[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
VoIP: WHO HAS JURISDICTION TO TAX IT?
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MARCH 31, 2009
__________
Serial No. 111-23
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas DANIEL E. LUNGREN, California
MAXINE WATERS, California DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts J. RANDY FORBES, Virginia
ROBERT WEXLER, Florida STEVE KING, Iowa
STEVE COHEN, Tennessee TRENT FRANKS, Arizona
HENRY C. ``HANK'' JOHNSON, Jr., LOUIE GOHMERT, Texas
Georgia JIM JORDAN, Ohio
PEDRO PIERLUISI, Puerto Rico TED POE, Texas
LUIS V. GUTIERREZ, Illinois JASON CHAFFETZ, Utah
BRAD SHERMAN, California TOM ROONEY, Florida
TAMMY BALDWIN, Wisconsin GREGG HARPER, Mississippi
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
[Vacant]
Perry Apelbaum, Staff Director and Chief Counsel
Sean McLaughlin, Minority Chief of Staff and General Counsel
------
Subcommittee on Commercial and Administrative Law
STEVE COHEN, Tennessee, Chairman
WILLIAM D. DELAHUNT, Massachusetts TRENT FRANKS, Arizona
MELVIN L. WATT, North Carolina JIM JORDAN, Ohio
BRAD SHERMAN, California DARRELL E. ISSA, California
DANIEL MAFFEI, New York J. RANDY FORBES, Virginia
ZOE LOFGREN, California HOWARD COBLE, North Carolina
HENRY C. ``HANK'' JOHNSON, Jr., STEVE KING, Iowa
Georgia
ROBERT C. ``BOBBY'' SCOTT, Virginia
JOHN CONYERS, Jr., Michigan
Michone Johnson, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
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MARCH 31, 2009
Page
OPENING STATEMENTS
The Honorable Steve Cohen, a Representative in Congress from the
State of Tennessee, and Chairman, Subcommittee on Commercial
and Administrative Law......................................... 1
The Honorable Trent Franks, a Representative in Congress from the
State of Arizona, and Ranking Member, Subcommittee on
Commercial and Administrative Law.............................. 2
WITNESSES
The Honorable Phil Montgomery, Wisconsin State Assembly
Oral Testimony................................................. 4
Prepared Statement............................................. 6
Mr. John L. Barnes, Director, Product Management and Development,
Verizon Business
Oral Testimony................................................. 10
Prepared Statement............................................. 12
Mr. Robert W. Cole, Manager, Tax Accounting, Sprint Nextel
Corporation
Oral Testimony................................................. 15
Prepared Statement............................................. 17
Mr. James R. Eads, Jr., Executive Director, Federation of Tax
Administrators
Oral Testimony................................................. 19
Prepared Statement............................................. 20
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan,
Chairman, Committee on the Judiciary, and Member, Subcommittee
on Commercial and Administrative Law........................... 3
APPENDIX
Material Submitted for the Hearing Record
Response to Post-Hearing Questions from the Honorable Phil
Montgomery, Wisconsin State Assembly........................... 32
Response to Post-Hearing Questions from John L. Barnes, Director,
Product Management and Development, Verizon Business........... 35
Response to Post-Hearing Questions from Robert W. Cole, Manager,
Tax Accounting, Sprint Nextel Corporation...................... 38
Response to Post-Hearing Questions from James R. Eads, Jr.,
Executive Director, Federation of Tax Administrators........... 41
VoIP: WHO HAS JURISDICTION TO TAX IT?
----------
TUESDAY, MARCH 31, 2009
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:16 p.m., in
room 2141, Rayburn House Office Building, the Honorable Steve
Cohen (Chairman of the Subcommittee) presiding.
Present: Representatives Cohen, Sherman, Johnson, Scott,
Franks, Jordan, Issa, and King.
Staff Present: Norberto Salinas, Majority Counsel; Adam
Russell, Majority Professional Staff Member; and Stewart
Jeffries, Minority Counsel.
Mr. Cohen. This hearing of the Committee on the Judiciary,
Subcommittee on Commercial and Administrative Law will now come
to order.
Without objection, the Chair will be authorized to declare
a recess of the hearing, which we will have to do when we go
into votes, which is not going to be too far from now.
I will now recognize myself for a short statement.
Telecommunications have moved from a fixed phone line
between two individuals, or in some places two coke cans and a
long line, to the point where anyone can place a call on a
wireless device from and to almost anywhere in the world. Today
someone using an iPhone can even video-chat with another
person.
But as technology evolves, many of our tax laws have not
kept pace--cultural lag. For example, just 10 years ago States
maintained a telecommunications tax structure based on a call's
origin. This structure worked well because telephone calls at
the time were placed from a fixed location. But mobile
telecommunications do not fit neatly into that tax structure
because mobile users rarely place calls from the same location.
State and local governments had to refine their tax systems
to address the broad use of mobile telecommunications devices.
This resulted in the passing of the Mobile Telecommunications
Sourcing Act of 2000, hereafter known as MTSA, which created
sourcing requirements for State and local taxation of
telecommunications services. In essence, MTS would be taxed
based on the customer's place of primary use.
State and local governments, providers, and consumers now
face a similar situation with the newest form of
telecommunications: Voice over Internet Protocol. With Voice
over IP, users are able to place calls over the Internet as
long as they have access to broadband Internet access. Some
providers and State legislatures have grown concerned that
current tax policies are difficult to apply to VoIP and urge
that Congress help resolve the taxation issue as it did with
mobile telecommunications.
Today's hearing will provide Members of the Subcommittee
the opportunity to hear testimony about Voice over IP and the
impact of its expected growth in usage. Members will also hear
testimony about State and local taxation of VoIP to determine
whether a taxation issue does exist and whether Congress should
intercede to resolve it. Accordingly, I look forward to
receiving today's testimony.
And, at this point, I recognize my colleague, the gentleman
from Arizona, Mr. Franks, the distinguished Ranking Member of
the Subcommittee, for his opening remarks.
Mr. Franks. Well, thank you, Mr. Chairman.
I want to welcome all the Committee here. I met Mr.
Montgomery earlier. He seems tall enough that he can reach out
and touch someone without a telephone. But it is a pleasure to
meet you, sir.
Today we are considering whether and how the Mobile
Telecommunications Sourcing Act should be modified to address
changes in telecommunications technology. The law was designed
to resolve questions as to which States and localities could
tax cellular calls. Existing Supreme Court precedent held that
a State had a jurisdiction to tax telecommunications if two of
three factors were in alignment: the source of the call, the
destination of the call, and the billing or service address of
the telephone.
Traditional wireline communications has presented very few
difficulties. A call placed from Arizona to Tennessee was
likely made on a phone whose billing address was in Arizona.
However, with cell phones, a call placed from Arizona to
Tennessee could be made with a phone whose billing address is
in the District of Columbia. Under such a scenario, the three
factors established by the Supreme Court could theoretically
never be in alignment.
To address this problem, Congress enacted the Mobile
Telecommunications Sourcing Act, which defined the place of
primary use of service and mandated that only the State of the
place of primary use could tax mobile telecommunications. This
helped consumers by ensuring that they could not be double-
taxed for their cell phone calls. It helped States by ensuring
that at least one, and only one, State would be eligible to tax
those calls. And it made it easier for mobile telephone
companies to properly assess taxes on customers' bills.
So now we are back to consider whether the rules that apply
to mobile telephones should also be used for Voice over
Internet Protocol, or VoIP. VoIP allows a consumer to use their
broadband connection like a telephone line. VoIP is often
cheaper than traditional land lines, particularly for long
distance and international calls.
Recently, the telephone companies have rolled out a new
technology known as nomadic VoIP--boy, they just keep coming up
with this stuff, don't they--which enables a consumer to use
their VoIP phone number and account number wherever they may
be. The implications for taxation are clear: Like mobile
phones, calls made from a nomadic VoIP no longer must be made
from the same location as the billing or service address.
Accordingly, this Subcommittee has the opportunity to
examine whether changes to the Mobile Telecommunications
Sourcing Act are appropriate. To that end, we have
representatives from both industry and the States here today.
It is my hope that we can work together to quickly resolve the
issues identified today so that States, industry, and, most
importantly, consumers can have the clarity and certainty that
they need to conduct their affairs.
And, Mr. Chairman, with that, I welcome the panel members
and yield back.
Mr. Cohen. I thank the gentleman for his statement.
Without objection, other statements of Members will be
permitted in writing and included in the record.
[The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Commercial and Administrative
Law
Voice over Internet Protocol is a new telecommunications technology
that is expected to overtake traditional land-line telecommunications
in the near future.
It allows users to communicate with one another by transmitting
voice signals over the Internet. It is less expensive than using analog
land-line telecommunications, and offers mobility to users.
Some are concerned that the mobility of Voice over Internet
Protocol does not lend itself to falling clearly under current State
and local tax systems.
For instance, a State may tax an individual if a nexus exists
between it and the individual at the time of the transaction.
As a result of Voice over Internet Protocol's mobility, however,
several States may claim nexus to tax the user. This could make it
difficult for providers to determine which taxes to collect, cause some
States and local governments to lose tax revenues, and result in
double, or even multiple, taxation for some users.
Additionally, the taxing may impede interstate commerce, and
therefore be unconstitutional.
Therefore, State legislatures and some providers have asked
Congress to consider legislation that would provide for the home State
of the user to be the sole authority to tax Voice over Internet
Protocol services.
Today's hearing will, I hope, help us consider three critical
questions.
First, we should determine whether there does exist an issue
concerning State and local taxation of Voice over Internet Protocol.
Second, if there does exist a taxation issue, we should consider
whether Congress can and should address it.
Third, if we determine that Congress can constitutionally address
this issue, and is better suited to doing so rather than leaving it to
the States to resolve, then we should determine the best course of
action.
For example, is there an existing framework to simplify State and
local taxation of Voice over Internet Protocol?
Or should Congress impose a new structure to determine which taxing
authority can tax Voice over Internet Protocol?
Today's testimony should help us answer these questions. I look
forward to hearing from the witnesses.
__________
Mr. Cohen. We have 15 minutes for votes. And I think, while
we could start and maybe get through one gentleman's testimony,
if you don't mind, I think we probably ought to vote and come
back and do all the testimony at the same time.
So, without objection, and in spite of the fact that we
have our largest attendance yet in this early spring training,
I would ask, without objection, that we take a recess and
return after votes are finished and promptly return.
Without objection, we are in recess.
[Recess.]
Mr. Cohen. Thank you, gentlemen. We are back in session.
