[Senate Report 106-328]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 662
106th Congress                                                   Report
                                 SENATE
 2d Session                                                     106-328

======================================================================



 
              REPEAL OF FEDERAL COMMUNICATIONS EXCISE TAX

                                _______
                                

                  July 5, 2000.--Ordered to be printed

   Filed, under authority of the order of the Senate of June 30, 2000

                                _______
                                

    Mr. Roth, from the Committee on Finance, submitted the following

                              R E P O R T

                        [To accompany H.R. 3916]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Finance, to which was referred the bill 
(H.R. 3916) to amend the Internal Revenue Code of 1986 to 
repeal the excise tax on telephone and other communication 
services, having considered the same, reports favorably thereon 
with an amendment and recommends that the bill as amended do 
pass.

                                CONTENTS

                                                                   Page
  I. Legislative Background...........................................2
 II. Explanation of the Bill..........................................2
          A. Present Law.........................................     2
          B. Overview of History of the Communications Excise Tax     3
          C. Reasons for Change..................................     4
          D. Explanation of Provisions...........................     4
III. Budget Effects of the Bill.......................................5
          A. Committee Estimates.................................     5
          B. Budget Authority and Tax Expenditures...............     7
          C. Consultation with Congressional Budget Office.......     7
 IV. Votes of the Committee...........................................8
  V. Regulatory Impact and Other Matters..............................9
          A. Regulatory Impact...................................     9
          B. Unfunded Mandates Statement.........................     9
          C. Tax Complexity Analysis.............................     9
 VI. Changes in Existing Law Made by the Bill, As Reported...........11

                       I. LEGISLATIVE BACKGROUND


Committee markup

    The Senate Committee on Finance marked up H.R. 3916 on June 
14, 2000, and ordered the bill, as amended, favorably reported 
by a voice vote.

Committee hearing

    No Committee hearings have been held on the Federal 
communications excise tax.

                      II. EXPLANATION OF THE BILL


                             A. Present Law

In general

    A three-percent Federal excise tax is imposed on amounts 
paid for communications services (Code sec. 4215).\1\ 
Communications services are defined as ``local telephone 
service,'' ``toll telephone service,'' and ``teletypewriter 
exchange service.'' \2\ The person paying for the service 
(i.e., the consumer) is liable for payment of the tax. 
Communications service providers are required to collect the 
tax; however, if a consumer refuses to pay, the service 
provider is not liable for the tax and is not subject to 
penalty for failure to collect if reasonable efforts to collect 
have been made. Instead, the communications service provider 
must report the delinquent consumer's name and address to the 
Treasury Department, which then must attempt to collect the 
tax.
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    \1\ The tax base does not include State or local taxes on the same 
service provided that the amount of the State or local tax is 
separately stated on the customer's bill.
    \2\ Teletypewriter exchange service refers to a data system that is 
understood to be no longer in use.
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    Local telephone service is defined as the provision of 
voice quality telephone access to a local telephone system that 
provides access to substantially all persons having telephone 
stations constituting a part of the local system. Toll 
telephone service is defined as voice quality communication for 
which (1) there is a toll charge that varies with the distance 
and elapsed transmission time of each individual call and 
payment for which occurs in the United States, or (2) a service 
(such as a ``WATS'' service) which, for a flat periodic charge, 
entitles the subscriber to an unlimited number of telephone 
calls to or from an area outside the subscriber's local system 
area.
    Special rules, enacted in 1997, apply to the sale of 
``prepaid telephone cards.'' These cards are subject to tax 
when they are sold by a telecommunications carrier to a non-
carrier for re-sale or use (rather than when communication 
services are provided to the consumer). The base to which the 
tax is applied is the face amount of the card.

Exemptions

    Present law provides for the following exemptions:
     Public coin-operated service from the tax on local 
telephone service, and to the extent that the charge is less 
than 25 cents, from the toll telephone service tax.\3\
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    \3\ If coin-operated toll service is taxable, the tax is computed 
to the nearest multiple of five cents.
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     Service for the collection of news by the public 
press, news ticker, or radio broadcasting services (providing a 
news service as part of or similar to that of the public 
press), from the toll telephone service tax. (Local telephone 
service provided to the press is subject to tax.)
     Private communication service for which a separate 
charge is made, from the local telephone service tax.\4\
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    \4\ Private communication service is defined as (1) service that 
entitles the customer to exclusive or priority use of a communication 
channel or group of channels, or an intercommunication system for the 
customer's stations; (2) switching capacity, extension lines and 
stations, or other associated services provided in connection with 
services described in (1); and (3) channel mileage connecting a 
telephone outside a local service area with a central office in the 
local area.
    Unlike the other exemptions, the special treatment for private 
communication service is accomplished by means of an exclusion from the 
definition of local telephone service rather than as a stated 
exemption.
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     Service provided to international organizations 
and the American Red Cross.
     Toll telephone service provided to members of the 
Armed Services who are stationed in combat zones.
     Certain toll telephone service to common carriers, 
telephone or telegraph companies, or radio broadcasting 
stations or networks in the conduct of these businesses.
     Installation charges (including wires, poles, 
switchboards, or other equipment).
     Telephone service provided to non-profit 
hospitals.
     Telephone service provided to State and local 
governments.
     Telephone service provided to nonprofit 
educational organizations.

