dec 19, 2005

We've heard how anti-war groups are urging citizens to withhold the embattled federal excise tax (FET) from telephone bills as a means of protest (TPR, Dec. 12), yet it's also well-known that the levy initially conceived to finance the Spanish-American war in 1898 - has been widely maligned on numerous occasions by service providers as detrimental to carriers, businesses and consumers (TPR, June 27).

The latest wrinkle among efforts to excise the FET - and there have been many legal challenges - came in a recent decision by a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit, which ruled that the 3-percent levy is unlawful. Interestingly, the judgment stemmed from a case brought against the FET by the National Railroad Passenger Corporation (a.k.a., Amtrak), and it involved a long history of how the tax did - or did not apply - to long-haul services Amtrak has been procuring from AT&T. The recent Amtrak decision upheld an earlier ruling against the FET by the U.S. District Court for the District of Columbia.

Legal wrangling over FET tends to focus on the argument that the levy doesn't apply to voice telephone calls that are priced on the basis of minutes of use, as opposed to FET language in the Internal Revenue Code that appears to involve toll charges based on distance and transmission time. This apparently did not change materially when Congress last amended the FET section of the code in 1965, when AT&T was virtually the only long-distance game in town.

The Background

Amtrak initially paid the tax but, believing its AT&T service to be nontaxable under subsection, it filed a refund claim with the IRS and then brought the litigation in the U.S. district court allegedly after receiving no IRS response. In its decision, the U.S appellate court pointed out that the district court - joining a chorus of other federal benches - found the FET inapplicable because Amtrak's charges did not vary by distance.

"In this case, we must decide whether a statute imposing a tax on telephone calls for which the toll charge varies in amount with the distance and elapsed transmission time of each individual communication covers long-distance telephone charges varying by time but not by distance," the appellate court said. "The district court concluded that the statute does not cover such charges, and we agree."

The court also had choice words about congressional intent with the FET: "Taxing all 1965 long-distance service, however, is a far cry from taxing all long-distance service today," the judges wrote. "Not only does AT&T no longer hold a monopoly on long-distance service, but today's multitude of long-distance carriers offer far more rate structures. Most significantly for our purposes, many customers now pay per-minute charges that remain constant regardless of how far their calls travel."

The legal twists and details of the case notwithstanding, the Amtrak decision represents the third time a federal appeals court has voided the tax since May (in all, it is believed that nine federal courts have ruled the FET unlawful). At least 13 other appeals courts reportedly have cases pending against the tax.

The U.S. Department of the Treasury has not yet revealed whether it plans to appeal any of the losing cases to the U.S. Supreme Court, and the Internal Revenue Service (IRS) apparently continues to insist the FET tax must be paid when it gets corporate and consumer inquiries or refund requests on the matter. Amtrak, for instance, brought its suit after what it considered to be unresponsive reactions from the IRS.

A Vocal Wireless Industry

The IRS position seems to be particularly galling to CTIA-The Wireless Association, which has been campaigning against the FET for some time. This past October, CTIA President and CEO Steve Largent, a former GOP congressman, said he was "outraged" that the IRS was ignoring an 11th federal circuit court ruling against FET based on litigation brought by American Bankers Insurance Group.

"The FET is now an outdated and unnecessary tax that has no place in a 21st-century high-technology economy," Largent said in response to an IRS guidance document that called for the continued collection of the FET, which he maintained adds insult to injury. "The American wireless consumer is buried under a heap of taxes and fees. As of right now, the average wireless consumer in America pays more than 17 percent of his or her monthly bill in taxes and fees. This is a completely unjustifiable rate of taxation, and I strongly encourage the IRS to reverse course and protect the wireless consumer from paying what is clearly an illegal tax."

CTIA had no formal comment on the most recent court decision on the Amtrak case, except to point out that the industry wants the tax removed immediately from bills and the money refunded. "Our customers shouldn't be paying a tax that courts have repeatedly found illegal," Largent reiterated to the general press recently.