I am now pleased to introduce the witnesses and hear their
testimony today.
I understand, Mr. Montgomery, you have a 4 o'clock flight?
Mr. Montgomery. Five.
Mr. Cohen. Five o'clock?
I am going to go ahead and take him out of order, if that
is all right with the other witnesses. Why don't we do that and
have Mr. Montgomery go first. And if he can stay for a while,
maybe we can get to ask questions, but if you have to leave,
you have to leave.
All right, I have to tell you the rules.
The first rule: Don't leave the University of Memphis for
Kentucky. That has already been violated. Bad day, bad day.
Your written statements will be placed in the record. We
ask that you limit your oral remarks to 5 minutes. You will
note that we have a lighting system. When it is green, that
means you have 5 minutes; yellow means 1 minute; red, over.
After each witness presents his or her testimony, the
Subcommittee Members have an opportunity to ask you questions
subject to a 5-minute rule.
Those are the rules.
Our first witness is Mr. Phil Montgomery. He was elected to
the Wisconsin State Assembly in 1998 and has chaired a variety
of committees, including the Assembly Insurance Committee,
Financial Institutions Committee, and the Telecommunications
Task Force. Most recently, he served as chairman of the
Assembly Energy and Utilities Committee for 4 years, where he
played a vital role in several key energy and telecommunication
reforms, including the Cable and Video Competition Act.
During the upcoming 2009-2010 legislative session,
Representative Montgomery will represent northeast Wisconsin on
the legislature's powerful Joint Committee on Finance, where he
will take a leading role in crafting the State's budget.
Thank you, Representative Montgomery. As a former State
legislator, I appreciate your service and welcome you here.
Would you proceed with your testimony?
TESTIMONY OF THE HONORABLE PHIL MONTGOMERY, WISCONSIN STATE
ASSEMBLY
Mr. Montgomery. Thank you, Mr. Chairman. I greatly
appreciate the indulgence.
Chairman Cohen, Ranking Member Franks, and Members of the
Subcommittee on Commercial and Administrative Law, I appreciate
the invitation to testify before you today on behalf of the
National Conference of State Legislators.
I am Phil Montgomery, a member of the Wisconsin Assembly.
And I serve as the chairman of NCSL's Standing Committee on
Communications, Financial Services, and Interstate Commerce.
Mr. Chairman, I am pleased to acknowledge your long history
as an active member of NCSL. Speaking on behalf of your
colleagues in the State legislatures, we are proud of your past
service as a State Senator and now your leadership in Congress.
We hope that during your tenure as a Member of Congress and
your chairmanship of this Subcommittee, we will have numerous
opportunities to work together to foster a strong Federal-State
partnership on interests of mutual concern.
Mr. Chairman, you may recall that, while you were a member
of the Tennessee Senate, you voted to implement Public Law 106-
252, the Federal Mobile Telecommunications Sourcing Act. The
legislation established a national framework that, when
implemented by the States between 2001 and 2002, provided a
mechanism on how mobile telecommunications calls involving
multiple jurisdictions should be assigned for purposes of tax.
The MTSA created the concept that the customer has a place of
primary use, which is the jurisdiction with the right to tax
wireless calls even if the call neither originates nor
terminates in that jurisdiction.
The MTSA was a win-win for both the industry and
government. State and local governments supported the MTSA to
prevent ``nowhere'' taxation and to bring administrative
simplicity and cost savings to the tax administration.
Furthermore, government organizations supported the legislation
to avoid potential congressional preemption of State taxing
authority based on burdens of interstate commerce.
The wireless industry supported the legislation to prevent
multiple taxation to achieve administrative simplicity and cost
savings in the billing process, to avoid expensive audit and
litigation exposure when multiple States claim jurisdiction to
tax the same call, and to avoid class-action lawsuits from
customers who claim that companies are improperly collecting
taxes even when they are merely complying with State laws.
NCSL is once again pleased to support and urge passage of
legislation to extend the MTSA provisions to VoIP. This
legislation will merely clarify how VoIP calls involving
multiple jurisdictions should be sourced for State and local
tax purposes. It will not change the tax status of any VoIP
provider.
As is the case with wireless calls, it is just as important
for VoIP communications that there be a clear, national rule
for determining what jurisdiction is permitted to tax a call
and, thus, avoid situations where multiple jurisdictions may
try to tax the same call or that a call might escape taxation
all together.
While the thought of tax-free communications may be
appealing, we must acknowledge that, if a government taxes
communication services, as policymakers, we have the obligation
to ensure that all providers, regardless of the medium used,
should be treated similarly for tax purposes. Taxes on
communication services must be applied in a competitively
neutral manner without being used to benefit one provider over
another in the marketplace.
In conclusion, last year the National Conference of State
Legislators' membership unanimously approved a request to
Congress for legislation that would extend the MTSA sourcing
provisions to Voice over Internet Protocol. The legislation to
extend MTSA provisions to VoIP should be considered
noncontroversial and should move without any opposition. For
this reason, we should request that the VoIP sourcing
legislation not become a vehicle for nongermane or slightly
related amendments that would only slow and probably keep the
legislation from enactment.
Mr. Chairman, thank you for inviting me to express the
concerns of NCSL with regards to the assessment of taxation on
VoIP services and our support for legislation on national
sourcing rules.
[The prepared statement of Mr. Montgomery follows:]
Prepared Statement of the Honorable Phil Montgomery
Chairman Cohen, Ranking Member Franks and members of the
Subcommittee on Commercial and Administrative Law, I appreciate the
invitation to testify before you today on behalf of the National
Conference of State Legislatures (NCSL). I am Phil Montgomery, a member
of the Wisconsin Assembly and I serve as Chairman of NCSL's Standing
Committee on Communications, Financial Services & Interstate Commerce.
As you know Mr. Chairman, the National Conference of State Legislatures
is the bi-partisan national organization representing every state
legislator from all fifty states and our nation's commonwealths,
territories, possessions and the District of Columbia.
Mr. Chairman, I also am pleased to acknowledge your long history as
an active member of NCSL, especially during your service on NCSL's
Executive Committee. Speaking on behalf of your colleagues in state
legislatures, we are proud of your past service as a state Senator and
now your leadership in Congress. We hope that during your tenure as a
member of Congress and your chairmanship of this Subcommittee, we will
have numerous opportunities to work together to foster a strong
federal-state partnership on issues of mutual concern.
I am pleased to have the opportunity to appear before you today to
discuss Voice over Internet Protocol and the problems related to the
assessment and collection of taxes on VoIP related services. I also am
here to express NCSL's support for draft legislation--the ``Voice over
Internet Protocol Sourcing Act of 2009''--and I want to commend you Mr.
Chairman for your willingness to sponsor this important legislation
that goes directly to strengthening the federal-state partnership.
mobile telecommunications sourcing act (mtsa)
Mr. Chairman, you may recall that while you were a member of the
Tennessee Senate, you voted to implement Public Law 106-252, the
Federal Mobile Telecommunications Sourcing Act (MTSA). This legislation
established a national framework that when implemented by the states
between 2001-2002 provided a mechanism on how mobile telecommunications
calls involving multiple jurisdictions should be assigned or sourced
for tax purposes.
Prior to the enactment of the MTSA, the Supreme Court decision in
Goldberg vs. Sweet governed the question of which jurisdiction has
authority to tax all interstate calls, both wireline and wireless.
Under the Goldberg rule, a jurisdiction could impose a tax on a call if
the call either originated or terminated in the jurisdiction and the
call was charged to a ``service address'' in that jurisdiction.
Because of the mobile nature of wireless telecommunications, it had
become more difficult to determine whether wireless calls met the two-
out-of-three ``Goldberg'' rule of origination or termination plus
service address, calling into question states' ability to tax such
calls. Furthermore, as customers increasingly selected single rate,
fixed-usage plans, the wireless industry's determination of which
jurisdiction has authority to tax the calls become more complicated.
With the growing popularity of the single rate plans, there was a
decreasing need to track individual calls for billing purposes.
Tracking individual calls solely for tax purposes unnecessarily wastes
company resources.
The MTSA solved both of these problems. It created the concept that
the customer has a ``place of primary use,'' which is the jurisdiction
with the right to tax wireless calls, even if the call neither
originates nor terminates in that jurisdiction. Thus, the federal law
allows states and localities to tax calls that they could not have
taxed under the ``Goldberg'' rule and precludes their ability to tax
other calls that they may have historically taxed.
The MTSA also provided a means to avoid another very contentious
fight between state and local governments, Congress and industry as was
the case just two short years before its enactment. You may recall,
that in 1998 in response to an effort by some states to tax access to
the Internet, Congress passed and President Clinton signed into the law
the first Internet Tax Freedom Act. The new law prohibited taxation of
access to the Internet by any government, federal, state or local. The
legislation did grandfather approximately 13 states, but the number is
now down to 9 to 10 states. With the rapid growth of the Internet in
the late 1990's, some state tax departments merely extended the
taxation schemes that existed in their states' telecommunications
statutes without any recognition of the impact on a new interstate
communications service. Applying the old tax scheme to an emerging
technology led to protests and complaints from communications providers
and Internet service providers. While Congress intended the original
moratorium to be a temporary measure, it has now been extended until
2014 and will likely be made permanent. The MTSA is a model in avoiding
another Internet Tax Freedom Act type battle between Congress, state
and local governments and industry. It is for this reason that we seek
quick congressional action to pass legislation that would extend the
sourcing provisions of the MTSA to Voice over Internet Protocol and get
it to the President's desk for his signature.
The MTSA was a ``win-win'' for both industry and government. State
and local governments supported the MTSA to prevent ``nowhere
taxation'' and to bring administrative simplicity and cost savings to
tax administration. Furthermore, government organizations supported the
legislation to avoid potential Congressional preemption of state taxing
authority based on the above mentioned burdens on Interstate Commerce.
The wireless industry supported the legislation to prevent multiple
taxation; to achieve administrative simplicity and cost savings in the
billing process; to avoid expensive audit and litigation exposure when
multiple states claim jurisdiction to tax the same call; and to avoid
class action lawsuits from customers who claim that companies are
improperly collecting taxes even when the are merely complying with
state laws.
The MTSA was enacted in July 2000 and in two years, all fifty state
legislatures and the Council of the District of Columbia passed
legislation to bring their states into compliance with the federal
legislation. The MTSA has served state and local governments well as it
ensured a vital revenue stream and provided clarity and uniformity for
providers in collecting our taxes and fees on wireless services. The
MTSA has served as a model of federal, state and private sector
cooperation.
