FLAT-RATE MONTHLY CHARGES PAID BY LONG-DISTANCE CARRIERS TO LOCAL TELEPHONE SYSTEMS ARE SUBJECT TO COMMUNICATIONS EXCISE TAX.

Rev. Rul. 87-108

ISSUE

Are "subscriber line charges" subject to tax under section 4251(a) of the Internal Revenue Code as amounts paid for "local" telephone service or for "toll" telephone service as described in section 4252 of the Code?

FACTS

X is a local telephone company providing local telephone service in several metropolitan areas. It also provides intrastate and (to a limited degree) interstate toll telecommunications, exchange access, and directory services.

Subscriber line charges ("SLC") are flat-rate monthly charges authorized by the Federal Communications Commission ("FCC") and imposed by X as well as by other local telephone companies on their subscribers. The SLC compensates these local telephone companies for the availability of their local exchange facilities for interstate use by long-distance carriers and subscribers. The local lines and related equipment connecting each subscriber's premises with X's central switching office (the "local loop") are used in making any call, that is, local, long-distance, intrastate, or interstate. The SLC thus recovers a portion of the fixed (not traffic sensitive) costs attributable to the local loop that is allocated to the FCC's interstate jurisdiction. Costs of the local loop recovered through the SLC are not traffic sensitive since the local telephone company incurs these costs regardless of whether a subscriber actually makes any calls and regardless of whether any calls actually made are local or long-distance.

Although the local exchange facilities are used by long-distance carriers and subscribers, payment of the SLC does not entitle the subscriber to make a long-distance telephone call and does not entitle the subscriber to any special facility or service in connection with making long-distance calls. Under applicable tariffs, failure to pay the SLC can result in suspension or termination of all telephone service.

LAW AND ANALYSIS

Section 4251(a)(1) of the Code imposes a tax on amounts paid for communications services, including local telephone service and toll telephone service. Section 4251(a)(2) provides that the tax shall be paid by the person paying for the services, and section 4291 provides that generally the tax shall be collected by the person receiving payment for the service.

Section 4252(a) of the Code provides that the term "local telephone service" means (1) the access to a local telephone system, and the privilege of telephonic qualify communication with substantially all persons having telephone or radio telephone stations constituting a part of such local telephone system, and (2) any facility or service provided in connection with such service. Section 4252(a) further provides that the term "local telephone service" does not include any service that is a "toll telephone service" as defined in section 4252(b).

Section 4252(b) of the Code defines the term "toll telephone service" as meaning --

(1) a telephonic quality communication for which (A) there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication and (B) the charge is paid within the United States, and

(2) a service which entitles the subscriber, upon payment of a periodic charge (determined as a flat amount or upon the basis of total elapsed transmission time), to the privilege of an unlimited number of telephonic communications to or from all or a substantial portion of the persons having telephone or radio telephone stations in a specified area which is outside the local telephone system area in which the station provided with this service is located.

The essence of the definition of local telephone service in section 4252(a) of the Code is access to a local telephone system. The SLC, even though separately stated, is a charge that represents some of X's basic costs of providing its local exchange facilities that X passes on to its subscribers. Although the SLC recovers a portion of the fixed costs that the FCC allocates to its interstate jurisdiction, the SLC is a charge that must be paid in order to obtain access to the local telephone system for all purposes, including the making of local calls. Hence, the SLC comes within the scope of the definition of local telephone service in section 4252(a) of the Code.

The situation in Revenue Ruling 79-404, 1979-2 C.B. 382, is distinguishable from the present situation. In Rev. Rul. 79-404, a company offered a service that permitted communication between ships at sea or other offshore facilities and telephone subscribers in the United States. Calls from a ship's radio station were relayed through an earth satellite to a landline station of the company in the United States that was connection into the regular long-distance telephone system for completion of the call. Rev. Rul. 79-404 holds that the satellite service is toll telephone service because it provides access to the long-distance telephone system in the United States.

Unlike the situation in Rev. Rul. 79-404, the SLC does not give telephone subscribers the right to make long-distance calls without further charge. Moreover, unlike the situation in Rev. Rul. 79-404, the SLC must be paid to obtain access to the local telephone system for purely local calls. The satellite service in Rev. Rul. 79-404 provided direct access into the long-distance telephone system in the United States without the call passing through any local exchange, and charges were imposed for specific long distance calls. Payment of the SLC, however, entitles the customer to obtain access to the long- distance system only through use of the local system's exchange facilities and is not for a specific long distance call.

HOLDING

Amounts paid to X for subscriber line charges are subject to the tax imposed by section 4251(a) of the Code as amounts paid for local telephone service.

DRAFTING INFORMATION

The principal author of this revenue ruling is Theodore N. Margopulos of the Individual Tax Division. For further information regarding this revenue ruling contact Mr. Margopulos on (202) 566- 3582 (not a toll-free call).