[Senate Hearing 106-1131]
[From the U.S. Government Publishing Office]
S. Hrg. 106-1131
S. 1755, THE MOBILE TELECOMMUNICATIONS SOURCING ACT
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
MARCH 7, 2000
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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WASHINGTON : 2003
____________________________________________________________________________
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virginia
KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan RON WYDEN, Oregon
SAM BROWNBACK, Kansas MAX CLELAND, Georgia
Mark Buse, Republican Staff Director
Martha P. Allbright, Republican General Counsel
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
C O N T E N T S
----------
Page
Hearing held on March 7, 2000.................................... 1
Statement of Senator Brownback................................... 1
Statement of Senator Dorgan...................................... 3
Statement of Senator Gorton...................................... 4
Witnesses
Bucks, Dan R., Executive Director, Multistate Tax Commission..... 12
Prepared statement........................................... 14
French, Irene, Mayor of Merriam, Kansas.......................... 5
Prepared statement........................................... 7
Scheppach, Raymond, Executive Director, National Governors'
Association.................................................... 9
Prepared statement........................................... 10
Wheeler, Tom, President, Cellular Telecommunications Industry
Association.................................................... 20
Prepared statement........................................... 22
S. 1755, THE MOBILE TELECOMMUNICATIONS SOURCING ACT
----------
TUESDAY, MARCH 7, 2000
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 9:36 a.m., in
room SR-253, Russell Senate Office Building, Hon. Sam Brownback
presiding.
Staff members assigned to this hearing: Lauren Belvin,
Republican Senior Counsel; Paula Ford, Democratic Senior
Counsel; and Al Mottur, Democratic Counsel.
OPENING STATEMENT OF HON. SAM BROWNBACK,
U.S. SENATOR FROM KANSAS
Senator Brownback. Then we will call the Committee meeting
to order.
I am glad to see so many people here. With the Chairman of
this Committee involved in a little tussle today, I am
impressed we have anybody here. So I thank you all for coming
out today.
The Committee today will hear testimony on S. 1755, The
Mobile Telecommunications Sourcing Act of 1999. It was
introduced by Senator Dorgan and myself in October.
And I am also pleased to announce today that we have
Senators Lott, Ashcroft, Cleland, and Kerry who have also co-
sponsored the bill.
The legislation will create a uniform national framework
for the taxation of wireless calls. The Mobile
Telecommunications Sourcing Act is a product of more than 3
years of negotiations between Governors, cities, state and
local tax authorities and the wireless industry. They have
worked long and hard to bring this bill to the point where it
is today.
The legislation represents a historic agreement between
state and local governments and the wireless industry to bring
sanity to the manner in which wireless telecommunication
services are taxed.
Wireless telecommunications has caught fire in the United
States. The United States now has more than 12 times the number
of wireless subscribers than it had in 1990. Almost 1 in 3
people in the United States currently have a cell phone. And my
guess is in this room, it is one in one person has a cell
phone.
Wireless telecommunications is expected to grow at a rate
of 18 percent per year over the next several years. By 2004,
wireless services in the United States are expected to achieve
a penetration rate of 70 percent, which would mean that there
would be 200 million wireless subscribers in the U.S. alone.
But for as long as we have had wireless telecommunications
in this country, we have had a taxation system that is
incredibly complex for carriers and costly for consumers.
Today, there are several different methodologies that
determine whether a taxing jurisdiction may tax a wireless
call. If a call originates at a cell site located in a
jurisdiction, it may impose a tax. If the call originates at a
switch in the jurisdiction, a tax may be imposed. And if the
billing address is in the jurisdiction, a tax can be imposed.
As a result, many different taxing authorities can tax the
same wireless call. The further you travel during a call, the
greater the number of taxes that can be imposed upon it.
For example--and we have this example on a chart here, that
you might want to turn a little bit so people can see. A
businesswoman from Kansas makes 3 wireless calls on the way to
the airport, flies to Denver where she makes 16 calls during
her cab rides from the airport to her meeting and back; then
flies to Seattle where she picks up a car to drive to Tacoma.
In the round trip between the Seattle airport and Tacoma,
she makes another 19 wireless calls. She makes her final
wireless call of the day on the drive home from the Kansas City
airport.
During this one business day, and this is a real-life
example, 39 wireless calls have been made, which require her
wireless carrier to keep track of the tax rates and rules in 26
different state and local taxing jurisdictions; 26, 1 day.
This system is simply not sustainable, as wireless calls
represent an increasing portion of the total number of calls
made throughout the United States.
To reduce the cost of making wireless calls, Senator Dorgan
and I introduced this legislation, The Mobile
Telecommunications Sourcing Act which has two primary
components. First, the bill eliminates the multiple taxing
problems of our current system. Only the state, local and sub-
local authorities in a consumer's place of primary use can
impose a tax on a wireless call, regardless of where the call
originates, terminates, or passes through. The place of primary
use is either defined as the customer's home or business
address.
Second, the legislation establishes a mechanism for
creating databases to determine the appropriate taxing
jurisdictions for a customer's place of primary use.
By creating this uniform system, Congress would greatly
simplify the taxation and billing of wireless calls. The
wireless industry would not have to keep track of countless tax
laws for each wireless transaction.
State and local taxing authorities would be relieved of
burdensome audit and oversight responsibilities without losing
the authority to tax wireless calls. And most importantly,
consumers would see reduced wireless rates and fewer billing
headaches. It is good news for all of us.
In the example that I mentioned earlier, under our
legislation--and we have got another chart which shows what it
would be after this legislation would pass--the 39 wireless
calls that my constituent made before would, for tax purposes,
be deemed to have all taken place from her Kansas City address.
As a result, only 3 taxing jurisdictions, Kansas City,
Wyandotte County, and the State of Kansas, in which her
business address is located, would have the authority to tax
the 39 calls. So it would go down from the 27 to those 3.
The Mobile Telecommunications Sourcing Act is a win-win-
win. It is a win for industry; a win for government; and a win
for consumers.
I thank Senator Dorgan for working with me in crafting this
bill, and most of all, I thank the groups represented here
today for coming together and reaching an agreement on this
important issue.
We will introduce the panels to make a presentation on
this. But first, I would like to turn to Senator Dorgan, who
has co-sponsored this legislation and been a leader in trying
to simplify this arcane situation.
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Senator Brownback, thank you very much. I
appreciate your leadership and work on this issue.
And this will be an unusual sight for those who watch the
legislative process. We are actually trying to solve problems
and doing so in a way that simplifies an issue in a manner that
allows government and industry to come together to view a real
problem and find a sensible, thoughtful solution to it.
Mr. Dan Bucks is here representing the Multistate Tax
Commission, and I was chairman of that commission for a couple
of terms some years ago. And when I was chairman, we created
offices in New York and Chicago and began a program called
Joint Auditing.
And the reason we did that was as businesses in this
country began more and more to do business in many states, the
question became: How do you divide up their income for purposes
of taxation? What portion of a business's income should be
attributable to this state versus that state?
Some states wanted to overreach and claim more income than
was justifiable. And some businesses wanted to hide their
income from all states. So you had both sides coming at it in a
way that was kind of disingenuous.
We decided, let us find a sensible way to apportion income
that is fair to business and fair to state and local
governments.
This is very much the same kind of issue. With the growth
of cellular telephone service, we have the kind of
circumstances you described in your opening statement, where a
telephone call can create so many different opportunities for
state and local governments to claim nexus or jurisdiction for
imposing some kind of a tax. That does not make any sense for
the industry. It does not make any sense to have that kind of a
murky situation exist for state and local governments.
I want to say, especially, to Tom Wheeler from the Cellular
Telecommunications Industry Association that when you
approached the Congress a couple of years ago and said, ``We
have a very practical problem, and we want to solve it. We are
not interested in avoiding taxes anywhere at any time. We just
want to solve a problem.''
Our visits with state and local governments led us to
understand they wanted exactly the same thing. They wanted to
solve a problem and create some clarity. They did not want to
overreach. They just wanted definition.
I think that approach from you, Mr. Wheeler, gave us the
nudge that was necessary to begin working with all of you who
are here today to say, ``Let us find a simple, thoughtful,
straightforward approach that solves this problem.''
I believe that the legislation we introduced late last year
does exactly that. My hope is that we will have a hearing today
in which we have supporting testimony, and then we will be able
to move this out of the Committee and through the Congress.
My expectation is this legislation should be one of those
few pieces of legislation that moves without great controversy,
because it is so eminently sensible.
Let me thank the League of Cities, the Governors'
Association, the Multistate Tax Commission, and the CTIA.
I have to speak on the floor at 10 o'clock, and I will be
gone for about 20 minutes and then return, so let me apologize
for not listening to all the testimony, but I shall return.
That is a famous phrase, is it not, ``I shall return''?
Senator Brownback. I shall return.
[Laughter.]
Senator Dorgan. But again, let me conclude by saying,
Senator Brownback, your leadership here has been very
important. I appreciate the opportunity to work with you on
something this important.
Senator Brownback. Thank you, Senator Dorgan.
Senator Gorton, do you have an opening statement to make?
STATEMENT OF HON. SLADE GORTON,
U.S. SENATOR FROM WASHINGTON
Senator Gorton. Well, I, too, only have a very few minutes,
and I would rather listen to the witnesses.
Senator Brownback. Good enough. Thank you both for joining
us.
I would like to welcome all our witnesses today. They are
Tom Wheeler, President of the Cellular Telecommunications
Industry Association; Raymond Scheppach, the Executive Drector
of the National Governors' Association; Dan Bucks, Executive
Director of the Multistate Tax Commission; and in particular, I
would really like to welcome the Mayor of Merriam, Kansas,
Irene French, who I rode in on a plane with last night.
Welcome, to our panelists.
And I believe, Mr. Wheeler, we will--are we starting with
you, or are we starting----
Mr. Wheeler. Why do we not let the mayor go first?
Senator Brownback. Yes.
Mayor French, welcome to the Committee.
STATEMENT OF IRENE FRENCH, MAYOR OF MERRIAM, KANSAS
Ms. French. Thank you so much. I could say ditto to your
opening statement and get up and leave.
[Laughter.]
That was very eloquent and thank you for saying those
things.
Mr. Chairman and members of the Committee, the National
League of Cities is pleased to have this opportunity to share
our views on the Mobile Telecommunications Sourcing Act.
My name is Irene French. And I am the mayor of Merriam,
Kansas, and the Chairwomen of the National League of Cities
Finance, Administration and Intergovernmental Relations
Steering Committee.
The National League of Cities represents 135,000 mayors and
local elected officials from cities and towns across the
country. NLC member cities and towns range in size from our
nation's very largest cities of Los Angeles and New York, to
the very smallest towns.
NLC is the nation's oldest national association
representing municipal interests in Washington.
At this time, I ask that my written testimony be submitted
for the record.
Senator Brownback. Without objection.
Ms. French. On behalf of the National League of Cities, I
would like to express my gratitude to Senator Brownback and
Senator Dorgan for introducing this Act.
Your leadership on the issue clearly shows your respect for
the principles of federalism and your confidence in state and
local government's ability to resolve complex
telecommunications issues with industry at the local level,
without the need to preempt our traditional municipality
authority.
The mobility afforded to millions of American consumers by
mobile telecommunications services has helped transform the
American economy, facilitate the development of the information
superhighway, and provide important public safety benefits.