NCSL is once again pleased support and urge passage of legislation
to extend the MTSA provisions to VoIP. We will work with the other
state and local organizations to obtain their support for a VoIP
sourcing rule. This legislation will merely clarify how VoIP calls
involving multiple jurisdictions should be sourced for state and local
tax purposes; it will not change the tax status of any VoIP provider.
As is the case with wireless calls, it is just as important for
VoIP communications that there be clear, national rules for determining
what jurisdiction is permitted to tax the call, and thus avoid
situations where multiple jurisdictions may try to tax the same call or
that a call might escape taxation all together. While the thought of
tax free communications may be appealing, we must acknowledge that if a
government taxes communications services, as policymakers we have an
obligation to ensure that all providers, regardless of the medium used,
should be treated similarly for tax purposes. Taxes on communications
services must be applied in a competitively neutral manner, without
being used to benefit one provider over another in the marketplace.
This legislation endeavors to ensure competitive neutrality.
voice over internet protocol
Ten years ago when negotiations were taking place between state and
local governments and providers on the sourcing of wireless calls, few
had any notion that soon another developing technology would provide
another medium for voice communications that would once again challenge
the way government taxes communications services.
Voice over Internet Protocol or VoIP enables packet transmission
over data networks which in essence converts voice to data and allows
for voice transmission over the Internet. I will leave the basics and
types of VoIP transmissions to the experts on this panel. However, as a
legislator and an advocate for enhanced communications services, I am
concerned about how my colleagues in state governments may attempt to
collect taxes on VoIP communications service. Under what ``tax rule''
will state tax departments attempt to assess VoIP services for
taxation? It certainly does not meet the standard of the Goldberg rule
I mentioned above and while in some respects the mobile
telecommunications sourcing rules could apply, VoIP technology also has
differences from wireless technology that will need to be addressed.
The legislation to source VoIP services provides the clarity that
state and local governments need to assess and collect taxes on VoIP
services. It ensures that well meaning tax officials do not try to
impose existing tax regimes on VoIP that will only lead to confusion,
litigation, lost revenue and possibly federal preemption.
This legislation will expand the sourcing rule adopted in the
Mobile Telecommunications Sourcing Act to VoIP services. This will
ensure consistent tax treatment of VoIP across all states. It will
provide consumers, vendors and state and local governments with
certainty, thus avoiding needless litigation. It ends the likelihood of
multiple taxation of the same call and eliminates the possibility of
``nowhere'' taxation.
As with the Mobile Telecommunications Sourcing Act, this
legislation allows the jurisdiction the customer identifies as their
place of primary use (PPU) to tax VoIP services and conforms with the
sourcing provisions of the Streamlined Sales and Use Tax Agreement.
VoIP providers may offer VoIP services that provide multiple
telephone numbers only a limited amount of capacity or lines for making
calls outside of the internal network. With VoIP it is important to
understand that telephone numbers do not necessarily equal a
traditional wireline access line. Therefore the VoIP sourcing rule will
only count those lines that a customer can make simultaneous calls as a
line for tax purposes.
As I mentioned previously, what this legislation does not do is
change the taxability of VoIP services. If VoIP is already taxable in a
jurisdiction, this legislation only provides certainty in how services
will be sourced for tax purposes, it does not force a state or local
government to impose any new taxes. As VoIP service is an Internet
protocol, it is possible that a VoIP service provider may not have
nexus in a state where it has customers. If a VoIP service provider
does not have nexus in a state, this legislation does not provide any
new authority to the state or local governments in that state to tax
the service provided by the non-nexus VoIP service provider.
conclusion
Last year, the National Conference of State Legislatures held a
total of three hearings on the question of assessing taxation on VoIP
services in which we invited all stakeholders to express their
concerns. At our annual meeting last summer, NCSL's membership
unanimously approved a request to Congress for legislation which would
extend the MTSA sourcing provisions to Voice over Internet Protocol. A
copy of the NCSL resolution is attached to my testimony.
The legislation to extend the MTSA provisions to VoIP should be
considered non-controversial and should move without any opposition.
For this reason, we also would request that the Voice over Internet
Protocol sourcing legislation not become a vehicle for non-germane or
slightly related amendments that would only slow and probably keep the
legislation from enactment.
Mr. Chairman, thank you for inviting me to express the concerns of
the National Conference of State Legislatures with regard to the
assessment of taxation on VoIP services and our support for legislation
on a national sourcing rule. We stand ready to work with you and the
other members of this Subcommittee to ensure quick congressional
passage of a sourcing rule for VoIP
Thank you.
ATTACHMENT
__________
Mr. Cohen. Thank you for your testimony, Representative
Montgomery. You must not realize this is the United States
Congress; we don't have nongermane and irrelevant and
extraneous types of amendments, something you must be used to
in Wisconsin.
Mr. Montgomery. Sir, in addition to my understanding of
legislative time, we have some of the same things back home, as
well.
Mr. Cohen. Thank you, sir.
Our second witness is John Barnes. Mr. Barnes is director
of Global Advanced Voice Product Development. He is primarily
responsible for the development, maintenance, and enhancement
of Verizon's VoIP suite of services and Contact Center suite of
services targeted at business customers.
In this capacity, he is responsible for managing the
software development and network deployment initiatives
associated with VoIP and Contact Center services. Additionally,
he is responsible for the development and maintenance of
implementation and post-implementation support procedures and
corresponding systems.
Before joining Verizon in 2005, Mr. Barnes served as
director of Voice over IP service product development for MCI,
where he was primarily responsible for the development and
enhancement of MCI's VoIP services targeted at business
customers. He held management positions focusing on the
development of MCI's VoIP services from 2001 onward.
Thank you for coming, Mr. Barnes. We will proceed with your
testimony.
TESTIMONY OF JOHN L. BARNES, DIRECTOR, PRODUCT MANAGEMENT AND
DEVELOPMENT, VERIZON BUSINESS
Mr. Barnes. Chairman Cohen, Representative Franks, and the
Members of the Subcommittee, thank you for this opportunity to
testify on an issue that will benefit both individual consumers
and businesses, drive technological innovation, and boost the
U.S. economy.
My name is John Barnes. I am the director of product
development for global advanced voice services, including Voice
over IP services, at Verizon. My testimony should provide a
better understanding of Voice over IP services, how they work,
why the technology is inherently mobile, and why the taxation
of Voice over IP services requires modernization.
VoIP stands for ``Voice over Internet Protocol.'' VoIP is
the conversion of traditional analog and digital voice into
data packets that are transmitted over an IP-enabled data
network.
Historically, voice transmissions originated from analog
and digital telephones required a dedicated connection to the
public switched telephone network, or PSTN. This connection was
fixed to a certain location and dedicated to the customer all
the way to the PSTN. With VoIP, these voice transmissions are
converted to IP signaling and media data packets using either
an IP phone or other conversion device. They are routed over an
IP-enabled data network, including the public Internet. Unlike
traditional telephony, when one customer is not using the
capacity, it can be used by other customers, resulting in
greater network efficiency.
Many equipment providers produce a wide variety of IP
phones and devices. Telecommunications carriers have developed
services using these devices. Carriers' network architecture
provide intelligent call routing, instructions on how and where
to route these calls. And they also provide basic features such
as caller ID and call waiting. Enhanced features include
features like simultaneous ring or routing incoming calls to
multiple devices simultaneously and selective call screening,
to name a few. Voice over IP technology is highly customizable,
and many of the features are controlled by the customer without
any direct intervention from the service provider.
Most Voice over IP devices have a traditional 10-digit
telephone number; however, they also have an IP address. This
is similar to the electronic serial number assigned to wireless
devices.
IP addresses are a global phenomena. They have no
correlation to a physical address or geography. As a result, a
VoIP device can be moved to any location where it can be
connected to an IP-enabled data network, including the public
Internet, and continue to send and receive calls. The network
recognizes and validates the IP address, but it cannot
determine the physical location of the device.
Software and equipment manufacturers continue to enhance
Voice over IP devices. For example, software can be installed
on a laptop computer and send and receive VoIP calls. As a
result, customers can place calls virtually anywhere they can
carry their laptop and connect it to a wired or WiFi Internet
connection. I brought an example of one such software device
that can be used in conjunction with a laptop computer.
Like wireless services, Voice over IP services are
typically packaged as a collection of basic and enhanced
features and local and long-distance calling for 1 monthly
price. These bundled pricing packages benefit consumers and
businesses with predictable monthly pricing and the opportunity
to reduce their monthly cost. However, they complicate the
ability to correlate specific charges to the physical location
of a Voice over IP device that may have been mobile sometime
during the billing period.
For businesses, Voice over IP services provide several
benefits. First, they achieve cost savings through converging
both voice and data services over a common network. They can
realize operating efficiencies by offering businesses with
multiple locations the ability to share physical access
capacity across multiple locations, substantially reducing the
overall capacity requirement and corresponding costs. This is
just simply not technically feasible with traditional PSTN
services.
In conclusion, the technology has simply outpaced the rules
that apply to taxation for telephone services. Consumers are
demanding, and the technology will continue to provide new
Voice over IP services that are inherently mobile.
A new system is needed to determine State and local
taxation for VoIP services, and the good news is such a system
already exists for wireless devices. Congress enacted the
Federal Mobile Telecommunications Sourcing Act in 2000. The
industry and government are in general agreement that Congress
needs to expand the Federal sourcing rules to include Voice
over IP services.
Thank you for the opportunity to testify today, and I would
be glad to answer any questions you might have.
[The prepared statement of Mr. Barnes follows:]
Prepared Statement of John L. Barnes
Chairman Cohen, Representative Franks, and members of the
subcommittee, thank you for this opportunity to testify on an issue
that will benefit individual consumers, small and large businesses,
continuing technology innovation, and the economy of the United States.
My name is John Barnes and I am the Director of Global Advanced
Voice Product Development for Verizon. My primary responsibility and
area of focus is the development, maintenance and enhancement of Voice
over Internet Protocol (VoIP) services that Verizon markets to business
customers.
The testimony that follows is intended to cover:
a definition of VoIP services
a brief description of how these services technically
work
why the services are inherently mobile
description of how the services are typically
packaged and sold to customers
why the services are beneficial to businesses and
consumers
This testimony should provide a better understanding of VOiP
services, the technology and how VOIP is inherently mobile,
necessitating modernization of the taxation methodology that applies to
such services.
definition of voip
VoIP stands for Voice over Internet Protocol. Simply put, VoIP is
the conversion of traditional analog or digital voice into data packets
that are then transmitted over an IP enabled data network.
