Audit Procedures for Telecommunications Taxes
Chapter 1 - Introduction
The telecommunications industry is a complex area, with many different services and charges. Among the many taxes and fees levied on telecommunications, the Comptroller is responsible for auditing 4 taxes and fees:
- Public Utility Commission Gross Receipts Assessment (PUC)
This applies to landline and intrastate long distance service, and its related charges. See Chapter 2.
- 911 Emergency Service Fees and Surcharges
This applies to landline and wireless connections, and intrastate long distance. See Chapter 3.
- Telecommunications Infrastructure Fund (TIF)
This applies to all services defined as telecommunications in Tax Code, Sec. 151.0103. See Chapter 4.
- Sales and Use Tax on telecommunications services
This applies to all telecommunications services as defined in Tax Code, Sec. 151.0103, as well as other items taxable for sales and use tax as provided in Chapter 151, Tax Code. See Chapter 5.
This table gives a snapshot look at the four tax types for telecommunications services:
||PUC – Chapter 2
||911 – Chapter 3
||Telecommunications Infrastructure Fund (TIF) – Chapter 4
||Sales & Use – Chapter 5
|Landline local calls
|Landline long distance, intrastate
|Landline long distance, interstate
A few definitions relevant to the telecommunications industry will be helpful. It may also be helpful to review information on the PUC website for Charges On Your Electric Bill
The PUC website also allows you to view the directories of the various groups of active telecommunications providers:
- When used in reference to data storage and transmission, analog format is that in which information is transmitted by modulating a continuous transmission signal, such as amplifying a signal's strength or varying its frequency to add or take away data. For example, telephones take sound vibrations and turn them into electrical vibrations of the same shape before they are transmitted over traditional telephone lines. Radio wave transmissions work in the same way. Computers, which handle data in digital form, require modems to turn signals from digital to analog before transmitting those signals over communication lines such as telephone lines that carry only analog signals. The signals are turned back into digital form (demodulated) at the receiving end so that the computer can process the data in its digital format
- Area Codes:
- Area codes are assigned by the North American Numbering Plan Administration (NANPA) to identify distinct geographic regions and provide the capability of assigning phone numbers to an ever-increasing population. There are currently 24 area codes within the state of Texas. To inquire on the locations of area codes, visit thePUC website.
By clicking on the map, you can view the counties, cities, and prefixes for any given area code.
- The range within a band of frequencies or wave lengths; the amount of data that can be transmitted in a fixed amount of time. For digital devices, bandwidth is usually expressed in bits per second (bps) or bytes per second. For analog devices, bandwidth is usually expressed in cycles per second, or Hertz (Hz).
- Basic Local Service:
- A basic monthly charge for a dial tone that enables you to make and receive calls.
- A type of data transmission in which a single medium (wire) can carry several channels at once. Cable TV, for example, uses broadband transmission. In contrast, baseband transmission allows only one signal at a time. Most communications between computers, including the majority of local-area networks, use baseband communications.
- Short for competitive local exchange carrier, a telephone company that competes with an incumbent local exchange carrier (ILEC). Visit the PUC website to inquire if a company is an active CLEC.
- CMTS - Cellular Mobile Telephone System:
- The original and still most common CMTS is a low-powered, duplex, radio/telephone which operates between 800 and 900 MHZ, using multiple transceiver sites linked to a central computer for coordination. The sites or "cells" cover a range up to several miles in each direction. The cells overlap each other and operate with different transmitting and receiving frequencies in order to eliminate crosstalk between cells. When a cellular phone is activated, it searches available channels for the strongest signal and locks on to it. While in motion, if the signal strength begins to fade, it will automatically switch frequencies or cells as necessary. If it fails to find an acceptable signal, the phone will display an "out of service" or "no service" message. Each cellular telephone has a unique identification number (electronic security number or ESN) embedded in the phone's memory chip, which allows the provider to track all mobile phones in its service area. The ESN) is not the same as the cellular telephone number.
- Dark Fiber:
- Unused fiber-optic cable. Companies frequently lay more lines than are currently needed to allow for future needs. Dark fiber can be leased to individuals or other companies who want to establish connection between their own locations.
- A method to dial a long distance number using a provider other than the customer's subscribed switched long distance service. The customer essentially "dials around" their long distance provider rather than "through" them.
- Describes any system based on discontinuous data or events. Computers are digital machines because at their most basic level they can distinguish between just two values, 0 and 1, or off and on. There is no simple way to represent all the values in between, such as 0.25. All data that a computer processes must be encoded digitally, as a series of zeroes and ones. The opposite is analog.
