What is the 'Federal Telephone Excise Tax '

The federal telephone excise tax is a statutory 3 percent federal tax on local telecommunications services. It is collected from the customer by telephone companies and then passed on to the U.S. Internal Revenue Service (IRS).

The tax does not apply to so-called “bundled” services such as prepaid calling cards, voice-over-internet protocol (VOIP) services and mobile phone contracts that do not distinguish between local and long-distance calls within the U.S.

BREAKING DOWN 'Federal Telephone Excise Tax '

The federal telephone excise began in 1898 as a way to help pay for the Spanish American War, given there was no federal income tax at the time. It was called a “war tax” but also referred to as a “luxury tax,” since telephones then were uncommon and typically owned only by the wealthy.

The original telephone excise tax was repealed in 1902 but reinstated in 1914 after the outbreak of World War I in Europe. Although the U.S. wasn't  directly involved in the war at this point, hostilities disrupted trade and led to a decline in U.S. corporate profits. The resulting drop in tax revenue from corporations inspired the Emergency Internal Revenue Tax Act, including reinstatement of the telephone tax. The tax increased after the U.S. entered the war in 1917 but Congress repealed it in 1924.

The telephone excise tax came back during the Great Depression with the Revenue Bill of 1932, and has since been reinstated dozens of times in various forms. It was added to the Internal Revenue Code of 1954 as a 10 percent tax on local and long distance calls. This rate dropped to 3 percent in 1966, but climbed again to 10 percent during the Vietnam War. During the 1970s and 1980s the tax fluctuated between 1 and 3 percent, where it currently stands. In 2000, President Clinton vetoed a bill to repeal the tax.

Major Revisions to the Federal Telephone Excise Tax After Lawsuit

A significant change came in 2006 after the IRS lost a court battle with the American Bankers Insurance Group. The issues were complex and related to the definition of a “toll” call. It resulted in the banishment of tolls for long distance calls and bundled services.

A Target of Tax Reformers

The telephone excise tax has long been targeted by reformers on both the right and left. The conservative Tax Foundation argues that the tax was originally meant to be temporary and thus should not be part of the permanent tax code; moreover, they argue there is no justification for a “luxury tax” on telephones, which are now an essential of modern life. On the left, antiwar activists argue that as a “war tax” it should be opposed on moral grounds since, they argue, it provides revenue for the waging of a so-called “permanent war” unauthorized by Congress. Over the decades, the tax has cost American consumers about $300 billion, according to the Congressional Research Service.

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