As we enter the 21st Century, however, the
telecommunications industry and state and local governments
have been wrestling with the numerous difficult taxation issues
presented by the changing marketplace and the technology.
This bill is proof positive that local governments and
industry can work together to forge solutions that address both
the critical fiscal needs of our cities and business needs of
the telecommunications industry.
NLC welcomes the opportunity to develop a partnership with
you, Mr. Chairman and the members of the Committee, to address
this Act, and other joint efforts of local governments and
industry relating to meaningful telecommunications tax
simplification that maintains respect for local governments'
fiscal needs and autonomy.
In my testimony today, I want to voice the National League
of Cities' strong support for this Act. This legislation is a
culmination of a 3-year cooperative effort between wireless
industry, the NLC, the National Governors' Association, the
Federation of Tax Administrators, and the Multistate Tax
Commission, which is most unusual.
Working with our industry and our state partners, we have
developed a measure that, we believe, provides a
straightforward solution to a very complicated problem that, as
things now stand, poses unresolved questions for both state and
local governments and for the industry.
From NLC's perspective, this legislation is a win-win-win
for consumers, state and local governments and the wireless
industry.
The application of local taxes to wireless services
presents unique and difficult problems both for local
governments and for the wireless service providers.
There has been considerable debate among industry and state
and local governments, as well as legal scholars, as to which
jurisdictions have the right to tax wireless calls.
Is it the city, the county, the state from where the call
originated, where the call terminated, where the wireless
provider's transmission facility is located, or is it some
combination of these, subject to apportionment or offsets?
The Act answers these questions and others like it in a way
that respects traditional notions of state and local
sovereignty with respect to taxation that are essential to our
idea of federalism.
It is important to note that the bill does not create any
new taxes, nor does it require that state or local governments
impose any new taxes.
The bill leaves the decision as to whether to impose a
local tax on wireless service where it currently is, and where
it properly belongs--the local government.
The mayors and councils of NLC member cities have widely
divergent views about whether to impose taxes on wireless
services. Some have imposed such taxes, while many have not.
Much, of course, depends on the budgetary requirements of
each local government, the level of demands placed on it by
residents for essential public service, and the scope of its
taxing authority under state law.
In our system of federalism, these are difficult balancing
matters that are best left to local elected officials who are
closest to the people. Wisely, we believe this bill does not
seek to alter that balance.
The bill is generally revenue-neutral among local
governments, equitable among carriers and taxing jurisdictions,
and considerably easier for carriers to comply with and for
local government to administer and audit.
For local government as well as industry, the bill
addresses and clearly resolves several important issues--taxing
nexus, collection and remittance of existing taxes due, and, of
course, simplification and uniformity.
The bill does not mandate any expenditure of state or local
funding. The bill bolsters the ability of state and local
governments to collect those taxes they choose to impose on
wireless providers while, at the same time, greatly simplifying
wireless providers' job of determining which taxes apply to
them, and remitting those taxes to the proper taxing authority.
The bill removes any doubt as to a local taxing
jurisdiction's ability to impose an existing tax on wireless
services by expressly recognizing the authority of those taxing
districts whose boundaries encompass the customer's place of
primary use, and preventing the exercise of taxing authority by
any other local taxing jurisdictions that do not encompass the
customer's place of primary use.
The critical component of the bill is the concept of a
customer's place of primary use. This must be either a
customer's residential address or a customer's primary business
address.
By restricting tax authority to a single location and by
allowing those taxing authorities where the customer's place of
primary use is located to tax a customer's entire bill, the Act
serves the twin objectives of simplicity and avoidance of
conflicting tax claims.
In addition to preserving our revenues, the Act lowers the
cost of collecting taxes that are owed.
I cannot stress enough that the current system is an
accounting nightmare and a drain on local governments. Overall,
the existing system is burdensome for local governments and
costly for consumers.
State and local taxes that are not consistently based can
result in some telecommunications revenues inadvertently
escaping local taxation altogether, thereby violating standards
of tax fairness, depriving local governments of needed tax
revenues to pay for vital services they provide, such as
police, fire and emergency services.
The Act would ease much of the local taxing authorities'
current costs and burdens associated with audits, tax
enforcement under our present law.
And, of course, the bill would relieve both industry, state
and local governments of high litigation costs resolving--
trying to resolve unanswered and difficult legal questions
posed by our current tax regime.
The bill's new method of sourcing wireless revenue for
state and local tax purposes is needed to avoid the potential
for double or no taxation, and to provide carriers, taxing
jurisdictions and consumers with an environment of certainty
and consistency in the application of tax law.
The bill represents a public, private partnership that
shows that state and local governments and the wireless
industry can work together to produce beneficial results.
Mr. Chairman and members of the Committee, I greatly
appreciate your leadership on this issue and look forward to
working with you on this crucial piece of legislation, and hope
that it moves through passage, and is accepted by all.
And we are very appreciative to you, Senator Brownback, for
leading this result.
[The prepared statement of Ms. French follows:]
Prepared Statement of Irene French, Mayor of Merriam, Kansas
Mr. Chairman and Members of the Subcommittee, the National League
of Cities (NLC) is pleased to have this opportunity to share our views
on the Mobile Telecommunications Sourcing Act (MTSA). My name is Irene
French, and I am the Mayor of Merriam, Kansas, and the Chairwoman of
NLC's Finance, Administration & Intergovernmental Relations Steering
Committee.
The National League of Cities represents 135,000 mayors and local
elected officials from cities and towns across the country. NLC member
cities and towns range in size from our nation's largest cities of Los
Angeles and New York to the smallest towns. NLC is the nation's oldest
national association representing municipal interests in Washington. At
this time, I ask that my written testimony be submitted for the record.
On behalf of the National League of Cities, I would like to express
my gratitude to Senators Brownback and Dorgan for introducing the
Mobile Telecommunications Sourcing Act (S. 1755). Your leadership on
this issue clearly shows your respect for principles of federalism, and
your confidence in state and local governments' ability to resolve
complex telecommunications issues with industry at the local level
without the need to preempt our traditional municipal authority.
The mobility afforded to millions of American consumers by mobile
telecommunications services has helped transform the American economy,
facilitate the development of the information superhighway, and provide
important public safety benefits. As we enter the 21st Century,
however, the telecommunications industry and state and local
governments have been wrestling with numerous difficult taxation issues
presented by the changing marketplace and technology. This bill is
proof positive that local governments and industry can work together to
forge solutions that address both the critical fiscal needs of cities
and business needs of the telecommunications industry. NLC welcomes the
opportunity to develop a partnership with you, Mr. Chairman, and the
Commerce Committee, to address the Mobile Telecommunications Sourcing
Act and other joint efforts of local governments and industry relating
to meaningful telecommunications tax simplification that maintains
respect for local governments' fiscal needs and autonomy.
In my testimony today, I want to voice the National League of
Cities' strong support for the Mobile Telecommunications Sourcing Act.
This legislation is the culmination of a 3-year cooperative effort
between the wireless industry, the National League of Cities, the
National Governors Association, the Federation of Tax Administrators,
and the Multi-State Tax Commission. Working with industry and our state
partners, we have developed a measure that, we believe, provides a
straightforward solution to a very complicated problem that, as things
now stand, poses unresolved questions for both state and local
governments and for industry. From the National League of Cities'
perspective, this legislation is a ``win-win-win'' for consumers, state
and local governments, and the wireless industry.
The application of local taxes to wireless services presents unique
and difficult problems both for local governments and for wireless
service providers. There has been considerable debate among industry
and state and local governments, as well as legal scholars, as to which
jurisdictions have the right to tax wireless calls. Is it the city,
county and state from which the call originated? Where the call
terminated? Where the wireless provider's transmission facility is
located? Or is it some combination of these, subject to apportionment
or offsets?
The Mobile Telecommunications Sourcing Act answers these questions
and others like it in a way that respects traditional notions of state
and local sovereignty with respect to taxation that are essential to
our system of federalism. It is important to note that the bill does
not create any new taxes, nor does it require that state or local
governments impose any new taxes. The bill leaves the decision as to
whether to impose a local tax on wireless service where it currently
is, and where it properly belongs: the local government. The mayors and
councils of NLC member cities have widely divergent views about whether
to impose taxes on wireless services; some have imposed such taxes,
while many others have not. Much, of course, depends on the budgetary
requirements of each local government, the level of demands placed on
it by residents for essential public services, and the scope of its
taxing authority under state law. In our system of federalism, these
are difficult balancing matters that are best left to local elected
officials who are closest to the people. Wisely, we believe, the bill
does not seek to alter that balance.
The bill is generally revenue-neutral among local governments,
equitable among carriers and taxing jurisdictions, and considerably
easier for carriers to comply with and for local government to
administer and audit. For local government as well as industry, the
bill addresses and clearly resolves several important issues--taxing
nexus, collection and remittance of existing taxes due, and, of course,
simplification and uniformity. The bill does not mandate any
expenditure of state or local funding.
The bill bolsters the ability of state and local governments to
collect those taxes they choose to impose on wireless providers while,
at the same time, greatly simplifying wireless providers' job of
determining which taxes apply to them, and remitting those taxes to the
proper taxing authority. The bill removes any doubt as to a local
taxing jurisdiction's ability to impose an existing tax on wireless
services by expressly recognizing the authority of those taxing
jurisdictions whose boundaries encompass the customer's place of
primary use, and preventing the exercise of taxing authority by any
other local taxing jurisdictions that do not encompass the customer's
place of primary use.
The critical component of the bill is the concept of a customer's
place of primary use. This must be either a customer's residential
address or a customer's primary business address. By restricting taxing
authority to a single location, and by allowing those taxing
authorities where the customer's place of primary use is located to tax
the customer's entire bill, the Act serves the twin objectives of
simplicity and avoidance of conflicting tax claims.
In addition to preserving state and local government revenues, the
Mobile Telecommunications Sourcing Act lowers the cost of collecting
taxes that are owed. I cannot stress enough, that the current system is
an accounting nightmare and a drain on local governments. Overall, the
existing system is administratively burdensome for local governments
and costly for consumers. state and local taxes that are not
consistently based can result in some telecommunications revenues
inadvertently escaping local taxation altogether, thereby violating
standards of tax fairness and depriving local governments of needed tax
revenues to pay for the vital services they provide, such as police and
fire, and emergency services. The Mobile Telecommunications Sourcing
Act would ease much of local taxing authorities' current costs and
burdens associated with audits and tax enforcement under present tax
regimes while, at the same time, preserving local authority to tax
wireless calls. And, of course, the bill would relieve both industry
and state and local governments of the high litigation costs of
resolving the difficult and unanswered legal questions posed by the
current tax regime.
The measure would allow, but not require, states and municipalities
to develop databases that assign each address to the relevant taxing
jurisdictions. If such databases are not provided, carriers may develop
their own, as long as they rely on nine-digit zip codes. From the
National League of Cities perspective, this matter is not
controversial. This measure provides much needed relief for state and
local governments without impinging upon the essential responsibility
of local taxing authority.
The bill puts local governments and service providers on a level
playing field by sparing them from the arduous task and expense of
determining the taxability of every individual call included in a
wireless service bill, including calls that crossed taxing
jurisdictions multiple times during the same call. The bill
accomplishes this by establishing a uniform standard--the place of
primary use--for sourcing all wireless telecommunications services for
all state and local governments that tax these activities. For local
governments, uniformity that respects local autonomy is important,
because it simplifies compliance for our cities and avoids multiple
taxation.
