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Does Uncle Sam Owe You Money?
FET Refunds May Be Coming to You
By Charles H. Helein |
Prepaid providers may be owed millions in Federal Excise Tax refunds; the time is now to preserve your rights.
For over 100 years, telephone service subscribers have been subjected to a 3% federal excise tax on communications services. The tax, originally designed to reduce the federal deficit caused by the Spanish-American War, was imposed on toll telephone service, local telephone service and teletypewriter exchange service. By now, most of you are well aware that the lawfulness of the excise tax on ‘toll telephone service,’ has been placed in serious doubt by courts across the nation.
The Internal Revenue Code defines ‘toll telephone service’ as a telephonic quality communication for which there is a toll charge which varies in amount with the distance and length of time of the call when the charge is paid in the U.S. Notwithstanding the unambiguous and plain language of the taxing statute, the IRS has argued that a long distance telephone call for which the charge varies with time but not distance is still a toll telephone service under the statute.
Courts which have reviewed the issue, however, have unanimously agreed that the IRS is flat wrong and found that the taxing statute’s definition of toll telephone service does not include long-distance telephone service charges that vary only by elapsed transmission of time, and not also by distance. In particular, the Sixth and Eleventh Circuit Courts of Appeal, the District of Columbia Circuit Court of Appeal, the Court of Federal Claims and the District Courts for the Second, Third and Ninth Circuit have all ruled in favor of the taxpayer and rejected the IRS’ strained reading of what constitutes “toll telephone service” under the statute.
Remarkably, in October 2005, following a defeat in the Eleventh Circuit, through Public Notice the IRS announced that it will effectively ignore the courts’ rulings and continue to assess federal excise taxes -- even in jurisdictions where its enforcement over the statute has been overruled.
The IRS stated that, although it was not appealing the Eleventh Circuit decision to the Supreme Court, it was appealing decisions in other judicial circuits and would therefore continue to assess and collect communications excise tax on toll telephone services. In adopting this “unprecedented” position, the IRS has directed collecting agents to continue to collect the tax, including from taxpayers in the Eleventh Circuit. This position sets the IRS squarely in violation of the law as declared by that Circuit. And, since releasing its Public Notice the time for appeal of the Sixth Circuit decision has also lapsed, thus putting the IRS’ Public Notice at odds with the Sixth Circuit, as well.
The IRS also reminded taxpayers that they are required to pay the excise tax to a collecting agent and that collecting agents are required to file returns and pay the tax over to the IRS. Taxpayers may preserve any claims for overpayment by filing refund claims with the IRS, but taxpayers were advised that the refund claims, including claims filed by taxpayers in the Eleventh Circuit, would not be processed by the IRS while there are pending cases in other Circuits.
The IRS’ indefensible position of suspending refund claims for federal excise taxes is in direct contradiction to the court rulings. It is believed that the IRS’ suspension policy is based on the ill-founded hopes that one court will eventually disregard the unambiguous statutory language at issue and apply the tax to postalized (flat fee) telephone services.
The IRS’ actions indicate that it is bent on using its reputation to neutralize taxpayers from seeking refunds by continuing to resist accepting the courts’ decisions and changing its policies to comply. The IRS’ logic may seem flawed, and it is both legally and perhaps constitutionally flawed, but not from another standpoint. That standpoint is that as long as the IRS can cower taxpayers into inaction, the more the three-year statute of limitations amortizes the amount of refunds that are filed.
It behooves all taxpayers and collecting agents to consider whether or not they may be entitled to a refund of the communications excise tax on toll telephone service. If a refund is due, it is important to act now and file the appropriate administrative refund claims in order to preserve the greatest amount of refund possible.
Are Prepaid Providers Entitled to a Refund?
The payment of the communications excise tax is unique in that under the taxing scheme the prepaid provider is considered a collecting agent that collects the tax from its distributor or customer (the first holder of the prepaid card or service that is not a carrier) and remits the tax to the IRS. Generally speaking, the tax “collector” is not considered a “taxpayer” for purposes of seeking a refund of such taxes. Instead it is the distributor or end-user customer that receives the prepaid services from a carrier that is considered the “taxpayer.”
In many instances, the “taxpayer” who made an overpayment and who is entitled to a refund of such overpayment is not in question. However, in situations where a prepaid provider actually pays the excise taxes on behalf of its customers and distributors, these questions arise:
• Can the prepaid provider file for and collect the refund of overpaid taxes?
• Can the prepaid provider keep the refund?
The IRS expressly enumerates two straightforward ways in which the prepaid provider has standing (the legal right to initiate a lawsuit) to seek an FET refund for the payment of the excise tax. The prepaid provider may file for the excise tax refund if it can establish that it has either:
1. Repaid the amount of the tax to the party from whom the tax collected; or
2. Obtained the consent of its customers/distributors to do so.
If the prepaid provider has neither repaid the tax to the customer nor obtained its consent to file for the refund, it may still have standing to seek a refund if it can establish that it has borne the economic burden of the tax and not passed it on to the distributor or customer. Thus, where the prepaid provider has itself paid the excise tax the provider should have standing to file for and collect the refund.
To prove that a provider “bore” the excise tax, the provider must show that it did not include the tax in the price of its service and has not collected the amount of the tax from its distributors or end use customers.
The prepaid carrier will face a rebuttable presumption that it included the 3% tax in the cost of its service (this is commonly referred to as “passing on” the tax to the customer). A rebuttable presumption means a presumption that is not conclusive and can be contradicted by evidence.
The prepaid provider would be required to contradict this rebuttable presumption by producing corroborating evidence in support of the fact that it bore the ultimate burden of the tax by a “preponderance of the evidence.” What does this mean? What kind of evidenciary burden is required?
The preponderance of the evidence standard means “the greater weight of the evidence” and is the standard of proof required in a civil (non-criminal) lawsuit for the trier of fact (jury or judge without a jury) to decide in favor of one side or the other. This preponderance is based on the more convincing evidence and its probable truth or accuracy, and not on the amount of evidence. Thus, one clearly knowledgeable witness may provide a preponderance of evidence over a dozen witnesses with hazy testimony, or a signed agreement with definite terms may outweigh opinions or speculation about what the parties intended. The tax collecting agent prepaid provider will win by preponderance of the evidence if its evidence merely “tips the scales” in favor of its position.
In short, all prepaid providers, whether acting as the collecting agent for its distributors and customers or as the taxpayer that bore the economic burden of the excise tax, should give serious and immediate consideration as to whether or not they are entitled to a tax refund for the toll telephone services provided during the course of the past three years.
Disclaimer: None of the information contained in this article should be construed as legal advice. If you need legal advice regarding any of the matters addressed in the article, please seek the assistance of legal counsel.
Charles H. Helein is the founder and managing partner of The Helein Law Group, a Washington, D.C.-area law firm specializing in federal and state telecommunications and technology matters. He can be reached at chh@thlglaw.com.
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