NEW YORK-Telecommunications carriers are experiencing and causing a lot of taxing questions related to how they are defined-and therefore treated-by tax departments in state and local government.
It’s not your father’s Oldsmobile anymore. The comfortable monopoly or duopoly environments are going the way of the dinosaur. In a process that is more revolution than evolution, operating conditions and technology advancements are changing with lightning speed.
“There is a lot of interest and controversy among state tax administrators, and to some extent at the federal level, because the telecommunications industry has changed so radically in the recent past,” said Deborah Goldstein, a tax attorney with Coudert Brothers, New York. “Therefore, you’ve got things like competition instead of monopolies, with all sorts of technological developments around access providers, paging, voice mail and so on. For a few reasons, what this does is create conceptual and other issues because state corporate, sales and use, and other taxes are keyed to older industries like manufacturing making tangible personal property at one or more locations for customers.”
While state and local governments have been called laboratories for change, they also have reputations for being reactive, rather than proactive.
Furthermore, they also operate under conflicting goals. On one hand, the telecommunications industry is widely recognized as a long-term growth engine for the economy that should be encouraged by more favorable tax treatment. The price escalation due to embedded tax burdens on telecommunications can act as a barrier to overall expansion of the customer base and customer usage, said an attorney for a Florida cellular carrier, who spoke on condition of anonymity.
Consequently, there is concern by governments that failing to alter archaic tax regulations will both slow telecommunications growth and drive companies to neighboring jurisdictions with better treatment. On the other hand, there is a fear of short-term revenue losses in the wake of changed tax policies.
“In many cases, utilities (which is how telecommunications companies still are characterized by some key taxation definitions) have become budget balancing taxpayers,” said Robert Geppert, national director of telecommunications state and local tax practice for KPMG Peat Marwick, Seattle. “If you look at the telecommunications industry, taxes can be as much as 10 to 25 percent of the end customer’s bill. That’s a high opportunity tax that can act as a barrier to companies getting into the business.”
The situation is further complicated by the fact that there isn’t necessarily a united front among different kinds of carriers because incumbents can realize certain competitive advantages from tax treatment that hurts newcomers.
Wireless carriers that got their radio frequency licenses for free would benefit if a pending lawsuit in Oregon upholds a state initiative to tax the value of radio-frequency licenses purchased from the federal government. Western Wireless Corp. is challenging this type of taxation on intangible personal communications services licenses. A final ruling either way not only could establish law in Oregon but also set a precedent for other states to follow.
In states like California with its Proposition 13 “welcome neighbor” property taxes that are much higher for newcomers than for longtime residents, the facilities of startup carriers can face disproportionately high assessments and bills. While incumbents like cable TV companies would prefer to continue that state of affairs, California has moved to level the playing field somewhat with respect to local property tax assessments, said Hollis L. Hyans, a tax attorney with Morrison & Foerster L.L.P., New York. Big, populous states often serve as trend setters. Here and there, hopeful signs exist that positive change is afoot.
State gross receipts taxes on utilities, including telecommunications carriers, are one example. Passed along to customers in their bills, gross receipts taxes are a kind of quid pro quo state governments have exacted from utilities as the price for the regulated and protected status of communications carriers under the old regime, Hyans said.
Now that the protected franchise environment is giving way to competition, some key states like California, Illinois, Michigan and Texas no longer impose gross receipts taxes on telecommunications carriers, she said. There is a slow but general trend away from this outdated form of taxation.
Similarly, New York and Florida, two other bellwether states, are reviewing recommendations for a more unified and consolidated type of tax structure on telecommunications companies. “New York and Florida right now have multiple taxes. In Florida, these include state sales and use taxes on certain enumerated services, gross receipts taxes, local public service taxes, local level sales taxes and franchise fees,” Goldstein said.
Utah recently included cellular phone contracts and paging services in its exemption from taxes on refundable subscriber deposits and some other items, she said.
Another taxing problem for carriers is that localities often allow depreciation of their personal property, i.e. the equipment they own, as if it had a long and useful life. That may have been true in the past, but rapid technological change often renders equipment outdated in a few short years, Geppert said. Thus, the deductibility of equipment depreciation can outlive its useful life to the carrier.
Within states, smaller jurisdictions often follow the lead set by larger and more sophisticated cities and counties. Consequently, one tactic that can prove synergistically successful is to work out new equipment depreciation schedules for personal property taxation with a large pace-setter jurisdiction, Hyans said.
One of the toughest conundrums to resolve regarding telecommunications taxation has to do with the issue of nexus, which means the right of a state to tax someone, she said. The issue arose with mail-order companies, and it was determined that those with physical facilities in the state where the customer lives must collect and return applicable state and local sales taxes from that customer to his/her state of residence. The situation is much more complicated when it comes to telecommunications companies.
“Suppose you have a paging service that leases a pager to a customer who lives in New Jersey, works in New York and whose job takes him to Connecticut four days a week?” she said.
Late last year, the Multistate Tax Commission, working under the auspices of the National Tax Association in Columbus, Ohio, launched a Communications and Electronic Commerce Tax Project. “The priority for the commission with regard to electronic commerce issues has been to foster a cooperative effort by the industry, states, local governments and any other interested parties to resolve emerging issues arising from electronic commerce,” said Dan Bucks, executive director of the Multistate Tax Commission.
A key constitutional barrier exists to redefining nexus in the new electronic era where customers and transactions and companies are all over the place. A definite link or minimum connection is required between a state and the person, property or transaction it seeks to tax.
“The feds would have to move under the Interstate Commerce clause as they did with the railroads,” Geppert said.
