Current Shareware 1994 January/SHAR194.ISO/textfile/ch1globe.zip/CH1BGLOB.TXT

Text File | 1993-08-22 | 14KB | 242 lines

Tollbooths on the information highway
State taxman may seek to cash in on communications revolution


_________________________________________________________________
                           By Josh Hyatt
___________________________GLOBE STAFF___________________________

CAMBRIDGE - It is easy to explain the constant hum that
rises from the purple one-story house where Channel 1
resides: There are almost 100 modems stuffed inside. But
lately, the sound of seething is nearly as audible.
   That comes from Brian Miller and Tess Heder, co-
owners of the computer bulletin-board service, which has
15,000 subscribers. Armed with personal computers and
modems, users tap into Channel 1 to try out software
programs, check up on stock prices, play games and trade
messages on any of 3,500 topics.
   But of late Miller and Heder themselves have been receiving
unwanted messages - from the Massachusetts Department of Revenue
which, starting in March, dispatched an auditor to comb through
Channel 1's invoices. Although the company has yet to be assessed,
the couple has calculated that Channel 1 may owe as much as
$150,000 in uncollected sales taxes and interest on memberships
dating back to September 1990.
  "It's enough to wipe us out," says Miller bluntly.
  The debate between the state and Channel 1 centers on the
relatively narrow issue of just what constitutes a taxable
"telecommunications service." But the definition that emerges will
have lmplications that extend far beyond Channel 1 or any of the
state's more than l,OOO bulletin boards.
  As communications technology advances, old categories blur and
new services are born, state and local tax authorities across the
country see in them a potentially rich source of new revenue.
  Indeed, with the so-called information superhighway - the nation-
wide computer network the Clinton administration has been promising
on the horizon, many states are eyeing the possibility of imposing
a "road tax" that would help replenish  state coffers.
But critics such as Miller and Heder argue that such taxes could
end up tarnishing one of high-technology's brightest spots, and
ultimately impede the flow of information, which ought to trade
freely.
    The Channel 1 dispute grows out of a 1990 Massachusetts statute
that imposed a 5 percent sales tax on telecommunications services,
defined as those that provide for the "transmission of messages"
through microwave,wire or fiber-optic cable.
     The statute - part of a sweeping effort by the state to
broaden sales taxes, most of which were repealed - clearly exempted
"the sale or use of information" from the tax.
      Miller and Heder argue that Channel 1 does not provide any
transmission services - users access it via telephone lines, upon
which they already pay a sales tax through their monthly bills -
but instead offers tax-exempt information. The Department of
Revenue cannot discuss specific audits because of confidentiality
laws protecting taxpayers, according to Karl Frieden, deputy
general counsel.
  But Robert Hurst, a Chestnut Hill accountant who has worked with
Channel 1 since March 1992, says the state's auditor has suggested
that at least one of Channel 1's services - specifically, the one
enabling subscribers to leave messages - qualifies as a taxable
telecommunications service as defined by law. According to Frieden,
companies that don't break out the taxable services from nontaxable
services - in this case, "transmission" from "information" - are
obligated to pay a  5 percent sales tax on all revenues.
   In his more generous moments,  Miller characterizes the state's
interpretation of the statute as a "tortuous twist of imagination."
Adds Daniel M. Saroff, a Channel 1 subscriber
from Somerville: "This is not reasonable. The state has picked on
the wrong crowd."
    But if, as Miller believes, Massachusetts is "trying to set a
precedent so that it will have access to taxing the information
superhighway," the state is hardly alone.
  "Many states are looking for what they hope is a whole new pot of
revenue from a growing area" says David Peyton, vice president of
processing and network services at the Information Technology
Association of America, a trade group representing computer
software and service companies, based in Arlington, Va.
   In Florida, Peyton says, bulletin boards have received similar
letters from municipalities. Tennessee recently repealed a 1989
statute that taxed "value-added network -services," Peyton says,
and in Pennsylvania "there's a substantial effort" to repeal a 6
percent tax on computer services.
   Given this state's longstanding, feud with the business
community
over taxation - earning it the -nickname "Taxachusetts" decades
ago, - the issue of taxing cyberspace is likely to provoke passion
on both sides. "There are struggles being waged all over, and there
should be," says Peyton, who was part of a group that met with
officials at the Massachusetts Department of Revenue in May. "This
is effectively tax on modernization."
   Once states move beyond taxing what the Federal Communications
Commission defines as basic regulated services - like phone
companies and into competitive unregulated services,"there is no
clear dividing line," Peyton warns. In addition to bulletin boards,
he says, states could impose a sales tax on such enhanced
telecommunications services as creditcard verification, or on