- DSL - Digital Subscriber Loop:
- Digital telecommunication protocols designed to allow high speed data communication over the existing copper telephone lines between end-users and telephone companies. It shares the same phone line as telephone service, but uses a different part of the phone line's bandwidth. DSL does not interfere with normal phone service because there is a significant amount of unused capacity in current phone wires.
- Extended Area Service (EAS):
- Expands a customer's local calling area by allowing them to call additional contiguous exchanges for an additional flat fee, rather than incurring long distance charges on a "per minute" basis. The size of the local calling area varies from company to company. EAS service may be either one-way or two-way. (Public Utility Regulatory Act, Section 55.021-024.
- Expanded Local Calling Service (ELCS):
- Expands a customer's local calling area by allowing them to call additional exchanges for a flat fee (Public Utility Regulatory Act, Section 55.048). For many rural customers, some services were outside the normal calling area (i.e., schools, doctors, hospitals, etc.) and calls to these locations were long distance. ELCS allows cities or customers to petition the PUC for ELCS calling to adjacent exchanges. If the cost of providing ELCS exceeds the revenues the company offering the service receives, state law allows the telephone company to surcharge all of its customers in Texas to cover the lost revenue.
- Federal Excise Tax:
- A federally mandated 3% tax levied on all local and long distance telecommunications services (Title 26, United States Code, Section 4251 and 4253). It does not apply to coin-operated telephones, answering services, installation charges, or mobile radio telephone service. This tax was originally created in 1898 as a luxury tax to pay for the Spanish-American War, then was applied to telephone bills I 1971. This tax does not apply to coin-operated telephones, installation services, answering services, mobile radio telephone service, telephone-operated security systems, or news services and radio broadcasts of news and sporting events.
- Equipment takes electrical signals representing sound below 300 Hz and filters them into frequencies above 300 Hz. Likewise, Petitioner's equipment takes electrical signals representing sounds above 3,400 Hz and filters them into frequencies below 3,400 Hz. This function is necessary because it conserves bandwidth for additional phone calls. (See STAR 200501079H for additional information on filtering, sampling, encoding, etc..)
- FUSF - Federal Universal Service Fund (Title 47, Code of Federal Regulations, Sections 36, 54, and 69):
- This charge is assessed to all telecommunications companies with interstate operations, including wireless, paging, pay phone and long distance. This fund assists in providing phone service to all customers and areas, including schools, libraries, and rural health care providers. May appear on local or long distance billings, and may also be known as "universal connectivity charge" or "universal service carrier charge."
- ILEC - Incumbent Local Exchange Carrier:
- An ILEC is a telephone company that was providing local service when the Telecommunications Act of 1996 was enacted. ILECs include the former Bell operating companies (BOCs) which were grouped into holding companies known collectively as the regional Bell operating companies (RBOCs) when the Bell System was broken up by a 1983 consent decree. Contrasted to CLECs, companies that compete with the already established local telephone business. When the FCC deregulated the local exchange market in the Telecommunications Act of 1996, it opened local exchange service to competition. The Commission created two new categories of certification called the COA - Certificate of Operating Authority and the SPCOA - Service Provider Certificate of Operating Authority. When the FCC deregulated the local exchange market in the Telecommunications Act of 1996, the existing local exchange carriers became known as the Incumbent local exchange carriers (ILECs). ILECs are entities that hold a certificate of convenience and necessity (CCN) as of September 1, 1995. To inquire if a company is an active ILEC, visit the PUC website.
- Short for interexchange carrier, a telephone company that provides connections between local exchanges in different geographic areas. Outlined in the Telecommunications Act of 1996, IXCs provide interLATA service. Well-known IXCs include AT&T, Sprint and MCI. When the FCC deregulated the local exchange market in the Telecommunications Act of 1996, it allowed states to require Interexchange Carriers, Prepaid Calling Card Providers, and other uncertificated non-dominant Telecommunications Carriers to register. The registration is done to identify, monitor, and protect the public interest against telecommunications entities providing uncertificated telecommunications services. To inquire if a company is an active IXC, visit the PUC website.
- LAN - Local Area Network:
- A local computer network for communication between computers, especially a network connecting computers and word processors and other electronic office equipment to create a communications system between offices.
- LATA - Local Access Transport Area:
- Texas has 18 LATAs. Local Access and Transport Area is a term that refers to a geographic region assigned to one or more telephone companies for providing communication services.
