Regressive Tax Harms Telecommunications Consumers
Today, the IRS released guidance providing details on refunds owed to consumers who overpaid on telecommunications Federal Excise Taxes (FET). However, while taxes on most services will no longer be collected, consumers who buy lifeline and standalone local telephone services will continue to pay FET. As this ConsumerGram will explain, this leaves a disproportionate share of the excise tax burden upon low-income consumers, consumers who do not extensively use telephone services, and consumers with disabilities.
In 1898, Congress enacted a luxury tax on telecommunications services in order to fund the Spanish-American War. After four months of fighting, the war was over, but the tax remained. In fact, until recently, a 3% tax on telecommunications services was applied to all wireless, local landline and long distance services. The notion of taxing telecommunications services has been controversial, since it runs counter to other federal government policies designed to promote the widespread availability of affordable telecommunications services. However, as will be discussed, recent tax changes have made the FET more controversial than ever and a prime candidate for repeal.
New Tax Rules Have Taken Effect
Important changes are reducing the excise tax burden on some consumers, but not all. Thanks to recent court rulings, the FET no longer applies to long distance (toll) and wireless services. In addition, the IRS has deemed that bundled services – services that combine local and all-you-can-eat long distance services (among other services) for a single price – are exempt, since they make no distinction between local and toll calling. For similar reasons, Voice-over-Internet-Protocol services (coined VoIP services) – a service that uses the Internet to carry voice traffic – are also exempt. These changes took effect August 1, 2006 and should greatly benefit consumers that subscribe to wireless, VoIP and local bundled services, as well as those who make a significant amount of long distance calls. Today, the IRS released its guidance which details how refunds will be given back to consumers who overpaid the excise tax.
However, while most telecommunications services will no longer be subject to FET, consumers who have “plain old local telephone services” are not exempt from excise tax and will see little benefit from the tax change.
Who Benefits from Tax Relief?
As mentioned, consumers who subscribe to bundled telecommunications services are exempt from excise tax. Because bundled telecommunications services are becoming popular among small businesses and some consumers, as confirmed by surveys and consulting reports, in the coming years, FET collections are expected to decline. For those who spend a lot on telecommunication services and those who purchase multiple telecommunications services, switching to bundled services can cost consumers significantly less than buying the same services separately.
Similarly, VoIP has grown in popularity and is a lower-cost alternative for those consumers who buy multiple services, such as high-speed Internet, long distance and local telephone services. Many consumers with broadband services can buy VoIP services with quality comparable to traditional telephone services at significantly lower prices.
As a result, small businesses, tech-savvy consumers, and consumers who buy multiple services, can and are signing up for tax exempt bundled and VoIP services at an increasing rate. In effect, the consumers that benefit from lower priced bundled services and lower priced VOIP services are the same consumers exempt from the excise tax.
Who is Left Paying the FET?
While these tax changes are good for many consumers, the FET will remain in effect for standalone local telephone services. Standalone local telephone services are services that are sold separately and are not part of any single-priced bundled service. In other words, consumers who do not use telephone services extensively and subscribe to “plain old local telephone services” will continue to be taxed. This means that, while most consumers will see tax relief, those left paying the telecommunications excise tax are, in fact, the most vulnerable consumers – namely, consumers with lower telecommunication needs, lower incomes and disabilities. Let’s look at these consumer groups:
- Consumers with lower telecommunication needs. Consumers who buy multiple services – like long distance, local, Internet and video services – can save by bundling services, and they will also save because bundled services are exempt from excise tax. Meanwhile, consumers who have standalone telephone services and make few telephone calls will be subject to the tax. As a result, taxed are consumers with little need to make long distance calls and those less likely to have a broadband connection. This means that many elderly consumers, those who depend primarily on local calling and access to emergency services, are less likely to subscribe to bundled or VOIP services, and they will not benefit from the recent tax changes.
- Consumers with lower-income. Many low-income consumers, specifically those receiving government-sponsored financial aid, can qualify for discounted local telephone service under a plan called lifeline services. Consumers who want a telephone, but do not expect to make many local calls, can signup for discounted “economy plans” and “measured service plans.” Unfortunately, the telecommunication excise tax applies to lifeline services, economy services and measured services. Consumers without computers will not benefit from lower priced VoIP and they too will pay FET on their local phone service. This means that the tax exempts those who can afford bundled and VoIP services, but it targets consumers who can least afford basic local telephone services.
- Consumers with disabilities. The tax also applies to the leasing of local telecommunications equipment. While most consumers no longer lease their telephone, the rental of specialized equipment for the hearing impaired and those with other disabilities are still subject to FET.
One hundred and eight years ago, Teddy Roosevelt charged up San Juan Hill, and the U.S. government has been charging telecommunications consumers every since. While wireless, long distance, bundled local and VoIP services are now exempt from excise tax, the most vulnerable consumers continue to pay. This ConsumerGram shows that the current telecommunications excise tax places a disproportionately higher burden on the poor, consumers who use telecommunications services the least and consumers with disabilities. These disadvantaged consumers are the least likely to benefit from lower priced VoIP services and attractively-priced bundled services, and they are the very consumers singled out by excise taxes. It is time for Congress to do the right thing and abolish this outdated, arbitrary and regressive tax for the benefit of all consumers in the information age.
 “Battle for the Bundle: Consumer Wireline Service Pricing,” Equity Research, Bank of America, January 23, 2006.
 “Quarterly VoIP Monitor: VoIP Gathering Momentum – Expecting 20 Million Cable VoIP Subs by 2010,” January 20, 2006; “Quarterly VoIP Monitor: VoIP Growth Still Accelerating,” Bernstein Research, April 18, 2006; “Quarterly VoIP Monitor: Six Million and Counting,” Bernstein Research, June 12, 2006; Richard Greenfield “Vonage Holdings: Attractive Consumer Product, but IPO Not Attractive Above $10, PALI Research, May 22, 2006; and William Stofega, “U.S. Residential VoIP Services 2006-2010 Forecast and Analysis: Where There is Smoke, Is there Fire?” IDC, #201638, Volume 1, May 2006.