* Re-examining telecom tax system
For the first time in 40 years, the nation’s telecom tax system might be getting an overhaul. The federal excise tax on communications services – which adds 3% to the cost of voice services – had its last major revision in 1965, during an era of monopoly telephone service. Several proposals are floating around Washington to modify, expand or repeal this tax in light of the migration of voice services to the Internet.
At the same time, states and municipalities are considering ways to revamp their taxes on telephone services, which add another 10% to 35% to monthly bills. States are considering proposals that would apply a lower tax rate on all information services, including voice, data and video available from cable, satellite, wireless and ISPs.
But it’s unclear whether any of these reform efforts will pass through Congress or enough state legislatures to make a difference to corporate customers.
“These are entrenched taxes that have been around for a better part of a century, born of an age when telephone companies had a monopoly,” says Lee Goodman, a partner with law firm LeClair Ryan. “Now the taxes are irrational in the information economy.”
Goodman says states such as Virginia – which has one of the highest local telecom tax rates – have been talking about reforming tax structures for years but haven’t been able to get it done. “I see momentum building,” he says. “But it’s too soon to tell if it will happen.”
Telecom services are taxed at a much higher rate than most goods. In addition to the 3% federal tax on communications services, corporate phone bills are levied universal service and other fees – which total 11.1% – to cover telecom costs in rural areas and schools. Only alcohol and tobacco are taxed more heavily.
Meanwhile, states and municipalities tax communications services at an average of 14%, bringing in more than $20 billion per year to government coffers, according to the Congressional Budget Office.
Today’s taxes apply to traditional telephone services, and don’t cover VoIP services available from cable companies or specialized VoIP carriers. Most Internet access services are exempt because of the Internet tax moratorium, which was extended last December until 2007.
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