A connection between two telephone companies within the same region is referred to as intraLATA. A connection between two local exchange carriers in different regions is called interLATA, which is the same as long-distance service.
To view a map of Texas LATAs, go to the PUC's website
- LEC - Local Exchange Company:
- A "local exchange" is the local "central office" of an LEC. Lines from homes and businesses terminate at a local exchange. Local exchanges connect to other local exchanges within a local access and transport area (LATA) or to interexchange carriers (IXC) such as long-distance carriers AT&T, MCI, and Sprint. (For additional definition information on LATA and IXC, go to: Search Networking, then look for "glossary" at the bottom of the page.)
- Local Number Portability Charge (LNP):
- The FCC requires all phone companies to make phone numbers portable from carrier to carrier so that customers may keep their same phone number even if they switch local carriers (Title 47, Code of Federal Regulations, Section 52.33; and the Federal Telecommunications Act of 1996, Section 251(e)(2). The companies are allowed this surcharge to fund investments in the necessary equipment upgrades. The assessment may be made only by phone companies that have the capability of providing local number portability within the local calling area. This does not provide the capability of retaining a phone number when moving to a different territory, just to a different company serving the same territory.
- Local Toll Calls:
- Long distance calls made within the LATA.
- Long Distance:
- A call outside the basic local exchange. Long Distance calls fall into four categories: international, interstate, interLATA (between LATAs), or intraLATA (long distance within a LATA).
- Municipal Franchise Fees:
- Compensates the cities for use of the public right-of-ways (Public Utility Regulatory Act, Section 54.206). The statute requires certificated telecommunications providers that provide telecom services within a municipality to compensate the municipality for the use of public rights-of-way. The PUC has the responsibility of determining the amounts. The statute also allows certificated telecommunications carriers the right to recover, on a pro rata basis, the amount paid to a municipality from its customers who are within the boundaries of the municipality. The charge is to be separately stated on the customer's bill.
- Presubscribed Interstate Carrier Charge (PICC>):
- Collected as a separate item prior to July 2000, this FCC approved charge is paid by long distance companies to local phone companies to contribute toward their costs of linking customers to the network (Title 47, Code of Federal Regulations, Sections 69.104, 69.153, and 69.154). If the customer had a long distance carrier, the long distance carried billed the charge directly to the customer. As of July 2000, it was combined with the Subscriber Line Charge. It is still assessed on multi-line business lines but is being phased out. The terminology for this fee varies, including "presubscribed carrier charge," "network access charge," "carrier line charge," "federal surcharge," or even "subscriber line charge."
- Subscriber Line Charges (SLC):
- created in 1983 and regulated by the FCC (Title 47, Code of Federal Regulations, Section 69.152). Allows phone companies to recover a percentage of costs associated with interstate access to local phone networks. Long distance or local exchange companies may collect this charge from their customers, and it may appear on the customer's bill as " FCC Charge for Network Access," "Federal Line Cost Charge," "FCC Approved Customer Line Charge," "National Access Fee," "Carrier Access Fee," or "Pre-subscribed line charge." Other terms may also be used to identify this charge.
- T1 Line:
- a high volume phone line, which is capable of carrying approximately 60 times more data than a normal residential or office phone line. The T1 line needs to be connected to a Web server.
- TUSF - Texas Universal Service Fund:
- Began in 1987 (Public Utility Regulatory Act, Chapter 56). Administered and collected by a third party vendor (Solix, Inc.) on behalf of the Public Utility Commission. The current rate is 5%. Companies are not required to collect this charge from customers, but most do. Tax-exempt entities are not required to pay this charge, nor does it apply to Lifeline, Link-up America, or Tel-Assistance customers. This fund allows affordable service to high-cost rural customers, funds the Relay Texas and Specialized Telecommunications Assistance program for the hearing disabled, funds telecommunications discounts to low income customers (Tel- Assistance and Lifeline). Visit the Solix Web site.
Then go to "Texas USF Customers." The worksheets and instructions can also be viewed at this site.
- VOIP - Voice over Internet Protocol:
- A category of hardware and software that enables people to use the Internet as the transmission medium for telephone calls by sending voice data in packets using internet protocol rather than by traditional circuit transmissions of the public switched telephone network. It converts analog voice signals into digital data and transports the bits in the same way that email messages are sent. In order to use VOIP, the customer must have a broadband internet connection like digital cable or DSL.