Lead Opinion
Oрinion for the court filed by Circuit Judge LINN. Opinion concurring in part and dissenting in part filed by Circuit Judge DYK.
The government appeals from a final judgment of the United States Court of Federal Claims following an order granting USA Choice Internet Services, LLC (“USA Choice”) a refund of communications excise taxes paid from January 1999 through April 2002 on various communication services purchased from local telephone companies. USA Choice Internet Serv., LLC v. United States,
I. BACKGROUND
USA Choice is an Internet Service Provider (ISP) that provides “dial-up” Internet access to residential and business customers in Pennsylvania. See generally Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs.,
During the relevant time period, customers would connect to USA Choice’s servers by using computer modems to dial a local telephone number or “access number” associated with one of these POPs. One of the network server modems would answer this incoming call and establish a connection between the computers; this connection required telephonic quality to successfully facilitate communication. USA Choice,
Dial-up customers connect to the local telephone company, known as a local exchange carrier (LEC), through a standard analog phone line known as “POTS,” an acronym for “Plain Old Telephone Service.” By comparison, USA Choice’s POPs connected to the LECs via dedicated circuits consisting of a group of digital communications channels purchased by USA Choice from telephone companies including ALLTEL, Sprint, Verizon, and Verizon’s predecessor entities GTE and Bell Atlantic. Id. at 781. The majority of these digital lines were generally known as Primary Rate Interface (PRI or PRA) circuits. These lines could carry 23 simultaneous communications, which could all be associated with a single local telephone number. Id. at 784. Other services purchased by USA Choice included Digital Channel Services (DCS) аnd Basic Rate Interface (BRI or BRA) circuits. Id. at 786-87.
At issue in this case are excise taxes levied on these lines connecting USA Choice’s POPs to the local telephone companies. Id. at 782-83. Section 4251(a)(1) of the Internal Revenue Code imposes a three percent excise tax on “communications services,” which include “local telephone service.” 26 U.S.C. § 4251(b)(1)(A). Section 4252(a) defines “local telephone service” as, inter alia, “access to a local telephone system, and the privilege of telephonic quality communication with substantially all persons having telephone or radio telephone stations constituting a part of such local telephone system.” § 4252(a)(1). “Local telephone service” excludes “toll telephone service” and “private communication service,” which are defined in subsections (b) and (d) respectively. See § 4252(a).
USA Choice filed a refund request with the Internal Revenue Service (IRS) on May 24, 2002. After the IRS disallowеd this request, USA Choice filed suit in the Court of Federal Claims on May 5, 2005. USA Choice argued that the services at issue fall outside the scope of § 4251(a)(1) because incoming-only lines do not meet the definition of “local telephone service” in § 4252(a)(1), and, alternatively, because they meet the “private communication services” exclusion from taxation as defined in § 4252(d). It also presented argument pertaining to excise taxes on long distance service not relevant to this appeal. The Court of Federal Claims held a trial in July 2006 and also considered post-trial briefing and argument. The Court of Federal Claims- ultimately issued an opinion granting USA Choice thé majority of the refund it desired, holding that USA Choice’s incoming-only lines were not “local telephone service” under § 4252(a)(1) and that nearly all of the remaining contested lines met the “private communication service” exception of § 4252(d). USA Choice,
II. DISCUSSION
A. Standard of Review
“In reviewing a final decision of the Court of Federal Claims after a trial, we review legal conclusions de novo, and we review factual findings under the clearly erroneous standard. A finding is ‘clearly erroneous’ when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” Am. Pelagic Fishing Co. v. United States,
B. Analysis
1. Local Telephone Service
The Court of Federal Claims held that those lines that were incoming-only— i.e., lines that did not permit outbound calls — did not meet the definition of local telephone service and thus were taxed improperly. USA Choice,
On appeal, the government argues that the statutory text does not preclude treatment of incoming-only lines as local telephone service and that the self-imposed restrictions placed by USA Choice on communications over these lines were irrele-
vant to its “privilege” to use the underlying service, which is subject to the excise tax. The government also urges us to defer to various IRS Revenue Rulings under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
a. Access to a Local Telephone System
The statute provides:
(a) Local telephone service. — For purposes of this subchapter, the term “local telephone service” means—
(1) the access to a local telephone system, and the privilege of telephonic quality 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 a service described in paragraph (1).
