Understanding the Taxes Imposed on Your Telecom Bills
This issue contains the second part of a two-part article on
regulated and non-regulated charges and taxes placed on them.
Unfortunately the subject of taxes as it applies to your telecom
bills is broad enough to warrant a lengthy discussion.
In Part I, we covered the regulated and non-regulated charges
that will appear on your bills. This issue will describe the
different kinds of taxes that you will find, what they are paid
for and who is exempt from them.
Taxes and tax-like charges can add as much as 25%, and more, to
local telephone charges in some jurisdictions. This is an area
to which no rules are universally applicable, so all
generalities have exceptions. That being said, there are three
"rules-of-thumb" which can be useful in understanding the taxes
placed on your bills.
1. Generally, the four types of taxes include service fees and
charges; franchise tax or surcharges; sales use or special
taxes; and federal excise tax.
2. Taxes are not uniformly imposed on all services.
3. Some categories of users are exempt from some taxes. Let's
take a closer look at specific taxes you'll encounter on your
bills.
Specific Service Fees and Charges These charges may be imposed
to support 911 services, operation of the Public Utility
Commission (California), provision of special equipment for
handicapped persons (California), Universal Service Funds,
poison control centers (Texas), etc. The Presubscribed
Interexchange Carrier Charge (PICC) would also fall into this
category. Such charges may be calculated on a per-line or
percentage basis. These fees apply universally and there are no
exceptions.
Franchise Taxes or Surcharges
Usually local items, these charges can and may be imposed by the
county or state governments. Most often these are calculated as
a percent of the items that apply, (various local service
charges, additional calls or message unit charges, and
installation charges), but they may be calculated on some other
basis. This tax is called a variety of names, including
franchise fee, city tax, municipal charge, surcharge, additional
charge (AC), gross receipts tax, etc. As usual, this varies from
state to state.
Sales, Use or Special Taxes
These taxes may be imposed by a municipality, county, school
district, transportation district, state or other taxing body.
The "state and local taxes" section of your bill may be a
combination of such items. Sales, use and special taxes
generally apply to local service charges, additional calls or
message unit charges, installation charges, and intrastate toll
charges. (Most states also tax interstate toll charges.) And
again, these taxes are most often a percent of the items to
which they apply. That base may include franchise taxes,
surcharges or other service fees. In other words, you are taxed
on taxes!
Federal Excise Tax
This tax is imposed by Congress on non-exempt items. It
generally applies to regulated services, except private lines,
mileage, centrex-related enhancements, service and installation
charges, and some other services. The base on which the tax is
calculated may include franchise taxes, surcharges, and gross
receipts taxes. Originally a Spanish-American War "luxury" tax,
the rate has varied between 1% and 10% over the years, but has
been held constant at 3% since 1983.
Remember, taxes are not uniformly imposed on all services. For
example, white-page directory advertising is not taxed in most
states, unless this statement item includes other items.
(Arkansas and Oklahoma are exceptions, however.)
Who is Exempt?
Charities, churches, schoools, nonprofit educational and
hospital operations, certain other entities that receive
government funding, foreign counselor operations, and others,
may be exempt from state and/or federal taxes. For example,
common carriers, newspapers and broadcast companies may be
exempt from federal tax on some services.
To understand the specific services that are exempt from federal
tax, refer to the Internal Revenue Service publication 510
entitled Communications Tax. This publication is very specific
as to what taxes are federally imposed and which are exempt.
Contact me directly if you'd like your own copy.
As you can see, taxes can be a complicated subject as it applies
to your telecom bills. But understanding them can be a major
step in reducing your costs when doing a cost-reduction study.