How you can resist funding the government →
a survey of tactics of historical tax resistance campaigns →
choose a small, easy, high-participation tax to resist →
phone tax resistance →
the death of the long distance phone service excise tax
A member of a war tax resistance email list sends along this interesting note:
There’s an interesting article in the issue of Tax Hotline, Box 892, Stamford, CT 06913-2060. Quotation is not permitted, but the gist of the article is that because the law provides for a federal excise tax on long-distance phone calls which are billed “by time and distance,” businesses which now have flat-rate long distance service are filing refund lawsuits for the excise taxes paid and are winning!
One New York company got a $400,000 refund (Fortis Inc., SD NY, No. 03 Civ 5137).
The IRS, of course, is appealing.
I wonder, though, if this might be a possible way to avoid the federal excise tax, as there now exist many flat-rate long distance service plans for individuals also.
The Spanish-American War Tax survived that war to become the federal excise tax that hides among so many other obscure fees on our monthly phone bills today.
It is a favorite target of war tax resisters — both because of its history as a war tax and because resisting it is relatively easy and risk-free.
For many tax resisters, phone tax resistance was the first step they took before they moved on to the harder stuff.
The tax has shown surprising endurance, but is starting to show its age.
There are frequent repeal attempts — in Congress passed a spending bill that included a repeal of the tax but President Clinton vetoed it; new legislation is targeting it for repeal again.
If Congress hasn’t been able to get rid of this “temporary” tax for , I won’t hold my breath.
But I may not have to — the phone tax is starting to decay in the face of modern communication technology without much help from the politicians.
The internet is part of this.
Today a lot of communication that used to happen over telephone is taking place in email and instant-messenger conversations and the like.
Also, the internet is starting to become a useful mechanism for voice communication — behaving like a phone, but not being billed or taxed like a phone.
The tax law is not keeping up with this, although the usual suspects in government are doing what they can to try to tax and regulate these new communications methods as they emerge.
Another way in which the phone tax is failing to keep up with the times is the “flat-rate long-distance” loophole (see also: ).
The law authorizing the federal excise tax on long distance reads in part:
(b) Toll telephone service
For purposes of this subchapter, the term “toll telephone service“ means—
(1) a telephonic quality communication for which
(A) there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication and
(B) the charge is paid within the United States…
Some long distance companies have a plan that charges per call, but does not vary that charge by the distance of the call.
In other words, you’re charged by the minute, but can call anywhere in the United States at the same rate.
A few clients of these companies objected to paying the excise tax because the law says that in order to be taxed under the law I quoted above a service must have “a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication.”
The IRS argued in court that by “and” it really meant “and/or” but most courts disagreed (one court agreed, but that decision recently got shot down on appeal).
Consumers of long distance telephone service should consider filing claims with the IRS seeking refund of taxes paid on toll telephone service.
At this point, it is not known whether the IRS will change its refund policy in light of the recent court of appeals decision, but even if the IRS chooses to “stick to its guns” and continues to deny refund claims, seeking refund and being denied is a necessary condition precedent to going to court to challenge the IRS denial.
The right to refund is not unlimited.
There is a three year statute of limitations on refund claims with the IRS.
Thus, taxpayers may not claim refunds for Federal Excise Tax paid before (assuming that refund claims are filed immediately).
Also, IRS refund procedures require that claims be thoroughly documented.
Records of payments — preferably photocopies of invoices — must be attached to any refund claims.
For companies who have not saved their telephone bill records for the past three years, it is possible that your vendors will be able to provide copies of bills to you.
But I wondered:
What effect is all of this having on how much money the government is getting?
I took the federal excise tax receipts numbers for from the (new and improved) IRS Tax Stats page and filtered them through the government’s consumer-price-index data to adjust the values for inflation.
( is when the current 3% excise tax rate took hold.)
Here’s what I came up with:
I don’t know that I’ve got it in me to draw much in the way of conclusions from that, but it satisfies my curiosity a bit.
A few more years of that downward slide in and I’ll go ahead and call it a trend, but the over-all gist is clearly larger tax receipts as time goes on.
