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Table of Contents:
 Truth in Billing and Taxes: Titles Tell the Tale
Report Identifies Major SMB Market Opportunities for Cable; OSS and Labor Costs a Major Factor
OCAP Brings Many New OSS/BSS Requirements to Cable
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Truth in Billing and Taxes: Titles Tell the Tale
When it comes to billing, “truth” is subjective and vulnerable to manipulation by regulators, carriers and special interest groups. Billing managers must wade through confusion and conflict if they want to comply with the FCC’s TIB regulations and stay out of court.
By Dr. Will Yancey
Truth in billing (TIB) compliance is a political and economic minefield for service providers. The basic concept of describing all taxes, fees and surcharges seems like a simple task. In practice, however, the service provider’s billing managers face challenges from many directions. Politicians are eager to use communications service providers as an engine to collect more revenue for the government, but they do not want it to look like a tax increase. Consumer advocates want the providers to “eat” the taxes and fees and not pass them on to the consumer. Regulators want a level playing field so that consumers can make comparisons between service plans. These opposing forces drive significant TIB issues relating to taxes and government-imposed fees that billing managers should understand in order to stay on top of the FCC’s amorphous rules.
FCC’s Truth in Billing Policy
The Federal Communications Commission’s truth in billing policy has a long history. In 1998 several Democrats in the U.S. Senate proposed federal amendments to compel the FCC to adopt strict TIB regulations. Although those amendments were not enacted, in 1999 the commission did adopt some TIB regulations, formally cited as 47 Code of Federal Regulations §64.2401. In 2005 the FCC extended its policy to wireless carriers as well. (The policy is published on the FCC website at http://www.fcc.gov/cgb/policy/truthinbill.html.)
FCC TIB rules require a telephone company’s bill to “contain full and non-misleading descriptions of charges.” However, the rules do not clearly define those terms, do not provide examples of unacceptable or acceptable presentations, and do not specify penalties for noncompliance. If there are complaints about billing descriptions, the FCC can begin an investigation and eventually obtain an injunction compelling a service provider to comply.
Consumer Advocacy
Over the past 10 years, the FCC and state regulators have heard consumer advocates assert that communications service providers are not fully complying with the letter and spirit of the TIB rules. The service providers continue to object to what they see as improper government interference in the free market. Standing in the middle of this debate, the FCC has not done much enforcement of its TIB policy.
In 2004 the National Association of State Utility Consumer Advocates (NASUCA) petitioned the FCC for a declaratory ruling prohibiting telecommunications carriers—both wireline and wireless—from “imposing monthly line-item charges, surcharges or other fees on customers’ bills unless such charges have been expressly mandated by a regulatory agency.” NASUCA contends that all monthly line items are subject to the “full and non-misleading billed charges” principle in the FCC policy. TeleTruth, a consumer advocacy organization based in New York City, goes further than NASUCA and demands that the FCC become more vigilant in investigating service provider fees, surcharges and taxes. Plaintiff class action attorneys, such as those affiliated with the National Association of Consumer Advocates, are always looking for new causes to file actions against service providers.
Similar initiatives are underway at the state level. The National Association of Regulatory Utility Commissioners (NARUC) represents the interests of state regulatory commissions. Some of the state regulators are demanding changes faster than the FCC is interested in moving.
Whose Tax Is It?
The legal incidence of a tax or government-imposed fee—meaning the assigned obligation to pay the tax—is defined by the federal, state or local statute. The tax or fee could be imposed on the service provider or on the consumer. Usually, a sales tax is a tax imposed on the consumer. Usually, other fees such as gross receipts tax, universal service fund assessment and franchise fees are imposed on the service provider.
The economic incidence, in contrast, refers to the party that actually bears the final burden of paying the tax. When government imposes a tax or a fee on a business, then that business will try to pass that tax on to consumers in the form of billing surcharges or higher product prices. If the business cannot pass on the tax or fee, then it has to reduce other operating expenses or profit-sharing for managers and shareholders. Although the analysis of economic incidence is subject to a number of assumptions, most economists believe the economic incidence of communication taxes and fees falls on the consumer.
