Florida Communications Services Tax and the Digital Subscriber Line “To Tax or Not to Tax?”
The Florida Department of Revenue (DOR) is considering whether digital subscriber line (DSL) services are taxable under the Florida Communications Services Tax Simplification Act (CST).1 E ffective October 1, 2001, the Florida Legislature enacted the CST to establish a new tax structure designed to treat communications service providers in a nondiscriminatory manner with respect to the taxes and fees they have traditionally provided to state and local governments. This simplified tax structure applies to virtually all providers of telecommunications and video services notwithstanding whether such providers utilize wireline facilities in the rights-of-way or provide services via wireless technology. Recently, DOR issued a notice of proposed rule development addressing the application of communications services taxes to DSL services seeking comments from members of the communications industry and other interested parties. This decision could have a significant impact on all Florida municipalities and counties (“municipalities”) and their residents with respect to taxes levied upon those receiving such services and revenues generated by the tax for the state and local governments.
Municipalities have taken the position that DOR has the authority under the relevant statutory provisions to adopt a rule providing that DSL services fall within the definition of “communications services” subject to the CST.2 Further, DOR has authority to find that DSL services do not fall solely within the exemptions or exclusions to the CST. The reasons for these conclusions are explained below and addressed in response to the issues raised by DOR at the rule development workshop in Tallahassee on December 4, 2002.
As a preliminary matter, it should be noted that the municipalities have a definite and unique interest in the appropriate application of communications services taxes. Under the CST, the legislature replaced various taxes and fees charged by local governments to communications services providers with the local component of the CST. The CST is the basis for local governments to receive compensation for the costs associated with use of their rights-of-way by communications providers, which local governments must maintain in the interest of public safety and welfare. Further, most local governments elected not to levy local permit fees in exchange for a higher communications services tax rate pursuant to F.S. §202.19(2), and thus the tax covers the costs of permitting work in the rights-of-way by communications providers. The interpretation of the CST and its appropriate application to various services provided by communications providers is, therefore, extremely important to local governments.
DOR Authority and Statutory Provisions
DOR is charged with the responsibility for adopting rules relating to the “interpretation or definition of any exemptions or exclusions from taxation granted by law.”3 The issue with the application of the CST to DSL services involves the definition of “communications services” and the exclusions created for “information services” and “Internet access service.”
F.S. §202.11 defines communications services that are subject to the communications services tax as follows:
“Communications services” means the transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals, including cable services, to a point, or between or among points, by or through any electronic, radio, satellite, cable, optical, microwave, or other medium or method now in existence or hereafter devised, regardless of the protocol used for such transmission or conveyance.
P ursuant to F.S. §202.11, the term “communications services” does not include:
(a) Information services.
* * *
(h) Internet access service, electronic mail service, electronic bulletin board service, or similar on-line computer services.
F. S. §202.11(7) defines “information service” as follows:
“Information service” means the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, using, or making available information via communications services, including, but not limited to, electronic publishing, web-hosting service, and end-user 900 number service.
In interpreting these definitions, DOR should be guided by a few well-accepted principles. First, tax exemptions and exclusions should be construed narrowly. See F.S. §202.13(2) (“It is the intent of the Legislature to exempt from the taxes imposed or administered pursuant to this chapter only the communications services set forth in this chapter as exempt from such taxes. . . . ”) (emphasis added). In addition, if a taxable communications service is bundled with an exempt service and sold to consumers for one charge, the tax applies to the entire sales charge. As an example, if a cable company sold cable service subject to the tax in a bundled package with cable modem Internet access for one charge, the CST would apply to such sale. If the bundled packages were not subject to the tax, it would be easy to avoid taxes on otherwise taxable services merely by bundling them with services exempt from such taxes.
Applying these principles, based on the technology involved in providing DSL services, the transmission of data in providing DSL services constitutes communications services under Florida law for purposes of the CST. While there may also be Internet access, unless communications providers separate the charge for transmission from the charge for access to the Internet, a single charge for DSL services is subject to the tax.
Issues Raised at Workshop
At the rule development workshop, DOR staff requested comments addressing the following issues:
1) An explanation of the technology used in DSL services;
2) Federal Communications Com-mission’s actions regarding DSL services; and
3) The application of the FCC’s actions and Florida law to the application of communications services taxes on DSL services.
