Phone Excise Tax on Way Out

Telephone callers will see one tax drop off their bills this summer and can look forward next year to a refund of federal taxes paid on long-distance and bundled services.

“That’s the taxpayers’ money, and they deserve to have it, not the government,” Treasury Secretary John W. Snow said Thursday, announcing the decision to stop fighting companies challenging the tax in court.

Beginning July 31, consumers will stop paying a 3% federal excise tax on long-distance calls and bundled services.

Consumers next year can also obtain a refund of taxes paid since March 2003, with interest, by asking for the money back through their 2006 tax returns.

Snow said the Treasury Department expected to send $13 billion back to consumers, but he had no estimate of how much the average individual might receive.

Consumers typically pay a few dollars each month for the tax. A caller who paid $50 each month for long-distance calls would pay $18 in taxes in a year, for example.

Sen. Rick Santorum (R-Pa.) said his tax bill amounted to $3 to $4 each month. “It’s a nice little check for a lot of folks,” he said of the expected refunds.

Businesses, some of which found it profitable to challenge the tax with lawsuits, stand to reap the largest returns.

“The big impact really is on big corporations with big long-distance bills,” said Bill McCloskey, spokesman for BellSouth Corp.

The federal excise tax on local telephone service remained in effect, but Snow said the administration supported terminating that levy as well.

Sen. Charles Grassley (R-Iowa), the Finance Committee chairman, said he planned to act as soon as possible to move legislation eliminating the remainder of the tax.

Snow said federal revenues were “surging” and the government could handle the reduction in revenue, even with annual budget deficits.

The Congressional Budget Office has estimated that the government expected to collect $52 billion over a decade from telephone excise taxes, including charges on local and long-distance calling.

Individuals can use one of two methods next year for calculating a refund. Those who have records of the taxes they’ve paid between March 2003 and July 2006 can add them up and request their money back.

Those who did not retain their records can use a simplified method under development by the Treasury Department and Internal Revenue Service, which will be announced later.

The IRS will also develop a special form to deliver the refund to individuals who do not have to file a tax return.

Businesses would be required to calculate the taxes they paid before requesting their money back.

It would be very costly for communications providers to comb their records and tell consumers how much tax they’ve paid, said Annabelle Canning, assistant general counsel at Verizon Wireless. Verizon has 53 million wireless customers and provides traditional phone service to 30 million households.

“It would take tremendous resources,” Canning said.

The tax dates to 1898, when telephones were a luxury and lawmakers needed money to fight the Spanish-American War.