The Order tries to minimize the potential that state or local taxes on broadband Internet access service (BIAS) will increase as a result of reclassifying BIAS as a telecommunications service. BIAS providers, however, have reason to be concerned that there may be significant tax impacts arising from the Order.

The Order itself relies on the Internet Tax Freedom Act (ITFA) to downplay “potential state tax implications” arising from reclassification. While it is probably correct that traditional sales and business taxes cannot be applied to BIAS under ITFA, there are several possible ways in which states or localities might impose new or increased taxes on BIAS providers.

First, 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, BIAS would no longer be exempt from the taxes to which ITFA applies.

Second, 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 BIAS provider. 

Third, 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 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.”  In making this statement, the Order is drawing a distinction between common carrier regulation (which is what it claims to be imposing on BIAS providers) and utility regulation (which is normally imposed on entities viewed as natural-monopoly suppliers of a good or service, such as the distribution of electricity, natural gas, water, etc.). However valid this distinction between common carriers and utilities might be, the Order  ignores the fact that state laws do not all track such a clean dichotomy.

Indeed, with respect to this and other state and local tax issues, the Order seems to ignore the fact that each state has its own tax laws and rules, phrased and interpreted in different ways, and that state and local governments 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 unfortunately seems likely that there will be significant controversy surrounding these issues for some time to come.