Logosm.gif (1927 bytes)
navlinks.gif (4688 bytes)
Hruler04.gif (5511 bytes)

Back to Tax Revision Commission main pageBack to list of research papers

Taxation of Telecommunications in the District of Columbia
David Meyer
January 1998

Home

Bibliography

Calendar

Columns
Dorothy Brizill
Bonnie Cain
Jim Dougherty
Gary Imhoff
Phil Mendelson
Mark David Richards
Sandra Seegars

DCPSWatch

DCWatch Archives
Council Period 12
Council Period 13
Council Period 14

Election 1998
Election 2000
Election 2002

Elections
Election 2004
Election 2006

Government and People
ANC's
Anacostia Waterfront Corporation
Auditor
Boards and Com
BusRegRefCom
Campaign Finance
Chief Financial Officer
Chief Management Officer
City Council
Congress
Control Board
Corporation Counsel
Courts
DC2000
DC Agenda
Elections and Ethics
Fire Department
FOI Officers
Inspector General
Health
Housing and Community Dev.
Human Services
Legislation
Mayor's Office
Mental Health
Motor Vehicles
Neighborhood Action
National Capital Revitalization Corp.
Planning and Econ. Dev.
Planning, Office of
Police Department
Property Management
Public Advocate
Public Libraries
Public Schools
Public Service Commission
Public Works
Regional Mobility Panel
Sports and Entertainment Com.
Taxi Commission
Telephone Directory
University of DC
Water and Sewer Administration
Youth Rehabilitation Services
Zoning Commission

Issues in DC Politics

Budget issues
DC Flag
DC General, PBC
Gun issues
Health issues
Housing initiatives
Mayor’s mansion
Public Benefit Corporation
Regional Mobility
Reservation 13
Tax Rev Comm
Term limits repeal
Voting rights, statehood
Williams’s Fundraising Scandals

Links

Organizations
Appleseed Center
Cardozo Shaw Neigh.Assoc.
Committee of 100
Fed of Citizens Assocs
League of Women Voters
Parents United
Shaw Coalition

Photos

Search

What Is DCWatch?

themail archives

Taxation of Telecommunications in the District of Columbia

David Meyer, Tax & Economic Policy Administration, Office of Tax and Revenue, Washington, D.C.

A Note to the Reader — This paper provides an in depth overview of telecommunications. An overview of taxation of telecommunications is available, as well as a matrix of District taxes assessed by service provider type. Tax policy questions and options are also presented. 


Acknowledgments: The author would like to thank the following individuals for their assistance in collection of data, ideas, assistance in interpreting the D.C. Code, and their many other contributions - Ed Wyatt, Mark Gripentrog, Modibo Coulibaly, Steve Swaim, Julia Friedman, Tom Kerwin, and Jean Muir. Hanns Kuttner provided invaluable assistance in the collection of data, preparation of tables, and drafting of portions of the report.

Disclaimer: The views presented here are the sole responsibility of the author and do not necessarily represent the views of the Office of Tax and Revenue or the Office of the Chief Financial Officer.


Table of Contents
PART I - History and Background
Introduction
A History of Telecommunications
History of District of Columbia Taxation of Telecommunications
Technological Convergence
Bundling of Services
Market Consolidation and Market Participants
PART II - Telecommunications and the Local Economy
The Telecommunications Sector's Role in the D.C. Economy
Economic Development
PART III - Discussion of District Taxes & Recent Developments
Description of District Taxes on Telecommunications Services and Providers
Gross Receipts Tax 
Sales and Use Tax 
Corporate Franchise Tax 
Real Property Tax 
Personal Property Tax 
Other Taxes, Fees, and Contributions 
Right of Way Fee
Recent District Legislative Actions Affecting Telecommunications
Recent Litigation
PART IV - Questions and Options to Consider
Taxation Scheme as Viewed Through Tax Principles
Policy Perspectives
Options
TERMS AND DEFINITIONS

TABLES AND GRAPHS
Tables

Table I Major Provisions of the Telecommunications Act of 1996
Table II Significant Events in D.C. Taxation of Telecommunications
Table III Dilemmas Facing Telecommunications Tax Policy
Table IV Role of Telecommunications in the District: A Snapshot from the 1992 Economic Census
Table V Location Quotients for Telecommunications Employment in D.C.
Table VI Ratio of Telecommunications Wages to Average Private Wages in the District of Columbia
Table VII Large Telecommunications Firms Heradquartered in the D.C. Metro Area
Table VIII Employment in Telecommunications-Dependent Industries in D.C.
Table IX Factors Important to Business Relocation
Table X Major Taxes and Fees Applied to Telecommunications Services in D.C.
Table XI Definitions of Service Categories

Graphs (Not Available On Line)

Graph I Distribution of Metro-based Telecommunications Firms by Jurisdiction
Graph II Toll Telecommunications Tax Revenue

INTRODUCTION

Rapid changes in telecommunications, the importance of this industry to the District economy, and the substantial District tax revenues paid by this form of commerce all mandate a full understanding of this sector. Analysts are trying to define exactly what telecommunications services include and whether various telecommunications services are distinct enough to be taxed differently. For example, is a personal communication service (PCS), with paging and other features included, the same as basic cellular service? Must these services be taxed the same or can they be treated differently? Is a company that had its start as a cable company, but now also provides phone service, still a cable company, a phone company or something else?

This paper provides the Tax Revision Commission with background information on the current tax treatment of telecommunications in the District of Columbia and raises important policy issues and options for the Commission to consider.

Taxation of telecommunications is an important issue across the nation, as states consider how to adapt tax laws to changes in technology and market structure. In states such as New York, Washington, and Florida, blue ribbon commissions have been formed to map out a sage course. While telecommunications was once seen as a natural monopoly, today's market is characterized by ever more entrants and services. The's definition of telecommunications is far more comprehensive and less clear-cut than "the plain old telephone system". A broad list of the types of services classified as telecommunications is presented in Table XI.

A plethora of difficult legal and economic questions remain to be sorted out. Policy-makers are concerned about maintaining revenues from taxation of telecommunication firms or from transactional taxes on telecommunication services. For others, the primary issue is competitiveness with other jurisdictions. Some are concerned about whether tax laws treat telecommunication firms fairly with respect to various segments within the industry and vis-a-vis other industries.

Experts also express concern about the potential of electronic commerce and its potential to erode sales and use tax revenues and other important sources of income to the states. Electronic commerce is an important issue to consider. However, this is more like a sales tax issue, and is outside the scope of this report.

For purposes of this paper, telecommunications includes local and long distance communications service, wireless communication services, cable and other video services. The paper does not address taxation of internet content provider, radio or televison broadcasters, or other industries which supply information. Thus, the types of businesses discussed here are carriers of information only.

Reviewing a history of the telecommunications industry reveals that governments have struggled with the best way to ensure that telecommunications services was widely available at reasonable prices.

A HISTORY OF TELECOMMUNICATIONS 

The Era of the Monopoly

Alexander Graham Bell patented the telephone in 1876, providing an enduring change in communications. His Bell Telephone Company was an instant success and the telephone was seen as a valuable, profitable invention. Due to Bell's patents, the Bell company was the only telephone company until 1893, when many independent telephone companies were formed. These companies generally served rural areas that Bell did not find profitable and they operated in no less than 110 cities and towns between 1893 and 1894. In larger cities, multiple companies built systems in direct competition.(1) One estimate suggests that there may have been as many as 6,000 telephone exchanges in operation in the 1890s.(2)

Technological and market barriers prevented the telephone companies from integrating their systems, which was essential to the provision of long distance telephone service. The primary problem was that the various telephone companies were not forced to serve each others customers, a concept now commonly known as interconnection. As a result, the usefulness of the telephone was limited by the capacity of individual companies. This favored the Bell Company, which dominated the market and serviced major metropolitan areas.

Theodore Vail purchased the Bell Telephone Company in 1907 and focused the company on increasing geographic coverage as a strategy to increase market share. Creating American Telephone and Telegraph, AT&T, and providing local service through local Bell companies, the company used access to its long distance lines as an incentive to encourage or cajole incorporation of independent telephone companies into the Bell System.

By 1912, the federal government became concerned enough with AT&T's market power to begin investigation of the business practices of the firm. This was settled in 1913 with the development of the "Kingsbury Commitment," which allowed independent phone companies to hook into the AT&T network for a fee, thus achieving interconnection. The Kingsbury agreement also allowed AT&T to continue to acquire independent telephone companies resulting in 63% market share.(3)

By 1921 the federal government began to see AT&T's market dominance as an asset. This was recognized in the Willis-Graham Act which exempted AT&T from powerful antitrust laws. One of the bill's sponsor's claimed at the time "it is believed to be better policy to have one telephone system in a community that serves all the people, even though it may be at an advanced rate, properly regulated by state boards or commissions, than it is to have two competing telephone systems."(4)

By the 1930's, AT&T monopolized the long distance market, controlled most local service markets, and manufactured and sold almost all telecommunication equipment, illustrating both horizontal and vertical market dominance.

Prelude to Full Competition

In 1934 the Federal Communications Commission (FCC) was established to regulate interstate communications, to promote wide availability of communication services at reasonable rates. This commission was granted the power to regulate AT&T's rates for interstate service. State public service commissions maintained authority over intrastate calls, including in-state toll service and local calling.

The vertical structure and market power of AT&T made it difficult for firms to enter any line of business associated with the telephone industry. In 1949, the U.S. Department of Justice brought suit against Western Electric, an AT&T company, for antitrust violations. AT&T was in the practice of making exclusive purchasing agreements with the subsidiary Western Electric, which in the view of the Justice Department, had allowed Western Electric to act as a monopoly through price discrimination and other means. Seven years later, in a settlement known as "the final judgement," the case was resolved by allowing AT&T to continue to operate as vertical monopoly, but was required to licence technology and was prohibited from entry into the fledgling computer business or other services.

Soon after "the final judgement" was made, in 1957, the federal courts issued a decision known as Hush-a-phone. Hush-a-phone was a product which could be attached to a telephone receiver to lower background noise, making it easier to hear. This decision allowed customers to attach equipment manufactured by companies other than AT&T directly to telephones for the first time, representing the first significant step toward opening parts of the telecommunications industry to competition.

