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Since early 2004
seven federal district court judges and one appeals panel have
ruled that the Internal Revenue Service has wrongly collected
a 3% federal tax on "toll telephone service," and
awarded large refunds. So has the IRS backed off? Don't be
silly. The IRS says, in effect, if you don't like it, sue us.
This is a tax that refuses to die. It
was first passed in 1898 as a luxury tax to fund the
Spanish-American War. Antitax pols consider it an anachronism,
and in 2000 Congress passed a bill to kill it and the $6.5
billion a year it now raises. But President Clinton vetoed the
bill.
Now, fed-up companies are suing--and
winning 100% refunds. In October a district judge awarded
Hewlett-Packard a $6.2 million refund, plus interest. Earlier,
Honeywell, AOL, OfficeMax, Fortis, Reese Brothers and Amtrak
won smaller amounts. More big companies--including Wal-Mart,
Home Depot, JPMorgan Chase, PNC Bank, MBNA, United
Technologies and Eaton--have filed suit.
Over the past decade dozens of other
big companies have quietly applied to the IRS and got about
35% of their tax back, reports lawyer Jacob Miles of Kelley
Drye & Warren. No matter, the IRS still insists that
telecom providers collect the tax, and it is appealing, or is
expected to appeal, all seven district court losses.
The government's main argument goes
like this: "Toll telephone service" is defined in
the law as service billed by distance and time. That
seems to exempt long-distance service that is charged at a
flat rate per minute, as most is these days. But the IRS says
the "and" in the 1965 rewrite of the statute can be
read as an "or," which renders the law ambiguous,
thus requiring a judge to discern Congress' intent, which was
to tax long-distance calls.
As for consumers and small
businesses, good luck. "Obviously, mom and pop with their
$17 claim aren't going to go through litigation," says
Stephen Rosen of Levine, Blaszak, Block & Boothby, which
has brought multiple telecom tax refund suits. And class
actions against the IRS aren't allowed under federal law.
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