The term “local telephone service” does not include any service which is a “toll telephone service” or a “private communication service” as defined in subsections (b) and (d).
26 U.S.C. § 4252(a). “In construing a statute, we begin with its literal text, giving it its plain meaning.” Hawkins v. United States,
On appeal, USA Choice argues that this prong presents an alternative ground for affirmance. It argues, as it did to the Court of Federal Claims, that “access” connotes the right to enter, and that because USA Choice can only passively receive incoming calls, it cannot “affirmatively enter” the local telephone system. USA Choice also relies on our observation in Trans-Lux that a particular device providing access to the Telex network allowed subscribers to “direct-dial any other network subscriber.”
We agree that general dictionary definitions of “access” provide little insight. Definitions contemporaneous with the introduction of this statutory language include restrictive language implying a right to enter as well as broad language merely requiring the ability to make use of something. Webster’s Third New International Dictionary 11 (1961) (defining “access” as, inter alia,' “permission, liberty, or ability to enter, approach, communicate with, or pass to and from,” “freedom or ability to obtain or make use of,” and “a way by which a thing or place may be approached or reached”). Our decision in Trans-Lux, however, which involved a very similar and related subsection of the same statute, informs that the “technological meaning of the word access ... in the communications field in general ... mean[s] the interface or connection between ... the central exchange and the [customer terminal].”
The Court of Federal Claims held that USA Choice did not enjoy “the privilege of telephonic quality communication with substantially all persons having ... telephone stations constituting a part of such local telephone system,” § 4252(a)(1) (emphasis added), on its incoming-only lines because it could not choose to initiate communications with whomever it chose to call, USA Choice,
USA Choice argues that Congress must have intended “with” to require the аbility to communicate “to and from” other telephone subscribers based on the contrasting statutory language used in an adjacent subsection. Specifically, the definition of “toll telephone service,” requires “the privilege of an unlimited number of telephonic communications to or from all or a substantial portion of the persons having ... telephone stations in a specified area which is outside the local telephone system area.” § 4252(b)(2) (emphasis added). USA Choice contends that without the ability to initiate calls, it did not enjoy the “privilege of communicating with” other local subscribers, and that construing this language to encompass incoming-only lines would impermissibly import the allegedly broader language of subsection (b)(2). See O’Neill v. Dep’t of Hous. & Urban Dev.,
The Court of Federal Claims agreed with USA Choice and held that while “[t]he words ‘to or from’ capture single-direction communications ... the word ‘with’ connotes reciprocity.” USA Choice,
Nor does Congress’ use of different prepositions in subsection (b)(2) compel the narrow reading of subsection (a)(1) advanced by USA Choice. A more natural reading of the statute indicates that this distinction likely relates to grammatical— rather than substantive — context. Subsection (a)(1) refers to “communication [singular] with” in the abstract, while subsection (b)(2) is framed in terms of “an unlimited number of ... [individual] communications [plural] to or from.” Even accepting USA Choice’s argument, however, would not compel a different result. Because the privilege of “communication with” another party requires only the possibility of two-way communication after a call is initiated, as discussed above, the distinction USA Choice reads into the use of “communication with” instead of “communications to or from” is irrelevant to the outcome of this case.
A review of the legislative history behind this language further supports our conclusion that Congress did not intend for local telephone service to turn on the ability to make outbound calls. Congress first levied excise taxes on telephone services as part of the Spanish War Act of 1898, and since that time has updated, modified, repealed, and extended the communications excise tax numerous times. See generally OfficeMax, Inc. v. United States,
First, there is no indication that the pre-1965 definition of “general telephone service” was in any way related to the ability to make outgoing calls. Prior to 1965, section 4252 defined “general telephone service” as
*1340 any ... telephone service furnished in connection with any ... telephone station which may be connected (directly or indirectly) to an exchange operated by a person engaged in the business of furnishing communication service, if by means of such connection communication may be established with any other ... telephone station.
