Billing Q & A with Jim O’Neill

Q—I have some questions regarding application of taxes when a customer makes a long distance call:

1) Are taxes based on the originating or terminating locations?

2) Are the rules different if customers are in the same state or in different states?

3) If it is an interstate call, and a long distance company carries the call, how are taxes calculated?

4) How do you know when your company is in compliance?



A—You have asked some very complex questions. Actually, the first three are easy, because in most cases, there is a relatively straightforward way to deal with them. In the past, there have been disputes between states on these issues, with some insisting that any traffic originating, terminating, and even passing through their state be taxed. Just imagine trying to keep track of that!

One of the early attempts to deal with these issues was a law passed in Illinois to avoid two states taxing the same call. It is called the “concept of nexus.” States can determine who has tax jurisdiction over the call by applying three criteria to every telephone call, and yielding tax authority to whichever state meets two of the three:

• Where the call originates

• Where the call terminates

• Where the service address is that the call is charged to.

In 1989 the U.S. Supreme Court agreed with this law, saying that by taxing only calls that meet two of the three criteria, there would be no possibility of two states taxing the same telephone call, and the state with the two hits gets to tax the call.

For example, if a landline caller in New York calls a person in Connecticut and the call is charged to a service address located in New York, than the call is subject to New York taxes. If the same call is charged to a service address in a third state, however, the call may not be taxable in any state, because the two-out-of-three rule was not met. This latter possibility highlights the increasing frequency of calls going in all sorts of directions with the new technology we have developed in the last decade.

However, the nexus rule was generally ignored by U.S. wireless carriers who, until this past July, taxed roamer calls based on where the wireless service was provided. A federal law that went into effect this summer calls for all wireless services to be taxed based on the billing address of the roaming customer, regardless of where the service was provided. I should also point out that the nexus rule is only a general guideline and that it is difficult to stay abreast of the increasing number of taxes applied to telecommunications.

Your last question is one that really goes to the heart of the problem.

There are over 7,000 different state and local tax jurisdictions using a combination of some 40 or so telecommunications taxes in the United States (see “U.S., State and Local Taxes and Fees”). If your company’s billing system is linked to commercially available tax software, it may be that you are in compliance already, as the leading packages stay up to date on state and special tax district requirements.

These packages can be expensive, but the leading ones can provide the most current information on state and local tax regulations and accurately calculate taxes. Some even generate the tax reports you need to file accurate tax returns.

Smaller companies that provide services in one or two bordering states and use homegrown tax tables generally have less of a problem, but even then it gets difficult. At the Billing World 2002 conference, one tax manager who has to deal with a number of special tax district requirements expressed considerable frustration. She explained that she has state, county, city, town, fire district and school district taxation issues, and that their boundaries do not match. What makes it even more problematic is that the municipalities themselves cannot agree on boundaries, or offer up-to-date maps. Some companies try to use postal ZIP codes, but these do not match jurisdictional boundaries, either.

Another problem can be traced to the government tax agencies, some of which either do not understand all tax regulations or are not properly trained to offer assistance. (Some years ago, a wireless company in a large Western state was confused about how to set up state-level tax tables in its billing system. We suggested having five different people in the company call the regulatory authority on separate days, use the best three out of five answers, and then call a tax attorney as well).

In addition to tax rates, you also have to consider:

• In which taxing jurisdiction(s) did the transaction occur?

• Which transactions are taxed in each jurisdiction?

• Which transactions are exempt from the tax?

• Which customers are exempt from each tax?

• Where does the tax that is collected need to be remitted?

• What is the cost of compliance?

Recent studies have highlighted the fact that nationally telecommunications taxes average about 18 percent (and yes, consumers are beginning to notice them more and more). A number of initiatives are under way to streamline telecommunications taxes and make them more standard state to state, to eliminate payment by different companies of different rates for providing the same services, and to straighten out the various interpretations by different states. Whether it will ever be possible to have local jurisdictions give up their hold on telecommunications taxes is anybody’s guess.

If you would like more information on taxes, there are a number of sources you can use.

The National Tax Association’s “Communications and Electronic Commerce Tax Project Final Report” can be found at www.ntanet.org.

The National Governor’s Association recently issued a report acknowledging the complexity of the current tax structure and called on the states to undertake a thorough review. Its report, “Telecommunications Tax Policies—Implications for the Digital Age,” is available at www.nta.org.