I suspect that this is largely the result of population growth, and suddenly start to wonder how the graph would look if I adjusted it further to show per-capita tax receipts:
Turns out it flattens the graph a bit, but doesn’t make a lot of difference to the trends shown.
Oh well…
For more information on phone tax resistance, see and .
For a debate on whether it is worth the bother, see and .
For more on how the phone tax is and isn’t adjusting to modern telecommunications, see , and .
In a couple of Picket Line entries ( & ), I’ve mentioned an interesting legal twist concerning the federal excise tax on long-distance telephone service — one that could end up costing Uncle Sam a lot of money.
In short: the law authorizing the tax was written to apply when “there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication” — in other words, what you typically think of as long-distance service.
Nowadays, however, there are long-distance companies that offer plans that have a per-call charge, but that do not vary the charge based on the distance.
Some companies that make a lot of long-distance calls, and so pay a lot of this excise tax, decided to go to court and try to get refunds based on this.
The IRS, for its part, has been arguing that the “and” in the law’s phrase should be interpreted as an “or” and that the tax should stand.
So far, the IRS has been losing.
The government’s recent loss… has caused some to question the continued applicability of the communications excise tax… ¶ The government is prosecuting appeals in five different circuits… ¶ This notice confirms that the Service will continue to assess and collect the tax… on all taxable communications services, including communications services similar to those at issue in the cases.
Collectors should continue to collect the tax, including from taxpayers within the jurisdiction of the United States Court of Appeals for the Eleventh Circuit.
They lost again , this time in the 6th circuit.
The court noted that “Every court to reach this issue — save one district court subsequently reversed — has concluded that the statute unambiguously requires variance by both distance and elapsed transmission time.”
If the IRS keeps losing, and if they ever decide to submit to the court’s authority, the government could be liable, according to its own figures, for as much as nine billion dollars in refunds to people and businesses who were erroneously taxed.
You may want to try to get your own long distance plan, or your company’s plan, into this category of untaxable long distance phone service because it’s looking more and more likely that the IRS will eventually have to give in on this one.
Or you could leapfrog this whole debate and try to move over to a Voice-over-IP internet phone service of some sort.
In a few past Picket Line columns (, , and ), I’ve discussed how the IRS has been losing over and over in court when trying to defend its taxation of flat-rate long-distance phone service.
They lost again:
On , a court in Washington, D.C., became the third federal appeals court to void the tax.
Two other federal appeals courts, covering seven states, have ruled the tax unlawful, and cases are pending elsewhere in the nation’s 13 appeals courts.
In all, nine federal courts have ruled that a 3% federal tax doesn’t apply to phone calls that are priced only by how long a person talks — not by how far the call travels.
That means cellular phones, Internet phone service and about one-third of long distance calls would be exempt from the tax.
The wireless industry estimates that consumers would save about $4.5 billion a year.
Taxpayers also would be due three years of refunds — about $9 billion.…
“It sounds absurd, but the law is written so that the government can keep collecting a tax even though it’s been ruled unlawful,” says Hank Levine, a lawyer representing businesses that challenged the tax.
Federal law makes it nearly impossible to get an injunction to stop the government from collecting a tax, he says.
The average consumer would be entitled to a refund about the size of the average $49.52 monthly bill paid by the USA’s 195 million wireless subscribers.
However, consumers would be required to seek refunds individually, documenting how much they paid each quarter in separate claims.
The time limit for refunds is three years.
A person entitled to a $50 refund would have to fill out forms a dozen times to get the three years’ worth of refunds permitted under tax law.
Collecting records and preparing the form would take about seven hours.
And on that note, phone tax resistance seems to be getting a lot of attention these days.
A San Francisco Chronicle article on the subject from a few weeks ago got picked up by papers coast-to-coast, and now a new Denver Post article is doing the rounds.
The IRS has lost again in its battle to save the long distance telephone service excise tax from the letter of the law.
This battle has now been fought in multiple circuit courts and the IRS has lost every time.
They just lost again in the Sixth Circuit.
