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Feds Surrender, Kill 108-Year-Old Telephone Tax

By Mark Huffman
ConsumerAffairs.com

May 25, 2006

Telephone Excise Tax • Mistakes Abound on Telephone-Tax Refund Requests • One-Time IRS Credit for Telephone Tax • Feds Surrender, Kill 108-Year-Old Telephone Tax • Congress Considers Permanent Ban on Internet Tax • Taxes, Fees & Regs Add 18% to Cell Phone Bills --- Spanish-American War Drawing: Library of Congress

The Treasury Department says it will eliminate a tax on long-distance telephone calls and refund about $13 billion collected from consumers.

Noting that it's not often that the government kills a tax, Treasury Secretary John Snow announced the federal excise tax on telephone service will officially expire at the end of July.

Originally established in 1898 as a "luxury" tax on wealthy Americans who had telephones, the federal excise tax on telephone calls is not compatible with today's modern information-age society.

It was adopted under the War Revenue Act as a temporary levy to help fund the Spanish-American War. The war, which ended in October of that year, established the independence of Cuba, ceded Puerto Rico and Guam to the United States, and allowed the U.S. to purchase the Philippines Islands from Spain for $20 million.

The tax was repealed in 1902 but didn't stay gone for long. It was reintroduced during World War I and was subsequently used to fund the nation's military activities during World War II, the Korean War and the Vietnam War.

The tax was given permanent status in 1990 and now stands at 3 percent of a consumer's monthly phone bill. It raises about $6 billion a year for general federal expenditures, including military spending.

In recent years, opponents of the Iraq War have refused to pay the excise tax, citing its long history of funding military activities.

Not surprisingly, telecommunications interests have long inveighed against it.

It was not a tax that went gently into the night. The Treasury Department engaged in a long-running legal dispute before finally conceding defeat.

The Department of Justice will no longer pursue litigation and the Internal Revenue Service (IRS) will issue refunds of tax on long-distance service for the past three years.

Taxpayers will be able to apply for refunds on their 2006 tax forms, to be filed in 2007.

"Today is a good day for American taxpayers; it marks the beginning of the end of an outdated, antiquated tax that has survived a century beyond its original purpose, and by now should have been ancient history," Snow declared.

"The Federal Appeals courts have spoken across the board. It's time to 'disconnect' this tax and put it on the permanent 'do not call' list," he said.

Government officials said no immediate action is required by taxpayers. Refunds will be a part of 2006 tax returns filed in 2007.

Refund claims will cover all excise tax paid on long-distance service over the last three years (time allowed given statute of limitations). Interest will be paid on refunds. The IRS is working on a simplified method for individuals to use to claim a refund on their 2006 tax returns.

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