INFORMATION BRIEF
Minnesota House of Representatives
Research Department
600 State Office Building
St. Paul, MN 55155 November 1999
Jeanne Cochran, Legislative Analyst, 651-296-8961
Pat Dalton, Legislative Analyst, 651-296-7434
State Taxes and Fees Applicable to
Voice, Video, and Data Service Providers
This information brief summarizes, in table form, state taxes and fees applicable to
voice, video, and data service providers. It also provides background information
on these taxes and fees.
Historically, the voice, video, and data services industries were separate industries providing
separate services over dedicated facilities. Today, that is no longer true. In recent years, the
voice, video, and data services industries, and the facilities they use to provide these services,
have begun to converge. As a result, the intent of state tax policy regarding providers of voice,
video, and data services is unclear. Is state tax policy intended to tax specific services, or is it
intended to tax specific facilities used to provide these services? This information brief provides
policymakers with information relevant to this question and to the question of whether the
existing state taxes and fees applicable to voice, video, and data service providers need revision.
This information brief consists of:
<a discussion of convergence in the voice, video, and data services industries, why it is
occurring, and why it matters from a legislative perspective;
<a table which presents the different state taxes and fees currently applicable to
telecommunications, video, and data service providers; and
<background information on the applicable taxes, fees, and services.
This publication can be made available in alternative formats upon request. Please call 651-296-6753 (voice);
or the Minnesota State Relay Service at 1-800-627-3529 (TTY) for assistance. Many House Research
Department publications may also be accessed via the Internet at: www.house.leg.state.mn.us/hrd/hrd.htm.
House Research Department November 1999
State Taxes and Fees Applicable to Voice, Page 2
Video, and Data Service Providers
How Have the Voice, Video, and Data Services Industries Converged?
Not so long ago, telephone lines running into homes were used for only one purpose, to make
telephone calls. Similarly, cable lines running into homes were used only for cable television
services. Today, that is no longer true. Multiple services are now available over a single line.
For example, in some areas of the country (including St. Cloud, Minnesota), it is possible to
receive telephone, high-speed Internet access, and cable television service all over the same
broadband cable wire. Traditional telephone lines are now commonly used both for voice
communication and data transmission (i.e., Internet access). In addition, new technologies such
as cellular telephones and digital satellites are also used to provide voice, video, and data
transmission services which traditionally were provided only over land lines by a single purpose
provider. These examples demonstrate how the voice, video, and data services markets are
converging.
Why Is Convergence Occurring Now?
The convergence of the voice, video, and data services industries has been accelerating in the past
few years. The recent increase in convergence is due largely to two factors: improved technology
at a lower cost and changes in the regulation of these industries. The improvement in technology
now makes it possible to transmit data effectively over an average telephone line and has allowed
voice communications to be provided over cable networks and the Internet, as well as via cellular
telephones. One of the most significant changes in technology is the transition from analog to
digital transmission of voice, video, and data. In addition, changes in federal and state law have
encouraged competition in the local and long distance telephone markets which were traditionally
monopoly markets, as well as in the data services and video programming markets. Together
these factors have facilitated the convergence of the voice, video, and data services markets.
Why Does Convergence Matter to Policymakers?
Because convergence has occurred fairly quickly in these industries, the existing statutory taxation
and fee structure may not have kept up with changes in the industries. Many of the taxes and fees
applicable to voice, video, and data services were established when each of these services was
provided exclusively over a single line. Since then, these services have begun to be offered via
multiple types of facilities. As a result, providers of the same service are in some cases now taxed
differently depending on the technology used to provide the service. For that reason,
policymakers may want to consider whether the state should tax the delivery system or the service
delivered. Policymakers may also want to examine more generally whether the state taxes and
fees applicable to voice, video, and data services need revision to reflect the convergence of these
industries and the changes in technology.
House Research Department November 1999
State Taxes and Fees Applicable to Voice, Page 3
Video, and Data Service Providers
In considering these issues, policymakers should be aware that in the not too distant future, voice,
video, and data transmissions will be transmitted largely or wholly in digital form, meaning these
three forms of communication will be indistinguishable while in the transmission pipe.
1
To assist
in the analysis of these issues, the following table examines the taxes and fees that are applied to
different providers of following services: local voice transmission, long distance voice
transmission, video transmission, and data transmission. Background information on the state
taxes, fees, and services covered by the table is included at the end.
