As Federal Stimulus Dries Up, State Taxing Authorities May Aggressively Pursue Communications Providers in 2011


IP-based communications service providers are advised to be on high alert for increased taxation by states, as federal stimulus funding has dried up and state taxation authorities are pushed to look for other sources of taxable revenue.  The Federal Government distributed over $767 billion in stimulus funding when it passed the American Reinvestment and Recovery Act of 2009 (“Recovery Act”), known to be the largest Federal government economic recovery package in U.S. history.  Over 91 percent of the funds, excluding tax benefits, have been distributed.

Much of the Recovery Act funding was distributed to state governments, many that are on the verge of bankruptcy.  Now that stimulus funding has been all but used up and with additional federal stimulus highly unlikely, we anticipate states will begin to explore alternative means to address their huge budget shortfalls, including increasing their tax base through enforcement of existing tax regulations and expanding regulations into new areas.

Telecommunications services have always been a favorite source of tax revenue for the states and because many state tax laws regarding communications services are broadly drafted, IP-enabled services could become easy targets for state taxation authorities seeking to generate revenue.  In fact, in most states interconnected VoIP services are already subject to the same taxes that apply to more traditional telephone services.  And in other states, whose tax regulations are broadly written, even non-interconnected VoIP and other variations of IP-based communications services may become targets, as well.

It remains to be seen how vigorous or aggressive states will be in broadening their taxable revenue bases through enforcement and other means, but one thing is for certain – many state governments are in desperate need of revenue and the communications industry is an easy and reliable target.  If you are concerned with your company’s obligations and potential tax exposure, please contact the Attorney assigned to your account for further guidance.

For more information about our Firm’s Communications Taxes and Fees Practice, visit us here:

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