Fed Long-Distance Tax Repealed

The Justice Department will no longer continue litigation on the issue of the federal excise tax on long-distance telephone service. The Treasury will no longer collect the 3 percent federal excise tax on long-distance calls. The Treasury is conceding their legal battle supporting the tax after five appeals courts declared the tax illegal due to long-distance billing changes.


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The deadline for the collection of the tax by phone and cellular providers is August 1, 2006. Although individuals and businesses may file for their refunds on their 2006 tax returns for taxes paid back to March 1, 2003, a standard refund will also be available. A standard refund has not been determined.

The Internal Revenue Service (IRS) will refund approximately $13 billion in taxes paid over the last three years by individuals and businesses. Reuters reports that the Treasury has not made estimates regarding the amount of refunds to businesses or individuals. USA Today reports the cost of eliminating this tax amounts to some $46 million in refunds, lost revenue and administrative expenses over the next five years.

John Snow, U.S. Treasury Secretary, described the tax as “antiquated” at a Capital Hill press conference. Snow said, “It's not often you get to kill a tax, particularly one that goes back so far in history.” Verizon Vice President Tom Tauke told USA Today, “This is a good first step in alleviating consumers’ telephone tax burden, which currently accounts for more than 18% of the average bill.”

Snow also urged Congress to repeal the local-phone excise tax currently levied at 3 percent, although the tax will no longer be imposed on services that do not distinguish local-calls, such as cellular, all-distance landline plans and Internet-based offerings. Consumers using these services may seek refunds on their full excise-tax payments, according to USA Today.

The tax has been in effect since 1898 when it was imposed as a temporary “luxury” tax to help fund the Spanish-American War, according to Bankrate.com. Other historical highlights of this tax follows:

1914 – long distance telephone tax levied at 1 cent per call to help pay costs of World War I.
1916-1917 repealed for a single year but reimposed in 1917 at 5 cents per call to help fund the United States’ participation in World War I.
1918 - Tax is expanded to include other phone services.
1924-1932 – The excise tax is repealed until 1932 when it is reimposed at a range of 10 to 20 cents on a per-call basis.
1942 – Excise tax rate is raised to 20 percent rate.
1943 – Excise tax rate increases to 25 percent.
1954 – Excise tax rate decreases to 10 percent.
1959 – Excise tax slated to expire in 1960.
1960-1964 – excise tax’s expiration schedule delayed each year.
1965 – slated to become part of excise tax reform project, tax is scheduled for three-year phase out.
1966 – Phase out delayed another year.
1968 – Phase out relegislated for 1973.
1969 – Phase out delayed another year.
1970 – 10 year plan replaces current phase out plan starting in 1973.
1981 – elimination of excise tax is deferred and 1 percent tax rate is extended through 1984.
1982 – excise tax rate increased to 3 percent, with elimination in 1985.
1984 – 3 percent excise tax rate extended through 1987.
1987 - 3 percent excise tax rate extended through 1990.
1990 - 3 percent excise tax rate made permanent.

Talking about the current excise tax, Rep. Rob Portman (R-Ohio) told Bankrate.com, “Today, this tax is paid by everyone who uses a telephone, makes a call on a cell phone or uses a phone line to access the Internet." Portman added, “For example, 96 percent of households with Internet access use a telephone line to go online. If the federal phone tax remains on the books, it would jeopardize recent efforts to keep the Internet tax-free.”

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