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Century-Old Telecom Tax Fades Away

By Keith Regan E-Commerce Times ECT News Network
May 26, 2006 11:02 AM PT

The U.S. Treasury said Thursday it will stop collecting a 108-year-old telecommunications tax assessed to support the brief Spanish-American War and offer tax refunds for the past three years.

Century-Old Telecom Tax Fades Away

The 3 percent federal excise tax applied to all long-distance calls since 1898, when it was put in place at a time when only the wealthiest Americans had access to long-haul telephone services. President McKinley put the tax in place to help defray the cost of the Spanish-American War, which was sparked by the sinking of the Battleship Maine in Havana Harbor in February, 1898.

Not the Original Purpose

That conflict lasted just four months but the tax has withstood for more than a century, surviving numerous court challenges and attempts to use legislation to repeal it -- including an effort in 2000 led by then-President Clinton -- but courts have more recently begun to side with those who say the tax is illegal, with some appeals courts ordering sizable refunds to corporations who sued successfully.

"Today is a good day for American taxpayers," Treasury Secretary John Snow said. "It marks the beginning of the end of an outdated, antiquated tax that has survived a century beyond its original purpose, and by now should have been ancient history."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 called on Congress to pass a law repealing a similar excise tax on local phone services.

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

Changing Landscape Cited

The tax was seen as having muted economic impact on phone users, with the surcharge amounting to US$1.50 on a $50 monthly long-distance bill, but generated $6 billion a year for federal coffers and some $300 billion since its inception.

The excise level has been adjusted over its history, going as high as 25 percent during the 1940s to help pay for the cost of fighting World War II and to 10 percent during much of the Vietnam War. The excise was lowered to 1 percent in the early 1980s before it was permanently fixed at 3 percent in 1990.

Still, the Treasury said it was prepared to offer refunds to those who request them for taxes paid over the past three years -- the maximum time allowed under law, Snow said. Taxpayers will be required to request refunds when they file 2006 tax returns early next year and the treasury will pay interest on refunds.

Snow said he had asked the Justice Department to cease litigation in support of the tax as well, likely ending numerous cases after recent rulings have begun to come down largely on the side of taxpaying businesses who have sought to avoid making the payments.

The tax, which generates more than $6 billion annually, has survived repeated efforts to eliminate it, most recently in 2000, when Clinton vetoed a larger bill that included a repeal of the excise fee.

It survived despite enjoying a broad coalition of support to eliminate it, from Republican and Democratic lawmakers and presidents alike, consumer groups and businesses, and the telecommunications companies that were forced to levy, collect and pass the surcharge along to the government.

The elimination of the tax may have occurred anyway, many note, as the evolution of the telecom industry hastens and as more calls are routed over IP-based networks rather than traditional long-distance lines.

Making Adjustments

The phone industry cheered the decision. "It is more than past time that consumers not be penalized for simply using critical communications services," said Walter B. McCormick Jr., President of USTelecom, an industry association.

McCormick and others were quick to call for additional action to remove or reduce other existing taxes.

"The average wireless consumer pays more than 17 percent in local, state and federal taxes, fees and surcharges every month," said Kimberly Kuo, executive director of another industry group, MyWireless.org. "We hope that state and local governments will take note and reduce the outrageous tax burden wireless consumers are forced to bear."

Regulators will be forced to revisit numerous aspects of their oversight of telecom, much of which dates to the earliest days of phone communications, according to telecom analyst Jeff Kagan.

"The landscape that was in place when the laws were passed and the one we're seeing emerge now are two entirely different worlds," Kagan told the E-Commerce Times.

Indeed, the Federal Communications Commission is already mulling a plan to change another tax program, the Universal Service Fund (USF), which funds telecom access for rural areas and low-income people, by changing the current percentage tax to a flat-fee for all phone numbers.

"IP communications makes it difficult to even levy the taxes the same way that it used to be done," Kagan added. "Technology has outrun the regulations."


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