When Secretary of the Treasury John Snow testified before Congress , he was interrogated by Representative Jim Ramstad:
Mr. RAMSTAD.
Mr. Secretary, I want to ask you about a thorn in the side of many taxpayers, and I am referring to the telephone excise tax.
As you know, this tax was first enacted — well, it was enacted in as a temporary tax to fund the Spanish-American War.…
Now, in the past few years, a number of taxpayers, business taxpayers, have challenged the IRS’s collection of this tax in Federal court.
In fact, no fewer than three Federal courts and a host of Federal District Courts have all ruled against the IRS.
Can you please tell me why in the world does the IRS continue collecting this tax, and can you give us an indication of how long the Government will keep litigating this issue?
Mr. Secretary, why not give it up?
[Laughter.]
Secretary SNOW.
Well, I think the courts may require us to do that very soon.
You know, this is pending in the Sixth Circuit.
The Department of Justice took an appeal from the District Court.
We are awaiting that judgment.
Should the judgment come down in alignment with the prior three Federal Circuit Courts, I think the handwriting is on the wall.
Mr. RAMSTAD.
That will be the end of the temporary tax enacted in to fund the Spanish-American War?
Secretary SNOW.
I would think the time to bring that to an end would be upon us.
Don’t pop the champagne corks just yet.
First off, maybe he was just bullshitting.
Second, this only applies to the excise tax on long distance phone service where that service not priced by the time of the call and by the call’s geographical distance.
But this still means Uncle Sam is out several billion dollars, so maybe it’s cork-popping time after all.
Phone tax resistance went mainstream , with Donald Luskin of Smartmoney.com calling the federal telephone excise tax “The Tax Worth Dodging”:
Want to save some money on your taxes?
It turns out there’s a tax you may be able to simply stop paying.
And if you don’t want to be that aggressive about it, just be patient — the tax is arguably illegal, and someday you’ll probably get a refund as part of one of the largest class-action suits in history.
He’s talking about the flat-rate long distance loophole I’ve discussed here before (most recently ).
I think he’s being a little optimistic about the likelihood that the recently-filed class-action lawsuit will really make the government cough up all of that money — if the government starts to lose the game, it can always just change the rules.
The unlikely vanguard of the antitax movement is antiwar activists who see not paying the tax as one way to cut off the money that pays for the war in Iraq.
They’re not too worried about being dragged off to jail for nonpayment, either.
They see what they’re doing as a classic act of civil disobedience.
According to the National War Tax Resistance Coordinating Committee, nonpayment is “relatively risk-free because the amounts are small.”
The Committee also says your phone company isn’t likely to cut off your service if you don’t pay the tax portion of your bill.
They claim, “IRS regulations… clearly state that the phone company is supposed to collect the tax, but has no power to enforce collection… Some companies have established special billing accommodations for war tax resisters and will provide you with a form.”
Of course you don’t have to be a war protestor to want to save a few bucks on taxes every month.
So maybe you should just call your phone company and tell them you’re not going to pay the excise tax anymore.
Your phone company may be very happy to help.
Luskin goes on to report on the class-action lawsuit seeking $9 billion in refunds from the IRS.
“The reason why the suit isn’t seeking even more,” Luskin says, ”is that there is a three-year statute of limitations on IRS refund claims. According to attorney Jim Glass, whose blog has been providing the best ongoing coverage of this story, you can stop the clock on the statute of limitations by filing a ‘protective refund claim’ for the past three years of taxes you’ve paid.
Your tax preparer can help you do that easily.”
, New York’s Sen. Charles Schumer publicly called for the IRS to make refunds to all cellphone users.
In a press conference , Schumer said, “The courts have now made it crystal clear that this tax is illegal, and yet the IRS continues to put it on everybody’s cellphone bill.”
Liberal Democrat Schumer isn’t normally a friend of tax cuts.
But for this one, an open-and-shut IRS abuse which hits so many consumers right in the pocket book, he’s making an exception.
“The IRS asks all of us not to violate the law,” Schumer said.
“Well, now we’re asking them the same.”
Who knew?
Liberals supporting tax cuts!
