Cell Phone Tax Issues

Last October I posted about the oddity of H.R. 1521 introduced to limit state and local taxes on cell phones so the industry could grow when the Pew Center reported that over 80% of individuals have cell phones (10/20/10 post). I came across more oddities today. The Tax Foundation just released a report - Fiscal Facts - States Target Cell Phones for Stealth, Burdensome Taxes by Joseph Henchmen. The report shows the average tax rate per state. California's is 10.67%. It also points out a few weaknesses of such taxes particularly the lack of transparency. Although the taxes are shown on cell phone bills, many people do not look at them or can't tell how they are computed.

The article also refers to a Forbes article - Scott Wooley, "How to Duck Cell Phone Taxes" (6/6/05) that describes how the Mobile Telecommunications Sourcing Act (PL 106-252; July 28, 2000) was (at least when the article was written in 2005) being interpreted differently by cell phone providers. That Act basically requires the cell provider to charge taxes based on the customer's place of primary use. That likely is the customer's billing address. But as the Forbes article pointed out, some providers determined the primary place was tied to the customer's area code. Also, the writer of the article states that he changed his address and phone number to Idaho, which he visits regularly, signed up for electronic billing and gets to use his phone mostly in Los Angeles but pay the lower Idaho cell phone rate. Clearly, something is wrong with the Mobile Source Computing Act and how it is interpreted. Part of that might just be that taxing cell phones is out-dated.

Ideally, the tax should go to the jurisdiction where it is used, but that can be difficult to compute. But, it is also easy to change ones area code (get a new number) or address. Given cell phone billing practices, I think many people do not bother to get a different phone number when they move. I know that more and more, I find that one's area code does not tie to where they live. And, as more people get paperless billing, their address is really not important (unless it is for a utility tied to their home, such as the gas or electric). So, perhaps this phone tax really just doesn't work any more.

BUT - in California, several cities collect the tax as part of their utility user tax system. Given challenges of replacing the tax with something else, namely, getting voters to approve the new tax, it is difficult for cities to modernize their tax systems.

This is an interesting issue. I plan to look more closely into how the Mobile Sourcing Act is interpreted and if there has been any rulings on that issue.

What do you think?