Senate Finance Committee Approves Tax Bill with Communications and Tech Provisions

June 28, 2006. The Senate Finance Committee (SFC) amended and approved S 1321, the "Telephone Excise Tax Repeal Act of 2005". This bill repeals the federal telephone excise tax that dates back to the Spanish American War. However, the bill, as amended, also includes numerous other tax provisions, including some that affect technology and communications.

Repeal of Telephone Excise Tax. Sen. Charles Grassley (R-IA), the Chairman of the SFC, stated in a release that "We're on the way to ending a quote-unquote temporary tax ... The temporary part means nothing, because this tax has been around since 1898. It was used to pay for the Spanish-American War by taxing the rich because in 1898, only the wealthy had telephones. Now everybody has a phone and pays this tax. It’s time to get rid of the tax."

Sen. Grassley (at right) said that this repeal will save phone customers $7 billion over 10 years.

He also stated that "The savings will apply to anyone with a land line telephone ... Because seniors tend to use land-line telephones more than other people, as a group they'll see financial help by eliminating this tax that's no longer justified."

Sen. Max Baucus (D-MT), the ranking Democrat, wrote in his opening statement [PDF] that "The war lasted just 229 days. But the tax lasted more than a century. It is time to give Americans relief from this regressive tax. It is time to repeal the tax, once and for all."

Sen. Rick Santorum (R-PA) introduced the original version of S 1321 on June 28, 2005.

Members of Congress have been trying to repeal the excise tax on phones for many years, without final success.

There were substantial efforts in the 105th,106th, 107th, and 108th Congresses to repeal this tax. (The current Congress is the 109th). See, for example, HR 3648 in the 105th Congress, HR 3916 in the 106th Congress, HR 236 in the 107th Congress, and HR 2957 in the 108th Congress. The House approved HR 3916 on a roll call vote of 420-2, on May 25, 2000. See, Roll Call No. 233. However, the full Senate did not approve the bill. HR 236 had 149 sponsors.

Licensing and Regulation of Software Developers. The bill as amended incorporates S 832, the "Taxpayer Protection and Assistance Act of 2005". Sen. Jeff Bingamon (D-NM) and others introduced the original version of S 832 on April 18, 2005. S 1321, as amended, amends the Internal Revenue Code (IRC) with respect to any "refund loan facilitator". The bill provides for the regulation by the Department of the Treasury of compensated income tax return preparers who are not already subject to another regulatory regime. This is a business and occupational licensing regime.

However, the language of the bill, as amended, goes far beyond regulation of tax return preparers. It amends the IRC to expand the definition of tax return preparer to include certain software developers and contractors of tax return preparers.

The SFC/JCT released a memorandum [151 pages in PDF], authored by staff of the Congress's Joint Committee on Taxation, that summarizes this bill. It states that "The proposal modifies the regulatory definition of tax return preparer to include any person who assists in preparing tax returns for compensation or holds himself out to tax return preparers or taxpayers as a person who assists in preparing tax returns, regardless of whether tax return preparation is the person's sole business activity and regardless of whether the person charges a fee for tax return preparation services. The proposal also specifically includes as a tax return preparer, a person who develops software that is used to prepare or file a tax return, electronic return originators/authorized IRS e-file providers, as well as contractors of the tax return preparer performing services in connection with tax return preparation." (See, paper page 81, and PDF page 85.)

The SFC/JCT's 151 page memorandum does not identity any problems that the Internal Revenue Service (IRS), which is a unit of the Department of the Treasury, has encountered with software developers. In contrast, the Department of Justice (DOJ) has taken legal actions against numerous unscrupulous tax return preparers.

Moreover, the IRS and Department of the Treasury have a history of overbroad and aggressive interpretation of their statutory authority in the context of communications and information technology.

For example, telecommunications carriers have in recent years begun offering services that have not fallen within the categories of services subject to the 3% excise tax. Nevertheless, the IRS continued to collect taxes as if these services were covered by the statute.

The IRS continued even after numerous courts uniformly held that it could not. It was not until May 25, 2006, that the IRS conceded the illegality of its actions. See, IRS Notice 2006-50 [14 pages in PDF], and story titled "IRS Announces It Will Cease Its Illegal Collection of Excise Taxes on Phone Service" in TLJ Daily E-Mail Alert No. 1,379, May 26, 2006. See also, story titled "IRS Announces That It Will Violate Court of Appeals Ruling Regarding Excise Tax on Phone Service" in TLJ Daily E-Mail Alert No. 1,241, October 27, 2005.

Five Courts of Appeals had ruled against the IRS. The U.S. Court of Appeals (11thCir) issued its opinion [22 pages in PDF] in ABIG v. IRS on May 10, 2005. See, story titled "IRS Loses Appeal Over 3% Excise Tax on Communications" in TLJ Daily E-Mail Alert No. 1,133, May 11, 2005.

The U.S. Court of Appeals (6thCir) issued its opinion [20 pages in PDF] in Office Max v. US on November 2, 2005. See, story titled "IRS Loses Another Appeal Regarding 3% Excise Tax" in TLJ Daily E-Mail Alert No. 1,246, November 3, 2005.