War protesters hand-in-hand with big business!
Apparently there’s one thing that can still unite Americans — outrage over an unfair and illegal tax.
This could be the Boston Tea Party all over again.
If you’re paying the federal excise tax on long-distance or cellular telephone service, it’s way past time to stop.
For one thing, it’s an easy tax to resist and I’m sure you don’t want me to start in on my rant about why you should resist paying something.
But for another thing, a number of circuit courts have ruled that the IRS has been collecting this tax erroneously all along!
A while back, the Secretary of the Treasury said if they lost in court again they’d give up.
They lost again.
And the Wall Street Journal reports that sure enough, they’re giving up.
They’re even considering handing out refunds — but what are the odds those refunds will ever end up back in your pocket?
They’ll probably just go back to the phone companies.
You’re better off just cutting ’em off now.
Update: I was too cynical.
The IRS did come up with a plan to give some of this miscollected tax back to us as income tax refunds.
See The Picket Line for .
The flat-rate long distance excise tax, which has been declared unlawful in every jurisdiction whose courts have taken it up, but which has been stubbornly enforced by an IRS sticking its fingers in its ears and singing “tra-la-la” is finally dead, and it’s taking the tax on other varieties of long-distance phone service with it.
Not only will they stop collecting the tax, but they plan to refund the tax collected over the last three years — $15 billion — with interest, even.
They’re still working on the details, but there will be a line on your 1040 next year on which you can apply for a refund.
If you didn’t save all of your phone bills for the last three years, they’ll even have a formula you can use to estimate how much they owe you absent the documentation.
Remember back when the IRS lost all of those court cases and finally was forced to recognize that it didn’t have the authority to charge a federal excise tax on most modern phone services?
Has it really been almost ten years? Time flies.
In , the agency stopped collecting that illegally-collected tax, and they even refunded some of their ill-gotten gains via a temporary income tax credit.
Data from the Tax Foundation show how this affected the over-all federal tax rate on wireless telephone service:
Year
2003
2004
2005
2006
2007
2008
2009
2010
2012
2014
2015
Rate
5.07%
5.48%
5.91%
2.99%
4.19%
4.23%
4.79%
5.05%
5.82%
5.82%
6.46%
I looked at this table and thought: “what the heck?”
How is it that after dropping the federal excise tax, the total federal tax rate is higher now than before?
Did they somehow sneakily add the tax back while I wasn’t looking?
The Tax Foundation explains:
[T]he elimination of the Federal excise tax was offset by a rapid increase in
the Federal USF [Universal Service
Fee], and the Federal USF rate more
than doubled from 2.99 percent to its current level of 6.46 percent.
The Federal USF is administered by
the Federal Communications Commission
(FCC) with open-ended
authority from Congress. The program subsidizes telecommunications services
for schools, libraries, hospitals, and rural telephone companies operating in
high cost areas. The Federal USF is
assessed on a provider’s Interstate revenues, which the
FCC deems to be 37.1
percent of the wireless bill for customers purchasing calling plans that do
not distinguish between interstate and intrastate calls.
The Universal Service Fund strikes most people as a fairly benign thing, and, if you’re a believer in the usefulness of a coercive government, this is perhaps the sort of taxation and infrastructure investment you have in mind.
On the other hand, according to its audit reports, the fund holds billions of dollars in U.S. Treasury Bonds, and so in this way is also an enabler for the rest of the government’s less-savory spending.
Not that there’s much we can do about it as phone customers (though I suppose, with internet telephony services like Skype available, the need to be a phone customer at all is not necessarily so great).
With the old federal excise tax, you could actually refuse to pay it, as a customer, and the phone companies would (though often only after some prodding) just report you to the government as a non-payer and leave it at that.
The way the tax was set up, the customer owed it and the telephone company was merely acting as the collector.
The USF isn’t like that.
The phone providers owe that fee to the government themselves.
They’re not even obligated to pass the cost on to their customers at all if they don’t want to, but in practice they all do, and they do so explicitly on your phone bill so they can advertise our amazingly low rate* rather than just our rate.
