Tax Article - Reimbursement for Previously Paid Telephone Excise Tax

The charge on your phone bill doesn’t say "luxury tax" or “war tax,” but that’s what the federal telephone excise tax was when it was enacted in 1898 to fund the Spanish-American war. Only the wealthy had telephones, the U.S. had no income tax at that time, so we relied on excise taxes to fund the war. This tax is now repealed and over the prior three years can be refunded.

Background: The U.S. Treasury Department announced it is conceding the legal dispute over the federal excise tax on long-distance telephone service. The cases hold that a telephonic communication for which there is a toll charge that varies with elapsed transmission time and not distance (time-only service) is not taxable toll telephone service as defined in § 4252(b)(1) of the Internal Revenue Code.

Toll telephone service--(i) Time and distance. Section 4252(b)(1) provides that toll telephone service includes a telephonic quality communication for which there is a toll charge that varies in amount with the distance and elapsed transmission time of each individual communication and for which the charge is paid within the United States.

Periodic charge for a specified area.

Section 4252(b)(2) provides that toll telephone service also includes a service which entitles the subscriber, upon payment of a periodic charge (determined as a flat amount or upon the basis of total elapsed transmission time), to the privilege of an unlimited number of telephonic communications to or from all or a substantial portion of the persons having telephone or radio telephone stations in a specified area which is outside the local telephone system area in which the station provided with this service is located. A long distance telephone call for which the charge varies with elapsed transmission time but not with distance is toll telephone service described in § 4252(b)(1) and therefore is not taxable.

Ruling: The Internal Revenue Service (IRS) will issue refunds of tax on long-distance service for the past three years

Period of Request: Requests may be made for credits or refunds of tax paid for nontaxable service billed after February 28, 2003 and before August 1, 2006.

Amount of the Request: Taxpayers will be permitted to request the safe harbor amount only if they have paid all taxes billed by their service provider after February 28, 2003, and before August 1, 2006 on nontaxable services. Refunds will not include tax paid on local telephone service. Interest will be paid on refunds.

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1. Requests by individual taxpayers: Individuals may request either the safe harbor amount or the actual tax paid.

a. Safe harbor amount. No documentation will be required to be submitted or kept to support the safe harbor request. However, taxpayers will be permitted to request the safe harbor amount only if they have paid all taxes billed by their service provider after February 28, 2003, and before August 1, 2006; they have not received a credit or refund of these taxes from the service provider; and either have not requested a credit or refund from the service provider or have withdrawn any request. The amount of this safe harbor is still under consideration and will be announced in later guidance.

b. Actual amount. Taxpayers that do not request the safe harbor amount

may request a credit or refund of the actual amount of tax they paid. Records will be required to be submitted or kept to support the actual amount. These records should include bills from the collector that show the amount of tax charged for nontaxable service for each month during the relevant period and receipts, canceled checks, or other evidence that the amount requested was actually paid.

2. Request by taxpayers other than individual taxpayers

No safe harbor amount is allowed for taxpayers other than individuals. Those entities can request only the actual amount of tax paid on nontaxable service billed during the relevant period.

Guidance on the form: 2006 Forms 1040 (series), 1041, 1065, 1120 (series), and 990-T will include a line for requesting the overpayment amount. The instructions to the respective federal income tax return forms will provide additional guidance. The forms and instructions will require taxpayers to certify that (1) the taxpayer has not received from the collector a credit or refund of the tax paid on nontaxable service billed during the relevant period and (2) the taxpayer will not ask the collector for a credit or refund of that tax and has withdrawn any such request that was previously submitted. The instructions will also require that taxpayers, except for those individuals using the safe harbor amount, retain records that substantiate the request.

Interest on the credit or refund included in income: If a taxpayer requests a credit or refund of the actual amount of tax paid, interest on the credit or refund of the tax paid for nontaxable service must be included as income on the taxpayer’s income tax return for the taxable year in which the interest is received or accrued. Thus, individuals are generally required to report the interest on their 2007 income tax returns.

Estimated tax effects: Although the credit or refund allowed to a taxpayer under this notice will be requested on the taxpayer’s income tax return, it is not a credit against tax for purposes. Accordingly, the taxpayer may not take the credit or refund into account in determining the amount of the required installments of estimated tax for 2006.

In determining the amount of the required installments of estimated tax for 2007, the income attributable to the credit or refund is taken into account on the date the income is paid or credited in the case of a cash method taxpayer and on the date the return making the request is filed in the case of an accrual method taxpayer.

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