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Have a question about the new state telecommunications tax law?
We have the answer ...
By Roger Wiley
EDITOR’S NOTE: This story is the second of two parts about a new law dealing with taxation of the telecommunications industry in Virginia. The law takes effect Jan. 1.
The long-debated restructuring of local taxes and fees on telephone, video and other communications services will finally occur. HB 568, sponsored by Del. Sam Nixon of Chesterfield County, was adopted by the General Assembly during the 2006 regular session and signed into law by Gov. Tim Kaine on April 17.
Here are answers to some of the most frequently asked questions that local governments will pose as they prepare to comply with the new law.
Q. When will the tax restructuring law take effect?
A. The law will become effective Jan. 1, 2007. The six-month delay from the customary effective date for new laws is intended to give the Virginia Department of Taxation time to program its computers and take other steps necessary to collect and distribute to localities the new Communications Sales and Use Tax and other fees that will be imposed under the new law. It also will allow the state Auditor of Public Accounts to get a final, accurate accounting of the amounts received by each city, county and town from the local taxes and fees being eliminated under the new law during the fiscal year ending June 30, 2006.
Q. What are the taxes and fees that will be eliminated on Jan. 1, 2007?
A. The taxes and fees that localities will no longer be able to collect include:
- Local consumer utility taxes on landline and wireless phones.
- Local consumer utility tax on cable television service (no longer authorized, but “grandfathered” in a few localities).
- Local E-911 fees on landline phone service.
- Cable television franchise fees and video programming excise taxes.
- Business license taxes on communications companies in excess of the permitted maximum of 0.5 percent of gross revenues (also collected in only a few localities, under “grandfather” provisions).
Q. What new statewide taxes and fees will replace them?
A. The new Communications Sales and Use Tax will be 5 percent of the total amount paid by customers on all voice, video and audio communications services, including many services not reached by current local consumer utility taxes. The only major exception will be fees for Internet access, which federal law exempts from state and local taxation. Many services not currently subject to local consumer utility taxes will be taxed under the new law – for example, long distance calling services, both cable and satellite TV and radio services, and voice-over-Internet-protocol services (VOIP).
Landline phone and VOIP customers will be charged a statewide monthly E-911 fee of 75 cents. (Cell phone customers will continue to pay the current monthly statewide fee, at the same 75-cent rate, which the companies will continue to send to the Wireless E-911 Board.
In addition, all cable television providers will begin charging their customers the same fee (currently 61 cents monthly per access line, but rising to 64 cents effective July 1, 2006) for use of the public rights-of-way that is now being paid by local landline phone customers under Va. Code § 56-468.1 in all counties except Henrico and in most cities and towns.
Revenue from these three sources will be received by the Department of Taxation from the service providers and placed into a separate fund for monthly distribution to localities.
Q. Why does the Auditor of Public Accounts (APA) have to certify what we received from the old taxes and fees in FY06?
A. Each locality’s share of the fund will be proportional to its percentage of the statewide total collected from the eliminated taxes and fees in FY 2006. If your locality’s revenues from the eliminated taxes and fees represented 1 percent of the statewide total from those sources, for example, your locality will receive 1 percent of all future distributions from the fund.
Q. What will we have to do locally to implement all these changes?
A. Actually, very little. The Department of Taxation will implement the new taxes and fees. The department will contact the communications providers before Jan. 1 to register them as “dealers” and instruct them on procedures for collection and payment.
Your only significant local responsibility will be to make certain that your locality’s independent auditors accurately certify your FY06 receipts from all the taxes and fees being eliminated before Oct. 1, 2006. Underreporting these figures to the Auditor of Public Accounts will permanently reduce your future distribution share of the new tax and fees. This is especially important for small towns, which are not required to deliver an audited financial statement to the APA. Even if your town does not normally pay an accountant to perform a certified public review of your books annually, you will need to engage one this year to certify your FY06 collection figures. There is no complete statewide database of which localities currently impose each of the eliminated taxes and fees. Without these numbers the APA cannot include your locality in the distribution formula, and you will not receive any replacement for your lost revenues.
Q. Won’t we have to repeal our local ordinances that impose the taxes and fees being eliminated?
A. Actually, VML does not recommend that you do that. Most of the communications service providers have actively followed this legislation, and all should be advised by the Department of Taxation of the need to collect the new fees and tax starting on Jan. 1. It is very doubtful they will need any prodding from your locality to stop collecting and paying your old taxes and fees.
Special language in the tax restructuring bill provides that if any significant part of the bill is ultimately found to be invalid by a final court ruling, the entire bill will be considered repealed, and the authority for the eliminated local taxes and fees as it existed when the bill was adopted will be automatically revived. VML believes the bill has been well constructed to survive court challenges. Nevertheless, it seems prudent to leave your local ordinances in place, at least for a while, so that if the new taxes and fees were found to be invalid, your local collections of the former taxes and fees could resume immediately.
Q. What about the rights-of-way use fee on cable customers? We had to adopt local ordinances several years ago to impose that fee on telephone companies and their customers. Won’t we have to do the same for cable?
A. In 1998, the General Assembly imposed the rights-of-way use fee on local customers in counties where VDOT maintains the public rights-of-way. VDOT collects that and adds it to each county’s secondary road funding. In cities, Henrico and Arlington counties, and towns that maintain their own streets, the General Assembly required the locality to adopt the fee by local ordinance and collect it directly from the phone companies. Some cities and towns and Henrico County have never adopted the fee.
