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Cell Phone Tax Relief

For once, a cell tax is being lifted. But don't count on such future luck.

Good news, telephone bill-payers: They've pulled the 3 percent federal excise tax, or FET, and will credit your payments next tax season. Originally levied a century ago to pay for the Spanish-American War, it was not repealed by Congress. Rather, after losing in court five times, the Treasury Department simply gave up on it.

Don't spend your refund yet. You may need it for increases in the dozen or so other taxes on your cell bill (depending on your locale). Few people know what they're for, but most fit the rubric "state and local taxes." When lumped in with still-rising federal levies like the Universal Services Fund, they add 12 percent to the average American's cell bill and as much as 19 percent in many of our most populous states, says Scott Mackey, economist and partner with government affairs firm Kimbell Sherman Ellis. For some reason, they're half again as high as sales taxes on other goods and services, and growing nine times faster. For a tax-by-tax breakdown in your state, check CTIA- The Wireless Association's tax website.

Those are consumer taxes only and don't include groundbreaking new levies localities are charging communications providers that can't be passed on. Obviously, those companies are directly impacted, as are entrepreneurial ventures developing new cellular services. But it also turns out that we phone users are a price-sensitive bunch and reduce our phone usage by more than 1 percent for each percentage point increase in our bills. "When a state like Florida or New York imposes a 16 percent tax, demand is reduced by as much as 20 percent," Mackey recently told Congress.

Curb your phone minutes, and you could miss out on some of the productivity our new communication methods deliver. A joint study by Ovum and Indepen Consulting attributed 80 percent of U.S. productivity growth in 2004 to telecommunications and related information and computer technologies.

Savor FET's removal. With authorities at every level rallying for new internet sales and phone taxes, it could be another 100 years before the experience is repeated.

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This article was originally published in the September 2006 print edition of Entrepreneur with the headline: Hit the Jackpot?.

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