The 3% federal telephone excise tax on communications services was established in 1898 to assist with financing the Spanish-American War and continued for the same purpose for World War I. Before the widespread use of the telephone following World War II, the tax was considered a “luxury” tax. Although the tax was scheduled for elimination over several decades, American consumers continue to pay the 3% federal tax on all local and long-distance service today. It is the third largest federal excise tax behind those on tobacco and alcohol.
There are several ways to access the Internet, including telephone, cable, and wireless infrastructures. The 3% federal excise tax applies to communications services, however, the boundary between taxable communications services and other telecommunications and information services is often unclear. This issue is becoming more complex as traditional and non-traditional service providers offer bundled services to consumers.
The 3% federal excise tax does not apply to sales of Internet access. However, the tax is typically applied to the local or long-distance telephone system calls used to reach ISPs. Other technologies can be used to reach ISPs but may not be subject to this tax.