What it means
An excise tax is a tax on a specific type of product or service, rather than on income or profit. In this case, the customer pays a percentage of the amount billed for qualifying telephone service.
The phone company collects the tax and sends it to the Internal Revenue Service, so the company acts as a collection agent and is not the one bearing the cost. The tax dates back to the late nineteenth century, when it was introduced to help pay for a war and was meant to be short term.
It has been repealed, restored and reshaped many times since then, but a version has remained in the tax code. The statutory rate has long been 3% of the taxable charge.
Over the years, changes in technology made the original wording hard to apply. After court cases about whether long-distance charges could lawfully be taxed on a time and distance basis, the tax authority stopped collecting the tax on long-distance and bundled services in the mid-2000s.
What remains is tax on local-only telephone service and a small number of related services. For a business, the practical point is that the tax appears as a separate line on a telephone invoice and should be recorded correctly.
Most companies code it with the cost of telecoms, but some treat it as a separate tax account so that it can be reviewed. Customers who are exempt, such as certain non-profit organisations, can usually claim exemption by giving the provider a certificate.
Telecom providers file returns for the tax on a regular schedule, and they are expected to apply it consistently across customers. If a customer is billed in error, the usual route is to ask the provider for a credit, because the provider is the party that dealt with the tax authority.
Keeping the invoice and the exemption paperwork makes that conversation quick. A useful nuance is that this is a federal tax, so it is added to any state and local taxes and fees on the same bill.
People often lump all of these charges together, which makes it hard to see which part is which. A finance team reviewing telecom costs should look at each tax line individually.
In practice
Real-world examples.
Example
A dental practice pays $200 a month for local-only phone lines. Its invoice includes $6 of federal excise tax, shown separately from the service charge. The practice manager checks the line and finds that it matches 3% of the taxable amount.
Example
A charity applies for tax exemption on its local phone service. It gives the provider an exemption certificate, and the provider stops adding the tax. The charity saves $4.50 a month on a monthly bill of $150.
Example
A growing company switches from separate local and long-distance service to an internet-based phone system. The provider's invoice no longer shows the federal excise tax on the bundled service. The finance team updates its coding rules to match.
Formula
Calculation
Tax = Taxable telephone charge x Tax rate
A small office receives a monthly bill for local telephone service of $200. The tax rate is 3%, so the tax is 200 x 0.03 = $6. The total bill is 200 + 6 = $206. Over a year, the tax comes to 12 x 6 = $72.Case study
Seen in the real world.
Brookfield Property Services is an illustrative, fictional company with 12 offices, each with local phone lines. During a cost review, the finance analyst found that some bills included a federal excise tax line and others did not, even though the services looked similar.
She traced the difference to the way each provider categorised the service. Local-only lines were taxed at 3%, while bundled packages were not. On total local charges of $4,000 a month, the tax was 4,000 x 0.03 = $120 a month.
The company moved a few offices onto bundled packages where that was cheaper overall, and it recorded the savings in the telecom budget. The illustrative lesson is that a small tax line can reveal how a supplier has classified a service.
Watch out
Common mistakes.
- Assuming that every telephone charge carries the tax, when long-distance and many bundled services are no longer taxed.
- Treating the tax as income of the phone company, when the provider only collects it and forwards it to the government.
- Lumping the federal tax together with state and local charges, which makes errors harder to spot.
Questions
People also ask.
Who pays the federal telephone excise tax?
The customer pays it as part of the bill, and the phone company collects and remits it.
Is the tax deductible for a business?
Generally it can be included in telephone costs as a business expense, but a tax adviser should confirm the treatment.
Can an organisation be exempt?
Some organisations, such as certain non-profit bodies, can claim exemption by giving the provider the right paperwork.
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