In 1898 Congress enacted a tax on telephones, then a luxury item, to help pay for the war against Spain. The war lasted 114 days (we won). The tax has lasted 38,181 days, and counting.

On several occasions over the years, the tax was scheduled to expire, but Congress extended it each time. In 1990, Congress made the tax permanent at three percent. As technology has expanded, our elected leaders have insured that the tax grows with it. In addition to telephones, the tax today applies to fax machines, cell phones and internet lines. Cell phone users alone pay about $4.5 billion a year.

Recently, the U.S. Court of Appeals for the D.C. Circuit, joining two other circuit courts, issued an opinion saying that long-distance telephone services are not subject to the federal telecommunications excise tax. The D.C. Circuit held that the definition of “toll telephone service” requires a toll charge that varies in amount with the time and distance of each individual communication.

The Court’s opinion effectively negates the applicability of the Spanish American War Tax. Consequentially, consumers of telecommunication services should see the cost of their telephone bills fall by three percent. The IRS, however, has yet to concede the issue and continues to require collection of the tax, which brings in approximately $8 billion annually to the federal treasury.

Read the full Policy Note here