Federal Telephone Excise Tax

What is the Federal Telephone Excise Tax

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

The tax doesn't matter to purported "packaged" services, for example, prepaid calling cards, voice-over-internet protocol (VOIP) services and mobile telephone contracts that don't recognize neighborhood and long-distance calls inside the U.S.

BREAKING DOWN Federal Telephone Excise Tax

The federal telephone excise started in 1898 as a manner to help pay for the Spanish American War, given there was no federal income tax at that point. It was called a "war tax" yet in addition alluded to as a "luxury tax," since telephones then, at that point, were exceptional and typically owned simply by the rich.

The original telephone excise tax was canceled in 1902 however restored in 1914 after the episode of World War I in Europe. Albeit the U.S. wasn't straightforwardly engaged with the war as of now, threats upset trade and prompted a decline in U.S. corporate profits. The subsequent drop in tax revenue from corporations propelled the Emergency Internal Revenue Tax Act, including reinstatement of the telephone tax. The tax increased after the U.S. entered the war in 1917 however Congress revoked it in 1924.

The telephone excise tax returned during the Great Depression with the Revenue Bill of 1932, and has since been reestablished many times in different forms. It was added to the Internal Revenue Code of 1954 as a 10 percent tax on nearby and long distance calls. This rate dropped to 3 percent in 1966, however climbed again to 10 percent during the Vietnam War. During the 1970s and 1980s the tax varied somewhere in the range of 1 and 3 percent, where it as of now stands. In 2000, President Clinton rejected a bill to cancel the tax.

Major Revisions to the Federal Telephone Excise Tax After Lawsuit

A huge change came in 2006 after the IRS lost a court fight with the American Bankers Insurance Group. The issues were complex and connected with the definition of a "cost" call. It brought about the expulsion of costs for long distance calls and packaged 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 contends that the tax was originally intended to be impermanent and subsequently ought not be part of the permanent tax code; moreover, they contend there is no legitimization for a "extravagance tax" on telephones, which are presently an essential of modern life. On the left, antiwar activists contend that as a "war tax" it ought to be gone against on moral grounds since, they contend, it gives revenue to the pursuing of a supposed "permanent war" unauthorized by Congress.