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

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