Usa Choice Internet Services, LLC v. U.S.

• Decision Date: 15 April 2008
• Docket Number: No. 2007-5077.,2007-5077.
• Parties: USA CHOICE INTERNET SERVICES, LLC, Plaintiff-Appellee, v. UNITED STATES, Defendant-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

522 F.3d 1332

USA CHOICE INTERNET SERVICES, LLC, Plaintiff-Appellee, v. UNITED STATES, Defendant-Appellant.

No. 2007-5077.

United States Court of Appeals, Federal Circuit.

April 15, 2008.

H. Christopher Bartolomucci, Hogan & Hartson L.L.P, of Washington, DC, argued for plaintiff-appellee. Of counsel on the brief was Anthony C. Gulotta, Anderson & Gulotta, P.C., of Harrisburg, Pennsylvania.

Teresa E. McLaughlin, Attorney, Tax Division, United States Department of Justice, of Washington, DC, argued for defendant-appellant. With her on the brief were Eileen J. O'Connor, Assistant Attorney General; Richard T. Morrison, Deputy Assistant Attorney General; Gilbert S. Rothenberg and Arthur T. Catterall, Attorneys.

Before LINN, DYK, and MOORE, Circuit Judges.

Opinion for the court filed by Circuit Judge LINN. Opinion concurring in part and dissenting in part filed by Circuit Judge DYK.

LINN, Circuit Judge.

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, 73 Fed.Cl. 780 (2006). Because we hold that USA Choice's incoming-only phone lines meet the definition of "local telephone service," 26 U.S.C. § 4252(a), and because none of the lines at issue fall within the "private communication service" exception, § 4252(d), we reverse.

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., 545 U.S. 967, 974-75, 125 S.Ct. 2688, 162 L.Ed.2d 820 (2005) (contrasting "dial-up" Internet access with "broadband" service, and noting that "[t]he traditional means by which consumers in the United States access the network of interconnected computers that make up the Internet is through `dial-up' connections provided over local telephone facilities. Using these connections, consumers access the Internet by making calls with computer modems through the telephone wires owned by local phone companies" (internal citations omitted)). USA Choice provided network access servers equipped with modems at several locations throughout Pennsylvania known as Points of Presence (POPs).

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, 73 Fed.Cl. at 783. Subsequent to establishing a telephonic quality connection between a USA Choice network server modem at the POP and a dial-up customer's computer modem, the following communication took place: USA Choice's server requested a username and password; the response was compared to USA Choice's records; and if the user could be confirmed, USA Choice provided a connection to the Internet through its network. Upon several failed authentication attempts, however, USA Choice's modem would instead disconnect the call. Id. Because neither USA Choice nor the telephone companies blocked incoming calls from subscribers who were not USA Choice's customers, anyone could dial one of the ISP access numbers and connect at least briefly to one of USA Choice's POPs. If the caller used a regular telephone instead of a modem, however, he or she might hear a set of electronically-generated beeps before being disconnected. Id. This accessibility allowed USA Choice's customers to connect to its servers from any telephone number, provided they used valid usernames and passwords.

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) and 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 disallowed 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 the 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, 73 Fed.Cl. at 802. The government timely appealed. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3).

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, 379 F.3d 1363, 1371 (Fed.Cir.2004) (internal citations and quotation marks omitted). "Statutory interpretation is a question of law that we review de novo." Wesleyan Co. v. Harvey, 454 F.3d 1375, 1378 (Fed.Cir.2006). Additionally, "[t]he proper application of the tax laws to an undisputed set of operative facts is a question of law, over which we exercise plenary review." Lockheed Martin Corp. v. United States, 210 F.3d 1366, 1370 (Fed.Cir.2000).

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, 73 Fed.Cl. at 795. Not all of USA Choice's lines were found to be truly incoming-only, however, and these other lines were analyzed under the "private communication service" provision, discussed infra.

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 irrelevant 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., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). USA Choice argues that the Revenue Rulings do not bind us and responds to the government by asserting that its incoming-only lines could not provide it with "access to a local telephone system," nor the privilege of "communication with" substantially all other subscribers, because it could not affirmatively initiate calls. It further contends that because it disconnected calls from subscribers without modems and from persons who are not customers, it did not communicate with "substantially all" subscribers in the local system.

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...