NCTA, Florida Governor Warn of Title II Tax Increase

While NCTA and Republican Florida Gov. Rick Scott joined those arguing that a Title II Communications Act net neutrality approach could lead to billions of dollars in state and local tax and fee increases on consumers, telecom attorneys and other advocates differed whether that would actually happen. That is partly because broadband may be considered an interstate service not subject to state and local tax, they said in interviews.

Saying the laws aren't clear, one former FCC official and now a telecom attorney said, “states will try [to raise taxes], and there’s going to be fighting.” Regardless, the former official, said litigation will bring cost and uncertainty.

NCTA, while not delving into the legal issues in a letter to FCC General Counsel Jonathan Sallet Tuesday, wrote that reclassification "could increase the cost of providing broadband service and increase the prices that consumers pay for broadband, both of which run counter to the statutory objective of universal access to broadband for all Americans.” The letter follows a Progressive Policy Institute study (see 1412010035) Monday. PPI estimated the potential annual impact of additional state and local fees, as well as a new requirement that broadband contribute to the USF, would come to $17 billion a year, including the proposed increase to $1.5 billion of the E-rate cap proposed by Chairman Tom Wheeler.

Scott's statement said President Barack Obama’s net neutrality proposal “regulates the internet as a utility, [and] would cost consumers billions of dollars a year while stifling innovation and job creation in the technology industry. Under President Obama’s recommendations, consumers could be taxed by more than $18 billion a year for the simple act of using the internet.” Obama endorsed a Title II approach. Scott’s office would not say how it got the $18 billion figure.

NCTA Executive Vice President James Assey wrote that many state and local governments impose higher or additional taxes on regulated industries like telecom or other utilities than on general businesses. Broadband providers, which are generally taxed at the same lower rate as general businesses, could see “materially higher taxes and fees,” Assey wrote, “either because a statute specifically references the federal definitions or because a state tax authority interprets state law in a manner that follows the federal definitions.” Reclassification could also encourage states to change their tax laws to get more taxes and fees from cable and broadband providers, Assey wrote.

Several states count the value of intangible property in assessing at the state level the property of telecom companies, utilities and common carriers, Assey's letter said. Broadband providers, in contrast, are subject to lower rates, NCTA said. Many states also impose taxes and fees on the sale of telecom services that don't apply to the sale of broadband services, the letter said. Among them are “universal service fund fees -- up to 8.5 percent on intrastate services -- telecommunications service relay fees, emergency communications fees, public utility commission fees," NCTA said. Broadband providers could be subject to those charges if reclassified, NCTA said. The Internet Tax Freedom Act imposes a moratorium against most state taxes on Internet access service, but several states and localities have gotten around that by imposing fees for a “'specific privilege, service or benefit conferred,’ and therefore do not fall within the definition of ‘tax’ under the moratorium," NCTA said. The FCC had no comment.

Free Press Policy Director Matt Wood said that because “broadband access is interstate and not intrastate, none of the intrastate taxes or special telecom fees would apply. The only taxes that could apply would be state sales taxes levied on interstate telecom services, he said. Even if one used PPI’s fuzzy math, this would amount to approximately $4 billion in total, nowhere near” the PPI study’s estimate, said Wood. One telecom attorney who has broadband clients agreed, citing a March 2002 declaratory ruling that an agency news release said was designed to increase broadband deployment by classifying cable modem service as an “interstate” information service. The FCC took the same path with Verizon's FiOS service, the former official said, predicting if the agency reclassified broadband, it would likely continue the “interstate designation and call it an interstate telecommunications service.”

PPI Senior Fellow Hal Singer, who co-wrote the institute’s study with Brookings Senior Fellow Robert Litan, cited a February 1999 order that, according to an agency news release, “declared that Internet traffic is jurisdictionally mixed and appears to be largely interstate in nature.” The order said carriers are bound by their existing interconnection agreements, as interpreted by state commissions, and are subject to reciprocal compensation obligations. It’s unknown if the agency would declare in reclassifying broadband whether it's an interstate service, Singer said.

Even so, Singer said state taxing authority “has never been limited to interstate services,” and the only tax limited by reclassification would be intrastate charges by state commissions. NCTA, in a statement to us, also said “an interstate designation by the FCC does not preclude states from taxing interstate service. The state definitions are generally not dependent on FCC classification for taxation purposes.” NCTA cited as examples state taxes on wireless for both interstate and intrastate services.

Even if the states could tax broadband service as an interstate service, it would be only on the “slimmer” intrastate portion of the revenue, said Wood, who questioned the size of any tax or fee increase under reclassification. “Congress could eliminate even that slim potential by amending and reauthorizing the Internet Tax Freedom Act,” he said.

Even going by Free Press’ assumptions on the potential for state sales taxes, NCTA said, “Free Press openly acknowledges that consumers will pay billions of dollars more annually if broadband is classified as a Title II service.”