Telecommunications and the Tangle of Taxes.

• Author: Mackey, Scott

State and local tax policy mustn't get lost in the dizzying pace of change in the telecommunications industry.

It is hailed as the key to economic freedom, prosperity and growth in the 21st century. It is the backbone of the digital revolution--without it, electronic commerce would not exist. Upstarts and Fortune 500 companies alike are in a knock-down-drag-out battle to control its future.

"It" is the nation's telecommunications network--the fiber optic cables, switches, routers, copper wires, satellites, and wireless communications towers and equipment. Wall Street has made hundreds of billions of dollars available to competing telecommunications companies to lay fiber, add switches and expand the cellular network. This expansion in the network--combined with new federal and state laws and regulations deregulating the industry--has led to an explosion of choices for many (but not all) consumers. And it has given the American electronic commerce industry an important head start over foreign competitors shackled with outdated telecommunications networks.

Now the industry is rushing to deploy a critical upgrade in this network--called "broadband." Broadband will dramatically increase the capacity of the pipe, allowing huge volumes of data to flow in and out of homes and businesses at speeds 100 times greater than the current network. The deployment of broadband will greatly expand the speed and efficiency of the Internet. It will open up many new educational, medical and commercial opportunities on the World Wide Web.

AT&T and the cable industry want to provide broadband through cable TV wires; the regional bell telephone companies want to "turbocharge" existing phone lines; and wireless providers are trying to perfect the technology to provide broadband access without wires. Cable companies, established telecos and others have invested billions on developing these technologies--some of which may be obsolete in a few years.

With the dizzying pace of change in the telecommunications industry, there is one important piece of the puzzle that is mired in the bygone era of Ma Bell: state and local tax policy. Many state and local tax statutes refer to industry structures that have ceased to exist. The result is a complex and burdensome tax system that costs the industry billions in compliance costs.

And the problem is only going to get worse as companies develop new technologies and new ways to market them. For example, some industry analysts are...