Feds cut off phone tax after 108 years

A pesky, century-old tax on your phone bill is finally being put to rest.

The Treasury Department said Thursday that it will no longer collect a 3% federal excise tax on long-distance calls and would refund about $15 billion to taxpayers.

The tax was imposed in 1898 to help pay for the Spanish-American War. It was designed as a tax on wealthy Americans, back when phone service was considered a luxury.

"It's not often you get to kill a tax, particularly one that goes back so far in history," Treasury Secretary John Snow said.

Treasury said it was conceding its battle to uphold the tax after five appeals courts declared it illegal because of changes in the way long-distance calls are billed.

Phone companies and cellular carriers must stop billing for the tax Aug. 1. Individuals and businesses can file for refunds next year on their 2006 tax returns for excise taxes paid on long-distance calls since March 1, 2003.

Individuals who don't have phone bill records can seek a standard refund that has yet to be determined.

Elimination of the tax will cost Treasury about $46 billion in refunds, lost revenue and administrative expenses in the next five years. That should be offset by higher tax revenue from a strong economy, Snow said.

Phone companies hailed the move. "This is a good first step in alleviating consumers' telephone tax burden, which currently accounts for more than 18% of the average bill," Verizon Vice President Tom Tauke said.

Callers will still pay a 3% excise tax on local phone calls. But that tax will no longer be levied on services that don't distinguish local calls, such as cellular, all-distance landline plans and Internet-based offerings. Consumers with those services can seek refunds on their full excise-tax payments.

Snow urged Congress to repeal the local-phone excise tax, as well.

Contributing: Reuters