20020118_ws.doc

MEMORANDUM

TO: COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
CC: RANDY LOBB
TERRI CARLOCK
JOE CUSICK
DON HOWELL FROM:
DATE:
JANUARY 18, 2002 RE: OVERCHARGE BY VERIZON IN ITS EXCISE TAX CALCULATION

Staff learned recently that Verizon over-collected approximately $93,000 from customers by including the 911 fee in its federal excise tax calculation. Because Verizon characterized the 911 surcharge as a service fee rather than a tax, the Company collected excise tax on the surcharge, just like it does on other customer service rates. Verizon accordingly received $0.03 per line per month it should not have collected as part of the excise tax. This amounts to approximately $0.83 per access line, collected during a 27-month period on 112,500 lines, resulting in a total over-collection of approximately $92,813.
The Company did not benefit by its improper tax calculation, however, because the money was paid to the U.S. Treasury Department. Verizon apparently included the 911 fee in its tax calculation pursuant to an IRS Private Letter Ruling dated August 2, 1988, provided at the request of Bell Atlantic. The IRS Letter states that a 911 fee “is in fact a permissible rate increase that is passed onto [the company’s] subscribers”, and concludes “that amounts paid by [the company’s] subscribers for its 911 service are includable in the tax base when computing the federal excise tax.” The IRS letter is now more than 13 years old, raising a question as to its current viability, and also contains the following limitation: “This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the [Tax] Code provides that it cannot be used or cited as precedent.” In addition, an Idaho Attorney General’s Opinion concluded the 911 surcharge is a tax rather than a service rate. Nonetheless, given this record, it is possible the IRS will agree with Verizon’s inclusion of the surcharge in its excise tax calculation.
Verizon has removed the 911 surcharge in the calculation of its federal excise tax obligation. Because Verizon no longer collects tax on the 911 surcharge, and the amount recovered by Verizon did not benefit the Company but was merely forwarded to the IRS, Staff has no plans to request additional relief from Verizon. Would the Commission like Staff to pursue the matter further, perhaps by seeking a refund of the amount collected?

vld/M:Verizon_ws

MEMORANDUM