Economics and Technology, Inc. -- Views and News, January 2012

January 2012

In this edition of Views and News, we look at recent press reports that Verizon may divest its consumer wireline business and the implications for customers, competitors and regulators. We also examine how state and local taxing authorities continue to be blindsided by regulatory and legislative initiatives and fast-changing telecom marketplace realities.

Read on below, or navigate over to econtech.com where you can read online, or download a printer-friendly version.

Verizon to spin off its consumer wireline business?

Earlier this month, Bloomberg BusinessWeek described a recent Goldman Sachs research report in which the investment banking firm had suggested that Verizon should divest its fixed-line consumer operations so as to clear the way for the company to merge its wireless and enterprise units with UK partner Vodafone. In 2000, Vodaphone and then-Bell Atlantic both contributed their US wireless operations and assets to a joint venture to be called Cellco Partnership d/b/a Verizon Wireless. For its contributions to the venture, Vodaphone received 45% of Cellco, but Verizon Wireless and Vodafone's UK networks have remained separate. Verizon has yet to comment on the Goldman recommendation, but there are a number of reasons why the company may well be considering such an initiative...

Continue reading at econtech.com

Tax Revenues Suffer Unintended Collateral Damage from Regulatory/Marketplace Changes

Should five percent appear too small
Be thankful I don't take it all
'Cause I'm the taxman, yeah I'm the taxman

If you drive a car, I'll tax the street,
If you try to sit, I'll tax your seat.
If you get too cold I'll tax the heat,
If you take a walk, I'll tax your feet.

The Beatles, Taxman

Although state and local taxing authorities rarely become involved in telecommunications policy matters, they have often been blindsided by regulatory or legislative initiatives that, whether intentionally or otherwise, have resulted in a net – and sometimes a large – reduction in tax revenues.

This is hardly a new phenomenon. Prior to the FCC's 1980 Computer II decision initiating the process of deregulating customer premises equipment (CPE) and the 1984 break-up of the former Bell System, the full range of ILEC CPE – from consumer handsets to PBXs – were carried as capital assets in an ILEC's rate base, and represented as much as 15% to 20% of a typical ILEC's assets. Local ad valorem property taxes, local and state franchise taxes, and various other taxation systems were often based upon the value of a utility's capital investment. When CPE was deregulated and transferred to a nonregulated affiliate and/or ultimately sold in-place to individual customers, aggregate ILEC asset values decreased substantially, and tax revenues based thereon experienced a commensurate reduction.

Tax revenues may also be unintentionally reduced even when regulatory policy and law are held constant in the face of major marketplace changes. For example, the introduction and development of competition by nonregulated entities across a broad range of telecommunications industry segments had a similar effect upon state and local tax revenues. In many instances, taxes applicable to "telecommunications" services were explicitly or implicitly linked to the service provider's status as a regulated telecommunications utility or "telephone company" under a specific legal definition. Rather than the tax being applied to the product or service irrespective of who produced it, many telecommunications taxes were specifically applied only where the service at issue was furnished by an entity subject to state public utility regulation. When nonregulated competitors captured some portion of the market for such services, the tax payments by the regulated utility would decrease, but would not be replaced by the nonregulated rival that was not itself subject to an equivalent tax.

Sometimes tax collections may be impacted by technological developments rather than through any specific policy initiative. A case in point is the Federal Excise Tax (FET) on long distance telephone calls. Section 4252(b)(1) of the Internet Revenue Code provides that toll telephone service is subject to the Federal Excise Tax where the charge for such calls varies with both the distance and elapsed transmission time of each individual call. This two-element long distance call pricing scheme – based on distance and duration – had been in effect since the introduction of long distance service nearly a century ago, and was certainly operative when the FET was adopted. But with the arrival in the 1990s of ultra high capacity fiber optics and digital switching, distance dropped out as a material cost driver, and long distance prices became "postalized" – i.e., subject to the same price irrespective of distance. The problem, from the perspective of the IRS, was that the FET was explicitly applicable only where both the distance and the duration element were present – take one away, and the legal basis for the FET disappeared. After a series of federal court challenges that the IRS had consistently lost, the IRS caved, and in 2006 issued Notice 2006-50 effectively eliminating the FET on long distance calls.

MAJOR TELECOM MARKETPLACE CHANGES WITH TAX IMPLICATIONS
Category	Taxable Format	Marketplace change resulting in taxation "gray area"
Music	CDs	iTunes Downloads
TV/Videos	Cable TV; DVD rentals	Netflix-type Streaming Videos
Retail Merchandise Purchases	Brick-and- Mortar retail stores	Amazon, other e- Commerce/ Online Stores
Voice telephone access lines	Wireline ILECs, CLECs	"Over-the-top" VoIP via consumer Internet access service
Mobile voice service	As Provided by wireless carriers	"Over-the-top" VoIP via wireless 3G, 4G, LTE broadband data services
Computers, software	In-house PCs, LANs, storage, software	Cloud computing, remote storage accessed via the Internet

And now, another technological development that has emerged over the past year or so portends a further erosion of state and local tax revenue...

Continue reading at econtech.com

About ETI. Founded in 1972, Economics and Technology, Inc. is a leading research and consulting firm specializing in telecommunications regulation and policy, litigation support, taxation, service procurement, and negotiation. ETI serves a wide range of telecom industry stakeholders in the US and abroad, including telecommunications carriers, attorneys and their clients, consumer advocates, state and local governments, regulatory agencies, and large corporate, institutional and government purchasers of telecom services.