ARE YOU PAYING WIRELESS TAXES?

photo-1462841764092-352b1d22ced3Key Findings

  • A typical American household with four wireless phones paying $100 per month for wireless voice service can expect to pay about $221 per year in wireless taxes, fees, and surcharges – down from $223 in 2016.
  • Nationwide, taxes make up 18.5 percent of the average U.S. customer’s wireless bill. Washington has the highest wireless tax rate in the country at 25.58 percent, followed closely by Nebraska at 25.10 percent, New York at 24.64 percent, Illinois at 24.59 percent, and Pennsylvania at 22.32 percent.
  • Since 2008, average wireless monthly bills have dropped from just under $50 per month to $41.50 per month – a 17 percent reduction – while wireless taxes have increased from 15.1 percent to 18.5 percent – a 22 percent increase.
  • Many states impose a much larger tax on wireless service than the sales tax imposed on the purchase of other goods and services.States with large disparities include Alaska (8.8 times) Nebraska (2.7 times), Pennsylvania (2.5 times), Maryland (2.2times), South Dakota (2.2 times), Florida (2.2 times), New York (2.2 times), Rhode Island (2.2 times), and Illinois (2.1times).
  • Connecticut, Louisiana, Oklahoma, Utah, and West Virginia increased 911 fees in 2017. States are under pressure to fund upgrades to next-generation 911 (NG911) programs.
  • In 2017, state Universal Service Fund (USF) rates increased in Alaska, Indiana, Kansas, New Mexico, Utah, and Wisconsin.South Carolina expanded the scope of its USF surcharge to include wireless service. California and Wyoming lowered the rates of their state USF surcharges.
  • At the end of 2016, over 66 percent of all poor adults had only wireless service, and 51 percent of all adults were wireless only. Excessive taxes and fees, especially the regressive per-line taxes like those imposed in Chicago and Baltimore, impose a disproportionate burden on low-income consumers. Chicago’s per-line tax increases to $5 per month per line as of January 1, 2018.

Executive Summary

Wireless consumers will pay an estimated $17.1 billion in taxes, fees, and government surcharges to federal, state, and local governments in 2017, down about $100 million from 2016. These taxes, fees, and surcharges break down as follows:

  • $6.7 billion in sales taxes and other nondiscriminatory consumption taxes.
  • $5.1 billion in federal Universal Service Fund (USF) surcharges.
  • $2.6 billion in 911 fees, a category that includes hundreds of millions of dollars that are not actually used for 911 purposes.
  • $2.7 billion in other industry-specific state and local taxes and fees.

A typical American household with four wireless phones paying $100 per month for wireless voice service can expect to pay about $221 per year in wireless taxes, fees, and surcharges – down from $223 in 2016.

Consumers in Washington, Nebraska, New York, Illinois, and Pennsylvania pay the highest wireless taxes in the country, while wireless users in Oregon, Nevada, and Idaho pay the lowest wireless taxes. While Washington consumers currently pay the highest wireless taxes in the country, Illinois wireless taxes will likely become the highest in the country in January 2018, when a sizable increase in the Chicago and Illinois 911 fees will take effect.

Nationwide, taxes and fees on wireless consumers were essentially flat between 2016 and 2017, falling from 18.6 percent to 18.5 percent of the average U.S. customer’s monthly bill. This was the first reduction in wireless tax burdens since 2014.State and local wireless taxes increased from 11.9 percent to 12.1 percent, the fourth consecutive increase. This increase was offset by a 0.3 percent decrease in the federal Universal Service Fund (FUSF) surcharge. This was the first reduction in the FUSF surcharge since 2003.

Fortunately for wireless consumers, intense price competition produced a large reduction in the average monthly cost of wireless service. Average revenue per subscriber fell dramatically, from $44.65 per month to $41.50 per month. Unfortunately, consumers were not able to fully enjoy this price reduction because taxes, fees, and surcharges continue to remain stubbornly high.

Wireless service is increasingly the sole means of communications and connectivity for many Americans, particularly young people and those with lower incomes. At the end of 2016, about 66 percent of all low income adults had only wireless service and 51 percent of all adults of all incomes were wireless only.[1] These excessive taxes and fees – especially those that impose high per-line taxes and fees – impose a disproportionate tax burden on those least able to afford them.

Wireless Taxes And Fees Remain High In 2017

This is the eighth in a series of reports that examine trends in taxes, fees, and government surcharges imposed on wireless service by federal, state, and local governments since 2003. The methodology for the report, which was originally developed by the Committee on State Taxation in a 1999 report, is detailed in Appendix A.

Table 1 shows national trends in tax rates imposed by all levels of government on taxable wireless service between 2003 and 2017. Between 2005 and 2006, wireless taxes dropped after the federal courts forced the IRS to end the imposition of the 3 percent federal excise tax on wireless service. After that court decision, wireless tax rates dropped to a low of 14.1 percent. Since then, however, wireless tax rates have climbed steadily to their current rate of 18.5 percent.

Table 1. US Average Wireless and General Sales & Use Tax Rates
1/1/2003 10.20% 5.07% 15.27% 6.87% 3.33%
4/1/2004 10.74% 5.48% 16.22% 6.93% 3.81%
7/1/2005 10.94% 5.91% 16.85% 6.94% 4.00%
7/1/2006 11.14% 2.99% 14.13% 7.04% 4.10%
7/1/2007 11.00% 4.19% 15.19% 7.07% 3.93%
7/1/2008 10.86% 4.23% 15.09% 7.11% 3.75%
7/1/2009 10.74% 4.79% 15.53% 7.26% 3.48%
7/1/2010 11.21% 5.05% 16.26% 7.42% 3.79%
7/1/2012 11.36% 5.82% 17.18% 7.33% 4.03%
7/1/2014 11.23% 5.82% 17.05% 7.51% 3.72%
7/1/2015 11.50% 6.46% 17.96% 7.57% 3.93%
7/1/2016 11.93% 6.64% 18.57% 7.61% 4.32%
7/1/2017 12.11% 6.34% 18.46% 7.65% 4.46%

Table 1 also separates the impact of federal taxes and surcharges from state and local government taxes, fees, and surcharges.Throughout the period, state and local taxes have been trending upward steadily, from 10.2 percent in 2003 to their current level of 12.1 percent in 2017. The FUSF surcharge has also increased throughout the period, although the FUSF declined in2017 for the first time since this report began tracking wireless taxes in 2003. For a detailed explanation of the FUSF and how it is imposed, see Appendix B.

Table 1 also shows the general trends in average tax rates of the sales and use tax, which is the primary broad-based consumption tax imposed by 45 states, the District of Columbia, and Puerto Rico. Since 2003, the average state-local sales tax rate has increased by about 0.8 percentage points – from 6.87 percent to 7.65 percent. During that same period, wireless taxes increased by 1.9 percentage points – from 10.2 percent to 12.11 percent. Wireless tax rates have increased roughly two-and-a-half times faster than sales tax rates.

Wireless industry competition has led to significant reductions in average monthly bills since 2008, a trend that accelerated dramatically in 2017 when average bills dropped from $44.65 per month in 2016 to $41.50 per month this year. In fact, Federal Reserve Chair Janet Yellen specifically identified wireless price reductions as a key factor in keeping U.S. inflation low. Since 2008, average wireless monthly bills have dropped from just under $50 per month to $41.50 per month – a 17 percent reduction – while wireless taxes have increased from 15.1 percent to 18.5 percent – a 22 percent increase. Unfortunately, consumers have not enjoyed the full benefits of wireless price competition because tax increases have offset some of the price reductions.

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