      B. Overview of History of the Communications Excise Tax \5\

    The first tax on telephone service was enacted in 1898 to 
help finance the Spanish-American War. That tax was repealed in 
1902 and was not re-enacted until World War I required 
additional revenues. The World War I telephone tax was repealed 
in 1924 and was re-enacted in 1932. All of these initial 
telephone taxes applied only to toll (long distance) service. 
In 1941, with the advent of World War II, the tax was extended 
to general local service.
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    \5\ For a more complete discussion of the history of the 
communications excise tax, see Congressional Research Service (Louis 
Alan Talley), The Federal Excise Tax on Telephone Service, A History, 
May 9, 2000 (RL30553).
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    An excise tax on telephone service has been in effect in 
every year since 1941, despite enactment of periodic 
legislation to repeal or phase-out the tax. In the Excise Tax 
Reduction Act of 1965, Congress scheduled a phase-out, 
beginning with a reduction in the then 10-percent rate \6\ for 
both local and toll service to three percent after 1965. 
Additional reductions of one percentage point per year were 
scheduled thereafter until there would have been no tax 
effective on January 1, 1969. However, the scheduled reductions 
were repealed in 1966 (effective April 1, 1966), and the 10-
percent rate was reinstated. A delayed phase-out schedule was 
enacted in 1968, to begin in 1970. This phase-out schedule also 
was postponed, with a one-percentage point per year phase-out 
finally going into effect on January 1, 1973.
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    \6\ At their highest, the tax rates were 15 percent on general 
local service and 25 percent on toll service costing more than 24 cents 
per message. These rates were in effect from 1944 until 1954.
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    In 1973, the tax rate declined from 10 percent to 9 percent 
as the first step in this phase-out, which was to be completed 
beginning in 1982. However, the Omnibus Reconciliation Act of 
1980 delayed the repeal by one year (until 1983); and the 
Economic Recovery Tax Act of 1981 further delayed repeal for 
two additional years. After reaching a rate of one percent, the 
rate was increased again to three percent in 1983, and after 
being extended at that rate several times, the three percent 
rate was made permanent by the Revenue Reconciliation Act of 
1990.

                         C. Reasons for Change

    The non-social security portion of the Federal budget is in 
surplus. Therefore, the Committee believes that it is 
appropriate to return some of the taxpayers' money to the 
taxpayers. The excise tax on telephone service is unfair to 
consumers, and further is outdated relative to current 
technology, thereby creating unnecessary complexity for 
communications service providers and the IRS who must 
administer the tax.
    The communications excise tax was enacted as a wartime 
revenue measure targeted at a service that was a luxury for 
many households. Today telephone service is not a luxury, but a 
necessity. As such, the burden of the excise tax on telephone 
service is regressive. Moreover, communications services 
provide the basis for much of the growth of the digital 
economy. Because the Committee wants to encourage this 
continued growth, it sees no legitimate policy grounds for 
taxing such services.

                      D. Explanation of Provisions

    The Federal communications excise tax is repealed, 
effective for amounts due with respect to bills first rendered 
after August 31, 2000.
    This legislation is designed to reduce the net amount paid 
by consumers for telephone and similar services. The Committee 
strongly believes that all savings resulting from the 
elimination of the communications excise tax should be fully 
passed on to consumers. The Committee does not intend for the 
benefit of the repeal to be reduced or eliminated by increases 
in communication service provider charges (whether regulated or 
unregulated) or by increases in other Federal or State fees or 
taxes related to such service. Accordingly, the General 
Accounting Office (``GAO''), after consultation with the 
Federal Communications Commission, is directed to complete a 
study detailing (1) the extent to which the benefit of 
repealing the excise tax is passed through to consumers 
(individuals and businesses) and (2) any actions taken by 
communication service providers or others that diminish the 
benefit of repealing the excise tax, including any increases in 
charges or taxes. The Committee expects that in completing this 
study, the GAO will include an econometric analysis of the 
incidence of the economic burden of the Federal communications 
excise tax to businesses and consumers. The study is to be 
submitted to the Senate Committee on Finance and the House 
Committee on Ways and Means no later than September 1, 2001.

                    III. BUDGET EFFECTS OF THE BILL


                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the following statement is made 
concerning the estimated budget effects of the provisions of 
the bill, as reported.
    The bill, as reported, is estimated to have the following 
budget effects for fiscal years 2000-2010.

