Taxes and tax-like charges can add as much as 25%, and more, to local telephone charges in some jurisdictions. This is an area to which no rules are universally applicable, so all generalities have exceptions. That being said, there are three "rules-of-thumb" which can be useful in understanding the taxes placed on your bills.

1. Generally, the four types of taxes include service fees and charges; franchise tax or surcharges; sales use or special taxes; and federal excise tax.

2.Taxes are not uniformly imposed on all services.

3.Some categories of users are exempt from some taxes.

Let's take a closer look at specific taxes you'll encounter on your bills.

Specific Service Fees and Charges
These charges may be imposed to support 911 services, operation of the Public Utility Commission (California), provision of special equipment for handicapped persons (California), Universal Service Funds, poison control centers (Texas), etc. The Presubscribed Interexchange Carrier Charge (PICC) would also fall into this category. Such charges may be calculated on a per-line or percentage basis. These fees apply universally and there are no exceptions.

Franchise Taxes or Surcharges
Usually local items, these charges can and may be imposed by the county or state governments. Most often these are calculated as a percent of the items that apply, (various local service charges, additional calls or message unit charges, and installation charges), but they may be calculated on some other basis. This tax is called a variety of names, including franchise fee, city tax, municipal charge, surcharge, additional charge (AC), gross receipts tax, etc. As usual, this varies from state to state.

Sales, Use or Special Taxes
These taxes may be imposed by a municipality, county, school district, transportation district, state or other taxing body. The "state and local taxes" section of your bill may be a combination of such items. Sales, use and special taxes generally apply to local service charges, additional calls or message unit charges, installation charges, and intrastate toll charges. (Most states also tax interstate toll charges.) And again, these taxes are most often a percent of the items to which they apply. That base may include franchise taxes, surcharges or other service fees. In other words, you are taxed on taxes!

Federal Excise Tax
This tax is imposed by Congress on non-exempt items. It generally applies to regulated services, except private lines, mileage, centrex-related enhancements, service and installation charges, and some other services. The base on which the tax is calculated may include franchise taxes, surcharges, and gross receipts taxes. Originally a Spanish-American War "luxury" tax, the rate has varied between 1% and 10% over the years, but has been held constant at 3% since 1983.

Remember, taxes are not uniformly imposed on all services. For example, white-page directory advertising is not taxed in most states, unless this statement item includes other items. (Arkansas and Oklahoma are exceptions, however.)

Who is Exempt?

Charities, churches, schoools, nonprofit educational and hospital operations, certain other entities that receive government funding, foreign counselor operations, and others, may be exempt from state and/or federal taxes. For example, common carriers, newspapers and broadcast companies may be exempt from federal tax on some services.

To understand the specific services that are exempt from federal tax, refer to the Internal Revenue Service publication 510 entitled Communications Tax. This publication is very specific as to what taxes are federally imposed and which are exempt.

As you can see, taxes can be a complicated subject as it applies to your telecom bills. But understanding them can be a major step in reducing your costs when doing a cost-reduction study.