States Target Cell Phones for Stealth, Burdensome Taxes

In recent years, cell phones have eclipsed landlines, in a big way. States have noticed and are busily taxing mobile with average consumers paying 16% in taxes and fees. According to the Tax Foundation, Nebraska taxpayers face the highest cell phone tax rates:

The number of U.S. cell phone subscribers has grown significantly in recent years, from 55 million in 1997 to 292 million in 2010.[1] That period has also seen a fall in landline telephones (there are now 50 million), and 2007 marked the first year that Americans spent more on cell phones than on landlines.[2] This trend toward cell phones has not gone unnoticed by state and local governments, which have targeted wireless services for higher taxes.

The average U.S. wireless consumer pays taxes and fees of 16.26 percent, of which state-local charges average 11.21 percent, according to a newly released study that identifies and calculates wireless taxes and fees.[3] Twenty-three states have average state-local wireless taxes and fees in excess of 10 percent, and taking into account the infamous federal telephone excise tax (dating to the Spanish-American War and partly repealed in 2006), some cell phone subscribers pay more than 20 percent in taxes.

Cell Taxes and Fees Are Often Hidden, Enabling Excessive Rates

States favor the taxes because they can raise revenue in a relatively hidden way. Texas even sued Sprint because the company listed a state tax as a line-item in its bill, rather than hiding it from customers.[4] Utah uses a wireless fee to fund its poison control centers-a government service that benefits the general public regardless of cell phone ownership or usage. Six states (Kentucky, Indiana, North Dakota, Pennsylvania, Rhode Island, and South Dakota) impose both sales taxes on wireless customers and gross receipts taxes on wireless service providers, both of which are ultimately borne by customers. Universal Service Fund (USF) charges are modest in most states but particularly excessive in Nebraska and Kansas, where they exceed 4 percent of the wireless bill.

Because each state and many localities can impose cell phone taxes, and because they can be imposed as a percentage or as a flat rate, there are numerous taxes which vary widely. Researchers have found it difficult to create a database of cell phone taxes, and cell phone companies have encountered similar problems in calculating the taxes. This can be a serious problem for cell phone businesses, because they collect the taxes from subscribers and can be held legally accountable for any mistakes-both over-collection and under-collection.

Continue reading at TaxFoundation.org…

Wireless Group Wants Repeal of Cell Phone Tax Law

Wireless association CTIA is the latest group to support new legislation attempting to repeal the 20 year old cell phone tax. It is supposed to be levied on the personal use of employer provided cell phones, but there is a lot of confusion about how these taxes should be calculated. As such, several groups have spoken out against the law, including the IRS Commissioner.

"The alternatives [to legislation] proposed by the IRS are either incomplete or inadequate solutions that would continue to subject employees and employers to onerous call log requirements," CTIA President Steve Largent said.

CTIA counts among its members the country's largest wireless companies – Verizon Wireless, AT&T Inc., Sprint Nextel Corp., and T-Mobile USA. Verizon Wireless is a joint venture of Verizon Communications Inc. and Vodafone PLC. T-Mobile is a unit of Deutsche Telekom.

The IRS is collecting comments on the cell phone-tax law. In June, IRS Commissioner Doug Shulman asked Congress to repeal it, calling it "obsolete."

Mr. Shulman's statement signaled a quick turnabout for the IRS, which had earlier proposed that employers assign 25% of an employee's annual phone expenses as a taxable benefit. Under that scenario, a worker in the 28% tax bracket, whose wireless device costs the company $1,500 a year, could see $105 in additional federal income tax.

Continued at the Wall Street Journal…

Apple Announces New iPhone; IRS to Let Your Employer Give You One Tax-Free

Yesterday after I blogged about financial issues early adopters of the new iPhone will encounter, I came across this entry from The Tax Professor Blog on another tax related iPhone issue. Check out the article below.

Apple yesterday announced its new iPhone 3G S. Also yesterday, the IRS announced that it was considering new rules that would allow your employer to give you one on a tax-free basis.

I previously blogged the draconian rule of § 280F that employers must include in an employee's W-2 income the value of employer-provided cell phones unless the employee satisfies onerous substantiation rules. Over the past few years, the IRS has increasingly raised this issue on audit, with the result that many employers, including universities, responded by no longer providing cell phones to employees (including professors).

In Notice 2009-46, the IRS requested comments on three alternative methods to simplify the substantiation rules for employer-provided cell phones:

Minimal Personal Use Method

• The entire amount of an employee’s use of an employer-provided cell phone would be deemed to be for business purposes if the employee can account to his or her employer with sufficient records to establish that the employee maintains and uses a personal (non-employer-provided) cell phone for personal purposes during the employee’s work hours.

