Telephone Companies

Telephone Companies

December 12, 2004 | By Keith Martin in Washington, DC


A US district court in New York said that a 3% federal excise tax that the US government collects on telephone calls does not have to be collected on charges for long-distance calls, unless the charges vary by the distance of the call. In the case before the court, the telephone customer was billed based only on the duration of his calls and not also the distance.

Critics of the telephone tax complain that the law is antiquated and needs to be rewritten by Congress. The US government collects a 3% excise tax on “communication services,” which are defined as “local telephone service, toll telephone service and teletypewriter exchange service.”

Long-distance calls may be taxed as “toll telephone service” depending on how the customers are charged. They are taxable if customers are charged fees that vary “with the distance and elapsed transmission time” of each call and the fees are “paid within the United States.” Alternatively, the calls are
taxable if the service is like a WATS line where the customer can make an unlimited number of calls outside his local phone system for a flat fee or for fees tied solely to the amount of time spent on the phone.

The New York case is Fortis, Inc. v. United States. The court gave the litigants its decision in mid-September, but the decision was not released to the public until late October.

The government argued in the case that it should be able to collect taxes on longdistance calls even if the customers are billed based solely on the duration of the calls. The court declined to read the word “distance” out of the statute. It also rejected the government’s claim that the call charges in the Fortis 
case varied by distance because the phone company had different rates for intrastate, interstate and international calls. 

Two other US courts split in similar cases earlier this year. A US district court in Florida ordered the phone company to collect taxes in a case called American Bankers Insurance Group v. United States. A US district court in Ohio said in OfficeMax v. United States that charges must vary both by distance and
elapsed time to be taxable.