26 U.S.C. § 4252(a) (1964). The legislative history surrounding the creation of this previous language indicates that the ability to originate calls was not essential. See S.Rep. No. 85-2090 (1958), as reprinted in 1958 U.S.C.C.A.N. 4395, 4440 (“If the existing facilities may be so connected [as described in section 4252(a) ], it is immaterial that the practice of the subscriber is not to make such connections, or that the person engaged in the business of furnishing communication service denies permission to the subscriber to make such connections.”). Because the definition of local telephone service was designed to track the earlier definition of “general telephone service” with the exceptions noted, and because the services purchased by USA Choice are neither WATS nor private communication services as discussed infra, we see no reason to infer that Congress meant to impose other new limitations on local telephone service related to call initiation.
Second, although USA Choice argues that the amendment of the toll telephone service definition to include WATS indicates an intent to remove any incoming-only or outgoing-only lines from the definition of local telephone service, we find no support for this argument. The House and Senate Reports clarify that WATS is included in toll telephone service, but their description of this service notably excludes any mention of restrictions on incoming or outgoing calls. See S.Rep. No. 89-324 (1965), as reprinted in 1965 U.S.C.C.A.N. 1690, 1725 (“This is a long-distance service whereby, for a flat charge, the subscriber is entitled to make unlimited calls within a defined area (sometimеs limited as to the maximum number of hours).”); H.R. Rep. 89-433 (1965), as reprinted in 1965 U.S.C.C.A.N. 1645, 1677 (same). These reports also discuss local telephone service without even mentioning the allegedly critical “communication with substantially all persons” language. See S.Rep. No. 89-324 (1965), as reprinted in 1965 U.S.C.C.A.N. 1690, 1725 (“[I]n the case of local telephone service, the definition makes it clear that it is the right of access to a local telephone system and the privilege of telephonic quality communication which is taxed together with facilities or services provided with this service.”); H.R. Rep. 89-433 (1965), as reprinted in 1965 U.S.C.C.A.N. 1645, 1676-77 (same). Moreover, the inclusion of “with” in the 1965 amendments cannot be accorded any significance as it relates to the prior statutory text because the replaced text similarly recited “communication may be established with any other ... telephone station.” 26 U.S.C. § 4252 (1964) (emphasis added). Accordingly, the more logical reading of the statutes and legislative histories indicates that the purpose of the 1965 amendments with respect to WATS related to the flat-rate long distancе characteristics of the service rather than to any limitations related to directionality.
As previously mentioned, the Court of Federal Claims also held that USA Choice did not enjoy the privilege of communication with “substantially all persons having ... telephone stations,” because its POP servers could only “communicate” with subscribers who used a modem. USA Choice,
USA Choice’s arguments ignore evidence that these use restrictions relate solely to USA Choice’s own self-imposed limitations. USA Choice’s decision to connect these lines to modems in its network servers rather than to telephones through equipment “such as a multiplexor or PBX,” see id. at 794 n. 24, “though perfectly understandable for a commercial ISP— resulted in self-imposed limits that did not fundamentally alter the nature of the services that [USA Choice] had the ‘privilege’ to use,” Comcation,
It is undisputed that “privilege” implicates either a “right” or “legal freedom” rather than actual use. See id. at 792; see also Comcation,
For the foregoing reasons, we hold that neither the inability to place outgоing calls, nor the choice to communicate using computer modems, nor the password authentication scheme employed by USA Choice excludes the communication services it purchased from the definition of “local telephone service” subject to the communications excise tax of section 4251(a)(1).
We note that our holding does not conflict with revenue rulings in which the IRS has held incoming-only lines subject to the communications excise tax. See, e.g., Rev. Rul. 77-196, 1977-
Nor do our interpretations of the “access” and “communication with” prongs render either prong of section 4252(a)(1) superfluous or redundant. See, e.g., Walters v. Metro. Educ. Enters., Inc.,
Although toll telephone services and VoIP technology can be said to indirectly access at least the local telephone network of the recipient, arguments that this qualifies as “access” under section 4252(a)(1) have been consistently rejected by other courts. For example, in OfficeMax, “the government argue[d] that OfficeMax’s plan must be a service provided in connection with a local telephone service because all long-distance services eventually require access to local telephone systems.”
