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.
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.IRS Weighs New Cell Phone Tax Rules2:15 The IRS is weighing a proposal to deem one-quarter of employees' use of work cell phones as personal use, and therefore subject to tax as a fringe benefit. Dow Jones Newswires' Martin Vaughan explains.
"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."
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.