States, Localities Chasing 911 Surcharge Revenue

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By Andrew M. Ballard

State and local governments are increasingly taking steps to boost their revenue from 911 surcharges amid questions about whether the collections are being properly spent.

Over the past few years, a series of lawsuits and investigations have been launched around the country, aimed at recovering hundreds of millions of dollars in revenue from telecommunications companies that allegedly aren’t collecting enough 911 surcharges from certain business customers. Several other jurisdictions have raised their surcharges, and more states are now collecting fees on prepaid phone services.

According to the Federal Communications Commission (FCC), states and territories collected more than $2.6 billion in 911 surcharges during 2015.

Rick Reames III, an attorney with Nexsen Pruet LLC in Columbia, S.C., who specializes in state and local tax issues, said that his firm has seen an increase in efforts by state and local governments to collect 911 surcharges. “This appears to be part of a growing trend to address various revenue shortages at the local level,” he told Bloomberg Tax.

“Local governments often feel the brunt of infrastructure neglect and population growth,” according to Reames. These factors, combined in many cases with failure by the state Legislatures to provide adequate local government funding, “has resulted in many localities taking matters into their own hands,” he said.

While some point to the need to help pay for upgrades to emergency notification systems, particularly with technological advances, there also is a question of whether 911 fees that are collected are being used to pay for system maintenance and upgrades.

Lawsuits Filed

Since 2014, a growing number of lawsuits have been filed that claim telecommunications companies aren’t collecting 911 charges from some of their business customers. The lawsuits claim that the communications providers classify multi-line-capable services in such a way to reduce the number of lines they report for their customers, thereby reducing the 911 fees the providers must collect.

Several of those lawsuits, including claims filed in Illinois, Massachusetts, Minnesota, and Pennsylvania, are lawsuits alleging false claims act violations. Much of that litigation was filed by Phone Recovery Services LLC, a private entity, which would financially benefit from any recovery.

Dozens of other lawsuits over inadequate collections by telecoms recently have been filed on behalf of local governments in Georgia, the Birmingham Emergency Communications District in Alabama, and Charleston County, S.C., along with other jurisdictions.

Among the companies named in the lawsuits are AT&T Inc., Bandwidth.com Inc., BellSouth Corp., CenturyLink Inc., Comcast Corp., Consolidated Communications Enterprise Services, Core Communications, Time Warner Inc., and Verizon Communications Inc. Tax attorneys told Bloomberg Tax that to date the plaintiffs haven’t prevailed in recovering the revenue at issue, but the bulk of the lawsuits still are pending.

Investigations Launched

In addition to the pending litigation, state regulators also are looking into the issue of under-collections of 911 fees.

New York State Comptroller Thomas P. DiNapoli (D) released a report Oct. 18 finding that the state Department of Taxation and Finance had inadequate controls in place to ensure that New York was collecting all the surcharge revenue to which it is entitled.

The report, based on an audit period of April 1, 2014 through Jan. 31, 2017, said the tax department didn’t have adequate controls in place to ensure that all eligible telecommunications providers collect, report, and remit the surcharges for all eligible devices. The comptroller also recommended that the department request the names and contact information of customers who haven’t paid the surcharge to determine if there is a material fiscal risk to the state.

New York’s Department of Taxation and Finance said in a prepared response to the report that it’s currently auditing the 17 telecoms that provide 98 percent of the wireless services in the state. The department is also developing new internal procedures and new guidance to inform and educate vendors about recent changes to the surcharge and their new collection and reporting responsibilities.

Likewise, the North Carolina Department of Justice is currently investigating Raleigh, N.C.-based Bandwidth.com over its collections of 911 service charges.

Collecting More Revenue

Revenue from surcharges are “critically important” to maintaining and upgrading the emergency response system, Brian Fontes, CEO for the Alexandria, Va.-based National Emergency Number Association, told Bloomberg Tax. Many localities haven’t upgraded their 911 systems in many years, and the need to fund improvements is “increasing in momentum,” due to the rise in usage of mobile phones and text messaging, he said.

Jurisdictions such as Guam and New Mexico and a number of localities have taken recent steps to generate revenue by increasing fees. Most states also are now collecting fees on prepaid services—New York will impose a surcharge of $0.90 on prepaid cell phones at the point of sale beginning Dec. 1.

Diverting Funds?

But the FCC says that some states are diverting the 911 fees to spend on other things.

In a March blog post, FCC Commissioner Michael O’Rielly said such diversion was “threatening the public’s safety for short-term budget relief” and called the practice “unconscionable.”

According to an FCC report cited by O’Rielly, eight states and one territory diverted about $220.3 million, or 8.4 percent of the more than $2.6 billion in nationwide collections, during 2015.

New Jersey diverted a whopping 89.9 percent and Rhode Island and New York came in at 68.4 percent and 42 percent, respectively, according to the report. The other jurisdictions called out for diversion were Illinois, Iowa, New Hampshire, Puerto Rico, Washington, and West Virginia.

“Far from being de minimis amounts, these substantial redistributions undermine the ability of local public safety emergency call centers to modernize, such as adopting and migrating to Next Generation 9-1-1 systems,” O’Rielly said in his post.

With assistance from Tripp Baltz in Denver; Michael J. Bologna in Chicago; Alex Ebert in Columbus, Ohio; Brenna Goth in Phoenix; Aaron Nicodemus in Boston; Leslie A. Pappas in Philadelphia; and Gerald B. Silverman in Albany, N.Y.

To contact the reporter on this story: Andrew M. Ballard in Raleigh, N.C. at aballard@bna.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bna.com

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