In the meantime, technological advances were making the use of microwave technology an integral part of the telecommunication business. The FCC, as the regulatory body with control over the airwaves, ruled in the 1959 "Above 890" decision to reallocate certain portions of the broadcast spectrum, which had previously been reserved for AT&T, to other companies to allow them to develop private networks. Thus, the FCC opened the possibility of competition to another portion of the telecommunication business — the transmission of calls over long distance via microwave.

Four years later, Microwave Communications Inc. (MCI), relying on the Above 890 decision, applied to the FCC to provide long distance private line service between Chicago and St. Louis, using microwave technology. The case would drag on until 1969, when the MCI application was approved. The FCC issued a series of decisions beginning in 1971 focusing on "specialized common carriers," essentially opening up private line and leased lines to competition. AT&T argued that these carriers would do irreparable harm to the national telephone system by serving only the most profitable lines of business, which would force AT&T to end subsidizing local telephone service and destroy universal service.

In 1968 the FCC issued a landmark decision, known as the Carterphone decision; the FCC prohibited AT&T from preventing connection of non-AT&T switching and other consumer premises equipment by telephone customers to the Bell system network. This decision supported development of a competitive industry for consumer premises telephone systems because, within certain quality standards, any manufacturer could supply equipment.

The Justice Department entered the fray again in 1974, filing an antitrust action against AT&T. In the view of the government, AT&T had continually engaged in anti-competitive business practices. Justice wanted the break up of the local telephone network from the long distance business, along with the separation of equipment manufacturing and research. This suit would eventually lead to the break up of the company.

MCI sought in 1975 to expand its long distance offerings through a service known as "Execunet." While the FCC turned down this application on the grounds that this service was not authorized under the Commission's private line rulings, the decision was overturned by the courts in 1978. By the end of the 1970's, the FCC had effectively set the long distance market on a track toward full deregulation. 

The End of an Era — Competition Takes Hold

In 1982 the "Modified Final Judgement" was issued by Judge Harold Greene, marking a settlement to the Justice department antitrust suit filed in 1974. AT&T was required to divest from its local telephone business. The final split-up of AT&T occurred two years later with the establishment of seven regional Bell companies. The FCC also required AT&T to offer its services for resale on a non-discriminatory basis, allowing hundreds of companies to become long distance service providers through resale. The local Bell operating companies were required to provide access to all long distance carriers on a non-discriminatory basis by 1986.

The Bell companies, often called Baby Bells, continued to serve as local monopolies, but were barred from providing long distance services. The long distance market on the other hand became highly competitive.

During the 1980's the cellular market also got off the ground. Advances in computer technology were also opening up the possibility to utilize the telephone network for new services such as call waiting and caller-i.d. In addition, cable television service became widely available and satellite television services developed.

By 1991, pressure for competition in the local service market was developing. A new class of providers, known as competitive access providers, sought through FCC rulemaking to provide services linking consumers directly to long distance carriers, bypassing the local Bell monopolies. In the early 1990's the FCC also began the rulemaking process to allocate radio spectrum space for personal communication services while prices for mobile phones plunged, increasing the affordability of cellular service

Because of the complexity of the issues and competing political claims, it was not until 1996, with the passage of the Telecommunications Act of 1996, that the Congress established the ground rules for local competition and removed most limitations on the range of businesses in which telephone companies could participate.

The provisions of the 1996 Act are broad and far-reaching, including almost all aspects of electronic communication - including wire-based and wireless voice, video, and data transmission services. Most notably, the Act prohibits the District or any other state from establishing or maintaining regulatory barriers to competition in the local telecommunications market. Major provisions of this Act, relevant to telecommunication service, are listed in Table I.

Both in the District of Columbia and across the nation, public service commissions have been working to deregulate local telephone service since passage of the Telecommunications Act of 1996. This has progressed more slowly than anticipated but local competition is in place in states such as California, Michigan, and New York.

There are indications that competition for local phone service in the District will commence within the early part of 1998. The D.C. Public Service Commission (PSC) has already approved at least 20 applications from firms wishing to provide local telephone service. Once these firms commence operations in the District, prices are likely to fall, along with revenues from telecommunications taxes.

HISTORY OF DISTRICT OF COLUMBIA TAXATION OF TELECOMMUNICATIONS

Almost as long as there has been telephone service, the District of Columbia has taxed it. Table II (p. 7) details the establishment of a gross receipts tax on telephone companies in 1902 and growth in both the rate of the gross receipts tax rate and the breadth of taxes applied to telecommunications firms.

While the gross receipts tax rate was unchanged for the first 70 years, it has been increased five times since 1972, and now is two and a half times higher than when first applied. Telecommunications firms have paid a variety of other taxes including franchise taxes, real estate taxes, personal property taxes, and sales taxes over the years. However, telecommunications firms also received exemptions from various business taxes others must pay. Telecommunications companies generally have not been taxed like other businesses operating in the District.

Table I Major Provisions of the Telecommunications Act of 1996
1. State and local laws which restrict competition in either the local or long distance markets are preempted. 

2. Bell companies are required to allow interconnection to all network facilities and services at reasonable, non-discriminatory rates. State public service commissions are assigned the responsibility for mediating and approving interconnection agreements. 

3. Electric utility holding companies are allowed to enter the telecommunication business through subsidiaries. 

4. Cross ownership of telephone and cable systems is permitted. 

5. Cable companies are allowed to enter the telephone business and telephone companies are permitted to offer cable services. 

6. National cable television rate regulation is set to end in 1999. 

7. Baby Bells are allowed to enter the long distance market once certain conditions have been met regarding competition in the regional Bell company local service area. 

8. Laws regarding telecommunication company mergers are eased. 

9. Local jurisdictions are prohibited from taxation of direct broadcast satellite. (The District of Columbia is treated as a state and is not subject to this prohibition.) 

10. Local governments are permitted to continue or commence charging fees on a non-discriminatory basis for use of the public right of way. 

11. The Act does not prohibit gross receipts, utility taxes or franchise fees on local telephone providers that are applied on a non-discriminatory basis.

 

Table II Significant Events in D.C. Taxation of Telecommunications
1902 A gross receipts tax is imposed on telephone companies at a rate of 4% 

1939 The gross receipts tax is applied to companies providing "public utility commodities" at a rate of 4%. Real property, personal property, and corporate income taxes are applied.  

1947 The Income and Franchise Tax Act of 1947 replaces the D.C. Income Tax Act of 1939. 

1956 Exemptions from the general sales and compensating use taxes are adopted. 

1972 The gross receipts tax rate is increased to 5%. 

1975 Telephone companies are required to make declarations and estimated payments. The gross receipts tax rate is increased to 6%. 

1983 The gross receipts tax rate is increased to 6.7%. Estimated payment and declaration provisions are repealed. Payments are required monthly instead of annually. 

1987 Gross receipts tax is applied to all telecommunication service providers. 

1989 Toll telecommunications tax is imposed in place of the public utility tax at a rate of 6.7% for telecommunications service providers other than those providing public utility services. Partial sales tax and personal property tax exemptions are enacted. Sale for resale is exempted from taxation. 

1991 Toll telecommunications and public utility tax rates are increased temporarily from 6.7% to 9.7% 

1992 Toll telecommunications tax rate increased permanently to 9.7%. The gross receipts tax is expanded to include cable TV, radio, video, and other services when customers pay for service. These firms pay tax on a quarterly basis. 

1994 Toll telecommunications tax rate increased to 10%. Gross receipts tax rate is increased to 10% 

1996 Wireless telecommunication service is subject to the same taxes and exemptions under provisions of the Telecommunication Competition Act of 1996. This includes a gross receipts tax imposed at a rate of 10%. 

1997 Commercial Mobile Radio Service Tax Clarification Act is passed to clarify taxation of wireless services.

TECHNOLOGICAL CONVERGENCE

Deregulation of the telecommunications industry is in part due to technological innovation and convergence. In recent years, companies that were in industries which were often treated as separate and distinct, have turned to the same technological solutions to provide service.

Centering on sophisticated computer hardware and software - digital formats, fiber optics, and radiowave transmission have become standard vehicles for sound, data, and video communication. Because the same technologies are in use, cable companies can transmit voice or data, telephone companies can transmit video or data, and wireless providers can deliver similar services from ground or satellite systems. Furthermore, electric and gas utilities are increasingly in a position to enter these markets, building off of private networks established for the operation of the utilities.(5)

The new industries are becoming indistinguishable, particularly in the case of telephone and cable companies, due to the use of common technologies and potential sale of similar services. For example, locally, in Alexandria, Virginia, Jones Communications, the local cable franchisee markets local telephone services, cable service, and high speed internet access. The distinction between wireline providers and wireless providers also is becoming obsolete in the metro area. For example, wireless internet access is marketed by Metricom Inc., a service traditionally provided via wireline technology.

The pace of technological innovation and convergence will continue to change the telecommunication industry itself, suggesting that high tax burdens on particular services or on the industry could be risky in the years ahead. These developments suggest that governments everywhere will continue to face challenges to telecommunications tax policy. Most tax reforms will be transitory, superseded as new types of services are brought to market.

Internet telephony is an example of this risk. While not quite ready for the mass market, this software allows long distance calls to be made for a fraction of the cost of traditional phone service, regardless of distance. The revenue implications for governments, which rely on tax revenue based on charges for long distance, such as the District of Columbia, are tremendous.

If companies, some of which are historically known as cable companies, telephone companies, or wireless telephone companies are all offering similar services, does there remain a justifiable reason to treat these companies differently for tax purposes? In the long run, will governments be able to generate the level of revenue from telecommunications taxes as they now do?

Table III Dilemmas Facing Telecommunications Tax Policy
  • Tax laws which are based on having separate industries (cable, local telephone, long distance telephone, wireless telephone, data transmission) are obsolete.
  • New service offerings may greatly reduce the revenues of telecommunications firms.
  • Competition in the local service market may cut prices, resulting in lower industry revenues and profits.
  • Telephone companies are more mobile - presenting economic development concerns.
  • Electronic commerce presents challenges for sales and use tax collection.
  • Service bundling requires equal taxation of services. 
  • The telecommunications industry is becoming like other competitive industries yet continues to be taxed more like a monopoly.

BUNDLING OF SERVICES

Bundling of services poses another dilemma for tax authorities. Telecommunication firms are in the process of consolidating services. Whereas a consumer in the past had separate providers for internet access, wireless services, local telephone service, and long distance telephone service, increasingly, individual companies are offering these services bundled together at a discount. Bundled service offers the consumer the advantages of consolidated billing, better service, and lower prices.

