America's most creative taxing authority, charged with collecting the innovative taxes the state government dreams up

No state can be more innovative in finding new ways to tax, fee, and surcharge residents than New York.  Once it becomes taxable in the Empire State, it’s only a matter of time before it becomes taxable in other states as well.  Now consumers face the prospect of paying new sales taxes on broadband and other services they purchase online, even in cases where federal laws would seem to exclude such possibilities.

New York residents have endured the so-called “Amazon tax” since June 1, 2008 when the state government demanded large, out of state Internet retailers collect and remit sales taxes for online purchases should they result from online advertising.  Although largely ignored by smaller online retailers, large high profile Internet retailers with so-called “affiliate programs” that pay independent websites for referring potential customers faced the choice of cutting ties with their “affiliates” in New York or imposing sales tax on New York customers.

Websites ranging from Overstock.com, Buy.com, Amazon.com, Newegg, and others were all targeted by the New York State Department of Taxation and Finance.  Overstock and Newegg eventually threw their New York affiliates under the bus to preserve an “unofficial” tax-free shopping experience for New Yorkers.  Buy.com and Amazon both complied with the state, although the latter filed suit challenging the constitutionality of out-of-state sales tax collection.

What made the New York sales tax law different from all the rest is that it delivered an end run around settled federal interstate commerce law.  A Supreme Court decision found it legal for states to demand sales tax payments from businesses that operate within their state, but no such provision was made for businesses who don’t locate an office or store in a particular state.  Buying a new hard drive from an online retailer inside your state?  You’ll be charged sales tax.  Order it from outside of the state, and the company typically won’t try to collect sales tax.

New York wants online businesses to get a new attitude.  It wants sales tax money for orders placed by New Yorkers no matter where your business is located.

As the Great Recession wreaks havoc on state budgets, state lawmakers who don’t want to cut popular spending programs are instead sniffing for new ways to raise revenues.  Some are declaring ‘I Love New York’ for blazing the trail to fatter sales tax coffers.

Colorado's legislature ignited a firestorm of controversy after passing an online sales tax bill into law

One recent example is Colorado, where state lawmakers borrowed liberally from New York’s tax law and passed their own — requiring large online retailers to start collecting sales taxes or provide a summary of residents’ web purchases in the state (so the Colorado taxing authority can pressure residents to declare those purchases and pay sales tax themselves.)  The penalty for not doing so is a fine of several dollars per non-compliant transaction.  Amazon.com, among others, yanked their affiliate program in the state, and some online retailers have declared they won’t comply.  A few proclaimed they would throw away any fine notifications, suggesting the state has no authority to impose such fines for interstate commerce, which is regulated on the federal level.

Rhode Island passed its own sales tax law, and collected almost nothing from it, in part because online retailers outside of Rhode Island almost universally ignored it.  Now the law faces repeal.

Other states like North Carolina and California have endured their own controversies over such legislation.  In North Carolina, Amazon.com threw their affiliates under the bus.  California Gov. Arnold Schwarzenegger vetoed a sales tax proposal last year.  There are bills to impose sales taxes on all online purchases in Iowa, New Mexico, Vermont and Virginia.

Meanwhile, New York’s taxing authority has some new ideas on how to expand the scope of sales taxation to include a whole new range of online activities.

The E-Commerce Times reports the New York State Department of Taxation and Finance has declared doing practically anything online that involves the transfer of money in return for a service could be subject to New York sales tax:

This new position results in the imposition of sales tax on purchases of services provided over the Internet that would not be subject to sales tax if provided in person by a human being. For example, the purchase of an educational course is not taxable if provided by a live speaker, but the same course may now be considered taxable by the Department if the course is given online.

The Department has painted with a broad brush to conclude in a number of advisory opinions that, among other things, the following services or forms of entertainment are really sales of software when provided over the Internet:

1. e-learning courses;
2. information technology courses;
3. mail-tracking services performed for airlines;
4. loan origination and processing services;
5. automobile insurance policy services;
6. payroll processing services; and
7. video games played on computers located at a business’ facility.

