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Taxation of Wireless – Stop the Discrimination - A State of the States
April 2006

Nearly five years after the National Governors Association (NGA) and the National Conference of State Legislatures (NCSL) urged states to reform and modernize their telecommunications taxes, most states have failed to enact meaningful reforms. More >

• On average, the typical consumer pays 16.85% of their total wireless bill in 
  taxes, fees and surcharges: a wireless 5.91% federal rate and a 10.94%    percent state/local rate. One only needs to compare the average wireless rate of tax/fee of 16.85% to the 6.94 % average tax rate for other goods and services to see the need for reform. Thirty-nine percent of all communications taxes (~ $7B in 2000) constitute “excess” taxes (i.e. far in excess of the tax burden imposed upon main street business).
• The effective rate of taxation on wireless service increased nine times faster than the rate on other taxable goods and services between January 2003 and July 2005. 
• Nineteen states currently impose double-digit state and local transaction taxes on wireless service, raising taxpayer equity and critical economic issues.  
• Economist Gregory Sidak estimates that a one-percent decrease in wireless    prices would "increase U.S. GDP by between $6.8 billion and $7.8 billion within two years of the tax reduction." 1
• Six of the ten most populated states: California, New York, Texas, Florida,    Illinois and Pennsylvania are on the top ten list of States with the highest tax rates on wireless. 
• Indiana, New York, North Dakota, Pennsylvania, Rhode Island, South Dakota and Texas all impose a sales tax on wireless communications, but also impose an additional gross receipts or excise tax on wireless communications.
• Rhode Island and New York now have a second 911 charge – Rhode Island    already imposes a 911 charge that is being partially diverted into the State’s general fund. 
• Virginia eliminated its sales tax exemption for purchases of wireless   communications equipment used as “business inputs,” while maintaining the exemption for other competitive, commercial businesses in the state. 

Some of the most burdensome taxes on communications services are local taxes authorized by state statute or imposed through local home rule authority. Examples of states with widespread local taxes on wireless service include California, Florida, Illinois, Kentucky, Maryland, New York, Utah, Virginia and Washington.  

• In Alexandria, Virginia, the City Council imposed a $3.00 per line charge on    wireless customers to cover a budget shortfall.  Calculated at 10% of the first $30 of service, the Alexandria tax is highly regressive.
• In Maryland there is an 8% local sales tax in Prince Georges County, MD, a    $2.00 per month line charge (approx. 4%) on wireless service in Montgomery County, MD, and a $3.50 per month line charge (approx. 7%) in Baltimore City, MD.
• In California, the city of Los Angeles imposes a 10% percent general-purpose tax on consumers of wireless services.
• In Washington, the city of Seattle imposes a 6% general purpose tax on   consumers of wireless services (these taxes are in addition to state and local sales taxes.)
• New York substantially increased the amount collected under its state 911 fee and authorized a second local 911 fee, even though the funds are still not being used solely to fund the 911 communications system.
• In Oregon, localities are seeking to impose 5% gross receipts tax (“rights-of-way fee”) on wireless services. Eugene has succeeded in adding a tax on consumers of wireless services and both Springfield and Portland attempted to follow this trend by applying a 5% tax to wireless services. The Springfield tax was referred to a ballot measure in May of 2005, where voters soundly defeated the measure by a margin of 73% to 27%. The city of Portland has put their proposal on hold due to considerable constituent opposition. 

The wireless industry and its customers are willing to pay their fair share of taxes to support government; however, the industry takes exception when its consumers are singled out to bear the burden of taxes that are higher than those imposed on general business and are used for things having nothing to do with wireless service.

The Impact 
State policymakers offer that they need to ensure their citizens, especially those in rural and underserved areas, have access to advanced communication services through broadband networks; however, these same states ignore the effect sky-rocketing taxes have on infrastructure (19 states have double-digit transaction tax costs). Additionally, some state and local governments tax wireless communications at rates that approach those levied by “sin taxes” that were designed to discourage use. This seems an odd approach to facilitating expansion and use of wireless broadband across the country and especially in rural areas.   More >
 
In a monopoly market structure, demand for telecommunications services was not sensitive to price. State and local governments could impose higher and higher taxes with very little impact on consumer demand. In today’s competitive wireless marketplace, taxes absolutely are linked to demand. According to the most recent authoritative study on the economics of wireless service, each 1% increase in the price of service reduces demand by an estimated 1.12% to 1.29%. In Florida or New York, this means that state and local taxes reduce customer demand by about 20%.  
 
The wireless telecom industry and its business and residential customers – rich and poor, urban and rural – are bearing far more than their fair share of the federal, state and local tax burden, when compared to other competitive industries. There is no reason to tax communications services at rates higher than the taxes imposed upon other Main Street businesses. Consumers who rely on phone services – typically lower-income consumers – are harmed the most by the current discriminatory tax system, which is highly regressive.  
 
The ability for the wireless industry to continue its tremendous growth and deliver advanced services to urban and rural consumers is incumbent on reasonable taxation. The ultimate success on reducing the excessive level of taxation on wireless consumers will only be achieved through a sustained, multi-pronged, industry-wide effort involving legislative tax reform, extensive education of consumers and legislators, targeted litigation and a robust public relations campaign focused on raising awareness among consumers about the excessive and discriminatory tax burden they are being forced to shoulder.

The Reaction 
Opposition to the level of wireless taxation on wireless consumers produced significant results in 2005 and demonstrated that wireless consumers are willing to voice their concern to state, local and federal policymakers. One significant development is the amount of attention wireless taxation is receiving in the press.  Articles such as the recent New York Times and USA Today pieces are helping advocacy efforts at the local and state levels. More >    
 
California: In California, a proposed referendum to increase the “911 fee” by $3.00 (419% increase) – to fund uninsured health care in California hospitals – was defeated 72% to 28%.
 
Missouri: With significant support from Missouri taxpayers, HB-209, was signed into law capping future business taxes on wireless at 5%. HB 209 will bring certainty to a complex tax structure and provide a limit to wireless taxation.  
 
Texas: An effort in the Texas General Assembly in 2005 to shift fees collected by municipalities and localities for using public "rights-of-way" from cable companies and landline companies to the wireless industry was defeated as a result of strong opposition by wireless consumers.     
 
Pennsylvania: The wireless industry is engaged in a multi-year effort to repeal the 5% Gross Receipts Tax (GRT) in Pennsylvania. Over 40,000 emails were generated from MyWireless.org to the General Assembly and Governor Rendell in 2005.  The House passed the GRT repeal effort in 2005 and the Senate is expected to vote on the measure in 2006. 
 
Oregon: The Springfield City Council voted in favor of a 5% tax increase on wireless services in December of 2004. Residents of Springfield forced a ballot initiative with a final vote of 73% to 27% in favor of removing the 5% tax on wireless service.  
 
Despite the Springfield vote, the Portland City Council considered a 5% tax increase on wireless service at their August 2005 City Council meeting.  Due to significant consumer contact, the City Council did not vote on the tax increase in 2005. 
 
Louisiana: Ironically, on April 15, 2005, the Louisiana legislature introduced legislation that proposed a 2% tax on wireless services in exchange for removing the fees that telephone companies pay to cities for using the public rights-of-way to place their facilities. A grassroots campaign resulted in a significant defeat of the bill on the House floor. 

1See “Is State Taxation of the Wireless Industry Counterproductive?”  J. Gregory Sidak, Criterion Economics, April 2003, at 25, http://www.criterioneconomics.com/docs/sidak_pacific_research.pdf.
 

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