Kissinger & Fellman, P.C. Communications Taxation Reform Are Local Governments in the Picture? NATOA Regional Workshop St. Louis, Missouri April 29, 2005 Kenneth S. Fellman

Kissinger & Fellman, P.C. ITFA Postscript  State and Local Government allies in Congress  Short, and not so sweet message: “we can’t keep saving your bacon”  State and local governments, and industry, need to resolve this

Kissinger & Fellman, P.C. NGA Proposal  High level meetings with governors, state legislators, local elected officials and industry leaders  Find compromise for communications tax reform legislation this session

Kissinger & Fellman, P.C. The Participants  Government: NGA, NLC, NaCO, USCM, NCSL, CSG (2 from each)  Industry: SBC, Sprint, Time Warner Cable, Knology, AT&T, Comcast, Level 3, T- Mobile, AOL, Verizon Communications, Verizon Wireless, BellSouth, Nextel, Qwest, Cingular, Broadband Service Providers Association

Kissinger & Fellman, P.C. Before the First Meeting  State and Local exec directors and staff meet to determine key principles  Recognized potential damage if State and Local governments appeared divided

Kissinger & Fellman, P.C. Before the First Meeting  Key State and Local Principles  Technology neutrality  Outcome revenue neutral for state AND local government  Federal government should not preempt state and local taxing authority  Respect state and local role in preserving public interest obligations  Transition time will be necessary

Kissinger & Fellman, P.C. First Meeting: 12/15/04  Industry Principles presented:  Tax rate for all taxes on communications industry should not exceed tax rate applied to general business  Special Purpose Funding Fees should be limited to funding important social goals (i.e., universal service, E-911) or to costs caused by provision of communications services (i.e., ROW fees)

Kissinger & Fellman, P.C. First Meeting: 12/15/04  Industry Principles (cont.)  Dramatically simplify collection, reporting and auditing of state and local transaction taxes on communications services  Streamlined Sales Tax Agreement should include transaction taxes on communications services

Kissinger & Fellman, P.C. Post 12/15 meeting  Staff working groups  Tax vs. fee working group  Technology neutrality working group  Centralized collection working group  Data collection working group

Kissinger & Fellman, P.C. 2 nd Meeting: 3/1/05  Update on principals’ positions  Update on working group status  Insufficient time set for meeting  Too much posturing from principals

Kissinger & Fellman, P.C. Largest Hurdles to Overcome  ROW fees – are they on or off the table?  Centralized collection – is it theoretically possible that it could ever work for local government?  Revenue neutrality – at state level or local government level?  What does industry mean when they say they want same level of taxation as general business?

Kissinger & Fellman, P.C. Post 3/1 Meeting  Smaller group of staff meeting  Goal to develop general principles  Each organization to then provide its specifics to give definition to the general principals  Compare specifics and see how far apart we really are

Kissinger & Fellman, P.C. Framework for Moving Forward  Temporarily suspend reality – imagine no existing regulatory framework  No such thing as “information,” “telecommunications” or “cable” services  How do we want the regulatory framework to look if we were writing it on a clean slate?

Kissinger & Fellman, P.C. Principles on the Table  State and local tax policy should not influence consumers’ selection or use of one specific communications technology or service over another  Competing services that are equivalent or viewed as viable substitutes by consumers ( “functionally equivalent services”) should be treated on a non- discriminatory tax basis by state and local governments regardless of technologies used to deliver them  State and local taxation should not advantage one provider over another provider of a functionally equivalent service

Kissinger & Fellman, P.C. Principles on the Table  Apply special purpose obligations (universal service, 911) on non- discriminatory basis between providers of functionally equivalent services. Revenues should be used only for the purposes for which they are collected  Apply charges for use of PROW on competitively neutral and nondiscriminatory basis among providers of communication services

Kissinger & Fellman, P.C. Principles on the Table  Authority to raise revenues to provide for public interest is vital to state and local governments and should be preserved  Reforms should strive to simplify collection, reporting and auditing of state and local taxes on communications services  A time of transition should be incorporated for all parties to adjust to any agreed upon communications reform

Kissinger & Fellman, P.C. Principles on the Table  Taxes on communications services, property, and providers should reflect the competitive nature of the industry and its proportionate share of taxes relative to the general business community  Reform should allow for solutions that are revenue neutral at the state and local government levels  Tax obligations should not vary based on the level of a provider’s presence in a taxing jurisdiction

Kissinger & Fellman, P.C. Obstacles to Success  Industry principals not at the table  NCSL/Industry – attempts to tie communications tax reform to streamlined sales tax legislation  Question as to whether industry can come to consensus

Kissinger & Fellman, P.C. Local Government Goal  Stay at the table  Compromises fine, within framework of key principles  If the process is unsuccessful, it will not be because local governments refused to negotiate