                                                         ESTIMATED BUDGET EFFECTS ON H.R. 3916, AS REPORTED BY THE COMMITTEE ON FINANCE
                                                                           [By fiscal years, in [millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
            Provision                      Effective            2000      2001      2002      2003      2004      2005      2006      2007      2008      2009      2010     2000-05    2000-10
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Repeal the Federal Communications  ( \1\)...................      -125    -4,328    -4,562    -4,799    -5,043    -5,303    -5,578    -5,868    -6,174    -6,502    -6,852    -24,160    -55,134
 Excise Tax.
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\1\ Effective for amounts paid for telephone bills first rendered after 8/31/00.

Note.--Details may not add to totals due to rounding.
Source: Joint Commitee on Taxation.

                B. Budget Authority and Tax Expenditures

Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that the provisions of the bill as reported 
involve no new or increased budget authority.

Tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the bill as reported involves no 
increased tax expenditures.

          C. Consultation With the Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office 
(``CBO'') has submitted the following statement.

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 16, 2000.
Hon. William V. Roth, Jr.,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3916, a bill to 
amend the Internal Revenue Code of 1986 to repeal the excise 
tax on telephone and other communication services.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Hester 
Grippando.
            Sincerely,
                                          Barry B. Anderson
                                   (For Dan. L. Crippen, Director).
    Enclosure.

               congressional budget office cost estimate

H.R. 3916--To amend the Internal Revenue Code of 1986 to repeal the 
        excise tax on telephone and other communication services

    Summary: H.R. 3916 would repeal the federal 
telecommunications excise tax. The Joint Committee on Taxation 
(JCT) estimates that the bill would reduce federal revenues by 
$125 million in fiscal year 2000, by $24 billion over the 2000-
2005 period, and by $55 billion over the 2000-2010 period. 
Because the bill would affect receipts, pay-as-you-go 
procedures would apply.
    H.R. 3916 contains on intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would not affect the budgets of state, local, or tribal 
governments.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of H.R. 3916 is shown in the following table.

----------------------------------------------------------------------------------------------------------------
                                                                By fiscal year, in millions of dollars
                                                     -----------------------------------------------------------
                                                        2000      2001      2002      2003      2004      2005
----------------------------------------------------------------------------------------------------------------
                                               CHANGES IN REVENUES

Estimated revenues..................................      -125    -4,328    -4,562    -4,799    -5,043    -5,303
----------------------------------------------------------------------------------------------------------------

    Basis of estimate: The estimate of H.R. 3916 was provided 
by JCT.
    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act sets up pay-as-you-go procedures 
for legislation affecting direct spending or receipts. The net 
changes in outlays and governmental receipts that are subject 
to pay-as-you-go procedures are shown in the following table. 
For the purposes of enforcing pay-as-you-go procedures, only 
the effects in the current year, the budget year, and the 
succeeding four years are counted.

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                                                                                By fiscal year, in millions of dollars
                                            ------------------------------------------------------------------------------------------------------------
                                               2000     2001      2002      2003      2004      2005      2006      2007      2008      2009      2010
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                                                                   (10) not applicable
Changes in outlays.........................
Changes in receipts........................     -125    -4,328    -4,562    -4,799    -5,043    -5,303    -5,578    -5,868    -6,174    -6,502    -6,852
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Intergovernmental and private-sector impact: H.R. 3916 
contains on intergovernmental or private-sector mandates as 
defined in the Unfunded Mandates Reform Act (UMRA) and would 
not affect the budgets of state, local, or tribal governments.
    Estimate prepared by: Federal Costs: Hester Grippando.
    Estimate approved by: G. Thomas Woodward, Assistant 
Director for Tax Analysis.

                       IV. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of Rule XXVI of the 
Standing Rules of the Senate, the following statements are made 
concerning the roll call votes in the Committee's consideration 
of the bill.
    A roll call vote was conducted on an amendment by Senators 
Graham and Robb. The amendment would have delayed the effective 
date of the bill until provisions are enacted extending the 
solvency of the Social Security trust fund through 2075 and the 
Medicare Part A program through 2025. The amendment was 
defeated by a roll call vote of 9 yeas and 11 nays. The vote 
was as follows:
    Yeas--Senators Moynihan (proxy), Baucus, Rockefeller, 
Breaux (proxy), Conrad, Graham, Bryan, Kerrey, and Robb.
    Nays--Senators Roth, Grassley, Hatch, Murkowski (proxy), 
Nickles (proxy), Gramm (proxy), Lott (proxy), Jeffords (proxy), 
Mack, Thompson (proxy), and Coverdell (proxy).

Motion to report the bill

    The bill was ordered favorably reported by a voice vote on 
June 14, 2000. A quorum was present.

