LEGAL ALERT
Clients and Interested Parties:
Earlier today [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 (for further
information regarding the recent
controversy over the FET, see our Legal
Alert at
http://www.tkcrowe.com/pub_federal.html).
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.
Please do not hesitate to contact us if you have any
questions.
Thomas K. Crowe, President "firm@tkcrowe.com"
Gregory E. Kunkle, Staff Attorney
(Admitted only in Virginia; practice
limited to federal communications matters)
Law Offices of Thomas K. Crowe, P.C.
1250 24th Street, N.W.
Suite 300
Washington, D.C. 20037
(202) 263-3640 (voice)
(202) 263-3641 (fax)
www.tkcrowe.com