NEW YORK-The discriminatory patchwork of state and local taxes on telecommunications carriers imposes a roadblock to providers of the highways over which all Internet traffic travels, according to recent testimony before a federal commission.
To remedy that disparity and confusion, the vice chairman of the California State Board of Equalization and a dozen telecommunications carriers offered two different but complementary alternatives at December’s penultimate meeting of the U.S. Advisory Commission on Electronic Commerce. Neither proposed taxing e-commerce transactions.
The commission’s final meeting will be held in March, and its recommendations to Congress on electronic commerce and tax policy are due April 21.
“I don’t see the e-commerce commission reaching consensus and solving the problem, but I do think they are moving in the right direction in terms of looking at the various issues … in an open forum,” said Robert Geppert, national director of telecommunications tax services for KPMG L.L.P., Seattle.
The 1998 Internet Tax Freedom Act, which created the commission, placed a moratorium that expires Oct. 21, 2001, on new state and local taxes on Internet access and on multiple or discriminatory taxes on electronic commerce. Congress directed the commission to recommend whether and how Internet transactions should be taxed.
“Congress may have been too optimistic in setting up the commission and thinking it could deal with this in a relatively short period of time. If anything happens, it will be an extension of the moratorium,” Geppert said.
“It’s such a monumental undertaking that it can’t be solved as a whole at one time, but it could be in incremental steps.”
Headquartered in Arlington, Va. the advisory commission is chaired by Virginia’s governor, James Gilmore III, who publicly opposes any taxation on e-commerce. The commission’s other 18 members include C. Michael Armstrong, chairman and chief executive officer of AT&T Corp. and John Sidgmore, vice chairman of MCI WorldCom Inc.
Carrier’s coalition
The coalition that offered a plan at December’s commission meeting to simplify and remove discriminatory treatment from state and local taxation of telecommunications comprised these carriers: Alltel Corp., AT&T Corp., Bell Atlantic Corp., BellSouth Corp., CommNet Cellular Inc., Global Crossing, GTE Corp., MCI WorldCom, Nextel Communications Inc., SBC Communications Inc., Sprint Corp., U S West Inc., Vodafone AirTouch plc and Western Wireless Corp.
Except for Global Crossing, these providers also participated in a 50-state study of telecommunications taxes the Committee on State Taxation, Washington, D.C., conducted and submitted to the commission at its September meeting. Just counting the varied state and local levies, the average tax rate on telecommunications is 18 percent nationwide, compared to 6 percent on the sale of goods by general businesses, testified Annabelle B. Canning, legislative counsel to COST.
The carrier coalition’s plan to eliminate discriminatory taxation of telecommunications would phase out “transaction taxes not applicable to general businesses.”
It also would level the playing field by gradually evening out tax rates imposed on telecommunications and other businesses.
The tax equity part of the telecommunications provider plan also asks that this industry benefit from the total or partial sales and use tax exemptions granted other kinds of businesses when they purchase equipment.
Finally, the proposal also would reform property taxes so that “assessment ratios and tax ratios applicable to telecommunications property [are] no higher than those generally applied to commercial and industrial property.”
On the issue of state and local property tax reform, the telecommunications group has a staunch ally in Dean Andal, vice chairman of the California State Board of Equalization and a member of the U.S. Advisory Commission on Electronic Commerce.
Discriminatory property taxation against telecommunications carriers is an outgrowth of 1800s-vintage railroad law that has not applied to railroads since the 1970s, he said. Consequently, telecommunications services providers, unlike many other businesses, are taxed on intangible assets, like federal operating licenses. Telecommunications carriers also pay a higher rate of state taxes on their tangible personal property.
“When the Penn Central Railroad collapsed in the 1970s, Congress responded by passing the Railroad Revitalization and Regulatory Reform Act,” Andal said.
“To encourage investment in the nation’s deteriorating rail system, the 4-R Act … prohibited states from applying discriminatory property taxes to railroads. It further allowed challenges to those taxes to be brought in federal district court and allowed federal courts to enjoin collection of such taxes while litigation was pending.”
Congress since has given similar protection to airlines, bus and trucking companies, but interstate telecommunications and natural gas pipeline industries lost a close battle for a comparable federal law in the late 1980s, Andal said. He called for application of 4-R tax treatment to the telecommunications industry.
“Telecommunications is now made up of many competitive companies with a substantial share of their value tied up in intangible assets. Property taxes are borne by shareholders, not rate payers,” Andal said.
“There is no guaranteed profit anymore, and market participants are forced to make multibillion-dollar investments in infrastructure to stay competitive.”
Besides the two proposals to provide taxation equity to telecommunications, the industry coalition proposal also offers two options to simplify the complexity of state and local taxation regimes. Under both, a carrier would have to file just one tax return for each state in which it does business, “as opposed to the many separate returns that are sometimes required to be filed with various local jurisdictions that currently administer their own taxes.”
As a result of the single tax return filed, both options also would limit the number of audits required to one per state.
The two alternatives for telecommunications taxation simplification also call for all 50 states to adopt nationwide uniform sourcing to establish for taxation purposes the location where the transaction occurred.
“This will eliminate the possibility of more than one state asserting a claim for a tax on a particular transaction,” the coalition proposal said.
In addition, both tax simplification options call for all states to develop uniform, nationwide definitions for local, mobile and other kinds of telecommunications services.
“This will greatly simplify the compliance burdens of telecommunications providers by making it much easier to determine which of their services are subject to a tax in a particular state,” the coalition plan said.
Uniform sourcing and definitions may require a congressional mandate, the industry group noted. Congressional action also would be required to implement one part of the carrier coalition’s second tax simplification alternative. This calls for a state-administered address database that is updated up to four times yearly.
The database would be compiled “in a nationwide uniform format that would assign each street address to the appropriate [locality] in a manner allowing telecommunications providers to determine the correct jurisdiction for which to report any tax attributable to each address,” the coalition plan said.
“This … would be similar in many respects to the address database contemplated by Section 804 of the proposed Mobile Telecommunications Sourcing Act (Senate Bill 1755) as introduced Oct. 20, 1999, by senators (Sam) Brownback (R-Kan.) and Byron Dorgan (D-N.D.).”
Under the coalition’s second tax simplification alternative, local governments that already impose telecommunications taxes would continue to be able to do so. However, they woul
d have to consolidate multiple kinds of taxes into a single tax.
Each state and local jurisdiction could determine the tax rate it imposes. However, each state and all its local governments would have to abide by a statewide consensus as to what measure of a carrier’s revenue or income constitutes the basis for taxation.
Recommendations
With several specific exceptions, the carrier coalition’s proposals do not envision a blanket federal mandate. Its members asked the commission to take three steps: “endorse the specific tax reform measures set forth in this proposal; ask Congress to adopt a resolution which strongly encourages states to work with the telecommunications industry to implement such measures and offers the resources of appropriate federal agencies to assist in the process; and recommend that Congress enact a law establishing a Congressional Review Commission, which after a period of three years, would review the progress of states in achieving the objectives of this proposal.”
Based on its findings, the review commission would recommend possible action to Congress.
“We agree with the proposals tendered by the coalition regarding simplifying the taxation of telecommunications services and property. [They] represent a reasoned approach to bring equity and fairness to a tax system that is currently burdensome, inequitable and unfair,” Geppert of KPMG said in his written testimony.
“The telecommunications industry is one of the most highly taxed … and implementation of any of the (coalition) proposals would be a positive step forward.”
