CCA 1046010: separately stated 911 fees are not subject to the communications excise tax

Plain-English summary

Chief Counsel advice concluded that mandatory 911 and E911 fees separately stated on communications bills are not subject to the federal communications excise tax. Section 4254(c) excludes a separately stated state or local tax from the tax base, and the advice treated the fees as taxes rather than regulatory fees based on how they were imposed and their broad public-safety purpose. The fees were imposed on all customers and funded emergency responder services that benefit the community, even when a particular customer did not use those services. The advice applied the same reasoning to an E911 fee, regardless of whether the communications service was provided over a landline, wireless network, or another method. The memorandum was issued as Chief Counsel advice and states that it may not be used or cited as precedent.

Ruling snapshot

• Question: Are separately stated 911 and E911 fees subject to the communications services tax?
• Outcome: Advice given
• Key authorities: IRC §§ 4251(a), 4251(b)(1), 4254(c), and 4291; Notice 2007-11, section 4(a)

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201046010
       Release Date: 11/19/2010
       CC:PSI:B07:TCortright
       PRENO-126165-10

UILC: 4251.00-00

date: September 21, 2010

 to:   Holly L. McCann
       (Chief, Excise Tax Program)

from: Frank Boland
Chief, Branch 7
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

subject: Communications Excise Tax; 911 Fees

       This memorandum responds to your request for assistance dated June 18, 2010. This
       advice may not be used or cited as precedent.


       ISSUE

       Whether 911 Fees are subject to the tax on communications services under § 4251(a)
       of the Internal Revenue Code (the Code).

       CONCLUSION

       911 Fees are not subject to the tax on communications services under § 4251(a) of the
       Code.

       FACTS

       911 Fees are mandatory charges imposed under state or local law to finance
       emergency responder services, such as ambulance, police, and fire in a particular
       jurisdiction. 911 Fees also include fees for “E911” or “enhanced” 911 service that uses
       additional software to allow the 911 operator to specifically locate someone who is using
       a cell or mobile phone to contact the emergency service provider. 911 Fees are
       separately stated on bills rendered to persons paying for communications services
       (Customer). The communications services provider (Provider) generally collects the

PRENO-126165-10 2

911 Fees from the Customer and remits them to the appropriate government authority.
However, a few jurisdictions impose the 911 Fee on the Provider and allow it to be
passed on to the Customer. On the customer’s bill, the Provider may describe the 911
Fee as either a charge, a fee, or a tax. The 911 Fee is generally based on either an
amount per telephone access line or a percentage of revenue and is paid by all
Customers.

LAW AND ANALYSIS

Section 4251(a) imposes a tax on “amounts paid” for communications services as
defined in § 4251(b)(1). Section 4251(a)(2) provides that the tax is paid by the
Customer and § 4291 provides that the tax is collected by the Provider.

For purposes of calculating the “amount paid,” however, § 4254(c) provides that the tax
base does not include the amount of any state or local tax imposed on the furnishing or
sale of the communications services, but only if the amount of the tax is separately
stated on the bill. Thus, if the 911 Fee is a state or local tax within the meaning of
§ 4254(c) (excluded tax), and is separately stated on the bill, it is not subject to tax.
The facts provide that the 911 Fee is separately stated. Therefore, the remaining
inquiry is whether the 911 Fee may be properly characterized as a state or local tax.

The IRS does not have any published guidance discussing whether a charge that is
described as a fee on a bill rendered for communications services may be characterized
as an excluded tax for purposes of § 4254(c). Rev. Rul. 77-472, 1977-2 C.B. 379, as
modified by Rev. Rul. 78-154, 1978-1 C.B. 361, holds that three categories of sales
taxes are not subject to the § 4251 tax because they are excluded taxes.1
Nevertheless, because the 911 Fee has not been described as a sales tax, we assume
that it does not fall under the categories of taxes identified in Rev. Rul. 77-472.