However, for tax administrators, bundling can be a challenge to current tax policies. Particularly when tax laws treat individual services differently, applying inconsistent rates, or when service providers are taxed differently, based on historic designations, tax administrators will have a difficult time administering taxes. Likewise, service providers can be faced with increased tax compliance costs because the firm may not know whether certain taxes apply or how to apply them.

An example helps to explain why bundling is problematic when inconsistent tax rates and bases apply. Suppose local telephone companies that are subject to regulation must pay a gross receipts tax on telephone services at 10%. On the other hand, internet access is not subject to a gross receipts tax but is subject to a sales tax at 5.75%. A provider sells these service together for a $5.00 discount and does not bill services separately, meaning that the gross receipts tax and sales tax cannot be applied to each service. Should the taxing jurisdiction require the bundled package to be included in the gross receipts tax base? Or should the gross receipts tax and sales tax apply according to a formula? Should the provider be required to itemize bills and apply the taxes separately? If so, how should the discount be allocated - against telephone service, whereby the gross receipts tax liability would fall, or to the internet access, whereby the consumer would see a reduced sales tax liability? Perhaps the discount should apply to both services, but on what basis would such allocation be made?

It may not be feasible or rational to tax telecommunications services at different rates within a bundled package. In some states, if a taxable service is included in a bundled package, a tax may be applied to the entire package, even if the tax would not be applied to all services, if they were sold individually.

This situation is further complicated if service providers begin to become content providers as well, offering products or services that extend beyond voice, data, and video transmission services, to include the actual sale of goods via electronic means. Such companies could offer discounts, either though cash discounts, credits, or other goods in order to entice consumers to conduct purchases through the provider. Again, if there are fundamental differences in the taxation of the various products and services offered, it will be difficult to determine how to tax the providers and services.

All of this suggests a need for consistency in the taxation of various telecommunication services and potentially in comparison to other taxable goods and services. 

MARKET CONSOLIDATION AND MARKET PARTICIPANTS

Combining several companies that have expertise in various markets such as local telephone service, long distance, and internet access, results in companies which are better positioned to offer bundled services and to compete in the increasingly competitive worldwide markets. As a result of the Telecommunications Act of 1996, several significant mergers have occurred recently.

Pacific Telesis merged with SBC Communications, forming an alliance of two Baby Bells covering California and parts of the South and Plains states. This company operates Cellular One, a company providing wireless and long distance services in the Washington metro area.

Recently completed, Bell Atlantic joined with NYNEX to form a company providing services including local telephone service, long distance service (presently outside the regulated east coast service area), wireless voice and data transmission services, and other related services.

Another important recent merger involves an internet service provider and several companies that primarily provide long distance services. UUNet, a leading provider of internet services was acquired by MFS Communications, allowing MFS to offer both voice and internet services to business customers. In turn, MFS merged with WorldCom, Inc. WorldCom has more recently announced the largest merger in U.S. corporate history, combining operations with District-based MCI.

MARKET PARTICIPANTS IN THE DISTRICT

The District of Columbia Public Service Commission has authorized two public utilities to provide local telephone service. In the last year, following the requirements of the Telecommunications Act of 1996 to deregulate local phone service and the District's own Telecommunications Competition Act of 1996, the Public Service Commission has approved more than twenty other companies to provide local telecommunication services as facilities-based or resellers of local telecommunications services. These new entrants are not subject to rate regulation by the PSC and are not public utilities.

As of the end of 1997, none of the recently approved competitive local phone service providers are actively marketing or providing local telephone service in the District. This is similar to most other states, in that local competition has developed more slowly than anticipated.

More than 100 companies provide long distance services to customers in the District. Records dating back to 1989 indicate that there has been little change in the number of companies selling services.

The wireless industry also is significant in the District. District records indicate that there are at least twenty firms selling cellular, PCS, paging, and other wireless services to consumers in the District of Columbia.

Between 15 and 25 cable television, subscription video or radio providers operate in the District. In addition to the District's cable franchisee, District Cablevision, companies such as hotels and music providers are subject to a gross receipts tax on this service. (The tax is described in a later section.)


THE TELECOMMUNICATIONS SECTOR'S ROLE IN THE D.C. ECONOMY

The telecommunications industry is an integral part of the economy of the District and the surrounding region. In addition to being major employers and economic engines in their own right, the region's telecommunications firms provide basic infrastructure for the District's service and public sector-based economy. Table IV  provides some information about the telecommunications industry in the District.

The 1992 Economic Census shows that the District's communications companies contributed about 1.7 billion dollars to gross state product in 1992 or about $2,800 per capita. These firms employed approximately 6,900 people in the District.

Another way to measure the relative importance of telecommunications in the economy is examination of location quotients over time. A location quotient compares the relative concentration of employment in a sector versus total employment in a jurisdiction to employment in the same sector versus total employment nationwide. A location quotient of one indicates that a jurisdiction has the average concentration of employment in that sector, relative to the nation; numbers above one indicate that employment in the jurisdiction is more concentrated in that sector than the nation as a whole; below one suggests that sector is less concentrated for that area than the nation as a whole.

Table IV
Role of Telecommunications in the District 
A Snapshot from the 1992 Economic Census
Industry Number 
of Establishments
Revenues Number 
of Employees
Telephone Companies 110 (A) 5,000-10,000
Telegraph Companies 5 7,781,000 34
Other Communications 10 (A) 500-1,000
Subtotal 125 1,697,793,000 6,846
Radio & TV Stations 34 543,346,000 2,072
Cable TV Services 14 75,703,000 457
Subtotal 48 619,049,000 2,529
TOTAL 173 2,316,842,000 9375

  Source: 1992 Economic Census, Bureau of the Census Note: (A) Data withheld by the Census Bureau due to confidentiality constraints. 

The District's location quotient, calculated using only non-governmental employment, has been consistently above one since 1985. However, as Table V shows, while consistently more important in terms of private employment in the District than in the nation as a whole, telecommunications' presence in employment in the District has been declining at a faster rate than in the nation as a whole. Telecommunications employment in the District fell 33 percent from 1985 to 1995. Technological and organizational change in the industry has brought about reduced employment in this industry nationally. Over the 1985-1995 period, private employment in the U.S. grew by 20 percent while telecommunications employment fell by 15 percent.

Table V Location Quotients for Telecommunications Employment in the District of Columbia

Year Location Quotient
1985 1.62
1986 1.43
1987 1.55
1988 1.66
1989 1.73
1990 1.32
1991 1.38
1992 1.43
1993 1.40
1994 1.40
1995 1.42

  Source: U.S. Department of Labor, Bureau of Labor Statistics, "Employment and Wages," various years   

Telecommunications jobs have proven to be better paying jobs than the average private sector job in the District. As Table VI shows, telecommunications jobs have consistently paid 35 to 40 percent more than the average private sector job in the District.

Table VI Ratio of Telecommunication Wages to Average Private Wages in the District of Columbia
Year Ratio of Telecommunication Wages 
to Average Private Employment Wages in the District
1985 1.44
1986 1.41
1987 1.46
1988 1.39
1989 1.38
1990 1.36
1991 1.36
1992 1.37
1993 1.40
1994 1.46
1995 1.44

  Source: U.S. Department of Labor, Bureau of Labor Statistics, "Employment and Wages," various years   

A number of telecommunications firms have headquarters in and around the District, including MCI, LCI International, Comsat, Telco Communications Group, and Nextel Communications, among others. Eleven of the region's largest 100 locally-based firms (by revenue) are telecommunications companies, data communications services, or internet access providers. Three of those firms had revenues in excess of $1 billion during the last year. (See Table VII)

Table VII Large Telecommunications Firms Headquartered in the D.C. Metro Area

Business 
(Industry Classification)
Revenue 
(millions)
Local Employment
Transaction Network Services, Inc. (Data Communication) $52 92
PSINet, Inc. (Internet Access) $90 275
MCI Communications Corp. (Telecommunications) $18,500 4,785
LCI International, Inc. (Telecommunications) $1,100 330
Comsat Corp. (Telecommunications) $1,015 1,200
Telco Communications Group, Inc. (Telecommunications) $429 358
Primus Telecommunications Group, Inc. (Telecom.) $173 60
LCC International, Inc. (Telecommunications) $142 380
Coherent Communications Systems Corp. (Telecom.) $54 90
Metrocall, Inc. (Telecommunications/Paging) $150 600
Nextel Communications, Inc. (Wireless Telecom.) $333 400
Totals $22,038 8,570

  Source: Washington Post Interactive 200 (http://www.washingtonpost.com/wp-srv/business/longterm/post200/post200.htm)     

Of the 11 telecommunications firms listed in Table VII, only MCI is located in the District. Nine firms are in Virginia, of which eight are in Fairfax County. Comsat is located in Montgomery County.

Two of the regions largest employers, based outside the metro area are telecommunications companies. Bell Atlantic employs 11,500 people in the region and AT&T employs 5,870.(6)

Along with these direct measures of the contribution of the telecommunication sector to the District's economy, it is important to note that other industries in the District rely heavily on telecommunication services to generate economic activity. Table VIII shows employment in some of these industries.

The data in Table VIII includes all persons working in the District of Columbia in industries deemed to be telecommunications-intensive. These industries were identified as telecommunications-intensive in the New York report "Improving New York State's Telecommunications Taxes: A Background Study and Status Report." The employment numbers presented below present employment by place of work, rather than residency. It is possible that a significant portion of these jobs are held by non-residents working in the District.

ECONOMIC DEVELOPMENT

Of central concern to many is the importance of telecommunications services to future economic development and business retention. In 1991, Deloitte and Touche surveyed businesses in New Jersey and nationwide to access the importance of a telecommunications infrastructure to location decisions. Surveys were sent to businesses which had recently relocated.

The respondents were asked to rate 22 factors in their relocation decision on a scale of one to five, with one being not important and five being very important. Based on this study, telecommunications prices and availability are somewhat important, but are only one of many factors a relocating firm might consider. The results of the study are reprinted in Table IX.

