Task Force Meeting Information

June 27th, 2006

Game & Fish Building, 3030 Energy Lane

Casper, Wyoming

 

Task Force Members Present

Senator E. Jayne Mockler, Chairman

Senator Curt Meier

Senator Robert Peck

Representative Rodney "Pete" Anderson

Representative Gerald Gay

 

Task Force Members Absent

Representative Tom Lubnau

Representative John Hastert

 

 

Legislative Service Office Staff

Mark Quiner, Assistant Director

Don Richards, Senior Research Analyst

Joe Rodriguez, Staff Attorney

 

Others Present at Meeting

Please refer to Appendix 1 to review the Task Force Sign-in Sheet
for a list of other individuals who attended the meeting.

 

Call To Order

Representative Anderson called the meeting to order at 1:00 pm.   Senator Peck nominated Senator Mockler to serve as Chair of the Task Force.  The motion was seconded and Senator Mockler was elected chair, without objection.  Please refer to Appendix 2 to review the Task Force meeting agenda.

 

Background Information

Chair Mockler initiated the discussion by presenting a short history of the issues raised by the work of the Task Force on Intangible Property and issues leading to the creation of the Task Force on State Assessed Property.  Through the work done to clarify the definition, and ultimately the exemption, of certain intangible property, the issue of state and local assessment of certain types of communication companies arose. 

 

Don Richards, Senior Research Analyst, LSO, provided the Task Force with an overview of the taxation and regulation of major communication companies.  (See Appendix 3A for a copy of the related research.)  Mr. Richards' summary included background on the different types of companies that are (a) locally assessed versus state assessed, (b) assessed at the 9.5 percent rate versus the 11.5 percent rate, (c) regulated, certificated, registered, or have no oversight by the Public Service Commission, and (d) covered by municipal franchise agreements or currently paying franchise fees.  Mr. Richards also discussed the taxation of several types of internet service providers (ISPs) and the emerging technology of voice over internet or internet telephony.  Mr. Richards described the differences in the tax and regulation structure for a variety of different companies that offered similar services but may be taxed somewhat differently depending upon either nexus or the primary service of the company.

 

Joe Rodriguez, Staff Attorney, LSO, presented the results of his research on the constitutionality of taxing certain industries differently than others and using gross receipts information as a possible method of valuation.  (See Appendix 3B for a copy of Mr. Rodriguez' memo on this topic.)  Mr. Rodriguez concluded that the rate of assessment within a particular class of property must be equal and uniform and opined that it is probably unconstitutional to selectively tax a certain industry differently from another.  However, he added that the Constitution gives the Legislature the authority to select the valuation method designed to assess full value and there is nothing that would preclude the Legislature from using gross receipts as a possible method of valuation.  Both Mr. Richards and Mr. Rodriguez responded to several questions regarding the content of their research.

 

Department of Revenue Comments

Wade Hall, Ad Valorem Property Division Administrator, and Ed Schmidt, Director, Department of Revenue, explained the use of the unitary method in assessing state assessed property.  Mr. Hall indicated that the unitary method establishes the value of an enterprise as a single unit.  With the recent statutory changes, the Department now values the company as a single unit, removes the appropriate value of the exempt intangible property, and then attributes the remaining value to Wyoming and each county within Wyoming.  In contrast, local assessors approach valuation by identifying the value of what is physically located in each county.  Local assessors generally rely heavily on the cost approach, which does not consider financial statements and the value of the entire business enterprise, unlike the income approach.

 

Mr. Hall provided the Task Force with a short summary regarding the history of telecommunications assessment in Wyoming.  (See Appendix 4.)  He briefly touched on important cases related to telecommunications assessment and also discussed some history regarding the statutory definitions of telecommunication services, i.e., one-to-one telecommunication, written versus verbal communications, etc.  Mr. Hall stated that currently if the state assesses the property, then the property is assessed at 11.5 percent.  For some companies that offer both local cable television services, assessed at 9.5 percent, and telecommunication services, assessed at 11.5 percent, the telecommunications part of their service is separated out into a distinct business unit.

