Courts Strike Down Phone Tax

Published February 1, 2006

Some large telecom consumers are filing lawsuits against the Internal Revenue Service … and winning. 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 IRS is having to defend itself against lawsuits from large telecom consumers because of its refusal to stop collecting the “temporary” federal excise tax (FET) on telephone services the federal government imposed to help fund the Spanish American War, which ended on December 10, 1898. Telephone service then was in its infancy, and only some wealthy people and businesses had telephones. The tax stayed in place, however, as telephone use spread, and it was expanded over time to cover other telecom services.

The Eleventh Circuit Court of Appeals, Sixth Circuit Court of Appeals, and D.C. Circuit Court of Appeals have ruled in favor of telecom consumers in recent years, affirming the 3 percent federal tax does not apply broadly to all communications services. However, the IRS continues to file legal challenges to keep collecting the tax.

While large telecom consumers have the financial wherewithal to launch legal challenges, typical telecom consumers have little recourse. Their cost of going to court would outweigh whatever refund they might win, and federal law does not allow class-action lawsuits against the IRS.

Treasury Department Opposes Tax

The U.S. Department of Treasury concluded in 1987, “the [FET] causes economic distortions and inequities among households” and “there is no policy rationale for retaining the communications excise tax.”

The average wireless consumer in America pays roughly 17 percent of his or her monthly bill to federal, state, and local governments in the form of taxes and fees. The wireless industry hopes the IRS will do the right thing and bring the 1898 “temporary tax” to a permanent end.

Competition Is ‘Intense’

The FCC’s Tenth Competition Report, released September 30, 2005, noted, “equity analysts and other industry observers continue to describe wireless price competition in the United States as intense.” The report says industry data indicate average revenue per minute has fallen 82 percent since December 1994.

Merrill Lynch recently reported wireless carriers invested $16.7 billion in the first nine months of 2005. Continued investment by the industry is improving wireless coverage and increasing the quality of service while delivering advanced communication services to both urban and rural areas.

According to statistics released by the International Telecommunication Union, as of January 1, 2005 the United States ranked 16th in the world in broadband penetration, measured as the number of DSL and cable modem subscribers per 100 inhabitants. One reason the U.S. does not rank higher is state and local taxation. Consumers appear to understand this: Last year wireless consumers weighed in heavily to help secure tax victories in Louisiana, Missouri, Oregon, and Texas.

Steve Largent ([email protected]) is president and chief executive officer of CTIA The Wireless Association, a former Oklahoma Congressman, and a National Football League Hall of Fame wide receiver.