Unintended Consequences? The Open Internet Order Could Open the Door to New Taxes

Could Benjamin Franklin have been wrong about the Internet when he said, “In this world nothing can be said to be certain, except death and taxes”? The FCC’s Open Internet Order suggests so – they told us not to worry about taxes resulting from an Open Internet. We’re not so sure.

The Order itself relies on the Internet Tax Freedom Act (ITFA) to downplay “potential state tax implications” arising from reclassification. While it is true that traditional sales and business taxes cannot be applied to broadband Internet access service under ITFA, in a classic tale of unintended consequences, there are several ways in which states or localities might impose new or increased taxes on broadband providers.

1. ITFA itself is not a permanent protection from state and local taxes. To the contrary, it expires later in 2015, and if Congress were to choose not to renew it, broadband Internet service would no longer be exempt from the taxes to which ITFA applies.  (A permanent extension was passed by the House on June 9, 2015, as happened in 2014, but the prospects are uncertain in the Senate.)
2. ITFA does not ban fees or charges “imposed for a specific privilege, service, or benefit conferred.” While the application of this language will certainly be controversial in particular cases, if a state or local government successfully claims that a particular fee (such as a franchise or right-of-way fee) falls into this category, ITFA would not protect the broadband provider.
3. Many state and local governments tax property used to provide telecommunications services in a more onerous way than applies to business property in general. Conscious of this potential result, the Order states that

"today’s decision would not bring broadband providers within the ambit of any state or local laws that impose property taxes on ‘telephone companies’ or ‘utilities,’ as those terms are commonly understood. . . .  As noted herein, we are not regulating broadband Internet access service as a utility or telephone company."

The Commission’s reliance on the distinction between common carrier regulation and utility regulation, while important under federal law, ignores the fact that state laws do not all track such a clean dichotomy.

The Commission ignores the reality that states and local governments have their own tax laws and rules and will not view themselves to be bound by the FCC’s statements in interpreting the meaning and scope of their own tax laws. As a result, it seems likely that there will be significant controversy and potential new state and local tax liability for broadband providers stemming from the Order.