Rulemaking and Technology Used in DSL Services
As pointed out at the workshop, the technologies involved in providing access to the Internet vary greatly and include for example, cable modem, dial up telephone, wireless (satellite, mobile, and fixed), power line (electric grid), and all-fiber technologies. It would be appropriate for DOR to issue a tentative rule addressing solely DSL services provided over traditional telephone technology, without addressing other technologies. While DOR has an interest in resolving the application of the CST to various technologies that provide Internet access, such an effort to create a broader rule would in any event not deal with all technologies. There will always be newer technologies and confusion over the application of CST to such technologies. confining the rulemaking to DSL services provided over traditional telephone networks, DOR will avoid concerns as to how a broader rulemaking may affect such unknown future technologies. Moreover, since DOR’s function is to interpret the statute addressing the CST and not to establish policy, it would be easier for the legislature to amend the statute if the legislature determines that it did not intend DOR’s interpretation. Further, the ever-evolving federal landscape regarding Internet services suggests a more cautious approach. In summary, because of the various and changing technologies used to provide access to the Internet, it is appropriate for DOR to approach this issue narrowly and confine this rule development to DSL services.
There are certainly engineers and others qualified to provide a discussion of the technology used to provide DSL services. There is, however, a court-accepted explanation of such technology that provides a clear and rudimentary explanation of the technology. In WorldCom, Inc. v. Federal Communications Commission, 246 F.3d 690 (D.C. Cir. 2001), the court described DSL technology over conventional telephone copper wire:
Two DSL modems are attached to a telephone loop, one at the subscriber’s premises and one at the telephone company’s central office. If the line carries both ordinary telephone service and high-speed data transmission, the carrier must separate these streams at the company’s central office, using a digital subscriber line access multiplexer. With this device the carrier sends ordinary voice calls to the public, circuit-switched telephone network (which keeps a phone line open during a voice call) and sends data traffic to a packet-switched data network (which compresses data and can send it in split-second bursts during gaps on a line), where it can then be routed to a corporate local area network or internet service provider (“ISP”).4
The FCC has similarly explained the technology involved in providing DSL services for the benefit of consumers.
Traditional phone service connects your home or business to a telephone company office over copper wires that are wrapped around each other. The wires are called twisted pair. The digital modem, which may be purchased or rented, located at your location, accesses the local telephone companies’ central office where a Digital Subscriber Line Access Multiplexer, which translates your DSL signal, has been installed. The signal is then transmitted from the copper telephone line onto a network backbone, and directed to the ISP’s location, where the ISP verifies the access to the network and delivers users to the Internet through the ISP’s relationship with a backbone network provider.5
D SL services, therefore, involve using traditional twisted pair telephone wireline facilities and a digital modem at the customer’s premises to transmit a signal to a central office. A multiplexer in the central office then translates the DSL signal, and separate voice from data. For Internet access, data signals are then transmitted through a network to an ISP.
FCC Action with Respect to DSL Services
The FCC notice of proposed rulemaking relevant to the classification of DSL services is In The Matter of Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities, FCC 02-42, 17 F.C.C.R. 3019 (Feb. 15, 2002). In this proceeding, the FCC is examining the legal and policy framework under the federal Communications Act, 47 U.S.C. §151 et seq. ,
for broadband access to the Internet provided over traditional telephone wireline facilities.