The bill's new method of sourcing wireless revenues for state and
local tax purposes is needed to avoid the potential for double or no
taxation, and to provide carriers, taxing jurisdictions and consumers
with an environment of certainty and consistency in the application of
tax law. The bill represents a public-private partnership that shows
that state and local governments and the wireless industry can work
together to produce beneficial results both for themselves and, perhaps
most importantly, for the consumers who are our constituents and
industry's customers.
Mr. Chairman and Members of the Commerce Committee, I greatly
appreciate your leadership on this issue and look forward to working
with you as this crucial piece of legislation moves forward toward
final passage. We are appreciative of the continued federal recognition
of the role of local governments in telecommunications and taxation. I
would be happy to answer any questions that the subcommittee may have
at the appropriate time.
Senator Brownback. Thank you very much, Mayor French, and
thank you for coming to town to testify on behalf of the
organization and on behalf of your community as well.
We look forward to some questions to discuss the issue with
you too.
I would like to call Mr. Scheppach, who is with the
National Governors Association, and who will present testimony
on behalf of the NGA.
STATEMENT OF RAYMOND SCHEPPACH, EXECUTIVE DIRECTOR, NATIONAL
GOVERNORS ASSOCIATION
Mr. Scheppach. Thank you, Senator. I appreciate you
inviting NGA to testify on S. 1755, The Mobile
Telecommunications Sourcing Act.
I would like to submit my full statement for the record.
And I will just take about 2 minutes to summarize it quickly.
Let me first thank you and Senator Dorgan for your
leadership in sponsoring this legislation.
Second, I would say that the Nation's Governors are in
strong support of this legislation. We know that the maze of
different state and local taxes has created a significant
burden on the industry, with their different tax approaches;
some with respect to taxing at the cell site, some at the
billing address, and others at the originating switch.
The current system of taxes was obviously created for
copper-wired home telephones, not for mobile cell phones. Not
only did it impose significant costs on the industry, but it
was also confusing to consumers, and it created a significant
amount of burden on state and local government to essentially
monitor it.
We appreciate the industry coming to us to negotiate this.
And we do believe it is a win for the industry, for customers
and for state and local government.
What the bill does is simplify the bill as if all calls
originate at the place of primary use. What this Act would do
is as follows: First, it would provide customers with a simpler
billing system.
Second, it would preserve state and local tax authority.
Third, it would reduce potential double taxation.
Fourth, it would simplify and reduce costs on state and
local government.
Fifth, it would do a similar reduction of costs on the
industry.
And sixth, it would assist the transition to bucket of
minutes
billing.
The Act would not impose any new taxes, would not reduce
any overall tax obligation, meaning that the sum total would be
neutral, and it does not mandate any additional state and local
spending.
Mr. Chairman, we look at this really as a model. We do
realize that with technology changing and the new economy
coming at us very, very quickly, that more and more we are
going to have to be willing to sit down with the industry and
negotiate out and--and solve problems. So we would like to also
work in other areas.
In summary, Mr. Chairman, the Nation's Governors are
strongly in support of this legislation, and we hope that you
will schedule an early markup and move the bill.
[The prepared statement of Mr. Scheppach follows:]
Prepared Statement of Raymond Scheppach, Executive Director, National
Governers Association
Senator Brownback and other members of the committee, thank you for
inviting me to testify on S. 1755, the Mobile Telecommunications
Sourcing Act. I am Ray Scheppach, Executive Director of the National
Governers Association, and I am testifying today on behalf of the
association.
First let me thank you, Senator Brownback and Senator Dorgan, for
your leadership and sponsorship of the Mobile Telecommunications
Sourcing Act. The National Governers Association is very excited about
this legislation, particularly about the process that led to its
creation and introduction at the end of last year. The wireless
industry approached NGA and other state and local organizations
slightly more than two years ago to bring an issue to our attention.
The issue was state and local taxation of wireless phone services.
The wireless industry had originally approached Congress to solve their
problems, but since the issue was by its very nature a state and local
issue, you asked them to come to us first to see if we could work out a
mutually acceptable solution. And that's exactly what we have done
during the past two years. The solution that we reached is reflected in
the legislation that we are discussing today.
We're hopeful that this approach can serve as a model for similar
issues in the future. By working collaboratively, government and
industry can develop solutions that end up working better for everybody
than solutions that are developed unilaterally. This applies not just
to collaboration between one level of government--such as state
government--and industry, but also to collaboration between the
different levels of federal, state, and local government. Part of what
makes this legislation so exciting from our perspective is this unique
cooperative approach between all affected parties.
You are going to hear about a lot of the details of this
legislation from the other witnesses today, so I would like to address
the legislation from a slightly broader perspective. Many state and
local telecommunications taxes and tax systems were created before the
advent of wireless phones. The result of this is that we have tax
systems in place that really are not appropriate for mobile
telecommunications and consequently create a lot of administrative
headaches and even financial liability for the companies in this
industry. Fundamentally, we have a 20th century tax system that applies
to a 21st century industry.
Let me just give you a few examples of what I mean. Some state and
local tax jurisdictions require phone companies to tax
telecommunications services where they occur. This is easy to do when I
pick up a landline phone in my office or my home and make a call. It
becomes a little more complicated when I pick up my cell phone and make
a call.
Should the service be taxed by the jurisdiction where I am
physically located at the time I am making the call? How does the phone
company figure out where
I am? What if I am driving between my home in Virginia and my office in
the District of Columbia? What if the cellular tower that is
transmitting the call happens to be located in a different tax
jurisdiction than the one in which I am physically standing?
As you can clearly see, the issue becomes very complicated very
quickly. And this list of questions applies only to one scenario of how
a state or local tax jurisdiction requires the tax to be applied. The
list may grow exponentially when you consider that different
jurisdictions have different rules for determining how calls should be
taxed. Some places tax telecommunications services based on where the
call physically takes place, other places apply taxes based on a
customer's billing address, and others still determine taxes using the
originating cell site, tower, or switch. It is simply unreasonable and
incredibly burdensome to expect the phone companies to be able to
figure out all these variables and then collect and remit taxes on
behalf of all the appropriate jurisdictions.
These issues alone are sufficient to require a solution, but the
problems go further than just figuring out the location of a call for
tax purposes. The marketplace for cellular telecommunications services
is evolving in ways that the existing tax system is not designed for
and cannot accommodate. Just as the task of figuring out exactly where
a call takes place for tax purposes has become increasingly complex in
the wireless era, so has the task of figuring out exactly how much a
call costs. Wireless services are often sold in buckets or bundles of
minutes, so it is very difficult for the phone companies to assign a
specific cost to each phone call or each minute of service for that
matter. When you add this complicating wrinkle to the already difficult
chore of figuring out which combination of state and local
jurisdictions have the authority to tax a call, it becomes readily
apparent why it is so important to overhaul the state and local tax
system for wireless telecommunications services.
I touched on this point earlier, but I would like to emphasize
again how remarkable and significant it is that different levels of
government have worked so successfully with industry to reach a
mutually acceptable solution. Rather than seeking to avoid existing tax
collection responsibilities, industry approached state and local
governments to help them develop a uniform and sensible approach to
fulfilling these responsibilities on behalf of state and local
governments. The Mobile Telecommunications Sourcing Act does not seek
to expand or reduce any company's tax collection responsibilities, nor
does it seek to determine or change whether a state or local
jurisdiction does or does not tax wireless services or at what rate
they choose to do so.
The act creates a uniform method for determining where wireless
services are deemed to occur for purposes of taxation. In those states
where wireless services are taxed today, they will continue to be taxed
under this bill. For those states that have chosen not to tax wireless
services, they will continue not to be taxed. Furthermore, state and
local governments will retain the authority that they have today to
make future changes as their governors and legislatures decide
regarding the taxability of these services and what rates apply to
them.
The bottom line is that the Mobile Telecommunications Sourcing Act
does what it needs to do in the way that it needs to be done. It
establishes uniformity across state and local jurisdictions in the way
that they determine which jurisdictions have the authority to tax a
particular call. This provides the simplicity and consistency that
industry needs. But the Mobile Telecommunications Sourcing Act also
preserves the ability of state and local governments to make
fundamental decisions about how to raise the revenues they need to
provide essential public services ranging from educating children to
building roads to providing police and fire safety. We appreciate the
hard work of industry to address these issues in a fair and mutually
beneficial manner and think that these efforts and the interests of
industry, state and local governments, and consumers are well reflected
in the Mobile Telecommunications Sourcing Act.
Thank you again for inviting me to testify today on behalf of the
National Governers Association. We look forward to continue working
with you, your colleagues in the House, and the other groups
represented here today to achieve passage of this important
legislation. I would welcome any questions you might have.
Senator Brownback. And that is certainly our intent to do
that, to try to move it through both houses and get it to the
President as soon as possible.
Mr. Bucks, thank you for joining us. Dan Bucks is Executive
Director of the Multistate Tax Commission. I look forward to
your testimony.
STATEMENT OF DAN R. BUCKS, EXECUTIVE DIRECTOR, MULTISTATE TAX
COMMISSION
Mr. Bucks. Thank you, Mr. Chairman. Mr. Chairman, members
of the Committee, good morning.
I am Dan Bucks. I am the Executive Director of the
Multistate Tax Commission. The Commission is an organization of
state governments that works with taxpayers to administer
equitably and efficiently the tax laws that apply to interstate
and international commerce.
Forty-four states, including the District of Columbia,
participate in various programs of the Commission.
I will be submitting as well a written statement for the
record. And I would----
Senator Brownback. Without objection.
Mr. Bucks. I am pleased to be here today to offer the
Commission's enthusiastic support for S. 1755, The Mobile
Telecommunications Sourcing Act, and am pleased to join with
the Governors and the cities and the industry that are here
today in support of this.
The legislation does represent a common-sense approach to
resolving a difficult issue involving the imposition of
transactional taxes on mobile telecommunications services.
I want to address the significant amount of work and
cooperation that went into developing this legislation. Some
years ago, the telecommunication industry approached state and
local governments and asked state and local governments to
address a number of--of critical issues. They continue to ask
us to address a number of these issues.
And this question of the situs and collection
responsibilities for taxes assessed on mobile
telecommunications services rose to the top and became the
focal point of the early discussions--cooperative discussions
between the industry and state and local governments.
And so over the course of approximately 3 years and not
without some disagreement from time to time, the industry and
state and local governments worked cooperatively to develop the
proposal that which is embodied in S. 1755.
Now, one might ask, what is the--why is the Multistate Tax
Commission--which is an organization of State governments that
is very concerned with the protection of State sovereignty, why
is the Multistate Tax Commission committed to working toward
passage of Federal legislation affecting state taxing
authority?
Well, I think the answer is simple. And Senator Dorgan in--
in the press conference introducing this legislation emphasized
the importance of protecting the Constitutional authority of
the state and local governments, but also noted the unique
circumstances affecting this industry and the--unique
situations and complexities involved.
And Senator Brownback, you have described very well and in
great detail, the kinds of complexities and challenges involved
where you have a mobile customer and a multiplicity of service
providers and the challenges that the companies faced in terms
of calculating the tax in these circumstances.
