Telecommunications: Taxation of Services, Property and Providers
Table of Contents
CCH INCORPORATED Chicago
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TABLE OF CONTENTS Paragraph CHAPTER 1
INTRODUCTION TO TELECOMMUNICATIONS TAXATION Deborah R. Bierbaum and James P. Kratochvill
Overview ....................................................................................................101 What Is Telecommunications? ....................................................................105 Will the Current Tax Structures Survive the 21st Century? .......................110 Overview of the Book.................................................................................115
CHAPTER 2
HISTORY AND OVERVIEW OF TELECOMMUNICATIONS TAXATION Nancy S. Abbott and Richard J. Sinton
Overview.....................................................................................................201 The Bell System and Regulation ................................................................205 Deregulation and the AT&T Breakup .........................................................210 Taxation of Traditional Telecommunications Services...............................215 Local Exchange Service...............................................................215.01 Message Telecommunications Service ........................................215.02 Wide-Area Telecommunications Service.....................................215.03 Private-Line Service.....................................................................215.04 Copyright ©2003, CCH INCORPORATED. All rights reserved.
xviii General Tax Issues ......................................................................................220 Property Tax .................................................................................220.01 Sales Tax ......................................................................................220.02 Gross Receipts Tax.......................................................................220.03 Local Taxes and Access Fees.......................................................220.04 Federal Excise Tax .......................................................................220.05 CHAPTER 3
APPORTIONING AND SOURCING TAXES ON TELECOMMUNICATIONS SERVICES Emily M. Burke, C. Stephen Rosander, and John C. Teemley
Overview.....................................................................................................301 Sourcing and the Goldberg Rule.................................................................305 State Sourcing Formulas for Taxes on Interstate Telecommunications Services...............................................................310 Origination or Termination ..........................................................310.01 Billing or Service Address ...........................................................310.02 Sourcing Rules Applied ...............................................................310.03 Federal Excise Tax ......................................................................................315 Apportioning Telecommunications Charges...............................................320 Constitutional Apportionment Tests.............................................320.01 Apportioning Private-Line Service ..............................................320.02 Sourcing Telecommunications Revenue for State-Income-Based Taxes......325 Transactional (Call-by-Call) Method...........................................325.01 Copyright ©2003, CCH INCORPORATED. All rights reserved.
xix Cost of Performance ....................................................................325.02 Regulatory Industry Methods ......................................................325.03 Single Factor Formula..................................................................325.04
CHAPTER 4
TAXATION OF LOCAL TELECOMMUNICATIONS SERVICES Karen Galanek and Duncan A. Ryan, Jr.
Overview.....................................................................................................401 What Is Local Telephone Service? .............................................................405 Optional Services .........................................................................405.01 Regulatory Fees............................................................................405.02 Resales..........................................................................................405.03 Variable Taxation: Sales and Gross Receipts Taxes ...................................410 District of Columbia .................................................................... 410.01 Florida ..........................................................................................410.02 Georgia .........................................................................................410.03 New York .....................................................................................410.04 North Carolina..............................................................................410.05 Ohio..............................................................................................410.06 Pennsylvania ................................................................................410.07 South Carolina..............................................................................410.08 Washington...................................................................................410.09 Copyright ©2003, CCH INCORPORATED. All rights reserved.