For purposes of regulatory obligations under the Communications Act, the FCC tentatively concluded that wireline broadband Internet access service is an “information service,” which is defined as “the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications.” In reaching this tentative conclusion, the FCC noted that the Communications Act defines “telecommunications service” as the “offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available to the public, regardless of facilities used.” “Telecommunications” is defined under the Communications Act as “the transmission, between or among points specified by the user, of information of the user’s choosing, without change in the form or content of the information as sent and received.”6
The FCC reasoned that under this definition, an entity provides telecommunications only when it both provides a transparent transmission path and it does not change the form or content of the information. If this offering is made directly to the public for a fee, it is deemed a “telecommunications service.” On the other hand, when an entity offers subscribers the “capability for gener-ating, acquiring, storing, transforming, processing, retrieving, utilizing or making available information via telecommunications,” it does not provide telecommunications, it is using telecommunications. It is significant to note that in making this tentative conclusion, the FCC stated that under the definitions contained in the Communications Act, “in the case where an entity combines transmission over its own facilities with its offering of wireline Internet access service, the classification of that input is telecommunications and not a telecommunications service.”7
The FCC’s statements regarding universal service obligations of providers of wireline Internet access services are more useful to DOR’s rule development with respect to taxation. The FCC funds universal service through contributions based on interstate end-user telecommunications revenues. The FCC concluded that even though it classified tentatively such services as an “information service,” such providers that bundle telecommunications services such as broadband transmission services, with enhanced, nontelecommunications services, such as Internet access, must pay into the universal service fund based on the bundled revenue.8 A ccordingly, DSL providers continue to make universal service fund payments. In its tentative conclusions, the FCC clearly left open the question of taxation of such services.9
The FCC has yet to finalize this proceeding and has requested comments on its tentative conclusion with respect to the classification of wireline broadband Internet access services as an “information service.” Moreover, the FCC requested comments on the impact of its tentative conclusion on the regulatory authority exercised by states. More particular to DOR’s rule development, the FCC requested comments on the following:
If we choose to revisit our conclusion that wireline broadband Internet access should be viewed, for universal service contribution purposes, as a bundled offering of a telecommunications service and an information service, should we decline to exercise our permissive authority over facilities-based providers of wireline broadband Internet access or simply modify the basis on which such providers contribute to universal service? For example, should facilities-based wireline broadband Internet access providers contribute based on all of their wireline broadband Internet access revenues, some fraction of those revenues, or some other amount? Commenters advocating that such providers of wireline broadband Internet access should contribute to universal service should discuss how to allocate revenues separately associated with the telecommunications or telecommunications service input from revenues associated with Internet access.10
A ccordingly, the FCC recognized the bundled aspect of DSL services, combining both telecommunications services with information services under the Communications Act.
Application of FCC’s Actions and Florida Law to Taxes on DSL Services
Initially, it must be emphasized that the FCC’s classification of DSL services as “information services” is tentative and has not been finalized. making such tentative classification, the FCC has not preempted state law with respect to taxation of DSL services. In fact, the FCC invited comments on what role states should have with respect to DSL services.
However, the FCC’s tentative conclusions relevant to universal service obligations provide guidance for the potential development by DOR of a rule regarding taxation. DOR should recognize, as did the FCC, that DSL services represent a combination of transmission and access to the Internet. Moreover, the FCC proceeding instructs that it is entirely appropriate to treat DSL services differently for different regulatory purposes. From a regulatory standpoint, it may not be appropriate to place common carrier burdens under the Communications Act on DSL providers. However, since a tax is more akin to the universal fund payment (especially in Florida where such tax revenues are used for rights-of-way infrastructure), it is appropriate from a regulatory sense to apply such taxes to DSL services.
As DOR staff recognized at the workshop, the definition of “telecommunications services” under the Communications Act is very different from the definition of “communications services” under Florida law for purposes of the CST. Under F.S. §202.11, “communications services” specifically includes “transmission.” Moreover, “communications services” under Florida law does not have the federal limitation “without change in the form or content of the information as sent and received.” In addition, unlike the FCC, DOR is not charged with making policy with respect to the application of the CST, but with providing interpretations and definitions for the exclusions and exemptions.
Given the broad definition of “communications services” under Florida law for purposes of the tax, it would certainly be appropriate for DOR to conclude that the technology used to provide DSL services falls within that definition. In some cases, such as where DSL services are used to provide a local area network, there is no question that DSL services are subject to the tax and the exclusions pertaining to “information services” and “Internet access” would not apply.
