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ISP Tax Break Could Come With New Cost

Internet-service providers in seven states are about to get a collective $500 million tax cut, but cash-strapped states could shift their gaze to streaming services to try and recoup the lost revenues, particularly with pandemic-hammered budgets to contend with.

July 1 is when the seven remaining states allowed to tax internet access service must close down that revenue stream. They were the states grandfathered (since 1998) from the temporary, then permanent, Internet Tax Freedom Act.

Steve Lacoff, formerly with The Walt Disney Co. and Comcast, is general manager, communications at Avalara, which provides cloud-based SAAS (software as a service) tax compliance, including for some of those affected by the July 1 cutoff. He spoke with Multichannel News about the demise of internet access taxes but the potential rise of streaming taxes to help fill those state coffers.

As internet taxes sunset, states and localities could look to streaming as a new revenue source, says Avalara’s Steve Lacoff.. 

As internet taxes sunset, states and localities could look to streaming as a new revenue source, says Avalara’s Steve Lacoff.. 

MCN: What is happening on July 1?

Steve Lacoff: What’s happening is that the Permanent Internet Tax Freedom Act is going to apply to seven [grandfathered] states that were still collecting taxes on broadband services.

MCN: Which ones are they?

SL: Hawaii, New Mexico, North and South Dakota, Ohio, Texas and Wisconsin. So, now there will be no incremental taxes in any states.

MCN: Any sense of how much money these states collect annually?

SL: Yes. It is roughly $550 million, which is not insignificant, particularly in the current environment as states are extending deficit spending and budget gaps are widening.

MCN: So is this a good thing for ISPs in these states since it is one less line item fee on their customers’ bills?

SL: Yes. Look, it is a good thing for the ISPs and a good thing for the consumer. But there are two sides of the coin. The reality is that if you look at a whole range of legacy telecom services, the whole basis [of the law] was to spur adoption of internet access and promote rural penetration. The counter to that argument is that, ‘Hey, given that we are at 82% broadband adoption today, does this type of policy still make sense?’ And we are not advocating policy or picking sides here.

MCN: By which you mean Avalara? What is your dog in this fight?

SL: Avalara writ large is a leading tax calculation company. We calculate, file and remit returns for businesses, anything from a sole proprietorship to a Fortune 500 company.

MCN: Are any of the ISPs having to pay these taxes your clients?

SL: Yes, and those clients include ISPs, CLECs [competitive local exchange carriers], streaming media providers and others.

MCN: So you could lose a little business when the moratorium ends?

SL: Yes.

MCN: Have you gotten any sense that anyone on the Hill may push to delay the moratorium given the economic climate and the potential loss of revenue to states?

SL: I don’t think we have seen anything from specific states looking to push this.

MCN: You have said that ‘some communications companies that are more heavily focused on providing traditionally taxable services question whether the internet tax moratorium comes at the expense of increased share of tax burden on their services.’

SL: It means that you have more traditional, point-to-point connectivity services that have always been subject to communications taxes and continue to be, and you have internet-based services where no taxes apply.

MCN: Are they concerned the taxes may shift to them?

SL: Yes, for the last seven states. And as we exit this chapter, I think it is going to be interesting, from a midterm horizon perspective, as these states start looking for ways to increase revenues. You are seeing that on the streaming media side.

MCN: Talk a little about that.

SL: You are starting to see jurisdictions impose streaming-specific taxes on things like Netflix and Disney Plus subscriptions. Roughly half the states [in the country] are applying sales and use taxes, and seven or eight of them are applying streaming ‘comm style’ taxes.

Again, you are seeing a transition from traditional TV, regulated service comm taxes. And you are seeing a shift in buying patterns to streaming services in that revenue mix.

MCN: So ISPs in those states that have to drop those access taxes might expect them to start trying to impose taxes on their streaming services?

SL: Yes, I think that is absolutely an issue that states are actively considering as the tax revenue base continues to decline. Some of these [taxes] are statewide, some are in specific municipalities. For example, Chicago has an amusement tax whose origins, I think, go back to fairs and they have used this as a means to tax streaming service.

MCN: For the ISPs in the seven grandfathered states, the advice should be to watch out for new taxes, perhaps on streaming services, particularly given pandemic-decimated budgets and the fact that the FCC is disallowing in-kind equipment and service exactions in franchise agreements?

SL: Exactly, and franchise fees are a big component of that. λ