xx Local-Revenue-Based and Utility User Taxes............................................415 Alaska...........................................................................................415.01 Florida ..........................................................................................415.02 Missouri .......................................................................................415.03 New York .....................................................................................415.04 Utah ..............................................................................................415.05 Virginia.........................................................................................415.06 Access Line Taxes, Fees, and Surcharges ..................................................420 What Are Access Lines? ..............................................................420.01 State Versus Local Taxes and Fees ..............................................420.02 911 Fees and Charges ..................................................................420.03 Telephone Relay Service..............................................................420.04 Universal Service Programs.........................................................420.05 Franchise Fees and Other Charges .............................................................425 Types of Franchise Fees...............................................................425.01 Challenging Franchise Fees—Case Examples ............................425.02 Federal Law as a Basis for Challenge .........................................425.03
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xxi CHAPTER 5
TAXATION OF WIRELESS TELECOMMUNICATIONS SERVICES Daurell Bell and Peter McKay
Overview.....................................................................................................501 Formats and Regulation ..............................................................................505 Wireless Formats..........................................................................505.01 Federal and State Regulation .......................................................505.02 Taxes on Wireless Telecommunications Services ......................................510 Retail Sales and Use Tax .............................................................510.01 Utility Taxes .................................................................................510.02 Right-of-Way Taxes .....................................................................510.03 E-911 Taxes..................................................................................510.04 Universal Service Fund Taxes .....................................................510.05 Public Utility Commission Fees ..................................................510.06 Wireless Telecommunications Equipment Tax Issues ...............................515 Typical Sales Arrangement ..........................................................515.01 Treatment of Discounted Phone Sales .........................................515.02 Taxation of Selected Wireless Services ......................................................520 Prepaid Wireless Service..............................................................520.01 Wireless Data Transmission.........................................................520.02
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xxii Property Taxes in the Wireless Environment..............................................525
CHAPTER 6
TAXATION OF POSTPAID CALLING CARDS Alex Hattem and Teresa Moore
Overview.....................................................................................................601 Types of Postpaid Calling Cards ...............................................................605 Subscriber Calling Cards .............................................................605.01 Nonsubscriber Calling Cards .......................................................605.02 Credit Calling Cards ....................................................................605.03 Corporate Calling Cards ..............................................................605.04 Internet Calling Cards ..................................................................605.05 Sourcing of Postpaid Calling Card Calls....................................................610 Determining the Type of Call ......................................................610.01 Sourcing Difficulties ....................................................................610.02 Sourcing Postpaid Calling Cards ................................................................615 Service Address Sourcing + Subscriber Calling Card Call .........615.01 Service Address Sourcing + Credit Card Call .............................615.02 Billing Address Sourcing + Subscriber Calling Card Call .......... 615.03 Billing Address Sourcing + Credit Card Call ..............................615.04
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xxiii CHAPTER 7
TAXATION OF PREPAID CALLING CARDS Joseph A. Dodd and Peter Milligan
Overview..................................................................................................... 701 Types of Prepaid Services...........................................................................705 Prepaid Cards ...............................................................................705.01 Prepaid Wireless Service..............................................................705.02 Prepaid Wire-Line Service...........................................................705.03 Prepaid Internet Telephony ..........................................................705.04 Sales and Use Taxes on Prepaid Services...................................................710 Point-of-Sale Versus Point-of-Usage Taxation ............................710.01 Sourcing on Point-of-Sale Basis ..................................................710.02 Federal Excise Tax on Prepaid Services.....................................................715 Liability for Tax Payment and Collection ...................................715.01 Taxable Amount ...........................................................................715.02 Gross Receipts Taxes on Prepaid Services .................................................720
CHAPTER 8
TELECOMMUNICATIONS SALE FOR RESALE ISSUES Richard L. Heller and John Paraskevas
Overview.....................................................................................................801 Resales of Telecommunications Services ...................................................805
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xxiv Sales Tax ......................................................................................805.01 Gross Receipts Tax.......................................................................805.02 Resales of Unbundled Network Elements ..................................................810 Sales Tax ......................................................................................810.01 Gross Receipts Tax.......................................................................810.02 Telecommunications Resales and Local Taxes..........................................815 Alaska...........................................................................................815.01 Colorado.......................................................................................815.02 California......................................................................................815.03 Illinois ..........................................................................................815.04 New York .....................................................................................815.05 South Carolina..............................................................................815.06
