Congress passes uniform sourcing law

The House, seeking a way to simplify how state and local jurisdictions determine taxes on wireless telecommunications, in July passed the Mobile Telecommunications Sourcing Act (H.R. 4391).

But the bill doesn't solve all the difficulties in determining tax jurisdiction, a tax expert says.

Calculating taxes and jurisdictions is a major headache for wireless carriers, especially low- to mid-tier carriers, who find it nearly impossible to keep up with the thousands of taxes, fees and other extractions levied nationwide. There are 7,000 to 8,000 taxing jurisdictions in the United States, each of which change their multiple tax structures and continuously redraw their boundaries. Carriers have employed a complex and arcane method of determining jurisdiction based on where the call originates, terminates and is billed. A 1989 U.S. Supreme Court decision, based on the Goldberg v. Sweet case in Illinois, created what has become known as the Two Out of Three Rule: “The tax act imposes a tax on the gross charge of interstate telecommunications if (1) originated or terminated in Illinois; and (2) charged to an Illinois service address, regardless where the telephone call is billed or paid.”

“There must be two points within the state for the state to be able to collect the tax,” Diana DiBello, research product manager for telecom taxation at Vertex, told Billing World (See “Wireless Taxation: From Middle Management Frustration to CEO Arrest,” Billing World, September 1999 ). “For instance, if I live in Pennsylvania, make a call from Pennsylvania to New Jersey, and my ‘bill to’ address is in Pennsylvania, then Pennsylvania will pick up the tax.”

“It’s the age-old law of the land, based on wireline technology,” says Jerry Allison, CommTax project leader for Vertex. “As soon as you introduce cellular and wireless into that, those positions become very tricky. You’re cruising down the highway at 60 mph talking on your cell phone; where’s your origin? You’re calling someone else zipping down the road in another state; where are they? What’s their termination point?” The Act has two main components, such as using a single address for taxing purposes. That area is known as the place of primary use, the address representative of where subscribers' use of mobile telecom services primarily occurs. This will often be the users' billing address--residential or business--and will serve as the sourcing point, or place where taxes can be collected from the wireless end-user. The Act also would require states to create a database that lists the tax jurisdictions associated with that address, including state and local governments, school districts, water districts, airport district, ad infinitum.

This will improve taxation functions on several levels, says Chris Patula, vice president of commercial affairs at the Cellular Telecommunications Industry Association (CTIA).: simplify and reduce costs of tax administration for carriers and state and local governments; reduce the chances of double taxation from competing jurisdictions; preserve state and local authority to tax wireless service; provide consumers with simpler bills; assist the transition to "buckets of minutes" billing plans.

Perhaps the biggest advantage will be a reduction in broken pencils and headaches in telco back offices. Keeping up with shifting tax jurisdictions, complex tax structures and ever-changing tax rates requires constant updates to taxing software modules and vigilant auditing. "The wireless carriers see hundreds of millions of dollars in savings," Patula says. "They won't have to incur the auditing costs. The current system is expensive for companies to maintain."

But problems could arise in companies with multiple offices nationwide, says George Abi-Esber, manager of tax research at Taxware International. Take the example of a company headquartered in Michigan with employees in offices in other states that use wireless phones. The Michigan company lists the place of primary use as its headquarters. But employees of the company based in Florida use their wireless phones primarily in Florida. Problems arise if a Florida tax jurisdiction finds out that Michigan is collecting the taxes on the gross receipt charges. The Florida tax jurisdiction can bill the company in Florida directly for those taxes. "It's vital that the place of primary use is defined accurately," Abi-Esber says.