Historically, in the large business context, voice transmissions
originated from analog telephones or digital telephones connected to a
PBX or key system. In a PBX or key system, there are multiple internal
or intercom lines and a much smaller number of trunk lines that allow
those internal lines to dial out to the public switched telephone
network (PSTN). This is best demonstrated by the need to dial ``9''
from an inside line to reach an outside line. The voice calls are then
routed to sending and receiving switches on the PSTN in order to be
delivered to a receiving analog or digital telephone. In the consumer
context, voice transmissions originate on a telephone at the customer's
premises and travel over a line that is dedicated to that customer all
the way to the PSTN. This requires every household to have a dedicated
line that sits idle much of the time and cannot be used by other
households.
With VoIP, these voice transmissions are converted to IP signaling
and voice media packets using either a VoIP phone or other conversion
equipment at the customer location and are routed over an IP enabled
data network. The IP enabled network may be either a private network or
the public Internet. However, when one customer is not using the
capacity, the capacity can be utilized by other customers resulting in
greater efficiency and better utilization of telecommunication lines
and maximization of resources. If VoIP calls are destined for another
VoIP device, they may route directly to the receiving device over the
IP enabled data network where they are converted back to a voice
transmission using a VoIP phone or another conversion device at the
terminating customer's location. If the calls are destined for a
traditional telephone connected to the PSTN, the calls are first routed
to a device, commonly referred to as a media gateway, where the signal
is converted back into a digital voice transmission and then routed to
the PSTN where the call can be terminated on a traditional telephone at
the terminating customer's location. A media gateway is a device that
is connected on one side to the PSTN switches and on the other side to
an IP enabled data network. The function of the media gateway is to
translate and route voice transmissions between other VoIP devices
connected to an IP network and traditional telephones connected to the
PSTN
how carrier based voip services work
Today, many VoIP telephony equipment manufacturers produce a wide
variety of IP phones, IP enabled PBXs and key systems as well as analog
or digital VoIP adaptors/gateways all designed to send and receive VoIP
calls.
Over the past several years, telecommunications carriers have
developed and marketed services to customers using these VoIP devices
available in the marketplace.
Creation of these services has resulted in the development and
deployment of carrier network architectures designed to provide
intelligent call routing instructions and features. Specifically, VoIP
devices interact with call routing intelligence (also referred to as a
call control server, an application server or a proxy) to receive
instructions regarding how and where to route a particular call. In
addition to providing call routing instructions to VoIP devices, these
call control servers provide basic and enhanced features to the VoIP
devices through association to the customers. Basic features would
include typical capabilities, such as Caller ID or Call Waiting. More
enhanced features would include capabilities such as simultaneous ring
(the ability to route an incoming call to multiple devices
simultaneously) or selective call screening (the ability to screen an
incoming call and route to the VoIP device or voicemail or other
routing option based upon criteria). These call control servers are
highly capable and highly customizable and serve as the foundation to
support future advanced service options. These features are all part of
the VoIP service package many of which can be controlled by the
customer without any interaction needed on the part of the VoIP
provider. As you know, traditional telephone service requires a
customer to separately subscribe to each desired feature which must
then be enabled by the telephone company to work for that particular
telephone number.
why voip is inherently mobile
For most VoIP services, the customer operated VoIP devices
described above have a traditional 10 digit North American Numbering
Plan telephone number assigned to them. However, the uniquely
identifiable characteristic for a customer operated VoIP device is the
IP address assigned to that device. This is very similar to the
electronic serial number (ESN) assigned and used to identify and
validate wireless devices. This IP address is used by the carrier in
conjunction with authentication information (user names and passcodes)
transmitted by the VoIP devices to recognize and authenticate the
customer operated VoIP devices and to provide services and features to
those devices. IP addresses are a global phenomenon and have no
correlation to physical addresses or geography.
As a result, while a VoIP device may have a traditional telephone
number assigned to it, the VoIP device can be physically moved to any
location where it can connect to an IP enabled data network and
continue to send and receive calls. The call control server does
recognize the IP address and validates the authentication credentials
of the VoIP device but cannot determine the physical location of the
device based upon its IP address.
This IP address associated with a customer operated VoIP device
provides a unique type of mobility in that the devices can be connected
and used to send and receive calls virtually anywhere they can be
connected to an IP enabled data network including the public Internet.
As carriers and software and equipment manufacturers continue to
develop and enhance VoIP devices to become more portable, VoIP services
will become even more mobile. For example, some equipment and software
manufacturers and carriers have developed application software that can
be installed on a laptop personal computer that can be used to send and
receive VoIP calls just like any physical VoIP device. As a result,
customers are enabled to place calls virtually anywhere they can carry
their laptop computer and have wired or WiFi access to an IP network.
In an effort to accommodate emergency services call routing in the
presence of this inherent mobility, most service providers have
developed methods for permitting individual VoIP device end users to
define a temporary location address for emergency services call routing
purposes. Based upon temporary address information provided by the end
user, service providers can validate the temporary address to determine
whether it is within a service area in which the service provider can
route calls to an appropriate emergency service provider. If the
address is not within a served area the VoIP device can be disabled
from placing calls over the service providers VoIP service until it
returns to an address for which the service provider can route calls to
the appropriate emergency service provider.
The portability and IP address association that characterize these
devices facilitates the VoIP service mobility that has been described
above. While these technological changes provide substantial benefits
to consumers, they also necessitate a reconsideration of the rules
applicable to voice services that have traditionally been associated
with the physical service address of the originating telephone device,
such as taxation.
how services are packaged for customers
For both business and individual consumers, VoIP services are
typically packaged as a collection of basic and enhanced features as
well as unlimited or defined local and long distance calling services
for a monthly fixed price.
For business customers, the monthly pricing model is often extended
one step further to be applied to simultaneous call capacity instead of
individual VoIP devices. Specifically business VoIP services are often
priced using structures similar to the purchase of traditional PSTN
access capacity like the PBX system mentioned above. As a result,
customers purchase sufficient simultaneous call capacity to support the
maximum number of VoIP devices that may be communicating with the PSTN
at the customer's busiest hour of the day/month and pay a monthly fee
based on simultaneous call capacity. In an effort to optimize costs,
the amount of simultaneous call capacity to the PSTN that a customer
purchases is most often far less than the total number of VoIP devices
that the customer may have in service, anticipating that not all VoIP
devices will communicate with the PSTN at the same time. Again, this is
similar to the intercom lines and the PBX trunk lines that require
dialing ``9'' but it is much more flexible allowing the capacity to be
shared by multiple locations and can take advantage of different time
zones to reduce the total capacity needed.
While these bundled pricing structures do provide individual
consumers and businesses with predictable monthly pricing and the
opportunity to reduce their monthly costs, they do further complicate
the ability to correlate specific charges for services to the physical
location of an individual VoIP device that may have been mobile for
some portion of time during the month.
voip benefits to businesses and consumers
Most frequently, the primary benefit to businesses and consumers
attributed to VoIP services is cost savings associated with combining
their voice services with their IP network services, reducing the
overall expense of having to purchase these two services separately.
While this is certainly a benefit, it only scratches the surface of
the advantages afforded to businesses and consumers as a result of the
operating efficiencies and enhanced applications made possible by VoIP
services.
For businesses, VoIP services not only provide cost savings through
converging their voice and data networks into one, because of the
architectural flexibility of VoIP, but they also enable service
providers to extend additional operating efficiency and business
continuity benefits. As referred to above, in the area of operating
efficiencies, some service providers can now offer the ability for
business with multiple geographically distributed locations to share
physical access capacity across the locations within their enterprise,
substantially reducing their overall capacity costs. This is not
technically feasible with traditional PSTN based services.
Additionally, VoIP affords the architectural flexibility to reroute
traffic real time. So, for example, in the event of a power outage or
natural disaster a customer can reroute traffic real time from an
affected area to an unaffected area to maintain business operations.
And with the mobile nature of VoIP services the business continuity
benefits are extended even further.
In addition to cost savings benefits, both businesses and consumers
benefit from the continually expanding array of hosted basic and
enhanced features enabled by VoIP services, some of which were
discussed earlier such as simultaneous ring and selective call
screening.
Carrying the concept further, many service providers have expanded
the scope of their VoIP offerings far beyond traditional voice calling,
to include a host of unified communication options such as instant
messaging, short text messaging, and audio conferencing.
Through industry collaboration between service providers, software
manufacturers and equipment manufacturers, through leveraging VoIP
technology, voice calling becomes much more tightly integrated into the
electronic tools that businesses and consumers use to communicate,
making the communication options far more flexible and the
communication itself far richer.
VoIP services significantly improve and enrich businesses' and
consumers' voice calling experiences through enhanced features and
capabilities, architectural flexibility, cost savings and operating
efficiencies. As a result, demand for these services has grown
exponentially and is expected to continue to grow to ultimately
displace traditional PSTN voice services. With this growth, so grows
the potential and propensity for these services to be increasingly
mobile. Because of this inherent mobility of VoIP services combined
with their exponential growth, it necessitates a near term
reconsideration and modernization of the rules applicable to voice
services that have traditionally been associated with the physical
location of the telephone device, such as taxation.
conclusion
Technology has outpaced the old rules that apply to the taxation of
telephone services. Consumers are going to demand, and technology will
provide, new VoIP services that are inherently mobile and cannot be
taxed according to the rules that have applied to landline telephone
services for many years. The rules need to be modernized so that a fair
tax system will apply at the state and local levels to these new
services. The good news is that such a system already exists for
wireless services--Congress enacted the Federal Mobile
Telecommunication Sourcing Act (MTSA) in 2000. I believe industry and
government are in general agreement that Congress needs to expand the
federal sourcing rules for wireless services to cover taxes applicable
to VoIP services so that all parties can have certainty in the taxation
of these services. My colleague from Sprint will explain further how
this can be achieved by Congress to benefit consumers, businesses,
technological innovation and state and local governments all at the
same time.
Thank you for this opportunity to testify regarding Voice over IP
services, the relevant technology and the inherently mobile nature
these services. I would be happy to answer any questions the committee
may have regarding my testimony.
__________
Mr. Cohen. Thank you for your testimony.
Our next witness is Mr. Rob Cole, tax research manager for
Sprint Nextel, a position he has held since 2003.
He has worked with industry coalitions and elected
officials on a variety of tax policy issues. Mr. Cole was
heavily involved with the coalition that worked to seek passage
of the Internet Tax Nondiscrimination Act in 2003-2004 and the
extension of the act in 2007. Mr. Cole has also worked with
several other coalitions involved with telecommunications
taxation legislation on State and local levels.
