State Taxes Hit Telecom Services Doubly Hard

Published August 1, 2005

State and local taxes imposed on telecommunications services continue to be more than double the average tax levied on general business, according to a recent study by the Council on State Taxation (COST).

The 2004 State Study and Report on Telecommunications Taxation, released in May 2005, shows the average state and local effective tax rate on telecommunications services is 14.17 percent, compared to 6.12 percent for general business nationwide. In many states, taxes make up more than 20 percent of a telecommunications consumer’s bill.

47,921 Tax Returns Each Year

“Tax laws in the states are antiquated and take money out of the pockets of every American telecommunications consumer,” said Stephen Kranz, tax counsel for COST and one of the study’s authors. “The fact that we require telecommunications providers to file over 170 tax returns per day demonstrates the time for unequivocal tax reform is long past.”

Compared to general business, telecommunications providers have 1,103 more transaction tax bases and 6,683 more taxing jurisdictions with which to contend, according to the study. A national telecommunications provider must file 47,921 tax returns per year compared to about 7,501 returns for a general business.

State Data Available

The COST study gives a national perspective on the tax load telecommunications consumers and providers must bear, and it also details the state and local telecommunications taxes and administrative costs imposed in each state.

Levels of taxation varied widely from state to state. Virginia taxes telecommunications more heavily than any other state, with an average of 29.77 percent in combined state and local taxes, followed by Maryland with an average rate of 27.31 percent, and Texas, which averaged 25.29 percent.

At the other end of the spectrum are Nevada (3.97 percent), Montana (5.88 percent), and Idaho (6.16 percent). Including federal taxes raises the tax bite by four percentage points in each state.

Stephanie Childs, vice president of government affairs and tax policy at the Information Technology Association of America (ITAA), said she has seen the study, which confirms what her organization has long known.

“On the state and local side, many government entities are seeing telecom as the fatted calf,” Childs said. “We’re trying to make the case that this is discriminatory and unfair, to single out this portion of our industry for very high taxes.”

Cable Customers Also Pay

While the COST study focused on state taxation of telephone services, both traditional wireline and wireless service, cable service is also highly taxed.

Cable operators pay a franchise fee to local governments that typically is 5 percent, the maximum allowed under federal law. They also pay sales tax in 23 states, and additional fees and charges are frequently levied as well.

As with taxes on phone service, the rates vary. In Washington DC, consumers pay taxes of approximately 18 percent, and Texas cable customers face taxes of about 14 percent. Taxes paid by consumers are typically lower in states without sales taxes.

Cable companies also frequently provide “in kind” services to the communities they serve, and these are not included in tax calculations. For example, in Tucson, Arizona, Cox Communications must provide nine public access channels worth more than $4 million annually, as well as free cable service to schools and city buildings, estimated to be worth more than $1.4 million per year. The estimated value of these “in kind” services exceeds the approximately $4.2 million per year Cox pays directly to Tucson

Fighting to Lower Taxes

On the federal side, the ITAA has teamed with various technology and taxpayer advocacy groups to persuade Congress to end the communications excise tax, enacted in 1898 to fund the Spanish-American War. That tax is a flat 3 percent on every telephone bill. It costs telephone and Internet users about $6 billion a year.

“That tax was put into effect a long time ago, when telephone service was a luxury only wealthy people could afford,” Childs said. “The fact that it’s still around shows how government policies have not adjusted to modern reality. We have regressive tax and regulatory policies that can stifle innovation and make it more difficult for people to afford these technologies.”

California Rep. Gary Miller (R) and Pennsylvania Sen. Rick Santorum (R) have introduced legislation to repeal the federal communications excise tax. In 2000 the House and Senate voted to end the tax, but President Bill Clinton vetoed the measure.

Sean Parnell ([email protected]) is vice president – external affairs for The Heartland Institute.

For more information …

To order a copy of the 2004 State Study and Report on Telecommunications Taxation, contact COST at or call 800/248-3248 and refer to CCH Offer # 0-4400-301.