Taxing the superhighway.

• Author: Zimmerman, Christopher
• Position: Tax implications of Federal Telecommunications Act of 1996 - Includes related article on law's provision on removing barriers to entry - Cover Story

The new Telecommunications Act is presenting state legislators and tax officials with some extra-knotty problems.

With the passage of the Federal Telecommunications Act of 1996 and the accelerated pace of innovation in the industry, the next few years may see a revolution in your work, homelife and entertainment.

You may be watching movies transmitted to your home by the phone company. Actually, "the" phone company may be an obsolete expression: You may be buying telephone service and Internet access from your cable television company, over the same coaxial cable that brings you ESPN and HBO. Or, you may go "wireless" altogether - for telephone, on-line computer services including Internet, paging and 200-plus television stations transmitting from around the globe.

For business there are similar implications, with stiff competition for services like telephone, data transmission and paging by companies that up until recently have been seen as distinct industries, such as local telephone, long distance, cellular and even electric power. Sales strategies may change, with the Internet holding the promise of true direct marketing. Ultimately, distinctions with financial services may break down, as telecoms offer credit cards and electronic cash becomes a preferred form of payment.

As legislators begin their first full sessions since passage of the landmark federal act, they will be faced with conflicting demands for new legislation of their own, particularly in the area of taxation. They will have to decide whether to act or wait. Industry groups may call for an overhaul of state and local tax policies, charging that current law will hinder the development of the new technologies, with the danger that their state will be bypassed by the information superhighway. On the other hand, administrators and local officials will also ask legislators to consider the risk of substantial gaps opening up in revenue systems.

As the new federal law takes effect and the industry continues to develop apace, will state tax policy be rendered anachronistic?

Existing tax policies have largely been premised on the notion of telecommunications providers as "utilities," regulated monopolies divided neatly into separate industries. Although competition has been working its way in for a number of years, the first rewrite of the federal regulatory structure in more than 60 years has thrown the door wide open.

In the early 1980s, long distance competition led to divestiture of the Bell System. Local service was separated from long distance. Now, observers speak of "technological convergence." What used to be hard lines separating industries - telephone service, cable television, computer services, electric power, etc. - may be washing away.

Now there is a corresponding "economic convergence," accelerated by the 1996 Telecommunications Act. A major thrust of the act was to open up local phone service to competition, and to let local phone companies ("RBOCs" - for Regional Bell Operating Companies - in telco lingo) enter into other fields.

Although it may be the end of the monopoly era, the likely watchword of the future is "bundling" - the integration of consumer services into packages, so that the customer will pay one bill for telephone, entertainment, paging and messaging, Internet and other computer services. Eventually this may mean a relatively small number of large firms competing across state, and even national, lines.

Another important feature of the new law is that it leaves much to the Federal Communications Commission. The FCC was given a lot of authority to write the necessary regulations - with a mandate to hurry. This includes some areas that are largely new to the agency - possibly including state tax policy.

The act potentially sets up a major test of federalism, enacting broad new preemption combined with a bow to the prerogatives of state and local governments. Trying to preempt any "barriers to entry" that state and local governments might erect, Congress imposed a requirement of competitive neutrality: All providers must be treated alike. Any regulation must be unbiased, and must not discriminate among...