Washington Looks to Overhaul Telecom Taxation, Create 5-Year State USF

In Washington, there’s an average 8.9 percent cumulative retail sales tax, but with an exemption for residential phone service, explained Tim Jennrich, tax policy specialist from the Washington State Department of Revenue, during the House hearing. The state of Washington extended its state and local retail sales tax to telecom in 1983 but with that residential exemption, interpreted to apply only to services regulated by the Washington Utilities and Transportation Commission, said the bill’s summary (http://1.usa.gov/ZQaqyZ). The commission doesn’t regulate cable service, wireless service, VoIP service or ISP service, it said. House Bill 1971 would kill state and local retail sales and use tax exemption for local residential landline service and coin-operated phone service, exempting VoIP service provided by a cable company prior to the bill’s effective date. It repeals the taxes funding the Washington Telephone Assistance and Telecom Relay Service program, instead funding those programs through the state general fund appropriations process.

The bill also establishes a temporary state universal communications service program, from July 1, 2014, through July 1, 2019. “The maximum amount appropriated each year cannot exceed $5 million,” the summary said of the USF. “A communications provider is eligible to receive distributions from the account if: (1) the communications provider has fewer than 40,000 lines; (2) the customers of the provider are at risk of rate instability or service interruptions absent distributions to the provider; and (3) the provider meets any other criteria established by the UTC.” The Washington Utilities and Transportation Commission has attempted to model the state USF off of the federal one, said Policy and Legislative Division Director Ann Rendahl. The commission believes there’s “a need for this fund,” she said. “It’s not our choice to decide what the source of these funds are."

Eliminate the residential sales tax exemption entirely, said Ron Main, executive director of Broadband Communications Association of Washington, which consists of cable companies. “We have been meeting for the past year as an industry group and are pleased to say we've reached an agreement on this proposal.” Other industry representatives agreed: “Tax policy has not caught up to that level of competition,” said T-Mobile Senior Manager-State Legislative Affairs Jim Blundell. “We all support the bill.” He called current tax policies “antiquated” both in Washington and across the country, and underscored parity. A Comcast representative also offered its support. The industry has “grown incredibly,” said AT&T Washington President Bob Bass. He called for “tax parity” and judged the bill’s language to be fair and consistent.

CenturyLink Director-Public Affairs Tom Walker pointed to cord-cutting and the transition to wireless and VoIP. “I would encourage your support,” Walker told legislators of the bill. “It is time for us to get to tax parity.” Toledotel customers would pay an extra 30 cents a month if the bill passes, a cost that’s “hopefully insignificant” in the state USF money it could get as part of the new law, said General Manager Dale Merten. He encouraged the bill’s passage amid mounting economic pressures. The Washington Independent Telecommunications Association supports the bill in its entirety, said Executive Director Betty Buckley.

The bill’s fiscal note (http://1.usa.gov/YEtLCl) said if the bill eliminates the sales tax exemption, the state will generate $39.8 million in 2014 and $43.4 million in 2015. Those numbers would change to “an additional” $131.1 million and $147.5 million in those respective years “if the exemption was expanded to cover telecommunications more generally,” the largest portion of that difference coming from including wireless companies, followed by VoIP providers, Jennrich said. The state will gain revenue overall, with 81,300 businesses affected, the fiscal note said. The convergence of telecom technologies in recent years has challenged officials on the issue of taxation, he added. Washington Department of Revenue Assistant Director Drew Shirk noted the bill may face litigation challenges, largely as a result of the technological convergence. “That is one of the big litigation risks before the state,” he said. “We've had previous litigation, and we've actually had new cases filed recently.”

The Association of Washington Cities supports the bill, Government Relations Advocate Victoria Lincoln told legislators. She expressed concern that without the bill, cities would have to pay refunds amounting to tens of millions. There’s “significant financial implications” for municipalities, the association said in a blog post (http://bit.ly/XXbzIu): “For state fiscal years 2013-2015, the measure would generate an estimated $63.7 million for the state general fund and $26 million for local governments, including $10 million for cities.” The post noted a recent lawsuit from Verizon, which identified what it saw as services subject to inappropriate sales tax. “If the Legislature does not pass a bill and a court requires the state to issue sales tax refunds, the impact is estimated at $674.1 million for the state and $249.5 million for local governments,” the post said.

The bill would also require retailers of prepaid wireless service to collect the state’s E911 tax. On behalf of the Northwest Grocery Association, Holly Chisa emphasized the problems in collecting the E-911 fees from people buying prepaid phones at a retailer’s counter, a “tremendous cost” for smaller businesses: “The ratios don’t work out.” She hopes retailers can recover some of their costs and urged legislators to include a provision to this effect. King County E-911 Program Manager Marlys Davis supported the bill’s existing E-911 tax provision and cited additional costs of upgrading the system to next-generation technology. The bill’s first provisions would go into effect Aug. 1, and it has yet to receive a vote.