The Future of State and Local Communication Taxes of State and Local...2.Competing communication services that are either equivalent or viewed as viable substitutes by consumers should

The Future of State and Local Communication TaxesNATOA Annual Meeting

September 26, 2012

© 2012 AT&T Intellectual Property. All rights reserved. AT&T and the AT&T logo are trademarks of AT&T Intellectual Property.

Deborah Bierbaum, Executive Director External Tax Policy, AT&TVoice: 908-234-8323 Email: [email protected]

Overview

• Changing Communications Landscape – Challenging State and Local Tax Systems

• Principles of Sound Tax and Fee Policy

• Federal Legislation Impacting State and Local Taxes on Communication Services

• State Communication Tax Reform Efforts

© 2012 AT&T Intellectual Property. All rights reserved. AT&T and the AT&T logo are trademarks of AT&T Intellectual Property.2

Changing Communications Landscape – Challenging State and Local Taxes & Fees


The Online World Stats for 2012


124+ Billion Tweets/yr

2.267 + Billion internet Users

901 Million Facebook Users

4 Billion Video Playbacks on YouTube/day

3.146 Billion Email Accounts

555 Million Websites

156 Million Blogs

107 + Trillion Emails Sent

http://royal.pingdom.com/2011/01/12/internet-2010-in-numbers/

http://www.itu.int/ITU-D/ict/material/FactsFigures2010.pdf

“Cutting the Cord”Wireless Substitution

One-third of American homes (34.0%) had only wireless telephones during the second half of 2011—an increase of 2.4 percentage points since the first half of 2011. Preliminary results July - December 2011 National Health Interview Survey (NHIS) .


Mobile Traffic Estimates: Video in High Demand


Figure 2 — Explosion in the demand for Video, 2008–2013 (estimates)

Source: Cisco graph at: www.itu.int/net/itunews/issues/2010/06/35.aspx

What the Internet Does


Provides a value-added platform to deliver content and services at lower cost to consumers.

Distributed Data

Distributed Text

• E-mail

• Instant messaging

• Text messaging

• E-collaboration/ e-work

• Blogs

Distributed Content: www

Distributed Voice Distributed Video

• Music

• Software distribution

• Retail Sales

• Public information

• Games

• Books

• VoIP phone calling

• Chat

• Audio conferencing

• Answering services

• Record and send

• Distance learning

• Medical consultation

• Remote monitoring

• Video conferencing

• Video distribution

Skype

TeleGeography estimates that cross-border Skype-to-Skype calls (including video calls) grew 48 percent in 2011, to 145 billion minutes.

TeleGeography estimates that Skype added 47 billion minutes of international traffic in 2011 – more than twice as much as all the telephone companies in the world, combined.


Source: http://www.telegography.com/mail/tg press 2011.html

In August of 2009, Hulu had More Viewers than Time Warner Cable

Pascal-Emmanuel Gobry

October 06, 2011

Hulu Plus is very successful, writes Hulu CEO Jason Kilar. It has now 1 million paying subscribers, and Kilar believes it will soon bring in half of Hulu's revenue.


Apple, Hulu Reach Collaborative Agreement July 31, 2012

(NASDAQ:AAPL) Apple and Hulu reached an agreement without much fanfare Tuesday, as Hulu began its Hulu Plus streaming service on Apple TV boxes. Hulu joins several other third-party providers – like the NBA, NHL and MLB.TV, among others – to offer its streaming service to Apple TV users.

Source: http://articles.businessinsider.com/2009-08-28/tech/30029893_1_hulu-video-platform-time-warner-cable

Principles of Sound Tax and Fee Policy


Tax Policy Principles – NCSL & NGA

Nearly two decades ago, the National Conference of State Legislatures and the National Governors’ Association published “Financing State Government in the 1990s.” The report urged states to evaluate their tax systems against five “principles” of sound tax policy:

•Certainty, stability, and predictability;

•Equitable distribution of tax burdens;

•Promotion of economic efficiency and economic growth;

•Ease of administration; and

•Accountability to taxpayers.


Principles for Communications Tax Reform – NLC

The National League of Cities is working on draft principles to help all levels of government frame discussions on how to reform communications taxes. The draft principles “recognize that taxes imposed by all levels of government on communications are based largely on an antiquated and static model of the industry that does not acknowledge its rapidevolution…”

1.The authority to raise revenues to provide for the public interest is vital to local governments and must be preserved.

2.A time of transition should be incorporated for all parties to adjust to any agreed upon communications reform.

3.Local tax policy and fees should not influence consumers’ selection or use of one specific communications technology or service over another.


Principles for Communications Tax Reform – NLC continued

The National League of Cities draft principles continued:

4.Local taxation and fees should not advantage one communications service provider over another provider of a functionally equivalent service.

