Telephone Tax to End!

The 3% Federal Excise Tax, dating to the Spanish-American War will end on July 31st for all but local phone service. This includes long distance on your home phone, wireless and/or VoIP phone service. In addition, it is likely that most will be able to claim a refund for the tax paid over the last 3 years with their 2006 tax returns (the ones filed in early 2007).

When established, the tax was based on calls priced by distance. However, the practice of charging different prices for calls based on distance ended a while ago, and that has led to numerous court challenges on the legality of the tax. Having consistently lost in court, the IRS and Treasury have thrown in the towel.

In terms of claiming a refund on your return next year, the IRS is planning to develop a "simple" process to let people claim this amount. Simple process and IRS are terms that usually don't occur near each other, so we'll have to wait and see what they come up with.

Will your future phone bills go down by 3% as a direct result of this repeal? This will likely depend on the segment of the market. It wouldn't surprise us if some providers attempt to insert or increase a cost recovery fee to offset the savings and make it bill-neutral for the customer. Since these fees are more or less lumped in with items like the telephone tax, consumers not aware of the repeal of this tax would be none the wiser, and your provider would have a quick 3% increase to their profits.