• Alternatively, the second proposal would define a specified amount or type of “minimal” personal use that would be disregarded in determining the amount of personal use of an employer-provided cell phone. For example, “minimal” could be defined by reference to a particular number of minutes of use or for certain personal purposes.

Safe Harbor Substantiation Method

The IRS and Treasury Department are considering a safe harbor method under which an employer would treat a certain percentage of each employee’s use of an employer-provided cell phone as business usage. The remaining percentage of use would be deemed to be for personal purposes. For this proposal, the IRS and Treasury Department propose a business use percentage of 75 percent.

Statistical Sampling Method

The IRS and Treasury Department are considering a proposal that would allow employers to use statistical sampling techniques to measure an employee’s personal use of an employer-provided cell phone. In general, an employer could use an approved statistical sampling methodology similar to that provided in Rev. Proc. 2004–29, 2004–1 C.B. 918, to determine the percentage of personal use of employer-provided cell phones. The employer would multiply that percentage times the value of each employee’s total usage to determine the value of personal usage. The remaining portion of the employee’s usage would be deemed to be for business purposes.

Senators Introduce Bill Banning Wireless Taxes

From Fierce Wireless.com:

Two senators have introduced legislation that would put a five-year moratorium on wireless and cell phone tax increases.

The Mobile Wireless Tax Fairness Act of 2009, introduced by Sen. Ron Wyden (D-Ore.) and Sen. Olympia Snowe (R-Me.), would prohibit federal, state and local tax increases on wireless services and infrastructure. The bill has drawn support from Sen. John McCain (R-Ariz.), who along with other supporters of the bill, contends that it will help consumers and that wireless companies have been hit unfairly with taxes.

The average tax rate for goods and services is 7.07 percent, but federal, state and local taxes make up 15.9 percent of the average wireless bill, according to figures from Phoenix Business Journal. Between January 2003 and January 2007, the effective tax rate on wireless services increased four times faster than the rate for other taxable goods.

"It is very troubling that wireless consumers have been taxed four times more than other taxable goods and services over an almost four-year period," CTIA President Steve Largent said in a statement. "The Wyden-Snowe bill will protect consumers from new discriminatory taxes and fees while preserving existing revenue for states and localities."

IRS Taxes Personal Calls On Work Cell Phones

Almost everyone has a cell phone these days. But if you're among the people who make personal calls on a company mobile phone, the Internal Revenue Service may want to talk with you.

As previously mentioned – and quoted here – in the LA Times, the IRS puts cell phones in the listed property category — right along with company-issued motor vehicles and use of the corporate plane. And they consider little perks like cell phone calls from your work BlackBerry to be taxable as an extension of your compensation package. So either you or your employer is supposed to pay up.

The law for taxing cell phones was written 20 years ago, when the wireless industry was in its infancy and mobile phones were about the size and weight of a brick. Back in the day, if you wanted one of those big Motorolas with the 2-foot antenna (visualize Michael Douglas on the beach in the 1987 movie Wall Street), you — or more likely, your company — would have shelled out about $4,000. So of course, they were reserved for top-level executives.

Fast-forward 20 years, and now everybody has cell phones. They're smaller, lighter and faster. Instead of just calling on them, you can watch the news, listen to music and scan your e-mail. The CEO, the IT guy and the facilities manager each have one. Doctors and reporters would be lost without them. And how else would that real estate agent know whether you've blown her off or you're stuck — again — on the freeway en route to meeting her?

IRS Cellphone Rule Called Outdated

From the LATimes.com:

“Small, cheap cellphones have become ubiquitous in the workplace. But federal tax rules governing them date to the days of big handsets, big bills and big hair.

Major employers, including the University of California system, have been hit with bills for hundreds of thousands of dollars in back taxes for violating the anachronistic laws. If the rules aren't changed, many employers say they will stop handing out cellphones to their workers.

The problem stems from the tax code's inability to keep up with technological advances.

When the makers of the 1987 film ‘Wall Street’ wanted to convey corporate raider Gordon Gekko's power and success, they gave him one of the era's most exotic executive perks: a cellphone.

The Motorola DynaTAC 8000X that actor Michael Douglas carried as he strolled along the beach was roughly the size of a brick and cost $3,995 when introduced three years earlier. A call during peak times cost upward of 50 cents a minute.

Times and technology have changed. Federal tax rules have not. The Internal Revenue Service still considers cellphones to be a pricey fringe benefit and has started enforcing regulations beginning in 1989. That's when Congress decided that mobile phones should be treated like company cars and other executive perks: Their personal use qualifies as extra compensation.

Continued…