In these unique kind of situations, the Federal Government,
because of its power to regulate interstate commerce and solve
issues of federalism, can assist state and local governments
and the industry to achieve an efficient and equitable result.
And that is what this legislation embodies.
Now, let us--I would like to take just a few minutes to
note some of the key characteristics of--of this legislation.
First of all, its impact on state sovereignty: States
retain the right to determine whether or not they wish to tax
telecommunications services including mobile
telecommunications.
This legislation neither mandates nor prohibits such taxes.
It only makes these taxes work better in the unique
circumstances of mobile telecommunications where customers
travel and make calls from several locations.
If anything, the legislation reinforces state sovereignty
by making state and local taxation work better in the context
of this industry.
Uniformity: Now, the key feature of this legislation is to
provide a consistent rule for deciding where calls made by a
wireless phone customer are taxable.
And the rule provides for a place of primary use as the
basis for taxation and this consistent rule of situsing for tax
purposes leads to substantial simplifications and efficiencies
that several have noted this morning.
The use of technology to solve a technological problem is
another characteristic of this particular piece of legislation.
The legislation breaks new ground in terms of harnessing
modern technology to help solve a problem that is created by
modern technology. And specifically that is in terms of the use
of certified tax rates for specific address localities that is
embodied in this particular legislation.
The use of technology as a part of the solution to tax
problems arising from new ways of doing business due to new
technology is something that I think will have wider
applicability in other tax areas far and beyond the case of
wireless telecommunications.
But this is the--this is a--a ground-breaking use of it in
the case of this legislation.
The non-severability clause in this legislation is
absolutely critical. Without that clause, the legislation could
create an incentive for unfortunate litigation that would seek
to convert this legislation from being of mutual benefit to
states, localities and industries, to legislation that would,
in fact, preempt state taxing authority and undermine state
sovereignty.
So the non-severability clause is a critical feature of
this particular legislation.
Now, I need to mention the fact that there are two
technical points in the--in section 3 of the legislation that
have been brought to our attention that we would like to
correct via an amendment when the legislation is brought up for
consideration. And these amendments are consistent with making
national legislation compatible with our system of federalism.
First, there will--there will be a technical amendment that
will conform the Federal legislation to unique circumstances in
one state's Constitution to allow telecommunications companies
operating within that state that are subject to that state's
business and occupations tax to calculate this tax base
according to separate provisions that are required by that
state's Constitution.
Second, there will be an amendment to exempt one state's
single business tax from inclusion of--under the legislation
because of the differences in the way the tax is calculated
between the legislation--the legislation and that tax.
These changes are technical in nature, but they are
important to make national legislation consistent with our
system of federalism.
We believe that our experience with working with industry
on this legislation is an important step in continuing
discussions to resolve other issues, and it is a great model
for the future in terms of resolving those other issues.
We want to thank you very much, Senator Brownback and
Senator Dorgan, for your leadership in introducing--this
legislation, guiding it through the Senate, and for your
continued support of state and local governments.
Thank you.
[The prepared statement of Mr. Bucks follows:]
Prepared statement of Dan R. Bucks, Executive Director,
Multistate Tax Commission
I. The Multistate Tax Commission. The Multistate Tax Commission is an
organization of state governments that works with taxpayers to
administer, equitably and efficiently, tax laws that apply to
multistate and multinational enterprises. Created by an interstate
compact, the Commission:
encourages tax practices that reduce administrative
costs for taxpayers and states alike;
develops and recommends uniform laws and regulations
that promote proper state taxation of multistate and
multinational enterprises;
encourages proper business compliance with state tax
laws through education, negotiation and compliance activities;
and
protects state fiscal authority in Congress and the
courts.
Forty-four states (including the District of Columbia) participate
in various programs of the Commission.
Mobile telecommunications have transformed our way of life. In the
present day, it is common, sometimes preferred, to conduct business or
converse with friends and family on a wireless telephone while moving
about the city, the state, the country, or the world. This new mobility
presents challenges for consumers, telecommunications service
providers, and, in particular, local, state, and federal governments
that must regulate both the service and use of mobile
telecommunications.
S. 1755, the Mobile Telecommunications Sourcing Act of 1999 is the
product of several years of earnest negotiations between the states and
telecommunications providers to resolve the difficult issue of
providing a uniform rule for determining the location of mobile
telecommunications services and assigning a taxing jurisdiction to
those services. This effort is unique. Rarely, have states and industry
collaborated in this manner. The result of this effort has produced a
dramatic simplification in telecommunications taxes that protects
consumers, streamlines tax reporting mechanisms for telecommunications
providers, and prevents potential double tax assessments by states upon
consumers. Most importantly for states and localities,
S. 1755 preserves their sovereignty and taxing authority over state and
local telecommunications tax structures.
The Multistate Tax Commission is pleased to offer its support for
S. 1755. A copy of the Commission's resolution supporting this
legislation is attached to this statement.
II. The Proposal. In practical and general terms, S. 1755, the Mobile
Telecommunications Sourcing Act (the ``Act'') provides a uniform rule
for determining the location of the sale and purchase of mobile
telecommunications (wireless) services when that determination is
necessary for the proper application of a state or local tax. The
uniform rule of the proposal is that only the taxing jurisdiction or
jurisdictions may impose the telecommunications taxes covered by the
proposal \1\ whose territorial limits encompass the wireless customer's
place of primary use. This defined location in practical effect
establishes where the sale and purchase subject to the state or local
tax is occurring. The uniform rule also necessarily identifies the
taxing jurisdictions that may impose a tax collection and/or payment
obligation and the wireless providers to which the obligation pertains.
---------------------------------------------------------------------------
\1\ There may be more than a single jurisdiction, because in some
states telecommunications taxes coming within the terms of the proposal
are imposed by local jurisdictions.
III. Reasons for the Proposal. states and localities impose
transactional taxes, like sales and use taxes, on the provision of
mobile telecommunications services. A transactional tax for these
purposes is a tax that necessarily requires a determination of where
the services are sold and purchased in order to apply the taxes
applicable to that location. It can be difficult to determine the
precise location of the sale and purchase of wireless services.
Consequently, it can also be difficult to determine the precise taxes
that are applicable to the provision of wireless services.
Difficulty in determining the precise location can arise from the
mobile character of the services. Thus, for example, a wireless call
can come from and go to any location and the location can even change
during the course of the call. Further, wireless companies offer
billing plans that significantly reduce at the retail level the
business need to identify the precise location of the retail sale and
purchase. One example of this trend is a nationwide subscription plan
that permits wireless calling without roaming charges or long-distance
charges from any location, provided a certain specified number of
minutes of use per month is not exceeded.
It can also be difficult to determine all the taxes that are
applicable to the precise location where a wireless call is sold and
purchased. This difficulty can arise from having to match correctly
each identified location to the boundaries of the various local taxing
jurisdictions in a state that permits local taxation of wireless
telecommunications.
Given these and other practical difficulties, the wireless industry
sought development of taxing systems that lessened the burden of having
to determine the location of the sale and purchase of each wireless
call and the taxes applicable to each call. This effort captured the
attention of state and local tax administrators who desire to have
existing tax systems better match current business practices and
reality. Representatives of the wireless industry and state and local
tax administrators jointly developed the proposed Mobile
Telecommunications Sourcing Act (July 21, 1999, version) (the ``Act'').
IV. Conceptual Structure of Proposal.
(1) Taxes Subject to Act--This remedial legislation is applicable
only to a limited set of state and local taxes for which the demands of
sourcing require amelioration. The taxes that come within the scope of
the Act are those for which it is necessary to determine the location
of the sale and purchase of mobile telecommunications services in order
to apply the tax.
(2) Sourcing--The Act eliminates the need to determine the precise
location of the sale and purchase of mobile telecommunications services
where charges are billed by or for the wireless provider with which the
customer contracts for services. In place of locating the sale and
purchase, the Act provides that wireless calls will be located for tax
purposes in the jurisdiction(s) of the customer's place of primary use.
Place of primary use for these purposes means either the customer's
residence or primary business location that is within the licensed
service area of the wireless provider with which the customer contracts
for wireless services. Limiting a place of primary use to one of these
two choices minimizes the opportunity for tax planning that could occur
through the selection of a taxing situs solely for its tax climate.
In implementing this sourcing rule, the Act contains both a
congressional authorization and prohibition. First, the Act authorizes
states and localities to apply their taxes to wireless
telecommunications on the basis of the place of primary use concept
regardless of the origination, termination, or passage of the
telecommunications being taxed. Second, the Act prohibits any other
state and locality from taxing the telecommunications.
(3) Identification of Tax Jurisdiction(s)--Additionally, the Act
provides that a state can elect, from time to time, to make a database
available to wireless providers that would match a specific street
address to the applicable taxing jurisdiction(s). This match would then
permit wireless providers to determine the applicable taxes of the
jurisdiction(s). If the wireless provider uses a database provided by a
state, the state may not assess the provider for taxes not paid as a
result of errors or omissions in the database. Alternatively, if a
state elects not to provide the database, the provider may use an
enhanced zip code (zip + 4 or a zip of more than nine digits) matching
system to determine the applicable taxing jurisdiction(s). A provider
may not be assessed for taxes not paid under the enhanced zip system as
long as the provider uses due diligence in completing the match.
(4) Nonseverability Clause--The Act provides that if subsequent
litigation determines that the Act violates federal law or the
Constitution or that federal law or the Constitution substantially
impairs the Act, the entire Act falls. This nonseverability is a
critical feature of the Act, because the states are giving up an
existing state tax system with one set of jurisdictional understandings
in favor of a different taxing system with a different jurisdictional
understanding. Without that clause, the legislation could create an
incentive for litigation that would, unfortunately, seek to convert
this legislation from being of mutual benefit to states, localities and
the industry to legislation that would, in fact, preempt state taxing
authority and undermine state sovereignty. If the new system is lost,
the states want an unrestricted ability to return to the status quo
ante.
V. Outline of Provisions. The provisions of the Act are as follows--
A. The findings of Sec. 2 describe the problem of applying state
and local transactional taxes to wireless telecommunications and the
competing value of preserving viable state and local governments in our
federal system. The findings also acknowledge the need for a practical
solution in the area of state and local taxation of mobile
telecommunications services.
B. Sec. 3 directs classification of the provisions of the Act to a
position in title 47, United states Code. Thus, title 47 is amended by
adding new Sec. 801 thru 812 with provisions as follows:
1. Sec. 801(a) describes the taxes subject to the sourcing
rules of the Act. By definition of inclusion and exclusion the
affected taxes are limited to transactional taxes where it is
necessary to identify the location of the sale and purchase of
the mobile telecommunications services.
2. Sec. 801(b) excludes the applicability of the Act to
certain specified taxes. The exclusion means that the Act
applies to taxes whose application is dependent upon locating
the place of sale and purchase of wireless telecommunications.
Taxes excluded from the Act include, among others, income taxes
and taxes on an equitably apportioned gross or net amount that
is not determined on a transactional basis.
3. Sec.801(c)(1) provides that the place of primary use
sourcing rule of the Act does not apply to prepaid telephone
calling services. See Sec. 3(m)(8) that defines these services.
