WASHINGTON-The IRS lost another one Wednesday in its quest to keep collecting a 3-percent tax on talking.
The U.S. Court of Appeals for the 6th Circuit agreed with the 11th Circuit that the tax cannot be collected on calls that are billed only by time and not time and distance.
“There is more to ‘and’ than meets the eye. The case, then, does not simply turn on the intuition that ‘and’ means ‘and,’ ‘or,’ and never the twain shall meet. For several reasons, however, the ‘and’ at issue in this dispute requires a telephone company’s toll charges to vary both by distance and time to be taxable,” wrote Judge Jeffrey Sutton.
The 6th Circuit covers Kentucky, Michigan, Ohio and Tennessee. The 11th Circuit covers Alabama, Florida and Georgia.
The IRS declined comment but the telecommunications industry hailed the ruling.
“Today’s ruling again rejects the IRS’ demand that telecom carriers collect an illegal and costly tax from American consumers. For the second time, a federal court of appeals has seen through the IRS’ misguided attempt to maintain this antiquated tax. The matter has been firmly decided and now it is time for the IRS to abide by the courts’ decision and stop enforcing the illegal application of the federal excise tax,” said Ed Merlis, senior vice president of government & regulatory affairs for the United States Telecom Association.
The wireless industry is not directly impacted by the two decisions but is preparing its own lawsuit to recover taxes it believes were wrongly assessed on end users.
After the 11th Circuit decision, the IRS did not follow through with an expected appeal of the case to the U.S. Supreme Court. Instead it said that all telecommunications carriers should continue assessing and collecting the tax.
The 6th Circuit did not speak with one voice. Judge John Rogers dissented in the 2-1 ruling. Rogers said the law was ambiguous enough that IRS interpretation should be followed. “We should not encourage lawyers to play word games at the expense of the public finances,” he wrote.
The IRS believes the tax on talking is legal due to language adopted in 1965 that says calls made through the wide area telecommunications system can be taxed.
While the telecom industry waits for the courts to act, it continues to press Congress to eliminate the tax. Bills are now pending in the House and Senate to repeal the tax.
The wireless industry has lobbied unsuccessfully to kill the tax since the late 1990s, coming close in the waning days of the Clinton administration when both houses of Congress passed versions of legislation. Despite industry and legislative backing for the tax’s elimination, it’s a tough sell because the tax is not earmarked and can be used to reduce the federal deficit. Last year, there was even consideration of increasing the tax to 4 percent.
