Telecom Scandal: The Great Excise Tax Scam

Telecom tax. Image: JSC and AI Art Generator.

Telephone companies, like companies in every industry, have been involved in “scams” of one sort or another.  Such scams can be undertaken to simply enhance the company’s bottom-line or serve a government’s interests.  One of the greatest of all telecom scandals is the great excise tax scam that was best described by Sen. Charles Grassley (R-IA):

The federal government installed a “luxury tax” at the turn of the last century to apply to the wealthiest Americans who could afford long-distance telephone service.

The federal excise tax on long-distance phone calls was enacted to help pay for the Spanish American War. It’s been nearly 109 years since Teddy Roosevelt and the Rough Riders charged up San Juan Hill.

And yet the IRS continued to collect the long-distance tax long after the signing of the Treaty of Paris ended the war.  Go figure. The war lasted less than a year and yet the federal government collected the tax for more than a century.

Sen. Grassley issued this statement on July 3, 2007.


A 2005 Congressional Research Service (CRS) report detailed that Congress enacted an excise tax on telephones in 1898 when they were then luxury items to help pay for the war against Spain. The war lasted 114 days and the tax lasted over 38,000 days.  The IRS and the Department of Treasury finally eliminated the 3 percent federal Spanish American War Tax on long distance phone service in May 2006.

The excise tax had a long, roller-coaster history.  In 1898, Congress passed the War Revenue Act authorizing a tax on a wide range of goods and services, including amusements, liquor, tea, tobacco and established a 1-cent per call “telephone tax”, which lasted three years.

When the tax was first levied, there were an estimated 681,000 phone subscribers in the U.S.; in 2006, there was an estimated 167.5 million fixed or landline subscribers and approximately 233 million cell phone subscribers in the States.

On September 4, 1914, Pres. Woodrow Wilson requested Congress raise $100 million through “internal” taxes to fund the nation’s effort to fight World War I. Congress quickly passed the Emergency Internal Revenue Tax Act of 1914, a renewal of the excises tax adopted in the Spanish-American War Revenue Act. It included a tax of 1 cent for telephone calls costing more than 15 cents.

The taxes instituted under this Act were initially set to expire on December 31, 1915. However, on December 17, 1915, Congress passed a joint resolution that continued the taxes instituted in 1914 through December 31, 1916.

The War Revenue Act of 1917 upped the tax of “5 cents upon each telegraph, telephone, or radio, dispatch, message, or conversation, which originates within the United States, and for the transmission of which a charge of 15 cents or more is imposed.” The tax was repealed in 1924.

Faced with the Great Depression and reduced federal revenues, the tax was yet again reintroduced in 1932. In 1941, as the U.S. was about to enter World War II, the tax was re-re-introduced but this time extended to local telephone service for the first time.  During the war, the tax rate was increased to 25 percent for long-distance calls and 15 percent on local services when the charge was more than 24 cents.

However, as the CRS notes, “Telephone taxes have been continuously collected since this period.”  While they were scheduled for elimination in 1969, the Vietnam War not only caused extension of the tax but resulted in higher rates.

Making matter wars, federal budget deficits in the 1970s, 1980s and 1990s led to repeated extensions – and numerous postponements of the tax’s repeal. The CRS adds, “In 1990 the tax became a permanent part of the federal revenue structure at a 3% tax rate.


Over the years, the telephone excise tax drew repeated Congressional efforts for its repeal.  In 2000, Rep. Ed Royce (R-CA-39) voted with the House to repeal the “tax on talking.” Royce was a cosponsor of the bipartisan bill [H.R.3916] which passed by a vote of 420-2. He noted:

Only Washington could extend a tax 102 years. And only Washington would think to tax talking. It’s so unbelievable that it’s a perfect candidate for ‘Ripley’s Believe It or Not.’ I would think that after 102 years, we would have paid off the five months of the Spanish-American War. This tax should have ended with it.

In the early 2000s, efforts challenging the excise tax increased.  In 2002, OfficeMax challengedthe legality of the excise tax and the following year requested a full refund of $380,296.72. OfficeMax argued that its phone service provider, MCI, was not providing “a telephonic quality communication for which there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication . . .”  Its challenge was followed by legal cases brough to Honeywell and American Bankers Insurance Group (ABIG), among others.

On May 25, 2006, the U.S. Treasury Department conceded defeat and announced that the Department of Justice “…will no longer pursue litigation and the Internal Revenue Service (IRS) will issue refunds of tax on long-distance service for the past three years.” On August 31, 2006, the IRS announced individual taxpayers can file for a refund that varies from $30 to $60 based on family size. The refund request would be filed along with the individual income tax return for the 2006 tax year.

A 2007 CRS economic analysis of the federal telephone excise tax reports that it generated $5.9 billion in revenue in fiscal year (FY) 2005. The study, “The Telephone Excise Tax: An Economic Analysis,” details the money generated for the years 1998 to 2005 and 2016.  Those nine years generated a total of $50 billion in revenues. Unfortunately, the services failed to estimate the total revenues generated since the telephone excise tax scam was first imposed a century-plus ago.

David Rosen is the author of Sex, Sin & Subversion:  The Transformation of 1950s New York’s Forbidden into America’s New Normal (Skyhorse, 2015).  He can be reached at; check out