For many companies, the wireless portion of telecommunications bills is a significant segment of their overall monthly telecom expenditures. Despite the fact that wireless rates have dropped over the past five years, the taxes portion of wireless bills has increased dramatically.

Like it or not, taxes for wireless phone service far exceeds the tax rate for other consumer goods and services - even alcohol and tobacco! Federal, State and Local taxes on a typical wireless bill can vary from 10% to as high as 24% or more of the total monthly service charges depending on the state the customer resides.

Why are wireless taxes so out of control?

One reason is that everyone wants a piece of the pie. Federal, State, and Local municipalities all contribute to the total taxes customers pay each and every month for wireless services. Nearly six years after the National Conference of State Legislatures (NCSL) urged state leaders to begin to reform their telecommunications taxes, most states have done little to ease the wireless tax burden for customers - and some have added more.

If you are not familiar with the specifics, the following are just a few of the many taxes that are in place to help drive up your wireless bill.

Federal Excise Tax - The infamous federal excise tax was signed into law in 1898 to help fund the Spanish American war. Since virtually no one had phones in 1898 (except the wealthy) the tax was originally designed as a luxury tax. 108 years later, wireless customers still pay a 3% federal excise tax on monthly bills.

Federal Regulatory Fee - The introduction of local number portability created this federal tax. It is intended to cover local number portability costs and other regulatory license fees and charges that are incurred by the carriers. This fee can vary significantly from carrier to carrier. It is often found in the surcharges section of the wireless bill and not the taxes and fees section.

Federal Universal Service Fee - The federal government imposes this tax to promote affordable telecommunications to all Americans — including low income consumers, schools, libraries, etc. The fee is actually imposed upon the carriers who then have the option to pass the costs along to the consumer. As you would guess nearly all carriers typically recover this tax on monthly wireless bills either as a fixed charge or as a percentage of revenue based on what they have estimated the total cost will be to meet this requirement.

State Universal Service Fee - Some states impose a State Universal tax right along with the Federal Universal tax. As with the federal tax of the same name this fee can either be levied on to the carrier or directly onto the wireless bill of the customer.

State 911 fees - All but five states impose a 911 fee to help fund state and local emergency communications systems. The amount of this tax can vary greatly from state to state.

State and Local Excise Taxes - For states that do not have a sales tax such as Montana, New Hampshire or Delaware, an excise tax on wireless service is imposed. This category of taxes is placed directly on the wireless customer bill and can be found in the taxes and fees section of the bill.

Wireless Taxes with Percentages By State

Just how much does your wireless bill go towards taxes? The following table of state listings will give you a good idea of the total amount of taxes in percentage of the monthly wireless bill. (in descending order)

Who is to blame?

From the perspective of state and local governments, wireless and telecommunications taxes in general are an important source of revenue. The concern of state and local municipalities is that federal legislation to cut or eliminate certain state and local wireless taxes would have a far-reaching impact on this important and much-needed source of revenue.

From the perspective of the telecommunications industry, the escalating taxes on telecommunications services as compared with other goods and services is just not sustainable.

Moreover, the foreseeable future will bring additional products and services directly to wireless devices. Wireless customers are already beginning to download video clips, games, music and other digital products and services. State and local governments that begin taxing these types of transactions will meet with even more protest from customers and carriers alike.

The convergence and popularity of new communications technologies (VoIP) will pressure states and local governments to begin to confront the over taxation of wireless customers. Not only will this type of tax reform help the pocketbooks of consumers and businesses, it will also encourage additional investment incentives for companies to lay the groundwork for the telecommunications networks of the future.

Who is tax exempt?

Payments for certain services or payments from certain users could be exempt. Charities, churches, schools, nonprofit educational and hospital operations, certain other entities that receive government funding, foreign counselor operations, and others, may be exempt from state and/or federal taxes on wireless services.

To understand the specific services that are exempt from federal tax, refer to the Internal Revenue Service publication 510 entitled Communications Tax. This publication is very specific as to what taxes are federally imposed and which are exempt.

How to duck cell phone taxes…

Can you reduce your taxes on your wireless phone without packing and moving to a state such as Idaho or Nevada? Yes and no. Although we don’t recommend this method, you could do what this Forbes writer did to significantly reduce his wireless taxes.

The good news is that talking on your wireless phone costs 80% less than it did 10 years ago. The bad news is that taxes on wireless services have soared to over 20% of a total wireless bill in some states. This tax rate is up to four times higher than for goods and services - even for alcohol and cigarettes!

Just how high are wireless taxes, fees and surcharges? We did a little research and came up with a top 10 states that carry the highest state, local and federal wireless tax burden for its consumers.

Having a wireless phone in these states can be certainly be hazardous to your wealth…

Source: Scott Mackey (Partner: Kimbell, Sherman, Ellis)
* Note: As of October 2006, the FCC adjusted the safe harbor assumption from 28.5% to 37.1%. On a quarterly basis, the FCC adopts adjusted contribution factors. Thus, the above reflects the effective federal USF contribution rate as of July 1, 2007.

Let’s take a close look at the regulated and non-regulated charges to your bills.

The charges for local telecommunications services include both regulated and non-regulated types. Taxes are assessed on both. You can find most of these specific charges contained in the “summary” section of your bill.

Regulated Telecom Charges

Tariffs are developed and filed by the Local Exchange Carrier with the state and public utility commission. After approval, these public documents define rules under which regulated services will be provided, and the charges that will be applied.

Once approved, tariffs have the weight of law, and deviations require special approvals by the utility commissions. For detailed information on tariffs, visit CCMI. (Center for Communications Management Information) The following are services regulated by tariffs in most states:

Connections to the central office (CO) and any local usage charges (excludes wireless)

•       Service enhancements are usually regulated. In several states, however, centrex-like services are now unregulated and such deregulation is becoming more common.
•       White-pages directory services (except bold listings)
•       Operator services provided by local exchange companies
•       Service initiation, changes, repair, and the like are usually regulated. The expression of such charges may be a “price list” of specific items, or it may be expressed as time and material “rates” for categories of work.
•       Some standard kinds of studies are priced through regulation. Detail of local usage or message units are typical examples.
•       Most “other” services

Non-Regulated Telecom Charges

Various price schedules and rates are applied to non-regulated offerings, in accordance with current business and competitive conditions. Keep in mind that all non-regulated charges are subject to rapid change and negotiation, although some are traditionally fixed for a year at a time.

• Prices and rates for non-regulated items must be obtained from suppliers. The following services are unregulated in most states:
• Terminal and switching equipment, and ancillary items.
• Pay telephones.
• Some service enhancements, such as wire maintenance and voice mail boxes
• Directory advertising, bold listings, street directories
• Sale of “foreign” directories.
• Many kinds of studies and some technical service matters, some corridor and other services.