TELECOM Digest OnLine - Sorted: Do the Feds Owe You a BIG Refund on Your Phone Bill?

Do the Feds Owe You a BIG Refund on Your Phone Bill?

Anders Mikkelsen (
Sat, 15 Jul 2006 14:59:11 -0500

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

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
'toll 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.

Anders Mikkelsen is a cost management consultant in New York City.

Copyright 2006

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