4. Sec. 801(c)(2) clarifies the application of the provision
in the Act that resellers are not customers when the Internet
Tax Freedom Act (Title XI of
Pub. L. 105-277) precludes taxability of either a sale or
resale of mobile telecommunications services. If the Internet
Tax Freedom Act prohibits taxation of either the sale or
resale, a state is not restricted under the Act from taxing the
sale (in case of a restriction against taxation of the resale)
or the resale (in the case of a restriction against taxation of
the sale) wireless telecommunications services.
5. Sec. 801(c)(3) provides that the place of primary use
sourcing rule of the Act does not apply to air-ground
radiotelephone service as defined in 47 C.F.R. Sec. 22.99 as of
June 1, 1999.
6. Sec. 802 establishes the rule of taxation that wireless
telecommunications are taxable by jurisdiction(s) in which the
place of primary use is located. The rule only applies to
charges for wireless services for which charges are billed by
or for the wireless provider with which the customer contracts.
See Sec. 809(5).
7. Sec. 802(b) authorizes states and localities to impose
taxes based upon the place of primary use and prohibits them
from imposing taxes on a different basis.
8. Sec. 803 limits the effect of the Act to its express
terms.
9. Sec. 804 allows a state or a designated database provider
to make a database available in a uniform format. The database
will match street addresses (in standard postal format) within
the state to the applicable taxing jurisdictions. A wireless
provider using the database is generally protected against
assessment for errors or omissions in the database.
10. Sec. 805(a) authorizes a wireless provider to use a
system that matches enhanced zip codes (zip + 4 or zip codes of
more than nine digits) to the applicable taxing jurisdictions,
when a state elects not to provide the database described in
Sec. 804. Specified conventions apply to the use of the
enhanced zip system. A wireless provider is protected against
assessment for an erroneous matching of a street address to the
applicable taxing jurisdiction(s) where the provider can show
it exercised due diligence.
11. Sec. 805(b) continues the qualified protection against
assessment for wireless providers that are using the enhanced
zip system for a defined transitional period following the
taxing state's provision of a database that meets the
requirements of Sec. 804.
12. Sec. 806(a) provides that a taxing jurisdiction under
specified procedures can require (through an audit-like action
after meeting certain standards) a wireless provider to change
prospectively the customer's place of primary use or require
the wireless provider to change prospectively the applicable
taxing jurisdiction(s). The affected customer or the wireless
provider is afforded the opportunity of administrative review,
if desired.
13. Sec. 807(a) notes that initial designation of the place
of primary use is principally the responsibility of the
customer. A customer's designation is subject to possible
audit. See Sec. 806(a) discussed above. Sec. 806(a)(2) states
that, with respect to taxes customarily itemized and passed
through on the customer's bills, the wireless provider is not
generally responsible for taxes subsequently determined to have
been sourced in error. However, these rules are subject to the
wireless provider's obligation of good faith.
14. Sec. 806(b) provides that in the case of a contract
existing prior to the effective date of the Act a wireless
provider may rely on its previous determination of the
applicable taxing jurisdiction(s) for the remainder of the
contract, excluding extensions or renewals of the contract.
15. Sec. 808(a) contemplates that a taxing jurisdiction may
proceed, if authorized by its law, to collect unpaid taxes from
a customer not supplying a place of primary use that meets the
requirements of the Act.
16. Sec. 808(b) states that a wireless provider must treat
charges that reflect a bundled product, only part of which is
taxable, as fully taxable, unless reasonable identification of
the non-taxable charges is possible from the wireless
provider's business records kept in the regular course of
business.
17. Sec. 808(c) limits non-taxability of wireless
telecommunications in a jurisdiction where wireless services
are not taxable. A customer must treat charges as taxable
unless the wireless provider separately states the non-taxable
charges or provides verifiable data from its business records
kept in the regular course of business that reasonably
identifies the non-taxable charges.
18. Section 809 defines the terms of art of the Act:
a. Sec. 809(1) defines ``charges for mobile
telecommunications services.''
b. Sec. 809(2) defines ``taxing jurisdiction.''
c. Sec. 809(3) defines ``place of primary use'' as
the customer's business or residential street address
in the licensed service area of the wireless provider.
Place of primary use is used to determine the taxing
jurisdiction(s) that may tax the provision of mobile
telecommunications services. If a wireless provider has
a national or regional service area, like a satellite
provider, the place of primary use is still limited to
the customer's business or residential street address
within that larger service area.
d. Sec. 809(4) defines ``licensed service area.''
e. Sec. 809(5) defines ``home service provider.''
f. Sec. 809(6) defines ``customer.'' Under a special
rule, customers include employees (the end users) of
businesses that contract for mobile telecommunications
services. Customers do not include (i) resellers,
except resellers where the Internet Tax Freedom Act
would prohibit taxation of wireless services sold by a
reseller (see item Q, above); and (ii) a serving
carrier providing wireless services for a customer who
is outside the customer's contractual provider's
licensed service area.
g. Sec. 809(8) defines ``prepaid telephone calling
services.''
h. Sec. 809(9) defines ``reseller.'' A reseller does
not include a serving carrier providing wireless
services for a customer who is outside the customer's
contractual provider's licensed service area.
i. Sec. 809(10) defines `` serving carrier.''
j. Sec. 809(7) defines ``designated database
provider.''
k. Sec. 809(11) defines ``mobile telecommunications
services'' as commercial mobile radio service as
defined in 47 C.F.R. Sec. 20.3 as of June 1, 1999. This
definition includes wireless services that are
furnished by a satellite provider.
l. Sec. 809(12) defines ``enhanced zip code,'' a term
that refers to zip +4 or a zip code exceeding nine
digits.
19. Sec. 810 negates FCC jurisdiction over the Act, thereby
avoiding the anomalous circumstance of a non-elected federal
regulatory body having administrative responsibility over a
provision going to the core of state sovereignty in our federal
system of government.
20. Sec. 811 expressly provides for nonseverability in the
event of a judicial determination that the Act is
unconstitutional or otherwise substantially impaired from
accomplishing its objective.
C. Sec. 4 establishes an effective date of the first month
following two years after enactment. The transitional delay allows both
business and tax administrators to gear up for a change in their
existing systems, including the possible use of the database authorized
by Sec. 804.
VI. Legal Issues. (1) Constitutionality--In Goldberg v. Sweet, 488 U.S.
252, 263 (1989), the U.S. Supreme Court explained what states had
jurisdiction to apply a transactional tax to interstate
telecommunications. Jurisdiction rested with the state or states from
which the telecommunications originated or in which the
telecommunications terminated, provided that that state also was the
state of the service address (address of the equipment to which the
telecommunications was charged) or the billing address. The Supreme
Court has not generally denied the possibility of jurisdiction in other
states, except that the Court has specifically noted a state through
which the telecommunications passes or in which the telecommunications
terminates lacks sufficient contacts to tax the telecommunications. See
488 U.S. at 263.
The place of primary use rule provided in the Act does not follow
the prescription of Goldberg v. Sweet. Some may question therefore
whether a state (or a local jurisdiction of a state) of the place of
primary use has sufficient basis for asserting jurisdiction to impose a
transactional tax in all instances contemplated by the Act. This
alleged deficiency is best illustrated by the taxation of a mobile
telecommunications event occurring in two states, neither of which is
the state of the place of primary use, e.g., a subscriber of mobile
telecommunications services in the State of A, travels to State B and
places a wireless call to a location in State C. Under the Act, State A
would be the only state with authority to tax this call.
The justification for permitting State A to tax the illustrated
call is that State A is the state in which the contractual relationship
is established that in effect sponsors the customer to make the State B
to State C call. Clearly State A has a significant contact with the
provision of mobile telecommunications services, no matter where the
call is made. State A's contact is especially compelling support of
jurisdiction, if the call is made pursuant to the provider's wireless
plan that allows the subscriber to make the call that involves other
states utilizing the provider's own system, but in separate licensed
service areas. Similarly, State A would have strong contact where the
provider's billing plan is a flat rate plan that generally ignores the
location from which calls are made as long as certain time limits are
not exceeded. In this latter case, the provider could be characterized
as selling wireless access and not selling specific mobile
telecommunications events.
But even without these kinds of strong contacts, as where the call
originating in State B and terminating in State C incurs roaming and/or
long-distance charges; State A's connection to the call is nevertheless
substantial. It is the subscriber's existing contractual relationship
to the State A provider that allows the subscriber to enter the
wireless system to make, and incur charges related to, the State B to
State C call. That kind of connection seems more than sufficient to
support State A's jurisdiction to tax the call, even though it does not
meet the origination/termination and service/billing address rule of
Goldberg v. Sweet.
Yet this faith in the jurisdiction of State A is unproven. And one
must face the prospect that a constitutional challenge may be mounted
under the Due Process Clause and the Commerce Clause against allowing
State A to tax the call. One would suppose a challenge under the
Commerce Clause would be easily rebuffed, since Congress can consent to
state taxation that would otherwise violate the Commerce Clause.
Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 434 (1946). The harder
question is whether Congress can consent to state taxation that would
otherwise violate the Due Process Clause. Thus, to the extent the
Goldberg v. Sweet rule is grounded in the jurisprudence of the Due
Process Clause, something a close reading of the Supreme Court cases
does not clearly disclose, this other question must be answered. The
States and local governments and congressional legislators will want to
weigh, before enactment of the Mobile Telecommunications Sourcing Act,
the strength of the alternative argument that a congressionally
authorized plan of taxation overcomes Due Process Clause objections in
certain circumstances.
Scholars have addressed the question about congressional power to
override Due Process Clause restrictions on state power. William Cohen,
Congressional Power to Validate Unconstitutional State Laws: A
Forgotten Solution to an Old Enigma, 35 Stan. L. Rev. 387 (1983);
William Cohen, Congressional Power to Interpret Due Process and Equal
Protection, 27 Stan. L. Rev. 603 (1975); Walter Hellerstein, State
Taxation of Electronic Commerce, 52 Tax L. Rev. 425 (1997). The
consensus seems to be that Congress' power to consent to state
violations otherwise occurring under the Due Process Clause does not
extend to violations of individual rights but does extend to violations
arising out of our federal form of government. Any other conclusion
would place our federal form of government at the mercy of requiring a
constitutional amendment to cure issues of federalism that could
otherwise be solved by congressional adoption of practical solutions to
intractable problems. Institutionally speaking, this kind of outcome
from the U.S. Supreme Court is a rare result reserved for only the most
fundamental of issues arising under our Constitution. State and local
taxation of wireless telecommunications under a congressionally-
sanctioned, practical convention sought by the industry to solve an
intractable problem and developed cooperatively with governmental
assistance hardly falls into that category.
To prevent the legislation from creating an incentive for
litigation, the Act contains a nonseverability provision. Act Sec.
3(b). This provision ensures that if the congressionally-sanctioned,
practical convention fails so will the newly established restrictions
that have been placed against state taxing power by the Act. Act Sec.
3(a)(2) (last clause). States that conform their law to the new taxing
convention of the Act may also provide for a back-up tax that is based
upon the assumption of the old taxing system remaining non-operational
as long as the new convention remains valid and in effect. A back-up
tax of this type will discourage adventuresome litigation to see what
might be gained by attacking the constitutionality of the new system.
