[Infowarrior] - IRS considers cellphone tax

[Richard Forno]

Tax Man's Target: The Mobile Phone
By MARTIN VAUGHAN and AMOL SHARMA

http://online.wsj.com/article/SB124473141538306335.html

The use of company-issued mobile phones could trigger new federal  
income taxes on millions of Americans as a "fringe benefit."

The Internal Revenue Service proposed 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.

The IRS, in a notice issued this week, said employees could avoid tax  
liability if they showed proof they used personal cellphones for  
nonbusiness calls during work hours. The agency also could decide on a  
set number of phone minutes as "minimal personal use" that would be  
untaxed.

In a third option proposed by the IRS, employers could use a  
statistical sampling to determine what portion of workers' cellphone  
use is personal and how much is work-related. Workers would be taxed  
on the difference.

The IRS move, which is spurring efforts by the wireless industry and  
others to kill the idea, would mark a stricter enforcement of an  
existing rule that classifies employer-provided cellphones as a  
taxable benefit, rather than a 24-hour-a-day work tool.

Under a 1989 law, workers who use company-provided mobile phones for  
personal calls are supposed to count the value of those calls as  
income and pay federal income taxes accordingly.

But businesses and workers have long ignored the requirement,  
prompting the IRS to consider steps the agency said would make it  
easier for businesses and workers to comply.

Some firms said they have ignored the tax because of the paperwork  
required to account for personal and work calls. U.S. companies allow  
incidental personal use for about 40% of employees with cellphones,  
according to a survey by In-Stat, a market research firm.

"The idea that you should keep a log saying, 'I made a call saying I  
will be late for dinner again,' that's a totally cumbersome and  
burdensome requirement that most employers and employees are not going  
to comply with," said Jot Carpenter, vice president of government  
affairs for CTIA-The Wireless Association, a trade group of cellphone- 
equipment manufacturers and service providers.

"It would be a nightmare for corporations to try to figure out what  
are work calls and what are personal calls," said Gerry Coady, chief  
information officer at Frontier Airlines Holdings Inc., who manages  
about 100 BlackBerrys for workers at the Denver-based airline.

Some employees aren't so happy about the idea, either.

"Your job gives you a phone to be in 24-hour contact. It's only  
natural that you're going to use it personally," said Anthony  
Cecchini, an analyst at investment bank Oppenheimer & Co. "If I need  
to get a personal email or call, it shouldn't be a big deal."
[talk time]

Individual taxes on employer-issued cellphones and smart phones would  
depend on the annual cost of the wireless service, as well as an  
employee's tax bracket.

The IRS didn't respond to requests for interviews on the tax. The  
agency will collect comment on its proposal through September before  
issuing a decision.

The mobile-phone industry has a big stake in the outcome. U.S.  
businesses will spend an estimated $59 billion on cellular voice  
service for employees in 2009, according to research by In-Stat. The  
market has been a big revenue source for wireless carriers, though it  
has taken a hit in the recession.

Cellphone companies worry, for example, that client firms wishing to  
avoid trouble with the IRS will cancel wireless contracts and instead  
reimburse employees for a portion of their personal cellphone.

David Lemelin, a telecom analyst, said enforcement of the tax could  
discourage sales employees from tending to customers after hours.  
"Personal use of cellular in these instances has increasingly become  
considered a cost of doing business," he said.

Wireless companies also argue the IRS rule is outdated. Rates have  
declined so dramatically in the past decade -- with night and weekend  
calls free under many plans -- that it makes little sense for the IRS  
to assess employee benefits by nickels and dimes.

"This is a regulation from a bygone time, dating back to the infancy  
of the cellphone business, and it is in desperate need of updating,"  
said Howard Woolley, a senior vice president with Verizon Wireless, a  
venture of Verizon Communications Inc. and Vodafone Group PLC.

Such companies as Verizon and Sprint Nextel Corp. are backing  
congressional proposals to repeal the tax. They are supported by local  
government, education and farm groups.

"This is an outdated regulation that was established at the infancy of  
our industry," Sprint spokesman John Taylor said. "We don't think it's  
really relevant in today's economy."

Over the past couple of years, the IRS has begun challenging employers  
over the accounting of workers' cellphone expenses during tax audits,  
said Mr. Carpenter, the trade-group spokesman.

The 1989 law requires that company-provided wireless services be  
included in a worker's gross income -- unless the employee keeps  
detailed records showing the device was used only for work.

Following one IRS audit, the University of California system owed  
additional payroll taxes because it couldn't substantiate that  
employees' cellphone use was solely work-related.

John Harper, the mayor of Rowlett, Texas, said his town wrestled with  
whether to declare as worker income a portion of the 100 cellphones  
provided to city employees, but decided it was too much work.

"I'm all for collecting taxes for the government," he said, "but let's  
not end up costing us more to do it than the tax you ultimately  
collect."
—Ben Worthen contributed to this article.

Write to Martin Vaughan at martin.vaughan at dowjones.com and Amol Sharma  
at amol.sharma at wsj.com