Telephone excise tax: does "and" mean "both" or "either"?

When long-distance telephone service does not take into account the distance of the call, should the 3% federal excise tax apply? In two recent cases, two district courts reached opposite conclusions.

American Bankers Insurance Group (ABIG), a Florida corporation, purchased interstate and international long-distance and intrastate long-distance phone service from AT&T in Florida, Georgia, Ohio and Oklahoma from October 1998 through March 2002. ABIG paid a uniform toll rate that varied only by the country to which the calls were being placed. It filed claims with the IRS for refunds totaling $361,763, contending that federal law imposed an excise tax only on long-distance calls that varied in rate based on the call's distance.

In a case with essentially the same facts, OfficeMax purchased long-distance phone service from MCI WorldCom Communications and MCI Telecommunications Corp. OfficeMax paid $380,296 in excise taxes and filed a refund claim with the IRS based on the same contention as ABIG's. OfficeMax maintained the toll charges were based on each call's duration, the type of access provided or the time of day and that distance was never a factor.

Result. For the IRS in ABIG; for OfficeMax in the other case. In both cases the critical question was whether the phone services the companies purchased were within the statutory definition of "toll telephone service" in IRC section 4252(b)(1). Toll phone service is defined as "a telephonic quality communication" for which the toll charge "varies in amount with the distance and elapsed transmission time" of each individual communication and is paid "within the United States." Each court viewed the word "and" in the definition differently.

In ABIG the district court ruled the word "and" was ambiguous and could mean the tax applied to toll phone service based on distance or time or both. The court concluded that, given this ambiguity, the congressional intent was to tax all long-distance phone service, regardless of whether it varied based on distance or time or both, and this intent would be thwarted under ABIG's contention.

In OfficeMax, however, the district court ruled the same word was not ambiguous. Since both distance and time were factors in determining toll charges when Congress enacted section 4252(b)(1), "it intended for the word 'and' to be read conjunctively to mean that a charge must vary by both distance and elapsed transmission time, and not by one or the other."

Given the differing conclusions of the district courts and the sizable amount of potential refunds, the IRS likely will challenge any future claims for refunds until the issue is resolved through appeals or legislation.

* American Bankers Insurance Group v. United States (DC FL, 1/29/2004), 93 AFTR2d 2004-1435.

* OfficeMax, Inc. v. United States (DC OH, 2/13/2004), 93 AFTR2d 2004-1190.

Prepared by Michael H. Brown, CPA, PhD, assistant professor of accounting, Millikin University, Decatur, Illinois.