Los Angeles Local Telecom Opportunity
2
Who to Call: Jeffery L. Morris Shannon Richards Brian Pluckhan Greg Elias Partner Account Manager Managing Partner Partner (714) 640-8668 (949) 836-3147 (646) 553-3467 (310) 405-0237 [email protected] [email protected] [email protected] [email protected] Los Angeles Telecommunication Tax Refund State and Local Update: Spotlight on the City of Los Angeles 3rd Quarter 2015 Los Angeles settles for $92.5 Million in Telephone Utility Users Tax-Significant Refund Opportunity for Large Los Angeles Telephone Users L.A. City preliminarily approved a $92.5M tax refund settlement for every business and individual who paid telephone utility tax on residential landline service, business landline service and mobile telephone service between October 19, 2005 and March 15, 2008. 1 There will be a 120 day timeframe to participate by either claiming the undocumented safe harbor amount ($50 for mobile, $50 for business line service and $30 for residential landline) or documenting and claiming the actual tax paid during the refund period. Virtually every business will want to elect the actual method in order to obtain the larger tax refund available. Background The California Utility Users Tax (“UUT”) allows cities and counties to impose taxes on certain utilities, including telecommunication services. Los Angeles (“City”) imposed a 10% tax on amounts paid for all interstate, intrastate and international calls, teletypewriter exchange services and cellular telephone services used by every person and business located within its city limits. The definition of L.A. UUT taxable services referenced the Federal Excise Tax (“FET”) definition under Internal Revenue Code Section 4251. The FET applies to only three defined types of telephone services: (1) Teletypewriter exchange services; (2) Local telephone services; and (3) Toll telephone services – defined as plans that bill based on both time and distance and Wide Area Telephone Service (“WATS”). Toll (i.e. long distance) charges were defined by the type of plans AT&T offered in 1965 and the Internal Revenue Code was never updated. Since telephone plans are no longer based on time and distance, the federal courts determined that the long distance plans did not meet the toll definition and should not be taxed. 2 Accordingly, the U.S. Treasury authorized Telephone Excise Tax Refunds (“TETR”) to every business and individual for telecommunication services from March 1st, 2003 to July 30th, 2006. 3 The IRS issued two Notices that outlined the documentation that would be required to obtain the TETR. Taxpayers were given the choice of a 1% of telecommunication expense Estimation Method or the Actual Method. For large taxpayers, the Actual Method provided a much larger benefit than the Estimation Method. In August 2006, the IRS stopped collecting FET on all long distance telephone services and offered refunds to all qualified and eligible taxpayers via their 2006 federal tax return. 4 The City, however, continued to collect the tax from telephone users on services to which FET (and UUT) applied. This was challenged in the Ardon class action lawsuit, concluding an 8 year legal battle with a $92.5M preliminary legal settlement. 5 Much like the federal TETR, taxpayers are given the option of either taking a safe harbor refund amount or documenting the refund and claiming the actual amount of L.A. UUT incurred. Qualifying Charges The federal TETR applied to telecommunication costs incurred on long distance toll services. Since the time and distance definition of toll services did not apply to modern per-minute plans or bundled service plans, all tax incurred on long distance services were refundable. However, local only telecommunications service plans were not included in the TETR. 6 This is also the case for the L.A. UUT which excludes “purely local service”. 7 Local only includes plans that do not include long distance service or a plan that separately states the charges for local service on the customer’s bill. Local only tax plans are not very common, typically because such plans only allow calling within a local radius (e.g. 15 miles). Generally, telephone plans include both local and long distance plans in a bundle. Under the federal TETR Notices, all of the tax 1 Estuardo Ardon v City of Los Angeles LASC Case No. BC363959. 2 See for example, OfficeMax, Inc. v. United States, 428 F.3d 583, 600 [96 AFTR 2d 2005-6824] (6th Cir. 2005); Am. Bankers Ins. Group, Inc. v. United States, 408 F.3d 1328, 1338 [95 AFTR 2d 2005-2291] (11th Cir. 2005). 3 IRS Notice 2006-50 and IRS Notice 2007-11. 4 The Federal refund period was March 1, 2003 to July, 2006 5 Supra FN 3 6 Supra FN 3 7 Supra FN 1
-
Upload
shannon-richards -
Category
Documents
-
view
121 -
download
5
Transcript of Los Angeles Local Telecom Opportunity
Who to Call:
Jeffery L. Morris Shannon Richards Brian Pluckhan Greg Elias Partner Account Manager Managing Partner Partner (714) 640-8668 (949) 836-3147 (646) 553-3467 (310) [email protected] [email protected] [email protected] [email protected]
Los Angeles Telecommunication Tax Refund State and Local Update: Spotlight on the City of Los Angeles 3rd Quarter 2015
Los Angeles settles for $92.5 Million in Telephone Utility Users Tax-Significant Refund Opportunity for Large Los Angeles Telephone Users
L.A. City preliminarily approved a $92.5M tax refund settlement for every business and individual who paid telephoneutility tax on residential landline service, business landline service and mobile telephone service between October 19, 2005and March 15, 2008.1 There will be a 120 day timeframe to participate by either claiming the undocumented safe harboramount ($50 for mobile, $50 for business line service and $30 for residential landline) or documenting and claiming theactual tax paid during the refund period.
