Communications Companies Seek Tax Reform

There is a tax on American phone bills that dates back more than a century to the Spanish-American War.

The franchise tax was imposed to help pay for the war, says Steve Davis, senior vice president of policy and law and deputy general counsel with Qwest Communications International Inc.

The government “pretty much covered that cost by now I’d guess,” he quips.

Davis and other lobbyists cite the 1898 war tax to express their frustration with the current tax system. They say it is antiquated, unfair and inconsistent from one jurisdiction to the next.

That is why the industry is working with state and local governments to develop a plan to modernize the tax laws. On Dec. 15, BellSouth Corp., Verizon Communications Inc. and other communications companies participated in a closed-door meeting with government representatives to tackle the thorny issue.

During a press conference that day, Virginia Gov. Mark Warner declined to reveal details of the meeting but said government representatives were committed to developing a framework for a solution.

One possibility: adopting model legislation that would be introduced at the state legislatures, although one phone rep who attended the meeting said the likelihood of state and local governments finding common ground on a piece of legislation is ‘miniscule.’

There could be a role for Congress in 2005, but Davis questions whether lawmakers would be inclined to block municipalities and states from imposing taxes. Such action, though, would not be unprecedented. The 108th Congress passed legislation reinstituting a ban on state and local taxation of Internet access for another three years despite opposition from local and state governments.

“Every single state has a tax bill every single year. It’s a neverending process,” Davis says. “I don’t see a timeline where I could say that … I think by X date 2007, we’ll have uniform and consistent treatment of communications services.”

Still, industry representatives have expressed a sense of urgency to reform the myriad tax structures.

State and local governments collect approximately $18 billion from the communications industry, according to Verizon’s Tom Tauke, executive vice president of public affairs and communications.

The industry is said to contribute a disproportionate amount of taxes compared to other businesses selling consumers traditional goods.

Ernst & Young released a 2002 report that claimed an estimated 39 percent of all telecom taxes exceed taxes that generally are imposed on other businesses and their customers, according to the Social Science Research Network. The reported excess tab: $7 billion.

Three states tax telecom companies between 24.4 percent and 29.8 percent while eight states tax between 19 percent and 24.4 percent, according to 2002 Ernst & Young data.

Then there are the administrative headaches. “Many companies file well in excess of 1,000 tax returns per month,” says Mike Shaw, vice president, tax, EarthLink Inc. “It’s very difficult to understand how any of [the] thousands of jurisdictions may apply antiquated tax statutes to newer, emerging … business models.”

“You can have jurisdictions notifying a company that they believe a certain service they have been selling for the last two years is subject to a certain tax statute,” Shaw adds.

Companies also grumble communications services are taxed differently based on the technology and other factors, such as the service being provided over the technology and the particular company. For example, phone companies and cable operators offering their respective flavors of high-speed Internet access - DSL and cable modem - are taxed differently even though the service is basically the same.

Fundamental changes in the telecommunications industry also are creating tax burdens for phone companies as Americans send e-mail, chat on their mobile handsets and use other means to communicate in lieu of making calls over the long-distance phone network. For example, phone companies are required to contribute a greater percentage of their interstate end-user revenue to subsidize federal universal service programs to compensate for a decline in traditional long-distance sales. In December, the FCC announced that the proposed contribution factor - the percentage of interstate revenue phone companies must contribute - is 10.7 percent for the first quarter of 2005, up from 8.7 percent a year earlier.

New technologies like Internet phone service, or VoIP, also have added another coat of complexity to tax policies. Federal regulators have classified VoIP as an interstate service outside the jurisdiction of the states, but the industry is not clear how that affects a company’s obligations.

Davis says regulators could help alleviate the tax problems. “I think if we had consistent regulation of such services by the FCC, it would do a great deal,” he says.


EarthLink Inc.
Ernst & Young
Qwest Communications International Inc.
Social Science Research Network

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