Thus, to determine whether the 911 Fee is an excluded tax, we must consider whether
it is a “fee” or a “tax” based on the facts and circumstances. There is case law
considering whether a charge is a fee or a tax. For example, Valero Terrestrial
Corporation v. Caffrey, 205 F.3d 130, (4th Cir. 2000), considers whether a solid waste
assessment charge, imposed by a state on the person disposing of solid wastes at
landfills, is a fee or a tax. The solid waste assessment charge was described as a “fee”
in the state statutes. Nevertheless, instead of relying on the name given to the charge

1
The three categories are:
Category 1. These sales taxes are imposed on the Providers but passed on to the Customers.
Category 2. The Providers are required by statutes to add these taxes to the sale price or charge for the
service, and the statutes also provide that such taxes become a part of the amounts charged for
telephone service.
Category 3. These sales taxes are imposed on the Customers and the statutes do not provide that the
taxes shall become part of the sales price or charge for the service. The Providers are required to collect
the tax from the Customers.
PRENO-126165-10 3

in the relevant statute, the Valero court considered whether the charge was for revenue
raising purposes, and thus a tax, or for regulatory or punitive purposes, and thus a fee.

To answer this question, the Valero court applied a three part test: (1) what entity
imposes the charge; (2) what population is subject to the charge; and (3) what purposes
are served by the use of the monies obtained by the charge. Valero at 134. Applying
the three-part test, the Valero court concluded that the solid waste assessment charge
was a tax because it was: (1) imposed by the legislature, not an administrative agency;
(2) paid by citizens and businesses who pay a collection service fee to have their waste
picked up; and (3) designed for the primary purpose of environmental safety, which
benefits a large segment of the population of the state. Id.

In reaching this conclusion, the Valero court described the “classic tax” as imposed by
the legislature on a large segment of society and spent to benefit the community at
large and the “classic fee” as imposed by an administrative agency on only those
persons, or entities, subject to its regulation for regulatory purposes, or to raise money
placed in a special fund to defray the agency’s regulation-related expenses. Valero at

134. However, the Valero court recognized that the most important factor is the
     purpose behind the statute, or regulation, which imposes the charge. Id. For examples
     applying the three-part test, the Valero court cited American Landfill, Inc. v.
     Stark/Tuscarawas/Wayne Joint Solid Waste Management District, 166 F.3d 835 (6th Cir.
     1999) (American Landfill) (holding the charge at issue was a tax, even though it was
     levied by an administrative agency instead of the state legislature, and even though one
     purpose of the fee was to defray administrative costs, because it served a broad public
     purpose of benefiting the entire community); San Juan Cellular Telephone Co. v. Public
     Service Comm’n, 967 F.2d 683, 685 (1st Cir. 1992) (holding the charge at issue was a
     fee, not a tax, because it was assessed by a regulatory agency, placed in a special
     fund, and used to defray the regulatory agency’s costs, but did not provide a general
     benefit to the public); and Bidart Bros. v. California Apple Comm’n, 73 F.3d 925, 931 (9th
     Cir. 1996) (holding a charge at issue was a fee, not a tax, because it was not assessed
     by the legislature, paid by a small segment of the population to promote apple-growing
     in the state, and provided only an incidental benefit to the general public).

Applying the Valero three-part test to the facts at issue, the 911 Fee is more like a tax
than like a fee because it is imposed on all Customers and provides a benefit to the
entire community, regardless of which governmental entity imposes of the fee. Cf.
American Landfill, 166 F.3d 835, supra. Access to emergency responder services
(such as ambulance, police, and fire), like the environmental safety provided in Valero,
benefits a large segment of the population. Further, the 911 Fee is paid by all
Customers, regardless of whether the Customer actually uses the service. Thus, the
911 Fee meets the requirements of § 4254(c) and is not subject to the tax on
communications services under § 4251(a) of the Code.

Section 4(a) of Notice 2007-11 provides that the method for sending or receiving a call,
such as on a landline telephone, wireless (cellular) telephone, or some other method,
PRENO-126165-10 4

does not affect whether a service is local-only or bundled. Similarly, the method for
sending or receiving a call does not affect whether a fee is treated as a tax for purposes
of section 4254(c). Thus, in addition to the 911 Fee, a fee separately stated on the bill
as “E911” is not subject to the tax on communications services under § 4251(a) of the
Code.

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