Cable Operators

Tax Reform in Florida, 4 Years Later

12/05/2004 7:00 PM Eastern

In 2000, Florida made a sea change in the way it collects taxes from cable operators and other telecommunications providers.

In order to broaden the tax base — thus capturing additional revenue from more providers — the legislature created the Communications Services Tax Simplification Law.

For cable operators, the proposal meant the end of locally computed and assessed franchise fees and utility taxes.

At the time, cable customers paid a 9.18% state sales tax, plus local levies of between 1% and 15% for franchise fees, utility taxes, local sales taxes and other user fees.

PAPERWORK SAVINGS

Lawmakers could not promise that cable companies would save money in taxes, but the proposal would save them the cost of computing and remitting checks to an estimated 472 regulatory authorities.

Administrative savings could be even greater for telephone companies. BellSouth Corp. alone filed 12,000 state and local tax returns each year, according to legislative testimony.

The bill also held the promise of leveling the playing field between cable and direct-broadcast satellite, because for the first time in Florida, the broadly based tax would be assessed on DBS.

Also, cable companies would achieve some savings because non-service revenue — such as home-shopping payments and ad sales — was excluded from tax computations.

While operators crossed their fingers and joined phone companies in supporting the bill, some cities vowed to challenge the new policy in court. Their argument: the state law would violate federal cable regulations that specifically call for local franchise regulation, including franchise-fee collection.

The new tax policy would retroactively change local contracts, they complained.

Despite the criticism, Gov. Jeb Bush signed the fiscal overhaul into law on Oct. 1 of that year. The legislature took another year to hammer out the details and put the scheme in place.

SEEMS TO WORK

It’s now four years further along the information superhighway — and, contrary to the rhetoric from when the bill was passed, the overhaul seems to be working.

The changes were an important public-policy objective for the state government, said Dominick Calabro, president of Florida TaxWatch, a nonprofit government and fiscal watchdog group.

“Something had to be done … we had [telecommunications] businesses here paying 24%, 27%” he said.

The state had a tax scheme that subsidized rural telephone users through higher rates in urban areas. An attempt at reform had been tried in 1997, but “they couldn’t get the 'pot’ right,” Calabro said.

The 2000 effort, which brought in such industries as cable and DBS, brought the bill closer to the goal of revenue neutrality, he said.

Cable companies have found some reasons to cheer the new regime.

“We have been able to streamline and prove efficiencies through just dealing with the [state] Department of Revenue,” said Charles Dudley, legislative counsel to the Florida Cable Telecommunications Association. The state agency then remits a share of the payments back to local governments.

Operators have not reported that cities have tried to create new local fees, he added.

Still, the tax package is “a living document,” Dudley said. Industries have maintained a working group, tweaking the legislation each year to address problems, such as assuring that all applicable telecom companies pay their fair share, as well as identifying and addressing gray areas.

One such area is voice-over-Internet protocol service. Non-facilities-based broadband providers such as Vonage Holdings Corp. do not yet pay fees, said Dudley, while cable and telephony providers do.

That creates an inequity for companies such as BrightHouse Networks, which is rolling out VoIP in the Tampa region.

“At some point, the state might have to take a look at that,” Dudley said.

There’s still work left to do, though.

“At some point, Florida needs to look at the overall height of the amount of taxes,” Dudley said. “It’s nice to streamline, but we’ve got to get to work on the total taxes paid.”

But with the state facing stratospheric bills for cleaning up after multiple major hurricanes, it’s not a good time to bring up tax cuts, Dudley noted. “That dust has to settle.”

CITIES SEEM HAPPY

City governments also seem satisfied with the four-year-old bill.

“Implementation has worked really well,” said John Wayne Smith, assistant director of legal affairs for the Florida League of Cities.

The state took the time needed to work out the administrative changes, determine what is taxable and set the rates, he noted.

“Everyone at the table got a little out of it,” Smith said of the negotiations.

Cities were also mollified by a “backup plan” that allows local governments to enact emergency ordinances to amend what’s paid to the local jurisdiction “if we messed up somewhere and there was a lack of local revenue as a result,” Smith said.

It also took the time to clean up its databases, to ensure cities received what they were due, according to Smith.

Some companies used postal zones (ZIP-plus-4 codes) to determine the locality to which fees would be remitted. That was not a tough enough standard, he said.

The Department of Revenue’s own database was more accurate, he said, and incentives were developed to get companies to use that information.

“They should have required that sooner,” said Smith. “That was the biggest thing.

“It didn’t matter how good the system is if the database is inaccurate and the locals don’t get the money.”

For the most part, ISPs, telephone companies and MSOs are satisfied, he said. But continued clarification as to the tax liability of some digital-subscriber line and VoIP services is still necessary, he said.

TAXES ON LANS?

As the policy moves into year five, the tinkering continues.

Revenue from the simplified tax has leveled off, and an amendment could allow for taxation of more products considered to be substitute communications services. That would mean levies on anything from inter-company local area networks to walkie-talkies.

That would prove a real hornet’s nest, said Calabro, but the government relies on incremental growth in telecommunications taxes to finance local needs such as school construction.

The state has opened public hearings on possible expansion of the tax base — but the governor has vowed publicly to veto any taxes beyond the current targets, said Brian Nelson, an attorney and member of the South Florida Technology Alliance.