Your company may be eligible for a partial refund of the three percent federal telecommunications excise taxes it has paid for the three years preceding the filing of a refund claim. A federal district court recently held that the Internal Revenue Service is not entitled to collect the telecommunications excise tax on certain telecommunications services because those particular services are not covered by the telecommunications excise tax statute. To protect your company's right to a refund, you would need to file a refund claim.
By way of background, the telecommunications excise tax statute defines "toll telephone service" subject to the excise tax as voice quality telecommunications service for which a toll charge is levied "which varies in amount with the distance and elapsed transmission time of each individual communication." For some time, however, many large users of telecommunications services have contracted with their carriers for flat or "postalized" long distance rates, and today most interstate long-distance rates are postalized. Under these rate plans, the per minute charge for a call is uniform, and the toll paid for a call varies only with its duration. Because the rates do not vary by the distance between the originating and terminating ends of a call, the service is not distance-sensitive. Therefore, a court recently held in a summary judgment order that the refund claimant was entitled to a full refund of the tax it had paid on telecommunications services covered by its postalized rates, which were not both usage-sensitive and distance-sensitive, as required by the tax law. While a different federal court a month earlier had upheld the position of the IRS, there is no certainty that the Service's view will prevail. Last year the Service tried to bolster its position by proposing regulations that would eliminate the distance-sensitivity requirement.
By filing a refund claim, you will preserve your company's entitlement to a refund. Because of the three-year statute of limitations on refund claims, filing a claim as soon as possible maximizes the size of the potential refund. It is important to ensure that a refund claim is well-documented and limited to the particular services that are outside the scope of the tax statute.
Helen E. Disenhaus is a partner in the Washington, DC office of Holland & Knight LLP. She can be contacted at (888) 688-8500.