The U.S. Court of Appeals (DCCir) issued its opinion [11 pages in PDF] in Amtrak v. US on December 9, 2005.

The U.S. Court of Appeals (2ndCir) issued its opinion [PDF] in Fortis v. USA, on April 27, 2006. See also, story titled "2nd Circuit Rules Against IRS on Excise Tax on Phone Service" in TLJ Daily E-Mail Alert No. 1,361, May 1, 2006.

The U.S. Court of Appeals (3rdCir) issued its opinion [23 pages in PDF] in Reese Brothers v. USA,
on May 9, 2006. See, story titled "IRS Loses Another Frivolous Appeal Regarding Telephone Excise Tax" in TLJ Daily E-Mail Alert No. 1,367, May 10, 2006.

Moreover, back in 2004, the IRS announced its interest in expanding the excise tax on phones to information services, despite its lack of statutory authority. See, story titled "IRS Publishes Advance NPRM Regarding Expanding the Excise Tax on Telephones to Include New Technologies" in TLJ Daily E-Mail Alert No. 931, July 6, 2004.

Some Members of Congress and others opposed this. See, for example, story titled "Rep. Cox Urges Bush to Instruct IRS Not to Expand Excise Tax on Phones" in TLJ Daily E-Mail Alert No. 945, July 26, 2004.

Free Electronic Returns. The SFC/JCT memorandum states the "The IRS has entered into cooperative relationships with commercial return preparation services to provide free electronic filing services to eligible low-income or elderly taxpayers. This program is called ``Free File.´´ Presently, the IRS does not permit taxpayers to file their tax returns electronically without the use of an intermediary."

The memorandum adds that the bill "requires the Secretary to establish the ``Direct e-file Program.´´ The Direct e-file Program is a program that provides individual taxpayers with the ability to electronically file their Federal income tax returns through the IRS website without the use of an intermediary or with the use of an intermediary with which the IRS contracts to provide free universal access."

Sen. Baucus (at left) stated that "This bill contains many provisions that will improve tax administration. For example, it authorizes the IRS to offer direct electronic filing. Taxpayers will no longer be forced to pay a preparer or to buy software in order to file a tax return electronically. Taxpayers can file a paper return for free. And they should be able to file an electronic return for free, as well."

Internet Tax Freedom Act. The SFC approved an amendment offered by Sen. Ron Wyden (D-OR) that removes the expiration date from the Internet Tax Freedom Act (ITFA), thus making the moratorium of the ITFA permanent.

It is currently set to expire on November 1, 2007. See, story titled "Bush Signs Internet Tax Nondiscrimination Act" in TLJ Daily E-Mail Alert No. 1,031, December 6, 2004.

The Senate Commerce Committee, which completed its mark up of HR 5252, the communications reform bill, on June 28, approved by a vote of 19-3 a similar amendment offered by Sen. George Allen (R-VA).

Expensing of Broadband Internet Access Expenditures. The SFC/JCT memorandum first explains the concepts of depreciation and expensing. It states that "A taxpayer is allowed to recover, through annual depreciation deductions, the cost of certain property used in a trade or business or for the production of income. The amount of the depreciation deduction allowed with respect to tangible property for a taxable year is determined under the modified accelerated cost recovery system", or MACRS, with most recovery periods for most form of tangible property ranging from 3 to 25 years.

The memorandum states that the bill "provides an election to treat any qualified broadband expenditure paid or incurred by the taxpayer as not chargeable to capital account, but rather, as a deduction. The deduction is allowed in the first taxable year in which either current generation, or next generation, broadband services are provided through qualified equipment to qualified subscribers."

It adds that "Expenditures are eligible for this election only for qualified equipment, the original use of which commences with the taxpayer. The proposal applies for qualified broadband expenditures incurred after June 30, 2006, and before January 1, 2011."

It also states that "Current generation broadband services are defined as the transmission of signals at a rate of at least 5 million bits per second to the subscriber and at a rate of at least 1 million bits per second from the subscriber. Next generation broadband services are defined as the transmission of signals at a rate of at least 50 million bits per second to the subscriber and at a rate of at least 10 million bits per second from the subscriber."

Reaction. BellSouth's Herschel Abbott stated in a release that "On the heels of the IRS action, today's Senate committee vote is welcome news for consumers. When passed by the full Congress, this legislation will further lower the cost of phone service. Senator (Rick) Santorum (R-Pa.) and Chairman (Chuck) Grassley (R-Iowa) deserve thanks for their efforts on behalf of consumers. Senator (Max) Baucus' (D-Mont.) amendment to promote broadband deployment and the vote to make the internet tax moratorium permanent are two more bonuses for consumers. We hope this bill is quickly enacted into law."

The U.S. Telecom Association's (USTA) Walter McCormick stated in a release that "We applaud the Senate Finance Committee's action today to repeal the remaining portion of the federal excise tax that customers who subscribe to local telephone service only are still forced to pay. Basic communications should not be taxed as a luxury, and repealing this regressive tax is long overdue. We look forward to seeing the repeal of this outdated tax this year. Additionally, we applaud the Committee's action to amend the Chairman's mark to include provisions to update the rules governing wireless depreciation and broadband expensing, along with making the Internet Tax Moratorium permanent."