companies that crunch payroll numbers over phone lines, or even on
electronic mail.
  "There's the potential here of impact on all kinds of companies
that consider themselves to be software companies," says Joyce
Plotkin, executive director of the Massachusetts Computer Software
Council Inc. "The state hasn't realized how many companies there
are that could be effected depending on how they define a
'telecommunications provider.'
    And as statutes stand now, there is plenty of room for
interpretation. In most states "the statutory structure has a lot
of ambiguity inherent in it," observes Paull Mines, counsel
for the Multistate Tax Commission. "It represents quite an issue
for the states and for taxpayers to sort out."
     Based in Washington, the agency works with states to come up
with guidelines to create uniform tax codes. Its members, which
number 33 states, have recently asked it to study the whole issue
of taxing enhanced telecommunications services.
   "We have looked extensively at what other states have done for
ideas and approaches," says Frieden of the Department of Revenue.
"But the whole area is so new that everybody is grappling with it."
   And Channel 1 isn't the only business in the state to have felt
the effects of that grappling.
   Richard Gorgen, chairman and chief executive of Framingham-
 based Microsystems Software inc.,says his Company was audited last
year because of the bulletin board it runs for customers. "We
explained that it is tax exempt because it is just information
we're allowing people to download," says Gorgen, whose company
makes scheduling software and software for the physically
challenged. "They ruled it was exempt."
   The state has also ventured beyond bulletin boards. Elaine K.
Hoiska, an accountant who runs the Boston-based State and Local Tax
Institute, reports that a couple of Boston law firms have been
audited - but not yet assessed - stemming from their use of online
database services. She says the state is exploring whether such
firms must pay a "use tax," owed when a Massachusetts customer buys
services from an out-of-state vendor that does not collect sales
taxes.
  (In fact, in July Channel 1 was assessed as owing about $16,000
in use tax for out-of-state equipment purchases between April 1990
and December 1992. Although Miller says this tax is "selectively
enforced"  he allows that "at least it is on the books.")
  Hoiska also says a manufacturing company has also been audited
for its use of Prodigy Services Co., the online service owned by
IBM Corp., and Sears, Roebuck & Co. "This is becoming a standard
part of an audit," she says. "They ask, 'Are you paying all the
taxes on your electricity? What about your telecommunications?' "
  According to Frieden, the state is working on revising its
regulation on telecommunications, and expects to release a proposed
regulation in the fall. As earlier proposed  revision, which was
offered for public comment in December, would have defined
companies like Channel 1 in such a way as to require them to
break out on bills their taxable transmission services from their
nontaxable information services.
  "Just the administrative burden alone would cost a tremendous
amount of money," Plotkin says of the software council. Frieden as-
sures that the department "has heard the concerns" of the industry.
"Any time we work in a new area, we try to be sensitive," he adds.
   But at least one national online service, Compuserve lnc., isn't
assuming that sensitivity will govern policy.
   Earlier this summer the Columbus, Ohio-based service sent
notices to its 27,000 Massachusetts subscribers that said it would
begin collecting a 5 percent sales tax as of this month. Spokesman
David Kisbler said that CompuServe "received a bulletin from the
state taxing authority. After seeking legal opinion it's our
understanding that this is something we are required to do."
He noted, though, that CompuServe differs from Channel 1 in that it
offers subscribers access to a "private network" - that is, its own
telephone lines - so that it does provide some transmission
services.
  Persuading the state of that distinction has so fair cost Miller
and Heder $35,000 in accounting and legal fees. "If we hadn't done
this we'd probably be paying the $150,000 and going out of
business," Heder says.
   Both have much at stake personally. Each abandoned earlier
careers- he still sees some clients as a psychologist, but she gave
up architecture - to "catch the information wave," as Miller, who
is 49, puts it. Heder declines to reveal her age for fear of
alienating those subscribers, whose imaginations are fired by her
messages.  Their 10-year-plan calls for establishing Channel 1 as
one of the biggest of the nation's estimated 55,000 bulletin
boards, distinguished by its gargantuan 100,000-program  library of
public-domain software and shareware, which subscribers can try and
buy from manufacturers. They then plan to sell the service. As
likely buyers, Miller lists "the Saudis, or maybe the Japanese or
maybe even AT&T." The business now grosses about $400,000 a year,
with a pretax  profit of $l00,000.
    "We are just a small mom-and-pop operation," says Heder. "But
we didn't just turn over and start collecting sales taxes when the
department of Revenue rapped on  our door. Because we have to draw
a line somewhere on this whole issue of taxing information. If we
don't, next they'll be taxing people to talk in the street."