Finally, we are mindful of the principle that “if doubt exists as to the construction of a taxing statute, the doubt should be resolved in favor of the taxpayer.” Xerox Corp. v. United States,
2. Private Communication Service
Having concluded that USA Choice’s lines provided “local telephone service,” we must now turn to the Court of Federal Claims’ decision that even the “local telephone service” lines were nonetheless exempt from the communications excise tax of § 4251(a)(1) because they met the requirements of a “private communication service.” USA Choice,
(1) the communication service furnished to a subscriber which entitles the subscriber—
(A) to exclusive or priority use of any communication channel or groups of channels,
* * i|c*1344 regardless of whether such channel, groups of channels, or intercommunication system may be connected through switching with a service described in subsection (a) [local telephone service], (b), or (c).
The statute also requires that “a separate charge is made for such service.” § 4252(d).
The Court of Federal Claims’ analysis and the parties’ arguments on appeal focus on the statutory requirement that a private communication service must “entitle [USA Choice] to exclusive or priority use of any communication channel or groups of channels.” § 4252(d)(1)(A). The parties debate the similarity between the “private communication service” defined in the statute and industry definitions related to “private lines.” USA Choice also argues that the statutory language clearly contemplates private communication systems connected to a local telephone exchange, that it did not have to share its lines to the local exchange — i.e., those lines only allowed calls to or from USA Choice’s POPs, and that the legislative history indicates Congressional intent supporting a broad interpretation of this provision. The government’s principal argument is that while an exempted private communication service may be connected with an LEC, the exemption does not extend to the very lines making that connection. Additionally, the government again contends that we should defer to IRS Revenue Rulings and makes various arguments based on the legislative history and a prior private communication service exemption. We conclude that the Court of Federal Claims erred in applying the private communication service exemption to the lines at issue in this case.
a.
The most significant shortcoming in the Court of Federal Claims’ analysis is that it failed to recognize that USA Choice’s lines did not serve to provide a distinct “communication service ... regardless of whether [that service] may be connected through switching with a [local telephone service].” § 4252(d)(1) (emphasis added). This statutory language requires that the system at issue provide a “communication service” beyond that of mere local telephone service, not just connectivity to the local telephone system itself. Dedicated lines that, alone or in combination with other privately owned or publicly shared equipment, do no more than furnish a subscriber with the ability to obtain local telephone service do not constitute the statutorily defined “private communication sendee” entitled to the exemption of § 4252(d)(1). As contrasted with typical private lines, PBX systems, Centrex systems, and answering service switchboard systems in existence at the time this statutory provision was enacted, all of which could be characterized as having communication channels that facilitated communications services beyond mere local telephone service, the lines at issue in this case served only to provide connectivity to the LEC and not to facilitate or provide any “communication sеrvice” that can be fairly characterized as “private.”
The legislative history further supports our conclusion. The recommendations from the President accompanying the pro
the tax on local and long-distance telephone service ... will no longer apply to amounts paid for private communications systems even where the private system is linked with the general telephone network. This service is almost exclusively a business cost item and competes with nontaxable business communication services. Charges for service on the general telephone network originating or terminating in the private system would be taxable ....
Recommendations Relative to Excise and Fuel Taxes, H.R. Doc. No. 173, at 5 (1965) (emphasis added). Nothing in the subsequent legislative history indicates any disagreement by Congress with this recommendation, and the relevant language proposed in this document was substantively identical to the text as enacted. See id. at 16 (defining “private communication service” as, inter alia, “the communication service furnished to a subscriber ... which entitles the subscriber to exclusive or priority use of any communication channel or groups of channels (regardless of whether such channel or groups of channels may be connected through switching with a [local telephone service] for which a separate charge is paid)”).
More generally, “Congress enacted the private communication services exemption in order to correct the imbalance that had developed between telephone company-furnished services and subscriber-owned equipment,” and in response to “telephone companies ... losing business to companies that provided ... equipment that could be purchased and operated by the users themselves.” Trans-Lux,
b.
