On May 25, 2006, the Internal Revenue Service announced that it will stop collecting the long-distance telephone tax. This landmark announcement came after the federal government lost multiple court cases challenging the collection of a 3% federal excise tax on toll telephone service whose rate was once determined by distance and elapsed transmission time but now is based solely on elapsed transmission time.
The first key element of this ruling addresses future collection of the tax. Effective August 1, 2006, telecom service providers collecting the tax on behalf of the federal government are required to stop collection against bundled and long-distance service. According to Notice 2006-50, Section 3 TERMS DEFINED, (a) Bundled Service is defined as "local and long-distance service provided under a plan that does not separately state the charge for the local telephone service. It includes, for example, VoIP, prepaid telephone cards, and plans that provide both local and long-distance service for either a flat monthly fee or a charge that varies with the elapsed transmission time for which the service is used. Telecommunications companies provide bundled service for both landline and wireless (cellular) service."
This definition allows the 3% tax to be repealed for all packaged services, including wireless service packages bundling toll long-distance service in the price. Notice 2006-50 also defines long-distance service as "telephonic quality communication with persons whose telephones are outside the local telephone system of the caller," in Section 3, (c) Long distance service.
Not only is the tax void after July 31, 2006 on bundled packages and long-distance telephone service, but Notice 2006-50 stipulates that subscribers are due refunds with interest from February 28, 2003 forward on all applicable excise tax collected. Taxpayers other than individual taxpayers (entities) are required to retain records substantiating the actual amount paid (e.g. telecom billing records) to support their refund requests.
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