5.Reform should help simplify the collection, reporting and auditing of local taxes on communications services, and reform should not negatively impact the amount of revenue raised.

6.Reform should allow for solutions that are revenue neutral at the local government level.

7.Tax obligations should not be based on the provider’s presence in a taxing jurisdiction.

8.Special purpose obligations, such as universal service and 911, should be applied on a nondiscriminatory basis between providers of functionally equivalent services.


Principles for Communications Tax Reform – Industry

As part of a 2005 Industry Government communications tax reform initiative a number of telecommunications companies existing at the time submitted the following principles:

1.State and local tax policy should not influence consumers’ selection or use of one specific communications technology or service over another.

2.Competing communication services that are either equivalent or viewed as viable substitutes by consumers should be treated on a nondiscriminatory tax basis by state and local governments regardless of technologies used to deliver them.

3.State and local taxation should not advantage one communications service provider over another provider of a functionally equivalent service.

4.Special purpose obligations, such as universal service and 911, should be applied to all providers of functionally equivalent services on a nondiscriminatory basis. Revenues from such obligations should be used only for the purposes for which they are collected.



2005 Telecommunications Industry principles continued:

5.Charges for the use of the public right of way should be applied on a nondiscriminatory basis among providers of communication services that use the public right of way. Right of way fees should be limited to the direct costs associated with managing the rights of way.

6.The authority to raise revenues to provide for the public interest is vital to state and local governments and should be preserved.

7.Reforms should strive to simplify the collection, reporting and auditing of state and local taxes on communications services.

8.A time of transition should be incorporated for all parties to adjust to any agreed upon communications tax reform.



2005 Telecommunications Industry principles continued:

9.State and local taxes on communications services, property, and providers should reflect the competitive nature of the industry and its proportionate share of taxes relative to the general business community.

10.Reform should allow for solutions that are revenue neutral at the state and local government levels.

11.Tax obligations should not vary based on the level of a provider’s presence in a taxing jurisdiction.


Federal Tax Legislation Impacting State and Local Taxation of Communications


Wireless Tax Fairness Act

The Wireless Tax Fairness Act HR1002/S543 has passed the House and currently has 19 co-sponsors in the Senate. The Act would:•Establish a five year moratorium against any new state or local discriminatory taxes on wireless services, property and providers.

•Does not repeal existing taxes, but does preclude any new discriminatory taxes on wireless during the five-year period

•Does preclude expansion of any existing discriminatory taxes to wireless during the moratorium period.

•Does not prevent enactment of new wireless taxes provided that they are not discriminatory when compared to general business

•Does allow revenue neutral tax reform during the moratorium

•Does not apply to E911 fees, USF fees or other “benefits conferred” fees that are not taxes.

•Does not apply to any local tax that would otherwise meet the definition of a “discriminatory” tax if they were enacted by a vote of the people.


Wireless Tax Fairness Act

Reasons for Act:

•Encourage State and Local governments to work with the industry on reforming the outdated systems.

•A report by Scott Mackey, “A Growing Burden: Taxes and Fees on Wireless Service,” in State Tax Notes shows that wireless taxes and fees on consumer bills have increased from 10.74 percent in 2009 to 11.21 percent in 2010.

•In 22 States the combined state and local tax rates is in the double digits. 5 States have combined state and local rates that exceed 20% (NE, WA, NY, FL and IL).

•Convergence has occurred without any change to our tax laws. Theantiquated tax systems do not work with newer communication models and result in confusion, increasing risk of inequitable taxation.


Digital Goods and Services Tax Fairness Act

The Digital Goods and Services Tax Fairness Act HR1860/S971 was reported favorably out of the House Committee of Judiciary. The Act:

•Provides a framework for taxation of digital goods and services.

•Clearly identifies the jurisdiction that has the right to tax digital transactions preventing multiple jurisdictions from taxing the same transaction.

•Precludes discriminatory taxes on digital goods and services.

•Excludes telecommunications and video programming services (except for pay per view and video on demand).

•Prevents expansive administrative interpretations of existing statutes to include digital goods and services.

•Does not preclude states or localities from taxing this segment of the new economy under generally applicable taxes.

•Meetings are currently taking place, led by NGA, to reconcile language concerns with representatives from the states and industry.


State and Local Communications Tax Reform Efforts


Quote on approaching state and local tax reform:

Harley Duncan (former Executive Director of the Federation of Tax Administrators) to NGA Economic Development Committee:

“I think we need to begin to pay some very serious attention in our state and local tax structure to the role of the digital economy, communications technologies, and the manner in which we tax those.. . . As you think about developing a system that promotes growth and investment, it should be perhaps a chance and the time to take a back-to-the-basics approach and say, do we have a system that is aligned with economic activity so that we know we are not creating a haphazard system of incentives and disincentives.”

