Federal Excise Tax History

Congress levied the first tax on telephone service in 1898 to help finance the Spanish-American War. FET was repealed in 1902, only to be reenacted during the First World War to provide additional revenues. It was again repealed in 1924, but reenacted during the Great Depression. Because FET provides such a significant source of revenue, Congress has continued to collect the tax ever since:

• During the period of 1944-1954, FET was as high as 25%.
• In 1965, Congress passed the Excise Tax Reduction Act, which was intended to gradually reduce FET until it was completely phased out by January 1,1969 .
• The 1965 phase-out was halted in April 1966, and FET was reinstated at 10%
• Another delayed phase-out was attempted in 1968, to begin in 1970 .
• This phase-out was also delayed, and the tax was again reinstated.
• After several more unsuccessful attempts to phase out the tax, the Revenue Reconciliation Act of 1990 made FET permanent.
• A 2000 bill to abolish FET was vetoed by President William Clinton.
• In May, 2005 Representative Gary Miller (R-CA) introduced a bill to Congress to abolish FET
• Also in May, 2005 the tide turned against the IRS in Circuit Court Cases as the Courts began a string of rulings in favor of business taxpayers receiving refunds of the tax.
• On May 25, 2006 the IRS ended FET on long distance, bundled and wireless service.

What the Law Says

The Excise Tax Reduction Act of 1965 which currently regulates the application of the Federal Communications Excise Tax has only paragraph (2) still in effect. The tax is still applicable to local telephone service. (The IRS conceded paragraph (1) on May 25,2006.).

Toll telephone service is: (1) A telephonic quality communication for which
(A) there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication and (B) the charge is paid within the United States, and [emphasis added] (2) A service which entitles the subscriber, upon payment of a periodic charge (determined as a flat amount or upon the basis of total elapsed transmission time), to the privilege of an unlimited number of telephonic communications to or from all or a substantial portion of the persons having telephone or radio stations in a specified area which is outside the local telephone system area in which the station provided with this service is located.
-Internal Revenue Code, Section 4252 (b)

Prior Refund Claims and Legal Action

Because of the language in IRC Section 4252 (b), a few Fortune 500 companies filed federal claims for FET reimbursement. These claims were settled by the IRS for a fraction of their value. Then in 2004, the IRS stopped paying claims altogether.
In response, a few taxpayers filed suit against the government and won. The Eleventh, Sixth, and D.C. Circuit Courts of Appeal, the U.S. Court of Federal Claims, and several U.S. district courts have ruled that taxpayers are eligible to be reimbursed for FET charges. Also, in May 2005, Representative Gary Miller (R-CA) introduced a bill in Congress to abolish FET.

Court Cases
(3 of the 5 Circuit Court decisions against the IRS)

• American Bankers Insurance Group v. United States - The Eleventh Circuit Court decision (May 10, 2005) overturned the district court decision for the IRS in favor of the taxpayer. The court stated that, "federal excise tax on long distance telephone calls does not apply to calls for which rate does not vary based upon distance of the call." Upon remand back to the district court, judgment for the taxpayer was entered in the amount of $352,851.60, plus interest and court costs
• Office Max, Inc. v. United States - The Sixth Circuit Court, hearing an appeal from the IRS, upheld the lower court's decision in favor of the taxpayer. In its ruling (November 26, 2005), the court held that, "long distance service whose charges were based on elapsed time, but not distance, was not within the Code's definition of taxable toll telephone service.” The total amount of refunds claimed is $380,296.72.
• National Railroad Passenger Corporation (Amtrak) v. United States -The D.C. Circuit Court, hearing an appeal from the IRS, once again upheld the tower court's decision. In its ruling (December 9, 2005), the court said, "that statute imposing federal communications excise tax on certain toll telephone services did not apply to per minute long distance telephone services."

Conclusion

In June, 2006 following the IRS's ending FET on long distance services, they came out with a plan to refund the tax for the 41-month period beginning with March, 2003 and ending with July, 2006. They decided not only to change the law on their own without consulting Congress as the law requires, but also how the refund would be handled. They told us all we could claim the refunds on our 2006 Federal Tax Returns. They gave us 2 options for calculating the refund amounts: research the actual tax paid on each of the 41 months' bills or use an estimation method they concocted. The estimation method is riddled with flaws.

The estimate of the amount of FET refunds available was set at $15 Billion. The IRS has been averaging over $5 Billion per year in collections of the tax since 1999. (quick math: $5 Billion per year times the 3 year-plus refund period = $15 Billion). Based on the "program" the IRS so graciously provided for getting our money back, we can be certain that at least half of that estimate has gone unpaid.