Virtually every business will want to elect the actual method in order to obtain the larger tax refund available.
Background
The California Utility Users Tax (“UUT”) allows cities and counties to impose taxes on certain utilities, including telecommunication services. Los Angeles (“City”) imposed a 10% tax on amounts paid for all interstate, intrastate and international calls, teletypewriter exchange services and cellular telephone services used by every person and business located within its city limits.
The definition of L.A. UUT taxable services referenced the Federal Excise Tax (“FET”) definition under Internal Revenue Code Section 4251. The FET applies to only three defined types of telephone services:
(1) Teletypewriter exchange services;(2) Local telephone services; and(3) Toll telephone services – defined as plans that bill based on both time and distance and Wide Area Telephone
Service (“WATS”).
Toll (i.e. long distance) charges were defined by the type of plans AT&T offered in 1965 and the Internal Revenue Code was never updated. Since telephone plans are no longer based on time and distance, the federal courts determined that the long distance plans did not meet the toll definition and should not be taxed.2 Accordingly, the U.S. Treasury authorized Telephone Excise Tax Refunds (“TETR”) to every business and individual for telecommunication services from March 1st, 2003 to July 30th, 2006.3 The IRS issued two Notices that outlined the documentation that would be required to obtain the TETR. Taxpayers were given the choice of a 1% of telecommunication expense Estimation Method or the Actual Method. For large taxpayers, the Actual Method provided a much larger benefit than the Estimation Method.
In August 2006, the IRS stopped collecting FET on all long distance telephone services and offered refunds to all qualified and eligible taxpayers via their 2006 federal tax return.4 The City, however, continued to collect the tax from telephone users on services to which FET (and UUT) applied. This was challenged in the Ardon class action lawsuit, concluding an 8 year legal battle with a $92.5M preliminary legal settlement.5 Much like the federal TETR, taxpayers are given the option of either taking a safe harbor refund amount or documenting the refund and claiming the actual amount of L.A. UUT incurred.
Qualifying Charges
The federal TETR applied to telecommunication costs incurred on long distance toll services. Since the time and distance definition of toll services did not apply to modern per-minute plans or bundled service plans, all tax incurred on long distance services were refundable. However, local only telecommunications service plans were not included in the TETR.6 This is also the case for the L.A. UUT which excludes “purely local service”.7 Local only includes plans that do not include long distance service or a plan that separately states the charges for local service on the customer’s bill. Local only tax plans are not very common, typically because such plans only allow calling within a local radius (e.g. 15 miles). Generally, telephone plans include both local and long distance plans in a bundle. Under the federal TETR Notices, all of the tax
1 Estuardo Ardon v City of Los Angeles LASC Case No. BC363959. 2 See for example, OfficeMax, Inc. v. United States, 428 F.3d 583, 600 [96 AFTR 2d 2005-6824] (6th Cir. 2005); Am. Bankers Ins. Group, Inc. v. United States, 408 F.3d 1328, 1338 [95 AFTR 2d 2005-2291] (11th Cir. 2005). 3 IRS Notice 2006-50 and IRS Notice 2007-11. 4 The Federal refund period was March 1, 2003 to July, 2006 5 Supra FN 3 6 Supra FN 37 Supra FN 1
Who to Call:
Jeffery L. Morris Shannon Richards Brian Pluckhan Greg Elias Partner Account Manager Managing Partner Partner (714) 640-8668 (949) 836-3147 (646) 553-3467 (310) [email protected] [email protected] [email protected] [email protected]
Los Angeles Telecommunication Tax Refund State and Local Update: Spotlight on the City of Los Angeles 3rd Quarter 2015
incurred on bundled service plans were fully refundable. A compromise was reached in the L.A. settlement that a 30% hair-cut would be applied to the landline costs to account for the local portion of bundled plans. Accordingly, 70% of the all landline charges will qualify for the refund without regard to whether long distance only or whether bundled with local services. Mobile telecommunication services do not distinguish between local and long distance services, making 100% of all mobile service plans subject to the L.A. UUT available for refund.
