Federal Communications Excise Tax: Coverage, Exemptions, and Refunds

The federal communications excise tax is a 3% charge on payments for local telephone service, imposed under 26 U.S.C. § 4251.¹ After IRS Notice 2006-50, the tax applies almost exclusively to local-only landline plans that don’t include long-distance calling. If you’re on a cell phone plan, a VoIP service, or any bundled voice plan, you almost certainly don’t pay it.²

What the Tax Still Covers

The statute reaches two categories: local telephone service and teletypewriter exchange service.¹ Local telephone service means access to a local phone system and the ability to call substantially everyone else on that same system.³ In practical terms, that’s a traditional landline subscription for calls within your local exchange.

Long-distance service used to be taxable too. Federal appellate courts ruled in the early 2000s that modern flat-rate long-distance plans didn’t fit the statutory definition of toll service, because the charges didn’t actually vary by distance and time.⁴ The Treasury Department conceded. IRS Notice 2006-50, issued in June 2006, told providers to stop collecting the tax on long-distance and bundled plans billed after July 31, 2006.²

Why Most Modern Plans Aren’t Taxed

The IRS defines “bundled service” as any plan that provides both local and long-distance calling without separately stating a charge for local service. Bundled service is nontaxable. Notice 2006-50 explicitly lists VoIP as an example, and the same treatment applies to standard wireless plans that combine local and long-distance calling. Prepaid telephone cards are also classified as bundled service.²

“Local-only service” stays taxable. That means a plan without any long-distance component, or one that breaks out the local charge as a separate line item on the bill. Providers of these plans must still collect the 3% tax on the local portion.²

Internet access, email, text messaging, and pure data services aren’t “telephonic quality communication” under § 4252 and fall outside the tax entirely. The tax has always been limited to voice-grade services.

Who Collects the Tax

The provider, not the customer, is legally responsible for collection. Under 26 U.S.C. § 4291, every person receiving payment for a taxable communication service must collect the tax from the payer.⁵ The phone company adds 3% to the customer’s bill for qualifying local service, holds the funds, and remits them to the IRS quarterly. The customer bears the tax, but the provider is on the hook if the money never reaches the government.

Who Is Exempt

Several categories of organizations and uses are carved out under 26 U.S.C. § 4253.⁶

State, local, and tribal governments paying from public funds.
Nonprofit hospitals qualifying under § 170(b)(1)(A)(iii) and exempt from income tax.
Nonprofit educational organizations exempt under § 501(a).
The American Red Cross and international organizations named in the statute.
News organizations, for services used to collect or distribute news for the public press or radio broadcasting, when the charge is billed in writing (the local-service portion is not exempt).
Military personnel making toll calls that originate in a designated combat zone while performing duty there, provided a certificate is furnished to the provider.
Common carriers and telecom companies, for toll service used in conducting their own business.
Installation charges for telephone equipment.
Coin-operated phones, for local service and for toll calls under 25 cents.

How an Exempt Organization Stops Being Billed

Exemption isn’t automatic. A qualifying organization has to give its provider a written exemption certificate identifying the specific subsection of § 4253 it relies on. For one-time payments, each charge needs its own certificate. For recurring service, a blanket certificate covers up to four calendar quarters.⁷

The certificate must include the entity’s billing information and address, the IRC section that authorizes the exemption, a signature from an authorized representative, and a commitment to notify the provider if the exemption basis changes. Providers are expected to verify each certificate and keep it with their service records. Fraudulent use can trigger criminal penalties under IRC § 7201.⁷

How Providers Report and Pay

Providers report the tax on IRS Form 720, the Quarterly Federal Excise Tax Return.⁸ It goes on line 22, “Local telephone service and teletypewriter exchange service,” at 3% of gross receipts from qualifying local-only service during the quarter. Revenue from bundled plans, long-distance-only service, and internet or data services must be excluded.

Form 720 is due the last day of the month after each calendar quarter:

January through March: due April 30.
April through June: due July 31.
July through September: due October 31.
October through December: due January 31.

Filing can be done electronically through an IRS-approved e-file provider or by mailing a paper return.⁹

Deposits Before the Return

Paying and filing are separate obligations. If quarterly excise tax liability exceeds $2,500, semimonthly deposits are required throughout the quarter rather than a single payment at filing.¹⁰ Each month splits into two semimonthly periods, and each deposit is due within 14 days after the period ends. If quarterly liability is $2,500 or less, no deposits are needed and the tax is paid with the return. Deposits must be made electronically, typically through EFTPS or IRS Direct Pay.⁹

Penalties for Not Paying Over Collected Tax

This is a trust fund tax: money the provider collects from customers on the government’s behalf. Under 26 U.S.C. § 6672, any person responsible for collecting and paying it over who willfully fails to do so faces a penalty equal to 100% of the unpaid amount.¹¹ It’s called the trust fund recovery penalty, and it reaches individuals personally, not just the business.

The IRS can assess it against anyone with authority to decide which creditors get paid who chose to pay others instead of the government. In a small telecom company, that’s often the owner or CFO. The statute carves out a narrow shield for unpaid, volunteer board members of tax-exempt organizations who served only in an honorary capacity, had no role in day-to-day financial operations, and had no actual knowledge of the failure.¹²

Before assessing the penalty, the IRS must notify the responsible person in writing, by mail or in person, at least 60 days in advance, unless collection is in jeopardy.¹²

Getting Back an Overpayment

Providers who collected and remitted more than they owed, often by applying the 3% to bundled service charges, can file Form 720-X, the Amended Quarterly Federal Excise Tax Return, to recover it.¹³ It can be filed on its own or attached to the next Form 720.

For communications tax, there’s a condition: before claiming the adjustment, the provider must certify that it either repaid the overcollected tax to the customer or obtained the customer’s written consent to claim the refund.¹³ The IRS won’t let the provider keep a refund for tax the customer actually paid. Each adjustment on the form needs a description of what went wrong and how the corrected amount was calculated.

The filing window mirrors the general refund statute of limitations: three years from the date the original return was filed, or two years from the date the tax was paid, whichever is later.¹⁴ The overpayment can come back as a direct refund or as a credit against the next quarter’s Form 720 liability.¹³

1
Office of the Law Revision Counsel. 26 USC 4251 – Imposition of Tax
2
Internal Revenue Service. Toll Telephone Service Notice 2006-50
3
Office of the Law Revision Counsel. 26 USC 4252 – Definitions
4
EveryCRSReport.com. The Telephone Excise Tax – An Economic Analysis
5
Office of the Law Revision Counsel. 26 USC 4291 – Cases Where Collecting Agent Is Not Required
6
Office of the Law Revision Counsel. 26 USC 4253 – Exemptions
7
Internal Revenue Service. Communications Tax Exemption for Government Entities
8
Internal Revenue Service. Form 720 – Quarterly Federal Excise Tax Return
9
Internal Revenue Service. Instructions for Form 720 (03/2026)
10
Internal Revenue Service. Instructions for Form 720 (03/2026)
11
Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax
12
Office of the Law Revision Counsel. 26 U.S. Code 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax
13
Internal Revenue Service. Amended Quarterly Federal Excise Tax Return (Form 720-X)
14
Office of the Law Revision Counsel. 26 U.S. Code 6511 – Limitations on Credit or Refund