Companies with PBXs, Private Radio Systems, or Other Communications Devices with Switching Capabilities in Florida Take Note: Florida to Hold Workshops on Implementation of Tax on Operation of Substitute Communications Systems
 
June 21, 2004
 

Florida’s Department of Revenue has issued proposed administrative regulations that would implement controversial state and local taxes on data or voice “substitute communications systems” (SCS). The taxes would be levied at rates equivalent to those of the communications services and gross receipts taxes levied on communications services obtained from carriers. Further, a separate provision of the tax statute requires operators of SCS to register with the Department of Revenue and remit taxes annually.

Before adopting the regulations, however, the Department plans to hold workshop sessions starting June 22, 2004, to learn more about the reasons companies deploy such substitute communications systems and how they are used. Because the taxes could be substantial – in the neighborhood of 13.17 percent to 15.17 percent (depending on the applicable local tax rate) of all a business’s actual costs of operating an SCS in Florida – your company should seriously consider participating in the workshops.

By way of background, tax rates for the SCS tax were approved in 2001, but final implementing regulations have not been adopted (although some taxpayers have been remitting taxes). The tax was originally intended to prevent loss of tax revenues as a result of installation of communications systems that would substitute for carrier-provided (and taxable) services such as Centrex. As a result of technological developments, however, under the proposed regulations the 2.37 percent gross receipts portion of the tax and the 4 percent - 6 percent local portion of the tax (which have no residential exemptions) would reach even home networks using a router to connect multiple computers sharing a broadband line (assuming that there were costs of operating the system that could be taxed).

While the tax would not apply to the initial costs of purchasing the communications system, or to charges for the use of any private lines or other services obtained from a carrier (which are already subject to the communications tax), the draft regulation takes a very comprehensive view of the taxable SCS costs. The tax would apply to equipment depreciation expenses and to all other operational and maintenance costs for a system, including the allocable portion of leases, utility bills, taxes, licenses, and franchising costs, and of the salaries and benefits of personnel operating and maintaining the system, as well as to the costs of any repairs, replacement parts, or additional equipment whose costs are expensed rather than capitalized. For multi-state systems, the tax would apply to the portion of a system located in Florida. In addition to PBXs and computer networks, the tax would also apply to such systems as private dispatch systems with switching capability; systems that monitor the activities of manufacturing equipment, pipelines, rail systems, or utilities; and private two-way mobile radio systems.

The tax would apply regardless of whether an SCS provides voice or data services, or both, and regardless of whether the SCS is operated on a stand-alone basis or is interconnected with carrier-provided services. So long as the SCS has switching capability and is operated exclusively for the taxpayer’s own use, the tax is applicable. Any company with an information technology department of any size faces substantial levies.

In the recently-concluded legislative session, the Florida Senate unanimously voted to defer until 2006 adoption of administrative rules for the SCS tax, and the bill was supported by the governor. The House leadership, however, did not take up the proposed legislation, which died with the end of the session. Therefore, if the Department of Revenue adopts some form of the proposed regulation, and it is approved by the governor and Cabinet, operators of substitute communications systems will face significant new costs. Financially-strapped local jurisdictions are understandably eager to receive a portion of these revenues, which could total hundreds of millions of dollars.

The Department of Revenue is looking at this issue in an environment of revenue shortfalls and concerns about taxable services being replaced by non-taxable services. (For example, the Department is also reviewing a separate proposed rule that would collect communications service tax on the transmission component of broadband internet access services, whether self-provided or not, and regardless of whether or not the transmission component of the service is billed separately to an end-user.) It is therefore very important that interested parties, particularly those with significant potential exposure under the draft regulations, monitor this matter and make their concerns known by participating in the workshop sessions.

For more information, e-mail Helen E. Disenhaus at helen.disenhaus@hklaw.com or call toll free, 1-888-688-8500.