Tax law fiber fix could speed up broadband efforts

Taxes can be complicated, but sometimes tax law makes things more complicated than they need to be. Take, for example, the Border-to-Border Broadband Development Grant Program that Minnesota launched in 2014.

It was designed to make the internet more accessible to residents throughout the state, and, in 2017, its accompanying tax provisions were revised to create a sales tax exemption for such telecommunications capital equipment as fiber and conduit. Or so legislators thought.

It turns out that the Department of Revenue had a narrow interpretation of what constituted “telecommunications capital equipment,” applying it only to telephone service. Hence, companies providing both phone and internet through their fiber optic cables have had to, for tax purposes, separate out the portions of fiber that have data or information from those used exclusively for telephone service. And that’s hard to do.

HF4422 is out to fix that. Sponsored by Rep. Julie Sandstede (DFL-Hibbing), it would exempt from state sales and use taxes any fiber and conduit purchased by broadband or internet service providers to provide retail internet access service. The exemption would be effective retroactively for sales and purchases made after July 1, 2017, with a special refund provision governing refund claims for the retroactive purchases.

Rep. Julie Sandstede

“It only makes sense to exempt all of it from the sales tax,” Sandstede said. “After all, in 2022, no providers are going through the experience of installing fiber exclusively for the purpose of landline telephone services. … We should do everything we can to expand broadband use in our state. We’re still short of our speed goals, with 17% of homes in the state still lacking access to the 2022 speed goal of 25 megabits download and three megs upload.”

The House Taxes Committee laid the bill over, as amended, Thursday for possible inclusion in the omnibus taxes bill, which is expected to be released on Monday. Its companion, SF3480, sponsored by Sen. Torrey Westrom (R-Elbow Lake), awaits action by the Senate Taxes Committee.

The Department of Revenue estimates the change would reduce the General Fund by $14 million in fiscal year 2023 and $6.3 million in the 2024-25 biennium.

“This bill will fix a problem that no one anticipated when you passed the sales tax exemption on capital equipment in 2017,” said Brent Christensen, president and chief executive officer of the Minnesota Telecom Alliance. “As consumers cut the cord on landline telephone and cable TV services, more and more of the fiber we deploy is strictly for internet use. This will have a dollar-for-dollar impact on the way broadband is deployed in Minnesota.”

Rep. Dave Lislegard (DFL-Aurora) asked if the increased costs due to taxes were passed on to the consumers. Christensen said no, and that savings from the proposed exemption wouldn’t necessarily reduce consumer costs, but would allow more broadband to be deployed. 

“The reason we have a border-to-border grant program in the first place is because we have a high upfront cost of broadband installation,” Sandstede said. “This exemption would go a long way toward making much needed broadband infrastructure projects a reality, so more Minnesotans can have the fast, reliable internet access that they deserve.”