(2) Open Mobile Telecommunications Systems--The solution developed
under the Act presupposes a wireless telecommunications infrastructure
that operates based upon a contractual relationship between the
subscriber and the home service provider that has a license service
area for the location of the subscriber's business or residence. While
it is never possible to predict where a form of commerce may eventually
go, there are indications that wireless communications may eventually
become open. An open infrastructure would mean that all one needed for
connecting into the wireless channels of telecommunications would be a
handset. Billing for use of the wireless channels of telecommunications
in an open system would be triggered by actual use based upon
information transmitted at the time of the placement of the call.
If an open system eventually develops for the most part, and there
is no assurance that it will, the utility of the solution offered by
the Act becomes limited. The Act to some extent acknowledges the
impracticality of the solution of the Act in an open system by
excluding the prepaid calling card system. But the Act's definition of
the term prepaid calling services is restrictive enough not to exclude
an open system from the operation of the Act. Nevertheless, it would
seem an open system by practical necessity is excluded from the
operation of the Act. The contractual relationship that is described in
the Act's concept of a home service provider would seem to be missing.
In addition, on-site billings that are presupposed by an open system
would seem to lessen the need for the practical place of primary use
solution of the Act. Finally, the coincidence of a residence or an
office with the licensed service area of the connecting provider in an
open system would seem to be in most instances a rare occurrence. But
if an open system is excluded from the operation of the Act, it remains
an unanswered question whether it is appropriate for the Act to
anticipate an open system in wireless telecommunications and to provide
a solution for this possible development also.
(3) Freezing definitions in time--Some key concepts of the Act are
frozen in time by legal understandings that exist as of a date certain,
June 1, 1999. These concepts are air-ground radiotelephone service and
commercial mobile radio service. Freezing central concepts in time has
the potential to permit the legislation to lose its practicality. Yet
it is also difficult to propose a solution that would work regardless
of whither the concepts develop over time. There is no easy answer to
the dilemma posed and perhaps the approach of the Act is best. After
all, if the Act loses its vitality due to evolutionary or even
revolutionary change, both industry and state and local tax
administrators are equally faced with the challenge of bringing their
respective systems into a synchronous relationship.
Senator Brownback. I am happy to do so and thank you for
your statement, Mr. Bucks.
And now, Mr. Wheeler, we were going to start with you, and
we will finish with you.
Tom Wheeler, President of the Cellular Telecommunications
Industry Association. Welcome.
STATEMENT OF TOM WHEELER, PRESIDENT, CELLULAR
TELECOMMUNICATIONS INDUSTRY ASSOCIATION
Mr. Wheeler. Thank you very much, Senator Brownback, and
good morning. Thank you for the leadership that you and Senator
Dorgan have been providing on this issue.
I want to associate myself with my colleagues here who have
uniformly been praising you and Senator Dorgan.
And I also would like to associate myself with you and
Senator Dorgan who have been uniformly praising my colleagues
up here, because as Dan Bucks just said, this was a 3-year
process.
Things that are easy do not take 3 years to resolve. This
has been an arduous exercise in good faith by both parties that
has--by all parties that has created something that I think
really moves the ball forward and, as has been said previously,
creates a significant new milestone for this kind of policy
issue.
Let me reiterate what you have heard, that nothing that we
are talking about in this legislation has any impact on any
jurisdiction's tax powers; rather, that it establishes a common
sense plan for the administration of those powers, a plan that
reflects the fact that we are now a mobile society.
The taxing power that local and state governments today
exercise grew out of a sedentary society. If I walked down to
Main Street and went to the hardware store, you knew where the
taxable transaction occurred. If I picked up my telephone at
home and made a call, you knew where the taxable transaction
occurred.
Wireless has stretched that model, however. The airwaves do
not respect state boundaries, and mobility has taken the phone
out of that fixed position across state and local governmental
boundaries.
The government has tried to deal with this as best they
could, using the previous model, but things got confusing real
fast.
For instance, in Senator Dorgan's State of North Dakota,
the taxing situs is the cell site from which the wireless call
is made. Across the border in the State of South Dakota, the
taxing situs is the switch that translates the call from one
point to another.
I am going to show you an example as to what that means.
Here is a situation where you have a call being made down here
in Town A, picked up by an antenna in Town B, and switched by a
switching facility in Town C. Now, who collects the tax?
Another example, if you get on I-95 and you drive 104 miles
from Baltimore to Philadelphia, you go through 12 distinct
state and local taxing jurisdictions.
You are making calls all along the way. It takes you a
couple of hours to make the drive. And you are making calls all
along the way. How do localities sort out who gets the tax? How
do the carriers sort out who gets the tax?
And imagine the consumer at the end of the month when they
get a bill that has a line item on there that says state and
local taxes, and this month it is wholly different from the
previous month, because of the fact that they went to
Philadelphia, instead of going to Harrisburg, or something like
this.
And so what this bill does is to create a common approach.
Let us go back to your peripatetic business woman example that
you gave at the outset, if we can look at that. Actually, let
us look at the second one. Let us look at the ``after'' one.
The significant thing here is that all 39 calls remain
being taxed. And as a matter of fact, in this instance, as you
pointed out in your statement, they are taxed with stacked
taxes. The city has a tax. Wyandotte County has a tax. And the
state has a tax that applies to all 39 of those calls.
But it is one location. It is simpler for the consumer. It
is simpler for the state and local governments. It is simpler
for the carriers to enforce.
And obviously if we pick any other point--somebody comes
from Senator Gorton's State of Washington and goes to the other
way around the triangle, the same kinds of concepts would
apply.
The airwaves cannot be taught to respect political borders.
And Americans are a mobile society. That leaves us with two
choices. Either we can develop very complex procedures that run
up the cost to government to taxpayers and run up the cost of
service to consumers; or we can enact the Brownback/Dorgan
common-sense plan that eliminates headaches, and saves everyone
a bundle.
One final aspect, Mr. Chairman, is the determination of the
taxing authority in which the PPU, the place of primary usage
resides. There are two solutions to that in the bill.
One, state and local governments may develop--may,
underline, develop their own datebase using zip codes. If they
do not, the carriers can develop a datebase.
There is going to be a couple-of-years period after
enactment where this can be worked out among the carriers and
the states as to how they want to phase in.
But what is significant here is that really for the first
time, both local governments and carriers are going to know the
impact of an annexation that has changed the taxing
jurisdiction, or other kinds of changes that happen along the
way.
Finally, on the question of the Federal nature of this,
this is clearly a Federal issue. The problem today is a lack of
uniformity. That is why the cities, the legislatures and the
Governors along with the industry all support this common-sense
approach and are grateful to you for your leadership.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Wheeler follows:]
Prepared Statement of Tom Wheeler, President, Cellular
Telecommunications Industry Association
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to appear before you today to present
the wireless industry's views on legislation that would create a
uniform method of sourcing wireless revenues for state and local tax
purposes. I am Tom Wheeler, President and CEO of the Cellular
Telecommunications Industry Association (CTIA), representing all
categories of commercial wireless telecommunications carriers,
including cellular and personal communications services (PCS).\1\
---------------------------------------------------------------------------
\1\ CTIA is the international organization which represents all
elements of the Commercial Mobile Radio Service (CMRS) industry,
including cellular, personal communications services, wireless data.
CTIA has over 750 total members including domestic and international
carriers, resellers, and manufacturers of wireless telecommunications
equipment. CTIA's members provide services in all 734 cellular markets
in the United States and personal communications services in all 50
major trading areas, which together cover 95 percent of the U.S.
population.
---------------------------------------------------------------------------
The wireless industry is founded on innovation, competition and
safety. With the key support of members of this Committee, these
principles have unleashed a telecommunications revolution in the past
decade. More than 80 million Americans were wireless subscribers in
1999, an astounding leap from just 4 million in 1990. Wireless
competition has accelerated to the point that 238 million Americans can
today choose from among 3 or more wireless providers. And, more than
165 million Americans live in areas where they can chose from among
five or more wireless providers. Throughout this growth, prices for
wireless service have fallen dramatically because of increased
competition--the average per minute rate has dropped by roughly 50
percent since 1990 in markets throughout America. Indeed, these
enhanced services, available to millions of Americans, testify to the
power and correctness of the policy judgements made by the members of
this Committee in the Omnibus Budget Reconciliation Act of 1993 and the
1996 Telecommunications Act. But, with this revolutionary growth of
wireless telecommunications, it is not surprising that from time to
time it becomes apparent that laws or regulations that worked for more
traditional telecommunications services simply do not translate well to
wireless communications.
I am here today to discuss with this Committee the work on one such
area--the assignment of wireless services to their proper taxing
jurisdiction.
The Problem
It is the mobile nature of wireless telecommunications that makes
the assignment of wireless services and revenues for tax purposes so
complicated. Chart 1 illustrates some of the practical problems. If I
make a phone call from my back yard, located in Town A, and that call
is picked up at the closest cell site, in Town B, and routed to the
nearest switch in Town C--where should the call be taxed? States and
localities have adopted a variety of methodologies to answer that
question, including: siting the taxes to the location of the
originating cell site, the originating switch, or the billing address
of the customer, which may or may not be a home address. All of these
methodologies are legitimate and were adopted in good faith by state
and local officials, but all have their shortfalls. For example, both
the originating cell site and the originating switch in my illustration
are outside the taxing jurisdiction from which I am making the call. To
complicate matters further, Towns A, B, and C may all be using
different methodologies, and that could result in multiple claims on
the same revenue for taxation. These are just some of the issues that
the tax departments of wireless carriers must deal with daily at the
local level.
Chart 2 offers some real-life illustrations of what the current
system means to consumers. Suppose a businessman is driving from
Baltimore, MD, to Philadelphia, PA, making phone calls throughout the
two-hour drive. During the course of this trip, the consumer will have
passed through 12 state and local tax jurisdictions, each with their
own telecommunications tax rates and rules. Even if there were not
competing methodologies complicating the picture, the administrative
difficulty for the wireless carrier of correctly determining tax rates
and rules for 12 different jurisdictions, passed through in just a few
hours is tremendous. Likewise, the administrative difficulties for the
12 taxing jurisdictions in monitoring compliance with their laws are
severe.
The administrative burdens of the current system are even more
striking when viewed at the national level (Chart 3). Let's use as an
example, a businesswoman living in Senator Brownback's home state of
Kansas. In one day of business travel, she makes 3 wireless calls on
the drive to the airport; flies to Denver where she makes 16 calls
during her cab rides from the airport to her meeting and back; then
flies on to Seattle where she picks up a car to drive to Tacoma. In the
roundtrip between the Seattle Airport and the Tacoma meeting site, our
businesswoman makes another 19 wireless calls, before catching the
dinner flight back to Kansas City. The poor woman makes her final call
of the day on the drive home from the airport to tell her family she'll
be there soon. During this one harried business day, 39 wireless calls
have been made, which requires her wireless carrier to keep track of
the tax rates and rules in 26 different state and local taxing
jurisdictions.
But as difficult as all this is for industry to complete and for
state and local governments to monitor--think what the consumer faces.
From month to month,
depending on where the consumer travels, the consumer's state and local
tax bill
will change. This rightly leaves customers scratching their heads. If
enacted, this uniform sourcing legislation will go a long way towards
solving this problem for consumers.
