Taxable Talk

As mentioned earlier, 2006 saw the end of the Spanish-American War (of 1898)…well, the funding for the war. The telephone excise tax, a “luxury” tax, has ended for most services. Taxpayers will receive refunds with their 2007 tax returns.

The IRS has computed standard amounts for the refunds, based on the number of exemptions on the tax return. You can choose the standard amount (between $30 and $60 dollars) or the actual amount (which will require you gathering phone bills from February 28, 2003 through July 31, 2006). The IRS has an excellent question and answer page. But here are some answers to other questions:

How do businesses get the refund? Businesses will have to figure the actual amount of tax paid, and complete a new IRS Form, Form 8913. Individuals who wish to receive the actual amount paid in tax will also complete this form.

I was charged this tax on my local service, my long distance, my cellular, and my Internet phone service. Which phone services are eligible for the refund? Courts held that whern the tax was based on transmission time, rather than distance, the tax was invalid. This means that the tax applies today only to local telephone service. The tax will be refunded for all other services where it was charged.

Why the specific dates (February 28, 2003 – July 31, 2006)? The Internal Revenue Code has a statute of limitations; the government only has to refund the money that was collected during this time-frame.

I’m still being charged the tax on my long-distance service. What should I do? Call your carrier and complain, and demand an immediate refund of the illegal tax. Then write your Public Utilities Commission and/or the FCC (Federal Communications Commission).

I don’t have to file a tax return this year. How do I collect the refund? The IRS announced that there will be a special tax form, Form 1040-EZ-T, for such individuals.

It really took 108 years for the government to stop funding the Spanish-American War? Unfortunately, the telephone excise tax continues on local phone service, so we’re still paying to “Remember the Maine!”

And you thought that the Treaty of Paris (signed on December 10, 1898) ended the Spanish-American War. No! It ended today, May 25, 2006, when the Department of the Treasury announced that they will no longer fight for enforcement of the 3% telephone excise tax used to fund the Spanish-American War.

Refunds of tax for long-distance service paid over the past three years will be given as part of your 2006 tax returns filed in 2007. As to what documentation (if any) is required, this has not been announced. (From a tax preparers’ viewpoint, I hope that preparers aren’t the ones who will have to check that individuals requesting refunds meet the requirements….)

Additionally, the press release and the news stories do not reference mobile telephone service (e.g. cellular). However, the IRS notice does, stating,

“These cases [on the telephone excise tax] 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. As a result, amounts paid for time-only service are not subject to the tax imposed by § 4251. Accordingly, the government will no longer litigate this issue and Notice 2005-79, 2005-46 I.R.B. 952, which states otherwise, is revoked.”

So cellular phone service and long-distance service should be free of the excise tax.

Until the IRS and the Department of the Treasury announce the procedure for refunds, keep your old phone bills! The Treasury Department estimates that refunds will total $15 billion.

Links: Reuters News Story, Roth Tax Updates, and TaxProf Blog

Do you remember the Maine?

For those of you who don’t remember history, the battleship USS Maine blew up in the harbor at Havana, Cuba. Even today, the cause of the explosion is still a mystery. But one thing is quite sure, the tragedy of the Maine led to the Spanish-American War.

That’s a nice bit of history, but you may be wondering what this has to do with a tax blog. Well, the war was funded by a tax: an excise tax of 3% on telephone service. This tax, on long-distance calls, continues today.

There’s a problem, though. Does the tax apply to wireless long-distance calls, which are charged based on time, rather than distance? As this article in USA Today notes, an appeals court in Washington, DC ruled that the tax, which has been extended to wireless service, does not apply to wireless service. Consumers are due refunds that total up to $50 billion; however, obtaining the refunds is a time-consuming process. Additionally, because cases are pending in all of the 13 Courts of Appeals, this matter will likely go up to the US Supreme Court and it is unlikely that the IRS will issue refunds until that happens.