The information in the following table is based on the assumption that the service is purchased
separately. As part of the convergence of the voice, video, and data transmission industries,
service providers are beginning to “bundle” various voice, video, and data transmission services
together and charge one price for the entire package of services. It is hard to determine which
taxes would apply to bundles of different services. In addition, the federal government has
imposed a three-year moratorium on imposing new taxes on Internet access under the Internet
Tax Freedom Act. For purposes of this act, “new taxes” includes existing taxes that were not
imposed on Internet access prior to the enactment of the moratorium on October 1, 1998. It is
unclear what taxes can be imposed on voice, video, or data transmission services that are sold as
part of a package that includes Internet access.
House Research Department November 1999
State Taxes and Fees Applicable to Voice, Page 4
Video and Data Service Providers
LOCAL VOICE
LONG-
DISTANCE
VOICE
VIDEO
DATA
State Taxes and Fees Applicable to Voice, Video, and Data Service Providers
2
(see Appendix A for background information on taxes, fees, and types of providers)
Type of Tax or Fee
Type of Provider
Capital
equipment
sales tax
Customer
sales tax
Local
franchise
fee
911
surcharge
TACIP
surcharge
TAP
surcharge
PUC /
Commerce
3
assessment
Incumbent local exchange
carrier (ILEC)
Yes Yes No Yes Yes Yes Yes
Facilities-based competitive
local exchange carrier (CLEC)
with traditional local loop
telephone service
Yes Yes No Yes
4
Yes Yes Yes
CLEC reseller Yes Yes No Yes
5
Yes Yes Yes
Cable telephony (CLEC) Yes Yes No Yes
6
Yes Yes Yes
7
Cellular Yes
8
Yes No Yes Yes No Yes
9
Long distance Yes Yes No No No No Yes
Two-way voice over Internet Yes No No No No No No
Cable programming service Yes Yes Yes No No No No
Satellite direct TV No
10
Yes
11
No No No No No
Video over Internet Yes ?
12
No No No No No
High-speed digital subscriber
services over telephone lines
Yes Yes No No No No Yes
Wide-area network provided
by cable
Yes No ? No No No No
Wide-area network provided
by telephone company
Yes Yes No No No No Yes
Cable Internet access Yes No ?
13
No No No No
Satellite Internet Yes No No No No No No
House Research Department November 1999
State Taxes and Fees Applicable to Voice, Page 5
Video, and Data Service Providers
1. Most data is transmitted in digital form today although data transmitted over traditional telephone lines via a
dial-up modem at speeds up to 56Kbps is transmitted in analog form. Voice and video are still largely
transmitted in analog form but can be (and are more frequently being) transmitted in digital form.
2. The table was prepared by House Research and Senate Tax Committee staff. Income taxes, property taxes,
and sales taxes on inputs to industrial production apply uniformly to the various business entities covered by
the table and therefore are not included.
3. Pursuant to the Department of Administration Order No. 181, the functions of the Department of Public
Service relating to telephone companies are transferred to the Department of Commerce. Because this
transfer was made by administrative order, the applicable statutes still refer to the Department of Public
Service.
4. CLECs collect and remit the 911 surcharge to the Department of Administration but the law is unclear as to
whether CLECs are required to do so.
5. See note 4.
6. See note 4.
7. Only on telephony portion of service if separately stated.
8. Capital equipment purchases made before May 5, 1993, by cellular service providers were taxed at a reduced
rate as decided in the 1997 tax court case, Minnesota RSA10 Ltd. Partnership v. Commissioner of Revenue,
1996 WL 53858 (Minn. T.C. 1996). However, in 1993 the legislature limited the capital equipment
exemption to equipment used in the production of tangible personal property for sale at retail. Therefore,
equipment used in the provision of cellular telephone service no longer qualified for the reduced rate.
9. The assessment authority only applies to cellular companies in limited circumstances where they are seeking
the jurisdiction of the PUC. Generally, cellular companies are not subject to the jurisdiction of the PUC.
10. Statutory exemption at Minnesota Statutes section 297A.2531.
11. Although tax is owed, it may be difficult to collect sales taxes due on satellite direct TV purchases. If the
provider of the service has no equipment or personnel in the state (nexus), it cannot be forced to collect the
state tax.
12. Minnesota Statutes section 297A.01, subdivision 3, paragraph (g), defines as taxable “[t]he furnishing for
consideration of cable television services, including charges for basic service charges, for premium services,
and any other charges for any other pay-per-view, monthly, or similar television services” (emphasis added).
The Department of Revenue currently has no ruling whether video delivered over the Internet fits into this
definition.
13. A local franchise fee is included under most franchise agreements but it is arguable whether cable companies
are legally required to pay a franchise fee on Internet access over cable facilities.