DOR needs to examine the application of these exclusions, however, in the context of a typical DSL subscriber who uses the service to access the Internet. In such a situation, DSL services include “offering the capability for retrieving or making available information” and thus include “information services” and would also include “Internet access services.” However, from a technical standpoint, the point where this occurs is following the transmission of the signal from the subscriber premises to the multiplexer located in the central office and is not until the signal is routed to an ISP.11
DSL services, therefore, involve communications services up to a point followed by potentially Internet access and information services. As the FCC recognized with respect to universal service obligations, it would be appropriate for DOR to conclude that communications services under Florida law are bundled with Internal access services. In developing an appropriate rule, DOR should recognize that DSL service providers that do not charge for the communications services component separately from the Internet access component offer the bundled services for one charge. Based on the interpretation of the statute, DOR’s rule should recognize that the revenue for taxable communications services bundled with excluded nontaxable communications service is subject to the communications tax. In its rule development, DOR should also provide for the situation in which a DSL provider may charge separately for the communications services component and for the Internet access component. In such a situation, only the communications services component would be subject to the tax.
While DOR is not charged with determining policy, the policy behind the CST supports these conclusions. The policy of treating communications services in a nondiscriminatory manner supports taxing DSL services. If a subscriber installs a separate phone line to access dial-up service, there is no question that phone line is charged. If a provider bundled such a line with access to an ISP service and markets both the phone line and ISP service for one charge, that charge is taxed. For example, if a hotel offered a flat rate per night for telephone calls and Internet access, that flat rate would be taxable.
In addition, from a policy standpoint, the revenue the state and local governments receive under the CST is supposed to be the same as the revenue they received under the old taxing system, taking into consideration expected growth. Local governments need to be concerned with losing significant revenue to subscribers who rely more on nontaxable services to communicate. It is expected, for example, that Internet calling or voice over Internet protocol will become more popular and replace to some extent traditional local and long distance telephone service.12 To retain such revenue neutrality as contemplated by the CST, DOR should maintain the taxability of taxable services when bundled with nontaxable services.
Conclusion
For the reasons stated herein, the rule developed by DOR should recognize that under F.S. §202.11, communications providers offering DSL services provide both communications services bundled with Internet access services. Based on an interpretation of the statute, the position of municipalities is that the rule developed by DOR should further recognize that when a communications provider offers taxable communications services for one charge with excluded nontaxable communications services, the entire charge is subject to the communications services tax.
1 Fla. Laws 2000 ch. 260 and Fla. Laws 2001 ch. 140.
2 The authors submitted the comments outlined in this article to DOR on behalf of numerous local governments. The Florida League of Cities subsequently adopted the authors’ comments and submitted them to DOR on behalf of all Florida’s 406 municipalities.
3 Fla. Stat. §202.26(3)(c).
4 WorldCom , 246 F.3d at 692.
5 FCC Consumer Facts (www.fcc.gov/cgb/consumerfacts/dsl2.html).
6 17 F.C.C.R. at 3030.
7 Id. at 3033.
8 Id. at 3051–52.
9 The unresolved taxation issue is further demonstrated by Commissioner Martin’s separate statement approving of the tentative conclusion, but dissenting from the FCC’s discussion with respect to requiring universal service payments from nonwireline broadband Internet providers, such as wireless, cable and satellite providers, likening the universal service fund to a tax. Id. at 3074.
10 Id . at 3053.
11 The point where “information services” and Internet access are offered is the same because without Internet access, the communications provider is not providing “the capability for retrieving or making available information.” Accordingly, while these are separately stated exclusions, from a technical standpoint they are the same.
12 Sarah Milstein, Operator, Get Me the Web Server , N.Y. Times , January 30, 2003.
Gary Resnick is a shareholder in Weiss Serota Helfman Pastoriza & Guedes, P.A., and chairs the firm’s communication practice. He chaired the Florida League of Cities Utilities and Communications Committee and currently chairs the Transportation and Urban Administration Committee. Mr. Resnick is also a member of the National League of Cities Information Technology and Communications Steering Committee. Mr. Resnick received his J.D., with honors, from Rutgers University and B.A. from Bucknell University.
Scott Robin is an associate in Weiss Serota Helfman Pastoriza & Guedes, P.A., concentrating in representing local governments in telecommunications and cable matters including drafting ordinances and negotiating franchises, renewals, and transfers. Mr. Robin graduated from the University of Miami School of Law, received his M.B.A. from Florida International University and his B.S.B.A. from the University of Florida.
This column is submitted on behalf of the City, County and Local Government Law Section, Thomas G. Pelham, chair, and Jewel W. Cole, editor.