Table VIII Employment in Telecommunications-Dependent Industries in the District of Columbia
Industry Employment Pct. of Private 
Employment 
in D.C.
Communications 8,362 2.24
Transportation and Utilities 17,155 4.60
Communications Equipment *  
Electronic Equipment *  
Computer and Other Office Equipment Manufacturing 75 0.02
Wholesale and Retail Trade 52,165 13.99
Finance, Insurance, and Real Estate 27,500 7.37
Business Services 46,955 12.59
Personal Services 2,220 0.60
Health Services 36,548 9.80
Legal Services 28,471 7.64
Misc. Services 83,139 22.30
Total 302,590 81.15
Total Private Employment 372,900  

Source: U.S. Department of Labor, Bureau of Labor Statistics, "Employment and Wages" (1995)   Notes: * = Not disclosed to protect confidentiality. Table does not include self-employed individuals

Table IX Factors Important to Business Relocation
Factors Rank Rating
Access to Major Airports 1 3.57
Labor Costs 2 3.54
Major Highway Access 3 3.53
Proximity to Major Markets 4 3.46
Market Conditions 5 3.40
Skilled Labor Force 6 3.17
Availability of Telecommunications Services 7 3.03
Housing Availability and Costs 8 2.88
Cost of Land 9 2.77
Proximity to Suppliers 10 2.77
Energy Availability and Costs 11 2.71
Price of Telecommunications Services and Products 12 2.66
Recreational Opportunities 13 2.65
Availability of Land 14 2.60
Crime Rate 15 2.55
Cultural Opportunities 16 2.55
Rating of Public Schools 17 2.53
Strength of Labor Unions 18 2.52
Colleges and Universities in the Area 19 2.35
Environmental Regulations 20 2.34
Long Term Financing 21 2.20
Proximity to Technical Universities 22 2.18

Source: Deloitte and Touche (1991), cited by Richard McHugh in "The Taxation of Telecommunications"


DESCRIPTION OF DISTRICT TAXES ON TELECOMMUNICATIONS SERVICES AND PROVIDERS

The District currently assesses a wide range of taxes and charges on telecommunications services and providers. These taxes include a gross receipts tax, sales tax, corporate franchise tax, real property tax, a franchise fee (in the case of cable television), and a personal property tax. In addition, the District imposes a variety of regulatory fees and charges not addressed in this report. Table X presents a matrix of which taxes are imposed by service provider type.

Gross Receipts Taxes

The District imposes a 10% gross receipts tax on: providers of both local and interexchange (long distance) wireline services, subscription television, video, or radio services, and commercial mobile services (cellular service, PCS service, paging, dispatch, or any other wireless telecommunication service). The District imposes the gross receipts tax in lieu of a personal property tax, although the personal property tax is applied to some telecommunications companies (description). Each gross receipts tax is described below.

Tax on Local Telephone Service

The District's laws impose a gross receipts tax on only regulated local telephone companies operating as utilities in the District. Unregulated firms selling local telephone service in the District do not pay gross receipts taxes, unless they are selling "public utility services or commodities." Generally speaking, revenues from District regulated services, such as basic service and local private line service, are subject to the gross receipts tax. Services that are not regulated, such as optional wire maintenance service, telephone installation, and voice mail are not subject to the gross receipts tax.

Unregulated companies entering the local telephone market will not be subject to the gross receipts tax under current law. By the very nature of deregulated service, companies which have recently been approved by the D.C. Public Service Commission to provide local phone services are not utilities and will not sell "public utility services or commodities." This loophole in the tax has had no effect on District revenues through the end of 1997 because none of these companies were providing local telephone service. However, it is inevitable that these firms gain market share from the utility-designated companies and gross receipts tax revenue will decline.

Due to confidentiality limitations, OTR cannot reveal the amount of revenue collected from local telephone companies for gross receipts taxes.

Toll Telecommunications Service Tax

The Toll Telecommunications Service Tax, established in 1989, is a broadly-defined privilege tax on toll telecommunications service. This tax was developed in response to the break-up of AT&T, which opened the long distance market to competition and removed this service from the definition of "public utility services and commodities." Following accepted national practice to establish nexus, as legitimized by the Supreme Court decision in the case Goldberg V. Sweet, the District imposes the tax on "gross charges from the sale of toll telecommunication service that originates or terminates in the District, and for which the charge is made to a service address located in the District, regardless of where the charge is billed or paid."(7)

The toll telecommunications tax is a significant source of revenue for the District, ranking as the seventh largest tax. Graph II shows revenue collections since the establishment of the tax.

Since 1990, the first full year of collections for this tax, revenue from this source has grown by almost 100% in nominal terms, from $23 million to $46.5 million. This is in part due to increases in the tax rate which occurred in 1991 on a temporary basis and permanently in 1992, from 6.7% to 9.7%, along with an increase to the current 10% rate in 1994. During this same period, inflation in the District was about 17%.

The issue of nexus is a central concern for the states and a matter of controversy among tax experts, industry, and tax administrators, particularly in the context of electronic commerce. Legal scholars are attempting to sort out the implications of the Goldberg case, along with other recent cases, most notably Quill V. North Dakota, which revolve around the question of when a firm has established sufficient activity within a jurisdiction, such that a state could subject a seller to taxation. Given the expected increase in electronic commerce, these discussions, federal legislation, and future Supreme Court cases will be critical to determining the circumstances under which firms selling goods over the internet can be subject to taxation.(8)  

Tax on subscription television, video, and radio services

The District collects a 10% gross receipts tax from providers of "cable television service, satellite relay television service, and any and all other distribution of television, video, or radio service with or without the use of wires provided to subscribers or paying customers, whether for basic service, ancillary service, or other special service, and any other charges related to providing the services within the District of Columbia, including, but not limited to, rental of signal receiving equipment."(9) Unlike other gross receipts taxes, the District collects this tax on a quarterly basis, rather than monthly.

An exemption is provided from the gross receipts tax to nonprofit educational institutions which provide programming to subscribers under an Instructional Television Fixed Licence issued by the FCC. OTR does not maintain records on such institutions and no estimate is presented as to the value of this exemption.

The District collects about $5 million per year from these providers. However, there was insufficient data to provide additional details about collections. For administrative and reporting purposes, collections for this tax are reported along with taxes on public utilities.

Tax on Commercial Mobile Radio Services (Wireless Telecommunications)

Following the passage of the Telecommunications Competition Act of 1996 and the Commercial Mobile Telecommunications Service Tax Clarification Amendment Act of 1997 (the Clarification Act), the District began collecting the 10% gross receipts tax on District-based cellular telephone, PCS service, specialized mobile radio services, paging services, dispatch, and other wireless message or data transmission services.

Due to the small size of the District and the mobile nature of these services, the District permitted wireless providers great flexibility to determine whether service to a customer constitutes a "District-based" service. These methods include using the customer's billing address, service address, or D.C. telephone number to determine whether service is taxable by the District.

The tax does not include charges associated with the sale, rental, maintenance, repair, or other charges associated with wireless telecommunication equipment.

The District collected about $2.5 million from this tax in FY 1997 with collections beginning in May 1997. The District will collect about $5 million in FY 1998 which will be included as part of the Toll Telecommunications Tax revenue in District financial reports.  

Concern about the Effect of Passing Through Gross Receipts Taxes to Consumers — An Important Note on Statutory and Effective Tax Rates

The D.C. Council, when considering the Clarification Act, debated about the effective 11.1% rate of the gross receipts tax on commercial mobile services. In most cases, businesses subject to gross receipts taxes explicitly pass through the tax to consumers as a line-item charge on consumers' bills. Thus, while the statutory incidence is on the provider, the customer often bears the full cost of the tax. However, because the tax is imposed on the provider, the tax, if collected from customers through a line-item charge, is itself included as revenue for purposes of calculating tax liability. In most cases, this means that the consumer pays an effective tax rate of 11.1% on taxable charges, in essence a tax on a tax. The Council expressed a lack of comfort about the difference between the statutory rate (10%) and the effective rate for most consumers (11.1%). As a result, beginning in FY 1999, the District will allow firms paying gross receipts taxes on commercial mobile services to exclude revenues explicitly collected from consumers to pay the gross receipts tax for purposes of determining tax liability.

The effect of this change is to reduce revenue by about 10 percent, while making no change in the statutory rate. The tax on a tax remains in place for wire-based local telecommunications service and long distance service, meaning that wireline telecommunications services will be taxed at a higher effective rate beginning in FY 1999.

A Note About Pre-paid Phone Cards

Telecommunication services purchased through pre-paid calling cards are not subject to the gross receipts tax beginning October 1, 1997. Rather, pre-paid calling cards are subject to a 10% sales tax at the retail level. This creates a different effective tax rate (10% versus 11.1%), in this case depending on a particular method of payment, assuming that gross receipts taxes are passed through to consumers. 

Sales and Use Tax

Sales and use taxes need to be viewed through two different lenses with respect to telecommunications. Telecommunications firms can either act as the purchaser or the seller. As a seller, telecommunications firms collect sales taxes and remit these payments to the District, to the extent that tangible goods and taxable services are sold. As a purchaser, telecommunications firms purchase goods and services which may be subject to taxation. 

The Sale of Telecommunications Services

The District imposes sales and use taxes on local telecommunications services at the general sales tax rate of 5.75%. However, a general exemption is made for residential telecommunications service, if classified as public utility service or commodities, and cable television service for residential customers.(10) Long distance services are also exempt from the sales tax. Further, the Clarification Act removed wireless telecommunications services from the sales tax base. Because a sales tax generally cannot be imposed on the federal government, in practice this means that only business customers face the burden of the combined gross receipts and sales taxes, assuming pass-through of the gross receipts tax.

As a result of the way in which the D.C. Code is constructed, the sale of local telecommunications services by firms other than utilities are not subject to the gross receipts tax but are subject to the sales and use taxes. It is not clear whether services provided by a regulated telecommunications provider, but resold through an unregulated provider, would constitute "public utility services" and would be subject to the gross receipts tax.

Assuming that the entire gross receipts tax is passed through to business consumers, the combined effective tax rate on local wireline telecommunications services purchased by businesses located in the District is 16.85%.

Some services that are not considered to be public utility services or commodities are subject to taxation, regardless of whether the purchaser is a business or resident. Services that fall into this category include answering services, voice mail, and other services not subject to regulation by the District Public Service Commission. "900" number-type services are subject to the sales and use taxes, along with telephone answering services, and coin-operated telephones, if these services are not subject to the gross receipts tax.

Pre-paid telephone cards are subject to a 10% sales and use tax but are not subject to a gross receipts tax as previously noted.

Data on the total sales tax revenue remitted by telecommunications companies was not available. However, a ballpark estimate, based on the author's calculations, suggests that telecommunications firms remitted between 1.5% and 3.0% ($7 - $14 million) of District sales tax revenue in FY 1996.

