States Lose Revenue Because of Skype and Snapchat

Madison WI capitol building with snapchat and skype logos

States Lose Revenue to Skype and Snapchat
| published July 22, 2014 |

By R. Alan Clanton
Thursday Review editor

So what happens when land line telephone use not merely declines, but plummets over a ten-year period, and, simultaneous to that, cell phone and mobile device usage increases 12-fold in that same period? And what happens in the U.S. when cell phone use alone more than doubles in a two-year period, as it did from 2011 to 2013?

Answer: states and cities lose revenue, lots of revenue. Almost all of the 50 U.S. states have watched as money culled from taxes and fees associated with old school land line usage have fallen dramatically in the last decade. Most states made up part of that difference by imposing a variety of taxes and user fees on mobile phones—the hope being that any lost revenue from declining land line usage would be easily offset by an increased use in cell phones.

But then along came things like Skype, Snapchat and other services. Untaxed and largely untouched by states and local governments, these web-based and application-based services empower millions to communicate directly, in real time, but without the use of traditional phone services.

Florida watched as it lost almost six percent of its revenue from telecommunications, according to a recent report in Bloomberg Businessweek. Likewise, Illinois lost half a billion dollars in just one year as a direct result of falling revenue from communications taxes. Other states impacted heavily by the decline in telephony taxes include Arizona, Pennsylvania, Oregon and Colorado. Some states have been able to make up part of that shortfall. Illinois has tried to close the gap by raising taxes on alcohol and cigarettes, but it has not gone far enough to make up for lost revenue. Colorado and Oregon gained a river of new revenue from taxation of marijuana, but for now, few other states have ways to easily regain what has been lost as millions migrate away from land line use, and millions more drop cell phone plans in favor of Skype and Snapchat.

Under Federal law, internet activity cannot be taxed. The original law, agreed upon by then-President Bill Clinton and Congress, was passed in 1998. The purpose of banning internet taxation was to guarantee unfettered advances in web technologies and internet expansion. Earlier in July, Congress reaffirmed its commitment to a tax-free web by voting to extend the moratorium indefinitely, and Representatives also agreed to eliminate those web taxes established by seven states before the 1998 law was enacted.

There were a few complaints, mostly from associations and political groups aligned with the interests of states and cities. But on the whole, the vast majority of internet users agreed that Congress has acted rightly. The Senate is expected to pass the bill without fanfare, and President Obama has already stated his intention to sign it into law as soon as it hits his desk.

When the original law was enacted in 1998, its authors no doubt did not envision a time when real-time communication would be able to migrate entirely away from landline or wireless technologies. Snapchat and Skype represent a disruption not merely to the business model formed around land phones and cell phones, but also to the revenue stream of state governments already facing heavy challenges as the economy staggers slowly out of recession.

One solution has been for states to simply increase taxes on all cell phone or mobile device usage. But this can become instantly unpopular for the legislators who author such bills. It also drives more customers away from even cell phone use and into the arms of ever-expanding services like Skype, which enables people to talk using both video and sound in real time using a web-based application—meaning it cannot be taxed. And since Skype itself is free to its users, there isn’t any revenue stream to tax—at least not in the traditional sense. Untaxable forms of interconnection, texting, chatting and other interactive multi-media rose nearly 30% in the one year period from 2012 to 2013. That increase is expected to accelerate to 34% by the end of 2014, and some analysts think it could go higher in 2015 as more American’s embrace alternate forms of communication—beyond even the rapid rise of cell phones.

Skype also cuts into the particularly lucrative revenue stream of long distance. This cuts deeply into the action once dominated by the big landline and long distance providers, but it also deprives states of additional fees for long distance and oversees phone calls. Likewise, Snapchat provides a way for customers to engage around the world while largely bypassing local and state taxes and fees.

Big communications companies are obviously scrambling to keep up with—or stay ahead of—this fast-moving curve, but the struggle for states and cities may become even more critical over the next 18 months. Infrastructure demands are continuing to rise, putting pressure on states to find other ways to drive the sort of revenue needed to maintain safe bridges, overpasses and roads.

In short, defenders of web-based technologies and internet access say that imposing taxes and fees on users of services like Skype and Snapchat is unfair—it is not the state’s business to attempt to regulate and tax infrastructure that is not theirs. On the other hand, states will need to get creative in the way in which they derive revenue—and that means uncoupling their budget processes from technologies invented a hundred years ago and already in decline.

Related Thursday Review article:

U.S. House Votes to Keep Internet Tax Free; R. Alan Clanton; Thursday Review; July 16, 2014.