Consumers Will Get Refunds for 1898 Phone Tax

Published July 1, 2006

More than 100 years after the Spanish-American War ended, the 3 percent telephone tax that was imposed to pay for the war is about to end.

The U.S. Treasury Department and Internal Revenue Service announced on May 25 they plan to stop 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.”

Push to Eliminate More

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 We also hope steps at the federal level to eliminate this outdated, industry-only tax serve as a model to eliminate other outdated and excessive taxes.”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.

All Will Benefit

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 Budget & Tax News.