It is more important than ever for telecommunications providers, wireless providers and mobile virtual network operators ("MVNOs") as well as prepaid telecommunications providers to ensure they are complying with applicable state "telecom taxes" and surcharges.
Compliance with state and local obligations is a potentially costly proposition for all but the largest companies, especially when operating in several states. Some states allow providers to offset part of the cost of compliance by retaining a portion of fees, surcharges and taxes they collect from end users. However, these amounts are usually too small, which means that most companies recover much of their administrative costs either by charging higher rates, assessing an additional surcharge of their own or accepting shrinking margins. Ultimately, compliance with up to fifty state regulatory regimes can cut significantly into a company's profitability and should figure into the company's overall business strategy.
Common State Fees, Surcharges, and Taxes
On-going state regulatory obligations in the form of so called "telecom taxes" are myriad and sometimes far more burdensome than their federal counterparts. They often take the form of public utility fees, state universal service fund ("USF") contributions, emergency 911 and enhanced 911 (or "E911") surcharges, local taxes (state, county and municipal), and other miscellaneous taxes and fees specifically targeting telecommunications services (including prepaids). Typically, these "telecom taxes" apply to providers offering in-state telecommunications services.
Not surprisingly, the states where telecommunications providers do most of their business (e.g., California, Florida, Texas, and New York) often are among the most expensive states in which to operate with respect to "telecom taxes".
Public Utility Fees
State public utility commissions ("PUCs") often recover at least part of their operating costs by collecting annual fees from companies within their jurisdiction. Telecommunications providers typically fall within that category of regulated companies subject to public utility fees. In some states, separate public utility fees apply to each type of regulated service offered (e.g., prepaid card and MVNO). These fees can be assessed at a fixed dollar amount or as a percentage of intrastate revenue, and are usually paid directly to state PUCs.
State Universal Service Funds
Most telecommunications providers should be familiar with the federal universal service fund. However, approximately one-third of the states have a similar universal service fund of their own. Although the programs supported by state-level USFs can differ considerably, typically they subsidize telecommunication service to "high cost" areas, underprivileged persons, hospitals, schools and libraries. The contribution amount for state USFs varies widely, from approximately 0.20 percent of intrastate revenues to just under 5 percent of intrastate revenues, and is paid to the state USF administrator.
911 and E911
Surcharges or taxes collected from end users to support emergency 911 and E911 programs are common. Typically these 911 and E911 requirements are applicable to wireless providers and MVNOs (although this is not always the case). For companies subject to these requirements, compliance can be confusing because state, county and municipal governments may each have a separate 911 and E911 program. Surcharges or taxes for 911 and E911 are as high as $1.00 per line in some states, and are typically paid either to the PUC, the state department of revenue or a 911/E911 fund administrator.
Telecommunications Relay Service ("TRS")
It is important to note that the companies subject to state TRS programs vary widely from state to state. These state programs require intrastate telecommunications providers to contribute funds designed to provide communications assistance to the hearing impaired and people suffering from other disabilities. These are independent requirements from federal TRS programs. Although state TRS programs are often assessed at less than one percent of intrastate revenues, that small percentage translates into a significant real dollar amount when multiplied over several states. TRS payments are usually remitted to the PUC or a TRS fund administrator.
Almost every state, county and/or city imposes its own taxes in the form of "sales taxes," "gross revenue taxes," or "sales and use taxes." Adding to the problem is the ambiguity surrounding what taxes telecommunications providers are actually required to pay. Often telecommunications providers have contracts with other businesses that have agreed to pay these taxes, or they don't operate in an ongoing or continuous nature in the state. Knowing what local taxes must be paid is essential for any telecommunications provider, especially when the combined amount of these taxes can exceed five percent of in-state revenues. These taxes are collected by state and/or local departments of revenue.
In addition to traditional local taxes, many local governments (including states, counties and municipalities) have also levied taxes and fees specifically targeting telecommunications services. These miscellaneous taxes add yet another layer of complexity for telecommunications providers because it is often unclear whether the services they offer are subject to them. Similar to local taxes, these taxes and fees specifically targeting telecommunications services can exceed five percent in many states and municipalities. For example, Florida imposes a state communications services tax at approximately nine percent, while the statewide average for Florida local communications services taxes is approximately five percent. These taxes and fees are usually collected by state departments of revenue or by the state PUC.
Consequences of Non-Compliance
Companies not diligent in complying with these state, county and municipal requirements are operating in a potential hailstorm of liability. The entities that enforce these fees, surcharges and taxes are likely to impose interest and penalties, and may even take actions to de-authorize telecommunications providers from providing service in the state (in egregious cases).
Establishing a long-term compliance strategy that identifies each fee, surcharge and tax applicable to the telecommunications services being offered is an essential component to a successful business strategy. An effective long-term compliance strategy should include periodic re-evaluation of current regulatory exposure, especially for companies operating in multiple states.
The foregoing is intended to provide a general overview only and should not be viewed as a substitute for conferring with qualified legal counsel. Each business will have unique requirements that should be analyzed by counsel.
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