Communications Tax Reform


“Telecommunications Tax Policies: Implication for the Digital Age”National Governors Association Center for Best Practices, 2000

“[S]tate and local telecommunications tax systems are not competitively neutral. In many cases, the current tax structure favors some segments of the industry over others. In other instances, the tax burden on the telecommunications industry is greater than that of other industries. In either case, telecommunications companies are not competing on a level playing field. The current tax system forces these companies to compete not only on the basis of economic factors, but also on the basis of the tax differential among them.”

The report recommends that state policy makers review their state telecommunications taxes with goals of increasing tax efficiency, competitive neutrality, tax equity and administrative simplicity.

Communications Tax Reform


Virginia Communications Tax Reform

In 2002, the Virginia General Assembly recognized that the taxation of telecommunications and video services was in desperate need of reform and created as subcommittee to study the issues. Some localities had a combined state and local tax rate of nearly 30%. A statewide provider of telecom services could be required to fill out and file over 4,300 separate tax forms.

• HB568 enacted in March of 2006:

• Repealed the local utility-based tax system and replaced it with a new, state-administered system

• Taxed all telecommunications and video services regardless of the method of delivery at a rate of 5% the same rate as the sales tax. This included satellite video services that are protected under federal law from locally administered taxes.

• Imposed a cost based right of way fee only on providers of telecommunications and video services in the right of way.

• Equalized the 911 fees on wireline and wireless services at the state level.


Virginia Communications Tax Reform

Scott Mackey*, an economist and partner at KSE Partners LLP in Montpelier, VT conducted a revenue analysis of the Virginia communications tax reform published in State Tax Notes on April 25, 2011.

The analysis was based on data submitted by the local governments to the auditors of public accounts. The key finding:

Local governments in Virginia have received more money under thecommunication services tax (CST) than they would have received under the previous law. The Virginia CST has provided stable revenues for local governments while relieving consumers from excessive tax rate on certain types of telecommunications services.

*Scott Mackey represents wireless companies on tax issues.


Model Communications Tax Reform Process

The communications industry submitted a model process paper to State and local Government representatives as part of a communications reform effort coordinated by the US Conference of Mayors in May of 2011. Key aspects included:

•Establish a process to gather financial data regarding tax revenues received by state and local governments from various sectors under current law with the ability to analyze various reform alternatives. The process should protect the confidentiality of the data.

•State and local governments should work together to develop methods to simplify tax collection at the state level, which can be distributed to localities through fair and reliable revenue distribution models.

•The revised system should result in non-discriminatory taxes that apply similarly to all vendors of the same product or service and should apply equitably and be economically neutral.

•The revised system should be simple to administer, but also ensure sustainable revenue streams for state and local governments.


Multistate Tax Commission Model Central Administration Acts

• In August of 2012 the Multistate Tax Commission passed a resolution adopting 3 model acts for central administration of communications taxes.

• The models are meant to provide guidance to state and local governments undertaking communications reform. They are a starting point that takes into consideration the administrative provisions (not imposition provisions) that need to be considered in drafting a centrally administered tax.

• The three models are:

• State administration and state imposition.• State administration and local imposition.• Centralized local administration and local imposition.


Current Communications Tax Reform Efforts

Florida Communications Tax Working Group

• Mission: Review tax policies related to the communications industry, historical tax revenue, fairness of the state’s communication tax laws and its burdens. Identify options for streamlining the administrative system. Identify options that remove the competitive advantages within the industry as it relates to the state’s tax structure without unduly reducing revenue to local governments.

• Detailed information can be found at: http://dor.myflorida.com/dor/cst_workgroup/

• A report of the working group is due to the Governor, the President of the Senate, and the Speaker of the House of Representatives by February 1, 2013.


Current Communications Tax Reform Efforts

Maryland Communications Tax Reform Commission

• Mission: The Commission is charged with evaluating the tax and fee system on the communications industry, and the feasibility and fiscal implications of modernizing it for State and local government. In its assessment, the Commission must consider all the sales and use tax; and taxes on State and local property, public service company franchises, corporate income, and local communications; and any other relevant communications taxes or fees.

• Detailed information can be found at: http://www.ctrc.maryland.gov/

• A final report of the Commission is due to the Governor by June 30, 2013.


Concluding Thoughts


• The changing communications landscape and the economy threaten traditional local revenue sources and place traditional providers of communications services at a disadvantage.

• Excessive taxes and fees on traditional services provide an added financial incentive to shift to newer technologies .

• A path forward is available if state and local governments and industry work together to find a solution that works for all stakeholdersfollowing model principles many of which are shared by the industry and state and local governments.

• The failure of most states to enact meaningful communications tax reform has reinforced arguments at the federal level on why pre-emptive legislation is needed.

Documents

The Future of State and Local Communication Taxes of State and Local...2.Competing communication services that are either equivalent or viewed as viable substitutes by consumers should