Telecom Taxes: Is A Breakthrough Near?

In the battle over whether states can tax new technologies, the nation's governors won a skirmish in November. While Congress agreed to temporarily restore a ban on state taxes on monthly Internet access charges, anti-tax lawmakers failed to bar state levies on Internet phone calls -- known as Voice-over Internet Protocol (VoIP). The issue is critical because VoIP promises to dominate the phone business within the next decade.

Now the states are going on the offensive. BusinessWeek has learned that two new initiatives may set the stage for dramatic changes in the way all telecom services are taxed. For consumers, that may mean an end to the stew of mind-numbing charges levied by state and local governments. But it may also mean that VoIP, now tax-free in most locales, will be hit by the same taxes as traditional phone services. At stake: $20 billion a year in taxes.

To protect that revenue, the National Governors Assn. has asked officials representing states, cities, and counties to meet with top telecom officials in Washington on Dec. 15 to begin talks aimed at resolving the tax issue. The goal: Simplify levies while taxing all phone services equally -- no matter what technology delivers them. "It's important that we work through this in a cooperative fashion," says Virginia's Democratic governor, Mark Warner, president of the NGA.

At the same time, local officials and industry reps in Virginia are close to a deal that could be a model for a national solution. Today, Internet-based calls are tax-free in Virginia, but calls connected by old-fashioned switches are subject to nearly $400 million in taxes and fees. The Virginia agreement would replace those levies with a flat 5% tax on all telecom services -- including VoIP. Negotiators hope to bring the plan to the state legislature in January. "Our goal is to treat VoIP like other voice technologies," says Michael L. Edwards, deputy director of the Virginia Municipal League. The deal, adds Rick Cornwell, Verizon Inc.'s (VZ) director of government affairs, is "our attempt to put everyone on the same level of taxation."

Unhappy Bells

Even if Virginia provides a blueprint, a national agreement will be a stretch. In most states, telephone taxes are set by local governments. And they are wary of letting states collect the levy, even if governors promise to return the revenue. For its part, the telecom industry is also split. The companies all want tax cuts. But a donnybrook is brewing between those that offer the new services, such as AT&T (T) and Vonage, and those that need to protect their old technology. Says one lobbyist: "The Baby Bells are stuck under regulatory and tax rules that the VoIP outfits don't deal with. And they want a level playing field."

The talks will take place under growing pressure from Congress. GOP tax cutters will try again to ban state and local VoIP taxes next year. And incoming Senate Commerce Committee Chairman Ted Stevens (R-Alaska) may soon push a broad rewrite of U.S. telecommunications law -- could toss the tax dispute into a massive political whirlwind.

So state and local officials are moving quickly. They know they have a narrow window to get ahead of the technology, tax all telecom services equally, and protect badly needed revenue. Perhaps consumers will even get a comprehensible phone bill in the process.

The easy days of pushing new rules on a scandal-weakened Wall Street are ending for the Securities & Exchange Commission. Phillip Goldstein, who runs hedge fund Opportunity Partners, has teed up a lawsuit to overturn a new SEC requirement that hedge-fund managers must register with the agency, charging that the SEC lacks explicit authority from Congress to oversee those private investment pools. SEC officials believe the agency is on firm legal ground. The suit is coming as the Street's protests are forcing the SEC to postpone its controversial plans to speed up electronic trading on the New York Stock Exchange. Rather than call a scheduled vote on Dec. 15, SEC Chairman William H. Donaldson now plans to send the proposal back out for more comment -- giving the Big Board's floor brokers and other opponents another chance to soften the plan.

Contractors in Iraq aren't off the hook yet. An overlooked amendment in the recent defense authorization bill extends the life of the Coalition Provisional Authority's Inspector General's Office, originally scheduled to expire on Dec. 28, into late 2006. After losing nearly half its employees, the IG unit is hiring again.

The office made headlines in late November when it recommended withholding payments owed to Halliburton Co. (HAL) With more than two dozen flak-jacketed workers doing what they call "extreme auditing" in Iraq, more critical contracting reports are likely. So are "lessons learned" studies that could slam the Bush team.

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