Do the Feds Owe You 9% of Your Long Distance Bill?

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Taxes and surcharges
are responsible for a huge portion of monthly
telecom bills paid in the US
. They amount to about 50% of the
cost of a local line, and less for other services.

While presumably
not considered a sin, telecom is taxed and regulated heavily like
gambling, liquor, and cigarettes, driving up the costs of service.
Telecom companies are huge tax collectors for the local, state,
and federal government. Fortunately taxes are now supposed to go
down for Long Distance. Amazingly this is because the IRS now has
to follow the letter of the law, and can no longer collect the Federal
Excise Tax of 3% on the per minute long distance charges sold today.
They may even owe you money.

This
is the official announcement.

The Federal
Excise Tax was created in 1898 to tax the new luxury of phone service
and help finance the Spanish American War. While that war was soon
over, the tax remained.

When the law
was re-written in 1965 a distinction was made between local and
toll services (and teletypewriter exchange services). The tax applied
to toll calls, and toll calls were defined as being based on time
and distance, not time or distance. In 1965 to call New Jersey from
New York was cheaper than calling California. All calls were toll
calls, and the distance to California made the call expensive. Today
u2018toll calls' don't exist as no one is charged based on the distance.
Clearly if no one is making calls based on time and distance, there
are no toll calls therefore there is no revenue to tax. [The law
really is that simple.] Naturally, the IRS chose to tax all long
distance calls, even ones that weren't toll calls.

The IRS has
been challenged in court repeatedly and for a long time. Apparently
the IRS wanted to argue that the law was clearly intended to tax
all long distance at three percent, regardless of how it was worded.
Since this clearly violated the letter of the law, it took many
years for Treasury to acknowledge the court decisions ruling against
the IRS.

The bottom
line is that you, the long-suffering taxpayer, should no longer
be charged for the 3% Federal Excise Tax on Long Distance starting
July 31st. Sadly the local Federal Excise Tax stays for now. It
is unclear, but it probably stays on all non-per-minute charges
related to cell phones, e.g. bundled minutes.

In addition
the IRS will also refund you on three years of taxes paid from March
2003 to July 2006. That could be 9% of your annual long distance
bill. Unfortunately you have to ask for a refund, and prove you
paid the taxes. The IRS may give a token $50 or so in a refund to
those unwilling to document their tax expenditures. There is no
reason to think the telecom companies that collected the taxes will
collect them back for their customers. However you should make sure
they don't collect the tax in the future, saving 3% a year.

Ironically,
for most people long distance is going down to zero with the proliferation
of cell phones, calling cards, voip, and cheaper long distance plans.
Long Distance is comparatively less regulated, so the market has
a chance to work its magic. My clients can pay a fraction of their
old rates, and even calling China can be dirt cheap. This means
most people are facing lower bills regardless. However if you have
high long distance bills, especially international calls, it would
be worth trying to get a refund.

The only reason
why this has happened is because a bunch of companies fought for
this in court. Those companies who did fight in court have apparently
still not received their money. Why did they fight? Well, even firms
with 500 employees can spend tens of thousands a month on telecom,
and $200,000 a year on long distance. The Federal Excise Tax just
for their long distance can be six thousand dollars, and the refund
eighteen thousand. If you have five thousand or fifty thousand employees
the savings would be orders of magnitude higher, justifying paying
a lawyer to point out the letter of the law.

While this
isn't a huge change, it is always nice to know that taxes are not
always permanent.

July
14, 2006

Anders
Mikkelsen [send him mail]
is a cost management consultant in New York City.

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