Client Alert: You May Have Substantially Overpaid Your Telecommunications Tax Bill

Kohrman Jackson & Krantz has recently identified potential tax refunds for its clients.  Your company may be entitled to similar refunds.

A recent decision by the United States Court of Appeals for the Sixth Circuit, and by federal courts in several other jurisdictions, determined that the Internal Revenue Service has improperly collected a 3% federal excise tax on many of the most common business telecommunications services.  26 U.S.C. § 4252(b) provides for a 3% excise tax on “toll telephone service” which is defined, in relevant part, as:

(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.

The IRS believes that § 4252 (b)(1)(a) permits the taxation of charges which vary in amount with the distance or elapsed transmission time.  The Sixth Circuit as well as the Eleventh Circuit disagreed with the IRS.  These Courts, as well as several district courts, held that in order to be taxed under this statute, “and” simply means “and.”  Most current telecommunication contracts do not charge clients by distance and transmission time.  While this appears to clarify the issues in some parts of the country, there are still some outstanding legal issues, and the IRS continues to both collect the tax and litigate these cases. 

What does this mean?
Simply stated, you may be entitled to a tax refund.  Specific services, such as some local service and WATS lines, are still taxable.  If you have paid this excise tax, which appears on your phone bill, you should consider whether you are entitled to a refund.  The estimates indicate that the gross amount of improperly assessed taxes is approximately $2.4 billion annually.  In order to qualify for a refund, companies should analyze their telecommunications contracts, analyze whether the telecommunications contract charges for services in an appropriate manner, determine which services were taxed, segregate the inappropriately taxed services from properly-taxed services, make a request to the IRS in a timely manner, and follow up with a claim in the appropriate federal court.

Your telecommunication contracts and bills, for at least the last three years, should be examined to determine whether you are entitled to a refund.  Many Fortune 500 Companies are in the process of requesting refunds.  Honeywell actually received a $1.2 million refund due to these overcharges.  If you have any questions, please feel free to call Brett Krantz at (216) 736-7238.

Pursuant to requirements related to practice before the Internal Revenue Service, any tax advice contained in this communication is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.