Let me also add that all these problems face even greater
challenges in the near future, challenges posed by home calling areas
that are growing and the latest ways consumers are buying wireless
service. Larger home service areas may encompass more and more state
and local taxing jurisdictions. And the new ``bucket of minutes''
billing plans fundamentally complicate proper tax determination--
particularly of roaming--as the allocation of minutes to calls and
revenues becomes unclear. In short, Mr. Chairman, the current system
doesn't work for consumers, industry or state and local governments--
and these problems will only get worse in the months and years ahead.
Uniform Sourcing Proposal, S. 1755, the Mobile Telecommunications
Sourcing Act
A new method of sourcing wireless revenues for state and local tax
purposes is needed to provide carriers, taxing jurisdictions and
consumers with an environment of certainty and consistency in the
application of tax law; and to do so in a way which does not change the
ability of states and localities to tax these revenues. After more than
3 years of discussions, CTIA and representatives from the National
Governers Association, the National League of Cities, the Federation of
Tax Administrators, the Multistate Tax Commission, the National
Conference of State Legislatures, and other state and local leaders
have worked to develop a nationwide, uniform method of sourcing and
taxing wireless revenues.
Under the leadership of Senators Brownback and Dorgan, we were able
to come together to forge this proposal. Senators Brownback and Dorgan
have introduced legislation--S. 1755--that implements the ideas we have
worked so long to craft. With the leadership and assistance of Chairman
McCain, Telecommunications Subcommittee Chairman Burns, Senator
Hollings and all members of this committee, it is our hope that this
legislation will soon become the law.
It is important to stress that this legislation does not change the
ability of states and localities to tax wireless revenues--it leaves
the determination of the tax rate and base to the state and local
taxing authorities. In other words, this proposal does not address,
change or effect whether a jurisdiction may tax, it only prescribes how
it may tax.
Which Taxes Are Covered?
It is important to distinguish which taxes would be sourced to a
``place of primary use.'' To state it most simply, uniform sourcing
applies only to ``transaction taxes''--or those paid by the consumer,
typically itemized on a customer's bill, and collected by wireless
companies. The Mobile Telecommunications Sourcing Act has no impact on
federal taxes or fees, such as the Federal Excise Tax or the Federal
Universal Service Fee. These federal taxes and fees are not included in
the scope of this legislation because they apply throughout the
nation--unlike state and local taxes which apply only in their
particular geographic area.
I would emphasize that this legislation addresses the taxes paid by
the consumer. Our industry is acting as the administrator of these
taxes, imposed on consumers by literally thousands of state and local
jurisdictions. So, I would again like to compliment the state and local
officials who have worked so hard to develop this proposal to simplify
the administrative duties of our industry. I believe the legislation
will also make it easier for the state and local officials who monitor
our industry to make sure we do the job right. But, great credit is due
these state and local officials for working so closely with us on this
important issue.
How the Uniform Sourcing Legislation Works
Place of Primary Use (PPU)
There are two major components to the uniform sourcing
legislation--the ``place of primary use'' and state by state databases
identifying state and local taxing jurisdictions. Let me start with
``the place of primary use.'' This legislation defines that for the
purposes of state and local taxation, the consumer's purchase of
taxable wireless telecommunications services, including charges while
roaming anywhere in the United States, have taken place from a single
address--a ``place of primary use.'' Then, only the taxing
jurisdictions in which that address is located may tax the charges. I
would note that there are often more than one taxing jurisdiction for
any particular address, given the multiple layers of state and local
governance (such as, the school district, city, county, and state).
The ``place of primary use'' is defined as the street address most
representative of where the customer's use of mobile telecommunications
services primarily occurs. It must be either the residential street
address or the primary business street address of the customer. That
address also must be within the licensed service area of their home
service provider. Customers will be asked to provide their ``place of
primary use'' when they sign up for service or renew their contracts.
For the convenience of the consumer, after the effective date of
the legislation (two years after passage to allow for necessary changes
in state laws and regulations) the legislation allows carriers to treat
the address they have been using for tax purposes as the ``place of
primary use'' for the remaining term of any existing service contract.
After that, when the service contract is extended, renewed, or changed,
the customer provides their ``place of primary use.''
Customers may also change their ``place of primary use''
designation if they find that their use of the wireless phone changes.
And, similar to any other tax situation in which the party being taxed
(in this case, the consumer) specifies an address for tax purposes--
should there be any dispute over whether the customer has designated
the appropriate address as the ``place of primary use,'' the
legislation provides state and local governments the authority to
review its accuracy, and change it if necessary.
To illustrate how the ``place of primary use'' works let's go back
to our harried businesswoman from Kansas City. Because this was her
business wireless phone, the street address of her company is her
``place of primary use.'' Under this legislation, the 39 wireless calls
she made in one day of business travel, would, for tax purposes, be
deemed to have all taken place from her Kansas City address. So, only
the 3 taxing jurisdictions--city, county and state--in which her
business address is located would have the authority to tax the 39
calls.
State by State Databases of Taxing Jurisdictions
Today, even after wireless carriers have identified which address
is going to be used for tax purposes, it is often difficult to
determine the appropriate taxing jurisdictions for that address.
Annexations of unincorporated areas and shifting local boundaries are a
frequent cause of this difficulty. And, as a result, the second major
piece of this legislation is the provision of state-level databases
which assign each address within that state to the appropriate taxing
jurisdictions. So, that all carriers can use the database, and so the
same code does not refer to more than one taxing jurisdiction, the
legislation provides for a nationwide standard numeric format for
codes. The format must be approved by the Federation of Tax
Administrators and the Multistate Tax Commission, organizations
representing the state and local officials who administer taxes.
A state or the local jurisdictions within the state may, but are
not required to, develop these electronic databases. If a carrier
utilizes the state database, and if there is an error due to a mistake
in the database (e.g., the database indicated our businesswoman's
address was in Overland Park, Kansas, when, in fact, the address is in
Kansas City, Kansas), the database is corrected and the carrier
utilizes the corrected database. What this legislation avoids is the
costly and difficult process of going back, figuring out the amount of
taxes paid to the wrong jurisdiction, then figuring out where they
should have been paid. Instead, this legislation applies some practical
common sense.
Only if a state chooses not to provide a database, a carrier may
develop a database that assigns taxing jurisdictions based on a zip
code of nine or more digits. The carrier is required to exercise due
diligence in creating this database. The legislation specifies that the
carrier must expend a reasonable amount of resources to create and
maintain the database, use all reasonably attainable data, and apply
internal controls to promptly correct mis-assignments. If such
standards are met, the same processes that apply if a state-created
database contains an error, apply to the carrier-created database.
I emphasize that state and local governments maintain authority
over both the ``place of primary use'' and the database. Any taxing
jurisdiction may request the carrier to make prospective changes to a
customer's ``place of primary use'' if it feels the one provided by the
customer doesn't meet the required definition. The affected taxing
jurisdictions simply get together, determine the correct place of
primary use, then notify the carrier. Likewise, if taxing jurisdictions
determine that an address has been mis-assigned to the wrong taxing
jurisdiction, the taxing jurisdictions simply notify carriers of the
error, and it is our responsibility to make the correction.
For this proposal to work, it will ultimately require the
implementation of the uniform sourcing rules by all states, in order to
eliminate the problems that would result if only some states
``uniformly sourced'' the wireless calls made by their residents in
other states. It is for this reason--the need for a standard and
nationwide approach--that government groups and industry began to look
for a solution to the problems of taxing wireless calls. Only federal
legislation can accomplish this, but because this legislation
recognizes that individual state and local tax laws and regulations
might need to be changed to conform to the federal law, the effective
date of this legislation is not until two years after enactment.
Conclusion
In conclusion, the Mobile Telecommunications Sourcing Act would not
impose any new taxes or change state or local authority to tax wireless
telecommunications; nor would it mandate any expenditure of state or
local funding or in any way reduce the tax obligations of the wireless
industry. Instead, it would ensure that wireless telecommunications
services are taxed in a fair and efficient manner, one that benefits
all concerned--consumers, state and local governments, and industry.
I am honored to represent the wireless industry today and to pass
along to you the wireless industry's enthusiastic endorsement of the
Mobile Telecommunications Sourcing Act. The telecommunications industry
is truly reshaping our world--which brings new challenges and
opportunities every day. I am proud of the cooperative effort among
state and local governments and industry on this proposal. And, I again
compliment the leadership of Senators Brownback, Dorgan and the other
members of this Committee for turning our proposal into the legislation
we discuss today. The wireless industry stands ready to participate in
more of these partnerships, helping to create new systems of governance
for the 21st century.
Thank you for your consideration of our views.
Senator Brownback. I thank you, Mr. Wheeler.
And thanks to all of you for working so hard and diligently
over the 3 years to try to solve a--a pretty vexing problem,
where everybody had to look and see what they could do best to
help--help solve it.
And this is an unusual situation where we have so many
people here in agreement on a bill and nobody in disagreement,
which is what it is going to take this year, I think, to move
things through. There is just going to have to be a lot of
agreement.
Let me ask each of you a couple of questions, if I could.
First, Ms. French, I am wondering if in Merriam or the National
League of Cities in general, if they have quantified the cost
savings that local governments would achieve by eliminating the
current cost and burdens associated--such as auditing and tax
enforcement functions that are related to these wireless
transactions.
I did not know if you had--you had mentioned in your
testimony about the burdensome cost of--of enforcing the
current system, if the League of Cities or----
Ms. French. I do not have a dollar figure, Senator. It
varies from city to city. But I can get that dollar cost to you
from our staff.
Senator Brownback. That would be good to have, because I
would think that this would be a very burdensome tax to carry
out as currently situated and as it currently operates.
Ms. French. Absolutely.
Senator Brownback. Mr. Wheeler, can you quantify the amount
of money that wireless carriers would save if this legislation
became law, putting in a simpler approach to taxation?
Mr. Wheeler. I agree with the mayor. It is very difficult
to get down and give you a rock hard number because of so many
nuances along the way. We are clearly, however, talking about
some substantial administrative costs, both for carriers and
local governments.
What is really significant, though, I think, Mr. Chairman,
is that this situation is not going to get better. It is only
going to get worse. It is only going to get more expensive as
there is a growth in the number of wireless subscribers as you
indicated in your opening remarks.
And as ``one-rate,'' national roaming becomes a reality,
where you take your phone anywhere.
So this is a situation that you are actually nipping in the
bud. It is a substantial administrative challenge today and
burden. It has substantial costs and those costs are only going
to get worse.
Senator Brownback. Mr. Bucks, how difficult will it be for
the states to design and maintain their own datebase systems to
implement this legislation if we went--if we went that route?
Mr. Bucks. Well, the difficulty is not excessive or not--
not an overwhelming challenge. States--some states, such as the
State of Washington, have already pioneered this kind of tax--
tax--tax datebase of rates for their local governments in that
particular state.
And it is not an overwhelming task. It is--it is a tax
that--to be done well, does impose an upfront challenge to
state governments, but it is not an overwhelming one.
And the payoff in the long term is--is substantial for
both--for all the parties involved, state and local governments
and for the industry. In other words, it will be a wise
investment.
But the technology is there, and it has already been
pioneered in the State of Washington is what I am trying to say
here.
Senator Brownback. So you do not think it will be a
difficult thing to develop, the datebase?
Mr. Bucks. Well, there is--there are the software methods
that--we know that the software technology is there. We know
that there are information--methods of gathering the
information.
