Convergence and Bundling: The Impact on State and Local Telecommunications Taxes

Posted: 28 Nov 2000

See all articles by Bruce Nelson

Bruce Nelson

Ernst & Young, LLP

Dee Tagliavia

EchoStar Communications Corporation


It is not an exaggeration to say that the single most important recent development in telecommunications is "convergence." Put simply, convergence is the bundling of voice, video, and data into one communications technology. Traditionally separate industries, telecommunications, Internet, cable, and satellite television providers are quickly evolving into a single communications industry. For example, according to the Wall Street Journal, AT&T is planning "a discounted package of local and long-distance phone service, Internet hookups, high-speed data access, and... cable TV service." Qwest Communications has begun selling unlimited dial-up Internet access bundled with long distance, online conferencing, and "a whole suite of Web-enabled services" for $24.95 a month.

Convergence should not be mistaken for the mere "stapling" of various communication services into one billing; rather, convergence is the integration of these services customized and priced to meet a specific customer's needs. It is customer-specific integration that creates added value, not the simple aggregation of the services provided. In fact, the way a communications company tailors convergent services to a customer's needs may be what gives it a distinct advantage over its competitors. According to a recent article in Telephony, price and reliability of service no longer afford a competitive advantage because they have become fairly consistent across providers. To distinguish themselves from their competitors in the marketplace, communications companies are offering convergent services and bundled billing with concomitant benefits to their customers.

Convergence is a direct consequence of the Telecommunications Act of 1996, which removed the regulatory barriers to competition among communication providers. While the long-term social, cultural, and commercial impact remains speculative, there are immediate consequences for state and local taxation. Because convergence is inherently a bundling of services, it creates problems by (1) juxtaposing services typically offered by traditionally monopolistic, regulated industries with those offered by unregulated competitive companies, and (2) conjoining services offered by electronic transmission providers with those of content providers. The resulting composite is difficult if not impossible to tear asunder, and yet, current taxing regimes seem to require that the bundled services be separately stated. The requirement of separation may have a metamorphic effect, not only on nascent technologies such as the Internet that are bundled with traditional products and services, but also upon the act of integration itself.

The bundling of telecommunication services with new untaxed services from emerging technologies presents serious challenges to traditional tax models. In this article, we will provide a summary and criticism of only a few of the questions prompted by these challenges. Specifically, we will address (1) whether and when a state may impose a tax on either the taxpayer or the service provided, (2) the difficulties confronting billing and compliance, (3) the inadequacy of traditional "true object" tests in segregating "mixed transactions" in bundled sales, and (4) the problems created in sourcing sales, not only for sales tax, but also for income tax allocation and apportionment. In sum, bundling not only raises questions regarding the very definition of telecommunications and its traditional division between content and transmission, but also challenges the very typology of traditional sales and use tax.

Suggested Citation

Nelson, Bruce and Tagliavia, Dee, Convergence and Bundling: The Impact on State and Local Telecommunications Taxes. State and Local Tax Lawyer, Vol. 5, 2000. Available at SSRN:

Bruce Nelson (Contact Author)

Ernst & Young, LLP ( email )

370 17th Street, Suite 4300
State and Local Tax Group
Denver, CO 80202
United States

Dee Tagliavia

EchoStar Communications Corporation

Littleton, CO
United States

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