Taxes Are Key to Telecom Reform

Taxes Are Key to Telecom Reform
February 1, 2005

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

The telecom industry needs tax relief, according to participants in The Heartland Institute’s Telecom Reform Conference held December 17 and 18 in Chicago.

“We want to be treated like any other business,” Deborah Bierbaum, director of external tax policy at AT&T, told conference participants, many of whom were state and municipal lawmakers from across the country.

In three states, telecom consumers pay sales taxes and fees exceeding 24 percent on their monthly bills. In 24 states, telecom taxes and fees exceed 13 percent, compared to an average sales tax of about 6 percent on other goods and services, Bierbaum said.

Telecom taxes include state and local taxes, 911 emergency services fees, right-of-way fees, gross receipts taxes, universal service funds, and federal excise tax.

Huge Compliance Costs Cited

Bierbaum noted telecom companies have 391 taxes to administer, compared to 118 collected by other businesses. Telecom firms must also contend with 15,218 taxing jurisdictions, versus 8,262 for other businesses.

“There are huge costs on the industry in complying with these taxes,” she said. “The number of returns that we have to file a year--we’re talking about transaction tax returns--for general business is about 8,284 returns a year. For telecom, it’s over 67,000 returns a year, for a national provider. AT&T’s number approaches that. Every 1.2 minutes of the workday, we are sending somebody at the state or local level a tax return.”

In addition to the administrative costs associated with the preparing and filing of so many tax returns, there are litigation costs, according to Bierbaum.

Sued for Collecting Taxes

“We’re put in a hard place as an industry in dealing with these taxes,” Bierbaum said. “AT&T and a couple of other phone companies now have class-action lawsuits against us for address jurisdictions.” She explained that in AT&T’s case, a new house was built in an unincorporated area of Oklahoma. The ZIP code indicated the house was in a county with a local telecommunications tax, and AT&T collected the tax. However, the house was actually over the county line.

“The class action names every state that has local taxes on telecommunications,” Bierbaum said, “and an Oklahoma judge is deciding whether we have to refund sales and gross receipts tax for all the other states in the country.”

She said the plaintiffs argue that if AT&T did not know which county the Oklahoma house was in, it must refund local taxes for the entire country, because similar mistakes could have been made elsewhere.

“And the court admits AT&T doesn’t have the money, and we refunded it to the customer, and any [revenue] we had was given to government,” Bierbaum said. “It went to the U.S. Supreme Court; they won’t hear the case, so now it’s back in Oklahoma to decide the fate of all your state and local taxes.”

Taxes Complicate Billing

Bundled service packages, which give consumers a variety of services such as local calling, long-distance calling, Internet access, and other services under one charge, are also causing problems.

In many locales, each piece of the package is taxed differently, sometimes not at all. Bierbaum said this makes it extremely difficult to determine what the tax should be.

“The customer shouldn’t have to pay tax on the full charge,” she said. “Again, this is important to us because of a class-action lawsuit risk. One of the regional Bell companies has a class-action lawsuit that has just been filed against it, where Internet access was included in the bundle. The consumers are saying, ‘Hey, wait a minute, my legislators said Internet access was not taxable. Why are you taxing us?’ Again, we’re put in the middle.”

New Entities Treated Differently

New voice providers, such as those using voice over Internet Protocol, which provides telephone service over the Internet, have big tax advantages over traditional firms, because they often have no tangible property or employees in states where they do business, according to Bierbaum. They cannot be compelled to collect taxes in states where they have no physical presence.

One such provider, in New Jersey, collects sales tax only on New Jersey customers. Customers in the rest of the country are not taxed.

“So you’re going to buy service from AT&T or Verizon and pay, in Richmond, Virginia, 28 percent,” Bierbaum said. “Or you can go to this new company and pay zero in tax. You’re going to distort behavior in consumers.”

Tax Laws Obsolete

“The technologies are exploding, and the laws are not keeping up with those changes,” said Scott Mackey, an economist at Kimbell Sherman Ellis who specializes in the telecommunications industry. “This is creating a lot of problems,” he said, including discrimination against certain providers of communication services.

“Clearly, the way the economy is going, you have got to have this infrastructure in your states,” Mackey said. “How are the companies that have these billions of dollars in network investments under the regulatory scheme going to survive if we persist in having this discriminatory tax system ...?

“The gap between the unregulated or favorably taxed provider and the provider that is saddled with all these discriminatory taxes is only going to grow as market forces drive down the price of the service but not the tax,” he said.

High Taxes Slow Investment

Mackey also argued that high levels of taxation on communications infrastructure are raising the cost of business and reducing the return on investment. That will depress investment and send capital to other sectors of the economy that are not as important to long-term economic growth, he said.

“Wall Street is not just saying, ‘Take our money and spend it how you want,’” Mackey said. “Companies are now having to spend their own, internally generated dollars, on this investment. Taxes do matter, funneling back how much money companies have to invest in these networks.”

Mackey also argued it’s not enough to level the playing field within the telecommunications industry, because high tax burdens will drive capital to other sectors of the economy even if all providers in the industry are treated equally.

“It’s amazing to me what an incredible disconnect there is between tax policy and economic development,” Mackey said. “All the states are going around creating new programs to subsidize broadband in rural areas, there are all these bills in Congress, and then you turn around and impose a 25 percent tax on the companies that are trying to generate the cash to make those same investments without subsidies. Something is not right when one hand is doing this and the other hand is doing that.”


Steve Stanek (stanek@heartland.org) is managing editor of Budget & Tax News.


For more information ...

Audioclips from the December telecom reform conference will be available in February on The Heartland Institute Web site at http://www.heartland.org.

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)