A ROSS PEROT FOR THE MODEM-MINDED

How many people know that the recently passed federal budget
package includes a special tax on modems?
   Too many, according to James Leonard. The tax doesn't exist, of
course, but it's an example of the kind of misinformation that gets
spread over the nation's computerized bulletin boards.
   With a growing subscriber base of around 3 million personal
computer users, various types of online services "can spread these
rumors like firestorms across the electronic global community,"
says Leonard, a spread sheet specialist who lives in Seattle.
   To douse those flames - and to help ensure that modem users
aren't targeted by a tax - he has set out to form a group called
the International Association of Modem Users. "THIS NOT A HOAX!"
shouts his invitation, which he dispatched on six bulletin board
systems two weeks ago.
   As Leonard notes, bulletin board users are nothing: if not
responsive. When the owners of Cambridge-based Channel 1 opened
up a forum for discussion of their dispute with the state
over telecommunications taxes - with the hyperbolic
claim that the Department of Revenue is "attempting to
tax the flow of information"  indignant users couldn't
log on fast enough.
  Among other things, they used the opportunity to de-
clare their devotion to Libertarian politics, to warn gov-
ernment "to keep its cotton-pickin' hands off the infor-
mation superhighway" and to diagnose the Department
of Revenue's behavior as "immoral, indecent and evil."
One suggested that the state's behavior befits "the old Soviet
Union, before it collapsed."
     Leonard, who apparently prides himself on being
sleepless, in Seattle hangs out online every night from
5:30 p.m. to 2 a.m. During that time, he says  he's picked
Up all manner of inaccurate reports about state efforts to
tax various aspects of modem usage. But he believes that
the fundamental fear is based in a simple truth: "It's be-
ing driven by cities and states, who are all looking for new
revenue."
    For now, Leonard is handing out free memberships
to anyone who wants to join his group  10 days after his
appeal went out, he had received 175 responses, from as
far away as Thailand - and he expects to spend time try-
ing to verify rumors members hear about relevant legislation. As
the grass-roots group gets organized, though, he will begin
charging dues. He already compares his fledgling movement to United
We Stand, Ross Perot's organization. "I think I am like him," he
says,"but I don't have a drawl."
   Nevertheless, he does believe he's the first to tap into
a potentially powerful constituency. "Modem use crosses
all classes of people," Leonard says, "and they all strong-
ly believe it's their right to communicate freely."
                              JOSH HYATT