CHAPTER 9
TAX TREATMENT OF TELECOMMUNICATIONS EQUIPMENT William A. Dvorak and Beth Sosidka
Overview.....................................................................................................901 How Telecommunications Are Produced ...................................................905 Who May Claim Telecommunications Equipment Exemptions ................910 Regulated Companies ..................................................................910.01 Telecommunications Companies .................................................910.02
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Introduction to Telecommunications Taxation
xxv
Purchasers of Qualified Equipment .............................................910.03 Limited Exemption States............................................................910.04 Equipment That Qualifies for Exemptions .................................................915 Representative State Exemptions.................................................915.01 Uniform System of Accounts.......................................................915.02 Direct Use Concept .....................................................................................920
CHAPTER 10
TAXATION OF INTERNET SERVICES Joseph F. Greco and JoAnne D. Seibel
Overview.....................................................................................................1001 History of the Internet.................................................................................1005 Federal Internet Tax Freedom Act ..............................................................1010 Taxes Barred ................................................................................1010.01 Advisory Commission..................................................................1010.02 Status of Moratorium ...................................................................1010.03 State Approaches to Taxing Internet Access...............................................1015 As Telecommunications ...............................................................1015.01 As Taxable Service.......................................................................1015.02 As Computer, Data Processing, or Electronic Information Services ..............................................1015.03 Internet-Specific Statute...............................................................1015.04
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xxvi Telecommunications: Taxation of Services, Property and Providers Internet Telephony ......................................................................................1020 Internet Access and the Sale for Resale Exemption ...................................1025 CHAPTER 11
EFFECT OF TELECOMMUNICATIONS CONVERGENCE ON STATE AND LOCAL TAXES Lacey Stevenson and Peggy Tilles
Overview.....................................................................................................1101 Factors Shaping the Telecommunications Industry ....................................1105 Historical Tax Treatment of Telecommunications Industry Sectors...........1110 Telephone Companies ..................................................................1110.01 Information or Data Services.......................................................1110.02 Cable or Video Entertainment Services .......................................1110.03 Telecommunications Industry Convergence...............................................1115 Taxation of Transmission Versus Content ..................................................1120 Taxation of E-Electronic Commerce—900 Service ...................................1125 How 900 Services Work ..............................................................1125.01 Taxation of 900 Services..............................................................1125.02 CHAPTER 12
THE BUNDLING OF TAXABLE AND EXEMPT COMMUNICATIONS SERVICES William A. Walsh and David D. White
Overview.....................................................................................................1201 A Glimpse into the Future of Telecommunications....................................1205
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Introduction to Telecommunications Taxation
xxvii
Vertical Integration of Television, Telephone, and the Internet ......................................................................1205.01 Challenge to Traditional Tax Models...........................................1205.02 What Is a Bundle?.......................................................................................1210 How Is a Bundle Taxed?.............................................................................1215 Bundled Transactions and the True Object Test .........................................1220 Applying Existing Laws to Bundled Services............................................1225 Georgia .........................................................................................1225.01 Illinois ..........................................................................................1225.02 Nebraska.......................................................................................1225.03 New York .....................................................................................1225.04 Ohio..............................................................................................1225.05
CHAPTER 13
PROPERTY TAXATION OF THE TELECOMMUNICATIONS INDUSTRY Gary D. Wiggins and Anna P. Winsett
Overview.....................................................................................................1301 Taxation Before Deregulation.....................................................................1305 Assessment of Telecommunications Property ............................................1310 The Unit Value ............................................................................................1315 Valuation Methodologies ............................................................................1320 Cost Approach..............................................................................1320.01
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xxviii Telecommunications: Taxation of Services, Property and Providers Income Approach .........................................................................1320.02 Market Approach..........................................................................1320.03 The Never-Ending Issue of Intangibles ......................................................1325 Improper Taxation of Intangibles.................................................1325.01 Going Concern .............................................................................1325.02 Enhancement Value......................................................................1325.03 Entrepreneurial Profit...................................................................1325.04 Other Property Tax Issues...........................................................................1330
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