Rhode Island's efforts to collect sales tax on out of state purchases was a flop

The logic used to justify taxation of online services illustrates the time and talent state workers are willing to extend to help fill New York’s dire budget pothole:

The Department is asserting that a purchaser of an online service is controlling the software on the provider’s server by clicking various icons on his or her own computer screen, and thus the purchaser has control over the software; hence the software has effectively been “transferred” to the purchaser. Accordingly, the Department is taking the position that the purchase of an online service is really the purchase of a license to use software, even though the software is being used by the service provider on its own server.

Critics of the taxing authority accuse it of exceeding its legislative mandate.  In fact, the New York State legislature previously considered — and rejected — legislation that would have imposed sales tax on digital downloads like music and movies.  The legislature has been resistant to taxing online activities in hopes of retaining high tech businesses in the state, who might consider locating out of state if it meant avoiding imposing sales tax on consumers.

Of course, online buyers are technically subject to paying sales taxes for every taxable purchase, made in or out of state.  But since most states ask taxpayers to voluntarily report such purchases, the compliance rate is notoriously low.

In New York, the taxing authority has a reputation best summed up as “we don’t play — padlock and seize first, ask questions later.”  Aggressive enforcement against non-compliant retailers is likely, and E-Commerce Times suggests online retailers need to pay attention:

The sales tax is a transfer tax, and sellers collect the tax from purchasers and remit the tax to the Department. However, when a seller fails to collect and remit any tax due, the seller itself becomes liable for the tax, interest and possibly penalties. The Department has not been content simply to apply its new position going forward, but rather has been seeking to apply its position retroactively on audit as well.

There have been instances of the Department auditing online service providers and assessing sales tax as far back as 2005, even though the Department’s first clear administrative guidance with respect to its new position dates from November 2008 (and even though the Department issued administrative guidance in February 2006, that seems to conflict with its present position).

The Times predicts this will all come to a head when the taxing authority sues an online retailer or state resident for non-payment of taxes.  Then it’s up to the courts to decide… when they get around to it.  Remember the lawsuit Amazon.com filed against New York in 2008?  The New York Supreme Court threw out the suit in January 2009, but an appeal was filed with the next court up the chain — the appellate court — July 13th.  It’s still pending.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Online Sales Taxes 4-5-10.flv[/flv]

Here are three reports about the ongoing online sales tax controversy underway in three states (9 minutes):

1. KMGH-TV in Denver reports on a local family running a campaign to repeal the so-called “Amazon tax” in Colorado which resulted in the end of the company’s affiliate program for Colorado residents.
2. WCAX-TV in Burlington, Vermont discusses a proposed Vermont law that would extend sales tax to online purchases.  Local merchants support the proposed law as a way to restore pricing fairness between online and brick and mortar retailers.
3. WTVR-TV in Richmond, Virginia covers that state’s proposed online sales tax bill.  George Peyton from the Retail Merchant’s Association reminds viewers whether or not an online retailer charges them sales tax, they still owe the state the tax — declared on your income tax return.

More than 36,000 Nebraska phone customers were left with blocked landline service, unable to reach 911 emergency services or many area business and government agencies after a switch failure resulted in “all circuits are busy” messages for hours on end.

Windstream’s service outage was unprecedented in Nebraska telephone history, lasting over 15 hours and impacting customers in at least 12 southeastern Nebraska counties.  Government agencies were forced to open emergency operations centers, police and fire officials asked people with emergencies to walk or drive to the nearest police station or firehouse, and some customers were left thinking the whole incident was a hacker April Fools Day attack on the telephone system.

The Nebraska Public Service Commission plans to hold hearings to investigate Windstream’s failure to maintain their network in good working order.  The Commission wants to know how the failure happened, why it took 15 hours to restore service, and what plans the company has to make sure it doesn’t happen again.

