As lawmakers look for ways to spur broadband expansion into rural areas, one potential aid to that goal keeps popping up: the elimination of the sales tax on telecom equipment.
Nearly half of the states (23, to be exact) exempt tax on equipment that providers purchase to build and operate internet networks, but some of the states where rural broadband growth is a hot-button topic — such as Alabama and Georgia — levy that tax.
There is movement to do away with the tax as broadband growth grows into a hotter topic, especially as lawmakers gear up for 2017 legislative sessions.
Kelly McCutcheon, president of the Georgia Public Policy Foundation, notes that raw materials used in manufacturing are exempt from taxation. He said the equipment used to build broadband networks should be no different.
“Economists agree you shouldn’t apply a sales tax to a business input,” he told Watchdog.org.
McCutcheon argues that telecom tax could put Georgia at a disadvantage when larger providers are looking to expand. He’s not alone — a frequent topic of discussion of a legislative committee that will soon provide a report to the full legislature on how to grow broadband in the state is how eliminating the tax could help.
“If you’ve got $50 million to deploy and you’re taxed in one state and not in another state – that’s a big disincentive not to invest in Georgia,” McCutcheon said.
In a blog post in 2013, T-Mobile said that in a state with the tax, such as Washington, each dollar invested would purchase less than 92 cents of telecom equipment, and noted the nationwide sales tax burden on such equipment at the time was nearly $1.5 billion.
“Not only are the network providers not investing the resources that are being taxed, but also consumers are paying the increased cost as hidden taxes built into their broadband telecommunications service rates,” wrote Russell Sarazen, national director of state legislative affairs for T-Mobile.
Andy Macke, vice president of external affairs for Comcast, told Watchdog earlier this year that a Georgia legislative panel studying how to help broadband expansion in the state would be wise to consider lowering taxes and fees to help “bend the cost curve,” potentially turning unprofitable expansions into situations in which companies would be more eager to run fiber to out-of-the-way areas.
“It would drive the investment,” he said.
It’s not just private providers sounding the horn — for admittedly self-serving reasons. In November 2015, the National Conference of State Legislatures’ task force studying property taxation on communications providers determined that many states “have antiquated property tax systems that have not been modernized since the telecommunications industry evolved from a regulated monopoly marketplace.”
NCSL noted that state legislatures must balance the need to modernize property taxes with the short-term hit to the budgets of schools and local governments.
“One way that states have addressed this challenge is to phase-in property tax changes so that they only apply to new investments,” the report concluded.
In Alabama, state Sen. Clay Scofield introduced bills late in the 2016 legislative session that he hoped would spur rural broadband development. The legislation didn’t get far because of the lateness of the filing, but the Guntersville Republican plans to try again in the upcoming 2017 session.
His bills would exempt broadband telecommunications network facilities built from 2016 on from taxation for 10 years, exempt materials or equipment used by those facilities from the state’s sales and use tax and offer an income tax credit equal to 10 percent of the investment in broadband network facilities.
In Georgia, eliminating the telecom equipment tax would cost state and local governments an estimated $68 million in annual revenue up front, but could yield more tax money in the long run with increased investment yielding a bevy of local taxes and fees and more customers paying more in sales and use taxes.