Callers Can Reach Out and Touch Some Cash

An obscure federal tax on long-distance telephone service, imposed in the late 1800s to fund the Spanish-American War, is finally being phased out because of court challenges. The result: Millions of customers are due refunds for taxes that they've paid in the last three years.

"Everybody is going to have an interest in this," said Eric Smith, a spokesman for the Internal Revenue Service. "Anyone who has paid for long distance services would be due a refund."

For people who don't spend a lot of time gabbing on the phone, the refunds could be minimal -- anywhere from $20 to $50 a person. But for those who regularly pay substantial bills for long-distance and cellular service, the amounts may be well worth documenting.

"We had a charge of $3.79 last month. You add that up and it's $147" over a little more than three years, Bill Hardekopf, chief executive of SaveOnPhone.com, a Birmingham, Ala.-based phone discount comparison service, said, referring to his small company's phone bill. "That's worth pulling records for."

Virtually anyone who has paid for long-distance or cellular phone service in the last three years is entitled to a refund. But nothing is automatic. You'll need to file a refund claim when you file your 2006 federal income tax return, Smith said. Even people who don't need to file 1040 forms because they don't earn enough to pay taxes may want to file next year simply to claim this refund, he added.

The federal excise tax was levied on telephone services in 1898 as a temporary measure to help pay for the Spanish-American War. Like many taxes in those days, it was meant to hit only the wealthiest Americans. The telephone was a rarity then, having been invented only 22 years earlier. The war was short, lasting a mere eight months, but the tax was never repealed.

Indeed, it became deeply ingrained in the tax law, revised slightly as phone service became more common and sophisticated. In 1965, the tax law was updated, defining three separate types of phone service subject to the tax -- local, toll and "teletypewriter exchange services."

But as time went on, the definition of "toll" service became a problem, said Mitchell Brecher, partner at the Washington office of law firm Greenberg Traurig. That's because when the law was updated, toll charges were defined as those based on the amount of time elapsed and the distance of the call. In those days, calls from Los Angeles to San Francisco, for example, cost less than calls from L.A. to New York.