                 V. REGULATORY IMPACT AND OTHER MATTERS


                          A. Regulatory Impact

    Pursuant to paragraph 11(b) of the Standing Rules of the 
Senate, the Committee makes the following statement concerning 
the regulatory impact that might be incurred in carrying out 
the provisions of the bill as reported.

Impact on individuals and businesses

    The bill repeals the Federal communications excise tax. 
Repeal of this tax will reduce tax burdens on individuals, 
businesses, and others.

Impact on personal privacy and paperwork

    The bill should not have any impact on personal privacy, 
and will reduce paperwork burdens on communications service 
providers (collectors of the current tax).

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
    The Committee has determined that the bill as reported does 
not contain any Federal mandates on the private sector or any 
Federal intergovernmental mandates on State, local, or tribal 
governments.

                       C. Tax Complexity Analysis

    The following tax complexity analysis is provided pursuant 
to section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998, which requires the staff of the 
Joint Committee on Taxation (in consultation with the Internal 
Revenue Service (``IRS'') and the Treasury Department) to 
provide a complexity analysis of tax legislation reported by 
the House Committee on Ways and Means, the Senate Committee on 
Finance, or a Conference Report containing tax provisions. The 
complexity analysis is required to address the complexity and 
administrative issues raised by provisions that directly or 
indirectly amend the Internal Revenue Code and that have 
widespread applicability to individuals or small businesses. 
The staff of the Joint Committee on Taxation has identified 
repeal of the communications excise tax as having such an 
effect, and has included a summary description of the 
provision, along with an estimate of the number and type of 
affected taxpayers, and a discussion regarding the relevant 
complexity and administrative issues.
    Following the analysis of the staff of the Joint Committee 
on Taxation are the comments of the IRS regarding each of the 
provisions included in the complexity analysis, including a 
discussion of the likely effect on IRS forms and any expected 
impact on the IRS.

Summary description of the provision

    The bill repeals the three-percent Federal communications 
excise tax, beginning with amounts due with respect to bills 
first rendered after August 31, 2000.
    The communications excise tax is collected by 
communications service providers as part of their regular bills 
for service to consumers. However, consumers are liable for 
payment of the tax.

Number of affected taxpayers

    It is estimated that the provision will affect 
approximately 93 million households and approximately 23 
million business service customers. There may be some overlap 
in these categories because some businesses are located in 
private residences.

Discussion

    Because the present communications excise tax is collected 
as part of telecommunications service provider bills, consumers 
(individuals and businesses) are not required to keep separate 
records of the tax under present law. Repeal of the tax will 
not result in any additional recordkeeping requirements for 
consumers. Repeal of the tax will eliminate current 
recordkeeping and tax payment requirements imposed on 
communications service providers.
    Repeal of the tax will eliminate any potential for disputes 
related to the scope of the tax between the IRS and either 
consumers or communications service providers. No consumers' 
tax preparation costs will be affected because, as described 
above, those individuals and businesses do not file 
communications tax returns under present law. Further, 
communications service providers will be relieved of the 
responsibility of collecting and depositing the tax and filing 
quarterly tax returns.

                        Department of the Treasury,
                                  Internal Revenue Service,
                                     Washington, DC, June 14, 2000.
Ms. Lindy L. Paull,
Chief of Staff, Joint Committee on Taxation,
Washington, DC.
    Dear Ms. Paull: Following are the Internal Revenue 
Service's (IRS) comments on the Senate Committee on Finance 
markup of H.R. 3916 (Repeal of the Federal Communications 
Excise Tax), which you identified for complexity analysis in 
your letter of June 13, 2000. Our comments reflect the Proposed 
Chairman's Amendment to the bill described in JCX 57-00, June 
12, 2000. Due to the short turnaround time, our comments are 
provisional and subject to change upon a more complete and in-
depth analysis of the bill.
    Provision: The three-percent Federal communications excise 
tax would be repealed, effective for amounts paid with respect 
to bills first rendered after August 31, 2000.
    IRS comments: The instructions for Form 720, Quarterly 
Federal Excise Tax Return, will need to be revised for the 3rd 
quarter of 2000 to advise filers of the repeal of the tax. 
However, since service providers will continue to collect tax 
on bills rendered through August 31, 2000, long after that 
date, the entry line for reporting the tax will remain on Form 
720 through 2001. This bill will reduce the reporting burden 
for approximately 4,700 taxpayers who currently report the tax. 
Minimal programming changes will be required to reflect the 
elimination of the tax. No regulatory guidance is anticipated.
            Sincerely,
                                                Bob Wenzel,
                    (Acting for Charles O. Rossotti, Commissioner).

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In the opinion of the Committee, it is necessary in order 
to expedite the business of the Senate, to dispense with the 
requirements of paragraph 12 of rule XXVI of the Standing Rules 
of the Senate (relating to the showing of changes in existing 
law made by the bill as reported by the Committee).

                                  
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