1. What is the federal excise tax (FET)? Since 1898, in order to fund the Spanish-American War, the IRS required phone companies to collect a three (3) percent federal excise tax from their customers based on each customer’s local, long distance and teletypewriter services revenues.
2. What happened to the FET recently? On May 25, 2006, the IRS announced it (and telephone companies) would stop collecting the FET on the long distances telephone services portion of customers’ bills dated on and after August 1, 2006. Five federal appeals courts have prohibited the IRS from collecting the tax on long distance services. See NTCA Washington Reports article, May 15, 2006.
3. Does the FET still apply to local telephone services? Yes, if the customer is charged local-only services separate from (and not bundled with) long distance services. The IRS defines "long distance service" and "bundled services" as "nontaxable services." The IRS defines "local-only services" as "local telephone service … provided under a plan that does not include long distance telephone service or that separately states the charge for local service on its bill to customers." The IRS defines "bundled services" as "local and long distance service provided under a plan that does not separately state the charge for the local telephone service … [and includes] Voice over Internet Protocol service, prepaid telephone cards, and plans that provide both local and long distance service for either a flat monthly fee or a charge that varies with the elapsed transmission time for which the service is used. Telecommunications companies provide bundled service for both landline and wireless (cellular) service. Phone companies will have to certify that the taxes reported on federal tax Form 720 do not include any tax on nontaxable services billed after July 31, 2006.
4. How can taxpayers get a refund of the taxes paid? Individual and business taxpayers can seek a credit refund of the FET that they paid based on their long distance telephone services before August 1, 2006. Taxpayers seeking the refund will have to certify to the IRS that: (1) the taxpayer has not received a credit or refund of the FET from the phone company, and (2) the taxpayer will not ask the phone company for a credit or refund. Individual taxpayers can request a "safe harbor" refund amount of all FET billed and paid for long distance and bundled services after February 28, 2003, with interest, by claiming a refund on their 2006 federal tax returns. Alternatively, individual and business taxpayers can collect their past phone bills since February 28, 2003, tally the federal excise tax and insert that amount on their 2006 tax forms. Businesses cannot use the "safe harbor refund" method and must include the refund as income if the business deducted the FET as a business expense.