Contradictory rulings frustrate wireless industry; better understanding needed

Two recent contradictory contribution rulings demonstrate that the various government bodies that regulate the wireless industry are still struggling to understand the full nature of how the industry operates. Last month, the CRTC reaffirmed a previous staff decision that said carriers can’t use monthly service revenue to cover the full cost of terminals for contribution purposes (RoW, April 16/02). In a separate but related decision, however, the Ontario government’s Retail Sales Tax Branch ruled that carriers can, in fact, use a portion of subscriber service revenue and attribute it to handset revenue for tax purposes. The crux of the provincial ruling is the handset subsidy issue. The Ontario government wanted to collect the eight per cent sales tax on the full cost of the handset, not just the portion paid by consumers. "(The government) had some eager beavers in the bureaucracy thinking that if the handsets are really worth $400, but cell phone companies only sell them for $50, they should be getting out eight per cent of the $400," explains Parke Davis, director of inter-carrier relations at Telus Mobility. To convince the Ontario Retail Sales Tax Branch that the province was actually receiving the eight per cent tax on the $400, the wireless operators argued that taxing the full $400 up front would have amounted to double taxation since the eight per cent on the remaining $350 is being collected through the ongoing provision of service. The ruling is significant. Rogers Wireless Communications Inc. gained $19 million from the tax ruling. But a third of that was offset by the negative $6.8-million hit as a result of the CRTC handset contribution decision. Consequently, the company was able to attribute $12 million to its bottom line in Q1 of this year. Dawn Hunt, VP regulatory at Rogers Wireless, says this is another example of the confusion from the wireless industry having to submit to rules from two or more regulatory agencies. The solution, she says, lies in a greater understanding of the industry. "The wireless industry has spoken for a number of years of the requirement for a better recognition among government departments as to how the wireless industry operates," she tells Report on Wireless. "I understand the commission’s reasoning, which basically was that there’s no reason why there can’t be different rules for accounting, regulatory or other purposes, but it’s frustrating to us. "Certainly we want to look at working cooperatively both within the industry and within the commission to identify (potential solutions)," Hunt adds. "(There needs to be) a recognition across various government departments as to the commitments the companies have. It comes back to recognizing wireless companies pay a lot in spectrum fees, have licence conditions attached to the spectrum in terms of R&D, rollout. It’s something that always concerned us because the commitments aren’t recognized." Government departments seem to have resisted any attempts to work together to ensure that their separate rulings don’t create too onerous responsibilities on the industry. In the past, the CRTC has said that spectrum licence fees are a cost of doing business and can’t be used as defence for lower contribution payments. For its part, Industry Canada has maintained that contribution is not within its purview and not a reason to lower spectrum licence fees (RoW, April 17/01). Telus Mobility’s Davis relates to the frustration expressed by Hunt. "(The CRTC rulings are) a blow overall to the industry," he states. "The industry paid about $60 million too much last year and for Telus Mobility, the bill was around $13 million or so." The company is also frustrated about the hair splitting going on at the CRTC. Davis explains that after attempting to separate the handset revenue from the service revenue by splitting a bundle, which he says the CRTC advised the company to do, the commission then refused it. "They said we couldn’t use the bundling procedures because (the services) weren’t a bundle, they were a package. I thought, ‘how many fairies dance on your pins?’" Neither Rogers nor Telus Mobility are satisfied with the CRTC rulings (Telecom Decisions CRTC 2002-22 and 2002-23), which maintain the status quo of increased financial pressure on the industry. The wireless industry has seen its portion of the national contribution pool increase dramatically from about $15 million in 2000 to about $200 million last year. The carriers can, however, take solace in the Ontario sales tax decision. It is still unclear at this point whether further action will be taken to fight aspects of the contribution regime. Davis tells RoW that Telus isn’t planning any more action in front of the commission at this point. What is clear, however, is that removing handset subsidies is not in the cards. Hunt says that charging full price for handsets would certainly have a negative impact on penetration. "Canada already has one of the lowest G7 penetration rates and I don’t think that works toward broader government goals in terms of innovation and wireless penetration," she says.

Contradictory rulings frustrate wireless industry; better understanding needed

News | May 13, 2002

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