He worked as a tax analyst for Sprint from 2001 to 2003
before becoming the tax research manager. Prior to coming to
Sprint, he worked as an attorney and law clerk with BillSoft,
Inc., a telecommunications taxation software company in Kansas.
Thank you, Mr. Cole. You are no longer in Kansas. Will you
begin your testimony?
TESTIMONY OF ROBERT W. COLE, MANAGER, TAX ACCOUNTING, SPRINT
NEXTEL CORPORATION
Mr. Cole. Chairman Cohen, Representative Franks, and
Members of this Subcommittee, thank you for the opportunity to
testify on an issue of significance to millions of customers,
businesses, and State and local governments across the United
States.
The emergence of new technologies in the telecommunications
industry has accelerated over the past two decades. Our
industry is in the opening phases of another technological
shift in how we provide telecommunications service to our
customers. This shift involves the transition from fixed-
location, circuit-switched landline services to Voice over IP,
or VoIP, and nomadic broadband service.
With opportunity and advancement, however, we are
confronted with fitting this new and dynamic service into
existing tax laws. The laws were written for services that had
a fixed location and phone numbers that identified a specific
geographic location.
However, there is a precedent for resolving this issue. The
wireless providers had similar issues with fitting mobile
services into existing tax laws prior to the enactment of the
Federal Mobile Telecommunications Sourcing Act in the year
2000.
The Mobile Sourcing Act is one of the great success stories
in both clarity and cooperation between our industry and State
and local government. It provides clear and simple guidance for
the sourcing of wireless telecommunications services for the
purpose of collecting and remitting sales, telecommunications,
911, and other taxes and fees. The Mobile Telecommunications
Sourcing Act mandates that wireless carriers collect taxes and
source these taxes to the customer's place of primary use. The
industry is here to advocate the same sourcing rules for VoIP
services.
Traditionally, the answer as to which State and local
jurisdiction has the authority to tax interstate fixed landline
services is well-settled. The U.S. Supreme Court in 1989
decided Goldberg v. Sweet and in that decision held that the
location of a call would determine the taxability of that call.
And that rule is basically the two-out-of-three rule. If two
out of three of the following points of a call--origination,
termination, and the service address--are in a single
jurisdiction, then that jurisdiction has the sole legal
authority to tax.
However, you can see where this would be a problem with
VoIP services. Goldberg is simply inapplicable for VoIP. First,
it is not possible for VoIP providers to comply with Goldberg
because VoIP providers may not have geographic information as
to the location of the call's origination or termination.
Additionally, VoIP customers have the option to choose an
out-of-area telephone number. This could be done, for example,
if you live in Washington, D.C., but your family is in
Tennessee. You could get a Tennessee telephone number, and your
family could call you without incurring long-distance charges.
Additionally, as we have heard from Mr. Barnes, many VoIP
services are nomadic or mobile in nature; they can be moved
around. And they can be originated anywhere there is a
broadband or high-speed Internet connection.
Additionally, VoIP services are commonly sold as a flat
monthly charge for the service rather than as a call-by-call
basis. And, finally, there is no call detail record generated.
Again, we have no identifying information other than an IP
address for many VoIP calls.
These are very similar to the issues that wireless faced
before the enactment of the Mobile Sourcing Act. Under the
Mobile Sourcing Act, a jurisdiction designated by the
customer's place of primary use would have the sole authority
to levy taxes and fees. And we would advocate this be extended
to VoIP services. Thus, if a VoIP user has a Washington, D.C.,
place of primary use, only D.C. Has the authority to tax that
call. If a tax jurisdiction determines that place of primary
use as applied by the customer is not correct, the act outlines
a procedure for notifying the VoIP provider and for the VoIP
provider to make those changes on an ongoing basis.
The existing Mobile Sourcing Act has been successful in
providing clarity to the wireless service providers, to
customers, and to taxing jurisdictions. Expanding that act to
include VoIP is sure to be just as successful.
By allowing only the jurisdiction identified by the
customer as his or her place of primary use to tax VoIP
services, multiple or ``nowhere'' taxation scenarios would be
avoided. This protects State and local governments and reduces
disputes regarding tax situs. Furthermore, the act protects
consumers by ensuring that taxes based on lines of service,
such as flat-rate 911 fees, are only imposed on the number of
lines that provide simultaneous outward access to the public
switched telephone network.
Our industry is facing an important deadline in this issue,
as billing systems need to be created or modified in order to
correctly bill and tax on VoIP services. VoIP technology will
become exponentially more prevalent in the coming years. In
order to have clarity for State and local governments and VoIP
service providers and fairness and simplicity for consumers and
businesses, VoIP services should be sourced according to the
user's place of primary use. The simplest and most efficient
way to accomplish this is to expand the scope of the existing
Mobile Sourcing Act to include VoIP service.
Again, Mr. Chairman, thanks for the opportunity to testify.
And I am happy to answer any questions that you or Members of
the Subcommittee might have.
[The prepared statement of Mr. Cole follows:]
Prepared Statement of Robert W. Cole
Chairman Cohen, Representative Franks, and members of this
subcommittee, thank you for this opportunity to testify on an issue of
significance to millions of consumers, businesses, and state and local
governments across the United States. The emergence of new technologies
in the telecommunications industry has accelerated over the past two
decades. Our industry is in the opening phases of another technological
shift in how we provide telecommunications service to our customers.
The technological shift involves the transition from traditional fixed
location, circuit-switched landline service to voice over internet
protocol or VoIP that is mobile.
VoIP technology allows providers to use the Internet and private
Internet Protocol networks to provide voice telephone services to our
customers. This technology is more efficient for providers because
telecommunications capacity no longer requires a dedicated line from a
household to the public switched telephone networks, while allowing
customers greater flexibility and convenience. With opportunities and
advancement, however, we are confronted with fitting this new and
dynamic service into existing tax laws. The tax laws were written for
services that had a fixed service location and phone numbers that
identified a designated geographic location. The wireless providers had
similar issues with fitting mobile services into existing tax laws
prior to enactment of the Federal Mobile Telecommunication Sourcing Act
or MTSA in 2000. The MTSA is one of the great success stories in both
clarity and cooperation between our industry and state and local
governments. The MTSA (4 USC Sections 116-126) provides clear and
simple guidance for the sourcing of wireless telecommunications
services for purposes of taxation. The MTSA ``sources'' wireless
telecommunications services to the customer's place of primary use. The
industry is here to advocate the same sourcing rule for VoIP services
Traditionally, the answer to the question of which state and local
jurisdiction has the authority to tax interstate telephone service is
well settled. The U.S. Supreme Court decided in Goldberg v. Sweet, 488
US 252 (1989), that the taxing location of a call should follow what
the industry refers to as the ``two out of three rule''. If two out of
three of the following points for a call, origination or termination
and service address, are in a single state, then that state has the
sole legal authority to impose tax on the call. For local telephone
service that is static, the service address is always the taxable
location because the service always originates from the service
address. Goldberg and service address provide a clear rule for
telecommunications companies charged with the collection of various
state and local sales, telecommunications, emergency 911, and other
taxes as to which state and local taxing jurisdictions have the
authority to tax. Furthermore, it provides these state and local
governments with assurances regarding collection and remittance of this
important revenue stream.
Goldberg and service address, do not, however, work for VoIP
service. First, it is not possible for VoIP providers to comply with
Goldberg and service address for a service that is not always provided
at a fixed location and for which the telephone number may or may not
have a geographic connection to the actual location where the VoIP
service originates. VoIP customers generally have the option to choose
an out of area telephone number. This may done, for example, if you
live in DC but your family members live in TN. If you purchase VoIP in
DC with a TN telephone number, your family members can call you without
incurring long-distance charges. Many VoIP services are ``nomadic'' or
mobile in nature, in other words, they are services that that can be
originated anywhere that there is a broadband or high speed Internet
connection. There is no fixed origination, termination, or service
address. Additionally, VoIP is most commonly sold as a flat monthly
charge for the service rather than on a call-by-call basis. Finally,
most VoIP calls do not generate a ``call detail record'' that has any
relation to the geographic location of the customer making the call.
Many times the only information available to the telephone provider is
an IP address or if a telephone number is provided, it may or may not
relate to the geography of the caller. When no geographic location
information is contained in the call detail record, the providers are
unable to apply the Goldberg rule. Again, the VoIP sourcing issues are
very similar to the wireless sourcing issues prior to the MTSA;
however, VoIP providers have even less geographic location information
than the wireless providers.
The issue of VoIP sourcing is further complicated by E911 routing
database requirements. Currently, federal law requires VoIP providers
to obtain from customers their location for purposes of identification
of the correct E911 emergency communications centers. For example, a
VoIP customer here in Washington, D.C. would provide his or her
physical location to his or her VoIP provider, who in turn provides
that location to the local public safety answering point for purposes
of dispatching first responders in the event of an emergency. However,
if that individual takes his or her nomadic VoIP device on a trip to
Memphis, Tennessee, the individual is required to notify his or her
provider of the new location so that it can be provided to the local
public safety answering point for dispatch of responders in the event
of an emergency. This makes perfect sense; however, it raises an
interesting issue for tax purposes. Who has the authority to levy tax
on the calls? Washington, D.C.? Memphis, Tennessee? Furthermore, the
E911 location systems don't normally have a connection to the billing
system that actually calculates the taxes. Although a provider may have
a physical location for E911 purposes during the month, that
information is not normally available in the billing systems without
substantial programming. Finally, when the locations change throughout
the month, it is not practical or feasible to prorate taxes or fixed
line charges for 5 days in TN and 20 days in DC and 5 days in NY.
Certainty is needed with respect to what location to use for purposes
of calculating taxes, fees and charges.
Under the Streamlined Sales Tax Agreement that has been adopted by
approximately 22 states, the place of primary use would apply to VoIP
services but not all states have adopted the SSTP and the SSTP does
apply to other taxes, fees and charges that are not sales taxes.
Under the VoIP Sourcing Act, the jurisdiction designated by the
customer as their PPU, and applied by the VoIP provider in good faith,
has the sole authority to levy taxes, fees or charges on amounts billed
for VoIP services. Thus, if a user has a Washington, D.C. place of
primary use, Washington, D.C. has the authority to levy tax on VoIP
service charges to that user. This applies whether the user is making a
call across the street in Washington, D.C. or is making a call while
traveling in Tennessee, Arizona, or Kansas. As long as the service
providers use an electronic database developed by a state or a
designated database provider, enhanced zip code and applying due
diligence or an alternate jurisdiction designated method to an accuracy
level of 95%, the service providers are held harmless from retroactive
taxes, fees or charges. If a tax jurisdiction determines a place of
primary use is not correct, the Act outlines a procedure for notifying
the VoIP provider and for the VoIP provider to make appropriate changes
prospectively. The existing MTSA has been successful at providing
clarity to the wireless service providers, the customers and the taxing
jurisdictions. Expanding to MTSA to VoIP is sure to be just as
successful.
