The Final Tax Tally

Accurately taxing subscribers has turned into a vexing problem.

For service providers and subscribers, assigning tax jurisdictions is frequently a taxing problem. Just ask Ken Small, auditing and special projects manager for the Florida League of Cities, the official organization of the municipalities of Florida.

For a number of years, service providers in Florida, the nation's fourth largest state, have had tremendous difficulty assigning accurate tax jurisdictions.

"With so many people using wireless devices, particularly cell phones, the industry's inability to determine accurate tax jurisdictions for telecom-utility-service taxes became a major problem in Florida in the past decade," he said.

The number of complaints by wireless users who claimed that they were being taxed improperly has mushroomed in the last five years. Small heard frequent grumblings from subscribers about service providers' unwillingness to address the problem. Things came to a head in 1998, when subscribers filed a spate of class-action lawsuits against the industry. In turn, the industry sought a legislative solution to reduce its liability in these cases.

In 1999, the Florida Senate passed a bill favorable to the industry on the taxation issue. To obtain a refund or credit for being assessed an incorrect public-service tax based on their tax jurisdictions, users had one recourse. They had to submit a written request stating their names, addresses, account numbers, tax amounts claimed, the months those amounts were collected and the reason those amounts were not due to any municipality. The bill proscribed a lengthy process that involved the subscriber, the business and the relevant municipalities.

"Needless to say, finding a consistent solution that accurately determines tax jurisdictions is paramount for users and the industry," Small said.

Service providers, frustrated by an arcane tax system, hope they have a similar solution on the federal level. The Mobile Telecommunications Sourcing Act, sponsored by Sen. Sam Brownback (R-KS) and Sen. Byron Dorgan (D-ND), would simplify and reduce the costs of tax administration for service providers and state and local governments, while preserving state and local authority to tax wireless service. Favorably received at a Senate Commerce Committee hearing in March, the bill is supported by the National Governors' Association, National League of Cities, Multistate Tax Commission and CTIA. The bill would determine taxes based on a subscriber's billing address as opposed to where a call originates, is switched or relayed.

Under the bill, states can create electronic databases that designate the appropriate tax jurisdiction and tax-jurisdiction code for each street address in the state. Both the Federation of Tax Administrators and the Multistate Tax Commission, organizations that represent state and local tax officials, must approve the electronic database system. If a state chooses not to develop a database, service providers can develop their own databases based on an enhanced ZIP code, also known as a ZIP+4 code. Any provider would not be liable for an erroneous tax or charge that was assessed due to an error in the state-sanctioned database or its own proprietary database, as long as it was created after exercising due diligence.

Lawmakers on both sides predict smooth sailing in the House and the Senate this session. With the act, there will be no change in federal telecommunications taxes, and states and local authorities will not cede their authority to tax wireless users.

Boundary Changes
Tax-jurisdiction boundaries frequently change, so such a database would need to be updated frequently. The concept of place is an important one when dealing with tax-jurisdiction assignment. Areas in the United States can be designated as incorporated places, non-incorporated places or determined to be outside a place. The Census Bureau must identify incorporated municipalities, which can levy taxes, as "places."

"The difficulty lies in the fact that in 1998, over 3,000 municipal place boundary changes were identified, tracked, analyzed and reported — and that figure represents nearly 1/6 of all incorporated places," said Martin Sohovich, GeoTAX product manager at Group 1 Software. In his recent testimony before the Senate Commerce Committee, Tom Wheeler, CTIA president & CEO, noted, "Even after wireless carriers have identified which address is going to be used for tax purposes, it is often difficult to determine the accurate taxing jurisdictions for that address. Annexations of unincorporated areas and shifting local boundaries are a frequent cause of this difficulty."

In Florida alone, 100 of the 400 municipalities changed their boundaries in 1998, and three quarters of all municipalities in the state charge public-service taxes on telecommunications. "As the situation in Florida demonstrates, wireless providers must keep up with these boundary changes in their tax-compliance and billing systems," Sohovich said.

Aside from tracking boundary changes, service providers need to be sure that they assign the proper tax jurisdiction to the address. Although many major tax-compliance systems assign jurisdiction based on a standard 5-digit ZIP code, this approach tends to be inaccurate.

"Relying on 5-digit ZIP codes can be disastrous, especially considering that each ZIP can be so large that they encompass multiple counties, municipalities, incorporated places or lie outside a place," Sohovich said. "If companies attempt to assign accurate tax jurisdictions based on a 5-digit ZIP, they are going to run into a lot of problems," added the League of Cities' Small.

A more accurate solution, as supported in the Mobile Telecommunications Act, is to assign tax-jurisdiction information to 9-digit ZIP records. This approach assigns Census geocodes to each customer-address record. The enhanced ZIP code corresponds to a city block or street segment, and typically only one side of a street, which is an important functionality because tax-jurisdiction boundaries may differ on the same street. The returned geocodes can then be cross-referenced to the corresponding tax rates for that location.

"We did not think there was a solution that could accurately assign tax jurisdictions in Florida," Small said. "In the wake of a comprehensive benchmark test, we can say that the enhanced ZIP code is a highly reliable tool for determining tax jurisdictions."

Similar to the legislation pending in Congress, Florida also is taking steps to make tax-jurisdiction assignment less confusing and more consistent while accommodating the needs of service providers, users and local governments. The Florida League of Cities and the telecommunications industry jointly are drafting the legislation.

The Florida League of Cities is working with Florida's Department of Revenue to develop a state-certified database that would contain the proper tax jurisdiction for each address in the state. The League of Cities also is attempting to determine whether a ZIP+4 approach could be an option for service providers.

"We're working with the industry to develop a workable solution for all parties involved," said Small. "We realize how difficult it often is for carriers to determine accurate tax jurisdiction, and it is in the vested interest of Florida's municipalities and chartered counties to ensure that accurate taxes are levied and collected from wireless users."

If telecommunications providers use a state-sanctioned solution, they would not be liable for any errors in tax-jurisdiction assignment.

At the bare minimum, Florida wants a solution that, for the time being, can determine tax jurisdiction for at least 95% of the state's addresses. Within the next few years, it would like any method of tax-jurisdiction assignment to approach 100% accuracy.

Currently, Florida is leaning toward allowing telecommunications providers to choose whether they want to use the state database or other certified alternatives, including the ZIP+4 method, to determine tax jurisdiction. Whether providers implement a database or ZIP+4 system, Florida's municipalities and counties must work to ensure the information used to assess taxes is accurate and up-to-date.

"Florida consumers will welcome a clearer resolution of the tax-jurisdiction issue, and I believe the over 80 million wireless consumers in the United States feel the same way about this," said Small.

Peikin (David_peikin@g1.com) is Group 1 Software public relations manager.