Political Smoke and Mirrors
The political problem is that government needs more revenue, but politicians do not want to favor tax increases. Thus, the government keeps coming up with more creative ways to impose fees on service providers without calling them taxes. Many consumers find that the layering of sales taxes and regulatory fees can add 15 to 25 percent to their bills.
The telecommunications industry bears an unusually high tax burden. A study by Ernst & Young, “Total State and Local Taxes Paid by the Telecommunications Industry, Fiscal Year 2004,” found that the transaction tax rate on telecommunication consumers is 2.28 times the average tax rate on all consumption.
Truth in Taxation
Many consumers do not trust government to spend taxes and regulatory fees on legitimate purchases. Many believe that collections for the federal Universal Service Fund, state telecommunications infrastructure funds or 911 emergency services are not spent for the intended purposes. They believe the government wastes money on overpriced or unused equipment. Some activists question why the government should subsidize infrastructure for consumers in rural areas but not those in urban areas. Currently controversy embroils USF distribution, with wireless carriers battling what they see as unfair bias in favor of rural landline subsidies. Despite such controversies, it does not appear that USF charges will disappear from bills any time soon.
Service providers often receive complaints from angry customers about why the taxes and regulatory fees are imposed. The provider’s response is that the government decided to impose the tax and requires the service provider to act as the government’s agent in collecting the tax. Some customers find it easier to vent their wrath on the service provider than to complain to the politicians who are actually responsible.
The Money Trail
Statutes may also define the duty to collect and remit a tax or fee. Since the government does not want to bill millions of customers, it requires service providers to collect and remit sales taxes from their customers. Usually the service provider has to remit the sales tax within a month after billing a customer, and that might be before the customer pays the service provider. If the government assesses the service provider for billing an insufficient amount of tax, then the service provider often has no practical way to back-bill the customer. If a service provider passes through a tax, fee or surcharge but the statute does not allow it, then the service provider may be sued and compelled to issue customer refunds.
A statute may allow the service provider to pass to the customer a tax or fee imposed on the service provider. For example, New Mexico imposes a gross receipts tax on most services, but allows that tax to be passed on to consumers. In early 2007 some Georgia state legislators introduced a bill that would require franchise fees imposed on telecommunications and other utilities to be explicitly billed to customers. One consequence would be that consumers would become more aware of how government gets its money.
First Amendment and Kentucky Taxes
Last year Kentucky began collecting a 1.3 percent gross receipts tax (GRT). The Kentucky statute specifically prohibits providers from adding a line item for the GRT on their bills to customers. BellSouth, AT&T and some other service providers sued Kentucky in U.S. District Court to allow them to list the GRT as a separate line item. In February this year the court ruled in favor of the service providers, saying that Kentucky’s blanket prohibition on itemizing the GRT violated the First Amendment to the U.S. Constitution. The service providers have a right to print what they want. The judge ruled the description was not misleading or confusing.
Sprint Nextel vs. Texas Margin Tax
In 2006 the Texas Legislature enacted the Texas Margin Tax (TMT), which imposes a 1 percent tax on 70 percent of gross revenues on most services in Texas. This is effectively a 0.7 percent tax on all service revenue. Sprint Nextel notified Texas customers that it would begin imposing a “Texas Margin Fee Reimbursement” in January 2007.
In February the Texas Attorney General sued in state court, arguing that Sprint Nextel was committing a deceptive trade practice. It responded by filing a motion in federal court to determine if Texas was interfering with federal regulation. The federal litigation, however, has not yet been resolved and is likely to take some time to play out.
On May 1, the Texas House voted 131-14 to amend the Texas Margin Tax to change the collection based on how the tax is described on the bill. Under this amendment, if a seller bills for a “Texas Margin Fee Reimbursement” or similar description, then the amounts collected from the customer would be treated as a voluntary payment by the customer to the state. In addition the seller would still be liable for the Texas Margin Tax. If this amendment becomes law and Sprint Nextel continues to bill for the “Texas Margin Fee Reimbursement,” then the company could pay the tax twice: by remitting the fee collected from customers, and by paying its own Texas Margin Tax liability as a service provider. If this amendment is enacted, Sprint Nextel and other service providers will probably fight it in federal court, as they did in their successful attack on the Kentucky gross receipts tax law.
