After 100 Years, Telecom Tax Is No More

Published August 1, 2006

The U.S. Treasury Department will stop collecting the 3 percent telephone tax, more than 100 years after the end of the Spanish American War, the conflict the tax was levied to fund.

The Treasury Department and the Internal Revenue Service announced they would cease collecting the tax on long-distance phone calls beginning August 1. Consumers will receive about $15 billion in refunds on their 2006 income tax returns, filed in 2007.

“Americans will be thrilled to learn that the Treasury has finally chosen to wind down the government’s unseemly game of dialing for tax dollars,” said John Berthoud, president of the National Taxpayers Union, in a statement issued shortly after the announcement. “Now that the federal tax man will be placing fewer calls to long-distance customers, it’s time for Congress to cut off other taxes on talking.”

Berthoud cited a proposal, introduced in May by Senate Finance Committee Chair Chuck Grassley (R-IA), to do away with the federal excise on local phone services.

At Verizon Wireless, “We are very excited,” said Annabelle Canning, assistant general counsel for tax policy. “This will provide a real benefit to our wireless consumers. We also hope steps at the federal level to eliminate this outdated, industry-only tax serve as a model to eliminate other outdated and excessive taxes.”

Refunds Allowed for 2006

Individuals will be allowed to claim three years’ worth of refunds on their 2006 tax returns. Taxpayers will be allowed to calculate their actual taxes paid or claim a standard amount to be set by the Treasury Department and IRS.

The government’s decision to stop collecting the excise tax on long-distance telephone services comes after a recent string of successful court challenges to the legality of the excise tax.

In October 2005, Hewlett-Packard won a $6.2 million refund, plus interest. Other companies, including Honeywell, AOL, and OfficeMax, have won smaller refunds. Wal-Mart, Home Depot, MBNA, and other major telecom consumers have lawsuits pending.

The tax was imposed at a time when only wealthy individuals and some businesses had telephone service. The tax stayed in place as telephone use spread, and it was expanded to cover other telecom services.

Five federal appellate courts have ruled in favor of major telecom consumers, but the IRS has repeatedly filed legal challenges to keep collecting the tax.

Though the rulings all have involved large telecom consumers, the reasoning behind the rulings also applies to small telecom consumers. However, federal law does not allow class-action lawsuits against the IRS, and the cost of going to court would have exceeded whatever refunds small telecom consumers might have won.

Some federal officials long have questioned the government’s collection of the federal excise tax (FET) on long-distance service. In 1987 the Treasury Department issued a report that concluded, “the [FET] causes economic distortions and inequities among households” and “there is no policy rationale for retaining the communications excise tax.”

Steve Stanek ([email protected]) is managing editor of The Heartland Institute’s Budget & Tax News, where this article first appeared.