Texas threatens Sprint Nextel over tax reimbursement

Texas Comptroller Susan Combs warned Sprint Nextel Corp. it could be audited and sued if it continues to collect fees from subscribers to cover the cost of the state’s revised franchise tax, but the carrier said the law is on its side.
“It’s not unusual for a company to collect an amount identified as a reimbursement for a tax or a fee,” Combs said. “But no such reimbursement for a franchise tax has ever been approved by the comptroller’s office.”
Combs said Sprint Nextel’s bill implies that it will pay a 1-percent tax on its gross receipts. But the effective tax rate under the revised franchise tax cannot exceed 0.7 percent. “Companies are prohibited by law from collecting more from their customers than the amount of tax the company will pay,” she stated.
The new charge began appearing on bills this month in what McCombs calls an apparent attempt by Sprint Nextel to pass through directly to its customers the state’s tax. Cellphone trade association CTIA said Texas has the fifth-highest wireless tax in the country, with more than 18 percent of wireless bills eaten up by various taxes, fees and mandates.
The state comptroller noted that the term “reimbursement” implies that the tax or fee appearing on customers’ bills has already been paid by Sprint Nextel. But, according to Combs, Texas will not begin collecting the revised franchise tax until next year.
In a letter to Mark Beshears, VP for state and local tax matters at Sprint Nextel, Combs asked the carrier to drop the new charge from its bills until the legislature has an opportunity to address the issue. “Failure to comply . could result in both audit and collection action by this office and a possible injunction by the Texas attorney general,” Combs wrote.
Sprint Nextel questioned how Combs can pressure it to drop the charge and at the same time concede in roundabout fashion that she’s unsure whether she has the authority to force the wireless carrier to make billing changes.
The Texas Margin Tax was passed last year to address a funding shortfall for public education in the state and became a flash point in Gov. Rick Perry’s successful re-election bid last fall. Texas is also embroiled in a separate fiasco in which lawmakers are allegedly diverting millions of dollars from a telecom tax-one designed to pay for Internet links in schools, hospitals and libraries and supposedly abolished three years ago-to the general treasury to fund other projects.
“In Texas, as in various states around the country, Sprint Nextel’s rates include certain surcharges for reimbursement of the company’s costs of funding and complying with government mandates and initiatives,” said company spokesman John Taylor.
Sprint Nextel has framed the Texas tax dispute as an improper foray by the state into wireless rates. States cannot regulate mobile-phone rates, but can oversee other terms of commercial wireless service.
Sprint Nextel and T-Mobile USA Inc. later this month plan to take the state pre-emption issue to the Supreme Court. A federal court in Washington state recently ruled in Sprint Nextel’s favor in a line-item lawsuit, with the judge agreeing that federal law pre-empts line-item regulation by states.
On a related front, the FCC Chairman Kevin Martin is trying to round up votes to rule that early-termination fees are a component of rate structures and therefore off limits to states.