Telecommunications Firms as Purchasers

The District grants exemptions from the sales tax from the sale of personal property used to provide telecommunications services in the District for most classes of telecommunications providers.

Long distance carriers and wireless telecommunications providers are granted an exemption from sales and use taxes on the sale of personal property used to furnish telecommunications services. However, these companies pay sales and use taxes on office furniture and equipment.

A telecommunications firm selling local regulated services is eligible for an exemption from the sales tax on the purchase of all personal property used to produce receipts subject to the gross receipts tax. When a provider in this class purchases equipment that produces receipts, only a portion of which are subject to the gross receipts tax, the District provides only a partial exemption.

A business not classified as a utility which provides local telecommunications service is subject to the sales and use taxes for all purchases of tangible personal property and services, to the extent that purchases are taxable under the general statutes for these taxes.

While sales and use taxes and personal property taxation of telecommunications equipment has been seen in some states as a deterrent to capital investment. This is not a significant issue in the District because of the broad exemptions.

OTR does not maintain records on the value of this exemption to telecommunications firms.

Corporate Franchise Tax

Telecommunications firms are subject to the general corporate franchise provisions of the District. Including surtaxes, the franchise tax rate is 9.975%. Telecommunications firms paid between four and eight percent ($4.0 - $9.8 million) of the corporate franchise tax revenue in FY 1996.

Real Property Tax

To the extent that telecommunications firms own real property in the District, they are subject to the real property tax. Currently the Class 4 property tax rate (general commercial rate) is $2.15 per $100 assessed value.

Data on the total real property tax revenue paid by the telecommunications sector was not readily available. The authors were able to collect data from OTR on the assessed value of real property in the District owned by Bell Atlantic for assessment year 1998. According to these records, Bell Atlantic owns in excess of twenty lots with a total value of $88.5 million and associated tax liability of about $1.9 million.

To the extent that technology allows, District consumers may be serviced by equipment located in Maryland and Virginia. If real property taxes are higher than surrounding jurisdictions, there may be some disincentive to locate facilities in the District. This would only be one of many factors however and the author has not determined whether telecommunications firms are servicing District customers from locations outside the District. 

Personal Property Tax

The extent of personal property taxation varies across sectors of the telecommunications industry. Local regulated telecommunications companies and cable television companies (if a franchise has been granted by the District) are exempt from the personal property tax, so long as the company is subject to a gross receipts tax. Wireless companies and long distance providers are generally exempt from the personal property tax, except on office furniture and equipment.

As constructed, if a telecommunications firm is not subject to a gross receipts tax, then it is subject to the personal property tax. Local telephone companies, other than regulated utilities, are not required to pay a gross receipts tax, and therefore, would be subject to the full personal property tax, without exemption. Wireless cable service providers are subject to the full personal property tax as well.

Other Taxes, Fees, Contributions

The District's cable company is subject to additional requirements. These include an annual franchise fee, public access fee, operation of community access channels and associated production, wiring of public buildings, a public infrastructure user charge, permit fees, and a Boxing and Wrestling Commission fee. The 5% cable company franchise fee can be stacked on top of the gross receipts tax to yield an effective tax rate of 16.66% to which all customers, residential and business, are subjected.

The local exchange carriers and inter-exchange carriers are subject to regulatory fees associated with operations of the Public Service Commission and Office of Peoples Counsel. Telephone companies may also be required to provide duct space for police, fire, and EMS services.

Right-of-Way Fee

The Department of Public Works commissioned a valuation study of the public right-of-ways and is now considering imposition of a right-of-way charge. A number of telecommunication companies and the District's cable franchisee have cables running through the District, either underground or on telephone polls. As such, it is likely that these users would be subject to a right-of-way charge should one be implemented.

Table X Major Taxes and Fees Applied to Telecommunications Services in the District of Columbia

Service Provider Type

Franchise 
Tax (9.975%)
Gross Receipts Taxes (10%)
Public Utility Tax T.V., Video, and Radio Service Toll Telecommunications Tax
Wireline/Microwave Telephone Service (Voice/Data)        
Local Regulated Service Y Y (A) N N
Local Non-regulated Service Y N N N
Long Distance Service Y N N Y
Wireless Services        
Cellular Y N N Y (B)
PCS Service Y N N Y (B)
Ricochet Data Transmission Y N N Y (B)
Wireline Cable Services        
Cable Y N Y N
Open Video System Y N Y N
Wireless Cable Services        
Direct Broadcast Satellite Y N Y N
SMATV Y N Y N
MMDS Y N Y N
Key:  Y= Service Subject to Tax  N = Service Not Subject to Tax

 

Service Provider Type

Personal Property Tax ($3.40 per $100) Sales Tax (5.75%) Real Property Tax ($2.15 per $100)
on Purchases on Services Sold
Wireline/Microwave Telephone Service (Voice/Data)        
Local Regulated Service N N (C) Y (D) Y
Local Non-regulated Service Y Y Y Y
Long Distance Service N (F) N (F) N (G) Y
Wireless Services        
Cellular N (F) N (F) N Y
PCS Service N (F) N (F) N Y
Ricochet Data Transmission N (F) N (F) N Y
Wireline Cable Services        
Cable N N Y (H) Y
Open Video Systems Y N Y (H) Y
Wireless Cable Services        
Direct Broadcast Satellite  Y N Y (H) Y
SMATV Y N :Y (H) Y
MMDS Y N Y (H) Y
Key:  Y = Service Subject to Tax  N  = Service Not Subject to Tax

Notes:

(A) Data transmission services subject to the gross receipts tax only if it is considered a public utility service. Otherwise, data transmission is subject to the sales tax.

(B) Beginning October 1, 1998, revenues collected from consumers solely to cover the gross receipts tax liability of a commercial mobile provider are not subject to additional gross receipts taxation.

(C) Sales of personal property purchased by a utility used to produce receipts subject to the D.C. gross receipts tax are exempt, but sales of personal property in which the property is used to produce receipts that are subject to the gross receipts tax and other receipts not subject to the tax are only partially exempt.

(D) Residential regulated services exempt. Certain additional services not deemed public utility services may be subject to the sales and use taxes.

(F) All personal property and purchases of personal property is exempt from taxation except office furniture and equipment.

(G) Pre-paid phone cards subject to 10% sales tax.

(H) Residential sales are exempt.

Table XI Definitions of Service Categories
Local Regulated Services - Traditional local wire-based telephone service subject to regulation by the District Public Service Commission.
Local Non-regulated Service - Local wire-based telephone service provided by competitive service providers such as re-sellers. Competitors of established local regulated exchange carriers.
Long Distance Service - Generally defined to be interstate or international carriers or IXCs which provide telephones services beyond the local calling area.
Cellular - A wireless telecommunication service which generally has greater range but less capacity than PCS service. Signals may be transmitted in analog or digital formats.
PCS Service - A wireless telecommunication service with greater capacity than cellular. Signals are transmitted in a digital format.
Ricochet Data Service - A wireless service data service allowing internet access, e-mail, and other transmission services.
Standard Cable - Wire-based television provided by either coaxial cable or fiber optic cable to subscribers.
Open Video Systems - This type of system is allowed under the Telecommunications Act of 1996 and permits telephone companies to operate video programing systems as common carriers. The OVS operator can provide programming but must offer access on a non-discriminatory basis. A competitive service of standard cable. (This service not available yet.)
Direct Broadcast Satellite - A satellite-based video service. This service competes with standard cable television.
SMATV - (Satellite Master Antenna Television) Essentially a private cable television network. This is primarily used in hotels and large apartment complexes. 
MMDS - (Multi-channel, Multi-point Distribution Service) A wireless cable television service using ground-based transmission rather than satellites. (This service not available in D.C.)

Observations about the Tax Burden on the Telecommunications Industry and Consumers

Although OTR could not release information about the actual tax liabilities of the major firms providing telecommunication services in the District, the author estimates (only as a ballpark estimate) that telecommunications firms or their customers pay the District between $90 and $110 million annually, including the gross receipts taxes, sales taxes, franchise fees (corporate and cable), real property, and other liabilities. To place this in perspective, this represents 4 to 5 percent of total tax revenues collected in FY 1996.

The District taxes telecommunications services more broadly and at higher rates than other types of taxable services. This is a probably the result of several factors. First, historically telephone services were provided by a monopoly, subject to rate regulation and which was generally guaranteed a profit. As a result of these conditions, higher fees and taxes could be passed through to consumers. Second, gross receipts taxes on telecommunications companies has been common practice in other states. Third, because the statutory incidence of the gross receipts tax falls on the service providers, this provided an indirect way to tax the federal government and other classes of consumers which are generally exempt from sales taxes. 

RECENT DISTRICT LEGISLATIVE ACTIONS AFFECTING TELECOMMUNICATIONS TAXATION 

There have been several major developments in telecommunications taxation since 1996, including the expansion of the gross receipts tax to include cable and related services, passage of the Telecommunications Competition Act of 1996, the Commercial Mobile Telecommunication Service Tax Clarification Amendment Act of 1997, and the possible adoption of a right-of-way charge. (Rate changes are noted in Table II.)

Omnibus Budget Support Act of 1992

In addition to increasing the gross receipts tax rate from 6.7% to 9.7%, this legislation extended the gross receipts tax to include cable television, satellite relay television service, and any and all other distribution of subscription television, video, or radio service.(11) 

Telecommunications Competition Act of 1996

Passed over the veto of the Mayor, the primary thrust of the Telecommunications Competition Act was to provide guidelines to the D.C. Public Service Commission for opening the local telecommunications market to competition. This Act contained the following language with respect to taxation of telecommunications:

Not withstanding any other provision of law, each local exchange carrier in the District of Columbia shall be subject to the same District of Columbia taxes and fees and shall be entitled to the same exemptions, including, but not limited to, personal property taxes. For purposes of District of Columbia taxation only, a local exchange carrier shall include a telephone company that sells public utility services. For the taxation purposes of this act, the term "public utility services" shall include all local telecommunications services sold to the public irrespective of the technology used to provide the services, including, but not limited to, local commercial mobile services.

