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Wireless consumers continue to face excessive tax burdens when compared to the tax burden on other goods and services purchased in the competitive marketplace. The average rates of taxes and fees on wireless telephone services are more than two times higher than the average sales tax rates that apply to most other taxable goods and services. Consumers in seven states—Washington, Nebraska, New York, Florida, Illinois, Rhode Island, and Missouri—pay total taxes and fees in excess of 20 percent of their bills.
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  FISCAL FACT   · Americans pay an average of 17.05 percent in combined federal, state, and local tax and fees on wireless service. This is comprised of a 5.82 percent federal rate and an average 11.23 percent state-local tax rate.  · The ve states with the highest state-local rates are: Washington State (18.6 percent), Nebraska (18.48 percent), New York (17.74 percent), Florida (16.55 percent), and Illinois (15.81 percent).  · The ve states with the lowest state-local rates are: Oregon (1.76 percent), Nevada (1.86 percent), Idaho (2.62 percent), Montana (6.00 percent), and West Virginia (6.15 percent).   · Four cies—Chicago, Balmore, Omaha, and New York City—have eecve tax rates in excess of 25 percent of the customer bill. · The average rates of taxes and fees on wireless telephone services are more than two mes higher than the average sales tax rates that apply to most other taxable goods and services. · Excessive taxes on wireless consumers disproporonately impact poorer families. Key Findings Wireless Taxation in the United States 2014 By Sco Mackey Joseph Henchman Managing Partner, KSE FOCUS LLPVice President of State and Legal Projects Oct. 2014 No. 441  2 Introduction  Wireless consumers continue to face excessive tax burdens when compared to the tax burden on other goods and services purchased in the competitive marketplace. The average rates of taxes and fees on wireless telephone services are more than two times higher than the average sales tax rates that apply to most other taxable goods and services. Consumers in seven states—Washington, Nebraska, New York, Florida, Illinois, Rhode Island, and Missouri—pay total taxes and fees in excess of 20 percent of their bills. It is true that, compared to 2012, wireless fees and taxes have decreased slightly from 17.18 percent to 17.05 percent. This reduction occurred despite the fact that the national average rate of the general sales and use tax—the primary consumption tax used by states and localities—increased during the period. Overall, the disparity between wireless taxes and fees and the general sales tax declined from just over 4 percentage points to 3.7 percentage points. Cell phones are increasingly the sole means of communication and connectivity for many Americans, particularly those struggling to overcome poverty. At the end of 2013, according to surveys by the Centers for Disease Control, over 56 percent of all poor adults had only wireless service, and nearly 40 percent of all adults were wireless only. 1  Excessive taxes and fees, especially the regressive per line taxes like those imposed in Chicago and Baltimore, impose a disproportionate burden on low-income consumers.In September 2014, Chicago increased its 911 fee from $2.50 per month per line to $3.90 per month per line. The stated purpose of this tax increase, according to published reports, is to avoid the need for a property tax increase. Fixed per-line charges have a disproportionate impact on so-called “family share” plans, where multiple lines are billed on a single account. For example, the Chicago fee hike will increase the effective rate for consumers on some four-line plans to over 35 percent. Chicago joins Baltimore, Omaha, and New York City as cities with effective tax rates in excess of 25 percent of the customer bill. Congress is currently considering legislation to extend the federal moratorium on state and local taxes on Internet access. The taxes described in this report are, for the most part, imposed on wireless voice and other taxable services, not wireless Internet access. Should the moratorium not be extended by Congress, the excessive wireless taxes discussed in this report could be imposed on wireless Internet access. This could add significantly to the tax burden on wireless consumers. This is the fifth in a series of reports that examines trends in the taxes, fees, and surcharges imposed by federal, state, and local governments on wireless service. These 1 Stephen J. Blumberg & Julian V. Luke, Wireless Substitution: Early Release of Estimates from the National Health Interview Survey, July– December 2013  (July 2014) at 6, http://www.cdc.gov/nchs/data/nhis/earlyrelease/wireless201407.pdf .   3 reports—published in 2004, 2008, 2011, and 2012 in State Tax Notes 2 —use the methodology developed in 1999 by the Committee on State Taxation, now the Council on State Taxation (COST). Recognizing that it would be nearly impossible to aggregate tax rates from the over 10,000 taxing jurisdictions across the country, the COST study used an average of the most populated city and the capital city in each state as a proxy to compare tax rates across the states. 