By allowing only the jurisdiction identified by the customer as his
or her place of primary use (PPU) to tax VoIP services, multiple
taxation or ``nowhere'' taxation scenarios would be avoided. This
protects state and local governments and reduces disputes regarding the
proper tax sourcing location. This Act does not determine the
taxability of VoIP services; it only identifies which tax jurisdiction
can tax VoIP services if their law subjects VoIP services to tax.
Furthermore, the Act protects consumers by ensuring that taxes based
upon ``lines'' of service, such as flat rate taxes to fund E911
service, are only imposed upon the number of lines that provide
simultaneous inbound or outbound access to the public switched
telephone network.
The VoIP industry is facing an important deadline on this issue as
billing systems have to be modified and developed and certainty is
needed in order to program the proper tax sourcing functionality. VoIP
technology will become exponentially more prevalent in the coming
years. In order to have clarity for state and local governments and
VoIP service providers, and fairness and simplicity for consumers and
businesses, VoIP services should be sourced according to the user's
place of primary use in every state. The simplest and most efficient
way to accomplish this is to expand the scope of the existing MTSA to
include VoIP services as has been done with the VoIP Sourcing Act.
Mister Chairman and members of the subcommittee, thank you again
for the opportunity to testify on this important subject, and I
respectfully urge you to pass legislation that would extend the mobile
telecommunications sourcing act to include VoIP services.
__________
Mr. Cohen. Thank you, Mr. Cole.
The final witness is Mr. Jim Eads, executive director of
the Federation of Tax Administrators starting in September
2008, capping a career of over 30 years in State tax work. He
leads the Federation of Tax Administrators staff in D.C. and
around the country as they seek both to serve and represent the
tax agencies of the 50 United States, the District of Columbia,
and New York City.
Prior to accepting this position, he was director of public
affairs for Ryan, a major tax consulting company where he
represented Ryan and its clients regarding State tax policy and
legislation across the country. He has also served as a partner
in the National Tax Department of Ernst & Young; a senior
attorney and government relations counsel with AT&T; senior tax
attorney with Sears, Roebuck; and chief counsel of the Revenue
Division of the Arkansas Department of Finance and
Administration. He is a past president of the National Tax
Association and former chairman of the Electronic Commerce Task
Force of the Council on State Taxation.
Thank you, Mr. Eads. Will you please proceed?
TESTIMONY OF JAMES R. EADS, JR., EXECUTIVE DIRECTOR, FEDERATION
OF TAX ADMINISTRATORS
Mr. Eads. Thank you, Mr. Chairman and Members of the
Committee. I am pleased to be here today and to speak to you
about this issue.
I find myself in a unique position, that I am able to
associate myself with some of the remarks of all the preceding
witnesses. I think all the preceding witnesses said that the
Mobile Telecommunications Sourcing Act was the product of a lot
of negotiation and discussion between government and industry
some 9 years ago and has resulted in beneficial effects, we
think, both for industry and government as it has been
implemented over the course of the years.
I am not here to obstruct in any way the discussion of
these issues. The Federation of Tax Administrators does
believe, however, that, because of the way that the Mobile
Telecommunications Sourcing Act came into being and because it
has worked so well, that applying its principles to Voice over
Internet Protocol, while it may indeed be meritorious, needs to
be done without making any substantive changes to the existing
Mobile Telecommunications Sourcing Act.
Again, because of the way it was negotiated, because of the
cooperation that existed then and, I think, continues to exist
between the industry and government, what we would urge is that
there be some continuing dialogue, working with your staff, Mr.
Chairman, to try to make sure that nothing is changed in the
Mobile Telecommunications Sourcing Act that isn't absolutely
necessary to be changed to supply its principles to Voice over
Internet Protocol.
I have submitted written testimony, and I would be glad to
answer your questions if you have any.
[The prepared statement of Mr. Eads follows:]
Prepared Statement of James R. Eads, Jr.
Chairman Cohen, Ranking Member Franks and Members of the
Subcommittee:
The Federation of Tax Administrators (FTA) is an association of the
principal tax and revenue collecting agencies in each of the fifty
states, the District of Columbia and New York City. Its purpose is to
improve the techniques and standards of tax administration through a
program of research, information exchange, training, and representing
the interests of state tax administrators before the Congress and the
Executive Branch.
The Federation of Tax Administrators appreciates this opportunity
to appear before you to discuss possible changes to Title 4 of the
United States Code that would apply sourcing requirements for State and
Local Taxation to Voice over Internet Protocol Services. The Federation
is receptive to some of the concerns the industry has raised regarding
this issue and hopes to be able to find a way to alleviate those
concerns before any legislation is considered for action. However, we
are not supportive of some of the suggestions being advocated.
Our concerns about possible legislation in this area are two-fold.
First, those advocating the application of the principles of the Mobile
Telecommunications Sourcing Act to Voice over Internet Protocol
services are proposing unnecessary changes to that Act, a law that was
enacted a relatively short time ago and that represented a
collaboration of parties with multiple interests. The Federation of Tax
Administrators cannot support changing settled law when the changes do
not appear to relate to Voice over Internet Protocol Services, which
was our understanding to be the issue to be addressed. Even if a
provision relates to VoIP, it should also relate to sourcing only.
Second, FTA opposes restrictions on the ability of states to enact and
administer their own taxes in ways that suit their unique needs without
a demonstrated necessity for doing so, as is being proposed by
industry.
If Congress legislates in this area, the public's interests as well
as those of the states and industry must be balanced. A primary
consideration is to maintain the administrability of the current
sourcing rules. Settled principles of law upon which individuals,
businesses and the states have come to rely should not be changed
unless circumstances strongly require such change. Many of the
proposals being advocated would unsettle the law without reason and
lead to wholly unnecessary interpretive conflicts that can be
exploited. This is the kind of intrusion into state authority and the
disruption of state revenue systems, particularly during this time of
severe economic stress that Congress should reject.
concerns with the proposed legislation
In 2000 Congress approved and President Clinton signed into law the
Mobile Telecommunications Sourcing Act (P.L. 106-252). The Act was
intended to address, for transactional tax purposes only, the problem
of determining the situs of a wireless telephone call, which had proven
to be difficult under normal standards of sourcing transactions. The
Act addresses this problem by sourcing all wireless calls and mobile
telecommunications services to the ``place of primary use'' (PPU),
which will essentially be the customer's residence or business address.
Only the state and/or sub-state taxing jurisdictions encompassing the
PPU could tax the calls or service.
The Act provides a mechanism for assigning PPUs to taxing
jurisdictions. It further provides, in Sections 119(c) and 120(a), that
a wireless carrier will be held harmless against errors that might
occur in such assignments if one of the two designated methods of
assigning the PPU is used.
The FTA, the industry and other interested parties worked to
establish a compromise law that, if it did not give everyone what they
wanted, at least achieved a solution that is workable and generally
acceptable. Some of the ideas for change being advocated do not relate
to Voice over Internet Protocol (VoIP) Services or even appear to
address sourcing. The rationale for these changes is not apparent and
represents a departure from the much discussed and ultimate
accommodation among competing interests that resulted in that
legislation being passed in 2000. These changes represent an effort to
rewrite what the states view as relatively useful and settled
principles.
Some examples of proposed modifications to settled law that do not
relate to issues of VoIP or sourcing as enacted in the MTSA are:
1. An expansion of the charges from which the providers would
be held harmless from the current law's ``any tax, charge, or
fee liability in such State,'' to now include ``any
disallowance, claim, liability, including but not limited to
taxes, charges, fees, penalties or interest that otherwise
would be due or could be asserted'' (with ``in such State''
deleted). The rationale for this change is not apparent. If it
is necessary it would appear that the change enlarges the scope
of matters from which service providers would be held harmless,
yet there is no evidence of which FTA is aware to justify this
change. It would open the door to interpretative questions as
to what is covered and lead to originally unintended tax
avoidance at worst and customer, industry and governmental
confusion at best. For example, 911 fees and other charges
might be ``deemed'' to be charges that are to be sourced to the
principal place of use, when that is not the current law under
MTSA
2. A provision apparently unrelated to sourcing that would
impose a limit on taxation of multiple VoIP service lines, in
that it provides that there is a limitation on certain fixed
charges. It provides that to the extent a tax, charge or fee
levied by a taxing jurisdiction is a fixed charge per VoIP
service line, it shall be levied on no more than the number of
VoIP service lines on an account that are capable of
simultaneous unrestricted outward dialing. The necessity of
such a restriction on taxing jurisdictions is not clear,
especially in view of the fact that the existing MTSA law
provides that it does not modify, impair, supersede, or
authorize the modification, impairment, or supersession of the
law of any taxing jurisdiction pertaining to taxation except as
expressly provided in sections 116 through 126 of this title.
3. A change to the existing MTSA to apply to state Universal
Service Fund payments is also proposed. This changes bears no
relationship to VoIP and it is unclear why it is a sourcing
issue. Even if there is some relationship, it is a change to
existing law that was the product of compromise and agreement
in 2000. The application of MTSA to revenues other than those
which were agreed upon, without some credible reason that can
be considered by the parties who negotiated in good faith to
enact MTSA, will lead to misunderstanding and could lead to
litigation. If the entire MTSA is to be opened up, state tax
administrators could have some changes they might propose.
Absent justification for changing P.L. 106-252 in ways unrelated to
Voice over Internet Protocol or addressing issues to taxation unrelated
to sourcing, the Federation of Tax Administrators believes that these
changes are unjustifiable policy options and should not be considered
for enactment. Unsettling current law without a compelling reason that
can be understood by the courts will lead to litigation which could
consume years.
state tax sovereignty
Many of the changes sought by industry are an intrusion into state
tax sovereignty. If enacted, that would arbitrarily circumscribe the
ability of the states to structure their taxes in the most efficient
and appropriate ways based on the considerations and action of their
elected representatives and chief executives. While some might consider
the concept of state tax sovereignty to be esoteric, it is fundamental
to our system of federalism and to the operation of states.
Determination of their fiscal destiny is a core concept of the
existence of the states. Within their sphere of responsibility, states
are able to define the level of government services they desire.
