SBJA Clarifies Employer-Provided Cell Phone Tax Picture

October 1, 2010 ( – While recent federal legislation may have given employers relief from having to withhold federal income tax for the value of company-provided cell phones, significant questions about the issue remain.

That was the bottom line of a recent client advisory by the Morgan, Lewis & Bockius law firm relating to the effects of the Small Business Jobs Act (H.R. 5297) (SBJA) on the cell phone taxation question.

According to the Morgan Lewis report, the SBJA removed cell phones from the Internal Revenue Code’s definition of listed property for taxable years after December 31, 2009. The problem, according to Morgan Lewis, is that the new law does not provide that an employee’s limited personal use of employer provided cell phones is nontaxable and it is still unclear how the Internal Revenue Service (IRS) will deal with the issue. The law firm said the IRS has the authority to adopt a “nonenforcement” position if it chooses. Morgan Lewis also pointed out that the IRS also has the authority to continue to tax employer-provided cell phones on audit.

However, the law firm argues that it may simply not be worth the government’s trouble to tax employee cell phones. “Analogies to the IRS’s well-known position on frequent flyer miles can be immediately drawn since tracking, valuing, and reporting cell phone costs and frequent flyer miles are equally administratively burdensome,” Morgan Lewis wrote. “The administrative efforts required to tax such benefits—and the loss of productivity that results—greatly outweigh the tax revenues generated.”

The Joint Committee on Taxation estimates that removing employer-provided cell phones from taxation will cost $410 million over 10 years—“a very low number considering the wide proliferation of cell phones,” the law firm commented.

The law firm acknowledged that employers have a wide range of options on how to proceed , but the “safest tax position” would be to model their own cell phone policy after that adopted by the IRS and other federal agencies for their own employees.

The law firm’s cell phone advisory is here.

It was reported earlier this year that the Obama Administration would move to kill the cell phone tax (see Cell Phone Tax Reported on the Way Out).