Paying for Pyramids
The label can determine how some taxes are paid. If a fee or surcharge is billed to a customer, then that amount itself may become part of the base subject to tax. This problem of paying a tax on top of another tax or fee is known as pyramiding of taxes.
For example, Texas assesses a 1.25 percent Telecommunications Infrastructure Fund (TIF) tax on specified telecommunications services in Texas. This fee is imposed on the service provider, but the service provider may seek reimbursement from its customers. However, this must be clearly labeled as a Texas TIF reimbursement and not a tax. If it is incorrectly described as a tax, then the provider may have to refund the amounts collected to the customer or submit them to the state as an improperly collected tax. But any TIF reimbursement billed to the customer becomes part of the base subject to Texas state and local sales taxes. Thus the effective rate of the TIF tax, including the sales tax imposed on it, is about 1.35 percent.
Ancillary Services
Truth in billing also applies to ancillary services and will therefore become a greater issue as carriers bring more third-party offerings to market. One recent example relates to a consumer class action lawsuit that was filed against three vendors of mobile phone equipment insurance.
The suit alleged that the deductibles and type of replacement phones—which turned out to be refurbished, not new, and less valuable than the insurance deductible—were not fully disclosed to consumers. Two of the insurers settled in U.S. District Court in Florida in January and must issue $5 rebate cards to all consumers who bought handset insurance. This settlement will reportedly cost insurers Asurion and Lock/line as much as $60 million. One of the other insurers did not settle and is now preparing for what will likely be a costly trial. (See “Florida Consumer Groups Take Aim at Proposed Legislation” by Jill Morgan, Billing World e-newsletter, April 6.)
Competition and Labeling
The communications service industry is highly competitive. Marketers know that many actual and potential customers are extremely sensitive to pricing. Customers might choose one plan over another because of a $1 difference in their monthly service charges. Marketers would like to gain and retain customers by keeping the monthly and per-minute rates as low as possible. Thus, the marketers would like to put the additional taxes, fees and surcharges at the bottom of the bill.
The regulators see a problem with marketing presentations that do not allow customers to make an accurate “apples to apples” comparison among the plans. Consider Plan A with a $30 monthly service charge and $6 of surcharges, versus Plan B with a $36 monthly service charge. Assume all other taxes are assessed on $36 for either plan. Naïve consumers will choose Plan A, even though A and B have the same bottom-line total.
The regulators want full disclosures on the monthly bill and in the pre-sale disclosures so customers can understand the total cost of their choices. Computing all taxes and fees prior to sale is often difficult. Taxes and surcharges depend on the customer’s service address, recurring monthly service, non-recurring usage and ancillary services. Even if the computation is correct on the date of sale, the amount on the next month’s bill might be different. Every month some government agency is changing the rate or base for taxes and regulatory fees.
The Federal Trade Commission also works on consumer disclosure issues, and it commented on the FCC’s TIB rulemaking in 1998. The FTC promulgates rules and enforcement actions under the authority of the Truth in Lending Act and Consumer Leasing Act. Although the FTC has been more focused on consumer finance, it is possible it will apply similar principles to communications service providers.
The Search for Truth Continues
Service providers should expect TIB issues to persist, particularly with so many new offerings coming to market. All the different interest groups have their own interpretations of what “truth” really is, and each has its own motivations. Amidst the many distractions and opposing forces, billing managers need to keep aware of changing TIB issues and rules to remain compliant and to stay out of hot water with both regulators and customers. It is imperative for billing managers to work with both their corporate counsel and marketing folks to make sure that any new line items or bill designs do not violate TIB rules and result in unwanted customer dissatisfaction or conflicts with state or federal regulatory agencies.
Dr. Will Yancey, CPA, is an independent consultant on transaction taxes and tax audits. He can be reached at will@willyancey.com.
Comments and feedback welcome, please email Jill Morgan at jmorgan@billingworld.com.
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