TELECOMMUNICATIONS PROPERTY TAXATION: A BIFURCATED SYSTEM THAT LACKS EQUITY
(from Maine Townsman, February 1999)
By Linda Lockhart, MMA Legislative Advocate

During the 118th Legislature, the Taxation Committee conducted an extensive review of Maine’s tax structure. The committee confronted the reality that Maine’s taxation of telecommunications services was rapidly becoming obsolete and contained language that was causing difficulty and confusion for taxpayers and for state and municipal officials administering the laws. In recognition of this growing controversy, the 118th Legislature created a "Task Force to Study Telecommunications Taxation".

Industry representatives serving on the task force were drawn from independent, regional and long distance telephone companies, cable television, Internet service providers, nonwire-based telecommunications carriers, and, representing municipal interests, Anne Gregory, assessor for the Town of Falmouth.

Telecommunications personal property tax was one of the areas the task force was charged with examining. The application of the tax to nontraditional and multi-purpose delivery systems required critical analysis. The division of taxing authority between the state, which has jurisdiction over "telecommunications personal property" and municipalities, which have jurisdiction over other personal property became a primary focus of this examination.

History of telecommunications taxation

Some form of special industry tax on telephone companies has existed for more than 100 years. For most of the 20th century, the tax was a gross receipts tax. In 1987, the gross receipts tax on telecommunications service was repealed and the current telecommunications personal property tax phased in. Deregulation of long distance telecommunications on the federal level, changes in the treatment of state gross receipts taxes in federal long distance rate-setting, and the desire to place telecommunications companies providing long distance services on an equal competitive playing field all served to justify state taxation of telecommunications property.

Since the change from the gross receipts tax to the state property tax, the tax revenue to the state has increased by only $3 million, from $25.7 million in 1987, to $28.7 million in 1998. At the same time, the telecommunications industry has grown exponentially and in ways not envisioned in 1987. In addition to telephone lines serving long distance calling, the industry now includes local plain old telephone service, intrastate long distance, interstate long distance, wireless (cellular, radio paging, satellite, mobile telecommunications), cable TV, Internet providers (Internet access, Internet service), satellite TV, and multichannel multipoint television distribution.

The controversy

According to former State Tax Assessor Brian Mahany, "Traditionally, utility property has been taxable by municipalities. In the late 1980’s, the legislature enacted a new state property tax scheme designed to replace telecommunications gross receipts tax. Many thought the gross receipts tax had become inequitable in its application. As more competition entered the industry, the potential for double and triple taxation increased. A single call which might utilize the wires of several phone companies created the state’s concern… A decade later, we again find ourselves with a tax scheme that many call inequitable and out-of-date…Although the tax appears equitable on its face, traditional wire based carriers (especially the rural independents that own many miles of poles and wire) bear the largest burden of the tax. Long distance carriers using microwave technology, cellular phone companies and now the satellite/PCS carriers bear comparatively little of the tax even though they represent the growth portion of the industry."

Mahany added, "A second problem of the telecommunications property tax is the blurred distinction between interactive and one-way communication. Under the current scheme, two-way telecommunications is taxable by the state. Cable television or other one-way communication equipment remains taxable by the municipality. Our local cable franchise in Augusta, State Cable, currently offers Internet service. Is this two-way or one-way or both? Who is entitled to the tax and at what mill rate?."

The businesses currently subject to the state property tax on telecommunications find themselves unfairly burdened as new competitors who are not subject to this tax compete with them for market share.

According to Dan Breton, Bell Atlantic, "."…the state tax on telecommunications property still discriminates against one segment of the Maine communications industry – the local wireline providers. These providers have invested heavily in equipment and facilities in the state, and therefore, any property tax significantly burdens this kind of provider in comparison to long distance and wireless providers."

Pete McHugh, representing cable TV interests, agreed with the anti-competitive characterization of the tax. According to McHugh, cable will not progress to two-way communication because the move would open them to the high mill rate.

Larry Sterrs, Telephone Association of Maine, reminded the task force that the focus of taxation should be on the value of the service provided rather than equipment that becomes obsolete almost as soon as it is purchased.

The task force concluded that the justification for a special telecommunications industry tax is no longer compelling. In an environment where types of services and providers are changing rapidly, devising an industry tax that treats similarly situated providers equally is challenging. Problematic issues with the current taxing scheme include:

• Rate. The state telecommunications personal property tax is assessed at the rate of 27 mills, far greater than the average municipal rate of 17 mills. Companies that pay the state rate are at a disadvantage when they compete with providers who are subject to local rates rather than the state rate. The state rate is a disincentive to development or expansion of telecommunications services within the state. Task force members described their reluctance to develop or expand new services for consumers for fear of being considered a "telecommunications business" and subjecting all of their personal property to the 27-mill rate.

• Jurisdiction. Advances in technology and business structures have already created uncertainty in determining whether the state or municipalities have taxing jurisdiction for certain types of property or businesses. The confusion impacts taxpayers and state and local tax assessors alike. The potential for migration of property from local to state jurisdiction creates administrative difficulties and a potential for loss of revenue to municipal governments.

The municipal perspective

The municipal community does not understand why the personal property of telecommunications property is treated differently from all other property under Maine’s tax code. There does not appear to be any rational justification for the special treatment of this property.

There is never a perfect relationship between a property owner’s tax obligations and the services that taxpayer receives from local government. An elderly couple, for example, may have no children in the local school but still be obligated to pay a property tax to support the schools. To find a perfect "nexus" between a person’s tax obligation and the specific governmental services provided to that person is not a system of taxation at all, but is instead a system of user fees.

