Communications Taxation Reform

1. Communications Taxation Reform Are Local Governments in the Picture? NATOA Regional Workshop St. Louis, Missouri April 29, 2005 Kenneth S. Fellman Kissinger & Fellman, P.C. www.kandf.com

2. ITFA Postscript • State and Local Government allies in Congress • Short, and not so sweet message: “we can’t keep saving your bacon” • State and local governments, and industry, need to resolve this Kissinger & Fellman, P.C. www.kandf.com

3. NGA Proposal • High level meetings with governors, state legislators, local elected officials and industry leaders • Find compromise for communications tax reform legislation this session Kissinger & Fellman, P.C. www.kandf.com

4. The Participants • Government: NGA, NLC, NaCO, USCM, NCSL, CSG (2 from each) • Industry: SBC, Sprint, Time Warner Cable, Knology, AT&T, Comcast, Level 3, T-Mobile, AOL, Verizon Communications, Verizon Wireless, BellSouth, Nextel, Qwest, Cingular, Broadband Service Providers Association Kissinger & Fellman, P.C. www.kandf.com

5. Before the First Meeting • State and Local exec directors and staff meet to determine key principles • Recognized potential damage if State and Local governments appeared divided Kissinger & Fellman, P.C. www.kandf.com

6. Before the First Meeting • Key State and Local Principles • Technology neutrality • Outcome revenue neutral for state AND local government • Federal government should not preempt state and local taxing authority • Respect state and local role in preserving public interest obligations • Transition time will be necessary Kissinger & Fellman, P.C. www.kandf.com

7. First Meeting: 12/15/04 • Industry Principles presented: • Tax rate for all taxes on communications industry should not exceed tax rate applied to general business • Special Purpose Funding Fees should be limited to funding important social goals (i.e., universal service, E-911) or to costs caused by provision of communications services (i.e., ROW fees) Kissinger & Fellman, P.C. www.kandf.com

8. First Meeting: 12/15/04 • Industry Principles (cont.) • Dramatically simplify collection, reporting and auditing of state and local transaction taxes on communications services • Streamlined Sales Tax Agreement should include transaction taxes on communications services Kissinger & Fellman, P.C. www.kandf.com

9. Post 12/15 meeting • Staff working groups • Tax vs. fee working group • Technology neutrality working group • Centralized collection working group • Data collection working group Kissinger & Fellman, P.C. www.kandf.com

10. 2nd Meeting: 3/1/05 • Update on principals’ positions • Update on working group status • Insufficient time set for meeting • Too much posturing from principals Kissinger & Fellman, P.C. www.kandf.com

11. Largest Hurdles to Overcome • ROW fees – are they on or off the table? • Centralized collection – is it theoretically possible that it could ever work for local government? • Revenue neutrality – at state level or local government level? • What does industry mean when they say they want same level of taxation as general business? Kissinger & Fellman, P.C. www.kandf.com

12. Post 3/1 Meeting • Smaller group of staff meeting • Goal to develop general principles • Each organization to then provide its specifics to give definition to the general principals • Compare specifics and see how far apart we really are Kissinger & Fellman, P.C. www.kandf.com

13. Framework for Moving Forward • Temporarily suspend reality – imagine no existing regulatory framework • No such thing as “information,” “telecommunications” or “cable” services • How do we want the regulatory framework to look if we were writing it on a clean slate? Kissinger & Fellman, P.C. www.kandf.com

14. Principles on the Table • State and local tax policy should not influence consumers’ selection or use of one specific communications technology or service over another • Competing services that are equivalent or viewed as viable substitutes by consumers ( “functionally equivalent services”) should be treated on a non-discriminatory tax basis by state and local governments regardless of technologies used to deliver them • State and local taxation should not advantage one provider over another provider of a functionally equivalent service Kissinger & Fellman, P.C. www.kandf.com

15. Principles on the Table • Apply special purpose obligations (universal service, 911) on non-discriminatory basis between providers of functionally equivalent services. Revenues should be used only for the purposes for which they are collected • Apply charges for use of PROW on competitively neutral and nondiscriminatory basis among providers of communication services Kissinger & Fellman, P.C. www.kandf.com

16. Principles on the Table • Authority to raise revenues to provide for public interest is vital to state and local governments and should be preserved • Reforms should strive to simplify collection, reporting and auditing of state and local taxes on communications services • A time of transition should be incorporated for all parties to adjust to any agreed upon communications reform Kissinger & Fellman, P.C. www.kandf.com

17. Principles on the Table • Taxes on communications services, property, and providers should reflect the competitive nature of the industry and its proportionate share of taxes relative to the general business community • Reform should allow for solutions that are revenue neutral at the state and local government levels • Tax obligations should not vary based on the level of a provider’s presence in a taxing jurisdiction Kissinger & Fellman, P.C. www.kandf.com

18. Obstacles to Success • Industry principals not at the table • NCSL/Industry – attempts to tie communications tax reform to streamlined sales tax legislation • Question as to whether industry can come to consensus Kissinger & Fellman, P.C. www.kandf.com

19. Local Government Goal • Stay at the table • Compromises fine, within framework of key principles • If the process is unsuccessful, it will not be because local governments refused to negotiate Kissinger & Fellman, P.C. www.kandf.com