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Protecting Municipalities
From The
Telecom Tax Fight

Joel Shain
By Joel Shain
League Energy Deregulation Counsel

artist drawing - men with megaphones standing on telephone receiver

Verizon New Jersey, Inc. claims that it is not obligated to pay taxes for any business personality1 located in municipalities where it no longer provides dial tone and access to “at least 51 percent of the local exchange(s).” Five municipalities are currently affected.

One affected municipality, tiny Wharton Borough in Morris County, was appropriately incensed and stood up to power. The administrator, Jon Rheinhardt, reminded Verizon of the disruption caused when it installed its new fiber optic infrastructure, of the additional financial burden on residents because of its tax avoidance position and its failure to act as a good corporate partner. He wrote the following in a letter to Verizon:

The Borough presently utilizes Verizon for wireless telephones provided to employees. As their contractual obligations expire we will move these wireless accounts to a more appropriate corporate partner to provide this service.

We will take action to migrate our traditional telephone service to take advantage of IP technology which will all but eliminate our need to utilize your services.

Our alarm lines will be migrated to radio communication which will make us self-sufficient and also eliminate our need to utilize your services.

When our residents come in to ask why their taxes are going up, we will point out that it is Verizon that has contributed to this and put their tax burden on the residents. We will provide them with a dollar amount impact as a direct result of your actions. I am sure that this will influence who their wireless, internet and traditional land line service provider will be. I am sure that this will help to further substantiate your loss of market share which was the basis for your first letter to us.” Letter from Jon Rheinhardt to Verizon, November 26, 2008.

Other municipalities may be contemplating similar actions against Verizon unless it reverses its position.

The New Jersey State League of Municipalities on behalf of and for the benefit of its member municipalities is contesting Verizon’s legal rationale. It has asked the Division of Taxation for a ruling directing Verizon to pay the tax.

Not surprisingly, Verizon’s action is consistent with the telecommunication industry’s multi-pronged effort to reduce the level of taxes it pays to local governments. The industry’s tools include advertisements, lobbying efforts at the national, state and local levels and litigation against local governments to contest taxes and fees. Local Government Perspective on Telecommunications Taxes (available on NLC.org.) In addition to refusing to pay taxes, Verizon is lobbying at both the local and state level for favorable tax treatment, even proffering legislation ironically called the “Municipal Revenue Restoration Act” to benefit its position against competitors and reduce its tax responsibilities to municipalities. Likewise, Cable Television and satellite companies have launched lobbying efforts of their own to protect and enhance their positions. But, it is the public interest, as viewed by its members, not the interests of for-profit companies, that the League works to protect.

In that vein, a Resolution was adopted at the Annual League Business Meeting held on November 21, 2008. It requested that the Legislature restructure and bring fairness to tax and franchise fees imposed on telecommunications and cable telecommunication service providers in New Jersey. The Resolution sets forth the rationale behind the request and specifically recognizes that telecommunication providers, including but not limited to direct broadcast satellites, open video systems, and cable television, which employ various technologies and offer multiple services, play an increasingly important role in the life of the state’s corporate and individual citizens. Obviously, all of these providers are necessary for economic growth and enhanced quality of life.

The Resolution points out that the convergence of telecommunication’s technologies and regulatory reform has blurred the distinction among the service providers as each provides a full range of voice, data and video services. Cable television companies are selling phone service; while phone companies are offering video, and high speed connections making it possible to use computer software to make calls over the Internet.

The Resolution addresses the issue of for-profit companies using the public rights-of-way, recognizing that these valuable assets are held in trust for the people of the state by state and local governments. Clearly, taxpayers are entitled to compensation when private corporations use the public rights-of-way to generate profits. Likewise, tax and right-of-way franchise fee policies should not bias competition among service providers nor distort the efficient use of public properties. Unfortunately, the current state system of compensation to municipalities for their use distorts efficient use of these public assets.

Public rights-of-way are essential to the health, safety, transportation, communications and economic development of a community. They accommodate pedestrian and vehicular traffic, shade trees, and other beautification, traffic signals and signs, street lights, electric wire, telephone, cable television, sanitary sewers, storm sewers, water mains, gas lines and pipelines. Management of municipal rights-of-way is therefore a process of balancing essential and competing demands on the same property. To protect the health and safety of our communities, as well as to protect the existing facilities of local government and other rights-of-way users, municipal governments must have the ability to ensure the efficient use of municipal rights-of-way. Local governments must have the ability to levy fees to recover costs and receive fees and reasonable compensation for the use of those municipal rights-of-way by telecommunication and cable television companies.

The increased pressure on public rights of way by the telecommunication industry imposes increased costs on municipal government in terms of shortening street life, increasing road maintenance cost, increasing traffic disruption and increasing management costs. Municipalities should be able to recover all their direct costs associated with having utilities encumber their rights-of-way. And municipalities should receive fair and reasonable compensation above these direct costs for the use of these public assets by private for-profit companies. Otherwise, property taxpayers are subsidizing shareholders.

The Resolution also addresses the concern that comparable telecommunication competitors face major anomalies in financial obligations to the state, while service revenue continues to shift from traditional telecommunication services, such as local and long distance to advanced services such as wireless/mobile, cable, broadband, and high speed Internet access. This shift will continue to intensify over the next decade, further distorting the financial obligations to the state among competing telecommunication service providers. The Resolution concludes that the current situation has proven inequitable, among telecommunication competitors and between taxpayer-owners of the rights-of-way and telecommunication companies.

Obviously, something has to be done and a new comprehensive legislative matrix is required. But, it must be one that ensures that consumers receive competitively priced, high quality services which are taxed equitably, that municipalities are held harmless from the shifts in consumption of telecommunication services from traditional services to more advanced services; and most importantly that the tax revenue associated with the provision of telecommunications service be paid directly from the service providers to the local government. New Jersey State League of Municipalities Conference Resolution No. 2008-09.

But, before any legislation is enacted to make widespread change to the tax structure, a careful analysis must be made of all current state and local fees and taxes affecting the telecommunication related industries and the public. Such a scheme must first ensure that local government’s revenue stream is not disrupted, but enhanced. Where feasible, tax equality among and within industries should be achieved. This should not be a piecemeal project of merely amending current legislation, but a total restructuring giving full consideration to the positions of the various stakeholders with specific focus on the public interest. We must steadfastly avoid any negative impact on the ability of local governments to provide needed services to their constituents or an increase in property taxes due to lost revenue caused by a flawed plan.

Getting companies with disparate tax structures and differing burdens on public rights-of-way to agree to trade-offs and reform will be a tough task and may well seem impossible. But, it is government’s responsibility to fashion and enact the right remedy.

To arrive at the end product—tax adequacy, stability and economic neutrality—is complex business. And, in my view it is better handled initially by a robust, lean and high level Task Force appointed by the Governor, approved by the Legislature and consisting of the State Treasurer, President of the Board of Public Utilities, the Commissioner of Community Affairs and the Public Advocate. After a full study and public hearings, the panel would render a report and propose legislation. All interested stakeholders would be invited to appear to present their views and question the views of others. In this manner, no one commercial entity would be directing or controlling the state’s telecommunications tax policy.

The communications’ industry has changed, and it has changed fast, with new technologies erupting every day. It is time for New Jersey’s tax policy to catch up to the new reality.

1 Personalty is all the company’s property other than real estate, i.e., telephone poles, wires, switches, etc.

 

Published in New Jersey Municipalities, Volume 86, No. 2, February 2009.

 

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