Contact Center Industry News

[May 26, 2006]

Remember the Maine, forget the phone tax

(Baltimore Sun, The (KRT) Via Thomson Dialog NewsEdge) May 26--It took America less than 100 days to start and finish the Spanish-American War. Americans have been paying for that "splendid little war" ever since.

That line on your wireless and landline phone bills that says "federal excise tax" started as a toll on phone calls by wealthy Americans to pay for the war. The war ended quickly, 108 years ago. But the temporary tax did not, growing over time to net more than the wealthy as telephones became ubiquitous.

Yesterday, however, U.S. Treasury Secretary John W. Snow said the government will finally abolish the "outdated, antiquated tax that has survived a century beyond its original purpose, and by now should have been ancient history."

"It's time to 'disconnect' this tax and put it on the permanent 'do not call' list," Snow said.

Starting Aug. 1, the Internal Revenue Service will stop collecting that 3 percent tax on long-distance telephone service, including wireless, voice over Internet, prepaid and other bundled services. Consumers will receive $15 billion in refunds in their 2006 tax returns filed in 2007, Snow said.

Given the statute of limitations, that figure only covers the last three years that American consumers and businesses have paid the excise tax - enough money to fight Spain at least a few hundred more times, given that Congress appropriated just $50 million back then for that campaign.

"Wow, that's amazing," said Paul A. Kramer, a Johns Hopkins University history professor who wrote The Blood of Government, a book released this year that deals partly with the Spanish-American War. "With that kind of money, we could have taken over the whole upper half of South America, too."

Perhaps Spain and all of Latin America can breathe easy now.

"I only went to public schools, but I was watching the History Channel the other day and found out this war has been over for quite some time," said Grover G. Norquist, president of Washington-based Americans for Tax Reform, which launched a campaign against the tax last year.

"This was supposed to be a temporary, hidden tax on rich people since they were the only ones who had phones and could afford long distance service back then," Norquist said. "Now everybody has phones. It became a permanent tax on everybody."

Back then, the tax was imposed on telephone bills according to distance and duration. The U.S. had no federal income tax at the time, noted David Traxel, a professor of history at the University of Sciences in Philadelphia.

"Income tax didn't become effective until 1914," said Traxel, who wrote a book called 1898, which covered the Spanish-American War. "You had to rely on tariffs or temporary excise taxes, which were usually seen as a sin tax or a luxury tax. But once those things get in, they're very difficult to get rid of."

These days, in a competitive marketplace that didn't exist in 1898, most consumers pay for telephone service by the minute. Distance is no longer a factor in most cases.

That's why a few years ago, big businesses such as Ford Motor Co. and Amtrak began balking at paying the tax on long distance and taking the government to court, according to Chicago tax attorney Thomas D. Sykes. The government fought back.

But after losing 14 court cases, including five in the federal appeals courts, the government paid back tens of millions of dollars to plaintiffs.

Soon, members of Congress were calling for an end to the tax. They included Rep. Jim Ramstad, a Minnesota Republican and chairman of the Ways and Means Oversight Committee, which has jurisdiction over the IRS.

"They had no choice but to end this tax," said Sykes, a partner in the law firm of McDermott, Will & Emery. "It's not like Congress hasn't looked at this tax since 1898. The tax was actually overhauled by Congress in 1965. They were going to phase it out in 1969, but Congress couldn't resist the lure of the money. It became permanent in the 1990s.

"Over the years, the government was under a lot of pressure to concede this," Sykes said. "Big companies didn't want to pay for it and phone companies didn't want to collect it. If you count the landlines and wireless, my guess is that it's about $3 billion to $3.5 billion a year they'll lose in taxes. It's a lot of money to give up when the government is running deficits."

Which might explain why the federal government hasn't stepped away from this obscure little tax completely. Yesterday's announcement covers only the part relating to long distance service. There is still a federal tax on local telephone service.Snow has called on Congress to terminate that tax as well, and there is a movement under way by some lawmakers to do so.

Telephone giants such as Verizon Communications Inc. hailed the move yesterday. "This is a good first step in alleviating consumers' telephone tax burden, which currently accounts for more than 18 percent of the average bill," said Tom Tauke, Verizon's executive vice president of public affairs, policy and communications.

Congress should move to repeal the remaining excise tax on local phone service as well, Tauke said.

As history buffs know, America made out fairly well at the end of the short war. The U.S. got the Philippines, Guam, Puerto Rico and Guantanamo Naval Base out of the deal, according to Traxel.

American consumers, however, shouldn't rush out to buy a Benz just yet with their windfall.

While big businesses that use a great deal of long distance service will likely reap millions from this, the typical individual consumer might expect about $16 back, Sykes said. If refunds for wireless bills are included, consumers might get an additional $54, Sykes estimates.

Snow said yesterday that figures are not yet available and that the IRS is still working out a simplified method for individuals to use to claim a refund on their tax returns.

Individuals who disagree with the IRS's estimated refund can challenge the numbers, but experts say the amount probably isn't enough to go to war over.

At least consumers will no longer pay for Teddy Roosevelt and his glorious Rough Riders to charge up San Juan Hill.

As Ramstad, the congressman from Minnesota, said, "I'm glad we're finally hanging up on a tax that should have ended when the buggy whip went out."

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