The Journal Star reported on what they’ve learned thus far about the outage:

Problems were worst in downtown Lincoln, including state and local government offices and the University of Nebraska-Lincoln. But they ultimately stretched to at least a dozen Southeast Nebraska counties.

Brad Hedrick, Windstream’s Nebraska vice president and general manager, said a number of operations and engineering technicians were doing a “root-cause analysis” Friday to try to find out what went wrong.

The outage came about 7 hours after Windstream updated the switch. But because the failure occurred so long after the update, Hedrick said, it’s unclear whether it played any role.

“We’re digging into all potential scenarios to make sure we didn’t overlook anything,” he said.

Windstream is not aware of a similar problem ever occurring before in its nationwide network, although Hedrick said he has heard of other companies having similar problems elsewhere.

Local emergency management officials said they had never experienced a service failure of similar magnitude.

“We’ve had, over the years, some minor outages, mostly geographical,” said Julie Righter, communications manager of Lancaster County’s 911 Center. “Nothing this widespread. This was multiple counties.

“It wasn’t just 911. It was every kind of phone.”

Righter said the 911 center was alerted to the problem by an alarm company employee.

“They called us and asked if we were able to call out, at which point our staff started making some test calls back and forth and we did discover we had problems.”

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/KOLN Windstream Outage Update 4-2-10.flv[/flv]

A complete wrap-up of the Windstream outage in Nebraska comes courtesy of KOLN-TV in Lincoln.  (16 minutes)

Included are interviews with three key players in the saga:

1. Commissioner Tim Schram – Public Service Commission
2. Brad Hedrick – Windstream Communications
3. Julie Righter – (Emergency) Communications Center

FCC Headquarters in Washington, D.C.

America’s broadband blueprint could wither on the vine of good intentions if some of America’s largest telecommunications companies prevail in efforts to derail the parts they dislike.  This morning, Reuters reports Julius Genachowski, the chairman of the Federal Communications Commission, and his circle of advisers are weighing options to try and keep the Obama Administration’s broadband policies on track.

They have their work cut out for them.

Net Neutrality vs. Restraint of Trade

In January, the Federal District Court of Appeals for the District of Columbia gave a hostile reception to the Commission’s argument it had the authority to order Comcast to stop throttling the speeds of their broadband customers.  Although Comcast complied, they also filed suit claiming the FCC overstepped its boundaries when it interfered with the company’s business practices.

A favorable court ruling for Comcast could create major problems for the Obama Administration’s Net Neutrality plans and broadband industry oversight in general.

Those monitoring the DC Circuit suspect the court will find for Comcast, but to what degree is unknown.  A narrow ruling could simply find the FCC erred in how it censured Comcast.  A broader ruling could require the Commission to seek more explicit authority from Congress to oversee broadband.  A sweeping ruling could wipe away the Commission’s ability to involve itself in broadband oversight, period.

Plan B: Regulate Broadband Under Existing Telephone Rules

One way around a court ruling unfavorable to Commission oversight powers would be to regulate broadband services under the existing rules governing phone service.  The most controversial aspect of those rules are found in “common carrier” provisions — including those that could potentially force open the broadband networks offered by cable and telephone companies to third party competitors.

While telephone companies have grudgingly accepted their more regulated status under the Commission’s regulatory service model, broadening it to also cover broadband will start World War III, according to Susan Crawford, former special assistant to President Barack Obama for science, technology, and innovation policy.

With billions in profits at stake, large telecommunications companies from AT&T and Verizon on the telephone side to Comcast and Time Warner Cable on the cable side would likely file lawsuits demanding such regulatory policies be deemed unconstitutional or also exceed Commission authority.

One warning sign that Obama’s FCC is not the same as the one in place under President Bush arrived in last week’s approval of a merger between Skyterra, a satellite company planning a nationwide 4G mobile network, and private capital equity firm Harbinger.  The FCC included provisions in the approval permitting the agency to review any plans by SkyTerra to lease or provide wholesale access of its spectrum to AT&T Mobility or Verizon Wireless.  In effect, the Commission can veto moves by the two mega-carriers to become even larger through SkyTerra.

