Government Relations

APA Recommends Suspension of Enforcement of Cell Phone Taxation

IRS notice requested comments on simplification of substantiation methods

In response to Notice 2009-46 from the Internal Revenue Service, containing proposals to simplify the methods by which employers must value and tax the personal use of cell phones and similar communication devices they provide their employees, the American Payroll Association recommended IRS suspend its enforcement efforts on this issue.

Currently, employers and employee are saddled with the burdensome requirement of detailed records of date, time, duration, business purpose, etc. of each business-related call made by an employee, much like the substantiation requirements for business use of an employer-provided vehicle. However, this process is much less practical when applied to cell phones.

Read on for a combined analysis of the IRS proposal and the APA comments. Or you can read the original text of the IRS proposal and the APA comments.

Why are cell phones taxable?

While many employers see the cell phone as just another necessary tool of business, just like the desk phones or desktop computers they let their employees use (and which aren't subject to tax), cell phones are included as "listed property" under Internal Revenue Code Section 280F, and only properly substantiated business use may be excluded from wages.

APA cited bills in Congress that would remove cell phones from "listed property," and quoted a June 2009 statement by IRS Commissioner Douglas Shulman encouraging the Congress to enact this legislation so that there would be "no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers." The bills under consideration are HR 690 and S 144.

The ideal solution and the "meanwhile recommendation"

We said that we agree with Commissioner's statement. "We are hopeful that Congress will enact legislation removing cell phones from listed property. Since the time that cell phones were originally designated as listed property, the nature and cost of cell phones, as well as the nature of the workplace itself, have changed dramatically."

Until that happens, however, "APA recommends suspension of enforcement surrounding taxation of employer-provided cell phones.

"A cell phone is not the rare perk it may have once been, and the incremental cost for each use of a cell phone is not as high or as simply calculated as it used to be. Many cell phones are under calling plans under which an employee's personal use may not create any additional cost. While we recognize that value, not cost, is the driving force in determining the amount to include in wages, the fact that there is not a marginal cost associated with each personal use makes the valuation of such personal use all the more difficult.

"In today's business world, more and more employers need to be able to reach their employees at any time during business hours (and perhaps during off-hours), and more employees need to be able to communicate with business contacts and access business-related data at any time. The need for such communication often arises when an employee is traveling or at a work location without typical land-line-based telephone service (such as a construction site).

"In addition, no matter the simplified substantiation method that may ultimately be determined, employers and their employees will still have a significant burden in performing the steps required to substantiate business use."

Simplified substantiation

IRS proposed four methods for simplified substantiation of the business (nontaxable) use of cell phones vs. the personal use. Each of the four proposed methods is briefly described below, quoting from the IRS notice.

In our comments, we suggested IRS allow all four methods, as modified based on public comment, in addition to the current method. "This would be similar to the choice of safe-harbor methods for the valuation of personal use of employer-owned vehicles."

Method 1a, Minimal Personal Use: ". . . the entire amount of an employee's use of an employer-provided cell phone would be deemed to be for business purposes if the employee can account to his or her employer with sufficient records to establish that the employee maintains and uses a personal (non-employer-provided) cell phone for personal purposes during the employee's work hours."

This would allow complete exclusion for employees that have their own cell phones in addition to the phones provided by their employers. IRS asked about the type of record that would establish that the employee uses a personal cell phone for personal use. We recommended "that the employee should be required to provide a copy of his or her cell phone bill. Rather than requiring the employer to collect and retain cell phone bills for each month for each employee using this method, perhaps an employer could be required to collect and retain a certain minimum number of statements per employee per year (pro-rated for employees who are not under this method for an entire year.)"

Method 1b, Minimal Personal Use: ". . . a specified amount or type of 'minimal' personal use that would be disregarded in determining the amount of personal use of an employer-provided cell phone. For example, 'minimal' could be defined by reference to a particular number of minutes of use or for certain personal purposes."

This would also allow complete exclusion for employees that make only limited personal use of the employer-provided cell phone. IRS asked how to define this specified amount or type of "minimal" personal use. We recommended "a list of examples of situations in which personal use is acceptable. Any attempt at quantification would be problematic, because the appropriate number of personal minutes could vary greatly among employees with different duties (e.g., those who are more likely to be delayed from getting home by their work compared with those who are not as likely). In addition, to implement such a definition would require the very burdensome tracking and reporting that this method is intending to avoid."

Method 2, Safe Harbor Substantiation: ". . . an employer would treat a certain percentage of each employee's use of an employer-provided cell phone as business usage. The remaining percentage would be deemed to be for personal use. For this proposal, the IRS and Treasury Department propose a business use percentage of 75 percent."

This could be the simplest method. It's sort of a "one size fits all" approach, but as long as the minimal personal use methods are also allowed (as we recommended), then the employees that truly make only minimal personal use of their employer-provided cell phones could avoid taxation.

Method 3, Statistical Sampling: ". . . allow employers to use statistical sampling techniques to measure an employee's personal use of an employer-provided cell phone. … The employer would multiply that percentage times the value of each employee's total usage to determine the value of personal usage.

This could be the most complex method. IRS has a particular sampling technique in mind for employers to use. It might be best for the employees that can't meet the "minimal personal use" standards of methods 1a and 1b, but whose personal calls do not reach the 25% level of method 2.

Simplified Fair Market Value Determination

Of course, for methods 2 and 3 above, the resulting personal-use percentage would have to be multiplied by the fair market value of the cell phone itself and its calling plan. IRS asked how employers are currently arriving at that fair market value and asked for suggestions of simplified methods.

Our answer referred to some sampling methods in the comment letters of other organizations (which relied on copies of cell phone bills), but pointed out that what is a workable method for one employer may not be workable for another. "Ultimately, we recommend an approach that IRS has used in other situations: employers should be held to the standard of a reasonable, good-faith application of a reasonable, good-faith method."

We also advised against IRS trying to set a chart of values. ". . . there is such a wide variety of phones and other communication devices and such a wide variety of pricing plans, that to try to devise a standard fair market value for the provision of a phone by an employer to an employee would be an impossible task. It could easily be compared with trying to determine the value of frequent flyer miles that an employee collects when traveling on the employer's business."

Emphasis on suspension of enforcement

We closed by expressing our appreciation to IRS for wanting to align the valuation and substantiation requirements more closely with the realities of today's telecommunications market and for wanting to minimize the burden on employers and individual taxpayers. We also reiterated our recommendation that IRS suspend enforcement surrounding taxation of employer-provided cell phones, while we wait for Congress to remove cell phones from "listed property."

Read the original documents

IRS Notice 2009-46
APA Comments