Telecommunications: The Excised Phone Tax

Getting your tax money back

Here's a good reason to get started on your taxes early. The 3% tax on monthly charges for long distance, wireless, and other bundled telecom services is finally going away--retroactively. You can apply for a refund with your business' 2006 federal income tax returns.

The tax, known as the Federal Excise Tax (FET), was conceived in 1898 as a luxury tax to help pay for the Spanish-American War. In May the Internal Revenue Service and Treasury Dept. discontinued it after companies including OfficeMax(OMX ) and Hewlett-Packard (HPQ ) successfully argued in court that the tax was archaic. Phone companies were ordered to stop collecting the FET by Aug. 1.

Businesses that used long-distance or cellular-phone service between March, 2003, and July, 2006, can request a full refund of their FET during this time, plus interest. (The statute of limitations permits payouts only for the past three years.)

Determining your refund isn't easy. "You need to figure out how many providers you have, find the applicable contracts and invoices, and calculate the amount collected and the interest for each quarter," says George Stewart, general manager of audit services at Telwares Communications in Pleasanton, Calif., which manages telcom expenses. Carriers may include one-time charges and surcharges in the FET, which aren't refundable.

A cottage industry of law firms, accountants, and consultants has cropped up to help calculate refunds and prepare IRS-compliant backup documents. Telwares is among those using auditors to crunch the numbers from invoices. Others, such as INI Global and Wireless Watchdogs, use software to scan electronic bills. If you decide to use an outside adviser, pick one that charges a flat fee, and start looking soon. This "gift" from the IRS is one-time only.

By Elizabeth Woyke

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