New sales tax hurts rural broadband, proponents say

Broadband advocates are arguing that one consequence of upcoming changes in the state's tax laws will be slower adoption of high-speed Internet in outstate Minnesota.

Starting Monday, when cable, telephone and cellular companies buy routers, switches, amplifiers and digital processors, they must add sales tax. The Department of Revenue estimates that by 2016-2017, taxes on these items will generate $82 million in revenue.

That's $82 million that won't be spent to expand broadband, said Margaret Anderson Kelliher, president of the Minnesota High Tech Association and chairwoman of the Governor's Task Force on Broadband.

"Unfortunately for a lot of Minnesotans who don't have good broadband or cellular access at this point, this is a step backward," Kelliher said. "We're going to work really hard to make the case in the next legislative session that this exemption should be restored."

Companies like Comcast, CenturyLink, Mediacom, Charter Communications and dozens of smaller firms have enjoyed a sales tax exemption on capital equipment since 2001, but theirs is among a handful of industries affected by a narrow expansion of the sales tax approved in the final hours of the legislative session.

Now telecom firms are joining warehouse companies in calling for the Legislature to reconsider.

Kelliher said the change in law is puzzling because lawmakers decided in 2010 to make high-speed Internet available to all Minnesotans by no later than 2015. About a fifth of Minnesotans lack access to download speeds of 10 megabits per second or greater, seen as a minimum threshold for high-speed Internet used by businesses, schools and hospitals, according to the latest report by the governor's broadband task force.

"The next time someone's driving in rural Minnesota and they want to get that better AT&T signal or Verizon signal, this is going to slow it down," Kelliher said.

Madeline Koch, a spokeswoman for the Department of Employment and Economic Development, which took over the Office of Broadband Development this spring, said the tax will not stop the state from reaching its broadband goals.

"Ultimately, whether or not the tax is involved, we have to get it done," she said. "We're not being as competitive as we should be when it comes to broadband. We're 19th nationally."

But even without a sales tax, making the numbers work for broadband in rural areas is difficult. Companies must purchase and install big pieces of equipment at central offices and in boxes by the road that serve up to a few hundred homes and businesses. They also must bury miles of new wire and cable.

Park Region Mutual Telephone in Underwood, Minn., has about 8,500 subscribers, mostly in rural areas, and CEO Dave Bickett said the member-owned company spends anywhere from $400,000 to $1 million per year on capital equipment.

He calculates that the new tax will prevent 192 homes from getting faster Internet, most of them on farms.

The companies most affected by the tax are big ones, like Comcast, which brought in a $6.2 billion profit last year and enjoys a dominant position among cable television providers in many parts of the country, including the Twin Cities.

Big companies are working on projects in several states, and the cost disadvantage in Minnesota will have an effect, said Michael Martin, president of the Minnesota Cable Communications Association.

"The reality is that you're dealing with national companies where the project manager in Minnesota has to compete with the project manager in Illinois," Martin said.

CenturyLink, which does business in 37 states, issued a statement saying the sales tax exemption has been a helpful incentive in stimulating investment in Minnesota, calling it "unfortunate" that the Legislature lifted the exemption.

Kanabec County is one part of the state working on broadband. The county's recovery from the recession has been slow, with unemployment still over 8 percent due in part to continued weakness in construction, said Doyle Jelsing, president of Peoples National Bank in Mora.

The county is too far south for the timber industry and isn't really a farming community. Jelsing said broadband is a crucial economic development strategy.

"It's probably the No. 1 equalizer for us," he said.

Officials just completed a study of the cost of extending broadband to less dense parts of the county. Now they are looking for public funding to make up the difference between what makes sense for a private telecommunications firm and what it will actually cost.

The sales tax on telecom equipment, he said, does not destroy the county's chances of getting a deal done, but it doesn't help.