Analysis Shows High US Taxes On Mobile Phones

by Leroy Baker, Tax-News.com, New York

22 February 2011

According to a new analysis, published by the Tax Foundation, United States’ taxes on mobile phones are significantly higher than for many other common consumer items, and are often hidden or obscured by state and local governments.

The Tax Foundation notes that the number of US mobile phone subscribers has grown significantly in recent years, from 55m in 1997 to 292m in 2010. That period has also seen a fall in landline telephones (there are now 50m), and 2007 marked the first year that Americans spent more on mobile phones than on landlines.

However, it also finds that this trend toward mobile phones has not gone unnoticed by state and local governments, which have targeted wireless services for higher taxes. The average US wireless consumer pays taxes and fees of 16.26%, of which state-local charges take an average of 11.21%. In fact, 23 states have average state-local wireless taxes and fees in excess of 10%.

It adds that cell phones are taxed at a much higher level than other consumer items, even as much as or more than alcohol or cigarettes. In Nebraska, the combined federal-state-local average rate is almost 23.7%, and in four other states (Florida, Illinois, New York and Washington), it exceeds 20%. Notably among local jurisdictions, Baltimore (Maryland) imposes a USD4 per line per month tax on wireless users, on top of federal and state charges. Nearby Montgomery County (Maryland) imposes a USD3.50 per line per month tax. These per line charges are especially burdensome on low-priced "family share" plans.

The Tax Foundation believes that some states favour the taxes because they can raise revenue in a “relatively hidden” way. It points out that the state of Texas, for example, sued Sprint because the company listed a state tax as a line-item in its bill, rather than hiding it from customers. Six states (Kentucky, Indiana, North Dakota, Pennsylvania, Rhode Island and South Dakota) impose both sales taxes on wireless customers and gross receipts taxes on wireless service providers, both of which are ultimately borne by customers.

In addition, it says that, because each state and many localities can impose mobile phone taxes, and because they can be imposed as a percentage or as a flat rate, there are numerous taxes which vary widely.

Researchers have found it difficult to create a database of mobile phone taxes, and mobile phone companies have encountered similar problems in calculating the taxes. This can be a serious problem for cell phone businesses, because they collect the taxes from subscribers and can be held legally accountable for any mistakes-both over-collection and under-collection.

Over recent years, legislation has been regularly introduced in Congress, such as the Cell Phone Tax Moratorium Act, that would restrict excessive state and local wireless taxes.

The report concludes that “making mobile phone calls and using wireless services for additional purposes may be getting easier, but paying mobile phone taxes is not. State and local governments should not single out one product for stealth tax increases, as they are doing with wireless services. … Cell phone users are overtaxed relative to consumers of other goods, and at risk of double taxation. Finally, the wide number of taxing authorities and the wide variety in rates makes tracking problematic and burdensome.”

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