The Association of U S West Retirees



U.S. May Stop, Refund Excise Tax On Phone Service
By Robert Guy Matthews and Amol Sharma
The Wall Street Journal
Friday, April 14, 2006

WASHINGTON -- The Treasury Department, following a series of hostile court rulings on the way it assesses the federal excise tax on phone service, is working on a plan to stop collecting the levy and refund billions of dollars to consumers and businesses, according to people familiar with the matter.

Government officials are holding closely guarded discussions on how to best handle the repayment process as well as mitigate the impact of about $60 billion in potential refunds and lost federal revenues over the next five years.  The surcharge would likely disappear from long-distance and wireless bills, but local-call levies could remain.

The Treasury, Internal Revenue Service and Justice Department wouldn't confirm the direction of the discussions.  "Treasury, IRS and Justice Department are working together and considering the matter and you could expect some sort of decision to come in the future," said Treasury spokesman Sean Kevilighan.  Treasury, Justice and the IRS wouldn't confirm that they are discussing refunds.

Courts have ruled seven times in recent years that the government is misapplying the 3% tax and ordered refunds to companies that have sued over the charges.  The courts have generally accepted the argument that the tax is outdated and should no longer apply on long-distance calls, given how technologies and calling plans have changed.  More suits are pending, and rather than continue with costly litigation, the Treasury has decided to concede defeat, say government officials.

Elimination of the excise tax would be a major victory for the telecommunications industry, which has fought for years in court and on Capitol Hill to do away with the surcharge.

The law -- originally enacted to help pay the costs of the Spanish-American War -- taxes telecom services based on both the duration of a call and the distance it travels.  But the changing nature of technology now lets phone companies offer flat rate per minute or monthly plans.  The government, however, has continued to assess the tax under the old services, sparking widespread protest.

When the tax was enacted in 1898, telephone service was something of a luxury and the levy affected relatively few Americans.  As telecommunications expanded to become a fixture of modern life, the tax has become a steady revenue stream that administrations of both political parties have been loath to surrender.  In 2000, Congress repealed the tax, at an estimated five-year cost of $24 billion.  Former President Clinton vetoed the measure over budget concerns.

A multibillion-dollar giveback would hit the federal budget hard at a time when the deficit is hovering around $423 billion, according to government estimates for 2005.  The telephone excise tax brought in about $6 billion in 2004 and is estimated to collect about $45 billion through 2010.

According to the Congressional Budget Office, if the law is rescinded, the IRS would be required to refund payments going back for about three years.

Treasury Secretary John Snow indicated in a House Ways and Means Committee hearing in February that he would likely have to concede total defeat if the IRS continued to lose appeals cases.

"Should the judgment come down in alignment with the prior three Federal Circuit Courts, I think the handwriting is on the wall," he said.

Write to Robert Guy Matthews at and Amol Sharma at