Proposal to cap and phase out telecommunications occupation tax considered

A bill that would phase out the ability of municipalities to impose an occupation tax on telecommunications services was heard by the Revenue Committee Feb. 4.

LB165, introduced by Valentine Sen. Deb Fischer, would prohibit any municipality from imposing a new telecommunications occupation tax or increasing the rate of the tax unless voters approve such increases. The bill would cap telecommunications occupation taxes beginning on Jan. 1, 2012 at 6 percent with the rate decreasing by 1 percent annually until it is eliminated on Dec. 1, 2017.

There is currently no limitation on telecommunications occupation taxes, Fischer said, and their rates vary from 1.5 percent to 6.25 percent in municipalities across the state. The application of the tax also differs from city to city, she said, as some communities tax only landlines and others include cell phones.

Fischer said the Legislature should define occupation taxes so that municipalities do not have to devise means for taxing telecommunications services.

“The Legislature … needs to decide what an occupation tax includes, not each municipality,” Fischer said.

The bill also would prohibit the application of telecommunications occupation taxes to total receipts for the purpose of sales tax computation. Fischer called the application of sales tax to telecommunications occupation taxes a “tax on a tax.”

Fischer said Nebraska was ranked by the Committee on State Taxation as the state with the highest taxes and fees on wireless phone services, with a rate of more than 18 percent. She listed taxes applied to a sample phone bill, which included state sales tax, local sales tax, city business and occupation tax, E911 fee, relay system fee, state universal service fund and federal universal fund.

Other taxes, such as corporate income taxes, are imposed on businesses and considered a cost of business, said Pam Spaccarotella, finance director for the city of Omaha. The difference between such taxes and the telecommunications occupation tax is that the latter is itemized on receipts, she said, which gives some the impression that it is a tax on a tax.

“Simply because the telecommunications occupation tax is separately stated [on billing receipts] does not make that a tax on a tax,” she said.

The estimated fiscal impact of LB165 is approximately $2.4 million annually, due to the current practice by which sales tax is applied to occupation taxes.

Spaccarotella said the tax ranking cited by Fischer does not take into account all taxes. For instance, she said, Iowa has aggregate wireless taxes and fees of 11.55 percent, but the state has higher income tax rates than Nebraska.

“You have to look at all taxes before you determine that one particular tax is higher than all the rest and therefore is making Nebraska not competitive,” she said.

Many proponents of LB165 complained about a city of Lincoln tax that applies to both telecommunications services and equipment.

Lyle Williamson, representing Verizon Wireless, testified in support of the bill, saying Lincoln’s imposition of the tax on equipment is discriminatory and similar taxes could spread to other cities.

“We hope over time we can work with cities in a way that allows them to have sustainable revenues with a nondiscriminatory tax method,” Williamson said.

Windstream vice president of government affairs Steve Meradith also testified in support of the bill. He said the voter approval provision of the bill would require cities to justify why the creation of or increase in telecommunications occupation taxes is justified.

Bill Mueller, representing AT&T and Viaero in favor of the bill, said the Legislature should define limits for occupation taxes so localities accept a standard tax. The same process works with sales tax, he said, where localities can adopt a local option sales tax but its rate is defined and its exemptions are delineated in state law.

Randy Gates, finance officer for the city of Norfolk, testified in opposition to LB165, saying the city’s telecommunications tax generates $320,000, which would require a 2.86-cent hike in their property tax levy rate to offset those losses. Combined with a potential reduction in state aid resulting from a bill advanced by the Revenue Committee, Gates said, the city could see a $500,000 decrease in funds.

Sidney city manager Gary Person said the city uses its telecommunications occupation tax to support their E911 communications center. Taking away the telecommunications occupation tax would add an additional burden on the the city, he said, which already has resorted to wage freezes, health insurance benefit cuts, attrition and police staffing reductions of 20 percent.

Rick Hoppe, chief of staff to Lincoln Mayor Chris Beutler and an opponent of the bill, said the city’s telecommunications occupation tax generates $7.8 million. Up to this point, the city has been able to avoid cuts to public safety, he said, but that could change with the revocation of this tax.

The committee took no immediate action on the bill.