By Larry Jones
April 27, 2009

On April 17 the Conferece of Mayors, National League of Cities and the Government Finance Officers sent a letter to congressional staff expressing opposition to including controversial communications tax provisions in a bill aimed at streamlining and simplifying the collection of taxes on remote sales. The letter points out that the groups continue to support the Streamlined Sales Tax Project (SSTP), a joint effort started several years ago by most states that have a sales tax, which has led to the development of uniform simplification standards for sales and use taxes.

Support is also expressed for the adoption of federal legislation that would authorize state and local governments that conform to the SSTP’s simplification standards to require out-of-state merchants to collect their taxes. However, the letter makes clear that the membership of the organizations “can not support the inclusion of communications tax provisions in the bill.”

While local groups support communications tax reform, the letter points out they believe it should be done in a separate bill and should involve all of the stakeholders “who should take the time they need to fully understand the issues from both sides (industry and local governments) and be willing to work towards a compromise,” the letter said.

In a meeting several weeks ago, local groups said industry representatives told them that including the communications provisions in the bill would benefit local governments by expanding their communications tax base, and thereby assist them in collecting revenues from service providers who traditionally have not been subject to state and local communications taxes. They also said that centralizing the administration, collection and auditing of local communications taxes, as called for in the draft bill, would lower local administrative costs.

After discussing these points with their members, local groups confirmed the following:

• State and local groups already have nexus over most communications service providers and those mentioned in terms of expanding their tax base, such as Skype and Hulu, in many cases provide services free of charge so no tax would be applied.

• Communications taxes are more complex than sales and use taxes in that they involve many different federal, state and local laws and contractual arrangements between communications service providers and local governments. Local communications taxes and fees include many provisions that protect local interest and should not be centralized.

• Sales taxes are largely administered by the state and generally applied to goods and services, while there are many communications taxes and fees that are largely administered by local governments and imposed on specific services. And some include contractual arrangements that protect local interests.

• The draft communications provisions would also require state-level centralization of the administration, collection and auditing of all local communications taxes and fees including rights-of-way fees which are considered charges or rent for use of the public’s land. In essence, in order to obtain authority to collect taxes on remote sales, the draft legislation would preempt local governments’ authority to administer, collect and audit local communications taxes.

• Under a centralized collection scheme, local governments would be concerned that all of the communications revenues collected by states would not be fully remitted back to them. They also expressed concern that local governments would lose authority under the draft bill to request an audit and that states would not be as aggressive in auditing tax issues on their behalf. Losing authority to collect and audit most likely will cause local governments to lose revenues instead of benefit from lower administrative costs as industry representatives claim.

• Finally, it is highly likely that the inclusion of the communications tax provisions would also undermine the SSTP, since states would have to amend their tax laws within a certain time frame to conform to the communications tax simplification standards. If only a few states fail to adopt the communications simplifications provisions, it could result in all member states being declared ineligible to collect taxes on remote sales.

The Conference and other local groups are scheduled to meet with congressional staff on April 27 to further discuss their concerns and urge that the communications provisions not be included in the bill. We have been told that Senator Michael Enzi (WY) plans to introduce a new bill soon. We will have to wait and see if it is introduced without the controversial communications provisions.