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Phone-tax fight heads to Capitol
Municipalities want the income; Internet-based phone-service providers want to remain tax-free.
By Beth Potter, Staff Writer Denver Post
Wednesday, January 25, 2006

Denver-based Qwest and other sellers of Internet-based phone service in Colorado are ready for Round 2 against city governments in a battle over at least $80 million in yearly tax revenue.

State Rep. Matt Knoedler, R-Lakewood, is sponsoring a bill drafted with Qwest's help to keep Internet phone service tax-free in Colorado.  A similar Knoedler bill in the 2005 legislative session failed by one vote.

"This bill would protect businesses from burdensome taxation and regulation and could place Colorado's high-tech economy at an advantage nationwide," Knoedler said.

The bill is up for a vote by the House Finance Committee on Feb. 1.

Vonage, the nation's largest Internet-based phone-service provider, also opposes taxation on its service, a spokesman said.

But taxes on land lines and cellphones generate big money for state and local government coffers - $83.2 million in 2004, to be exact, said Chip Taylor, legislative director of Colorado Counties Inc.

If most telephone customers switch to Internet phone service, a move analysts predict will happen in 10 years, that revenue would disappear under Knoedler's bill, Taylor said.

Land-line telephone customers typically pay about 30 percent of their bills in taxes and surcharges.  Most are historical fees and charges that have nothing to do with phone service, Knoedler said.

Taylor wants the same taxes that are applied to land lines and cellphones applied to Internet calls, also known as Voice over Internet Protocol, or VoIP, phone service.

"Why are we treating one kind of phone service differently than another kind of phone service?" Taylor asked.

Officials feel similarly at the Colorado Municipal League, which represents city governments.

"We don't think the government should be busy picking winners and losers in the free market in this fashion," said Jeff Wilson, a Municipal League spokesman.

About 3.8 million customers nationwide use Internet phone calling, said Travis Mitchell, vice president of business development at Denver's VoIPReview, an online trade magazine.  Exact numbers for Colorado are not available.  Internet services are not taxed.

Arvada Mayor Ken Fellman says it doesn't matter how residents make calls;  cities still need the revenue that comes from telephone lines.

Arvada would lose about $400,000 a year at current collection rates if telephone-line tax revenues go away, Fellman said.  The city's yearly budget is about $65 million.

"It means fewer cops on the street, fewer libraries," Fellman said.  "You're giving a tax break to one part of the industry that doesn't need it, at the expense of local municipal services."

Regardless of the taxing issue, Qwest needs to be competitive to survive in the marketplace, said Chuck Ward, Qwest's top regulatory-affairs official.  The former Baby Bell has been required to charge all sorts of taxes attached to its phone services over the years, and many of its competitors don't have to, Ward said.

"A lot of it is a legacy from when there were no alternative services," Ward said.  "Now customers have choices, so it's a competitive issue for us.  Our idea is to reduce our taxes."

Like Internet phone service, Comcast cable's Digital Voice service is not taxed.

Cindy Parsons, Comcast's Denver spokeswoman, said with the tax-collection issue getting more attention across the country, Comcast is being cautious.

She said the cable company, which serves about 700,000 customers in Colorado, makes a "voluntary contribution" for state and local taxes, excise taxes and gross-receipt taxes for its Digital Voice customers, but she wouldn't say how much.

Staff writer Beth Potter can be reached at 303-820-1503 or