Mobile Telecommunications Sourcing Act--Background

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In July 2000, Congress approved the Mobile Telecommunications Sourcing Act (P.L. 106-252). The Act is intended to address, for transactional tax purposes only, the problem of determining the situs of a cellular telephone call, which has proven to be difficult under normal standards of sourcing transactions. The Act addresses this problem by sourcing all wireless calls and mobile telecommunications services to the "place of primary use" (PPU), which will essentially be the customer's residence or business address. Only the state and/or sub-state taxing jurisdictions encompassing the PPU could tax the calls or service.

Hold Harmless. The Act provides a mechanism for assigning PPUs to taxing jurisdictions. It further provides, in Sections 119(c) and 120(a), that a wireless carrier will be held harmless against errors that might occur in such assignments if one of the two designated methods is used.

Under the first scenario, at Section 119, a state would furnish vendors with a database (e.g., Geographic Information System) matching addresses with taxing jurisdictions, and vendors would be held harmless for any errors resulting from their use of that database. There will be no hold harmless for vendors that do not use the state-supplied database, after a period allowed for converting to the database.

Under the second scenario, at Section 120, if a state does not furnish vendors with a database, vendors would be held harmless if they employ a zip code of at least nine digits (an "enhanced zip code"), and exercise "due diligence" in assigning addresses to taxing jurisdictions. "Due diligence" is defined to require vendors to expend resources, maintain internal controls, and employ all obtainable data pertaining to changes such as municipal annexations. It is thought that states for whom sourcing of wireless calls has a material effect on revenues will be motivated to provide the database discussed in Section 119, while states for whom such sourcing is not important will be content to allow vendors to employ the enhanced zip code, the accuracy of which has been characterized within a range of 80-99-plus percent.

FTA and MTC Obligations Under the Act. Section 119 of the Act provides that each state may provide vendors with an electronic database that assigns each address in the state to the appropriate taxing jurisdiction and that vendors will be held harmless for errors resulting from the use of such a database provided by a state.

The section also delineates the technological standards that a state-provided database must meet, and provides that the format for such a database must be approved by the American National Standards Institute's Accredited Standards Committee X12. In addition, each state's database must provide a standard way of identifying each taxing jurisdiction that is consistent with a "one nationwide standard numeric code" that employs a format similar to "FIPS (Federal Information Processing Standard) 55-3," a standard now employed in various contexts, "or some other appropriate standard approved by the Federation of Tax Administrators and the Multistate Tax Commission, or their successors."

Thus, FTA and MTC were in the position of establishing a standard data format for use in databases employed by states. The two organizations have coordinated efforts to develop a national-standard data format for use in matching addresses with taxing jurisdictions in compliance with the provisions of the Act. This enables individual states, at their option, to provide electronic data or databases linking tax rates to specific locations for the use of wireless service providers in billing their customers.

Wireless Task Group. FTA and MTC created an 8-person committee to fulfill the development of the national-standard data format. Will Rice from Washington State is the MTC co-chair, and Gerald Johnson from Florida is the FTA co-chair. Other states represented include South Dakota, Texas, South Carolina, Idaho, Illinois, and the California Bd. of Equalization.

MTC Staff Contact

Elliott Dubin < edubin@mtc.gov >

FTA Staff Contact

Jonathan Lyon < jonathan.lyon@taxadmin.org >

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