A national report concludes taxes on U.S. wireless customers average 16.3 percent and pose a significant burden on low-income people and small businesses. The rate is double the average retail sales tax rate, and includes federal, state, and local levies.
“A Growing Burden: Taxes and Fees on Wireless Service,” written by Scott Mackey, an economist and partner at Montpelier, Vermont- based Kimbell Sherman Ellis Partners LLP, found taxes and fees on wireless devices decreased slightly between 2005 and 2008 but have been rising again since 2008. Nationally, customers pay up to $8 per month in fees and taxes on wireless phones.
Mackey blames taxes for a portion of the increase, but he says the major culprit is the rapid growth of the Universal Service Fund administered by the Federal Communications Commission. The USF was established to subsidize telecommunications service for schools, libraries, hospitals, and rural phone companies and their customers, he notes. The USF fee was below 4 percent when it began in the 1990s, but it rose to 10.2 percent in 2005 and was increased to 13.6 percent in 2010.
Nebraska Hardest Hit
Mackey’s report, released in February, reveals Nebraska and Washington wireless customers are the hardest hit by fees and taxes. In Nebraska, customers pay a combined tax rate of 23.69 percent, closely followed by Washington customers who pay a combined tax of 23.53 percent.
Neighboring Oregon customers are subject only to a 6.86 percent rate, and Idahoans pay only 7.25 percent. The average rate throughout the nation is 16.26 percent.
According to Carl Gipson, an economic policy analyst with the Washington Policy Center, wireless users in Washington pay additional fees nearing levels normally reserved for “sin” taxes in the state; currently 50 percent per carton of cigarettes and 40 percent for alcohol.
‘Taxes a Cash Cow’
Mackey and Gipson are joined by a chorus of telecom and business experts who say these fees and taxes are severely limiting the growth of mobile businesses – as well as proving too expensive for low-income consumers.
“What tends to happen is that legislators at the state and local levels see the wireless industry as one that is booming and making a lot of money, so they see it as a cash cow,” said Jim Kranjc, principal and telecom practice leader for Ryan, a global tax practices firm based in Pittsburgh, Pennsylvania. “They see it as something that they can tax and it won’t affect the demand.”
That’s not the case, according to Kranjc. “The economic damage and real hurt is to customers who see the wireless phone as a necessity, not a luxury. You see effects on people that can least afford it, low income and younger people, many of whom don’t have a landline at all. So these folks have really come to rely on wireless services.”
State and Municipal Taxes
Compounding the issue in Washington is that both state and municipalities are allowed to tax wireless services. Even in California, known for high taxes, only municipalities can tax wireless services. In other states, there are no municipal taxes.
Although some states with higher taxes can drive people to do business elsewhere, that is not the case with wireless taxes. The laws permitting taxation of telecom services dictate that they be taxed based on the rate of the location where the customer has his or her “primary use,” Kranjc said.
“I work with a lot of small businesses and many of them are not ready to step up to the next level – smart phones and applications – because the total bill makes it very hard to justify, even if it would be a good business move,” added Rick Hoffman, managing director of Mobilocity, a mobile productivity company based in Evertett, Wash.
‘Deterrent to Bottom Line’
“It’s a deterrent at the outset when you look at the bottom line and your costs are increasing,” Hoffman said. “A smart phone is a tool that should enable you to cut costs. But these taxes make it much harder to take that step. When the taxes are nearly 30 percent of the bill, that’s just wrong.”
Hoffman added that he recently worked with a small, local organic food shop that could benefit from more advanced mobile communications such as smart phones because it would eventually enable them to save on costs. But the high monthly fees – largely due to taxes – make it too expensive for small businesses to take this step because they need to start making those increased payments immediately and don’t have the income to do so, even if there will be an eventual benefit.
“Small businesses are very cost conscious,” Hoffman said.
Phil Britt ([email protected]) writes from South Holland, Illinois. Bruce Edward Walker ([email protected]) is managing editor of Infotech & Telecom News.
“Washington’s Wireless Telecommunications Tax Rate is Discriminatory, Second Highest in Nation,” Carl Gipson, Washington Policy Center, March 2011: http://heartland.org/infotech-news.org/article/29658/Washingtons_Wireless_Telecommunications_Tax_Rate_is_Discriminatory_Second_Highest_in_Nation.html
“A Growing Burden: Taxes and Fees on Wireless Service,” Scott Mackey, KSE Partners LLP, February 14, 2011: http://heartland.org/infotech-news.org/article/29659/A_Growing_Burden_Taxes_and_Fees_on_Wireless_Service.html