Section 8, Telecommunications Act of 1996

The legislation appears to espouse the general principle of horizontal equity among local telecommunication providers, regardless of whether services are provided via wire or wireless technology. However, in the author's view, due to an absence of discussion about the intent of this provision of the law by the Council, and a lack of clarity flowing from a plain reading of the language of the statute, the District lacks the authority to collect taxes from local telephone companies not classified as utilities in a manner similar to utilities providing regulated services. Additional legislation will be required by the District if officials wish to achieve equity in the tax treatment of providers of local telecommunications.

The Commercial Mobile Service Tax Clarification Amendment Act of 1997

Passed at the end of 1997, this legislation was crafted by OTR to provide clear rules regarding the taxation of wireless telecommunications companies, reflecting unique aspects of wireless service. OTR developed this legislation with the support of the wireless industry because the Telecommunications Competition Act was not clear as to the intent of the Council to tax wireless services. As Section 8 of the Telecommunications Competition Act above indicates, the Council sought to provide parity for all local telecommunications providers. However, in a previous section of the law, the Council appeared to exempt wireless service providers from the Act.(12)

OTR implemented a gross receipts tax on wireless services beginning in May 1997, relying on guidelines issued by the Office of the Chief Financial Officer. Thereafter, the Clarification Act was passed by the Council, providing sufficient legal authority to continue collection of the gross receipts tax on wireless telecommunications services.

Fiscal Year 1997 Budget Support Emergency Act of 1996 (Authorizing the Mayor to Impose a Right-of-Way Tax)

In July 1996, the Council passed legislation which would allow the Department of Public Works to impose a charge on users of the public right-of-ways. This authorized tax is described in more detail in a following section.

RECENT LITIGATION 

There is currently no litigation in either the District's local courts or federal courts regarding specific telecommunications tax laws of the District. The most significant telecommunications tax case in the District since 1990 has been the "Sprint case"

The Sprint case was resolved in 1994 in favor of long distance telephone companies located outside the District. The case involved the legality of an allocation formula used to apportion the personal property tax on equipment which was used to produce receipts subject to the toll telecommunications tax. The Court found that the District was unfairly discriminating against businesses located outside the District. As a result, the District replaced the allocation formula with the current general personal property tax exemption for long distance companies.


TAXATION SCHEME AS VIEWED THROUGH TAX PRINCIPLES

This section considers the District's current approach to taxation of telecommunications in terms of several criteria commonly used to analyze tax policy.

Efficiency

Any tax will lead to a different set of choices by taxed entities than would be made if there was no tax. The usual measure of distortion is what economists call "dead weight loss," that is, the loss of consumer well-being that results from the wedge between the price with and without the tax. The size of the loss to consumers depends on how much users respond to changes in prices. The degree of distortion is a measure of the efficiency of a tax.

The ability to substitute between goods and services, especially between those that are taxed versus untaxed or differentially taxed, shapes the distortion brought about by a tax.

In the past, there were few close substitutes for telephone service. However, substitutes are emerging within the telecommunications sector. For example, one growing option instead of long distance telephone service is e-mail. Wireless telephone service is a substitute for wireline telephone service and Direct Broadcast Satellite television is a substitute for cable television.

Emerging options alter the elasticity of demand for traditional telephones services, making it more likely that differential taxation across services will distort the market. In other words, having different taxes apply to similar services may induce some individuals to alter which products they purchase.

Distortion can also result from differential taxation of the same service. For example, purchasing pre-paid telephone cards in another state may avoid taxation in the District, although a use tax obligation would exist. The ability to avoid taxes may encourage sole individuals to alter the method by which they acquire goods and services.

The District taxes similar services differently and applies different taxes to the same service, based on method of payment. This can be associated with loses in efficiency.  

Equity

Equity can be considered horizontally — across similar providers or similar types of goods — and vertically — across income groups.

The District generally assesses gross receipts taxes on the telecommunications sector. However, as Table IX (p.27-29) shows, local non-regulated telephone service is not currently subject to the gross receipts tax. Further, there is inconsistency in the application of sales and personal property tax exemptions. These differences represent departures from horizontal equity which should not be sustained in a deregulated environment.

Thus, taxes on local telephone service tend to be more regressive than taxes on long distance service. Richard McHugh reports that analysis of telephone bills from a national sample of 40,000 households in 1993, indicates that there is some regressivity associated with intrastate and interstate toll service. However, as income rises, expenditures for interstate service tend to increase.

The vertical equity of the gross receipts tax is difficult to assess. On the one hand, the basic line charge does not rise with income. On the other, the tariff structure does allow households to choose more and less costly local service. Bell Atlantic provides residence service plans that range from $1.00 to $14.15 per month. The lowest cost service is available to customers who meet certification requirements of the District of Columbia Energy Office: $11,835 annual income for a one person household, $15,915 for a two person household. Flat Rate Economy II Service is available to those aged 65 and older. Younger household heads qualify for Message Rate Economy II Service for $3.00 per month, with up to 120 local calls per month. (Service for those who do not apply for or qualify for the certification requirements of the District of Columbia Energy Office begins at $4.35 per month, with each local call billed at $.065. These programs mediate the regressive effects of taxes on local telephone service for the poorest households.

Revenue Stability and Adequacy

The telecommunications sector has provided a stable source of revenue in the District for decades. However, once the local telephone market in the District is deregulated it is likely that prices and associated tax revenue will fall. This may be offset by growth in the addition of second lines.

In the long distance market, lower prices were accompanied with increases in consumption, limiting the effect of long distance deregulation on gross receipts tax revenues. The long distance market is the fastest growing segment of the market and therefore taxes on this service are likely to be more stable for this service.(13)  

Administrative ease

It is likely that OTR will be required to devote additional staff to the collection of gross receipts taxes within the next few years - reflecting growth in the number of returns filed. In the days of monopoly telephone service, telecommunications taxation typified administrative ease: a single regulated firm remitted, in regular monthly payments, most of the revenue received from the industry. Compliance was near perfect, administrative issues few. Now in the era of competition, the number of firms subject to the tax is increasing and the administrative complexities are growing.

The possible application of a right of way tax by the District has the potential for greatly complicating the revenue collection effort. Particularly, if the tax is imposed on the basis of linear feet occupying the right of way or a similar method, a significant cost to both the District and right-of-way users will arise. 

Economic Growth

Telecommunications taxes are an important input cost for telecommunications-intensive businesses. To the extent that telecommunications-intensive activities can be relocated and significantly lower taxes apply in other jurisdictions, some firms will locate operations elsewhere. One approach to mitigate the impact of taxes on telecommunications-intense firms is to exempt long distance services from the sales tax. Eight of the 17 states currently taxing interstate long distance service exempt Wide Area Telephone Service and 800-number type service from the sales tax base.(14) 

POLICY PERSPECTIVES

The following section raises significant policy issues. This is followed by an Options section presenting some alternatives.

Is the current tax scheme flawed?

As a general principle, the District ought to tax all telecommunications providers the same. The D.C. Council appeared to take a step in this direction in the Telecommunications Competition Act of 1996, as noted on pages 29-30, but additional legislation will be necessary. Whether a company was classified as a cable provider, local telephone company, long distance market participant, or wireless service company in the past is not relevant. To the extent that various telecommunications services are equivalent, these services ought to be subject to similar taxation. As was illustrated in Table X, District tax laws are inconsistent regarding taxation of telecommunications services and providers.

By having equal rates apply to services, the District can avoid problems determining how to tax bundled telecommunications. Further, by having a single rate, to which all types of service are subject, there would be no discrimination against a particular method of service delivery, for example wireline versus wireless.

The District may be at risk of litigation due to inconsistent laws regarding the purchase of equipment which is used to produce receipts subject to gross receipts taxes. In addition, obligations under the personal property tax are inconsistent, which could lead to a lawsuit. 

Is ten percent the right gross receipts tax rate for the District? 

Significantly higher tax rates for telecommunications services compared to other jurisdictions may hinder economic development by inducing businesses and government agencies to locate telecommunications-intensive activities in lower-tax places. Even though a larger base theoretically allows the District to impose lower rates than under a sales tax scheme, officials may lower rates for other taxes, which may or may not improve the overall equity of District taxes. This shifts the business tax burden in the District from businesses that are less reliant on utility and telecommunications services to those that are more intensive, or from residents to businesses. Residents also bear the costs of the relatively high rate of the gross receipts tax. Whether or not the current rate is high enough to induce residents to relocate from the District is not known.

A number of factors could be considered when determining whether the current gross receipts tax rate is the best rate for the District. Among these factors: impacts on economic development, equity for residents and businesses, equity for telecommunications providers vis-a- vis other industries, the revenue requirements of the District, and the potential to substitute lower taxed services for higher taxed telecommunications services.

Is it appropriate to tax telecommunications firms and services differently than other industries or services?

Telecommunications firms are or soon will be subject to the same market forces and pressures that other industries must face. These firms generally are not guaranteed to make a profit and may be less able to pass through gross receipts taxes than in the past. New technology such as internet telephony may have a profound effect on the long distance market, for example, by creating a close substitute at a substantially lower price. Long distance firms would be forced to lower prices to compete and might cease to generate profits, yet would continue to face gross receipts tax liabilities that they may not be able to recover from consumers. Other companies, generally being subject to the franchise tax, which is a tax on net income, would pay only the minimum franchise tax.

One could argue that the gross receipts tax produces greater horizontal equity than other taxes such as the sales tax because the tax base is larger for this tax than other business taxes. One may also conclude that this tax is equitable because only people who use telephones bear the cost of this tax and that the tax burden increases with use of the service.

Clearly, an advantage of a gross receipts tax is that it allows the District to expand the tax base to include sales to the federal government and other generally tax-exempt institutions. This has allowed the District to maintain lower rates for other taxes. Robert Ebel and Barbara Libman noted in a 1988 study of District telecommunications taxes that as much as 50% of long distance charges and 45% of local telephone revenues came from governments and others with tax-exempt status.(15)

The gross receipts tax is simple for the District to administer. A limited number of payers means that fewer resources need to be devoted to these taxes. However, deregulation and expansion of the gross receipts tax base is increasing the workload associated with administration of these taxes. Originally, the District needed to collect the gross receipts tax from only one telephone company. Now, even before local deregulation takes hold, OTR receives returns from more than 100 telecommunications firms each month.

Many states still impose gross receipts taxes on telecommunications but the national trend is toward elimination of these taxes. New York State reports that in 1986, 30 states imposed a gross receipts tax, while only 20 did in 1996. Only seven states impose a gross receipts tax on long distance providers and four states impose a gross receipts tax on cable television (excluding the District).(16)

A gross receipts tax on telecommunications services is an attractive option for the District even though many states are eliminating this tax.  

