Rev. Rul. 56-248

Advice has been requested concerning the applicability of the tax on local telephone service, imposed by section 4251 of the Internal Revenue Code of 1954, to assessments or charges against members or subscribers of a mutual or cooperative telephone company or association for switching services or facilities, or for the repair or replacement of instruments, poles, wires, equipment, etc., incidental to ordinary maintenance.

Semiannually, a mutual or cooperative telephone company makes assessments against its members or subscribers for maintenance and repair of the members' telephone instruments and lines. The cooperative does not own a switchboard. Consequently, all switching is done by a commercial communication carrier. Charges for this latter service, together with the applicable tax, are billed directly to the subscribers or members on a monthly rate basis by the commercial carrier. In another situation, the mutual or cooperative telephone company collects assessments from its members which include a proportionate amount which the cooperative pays to a commercial communication carrier for switching service. The difference between the amount assessed against the members and the amount paid to the carrier is retained by the cooperative for maintenance and repair purposes. In a third situation, as a result of recent storms, a mutual telephone company suffered severe damage to its lines. It was necessary to purchase poles, wire, and other miscellaneous equipment, to repair the damage. To cover this cost of repairs, an assessment was made by the company against its subscribers.

Section 4251 of the Internal Revenue Code of 1954 provides that a tax shall be imposed on the amount paid for local telephone service and that the tax shall be paid by the person paying for the service or facilities.

Section 4252(a) of the Code provides that the term `local telephone service' means any telephone service not taxable as long distance telephone service; leased wire, teletypewriter or talking circuit special service; or wire and equipment service. Amounts paid for the installation of instruments, wires, poles, switchboards, apparatus, and equipment, shall not be considered amounts paid for services. It is the position of the Internal Revenue Service that this latter sentence applies specifically to amounts paid for initial installations, installations in expansion of existing facilities, installations necessary to provide an entirely different service from that being provided, or installations necessary to the conversion of a telephone system.

Section 4291 of the Code provides that every person, receiving any payment for service or facilities on which a tax is imposed upon the payor thereof, shall collect the tax from the person making such payment.

Section 130.41 of Regulations 42, which is made applicable to the Internal Revenue Code of 1954 by Treasury Decision 6091, C.B. 1954-2, 47, provides that the `amount paid' means the amount collected for the service whether the charge is made on a monthly or other periodic basis, or is based on the number of calls made, or is in the form of an assessment as in the case of a mutual telephone system.

Recurring damage to and the progressive deterioration of the plant of a telephone system are normally accepted factors in the operation and maintenance of such system. The repair and replacement of components such as lines, poles, etc., as a result of such deterioration or as a result of storms, are incidental to ordinary maintenance. This would be true regardless of whether it is the system of a commercial carrier or a mutual or cooperative association.

Commercial communications carriers, in fixing rates, provide reserves for the repair and replacement of plant components such as instruments, poles, wires, equipment, etc. Mutual or cooperative companies follow the same practice, or make proportionate assessments to cover the repair and replacement of components as the need arises.

Accordingly, it is held that assessments or charges paid by members or subscribers of a mutual or cooperative telephone company, association, or system, for the repair or replacement of instruments, poles, wires, equipment, etc., incidental to ordinary maintenance, are subject to the tax for local telephone service under section 4251 of the Code. The tax also applies to assessments or charges paid by such members or subscribers to cover charges for switching services or facilities, whether fixed on a pro rata or other basis. Such tax should be collected by the mutual or cooperative company, or by the entity furnishing the switching services or facilities, whichever is the agency receiving direct payment from the individual members or subscribers.