After suffering seven consecutive losses before courts of appeals across the nation, the IRS has decided to discontinue collecting the 3 percent “Federal Excise Tax” (or “FET”) on outbound long distance service. All taxpayers, including businesses, will be able to apply for refunds on their 2006 tax forms, to be filed in 2007.
The FET, established in 1898 to fund the Spanish American War, was considered a luxury tax on the few wealthy Americans who then owned telephones. As telephone service became ubiquitous, the FET became a major revenue stream for the IRS. The agency applied the FET to virtually all types of telecommunications services, despite the express language of the tax statute which limited the long distance services subject to the FET to services that are both time-lapse and distance-sensitive. Seven court challenges over the past few years curtailed the IRS’s expansive interpretation of the FET, and since long distance service is no longer priced on minutes of use and distance, the IRS determined to forego the FET altogether on long distance service. In announcing its decision, the IRS also asked that Congress repeal the FET, which would eliminate the three percent surcharge on local service as well.
The IRS indicates that taxpayers will be able to file for FET refunds on their 2006 tax returns (filed in 2007) dating back three years, including interest, but no form or specific process has yet been made public. We will monitor the IRS’s activity on the FET and pass along the new form or instructions when available.
If you have any questions about the FET or would like our assistance in applying for a refund, please contact us.