Endnotes
House Research Department November 1999
State Taxes and Fees Applicable to Voice, Page 6
Video, and Data Service Providers
Appendix A
Background Information on State Taxes and Fees
and Voice, Video, and Data Service Providers Included in the Table
State Taxes and Fees
Capital Equipment Sales and Use Tax. The state generally exempts the purchase of capital
equipment used in the production of tangible personal property from the state sales and use tax of
6.5 percent. However, this exemption does not extend to capital equipment used to produce most
intangible products or services.
Customer Sales Tax. The general Minnesota sales and use tax of 6.5 percent paid by final
purchasers of certain telecommunication services.
Local Franchise Fee. Under federal law, the local cable franchise fee amount is established by
agreement between the local franchising authority and the cable company up to a maximum fee of
5 percent of annual gross receipts derived from operation of the cable system, to provide cable
services. The maximum rate allowed is commonly the agreement rate.
911 Surcharge. This surcharge is imposed on local telephone users to fund the 911 and
enhanced 911 emergency service system. Currently the monthly charge is $0.27 for each
telephone service capable of making a 911 call (including cellular).
PUC (Public Utilities Commission)/Commerce Operating Revenue Assessment. The general
operating revenue assessment is collected through direct charges or indirect charges. Direct costs
result from agency work activity created by a specific company or specified group of companies
and the corresponding direct charges relate only to that company or group. Indirect costs result
from agency activities which are not linked to a specific company or group and are allocated to all
companies in the industry on the basis of company gross operating revenues. Both charges are
subject to a cap: for direct charges, two-fifths of 1 percent of the gross jurisdictional operating
revenues for all direct costs; for indirect costs, one-eighth of 1 percent of the total gross
jurisdictional operating revenues for telephone companies, and one-sixth of 1 percent for energy
utilities. These assessments recover regulatory costs incurred by the Public Utilities Commission,
Department of Commerce, and the Office of Administrative Hearings (i.e., those which relate to
commission proceedings).
TACIP Surcharge. This surcharge is imposed on local telephone users to fund the Telephone
Access for Communication-Impaired Persons (TACIP) program, which provides funding for
telecommunications relay service and equipment program for eligible communication-impaired
persons. Currently the monthly charge is $0.12 for each service capable of originating a
telecommunications relay call (including cellular).
TAP Surcharge. The Telephone Assistance Program (TAP) surcharge is imposed on local
telephone access lines (land lines only, not cellular) to provide financial assistance to low-income
House Research Department November 1999
State Taxes and Fees Applicable to Voice, Page 7
Video, and Data Service Providers
elderly and disabled persons for basic telephone service. Currently, the monthly charge is $0.06
per access line. The 911, TAP, and TACIP surcharges for each line are combined and appear as a
single surcharge on the customer’s bill.
Local Voice Service
Cable Telephony. Telephone service provided over facilities which are traditionally used for
cable television service.
Cellular Telephone Service. Radio telephone service which uses multiple transceiver sites,
called “cells,” to transmit and receive signals to and from telephones within a cell. The user is
transferred from one cell to another as the user moves between areas. When a cellular call is
made, the call is transmitted to the cell which connects the call to a central switching office. From
there, the call is connected to the person being called.
CLEC Reseller. A CLEC which offers local telephone service by reselling the services of the
ILEC.
Competitive Local Exchange Carrier (CLEC). A company which competes for local
telephone business with the ILEC.
Facilities-based CLEC. A CLEC which offers local telephone service using its own
telecommunications facilities.
Incumbent Local Exchange Carrier (ILEC). The established local telephone company that
provided service in an area before local telephone competition was permitted by law.
Long Distance Service
Traditional Long Distance. Telephone service for calls outside the local telephone service
calling area. A toll charge generally applies to long distance calls.
Two-way Voice over the Internet. Voice communication between two users over the Internet,
rather than over the traditional telephone network.
Video Service
Cable Television Service. Multiple station television service provided over a coaxial cable wire
running into the customer’s home.
Satellite Television Service. Multiple station television service provided via satellite
transmission.
House Research Department November 1999
State Taxes and Fees Applicable to Voice, Page 8
Video, and Data Service Providers
Video over the Internet. On demand video programming service provided over the Internet.
Data Transmission Service
Cable Internet Access. Internet access and data transmission services via a coaxial cable running
into the home, traditionally used for cable television service, at speeds greater than are available
with a traditional dial-up modem over a traditional telephone line.
High-speed Digital Subscriber Services over Telephone Lines. Data transmission and Internet
access services over traditional telephone lines at speeds greater than are available with a
traditional dial-up modem over a traditional telephone line.
Satellite Internet Access. Internet access and data transmission service via satellite, at speeds
greater than are available with a traditional dial-up modem over a traditional telephone line.
Wide-area Network. A communications network that connects geographically separate areas.