Should the District impose sales taxes on residential local telephone service?

There is little rationale for granting a residential exemption from the sales tax beyond equity concerns. Programs are in place to ensure that low income residents have access to telephone service.

Of the 45 states that impose sales taxes, 39 impose a sales or excise tax on local telecommunications service.(17) Of these states, only four exempt residential services, including Florida, Pennsylvania, Washington state, and the District.(18)   

Should the District exempt all telecommunications sales from the sales tax?

A minority of states do not apply a sales tax to telecommunications services. In some cases, the state does not have any sales tax. Given the inability to apply the sales and use taes to governmental sales and the existing exemptions for long distance service and local residential cable and telephone service, extension of the exemption to all telecommunications services would allow consistency for all consumer classes. An exemption for business customers may encourage economic development. 

Should the District subject long distance service to the sales tax?

Most states do not apply a sales tax to long distance service. Of the 19 states that do, eleven make an allowance for large users. Ten states in this category exempt 800-number type service.(19)  

Should pre-paid phone cards (PPCs) be taxed by a retail sales and use tax or like other telecommunications services?

An issue of great interest to the telecommunications industry and the states in the last few years has been the taxation of pre-paid telephone cards. These cards allow a consumer to purchase "units" of telephone service in advance.

Revenue from the sale of these cards is in excess of $1 billion per year nationally and growing. Some industry observers envision the use of these cards expanding beyond telephone service to include other products, services, or goods.

There is no clear single national trend regarding the taxation of PPCs, although many industry advocates have urged the states to enact one standard. There appears to be two general policy options: (1) Subject telecommunication services paid for through use of PPCs to telecommunications taxes on the value of the telecommunication service at the time of use or (2) Tax PPCs as tangible personal property, subjecting the value of PPCs to taxation through sales and use taxes.

Several states, including the District, tax the cards as tangible personal property but a majority of the states require telecommunications taxes to be paid on the value of the telecommunications services at the time the card is used. Richard McHugh reported that in 1996 that PPCs were taxed at the point of sale in 11 states, at the time of use in 30 states, at the discretion of the seller in one state, and not at all in nine states.(20)

Taxing PPCs at the retail level in the District and requiring retailer to collect the tax creates an additional tax burden on retailers. PPCs are taxed at the 10% rate - not 5.75% which will create confusion for retailers and the public.

Generally, a retail sales and use tax is more difficult to administer than gross receipts taxes (although not necessarily for the telephone providers). In the event that PPCs are purchased in a state with no sales tax, such as Delaware, which has no sales tax, and the cards are used in the District, the District will have few tools available to monitor and collect use taxes. Further, since the cards are not being used in the state in which they were purchased, it is not likely that state of purchase would have the requisite nexus to tax the PPCs.

On the other hand, some telecommunications providers have argued that states are better off under a retail sales tax because taxation at the time of use raises nexus issues and because the state can collect taxes on the PPC regardless of whether the card is actually used. 

Should the District tax internet access?

Not to be confused with taxation of "electronic commerce," taxation of internet access has been the subject of national debate. While electronic commerce is the selling and buying of goods and services through electronic means, taxation of internet access is somewhat akin to taxation of the on-ramp to the Information Superhighway. Internet access differs from electronic commerce in that access consists of linking a user to the internet, rather than the content of the internet itself, although it is possible for a vendor to provide access and offer products or services in conjunction.

A number of states have indicated that internet access is a taxable communication service. For example, North Dakota includes "interactive electromagnetic communication, including voice, image, data, and any other information" as taxable. Illinois subjects internet access to telecommunications excise taxes. The District also subjects internet access to taxation.

Most states are not taxing internet access. For example, Virginia treats internet access as a non-taxable service. In Nebraska internet access is taxed only as part of a connection service if access software is included but additional access charges are not subject to taxation.

Several justifications are given for not taxing internet access. First, some policy-makers have been concerned that access would then be taxed once at the retail level and again at the level of the provider. Second, many states have been persuaded that the internet needs to be protected to allow it to grow. 

Should the District levy a tax on use of the public right-of-ways?

The question of how much (if any) the District should charge utilities for use of public space was raised by the Fiscal Year 1997 Budget Support Emergency Act of 1996, as previously noted. That legislation permitted fees to be imposed on users of pubic right-of-ways. Some users of public space, such as sidewalk cafes and vaults built beneath sidewalks, are charged for their use; others, such as utilities placing pipes, conduits and ducts below street level and poles in District-owned rights-of-way are not.

Two sets of issues are involved. The first relates to direct cost recovery. Direct costs are of two types: first, the cost of permitting to make pavement cuts and inspect those cuts; second, the value of the reduced lifespan of pavement into which cuts are made. The second relates to the economic value of the use of the right-of-way.

The District's direct cost recovery is today limited to permits for underground excavations, constructing manholes and connecting sewers, conduits and mains. Most rates were established in 1980. A consultant to the Department of Public Works has recommended updating of permit fees to reflect actual costs. In addition, the consultant has proposed charging utilities that make pavement cuts for diminishing pavement quality faster than was expected under the original design.

In the event that additional fees are levied to cover the diminished life of roads and to cover the cost to repairs, these funds should be allocated to the Department of Public Works for that purpose.

The second set of issues is more complex. What is economic value associated with allowing businesses to use public property for private purposes? The government can choose to capture a portion of this value.

The administratively simplest approach is compute the economic value of private use of the public right-of-way, to avoid costs of accounting for each pole and linear foot of pipe, conduit, and duct, is to impose a fee based on gross receipts or flat fee. In some cities, the fee takes the form of a franchise fee paid by the utility in exchange for the privilege of doing business in the city. The District imposes one franchise fee, on the cable television service provider.

However, the District already imposes a 10 percent gross receipts tax on telecommunications companies and a sizable right-of-way tax would serve only as a tax increase. As either an economic matter or what is seen on the bottom line by taxpayers, a franchise fee and gross receipts tax are equivalent.

Both franchise fees and gross receipts taxes lack the precision of prices for allocating resources and assuring that an efficient level of public space is used in providing utility services. For example, because no charge is made for use of public space, a firm intending to lay a fiber optic network in the District may decide to build its own set of conduits rather than rent space from an entity which has already built an underground network (for example, WMATA, which receives $1.8 million per year for renting such space in Metro tunnels.) But the normal reference point for prices, opportunity cost, is lacking in pricing right-of-ways (at least until the point that so many firms wanted to build underground networks or install utility poles that physical space limitations arose.) Because the right of way is priced at zero, some distortions arise. For example, the relative shares consumers choose of cellular and hard wired telephone service would be different if the provider of wired service had to pay for use of the right of way for poles to connect users to the network.

The approaches suggested for pricing right of way access on a unit basis are crude. They generally involve devising a generic value of land in the District and multiplying that value by the amount of space assumed to be used.

If the District were to adopt unit pricing of right of way use, there would be significant costs associated with setting up a system to establish a baseline for current right of way use and future changes.

It is also important to consider the effect of imposing charges on the use of the public right of way vis-a-vis wireless services. If the right-of-way fee or tax is not tied to the cost (whether as an opportunity cost or maintenance cost), the District would unfairly discriminate against wireline providers occupying the right-of-way.

Should the District tax direct broadcast satellite (DBS) and SMATV?

Under current law, the District taxes all subscription video services under the 10% gross receipts tax. Conceptually this is appropriate because all such services are taxed equally, regardless of whether the services are provided by a cable company or through wireless means. Further, this means that traditional telecommunications services and cable are treated similarly, avoiding future complications if the cable franchisee begins offering telephone service or if a phone company offers video services.

The District's inclusion of DBS and other video service is consistent with practices in other states which tax cable. Twenty-three states tax cable television, while twenty-eight exempt these services from transactional taxes.(21) However, the District is unique in comparison to other municipalities. All other local governments are forbidden from taxing DBS under provisions of the Telecommunications Act of 1996.

Should the District impose a tax on telecommunications services for 911 services?

The advent of 911 as an emergency response and dispatch service has been accompanied by a variety of ways to finance the telephone lines, specialized equipment, and personnel required.

In the District, the costs of the 911 system are divided between those borne by the District government and those borne by the local exchange company, Bell Atlantic-DC. Bell Atlantic-DC owns and operates the lines between the central office and the dispatch center. It recovers these costs through a per line charge of 16 cents per month on business and residential lines and two cents per month on Centrex lines. The Public Service Commission has allowed Bell Atlantic to include this cost in its line charge; no separate amount for this service appears on customer bills. The District's costs include the equipment, equipment maintenance, and personnel who answer calls. The personnel are part of the Communications Division in the Metropolitan Police Department (MPD.) The District's costs come from general revenue funds. The District is also unusual in the ownership of a component of the communications system by the local exchange carrier rather than the government.

Among 46 states surveyed on emergency communications financing, only two, Connecticut and New Jersey, do not turn to some source besides general revenue for some component of the costs. While all with specialized revenue sources use that revenue for capital costs associated with emergency response, 38 also use that source to pay some or all of the operating costs of the system.

These non-general revenue sources take a variety of forms. The most common is a flat amount charged per access line. Among the 18 states with flat amounts, the monthly fee ranges from 25 cents to $2.00, with fifteen imposing flat fees of less than $1 per month. The next most common approach is a percentage of the rate charged for local service. Other approaches include a property tax surcharge (Nevada) and a surcharge on heavy users of directory assistance (Massachusetts, 34 cents a call past the tenth call per month.) Other features that vary across states include limits on taxable lines per account, the nature of the funds into which collections are deposited, and fees paid to local exchange carriers for collecting the revenue.

The costs attributable to 911 in the District are difficult to identify. Operating costs are some portion of the Metropolitan Police Department's communications division. In addition to 911, the communications division also handles dispatch and internal police communications. The FY 1998 budget for the communications division is $11,341,000, of which $9,758,000 is personnel and related costs.

In order to undertake a user fee-type approach to financing 911 services, the District would need to first clearly identify the costs of the 911 service versus other functions of the communications division. 

OPTIONS  

In this section, options and ideas are presented for consideration. Where possible, an estimate of the annual revenue impact associated with each option compared to current law was calculated. 