In fact, what we are discovering is that in many instances,
state governments have had for some time information about
local taxing jurisdictions in their property tax systems that
need--that can be drawn upon to be utilized over here in the
context of transactional taxes.
So the information is there. The technology is there, and I
think the commitment is there. And that is--that is what you
need, and so I think with the combination of the 3 things, we
can move forward on this.
Senator Brownback. Mr. Scheppach, do you have any comment
on that, on the sense of how many states will create their own
datebases to deal with this law and this situation?
Mr. Scheppach. Not really. I would rely on Dan, who--who
deals more directly with the tax people, so----
Senator Brownback. Okay.
Mr. Wheeler, I want to take you back to an earlier
statement. But I want to make something clear, as I did at the
press conference when we announced this bill.
Mr. Bucks, you were kind of mentioning that this might be a
template for other difficult taxing issues that we have when we
go from--I do not think I want to put it quite like taxing a
sedentary society. That sounds like a society of couch
potatoes.
[Laughter.]
But anyway, we continue to move to a more mobile society
and an aggressively mobile society. We are not trying to design
this will for future issues or for future tax transactions.
That is a whole other kettle of fish. And I do not know how
long that is going to take to work out. It could take some
period of time.
I appreciate your support for the bill and statement of
that regard. I am just saying, as a sponsor, that is not what
we are trying to get at.
We want to pass this bill this year. We think it makes good
sense for the industry and for the nation, and not necessarily
as saying, ``This is the way you figure out these other
difficult taxing problems.''
So I do not want to have any of my colleagues think that
this is step one of moving forward on some other issues that we
are hearing a lot about from other people.
Mr. Wheeler, you talked about, you know, when you have
these approaches where you have a bucket of minutes that you
buy and the billing plan impacts determination of the proper
taxing jurisdiction.
How do you see this particular piece of legislation
impacting that situation as we go increasingly toward those
bucket of minutes approaches?
Mr. Wheeler. That is a really good question. And it is
going to facilitate the growth of these bucket plans. And we
all know that the impact that these bucket plans have had is to
lower the cost to consumers.
But let us take a specific example. A consumer buys 1,000
minutes of use. It costs him $100. It is 10 cents a minute. The
1,001 minute costs him 25 cents. They use 1,005 minutes for the
course of the month. So their total bill is $101.25.
Was the minute that was used the 10-cent minute used in
their home area, or was it one used in an outside area? How do
you determine when you have this reality of, ``Well, here are
some 10-cent minutes and here are some 25-cent minutes,'' and
who gets the right to tax a 25-cent minute, and who does not?
Did I use that 25-cent minute when I was across the border, or
did I use it here at home? And how do you prove that?
And so it becomes incredibly complex and a hindrance to
this kind of price lowering, pro-consumer marketplace--
competitive-marketplace driven innovation of the industry.
So what your bill does is really simple. It says, ``We will
not worry about where.'' The answer is: It is at the place of
primary use. That is where it will get taxed.
We do not worry about ``Was it a 25-cent minute here and a
10-cent minute there,'' or whatever the case may be. It is one
place that we tax, and we tax the full number.
Senator Brownback. And that may not sound like much to some
people, but the total value of wireless calls made in America
today, do you--do you have a rough number?
Mr. Wheeler. About $40 billion.
Senator Brownback. Today?
Mr. Wheeler. Today.
Senator Brownback. Of value of wireless calls. And what are
you projecting that to be in 5 years? Is there--are there
industry projections?
Mr. Wheeler. It depends upon who you listen to, but a lot
larger.
[Laughter.]
Senator Brownback. Particularly as you get Internet access
over wireless.
Mr. Wheeler. And what we are seeing is an increased minutes
of use. I mean, as the price goes down, usage goes up. It only
makes sense.
What that does, however, is trigger exactly the question
you raised. And that is, ``Oh, my goodness. I have gone over my
big bucket into something else now. How does that additional
fee get taxed and who gets to claim it?''
That is a real----
Senator Brownback. Nightmare, is it not?
Mr. Wheeler. Right.
Senator Brownback. What was it 5 years ago, the total value
of wireless calls in the country, if it is $40 billion today?
Just to give us some perspective on how that is going.
Mr. Wheeler. Five years ago, I would say we were probably
at about $15 billion. I mean, it has had--there is a
significant growth curve.
We are Mr. Chairman, we are adding one new subscriber every
two and a half seconds, 24 hours a day, 365 days a year.
And when those people sign up under this bill, they will be
asked, ``What is your place of primary use,'' and that--at that
point in time we will solve all these issues that we are up
here trying to wrestle with. That is progress.
Senator Brownback. And they are--you are not only getting
more subscribers, but they are also using their cell phone far
more per subscriber than they were 5 years ago.
Mr. Wheeler. Yes, sir.
Senator Brownback. Do you have any average numbers on that
by per-subscriber use?
Mr. Wheeler. Yes. It used to be that the rule of thumb was
about 100 minutes a month. And now what we are seeing----
Senator Brownback. A 100 minutes a month.
Mr. Wheeler. A 100 minutes a month. Now, what we are
seeing----
Senator Brownback. That is almost a laughable amount, now.
Mr. Wheeler. What we are seeing is 300 and 400 minutes a
month averages not being atypical. And what is significant
there, Senator, is that your average residential subscriber
uses about 1,200 minutes a month.
So we are now talking about 25 to 30 percent of the total
minutes of use, they are now moving over into a wireless
environment and triggering this problem.
Senator Brownback. And then when you have more Internet
access on the wireless, you anticipate, I would say, presume, a
large increase then in the usage and the time on?
Mr. Wheeler. Yes, sir. As a matter of fact, in 5 minutes
one of the investment banking houses on Wall Street is holding
a conference call on that very issue and what is going to be
the impact of the Internet on wireless usage.
And projections are a significant increase. And that,
again, just messes up this whole situation even more, unless we
do something about it today.
Senator Brownback. Are there projections on the impact on
the wireless industry of readily available and economically
available Internet access?
Mr. Wheeler. Yes. I will be happy to give you a for
instance. Lehman Brothers just came out with a very good
analysis of this, and they are now projecting that, I believe,
Senator, it is by 2007, 50 percent of wireless subscribers will
be accessing the Internet wirelessly.
Senator Brownback. They will be on wireless to access the
Internet.
Mr. Wheeler. One of the services you will be able to get on
your wireless phone is to access the Internet.
Senator Brownback. But you are saying that 50 percent of
the wireless access will be for Internet by 2007?
Mr. Wheeler. No, the projections are that 50 percent of
wireless consumers will have wireless Internet access.
Senator Brownback. I saw a guy who was in my office the
other day that had his Internet access phone, I guess you would
call it--I mean, what do you call them now? What--what is it?
It is not a phone, but----
Mr. Wheeler. It is a--well, there is a--there are numerous
devices. You can call it a phone. You can call it a PDA, a
personal digital assistant. You can call them Internet access
device. We have not quite got the names down yet.
Senator Brownback. PDA, Okay. I had not heard that one yet.
I will have to get my PDA.
[Laughter.]
But he was pulling up my weather in Topeka, Kansas from
here. I had not thought about where he was being taxed, because
he was from New York. He was in Washington, and he was calling
up Topeka information.
So I at least hoped at that time, he was being taxed in
Topeka. But under this bill, he would be taxed in New York.
And I just think, you know, as we go forward, hopefully, we
can move this legislation this year to solve a problem, because
when you are talking about $40 billion now, going up to 80
million or 90 million subscribers, and its not just the number
of subscribers, but the number of minutes that they will have,
so I think passing this bill is one of the key things that we
can do to try to hold costs down as much as possible within the
taxation system.
That is what this legislation is aimed at being able to do,
and also making it simpler for cities and for Governors in
being able to tax in a sensible fashion, but not having to
track down everybody that is using a wireless system going and
passing through your state or through your taxing jurisdiction
of a community or of a county of government.
Do any of you have anything additional you would like to
add to your testimony or responses to other questions that have
come up? Anybody else?
[No response.]
Senator Brownback. Mr. Wheeler, one other question I want
to ask you. What impact would this legislation have on the
line-item charges that currently appear on consumer bills? What
will it look like after this legislation?
Mr. Wheeler. I think that the impact on consumers of this
is going to be to simplify and make more understandable what
those line item charges are.
As I indicated a minute ago, there is normally a line on
the bill that says state and local taxes. Now, that number can
today gyrate all over the place depending----
Senator Brownback. And does.
Mr. Wheeler.--and does, depending on where you have been
and what taxing authorities and this sort of thing.
What this is going to do to consumers is to remove the,
``My goodness, this does not make any sense. Last month it was
this. This month it is that. Why is it?''
Senator Brownback. And I use the same amount of calls. My
total telephone bill, absent taxes, was virtually the same.
Mr. Wheeler. Right, exactly.
And so they call us, and they say, ``Well, why is this?''
And--and--and we would say, ``It all depends on where you go.''
``Well, why?''
``Well, because it depends on whether it is the cell site
in one place, or the switch in another place,'' or--and all of
these kind of things, and that does not compute to consumers.
Okay. Consumers want to know, ``What is it going to cost
me. Can I expect some stability in that? Does it make sense?''
And that is what this bill does. It creates simplicity and
creates understandability for that line item on the bill.
Senator Brownback. Mr. Bucks, amongst the various taxing
authorities across the nation, has this been an area of great
dispute between various taxing jurisdictions, or has it just
been mostly a headache to date?
Mr. Bucks. I would put it in the latter category of--of
primarily an administrative burden for the industry. I do not
think it has been the source of--of major disputes, certainly
not at the state level. I am not sure if there have been some
disputes at the--at the local level or not.
But I think it is just the administrative--the perception
of--of state and local governments is that the current
situation just creates an administrative burden and some
confusion and complexity that is not needed to make the tax
system work sensibly. And that is, I think, the--the major
perception out there.
Senator Brownback. Do you--do you have numbers, or could
you provide them to the Committee, of the amount of taxation
revenue that is generated currently from the wireless industry
to state and local authorities? Do you--do you have those
available today?
Mr. Bucks. I do not have those available right here, but we
will submit what information we have on that subject in terms
of the tax revenues involved.
Senator Brownback. If--if you could, and if you have
projections of what those will be in, you know, the upcoming
years, if you have any of those, I would appreciate those for
the record as well, because I am certain we are not talking
about a small amount of taxation revenue that is--that is
coming in. So I would like to be able to have that for the
record. And it is going to be growing substantially.
Good. Well, I want to thank each of you for coming. I am
certain Mr. Dorgan regrets not being here. He, unfortunately,
was called to the floor and had a presentation that he had to
make on the floor.
We will keep the record open for the requisite amount of
time, so Senator Dorgan may be submitting some post hearing
questions to you. And as I stated previously, we are going to
try to move this legislation as rapidly as possible.
Senator Lott has signed on as a co-sponsor of the bill.
That is always a good sign on moving legislation. When you get
the majority leader to co-sponsor a bill, it makes eminent
sense.
The current taxing situation is a big problem now. It is
going to be a bigger problem in the future. We have got
uniformity of agreement of the various taxation entities and
the industry. This just makes good sense to move on forward, so
we are going to try to press forward as rapidly as we can.
With that, thank you all very much for your informed
testimony. Good day.
[Whereupon, at 10:30 a.m., the hearing was adjourned.]