Further, they are, within the bounds of the United States Constitution,
free to tax the activities occurring within the state to finance those
services. The two responsibilities go hand in hand.
The importance of state tax authority to state sovereignty and our
federal system virtually requires that Congress tread lightly in
limiting the authority of the states and do so only on a showing of
compelling need and only after balancing an array of significant and
appropriate interests.
federation of tax administrators policy statement
The FTA has addressed this specific issue of telecommunications tax
policy as long ago as 2006, when a resolution was adopted by the
membership at its annual meeting that says in pertinent part:
``WHEREAS, many states have specifically included VOIP, and have
included other electronic products and services in their tax bases, and
WHEREAS, taxation of telecommunications and related products and
services provides a critical pillar in the foundation in the state
fiscal systems, therefore let it be
Resolved, that as Congress considers updating federal
telecommunications laws, it refrain from adopting provisions that limit
or abrogate states' rights to apply their taxes to Voice Over Internet
Protocol and other electronic products and services in a rational and
evenhanded manner, and be it further
Resolved, that given the dramatic changes in the nature of the
communications services available to U.S. consumers and in the entities
and manner by which such services are provided, states should examine
their taxes on communications services and electronic products and
services to ensure that they are applied in a rational and evenhanded
manner.'' (Resolution 24, adopted June 7, 2006).
conclusion
The issues addressed by this proposal are complex and in need of
thoughtful consideration by all of the parties with an interest in
making tax administration more straightforward and compliance simpler.
That being said, those complex issues deserve careful consideration so
that the solution does not become more complex than the problems and
result in tax economic and administration turmoil.
__________
Mr. Cohen. Thank you, sir. I appreciate that, and I
appreciate your testimony.
At this time, we have questions.
And I would like to ask first, Mr. Barnes, is that the kind
of device that Osama bin Laden has?
Mr. Barnes. To be honest with you, I can't tell you what
type of device----
Mr. Cohen. But he could use that. That is the kind of thing
you could kind of go and--you said nomadic-type thing. I mean,
he could take that and you couldn't find him, could you?
Mr. Barnes. It is true that nomadic devices do provide
extensive mobility advantages. But all of those services have
to be connected to a Voice over IP service provider's service
that comes along with order entry information and customer
authentication credentials that help define who the customer is
and what use they will put the services to.
Mr. Cohen. So when you get that type of equipment, you can
hide it from everybody but the taxman, is that right?
Mr. Barnes. Or the service provider.
Mr. Cohen. Or the service provider. Okay.
Mr. Cole, you indicated in your written statement that the
industry is facing an important deadline on this issue, as
billing statements have to be modified and developments. When
is that deadline and what is the deadline?
Mr. Cole. Well, sir, it is coming very close.
Because this is the future of landline telephone service,
in my opinion--and I think Mr. Barnes would concur with that--I
think we, as an industry, are moving many of our large
enterprise customers toward this type of service. And as you
have necessary allocation of dollars for system development, it
is important that we make a decision on this now--and when I
say ``now,'' I think immediately--in order to make sure that,
one, there is no revenue loss to State and local governments;
two, that we stay out of the courts, States fighting over who
has the right to tax; and three, in fairness to our customers.
You know, I deal with questions from customers, and very
rarely do I get questions about tax situs, and when I do, it is
very easy for me just to point to the Mobile Sourcing Act, and
the customers are satisfied. It is a great piece of
legislation. It is clear, it is concise. It says exactly, you
know, how the provider is to bill and remit taxes and determine
the situs for those taxes.
So, in order to have that same level of clarity and
certainty for what is really an exponentially growing industry,
the answer would have to be sooner rather than later.
Mr. Cohen. Thank you.
Representative Montgomery, you have suggested that the
Mobile Telecommunications Sourcing Act would be a model for
legislation to provide the clarity that State and local
governments need to assess and collect taxes on this type of
Voice over Internet Protocol.
Before basing any legislation on a past act, we need to
know whether and how well that act has held up in court
challenges. Do you know if there have been court challenges to
the MTSA? And, if so, what was the basis of the action?
Mr. Montgomery. I am going to defer to my lawyer, but, as
far as I know, there has not been--again, in fact, it has
brought better clarity and order to what could be a very
confusing situation. And so using, again, that model of clarity
to both the provider, the consumer, and to governments I think
is the major benefit from it. And so if there have not been
challenges, I would, again, for the sake that it has brought
that clarity, would use it as a model.
Mr. Cohen. I got you. What is the Senator's name there from
the capital, that has been there forever? Fred, is it Reichert?
Mr. Montgomery. Risser.
Mr. Cohen. Is he still there?
Mr. Montgomery. He is. He kind of got crossways of his
leader and got removed as the longest-serving member in history
on the Building Commission, but they reinstated him after there
was a bit of an uproar. But he is a great colleague, and he and
I share ties.
Mr. Cohen. Well, he is a gentleman. Thank you. Remember me
to him, if you would.
Mr. Eads, in your written testimony, you expressed concerns
about three proposed modifications to the MTSA, which you say
go beyond the scope of merely applying sourcing principles to
VoIP. Would you elaborate on those three particular proposed
modifications? And who is proposing them, and what are your
concerns?
Mr. Eads. Yes, sir, Mr. Chairman, I would be glad to. I
have used those in my written testimony as examples. Obviously,
we haven't seen any final version of a bill. We have simply
seen versions of the bill as it has evolved and may be
introduced.
Changing the language of the MTSA relating to the hold-
harmless provisions for the industry seems to us to be of some
concern, inasmuch as we are not sure why that change would have
any applicability to making those MTSA principles applicable to
Voice over Internet Protocol services. The provision relating
to multiple VoIP lines may, in fact, be benign. It is just
simply an issue that we believe needs some further discussion.
And, finally, with regard to the Universal Service Fund, there
is some disparity of treatment of that issue by the States,
although I think the vast majority of the States do it in a way
that this bill contemplates.
All we are suggesting is that these are not fall-on-
your-sword, undermining-the-foundation-of-the-republic
issues. We believe that they are simply changes to MTSA that
don't appear to be directly related to VoIP, and therefore we
would like to have some further explanation of them, working
with your staff and with the proponents.
Mr. Cohen. Staff has been so instructed and will do that.
Thank you, sir.
Mr. Scott, the gentleman from Virginia who has a new
basketball coach, one of his choosing I think, you are
recognized.
Mr. Scott. Thank you, Mr. Chairman.
Let me just get all the witnesses just to give us an idea
of what is going on now, what the present law is and where you
are taxed. If you buy a phone in Maryland, you use your phone
in Washington, DC, you live in Virginia and your best friend
lives in New York, so you have a 212 area code. Now, on cell
phones, where do you get taxed today with a cell phone? Where
would you get taxed today with VoIP? And if a bill passes, what
would change?
Mr. Cole. Okay, you may have to run by those locations.
Mr. Scott. Okay, you buy your phone in Maryland. You use
your phone in D.C. You live in Virginia. Your best friend lives
in New York City, so that is where you are calling back and
forth.
Mr. Cole. What we would do as a provider, under the Federal
Mobile Sourcing Act, with mobile telecommunication services,
not VoIP services, would be to rely on the place of primary use
that you provide me. What the language of that Mobile Sourcing
Act says is that we can default to your home address. So, if I
kept track of this correctly, that would be in Virginia. You
live in Virginia, correct?
Mr. Scott. Right.
Mr. Cole. Okay. So, under the Mobile Sourcing Act, and if
that was the primary place of use that you provided----
Mr. Scott. Well, if I am using the phone and if all
outgoing calls are coming out of D.C., since that is where I
work and that is where I am during the day----
Mr. Cole. Again, that would have to be--if you provided us
with a D.C. Business address----
Mr. Scott. No, I gave you my home address as my address,
but I use the phone in D.C.
Mr. Cole. If you provided your home address, then it would
be Virginia. Under the Mobile Sourcing Act, your home street
address is--that jurisdiction that encompasses that has the
sole authority to tax those calls.
Now, moving along in your question, for VoIP right now, I
think you have illustrated the nature of the question: Which
State does get to tax that? We don't know. Right now we simply
do not know. If the Mobile Sourcing Act were to be expanded to
include VoIP, then we would rely on that same place of use that
you provide, your home address, and that would be Virginia.
Mr. Scott. Now, I provided the home address. Is there a
little box you can check off or a little blank you can fill in
where the primary use is?
Mr. Cole. Actually, I can't speak for other providers, but
that is something that we require our customer service reps
when we set up an account, we ask them specifically, ``What is
your place of primary use,'' because that is required by
Federal law.
Mr. Scott. Okay. And if I find out that North Carolina
doesn't have a tax, can I say Raleigh?
Mr. Cole. You can find that out, but it would be a
violation of Federal law.
Now, the corrective measure in the Mobile Sourcing Act is
that, if Virginia comes in on audit and determines that is
incorrect, that you, the customer, have been giving us false
information, here is the beauty of the Mobile Sourcing Act: We
are not held harmless, going backwards, because it is not our
fault, we as the provider. And the State is able to say, going
forward, ``Hey, this is incorrect. This place of primary use is
really in Virginia. You need to bill and remit these taxes in
accordance with a Virginia place of primary use.''
And that is why I think the Mobile Sourcing Act has been
such a great success. It is a win-win situation for all three
of the parties. And, frankly, I am not aware of any issues, in
my time at Sprint, where a customer has attempted to game the
system in that fashion.
Mr. Scott. Well, you have said primary use. If I only use
the phone in D.C. And all of the calls that you have a list of
start off in D.C. And none of them are in Virginia because, by
the time I get back home, it is too late to be using the phone
in Virginia, you still tax at my home address?
Mr. Cole. Right. And there are two reasons for that. One,
it is the place of primary use that you provided us. And, two,
the default under the Mobile Sourcing Act--and this is also
consistent with Streamlined--is your home address--the
Streamlined Sales Tax Act.
Mr. Scott. But with cell phones, you have a record of where
the calls are coming from. Do you ever check?
Mr. Cole. No, because we are not required to under Federal
law. Under the Mobile Sourcing Act, we are not required to do
that. And the reason why is to prevent D.C. And Virginia from
fighting over those tax revenues. This provides Virginia with a
clear mandate that they have the authority, and they alone, to
tax those calls.
Mr. Scott. And if I were to move to Maryland, move my home
address to Maryland, then the taxing would change?
Mr. Cole. Correct. You would have to provide----
Mr. Scott. So the only thing that seems to matter is the
home address.
