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5 Minutes With Gary Rhodus of Atlantax Systems
By Gene Retske |
One of the oldest and most established tax compliance services
in the telecommunications industry is Atlantax Systems, headquartered
in Atlanta. Atlantax founder, Gary Rhodus literally created the
tax compliance industry, at least as far as telecommunications resellers
and carriers are concerned. They offer a variety of services and
software to help with tax compliance issues. Gary Rhodus has always
been at the leading edge of tax issues, and recently told me about
an issue that could have significant impact on the prepaid industry.
Gene: So, you have discovered that some companies have been getting
rebates of the Federal Excise Tax (FET) that they paid for long
distance calls?
Gary Yes, that is correct. The issue is, that with respect to long
distance telephone calls, commonly referred to as “toll,”
there have been a number of companies that have filed refund claims
with the Internal Revenue Service (IRS), saying that the FET was
not due on their long distance charges.
Gene: Why?
Gary Because they were not distance sensitive. They were postalized
rates. The current Federal Excise Tax law as we know it was last
worked on in 1965. Obviously, there have been a lot of changes since
then. In the statute as it was written at that time, toll calls
were defined as calls that were paid for based on time and distance.
Of course, over the years, time and distance have disappeared as
a way to charge for a toll call. We have a lot of postalized rates
now, flat fee charges, regardless of where you call or how long
you talk. A literal reading of the statute would indicate that the
FET would not apply to toll calls that are charged for on a postalized
rate basis, as opposed to time and distance sensitive.
Gene: What is the status of those cases?
Gary Virtually all of these cases have now been decided in favor
of the companies that filed refund claims. That, notwithstanding,
the IRS has required companies that are billing FET to continue
to do so. Those people that think it should not apply have to file
a refund claim against the IRS.
Gene: All of the cases have gone in favor of the taxpayers?
Gary All of the cases except one have gone in favor of the taxpayers.
And, that decision has since been overturned.
Gene: So why is the IRS still collecting the tax?
Gary The bulletin that came out from the IRS, notice 2004-57, IRS
bulletin #376, said that these cases notwithstanding, providers
of telecommunications services, sellers of toll, would still be
required to bill and collect the tax and remit it.
Gene: All of these cases were enterprise customers?
Gary Yes.
Gene: Could resellers apply for this refund?
Gary No, because resellers are presumably not paying tax on their
purchases anyway.
Gene: Who pays the FET for prepaid services?
Gary A reseller who is selling through a convenience store chain
will have the responsibility for paying the FET on the retail value
of the cards at the time of the transfer. Before a refund claim
will be allowed, the company that is applying for the refund claim
will have to show that it is going to pass the refund on to whoever
was actually charged. So, take Office Max, which was one of the
early cases. Since they were the ones that had actually paid the
tax to the supplier, the refund was going to the person who had
paid the FET.
Gene: What if the reseller is just absorbing the FET, and factoring
this into the rates?
Gary The IRS might say that whoever was buying the services was
really paying the FET, since it was included in the pricing. If
that were true, and the IRS gave it back to the reseller, the reseller
would be required to somehow refund the tax to the end user consumer,
something that would probably be impossible. If they did not refund
the money they might be guilty of double dipping since they would
have been paid twice for the FET.
Gene: What about the situation where the service provider charges
the distributor for the FET? Could the distributor ask for the refund?
Gary Yes, exactly. The distributor cannot pass it on to the end
user consumer. That’s a good point, the distributor might
have a valid claim because the distributor is the end user consumer
under the statute. The last carrier in the chain of commerce passes
it on to the first non-carrier. The distributor cannot pass the
FET on because he is not selling telecommunication service. If one
of the retail chains wanted to file a refund claim with the IRS,
these cases seem to indicate that they would have a fairly good
chance of winning. They would, however, have to show that FET was
paid, and that it had been paid based on a postalized rate structure.
Gene: This sounds like quite a mess right now.
Gary This whole FET thing is up in the air and fraught with controversy
right now. These IXCs and traditional carriers are caught in the
middle. On one hand, they are told, ‘you must collect a tax,
and pay a tax,’ that the courts are saying is not due. Could
a convenience store chain file a claim? Absolutely. They could file
a claim and they would be the party that had standing to file the
refund claim, again assuming they could prove they paid the tax
and that it was based on postalized rates.
Gene: What if the c store is charging the end user the FET in some
form?
Gary First, they should not be since they are not selling
telecommunications service as far as the FET is concerned. However,
I would think this would be a potential nightmare. I hate to say
this, but it seems to me that a potential exists for some kind of
a class action suit. There are statutory provisions that they are
not supposed to bill the tax. So, if the c-store is billing a 3%
extra charge, they might first have to explain why they are charging
it, but their customers would be the one who had the refund coming.
Gary Rhodus is President of Atlantax Systems. He can be reached
at grhodus@atlantax.com.
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