 

In response to Task Force questions, Mr. Hall indicated that the Department of Revenue (DOR) certainly looks at reports filed with the SEC and PSC; however, determining value, or the total income of an enterprise, is not that difficult.  Rather, identifying the appropriate value of the exempt intangibles and removing that value is more difficult.  He added that DOR is seeing generally what they expected in the self-reporting of exempt intangibles.  That is, the percentages of exemptions for intangibles has remained relatively stable or declined, except for cellular telecommunications companies.  Director Schmidt indicated that the Department responds to only one or two appeals each year on assessments of this type, from a universe of over 400 companies.

 

After the conclusion of DOR's presentation, the Task Force discussed whether the current structure is level, uniform, or results in unintended consequences with respect to both regulation and taxes in the larger communications industry.

 

Mr. Hall indicated that assessments based upon the physical pipe or conduit, rather than taxation based upon the type of data or information being transmitted, is easier to administer for purposes of nexus and property taxation.  Director Schmidt summarized the issues for the Task Force and suggested that they first consider whether the tax is fair and then give consideration to ease of collection.  Mr. Hall concluded that policymakers may wish to focus on equitability in taxation method rather than equality in outcome.  In response to further discussions, Mr. Hall estimated, based upon rough calculations and 2006 appraised values, that a reduction in the assessment rate from 11.5 percent to 9.5 percent would result in the following tax reductions:  $405,000 for major telecommunication companies; $166,000 for cellular companies; $238,000 for rural telecommunication companies; and a very small amount for telecommunication resellers.

 

Public Comment

Erin Taylor, Wyoming Taxpayers Association, (WTA) provided the Task Force with several handouts (Appendices 5 through 9) related to other work in the area taxation of the telecommunications industry.  (Appendix 5 summarizes WTA's philosophy on the cornerstones of taxation.)  Ms. Taylor indicated that this issue is being addressed by many states as technology develops.  Ms. Taylor stressed that the consideration should not focus on a comparison between Wyoming and other states, but rather a discussion of treatment of similar companies within Wyoming.  She concluded by urging the Task Force focus on inequities in the system and potential discriminatory tax policy.

 

Stacie Sprinkle, Verizon, indicated that the goal of the communications industry is to be taxed like a traditional commercial business.  She stated that historically, telecommunications services in Wyoming have been treated as a utility, but these companies should be taxed like any other commercial business in Wyoming.  Ms. Sprinkle suggested the state is really imposing an income tax on a select few companies.  Such an assessment system - using income as a method to identify property value - was found to be sound if the return is regulated and has a relation to the assets.  However, this is not the case for companies that are not rate regulated. 

 

Next, Ms. Sprinkle provided the Task Force with a numerical example of how the current property tax structure in Wyoming affects communication companies as compared to general businesses in a worst case scenario.  (See Appendix 10.)  She indicated that there are two issues present: (1) the choice of valuation method and (2) the difference in assessment ratios.  Ms. Sprinkle added that the 2 percent difference [between 11.5 percent assessment rate and the 9.5 percent assessment rate] is really not that substantial, yet the communications industry should be taxed consistently with general business.

 

Ms. Sprinkle then offered the Task Force a comparison of communication companies and general business for a range of taxes in Wyoming.  (See Appendix 11.)  She indicated that Verizon does not have an issue with some taxes Wyoming has elected to impose if they are conditioned upon funds used for appropriate services, e.g., Universal Service Fund (USF) and 911 taxes.  In Wyoming, the use of these funds does not appear to be a problem, according to Ms. Sprinkle.  She also discussed franchise fees as a way to compensate jurisdictions for the use of  public rights-of-way and explained that wireless companies do not use rights-of-way, do not have exclusive franchise agreements, but do have an additional cost of doing business - renting space for towers.  Ms. Sprinkle concluded her presentation with a discussion of the comprehensive tax model imposed in Virginia. 

 

The Task Force queried Ms. Sprinkle on the application of her summary of communication and business taxes (Appendix 11) and whether she recognized some industries pay significant fuel taxes.  The Task Force also inquired whether such a comparison was appropriate since some of the taxes, e.g., sales taxes are paid by the ultimate consumer and remitted, but not paid, by the telecommunications industry.  The Task Force also discussed recent intangible exemptions claimed by the wireless industry.  Finally, the Task Force raised the possibility of imposing a gross receipts tax [or a gross receipts method to valuation].  Ms. Sprinkle indicated that if the gross receipts tax is another imposition of taxes just for the telecommunications industry, there would appear to be no rational basis for charging the tax.

