States Aren’t Ready for New Mobile Sourcing Rules

With an Aug. 1 deadline looming, states are far from ready to conform to new mobile taxing rules meant to simplify how the wireless industry determines what it owes state and local tax jurisdictions. The federal Mobile Telecommunications Sourcing Act (MTSA) changed the way local jurisdictions tax wireless end users. Wireless carriers have had to figure out what to tax consumers in some 36,000 jurisdictions, some of which attached multiple taxes to a single phone call. Under the new rules, calls are now taxed based on the billing address, also known as place of primary use (PPU).

MTSA mandated states to create a uniform tax database for assigning mobile calls to the correct taxing jurisdiction. The database acts as a safe harbor for carriers. If they use the state’s database to figure taxes, they can’t be held accountable if the database is inaccurate.

But simplification is still out of reach. So far, only 31 states have signed compliance measures into law, 11 states have them pending, and five states and the District of Columbia have not even introduced legislation to meet the federal law’s requirements. Virginia and Maryland are writing regulations to comply with it, and the governor of North Dakota even vetoed conforming legislation.

Telecom tax experts say confusion will result, because carriers won’t be certain how to tax. If one state has a uniform database and another doesn’t, carriers may find themselves having to use dual methods when figuring what to tax consumers. Other carriers may employ third-party tax sourcing software that uses ZIP+4 or ZIP+9 standards to determine taxing jurisdictions, an option the act offers them.

“The hard part is right now,” says Dean Bruno, state and local tax partner for Ernst & Young in Chicago. “Once it’s up and running it will be simplified, but this is not going to happen by osmosis. There are things that now have to be changed to integrate with billing systems.”

Because states won’t be ready, carriers may simply pay the tax rate they believe the state is owed, Bruno says. “I believe the carriers will say, ‘We will continue to give them tax, we can’t have dual systems for paying taxes. We’re going to run one system domestically and give them what they would get if they had passed [the conforming law], then they should be happy with it.’ ”

Carriers may not be ready either. “Most of them have been slow starting,” he says.

Steve Riddle, a tax analyst with Ernst & Young in Denver, agrees. Many wireless providers still have tax databases set up on the old rules, in which the taxing jurisdiction is determined by a clumsy two-out-of-three criterion using call origin, call destination and billing address.

“The software vendors out there have good products, but at the end of the day it’s just a tool [for the carriers]. Operators have to make it work with your application. It’s up to the provider to map the primary place of use,” Riddle says. “That’s a customer data file issue. Operators need to be able to map or send different criteria through the API to make sure they are hitting the PPU address. Typically, though, many of them are hard-coded based on the [former Gold v. Sweet rule]. That means providers will have to clean up customer data for thousands and thousands of accounts. They have to implement new interfaces between billing systems, state databases and third-party taxing applications.”

As for those state databases, few indeed are ready, and the rest won’t be for quite a while, says Martin Sohovich, director of sales and marketing for GeoTax at Group 1 Software. The company develops software that helps carriers determine in which tax jurisdictions billing addresses reside. “No state has a completed system yet, except for Florida or Washington State,” Sohovich says. A couple more states will break through in the next year.”

That leaves the problem of mistakes and confusion that can result in frustrated customers. “If customers complain about improper taxation, carriers have 60 days to research the problem and make resolution, or explain why the customer is wrong,” Sohovich says. “Tax jurisdictional research is going to have to increase at carriers. They have to keep their database current, and have to keep track of changing boundaries and special tax districts.”