The Tax Man Visits the Mobile Phone

Have you heard the news? If you don't think you get taxed enough already, then you're going to love the latest proposal from the Internal Revenue Service. The Wall Street Journal reported that the IRS has proposed taxing the use of company-issued mobile phones as a “fringe benefit.” Here's the deal: employers would assign 25% of an employee's annual phone expense as a taxable benefit. Under that scenario, a worker in the 28% tax bracket, whose wireless device costs the company $2,500 a year, could see their tax bill increase by $175. Employees could avoid the tax if they could prove that they used their personal cellphones for non-business calls during work hours.

Full disclosure: I work for Research in Motion (RIMM) and they generously provide me with a fully paid, wonderfully capable BlackBerry smartphone. That said, this proposal irritates me for several reasons:

• It's none of the Government's business. The Government has no place intruding on what amounts to a small, but certainly appreciated, employee benefit. What's next? Company-purchased coffee, T-shirts and mugs based on the percent used during non-business hours?
• It's too cumbersome. Can you imagine a F500 company parsing every employee's phone bill in order to determine the percentage of business vs personal calls? If companies must track every call made home like “Hi Honey, I'll stop and pick up some milk,” then this will make Sarbanes-Oxley look positively effortless. As it turns out, there's been a law in place since 1989 that requires workers who use company-paid phones for personal calls to count the value of those calls and pay federal income tax accordingly. But neither businesses nor workers have paid much attention to it for the very reason that it's simply too burdensome to bother.
• It's not worth it. Has the IRS estimated the potential tax revenue from this proposal? At the dawn of the cellphone industry, wireless minutes were a precious commodity. Today is another story. The cost per minute has dropped increasingly with time, with most wireless plans containing judicious amounts of night and weekend free minutes. In light of the trillions of dollars being added to the national debt, it's hard to see this tax moving the needle.
• It's counter-productive. Employee's with phones attached to their hips are working 24x7. If the Government is going to tax personal calls made during business hours, should workers be given credits for making work-related calls during non-business hours? After all, they're not supposed to be working. A tax like this will only make employees think twice - or be bitter at best – about tending to business during the “off hours” time.

Bill Dalton, reporting on KansasCity.com, says “The question for the mobile phone industry, particularly companies like RIM, which sells its Blackberry primarily for business use, will see any drop off in sales if the IRS is effective in enforcing the rule.”

I don't see that happening. The smartphone has become an indispensable productivity tool for businesses. Demand will likely remain whether it's a company-provided benefit or not. Let's just hope common sense prevails at the IRS as they ponder how to raise tax revenue during this recession.