 

Jody Levin and Paula Roney, Qwest, began their remarks by clarifying that Qwest is paying a franchise tax at the local level ranging from no fee to 3 percent, but it is not operating under franchise agreements.  The arrangement does not provide exclusivity, according to Ms. Levin; rather, the fee provides for the cost of accessing the public rights-of-way.  She indicated that there are two conflicting circuit court rulings on this issue, but indicated that Qwest intends to continue to pay the franchise fees until the courts or Congress clarifies the issue.

 

From a taxation perspective, Wyoming is often ranked #1 or #2 in terms of low tax rates; however, according to Ms. Levin, there are issues of inconsistency.  Historically, there were a lot of reasons for developing the current tax structure; however, increases in technology removed the limitations of the current tax structure.  Qwest supports equitable, simple tax treatment, and Qwest supports assessment at the state level.  Ms. Roney noted that central assessment provides for a more direct method for attributing the value of a company to the counties throughout Wyoming.

 

Responding to questions of the Task Force, Ms. Levin indicated that she could not say a reduction in two percent in the assessment rate would result in a similar investment in infrastructure.  However, she added that the costs of regulation compounded by discriminatory taxation reduces Qwest's ability to deploy service. 

 

Liz Zerga, Alltel, briefly offered her support for moving the telecommunications industry to the general commercial rate, assessed at the local level.  When asked if she was recommending that railroads become locally assessed as well, Ms. Zerga indicate no, the railroads like where they are.

 

Doug Brandt, Park County Assessor, offered the Task Force a local assessor's perspective and some additional history.  He suggested that the Board of Equalization in a 1992 ruling tied the hands of the local assessors and required local cable companies to be assessed at 9.5 percent.  (See Appendix 11 for a copy of the Board of Equalization Order 92-1.)  Mr. Brandt indicated that six counties tried to impose the 11.5 percent assessment rate.  He added that as far as valuing the cable companies, the counties were deemed not to  have the authority by law to assess these properties using the income approach.  He added that county assessors have no standing to appeal the State Board of Equalization Order, but argued that counties should have standing.

 

Mr. Brandt discussed the telecommunications industry and how the technology is expanding not retracting and noted that the cable companies should be assessed at 11.5 percent, rather than reducing the rate for telecommunication companies to 9.5 percent.  In terms of assessments, Mr. Brandt noted that property assessment [as shown in the illustration in Appendix 10] has very little to do with book value for IRS purposes.  He added that book value can go down to zero, but property would almost always be worth something.

 

Committee Discussion

Senator Meier suggested that this Task Force would have difficulty addressing the taxation of internet telephone companies such as Vonage.  However, he indicated that the Task Force could remove the sales tax from all communication services, lump all communication companies in one assessment rate and revise the definition of communications, or telecommunications companies.  Representative Anderson indicated that another approach to resolving potential inequities in the property tax system would be to simply expand the definition of exempt, intangible property.  He added that within whatever change is contemplated, political subdivisions would likely want reimbursement for their share of any lost revenue.

 

The Task Force then discussed equity of the taxation system and whether the property could and should be state assessed at a rate of 9.5 percent.  The Task Force also considered whether the gross receipts approach to valuation would be worthwhile.  During this discussion Stacie Sprinkle, Verizon, noted that revenue neutrality within the telecom industry is not the issue.  She stressed that discrimination of tax policy between the telecom industry and general business is a larger issue.  Finally, Brenda Arnold, Laramie County Assessor, suggested that the Legislature could design a system similar that used for assessing mobile machinery by exempting it from property taxation and designing another system to raise revenue.

 

After conclusion of the discussion, Chair Mockler directed LSO staff to write a bill that requires all one-way (locally assessed) and two-way (state assessed) property be state assessed at 9.5 percent; removes the sales tax on all communication services, including newspapers; and incorporates a sunset provision.  She added that the Task Force should also consider the option to raising the assessment rate for cable television to 11.5 percent.  Chair Mockler also requested that LSO staff provide a statement of the estimated fiscal implications of each of the components separately.

 

Brenda Arnold noted that the total assessed value for the cable television is not currently segregated and identifying the fiscal impact of a raise in the assessment rate to 11.5 percent for those properties may be difficult.

 

Meeting Adjournment

There being no further business, Chairman Mockler adjourned the meeting at 4:30 p.m.

 

Respectfully submitted,

 

 

 

Senator Mockler, Chair