3  This methodology allows for time series comparisons of trends in wireless taxation. Wireless Tax Burdens Dropped After 2005 but Have Since Risen to 17 Percent Figure 1 shows national trends in state and local average tax rates on wireless service between 2003 and 2014. Between 2005 and 2006, wireless tax burdens dropped after a series of federal court decisions forced the IRS to end the imposition of the 3 percent federal excise tax on wireless service. Since then, rates climbed steadily until declining slightly in 2014. Table 1 shows the detail behind the trends highlighted in Figure 1, including state-local average rates as well as federal impositions. Between 2003 and 2014, state and local taxes, fees, and surcharges on wireless service increased by just over 1 percentage point—from 10.20 percent to 11.23 percent—while average state and local sales tax rates increased by six-tenths of a percentage point, from 6.87 percent to 7.51 percent. Federal taxes and Universal Service Fee (USF) charges increased from 5.07 percent to 5.82 percent. 2 Sco Mackey, The Excessive State and Local Tax Burden On Wireless Telecommunicaons Service , 33 S TATE  T AX  N OTES  181 ( July 19, 2004); Sco Mackey, Excessive Taxes and Fees On Wireless Service: Recent Trends , 47  S TATE  T AX  N OTES  519 ( Feb. 18, 2008); Sco Mackey,  A Growing Burden: Taxes and Fees On Wireless Service , 59  S TATE  T AX  N OTES  475 (F EB . 14, 2011); S co Mackey, Wireless Taxes and Fees Connue Growth Trend ,  66 S TATE  T AX  N OTES  321 ( Oct. 29, 2012) . 3 Council on State Taxaon, 50-State Study and Report on Telecommunicaons Taxaon  (1999). Figure 1. Federal/State/Local Average Wireless Tax Rates vs. Sales Tax Rates 15.27% 16.22% 16.85% 14.13% 15.19% 15.09% 15.53% 16.26% 17.18% 17.05% 6.87% 6.93% 6.94% 7.04% 7.07% 7.11% 7.26% 7.42% 7.33% 7.51% 0 2 4 6 8 101214161820%2003 2004 2005 2006 2007 2008 2009 2010 2012 2014 Wireless federal/state/local tax & fee General Sales & Use Tax Source: Methodology derived from Council on State Taxaon, 50-State Study and Report on Telecommunicaons Taxaon  (May 2005). Updated July 2014 from state statutes, FCC data, and local ordinances by Sco Mackey, KSE Partners LLP, Montpelier, VT.  4 The combined federal, state, and local burden on wireless consumers increased from 15.27 percent to 17.05 percent, or nearly 2 percentage points. Overall tax burdens on  wireless consumers grew about three times faster than general sales taxes on other taxable goods and services.The causes of the growth in the wireless tax burden differ markedly depending upon the time period considered. State and local impositions grew rapidly between 2003 and 2006, leveled off between 2007 and 2009, increased again from 2010 to 2012, and leveled off again between 2012 and 2014. On the other hand, federal impositions dropped dramatically in 2006 when the Internal Revenue Service concluded that the 3 percent federal excise tax no longer applied to wireless service. Between 2007 and 2012, the federal USF rate grew rapidly before leveling off in 2014. The federal USF is administered by the FCC with open-ended authority from Congress. The program subsidizes telecommunications services for schools, libraries, hospitals, and rural telephone companies operating in high cost areas. The USF is assessed on a provider’s interstate revenues, which the FCC deems to be 37.1 percent of the wireless bill for customers purchasing calling plans that do not distinguish between interstate and intrastate calls. 4  The notes at the bottom of Table 1 show the significant growth in the USF contribution rate from 7.3 percent in 2003 to 15.7 percent in 2014. 4 FCC rules allow wireless providers to mulply this 37.1 percent “safe harbor” by the quarterly contribuon percentage rate to determine the federal USF surcharge rate imposed on monthly contract plans that do not disnguish between interstate and intrastate calls. The FCC also allows carriers to use “trac studies” showing the actual, network-wide percentage of interstate and intrastate calls as an alternave method for determining the federal USF contribuon amounts and related surcharge rate. For the purposes of this study, the rates are calculated using the “safe harbor” method.  Table 1. U.S. Average Wireless and General Sales & Use Tax Rates 1/1/034/1/047/1/057/1/067/1/077/1/087/1/097/1/107/1/127/1/14Weighted AverageWireless—state/local tax & fee10.20%10.74%10.94%11.14%11.00%10.86%10.74%11.21%11.36%11.23%Wireless—federal tax & fee5.07%5.48%5.91%2.99%4.19%4.23%4.79%5.05%5.82%5.82%Wireless federal/state/local tax & fee15.27%16.22%16.85%14.13%15.19%15.09%15.53%16.26%17.18%17.05%General Sales & Use Tax6.87%6.93%6.94%7.04%7.07%7.11%7.26%7.42%7.33%7.51%Disparity between General Sales and Wireless Taxes3.33%3.81%4.00%4.09%3.93%3.75%3.48%3.79%4.03%3.72% Source: Methodology derived from Council on State Taxaon,  50-State Study and Report on Telecommunicaons Taxaon  (May 2005). Updated July 2014 from state statutes, FCC data, and local ordinances by Sco Mackey, KSE Partners LLP, Montpelier, VT. Federal includes 3% federal excise tax (unl 5/2006) and federal Universal Service Fund charge, which is set by the FCC and varies quarterly:Federal USF 1/1/2003 -- 28.5% FCC “hold harmless” mes FCC contribuon factor of 7.3% = 2.07%Federal USF 4/1/2004 -- 28.5% x 8.7% = 2.48%Federal USF 7/1/2005 -- 28.5% x 10.2% = 2.91%Federal USF 7/1/2006 -- 28.5% x 10.5% = 2.99%Federal USF 7/1/2007 -- 37.1% x 11.3% = 4.19% Federal USF 7/1/2008 -- 37.1% x 11.4% = 4.23%Federal USF 7/1/2009 -- 37.1% x 12.9% = 4.79%Federal USF 7/1/2010 -- 37.1% x 13.6% = 5.05%Federal USF 7/1/2012 -- 37.1% x 15.7% = 5.82%Federal USF 7/1/2014 -- 37.1% x 15.7% = 5.82%Source: Federal Communicaons Commission, Contribuon Factor & Quarterly Filings - Universal Service Fund (USF)   Management Support , hp://www.fcc.gov/encyclopedia/contribuon-factor-quarterly-lings-universal-service-fund-usf-management-support.
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