Toll Phone Services Not Subject to Excise Tax

Article excerpt

Recently the District of Columbia Circuit Court of Appeals joined the and Eleventh Circuits in holding that the federal communications excise tax does not apply to telephone charges calculated solely on a time basis. IRC section 4251 imposes a 3% excise tax on telephone charges based on both the time and the distance of the calls.

When calculating the monthly service charges for the National Railroad Passenger Corporation (Amtrak), the telecommunications company, IBM, considered only one of these factors---the number of minutes the company used. After paying the excise tax, Amtrak filed for a refund. When the IRS did not respond, Amtrak sued in the D.C. district court claiming IRC section 4251 did not apply to telephone charges based on only one variable (in this case, time). When the district court granted summary judgment, the IRS appealed to the D.C. Circuit.

Result. For the taxpayer. In December 2005 the D.C. Circuit held that telephone charges based only on the minutes used were not subject to the communications excise tax.

IRC section 4251 imposes an excise tax on the cost of "toll telephone service," defined in IRC section 4252(b)(1) as a telephonic communication for which there is "a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication." The court had to determine whether Congress meant to use the word "and" conjunctively or disjunctively If a conjunctive interpretation was intended, the tax would be imposed only if the charges were computed based on the time and the distance of the calls. However, a disjunctive interpretation would cause the tax to apply if the charges were based on time or distance.

The IRS argued section 4252 applied to charges for telephone service based either on distance or time. It cited cases in which the Supreme Court decided it was necessary to read the word "and" disjunctively to realize Congress's intent.

The D.C. Circuit acknowledged that Congress occasionally used the word "and" disjunctively but deemed it did not in this instance. In 1965, when Congress last amended section 4252, AT&T was the only long-distance provider. …