Publication 4164: Communications Excise Tax Explained
A guide for service providers on federal communications excise tax compliance, covering the process from identifying taxable services to remitting payment.
The federal excise tax on communications services applies to specific types of telephone services. This tax is collected by the service provider directly from the customer as a line item on their bill, placing the administrative burden of collection and remittance on the telecommunications company.
Scope of the Communications Excise Tax
The federal communications excise tax is a levy applied to certain communication services. The telecommunications service provider is responsible for collecting the tax from its customers and then remitting those funds to the Internal Revenue Service (IRS). The provider calculates the tax owed on the taxable portion of a customer’s bill and forwards it to the IRS according to a set schedule.
The current tax rate is 3% of the amount billed for taxable services. It is a percentage-based tax, meaning the total amount of tax depends directly on the cost of the services subject to it. For example, if the taxable local service portion of a phone bill is $20, the communications excise tax would be $0.60. This calculation is performed by the service provider before the bill is sent to the customer.
Identifying Taxable Services
A clear distinction exists between services that are subject to the communications tax and those that are not. The primary service that remains taxable is local telephone service, provided it is billed separately from other services. This includes basic local service provided by a traditional landline carrier. The tax also applies to the face amount of prepaid telephone cards, which are treated as an advance payment for communication services.
Many modern communication methods are not taxable. The tax does not apply to long-distance telephone service, internet access, or Voice over Internet Protocol (VoIP) services. Private communication services, such as dedicated lines or private networks not connected to the public telephone system, are also exempt.
When a provider offers a package that includes local phone, long-distance, and internet access for a single, non-itemized price, the entire bundle is not subject to the communications excise tax. The tax only applies if the charge for the taxable local service is identified separately on the customer’s bill. This “unbundling” is what triggers the tax liability; without a specific charge for local service, the tax cannot be calculated or applied.
Required Information for Filing Form 720
To report and pay the communications excise tax, service providers must use Form 720, Quarterly Federal Excise Tax Return. Before filing, a provider must gather the total amount it has billed to all customers for taxable communication services during the quarterly period. This figure represents the tax base from which the liability is calculated.
The total amount billed for taxable services is multiplied by the 3% tax rate. For instance, if a provider billed a total of $100,000 in taxable local telephone services for the quarter, the tax due to the IRS would be $3,000. This is the amount that must be reported on Form 720. Official copies of Form 720 and its instructions are available for download from the IRS website.
When completing the form, the filer must enter their business information, including the Employer Identification Number (EIN). The calculated communications tax is reported under Part I of the form, which covers Communications and Air Transportation Taxes. Specifically, the amount is entered on the line for IRS No. 22, which corresponds to the tax on communications.
The Filing and Payment Process
Form 720 must be filed according to a quarterly schedule. The due dates are:
- April 30 for the first quarter
- July 31 for the second quarter
- October 31 for the third quarter
- January 31 for the fourth quarter
These deadlines mark the end of the month following the close of each calendar quarter. Filing can be done by mailing the completed paper form to the address specified in the Form 720 instructions or by using an IRS-authorized e-file provider to submit the return electronically.
Payment of the collected excise tax must be made electronically using the Electronic Federal Tax Payment System (EFTPS). To make a payment, the filer must first be enrolled in EFTPS, which can be done online or by phone. Once enrolled, they can log in to the system, select the appropriate tax form (Form 720), enter the payment amount, and schedule the payment for the desired date.