IRS Threatens to Expand an Obsolete Tax

June 12, 2014

The Internal Revenue Service (IRS) has spent years battling the now-bankrupt company WorldCom over telephone excise taxes, explain Joseph Henchman and Chris Stephens of the Tax Foundation.

  • To help finance war against Spain in 1898, Congress passed an excise tax on telephone service.
  • The tax was repealed in 1902, re-enacted in 1917, repealed again in 1924 and subsequently re-enacted in 1932.
  • Since that year, the tax was extended 29 times until it became a permanent part of the tax code in 1990.

Three services are taxed by the law: local telephone service, long-distance service that varies by distance and time and teletypewriter exchange service. Taxes on the latter services are no longer applicable today.

In 2007, the IRS asked for $16 million in back telephone taxes from WorldCom, a now-bankrupt company. The IRS insists that WorldCom's dial-up internet streaming services during the 2000s were "local telephone services." After two courts ruled in favor of WorldCom, the Second Circuit Court of Appeals ruled for the IRS. Now, the case is heading to the Supreme Court.

The Tax Foundation submitted a brief in favor of WorldCom, contending that the court should not expand the definition of "local telephone service" to services that were not contemplated when the tax was passed. If the Second Circuit's decision stands, the Tax Foundation argues, there will be a significant amount of uncertainty as to whether broadband service is taxable, even if the broadband service cannot transmit telephone calls. Currently, more than 70 percent of American homes have broadband service.

Source: Joseph Henchman and Chris Stephens, "Stopping the IRS's Revival of an Obsolete Tax: WorldCom v. IRS," Tax Foundation, May 21, 2014.

 

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