AT&T and Verizon Wireless called the FCC’s approval terms “flawed” and “manifestly unwise and potentially unlawful.”

Congressional Action: Reopening the Telecommunications Act of 1996

The presidential signing ceremony for the 1996 Telecommunications Act

Another possible option for the FCC is to seek expanded authority with the passage of new telecommunications laws enacted in Congress.  The last wholesale review of telecom policy was during the second term of the Clinton Administration.  The 1996 Telecommunications Act was a gift to the industry, delivering sweeping deregulation, allowing increased consolidation and reduced oversight.

Opening the door to a 2010 Telecom Act would bring millions of dollars in lobbying by large players to preserve, protect, or expand their positions in the marketplace.  Many providers still favor telecommunications reform that would further deregulate their businesses.

Amit Schejter, professor of telecommunications policy at Penn State University, told Reuters he doesn’t believe Congress can pass such legislation at this time, especially with a divided, partisan Congress.

Not everyone is concerned that the FCC’s position between a rock and a hard place is all that unusual.  The last administration’s FCC rarely tangled with the telecommunications industry.  That Chairman Genachowski may be leading the Commission in a different direction is welcome news for some.

“The only reason this looks new and shocking is that for so long the FCC hasn’t made a decision opposed by a major company,” Ben Scott, policy director for Free Press told the Washington Post. “The FCC has spars with companies on a regular basis and this is good news.”

Windstream Communications customers in eastern Nebraska have spent much of today without access to emergency 911 services, and many were without their own landlines as well.  A switch failure in downtown Lincoln caused the outage impacting several counties starting at 7:45 Thursday morning.

Emergency services personnel were forced to rely on cell phones and amateur radio operators to process calls for emergency service, and several law enforcement personnel were staged in outage areas to assist with any calls for help.

Emergency dispatch centers were silent for much of today.  Those attempting to call 911 received a busy signal.

“You know there’s people out there that are going to need help at some point, there always is, and they’re unable to get that help,” Cass County dispatcher Deb Thiessen told KETV in Omaha.

“It’s very rare there’s an outage of this type,” said Cass County Chief Deputy Brad Lahm.

[flv]http://www.phillipdampier.com/video/KOLN-ABC Nebraska Windstream Suffers Major Outage 4-1-10.flv[/flv]

KOLN-TV and NTV report on today’s major Windstream outage.  (5 minutes)

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/KETV Omaha Windstream Failure No April Fools Joke 4-1-10.flv[/flv]

KETV-TV in Omaha also covered the outage in their viewing area. (2 minutes)

Comcast's usage meter is now available in 25 states

Comcast customers in at least 25 states have been notified that Comcast’s new usage measurement meter is now up and running.  Comcast introduced a 250 GB monthly usage limit in August 2008 after the Federal Communications Commission stopped the company from throttling usage-intensive file-trading applications.  Comcast has enforced the cap among those customers who regularly exceed it by wide margins, usually warning customers by phone or mail that they must reduce usage or face account suspension.  The usage meter application allows the company to direct customers to the self-measurement tool the company hopes will reduce the need for warnings.

Customers in Alabama, Arkansas, Connecticut, Colorado, Delaware, Florida, Georgia, Kansas, Maine, Maryland, Minnesota, Missouri, Nevada, New Hampshire, New York, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Vermont, Virginia, Washington, Washington, D.C., West Virginia, and Wisconsin should have already or will receive e-mail from the company officially notifying them about the launch of the usage meter.

Since the meter was introduced, broadband usage and pricing has increased for many customers, but the usage cap has not.  While generous by current standards, an inflexible usage limit will increasingly trap customers who use Comcast broadband service for high quality video streaming, file backups, or file trading activities which can consume considerable bandwidth.

Informally, Comcast has allowed some residential customers to purchase second accounts if they intend to blow past their usage allowance, because the company currently offers no official provisions for those who exceed the limit.