In negotiating the new tax-restructuring bill, it was important for the cable industry to agree to charge and pay the right-of-way use fee in addition to the new 5 percent sales tax. This will be a defense to any claim by the competing satellite TV industry and its customers that they are being treated unfairly by having to pay a tax when they do not use the public rights-of-way. To ensure this legal protection, the fee on cable customers had to be imposed statewide, and distributed along with the 5 percent communications sales tax. No local ordinances will be needed to implement this change.
Q. How often will the Department of Taxation distribute the funds to localities? When can we expect our first distribution?
A. The new 5 percent tax, E-911 fee and right-of way use fee on cable customers will all apply to bills rendered after Jan. 1, 2007. The department will receive the payments from the communications service companies beginning in February 2007, and will begin distributions of the previous month’s receipts to each locality around March 25, and monthly thereafter, using the distribution percentages prepared by the APA. Each locality’s share will be paid by an electronic funds transfer similar to that used to distribute the local share of the general sales tax.
Q. Who will audit the companies for compliance with the new tax and fee requirements?
A. The Department of Taxation will be responsible for auditing and enforcement. Rules about delinquent payments, appeals, resolution of disputes and other technical details will mirror those that now apply to the general sales tax. Over the summer, the department will be developing draft guidelines to be followed by the communications companies in applying, collecting and paying the tax. Both industry and local government representatives will be invited to take part in the development of these guidelines.
Q. Suppose after Jan. 1 we are still waiting to collect taxes and fees from companies that they billed to or received from their customers before that date; will we lose those or have to depend on the state department to collect them?
A. No. Specific language in the restructuring bill says that any obligation incurred under the old local taxes and fees while they were in effect will continue after their elimination. Localities will retain their full authority for enforcement and collection of those prior obligations.
Q. Isn’t there still a danger that the General Assembly will take some of the money from these new taxes and fees for state use instead of letting it come to the localities?
A. The restructuring bill requires that only two state costs be paid out of the fund created from the Communications Sales and Use tax, landline E-911 and cable right-of-way use fee receipts. A small percentage will be taken to pay the Department of Taxation’s expenses for administering collecting and distributing the taxes and fees. This amount will be somewhat larger for startup costs in the first year; thereafter it will be reduced, covering only the cost of auditing and ongoing administration. Another relatively small percentage of the fund will be taken to pay the costs of the Virginia Relay Center that processes telephone calls for the hearing-impaired. A small state-imposed fee on telephone bills that also will be eliminated under the restructuring bill currently funds that agency. Together these deductions will represent less than 1 percent of the projected annual collections from the new statewide tax and fees.
To alleviate local governments’ concerns that the General Assembly might try to “raid” the fund created by the new tax and fees, the restructuring bill requires the Department of Taxation to make the monthly distributions of the entire balance in the fund automatically, without any annual state appropriation or other legislative action. No balance greater than the current month’s receipts will accumulate in the fund that could tempt future state legislators or budget staff to spend it on state needs. This distribution model has worked successfully for years with the local portion of the general retail sales tax, as well as with an “add-on” to the state gasoline tax that the Department of Taxation collects and remits automatically to two transportation districts in Northern Virginia. In both these instances, the General Assembly has recognized its ongoing obligation to treat the amounts received by the department as local revenue, and none of these revenues have ever been diverted for state purposes.
Q. Won’t some of the money from the new tax also be used to compensate the communications companies for collecting these taxes and fees from their customers? Why was that done?
A. Because the Communications Sales and Use Tax was modeled on the general retail sales tax, the companies will be allowed to retain 2 percent of the total tax they collect from their customers, as compensation for their expenses of collecting this tax. This “vendor compensation” or “dealer discount” is the same percentage that the state has long allowed to retail merchants for sales tax collection. The communications companies have been receiving similar vendor compensation for collecting some of the eliminated taxes and fees, but not for all of them. The companies did agree, and the bill provides, that they will not begin receiving this compensation for collecting the new tax until it has been proven that annual receipts from the three new revenue sources are at least equal to the total collected from the eliminated taxes and fees for FY2006. This means that they will not be allowed to start retaining the 2 percent dealer discount on the new tax for at least a year.
Q. Why is the E-911 fee on landline phones being lowered to 75 cents per month? Doesn’t this mean that public safety agencies that handle emergency calls (PSAPs) will be getting a lot less revenue to fund their operations?
A. One of the major goals of the tax restructuring effort was to eliminate inequities in the taxes and fees charged on different but competing technologies. The current law, capping monthly E-911 fees on wireless phone service at 75 cents while allowing monthly fees up to $3 on landline services, was a major inequity giving wireless companies a competitive pricing advantage. Setting the fee at the same 75-cent rate for both landline and wireless customers removes this inequity.
Each locality’s current monthly rate on landline E-911 service will be reflected in its collections from that source during FY05-FY06. This in turn will be reflected in each locality’s distribution of the proceeds from the new tax and fees. Your locality will therefore be receiving revenue from the new funding source to offset what you previously collected on landline E-911 fees. The difference will be that you will now receive that money as unrestricted general fund revenue, instead of revenue restricted paying to PSAP costs. For that reason, some PSAP representatives have been opposed to the change. When budgeting for PSAP operations in the future, each locality will need to allocate sufficient general fund revenue to meet PSAP needs, recognizing there is less E-911 fee revenue earmarked for that specific purpose.
Q. Whom can we contact if we have additional questions?
A. Roger Wiley, VML’s counsel for this legislation or Department of Taxation Policy Analyst Joe Mayer.
About the author: Roger Wiley is a Richmond attorney who worked extensively on the telecommunications tax law as legislative counsel for VML. He is a partner with the firm of Hefty & Wiley, PC.
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