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Illegal Tax that Cost U.S. Consumers $300B

Dow Jones reports that the brief Spanish-American War ended more than a century ago, but not the federal tax assessed to fund the victory. Until now.

The U.S. Treasury said it would stop collecting the 3 percent 'federal excise tax' on long-distance calls, a fee originally assessed in 1898. The government also said it will issue refunds 'requested' by consumers and businesses that paid the fee over the past three years. Taxpayers will be able to request refunds when they file 2006 tax returns in early 2007.

The tax, which generates more than $6 billion annually, has survived repeated efforts to eliminate it. For decades, all telecom service providers (phone companies like AT&T) have been required to collect the excise fee from customers and pass it on to the federal government.

Yet some large corporations such as Hewlett Packard successfully sued to get rid of the tax, claiming it was illegal. Others have won large refunds from the IRS. However, the average American consumer has been forced to continue to pay the 'illegal' tax, until today.

If the tax remained in place over the next decade, it would have generated about $67 billion for the federal coffers, a congressional panel estimates. Altogether, the excise has raised more than $300 billion in its entire existence, the Congressional Research Service found.

The excise fee was originally established in 1898 because telephones were considered a 'luxury' by the U.S. Federal government, and only the wealthiest Americans could afford service.

These days, the tax affects all consumers directly or indirectly, no matter what their annual income. Regardless, Senator Lamar Alexander (Republican from Tennessee) has argued vigorously to increase the excise tax, and to add new taxation to Internet access services.

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