Refund Opportunity
The refunds apply to telecommunication charges for the periods October 19th, 2005 through March 15th, 2008. Telecommunication customers will have two UUT fund options:
(1) Option 1 -- Standard with No Documentation -- $50 for mobile and $50 for business landline service. Forresidential landlines the standard refund is $30.
(2) Option 2 -- Actual with Documentation -- The second option pays 100% of UUT paid on mobile services and70% of UUT paid on residential and business landline telephone services. This option requires submission of UUTdocumentation, but will result in significantly higher refunds. The documentation may include the sum of all UUTshown on the bills or other forms of proof.
Settlement Funds
The $92.5M settlement will be reduced by attorney’s fees, notification costs and administration costs that will reduce the fund by roughly $25M. Within 30 days of the final approval of the settlement, the City will deposit $50M, less any costs of notice and preliminary administration, into a separate account. The City may pursue issuance of a bond or use other funding options if necessary to fund the balance of the settlement (after costs). The City settlement funds will be allocated equally between Option 1 Standard Claims and Option 2 Documented Actual Claims. If either category is not fully utilized, then the unused funds will be reallocated to the other option category if there is a shortfall. For example, if the Option 2 funds are not fully utilized, then the unallocated funds will be reallocated to the Option 1 Standard category.
Due to the simplicity of the Option 1 method, it appears likely that undocumented claims for the Option 1 funds will exceed the allocation of the funds to that category (i.e. 50%). Less than a million Los Angeles mobile or land line claims would exceed funding available under Option 1. If the Option 1 Standard claims do exceed the funding, then the amount of the refunds will be reduced on a pro-rata basis to all of Option 1 Standard refund claimants.
Fortunately, for larger taxpayers, the settlement funds set aside for Option 2 actual documented claims will not be impacted if the Option 1 claims exceed the 50% of the funds set-aside for Option 1 claims. What that should mean is that larger taxpayers who take the effort to document the actual tax, should have a lower likelihood of having their claim reduced by a pro-ration of the actual Option 2 claims made. That is, the Option 2 funding is separately set-aside and will only be reduced by pro-ration if Option 2 documented claims exceed half of the net-settlement proceeds.
Notification
Los Angeles will take various steps to notify individuals and registered businesses about the Settlement, including a Publication Notice no later than 35 days after entry of the order preliminarily approving the Settlement. The claims have to be filed within the 120 day claim period which begins the later of the date of completion of the mailing of the Notice or the date of the Publication Notice.
Time-Line and Documentation Process
With only 120 days to collect the data necessary to document the L.A. UUT, it is important to start the process early (the 120 day period is expected to start in 2016). We’ve represented over 200 Fortune 1000 companies with Federal Telecommunication Excise Tax Refund services generating over $200M in refunds. We have proven telecommunication documentation methods built around your electronic and physical documentation. Our team includes former telecommunications professionals who work directly with the telecommunications providers (e.g. Verizon, Sprint and AT&T) to collect and document telecommunications tax expense by accessing data through the vendor’s electronic portals. In addition, our federal TETR sampling methods were approved that made record collection and the related time required to document the TETR reasonable.
Please contact Jeffery Morris (CPA, MBT, CMI) or any other professional below to discuss documentation options for your Los Angeles Telecommunication tax refund at 714-640-8668.