On the other hand, fundamental tax policy holds that there is some relationship between the ownership of property in a community and the responsibilities of the local government to maintain a system that protects that property. The owners of all other utility property in Maine’s towns and cities either contribute to the public treasury just like all other property owners, or are exempt from taxation for being essentially governmental property. The exception to the general rule is with respect to the owners of most telecommunications property. This is the only property tax assessed by the state outside of the unorganized territories.

Some people may have the misperception that the property tax revenues generated by this state-assessed property tax somehow find their way back to the municipalities of origin, through municipal revenue sharing. That is not true. The telecommunications tax revenue is not included in the pool of revenue from which 5.1% is returned to the municipalities through the revenue sharing formula.

According to the state’s figures, there is approximately $1 billion worth of telecommunications personalty that is being assessed by the state. Contrary to the completely open records of virtually all municipal property tax assessment, no one is able to learn from the state, under rules of confidentiality, where this property is located and whether it is being accurately assessed.

Maine’s towns and cities are responsible for maintaining the infrastructure that supports the location of the vast majority of the personal property that is being assessed by the state. The municipal position is that the jurisdiction of all telecommunications property belongs with the municipalities. Returning telecommunications property to municipal jurisdiction would:

• Provide the tax revenues to the level of government that is expending funds to maintain the public right-of-ways and other infrastructure that supports an protects telecommunications property;

• Reduces the mill rate demand on the property by nearly 40% (from a flat rate of 27 mills to an average, state-wide equalized mill rate of 17 mills); and

• Ensures the property being assessed is properly valued and accounted for according to the open, accountable assessing system that is used at the local level for all other property.

Municipal Telecommunications Taxation Survey

MMA surveyed its membership last fall on the issue of telecommunications taxation. Based on the survey data from the nearly 200 respondents, the statewide value of cable television personal property is approximately $134 million and telecommunications real estate property is $33 million. Sixty-three percent of the assessors responding indicated that there are problems with the current bifurcated method of taxation including:

• It is confusing;

• It does not set clear guidelines for the industry to provide adequate information; and

• It leads to the under-valuing of telecommunications property.

The survey invoked some strong indictments of the current taxing scheme:

"There is a convergence of technology occurring, which will render our current statutes obsolete and impossible to administer. If the state’s revenue from telecommunications has only increased $3 million since 1987, clearly value has been badly understated."

"The 1987 tax changes removed $14,000,000 from the Andover tax base and transferred it to the state, much to the detriment of the town."

"The law "splitting" the real property between town and state will become more difficult to administer as the industry keeps changing. The towns will continue to lose revenue to the state, as more property becomes two-way telecommunications."

"I do not believe the state is getting the full value of the towers and equipment. I believe it should be taxed locally."

"I am concerned that we may lose cable TV [for taxation purposes] and the state will assess it. It is far too complicated to figure out what items should be taxed by the town and what belongs to the state for taxation purposes."

Solutions

In her role on the Task Force to Study Telecommunications Taxation, Falmouth’s Anne Gregory championed the proposition that all property tax authority should be restored to municipalities. Other members of the task force, including industry representatives and legislators, almost uniformly embraced the proposition. In its report to the 119th Legislature, submitted January 15 of this year, the task force proposed legislation that would phase out the state taxation of telecommunication property and restore full property tax authority to municipalities.

There are issues to be resolved before municipalities can expect to resume full property tax authority. Larry Record, Director of the Property Tax Division of Maine Revenue Services, believes that municipalities will have great difficulty in assessing the telecommunications personal property that would fall to them with a change from state to municipal responsibility. Other concerns expressed by those who are skeptical of the idea of transfer include the need for a mechanism for dealing with the "windfall" that municipalities would experience with the transfer.

However, supporters of the transfer countered with their own view. Local is easier because every new installation requires a permit. The state can hand over the declarations that telecommunications businesses currently make to the state and the state can assist with technical guidance. Larry Sterrs, representing the Telephone Association of Maine, predicted that customer rates would go down if the taxing authority were transferred from the state to municipalities.

The largest obstacle will be the fiscal one. The loss of $29 million to the State’s general fund must be offset in some fashion. The idea of reducing the Local Government Fund of the state-municipal revenue sharing program has been advanced as a possible solution. This would be consummately unfair to municipalities that have little or no telecommunications personal property to tax because they would see a reduction in revenue sharing with little or no counterbalancing rise in property tax receipts.

Still, returning the right to tax telecommunications personal property to municipalities is the rational and fair course that must be followed, both for the competitiveness of the telecommunications industry and for municipal property tax administration. A solution to the remaining problem of general fund shortfall should be the primary focus of continued efforts.

SIDEBAR

Telecommunications Property and Excise Tax General Fund Revenue
History of Collections

Fiscal Year

Assessment

Entities

Notes

1986

$25,758,100

24

Excise tax only @ 6% maximum

1987

$30,364,681

24

Excise tax only @ 7% maximum

1988

$30,803,444

29

Excise @ 3.5% max plus property tax @ 21 mils w/ 120% cap

1989

$33,850,611

37

Excise @ 3.5% max plus property tax @ 27 mils w/ 120% cap

1990

$21,403,027

37

Property tax only @ 27 mils

1991

$21,883,722

36

Property tax only @ 27 mils

1992

$22,936,894

40

Property tax only @ 27 mils

1993

$23,533,972

40

Property tax only @ 27 mils

1994

$25,325,287

40

Property tax only @ 27 mils

1995

$26,576,233

43

Property tax only @ 27 mils

1996

$27,856,739

43

Property tax only @ 27 mils

1997

$28,291,722

43

Property tax only @ 27 mils

1998

$28,726,692

43

Property tax only @ 27 mils

1999

$28,300,000

Estimate

2000

$28,725,000

Estimate

2001

$29,000,000

Estimate