USA Choice contended before the Court of Federal Claims and argues again on appeal that notwithstanding the fact that its lines served only to provide connections to the local telephone system, the “ ‘specially configured’ high-speed digital circuits” it chose to purchase necessarily provided the “exclusive or priority use” required by § 4252(d)(1)(A). Appellee Br. 56-57 (arguing that “USA Choice purchased dedicated line .capacity for its sole use ... [and that] no other telephone sub
USA Choice’s lines fail not only the statutory requirement of “exclusive or priority use,” but also the statute’s definition of private communication service as “the communication service furnished to a subscriber which entitles the subscriber ... to exclusive or priority use.” § 4252(d)(1) (emphases added). The Court of Federal Claims held that because the dial-up customers used USA Choice’s lines only “by dint of their relationship with USA Choice,” the statutory requirement was met. USA Choice,
The Court of Federal Claims further erred in accepting USA Choice’s argument that “by terminating a call when a caller fails to properly authenticate that he or she is a USA Choice customer, USA Choice demonstrates its priority of use.” USA Choice,
In light of this analysis, we need not address arguments related to “private lines” or prior tax exemptions, neither of which we find particularly helpful. Finally, we note that — as with our “local telephone service” analysis — our conclusions present no conflicts with the revenue ruling rehed upon by the government. See Rev. Rul. 78-437, 1978-
We therefore hold that the communication services purchased by USA Choice do not meet the statutory definition of a “private communication service” and for that reason are not exempt from the communications excise tax of section 4251(a)(1).
CONCLUSION
For the above reasons, we conclude that the Court of Federal Claims erred in holding that USA Choice’s incoming-only lines were not subject to the communications excise tax as local telephone service and in holding that USA Choice’s lines were exempt as private communication services, and thus its judgment is
REVERSED.
Notes
. The Court of Federal Claims also held that USA Choice’s use of computer modems and password authentication limited its ability to communicate with other subscribers, USA Choice,
. The Court of Federal Claims observed that if USA Choice wished to use its lines for voice communications, its “channеl or circuit would also have to be configured by the provider to allow use of” voice-capable equipment. USA Choice,
Regardless, USA Choice bore the burden to show that its lines were not appropriately configured.
. The Court of Federal Claims held that USA Choice’s non-incoming-only services met the statutory exception for private communication services with the exception of specific Verizon and Sprint services, which failed the "separate charge” requirement. USA Choice has not appealed thе Court of Federal Claims’ determination regarding these services. An affirmance of this ruling would require a remand for a determination of whether the various incoming-only services met this requirement as well. Because we reverse, however, no such inquiry is necessary.
Concurrence Opinion
concurring in part and dissenting in part.
I join the majority opinion with the exception of Part II.B.2.b. For the reasons stated by the majority, the services at issue constitute “local telephone service” within the definition of 26 U.S.C. § 4252(a)(1). They are not within the “private communication service” exemption of 26 U.S.C. § 4252(d) because they do not meet the basic requirement of providing a distinct “communication service” in addition to local telephone service. However, the majority alternatively holds that the “private communication service” exemption does not apply here because USA Choice does not have “exclusive or priority use” of its lines as required by 26 U.S.C. § 4252(d)(1)(A). I respectfully disagree with this alternative holding.
In reaching this alternative holding, thе majority properly rejects the reasoning of the Court of Federal Claims that USA Choice’s customers are “subscribers” within the language of the statute. USA Choice’s customers may subscribe to the internet services offered by USA Choice, but they do not “subscribe” to the relevant telephone company services at issue in this case. The only subscriber is USA Choice itself. However, USA Choice, as the subscriber, does have “exclusive or priority use” of its lines. In my view, USA Choice has “exclusive use” of its lines, because the lines cannot be used to direct calls to any other party. When a caller dials one of the telephone numbers associated with USA Choice’s POPs, the call is routed at the central office over the dedicated circuits and to the POPs. Any call routed onto these circuits can only reach USA Choice.
The majority suggests that USA Choice does not enjoy exclusive or priority use of those lines because “anyone else on the [Public Switched Telephоne Network] was free to dial USA Choice’s access numbers and necessarily made use of USA Choice’s dedicated lines to connect with its POPs.” Maj. Op. at 1346. I disagree. The statute focuses on the subscriber’s entitlement, and here the subscriber is the only party who can be reached by a call routed over the lines at issue. PBX service, the very service for which the exemption was de
While I believe that the “exclusive or priority use” requirement was satisfied, I nonetheless agree that the majority reaches the correct result in holding the exemption unavailable. In my view, the exemption is unavailable for the reasons stated in Part II.B.2.a of the majority opinion.