Mr. Cole. That is correct. That should be the place of
primary use provided by the customer.
Mr. Scott. Whether it is the primary use or not.
Mr. Cole. Correct.
Mr. Scott. Can you argue that your primary use is in a
lower tax jurisdiction?
Mr. Cole. You could argue that, but then, again, if we
get----
Mr. Scott. Well, I mean, if D.C. has a lower tax than
Virginia and I am actually using it in D.C., can I argue that
the primary use is D.C.?
Mr. Cole. Not if you didn't present that as your place of
primary use.
Mr. Scott. When I bought the phone.
Mr. Cole. Right.
Mr. Scott. And if the primary use location changes, what
happens then?
Mr. Cole. Then it is the customer's responsibility to
provide that information to the telecom provider.
Mr. Scott. Okay. Thank you.
Mr. Cole. And, again, this has been the settled law for
almost 8 1/2 years now. And I think it has worked very well for
both the State and local governments and for industry and,
frankly, for consumers. I have gotten a handful of questions
about this sort of thing from customers, and it is very easy to
say, ``Hey, you know, this is why you are getting these taxes,
it is because you provided this place of primary use,'' and
then they understand that no one is trying to play games, no
States are trying to fight over these taxes, the industry is
doing it as required by law.
Mr. Scott. What is the complication of expanding it to
include the VoIP?
Mr. Cole. I don't see a complication. I think that is the
answer to the problem where, going back to your scenario with a
VoIP device, a nomadic VoIP device like this here, you have
those very same questions, you know, purchased in Maryland,
used in D.C., home address in Virginia, there is no clear
answer in Federal law or State law as to where to tax that
call. And so that is why----
Mr. Scott. The computer could be in D.C.
Mr. Montgomery. And this is one of many issues that we are
dealing with at the State. In Wisconsin, we just enacted the
streamlined sales tax, where if you purchase something in
Wisconsin or you purchase it on the Internet, we are able to
collect the tax in another State. And part of that is getting
the verbiage of whatever it is you are purchasing down to
something discernable. So if you buy a bottle of water or a
bottle of juice, it is, in essence, taxed the same way.
So this is just another area where we are dealing with a
new generation of telecommunications that we are trying to make
it, again, incumbent on the customer to say, ``I live in
Virginia, but almost all my calls are in Maryland,'' and so you
would then declare Maryland as your primary point. But if you
declare your home as Virginia, they can come back later and if
they see 99.9 percent of your calls are actually in Maryland,
then Maryland would have a case to say, ``Well, no, your
primary point of use would be Maryland.''
Mr. Scott. Thank you, Mr. Chairman.
Mr. Cohen. Thank you, Mr. Scott.
Mr. King, you are recognized. And if you have questions of
Mr. Montgomery, I would ask that you try to ask them first, so
he can take off to the airport. He has a plane to catch.
Mr. King. Thank you, Mr. Chairman. I would be happy to
accommodate that.
Mr. Montgomery, it just raises a little a curiosity in me,
having just passed the streamlined State sales tax that you
mentioned, how many States have conformed with the language
that Wisconsin has approved?
Mr. Montgomery. I believe 28 now have. And, again, one of
the misconceptions of streamlined sales tax is that it has to
be a revenue enhancer. In fact, you can implement it as part of
your overall tax policy without having to raise taxes by
implementing it.
Mr. King. ``Revenue enhancer.'' How would you then,
Representative Montgomery, how would you deal with it in
Wisconsin--having just been through this debate and having a
real feel for trying to broaden and level these sales taxes out
so that there are fewer exemptions and that you can conform the
exemptions--how would you then react as a State legislature if
we were to do the prudent thing here in this Congress and
eliminate the IRS, the Federal income tax code, and impose a
national consumption tax to supplement your State sales tax?
Mr. Montgomery. Yeah, and, again, it is a very fine line
for us to--again, when you are advocating for simplicity and
then again having Federal preemption, as always I will stand by
the States and ask that you allow us to work in conjunction
with each other to determine that.
But, again, as I go down my Main Street and I talk to my
retailers of computers and everything else, they are
automatically, in a very competitive market, put at a 5 percent
disadvantage if the consumer chooses to use the Internet.
So there are a number of different issues that come into
this. But, overall, I would say that, again, the States have
done a great job of working together through NCSL to address
those issues.
Mr. King. And have you worked with the American Legislative
Exchange Council, as well, or what is their level of dialogue
in this discussion?
Mr. Montgomery. I apologize, I could not hear the group?
Mr. King. The ALEC, the American Legislative Exchange
Council?
Mr. Montgomery. Yes, you know, and I have, in fact, because
I am a member of that organization, as well. And they take a
different approach, again, or a little bit more on wanting each
individual State. Again, there is a balance.
And, again, when I talk to people at ALEC, again, you can
implement this without raising people's taxes. I won't use the
``revenue enhancement,'' but you can implement this and, again,
represent your people on Main Street that are having to compete
on the Internet against providers.
I have a provider of Sony computers in my district. He is a
very big supporter of University of Wisconsin-Green Bay. He
regularly loses out on bids to people that don't even live in
our State, let alone pay any kind of property tax or support to
the university.
Mr. King. I agree with you, Representative Montgomery, that
it is a disadvantage to our Main Street businesses that have a
disproportionate sales tax that might be sold over the Internet
as part of the motive for this.
It is your hope, then, that the rest of the States will
follow and conform to the legislation that you have passed in
Wisconsin and the 27 other States?
Mr. Montgomery. Well, again, I would hope that they each
look at it in such a way that--I did not implement it in my
State. In fact, I voted against it, because it was used as,
again, as a revenue enhancer as opposed to an overall tax
policy.
But I would say this, that, again, the aspect of it that
levels the playing field for my Main Street, brick-and-mortar
businesses is something that I totally agree with.
Mr. King. I thank you, Mr. Montgomery. And I want to make
sure that, if you do have to run and catch that plane, I won't
come back with a follow-up question to you. But I did have a
couple of others that I wanted to direct across the panel.
Just a short one to Mr. Eads before I go to the
telecommunications companies, and that was also in response to
one of your responses to the questions I think, Mr. Eads, or
perhaps when I read your testimony. But are you as an
organization working hand-in-glove with NSCL?
Mr. Eads. Representative King, we are in same building as
NCSL. We are in the same building with the National Governors
Association. We are in the same building with a lot of
associations of State officers.
The Federation of Tax Administrators represents tax
agencies. So I don't come from a constituency in which I can
come up here and sign off on behalf of the States on something.
I come as a representative of an organization that has what we
hope is some technical knowledge about how tax administration
works and how tax policy gets implemented.
And so, the short answer to your question is, yes, we work
with NCSL, we have worked with the National Governors
Association. But we are here primarily as a resource about what
are the technical and policy issues regarding tax
administration, and that is what we try to provide to Congress.
Mr. King. Mr. Eads, I understand your professionalism in
this. And I am curious as to what level of involvement, then--
in the same building with NCSL--how involved, then, is the
American Legislative Exchange Council? Are you able to work
with them also?
Mr. Eads. We work--ALEC is not in our building. I have
worked with ALEC in my prior lives. I know ALEC members. And
the Federation of Tax Administrators is willing it to work with
anybody who is interested in efficient tax administration and
good tax policy, absolutely.
Mr. King. And That really does, I think, answer my
question. I just wanted to bring that up to that level. And I
see my light has turned red. However much curiosity I have, I
am going to defer to the rules of Committee and----
Mr. Cohen. If you would like it to ask another question,
you have been here, and I appreciate it, and you go ahead, Mr.
King.
Mr. King. Well, thank you.
And I do have--and I listened to each of you. I would go to
Mr. Barnes, if I could.
And I mentioned the situation and you are concerned about
how taxation, multiple taxation that might take place, the
possibility of multiple taxation. What is your level of
comfort, after testifying in this hearing, that there won't be
multiple taxation on the services that you provide?
Mr. Barnes. Excellent question.
I believe that, as we define clear and concise taxation
methodology from the outset, that we can establish those rules
in advance of tax assessment. And, as a result, we can avoid in
advance any opportunities for double taxation.
Mr. King. Thank you.
And, Mr. Cole, same question?
Mr. Cole. I think, frankly, sir, if this legislation is
passed, I don't think you will see any multiple taxation. I
think if this legislation is not passed, I think you could
conceivably have a customer that receives taxes from several
jurisdictions. One provider might choose to look at the law in
that State one way, Sprint may look at it another way, and the
customer may get different State taxes from different
providers. I mean, it is really a situation where that type of
confusion could exist if we don't establish a clearer framework
at the outset.
Mr. King. Okay. And I am presuming here a little bit
because I didn't hear the early part of the question, I regret
I was called away. But do I understand this that we would have
and we would deploy the technology that would automatically
direct the taxes to the jurisdiction where they should be
applied because of predominant use?
Mr. Cole. That is correct, yeah. We already have that on
the wireless side, and it would be much easier to implement if
we were to go to this on the VOIP side. And I know that it
would probably be just as easy for the third-party software
providers like Vertex that provide some of our tax rating
software to the various carriers.
Mr. King. Let me just submit that, in my experience,
looking at efficiency and mistakes and error, that the most
persistent errors are created by human beings and the most
efficiency that we provide is with machines and technology. So,
with that, I am always going to want to err on the side of let
the technology make the decision, because human beings are
fallible.
I appreciate the testimony of all of you.
Mr Chairman, I appreciate this, and I would be happy to
yield back the balance of my time.
Mr. Cohen. Thank you, sir. I appreciate your attendance,
and that of Mr. Scott and Mr. Johnson here earlier.
I thank all the witnesses for their testimony.
Without objection, Members have 5 legislative days to
submit any additional written questions, which we will forward
to the witnesses and ask you to answer promptly. They will be
made part of the record.
Without objection, the record will remain open for 5
legislative days for the submission of any other additional
materials.
Again, I thank everyone for their time and patience,
particularly Mr. Eads. You have had previous lives, you and
Shirley MacLaine. It is nice to have had you here.
This hearing of the Subcommittee on Commercial and
Administrative Law is adjourned.
[Whereupon, at 4:04 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Response to Post-Hearing Questions from the Honorable Phil Montgomery,
Wisconsin State Assembly
Response to Post-Hearing Questions from John L. Barnes, Director,
Product Management and Development, Verizon Business
Response to Post-Hearing Questions from Robert W. Cole,
Manager, Tax Accounting, Sprint Nextel Corporation
Response to Post-Hearing Questions from James R. Eads, Jr.,
Executive Director, Federation of Tax Administrators