Issue #1 — Gross Receipts Tax, Sales Tax, Or Both 

Option A. Eliminate the gross receipts tax for all telecommunications services and replace this with a sales tax [Estimated annual revenue impact (-$75,000,000)] 
Pro - Treats telecommunications services like other taxable services
- Consistent with trends of the states moving away from gross receipts taxes
Con - Would result in a substantial loss in revenue, which would have to be made up through a higher sales tax rate on telecommunications or another source, in a revenue neutral plan
- Tax base would be much smaller, excluding government and tax exempt sales
Option B. Eliminate sales tax on local telecommunications for businesses [Revenue Impact (-$8,000,000)] 
Pro  - Would lower the effective tax rate on local telecommunications services paid by taxable businesses by 34%, lowering the cost of doing business in the District.
Con - Would result in a revenue loss which would have to be recouped elsewhere in a revenue neutral plan.
Option C. Eliminate the sales tax exemption for local residential service. [Revenue Impact +$5,000,000]
Pro - Not likely to deter residents from access to telephone service.
- Would generate additional revenue which could be used to offset tax reductions in other areas.
Con - Would increase the cost of local telecommunications services for residents.

Issue #2  The Gross Receipts Tax Rate  

Options A, B, and C are mutually exclusive; option D and E are mutually exclusive.

Option A. Leave the gross receipts tax rate at 10.0% [Revenue Impact $0] 

Option B. Reduce the gross receipts tax rate to equal the sales tax rate - 5.75% rate without deductions which equals an approximate effective tax rate on telecommunications services of 6.1%, assuming tax is passed through to customers [Revenue Impact (-$45,000,000)]
Pro  - Provides high degree of horizontal equity between telecommunications services and other goods and services subject to the sales and use taxes. 
- Treats the telecommunications industry more like other competitive industries, rather than like regulated monopolies.
Con  - Reduces revenue. If recommendations are to be revenue neutral, additional funds would need to be generated through another source.
Option C. Increase the Gross Receipts Tax Rate for Telecommunications Services from 10% to 13% - without deductions, this would yield an effective tax rate of 14.9%, assuming tax is passed through to customers [Revenue Impact +$32,000,000] 
Pro  - Would generate revenue which could be used to offset elimination of the unincorporated business franchise tax, a reduction in the general sales tax rate, or personal property tax rate. Both the sales tax and personal property tax have been identified by other analysts as having negative economic consequences for the District.
- A gross receipts tax allows taxation of a wider base (the federal government, international organizations, and tax-exempts) which could be viewed as more equitable than a sales tax.
Con  - Would treat telecommunications services very differently than other services.
- Could induce telecommunications-intensive businesses and federal agencies to relocate outside the District.
- A higher rate could encourage evasion of the tax.
Option D. Eliminate the "tax on a tax" changing the effective rate from 11.1% to 10.0% for all telecommunications providers 
[Revenue Impact (-$10,000,000)]
Pro  - This could make the tax more understandable to the public.
- Avoids potential discrimination against wire-based companies by treating all providers the same.
Con  - Elimination of the tax on a tax would amount to a 10% reduction in revenue. This would have to be recaptured elsewhere in a revenue neutral plan.
Option E. Reincorporate the "tax on a tax" into the tax base for wireless service providers. [Revenue Impact - +$500,000]
Pro  - Avoids potential discrimination against wire-based companies by treating all providers the same.
- Would generate small increase in revenue.
Con  - Continues the current practice resulting in a difference between the statutory rate and effective rate, which is confusing to the public.

Issue #3 — Expansion of the Gross Receipts Tax Base/Equal Treatment of Providers

Option A. Include all providers of wireline local telecommunications under the same tax scheme. [Revenue neutral under existing market conditions where all local wireline service is being provided by regulated utilities.]
Pro  - Eliminates a potential loophole in the gross receipts tax and is non-discriminatory regarding the classification of the provider or the method of service delivery, whether wireline or wireless.
- Promotes horizontal equity across providers and services.
Con  - May be difficult to implement in practice because nexus rules may need to be different for wireline and wireless service providers.

Issue #4 — Pre-paid Telephone Cards   

Option A. Tax PPCs as tangible personal property at 10% [Revenue Impact - $0 - current practice] 
Pro  - This method is less burdensome to the telecommunications firms.
- District collects revenue on cards regardless of use. (However, the District may not be able to collect sales and use taxes if a card is used outside the District.)
-Some other states are also taxing PPCs as tangible personal property
Con  - Creates an artificial difference in the taxation of telecommunications services, based on the nature of payment.
-OTR unlikely to collect use taxes on cards purchased elsewhere but used in the District; provides an incentive to purchase cards in a tax free jurisdiction to avoid taxation
-Creates an additional administrative burden for District retailers
-Not clear if government enterprises selling PPCs charge sales tax, meaning that a portion of the base is likely to go untaxed. 
-Cannot be imposed on the federal government or tax exempt institutions.
-Fails to eliminate record-keeping requirements for telecommunications providers because many other states continue to tax PPCs like other interstate telecommunications services.
Option B. Revert to taxation of PPCs as telecommunications services [Revenue Impact - increase less than $1,000,000]
Pro  -Eliminates artificial difference in the taxation of telecommunications services based on the form of payment 
-Tax paid by the telecommunications providers if the card is used in the District, regardless of the taxable status of the consumer or retailer.
Con  -Creates administrative burden on telecommunications providers.
-District only collects revenue when cards are used and not at all if a card goes unused.

Issue #5 — Taxation of Internet Access

Option A. Include internet access in the sales tax base

Option B. Include internet access in the gross receipts tax base
Pro  - Treats internet access as a telecommunications service

Option C. Do not tax internet access 

Issue #6 — Impose a 911 fee   

Option A. Impose a monthly 911 fee on telephone bills to pay for 911 service [Revenue Impact - revenue dependent on price of fee] 
Pro  -911 service has defined costs which could be financed via a user fee.
-Could provide a defined stable source of revenue for an essential public service.
-This is a common user fee throughout the nation.
Con  - Residents may have an expectation for greater or higher quality service if current costs were made explicit, leading to the need for even higher fees.
- Would require funds to be earmarked, leading to less control over the budget 

Issue #7 — Application of the Personal Property Tax

Option A. Exempt all telecommunications companies from the personal property tax.

Option B. Exempt all telecommunications companies from the personal property tax, except office furniture and equipment.

Option C. Subject all personal property located in the District to the personal property tax.

Issue #8 — Exemption from the Sales and Use Taxes for Personal Property Purchased by a Telecommunications Company

Option A. Exempt sales of personal property purchased by a telecommunications company if the company is subject to a gross receipts tax in the District.

Option B. Exempt sales of personal property purchased by a telecommunications company where the equipment is used to provide telecommunications service subject to a gross receipts tax in the District but tax office furniture and equipment.

Option C. Subject all sales of personal property purchased by a telecommunications company used in the District to the sales tax.

Issue #9 — Imposition of a Right-of-Way Tax or Regulatory Fee 

Option A. Impose a non-discriminatory right-of-way tax, using gross receipts as a basis, on all users of the public right-of-ways based on District gross receipts

Option B. Impose a non-discriminatory right-of-way tax based on linear feet of occupied space.

Option C. Do not impose right-of-way tax but impose maintenance cost recovery fees as necessary.


Terms and Definitions  

Cellular Service
A wireless telecommunication service. The technology permits greater range than PCS but cannot support as many features.
Competitive Access Providers
Companies that provide access to long distance carriers bypassing established local exchange carriers. CAPs directly compete with local exchange carriers.
Electronic Commerce
There is no generally accepted definition of electronic commerce. However, in the most basic of terms it is the sale of goods and services via electronic means - generally via computer. Some people extend this definition to include not only the transactions but also the technology and software used to conduct such transactions.
Interconnection
The integration of independent telecommunications providers into a single network, including rules for origination and termination of telephone calls among providers.
Interexchange Carrier (IXC)
A company which provide telephone service from one local calling area to another.
Local Exchange Carrier
Company that provides local telephone service which can include intra-state toll service and local service.
Personal Communication Service (PCS)
A wireless telecommunication service which can include voice, messaging and other services, and data transmission service.

1. "United States Telephone Association," A Brief History, http://www.usta.org/history.html (Accessed 11/97).

2. "O'Rouke, Jill," Keeping Rural America Connected: How Public Policy Has Created and Preserved Universal Service, http://www.mobiltel.com/opastco.htm (Accessed 11/97)

3. "Tcherneva, Pavlina R.," Chapter 6 - Regulatory Reform in Telecommunications Industry: The AT & T Case, http://www.gettysburg.edu/~s282990/chapter6.html (Accessed 11/97)

4. Ibid.

5. Richard J. McHugh, "The Telecommunications Industry: Implications for State and Local Taxation" State Tax Notes Volume 12. #1: January 6, 1997.

6. "Washington Post,". Washington Post Interactive 200, http://www.washingtonpost.com/wp-srv/business/long-term/post200/bfoutsde.htm#7 (Accessed 12/97)

7. District of Columbia, Taxation and Fiscal Affairs, §47-3902(b).

8. An excellent concise review of the relevant cases was written by Richard McHugh and is included in his study "Sales Taxation of Telecommunications Service in the State of Utah" available from Georgia State University. See Note 14.

9. District of Columbia, Taxation and Fiscal Affairs, §47-2501.1(a)

10. Residential cable television service is exempt from the sales tax but the sale or rental of property such as descrambling devices may be taxable.

11. District of Columbia, Taxation and Fiscal Affairs, §47-2501.1(a)

12. D.C. Act 11-300 Section 7(b) states: Pursuant to the federal Telecommunications Act of 1996, this act shall not apply to licenced or unlicenced wireless services authorized by the Federal Communications Commission operating in the District of Columbia."

13. Richard McHugh, Sales Taxation of Telecommunications Services in the State of Utah, (p.34) School of Policy Studies Report Number 67 (Atlanta, GA: Georgia State University, May 1996).

14. Ibid, p.36.

15. Ebel, Robert D. & Barbara J. Lipman, "Taxation of Telecommunications in the District of Columbia" April 1988.

16. State of New York, Office of Tax Policy Analysis, Albany, Improving New York State's Telecommunications Taxes., (August 1996), p.60-61.

17. Ibid.

18. Richard McHugh, Sales Taxation of Telecommunications Services in the State of Utah.

19. Ibid.

20. Ibid.

21. Ibid.

Back to top of page


Send mail with questions or comments to webmaster@dcwatch.com
Web site copyright ©DCWatch (ISSN 1546-4296)