Case Studies

Industry Alert!

Federal Excise Tax

On May 25, 2006, the U.S. Treasury Department announced that it would no longer seek to challenge the various court rulings which had struck down the application of the 3% Federal Excise Tax (“FET”) to charges for toll services which are only assessed based on elapsed transmission time and do include a distance component. Shortly thereafter, the IRS released a Notice describing in further detail the services to which FET would no longer apply the affect on future FET collections, and the mechanisms for refund requests. This major development would appear to put an end to the recent controversy over whether FET applies to long distance and bundled service calling plans.

Categories of Service Affected

The IRS’s Notice sets forth two categories of service which will no longer be subject to FET. The categories are Long Distance Service, which is defined as telephonic quality communication with persons whose telephones are outside the local telephone system of the caller, and Bundled Service, which is defined as local and long distance service provided under a plan that does not separately state the charge for the local telephone service. The Notice states that Bundled Service includes, “Voice over Internet Protocol service, prepaid telephone cards, and plans that provide both local and long distance service for either a flat monthly fee or a charge that varies with the elapsed transmission time for which the service is used”. Bundled Service can be provided through either landline or wireless service.

The Notice does not affect local-only service and carriers should continue to collect and remit FET for such services until further notice.

Future FET Collections

The Notice directs carriers to cease collecting and remitting FET for any non-taxable service that is billed after July 31, 2006. In addition, carriers are no longer required to report customers to the IRS which refuse to pay FET charges billed after May 25, 2006. Thus, affected carriers should begin considering steps to discontinue FET line items and similar charges.

Refunds

The Notice sets forth various methods by which taxpayers can seek tax refunds or credits from past FET payments. In general, all refunds or credits are to be requested in the course of an income tax return whether the requestor is an individual or business entity. The Notice states that individuals will be granted a safe-harbor amount which they can elect to claim on their tax returns in lieu of calculating actual FET payments. All other entities must calculate the actual FET payments when requesting a refund. Requests for refunds or credits can be made for FET billed after February 28, 2003 and before August 1, 2006.

Note that the Notice reiterates the general rule that the FET refund right rests with the end user or similar entity that paid the tax to a carrier. In fact, for any entity considered to be an FET collector (i.e., most carriers) to request a refund, the collector must show that it has repaid the amount of the tax to the person from whom the tax was collected, or has obtained the written consent of such person to the allowance of the credit or refund. Obviously, this will reduce the ability of most carriers to obtain refunds for FET payments made by their customers.

The IRS’s notice can be viewed online at: http://www.irs.gov/pub/irs-drop/n-06-50.pdf.

Ariel Link has previously filed for and received form the IRS, the refund of FET taxes on telecommunication services. We can do the same for your organization. Please contact us so we may further assitst you and your organization in the recovery of this tax.