Phone mystery: landline usage down, taxes up.

And CenturyLink, the state's largest provider of good old hardwired phone service, is happy as can be.
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CenturyLink's landline use is down 60 percent.

And CenturyLink, the state's largest provider of good old hardwired phone service, is happy as can be.

Residential phone customers have been abandoning CenturyLink at a faster clip than Mariners fans have forsaken Safeco Field. And that’s saying something.

Once the foundation of telecommunications, conventional “wire line” telephones have gone the way of the buggy whip for many. Their functional equivalents, cells, cable-company telephony and so-called VoIP systems, are typically available for significantly less money as part of a bundle, like Comcast’s so-called “triple play” combo of Internet, TV and phone.

In Washington State, between December 2001 and December 2012, CenturyLink’s “retail access lines” — telecom jargon for old-fashioned, copper-wire residential phones — declined 60 percent, from nearly 2.7 million to just over 1 million. (Mariner attendance over the same period dipped about 40 percent).

So the last thing you might have expected to see was CenturyLink — formerly Qwest and before that US West — supporting legislation to increase the cost of phone service by a few bucks per month, possibly enough to send even more residential customers packing. Yet that’s just what CenturyLink did in Olympia this past spring when it joined with other telecom providers, including wireless carriers, to back a tax reform package meant to standardize those enigmatic taxes and fees tacked onto phone bills.

Such “parity” hits CenturyLink’s residential customers hardest, because the single biggest change was to remove an exemption that spared them from paying sales tax on basic service.

The company’s support is consistent, however, with its position before the Washington Utilities and Transportation Commission (UTC). CenturyLink is petitioning to be treated like one of the gang — just another company in a crowded and highly competitive market — and not the quasi-monopolist it was until a broad array of alternative technologies killed the once true “captive customer base” scenario.

CenturyLink’s wish will likely be granted. The UTC is expected to approve lighter regulation as soon as early next year, according to Brian Thomas, a senior policy advisor with the commission. The UTC has already eased off some regulatory controls, primarily in connection with CenturyLink’s business customers.

“We believe in tax parity; we believe in regulatory parity,” says longtime lobbyist Tom Walker, who has represented CenturyLink and its predecessor companies since 1980. “We’re all competing for the same customer, providing the same types of services using different technologies. But we’re all regulated and taxed differently. We have to get to a point where regulation and taxes aren’t the deciding factors on who are the winners and losers in the market.”

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CenturyLink customers are paying more for landlines. Credit: Dan Strange/Flickr

Another reality that helps explain CenturyLink’s move in support of what amounts to a rate hike for its customers is that the residential phone market isn’t the golden goose it used to be for conventional telephone companies. Nor does the residential-phone crowd seem to be the sector the company is targeting, judging by its acquisitions and mainstream advertising. Two years ago, for example, CenturyLink paid $2.5 billion to acquire Savvis, a company specializing in cloud computing and data management for businesses.

What really propelled the legislative reform package that led to tax parity was less about CenturyLink, though, than a lawsuit brought by Sprint that led to a bombshell court ruling.

State Rep. Reuven Carlyle, the Seattle Democrat who co-sponsored the legislation, explains: In 1983, a state law took effect that gave a tax break to residential phone customers. The chief beneficiary in Washington was Century Link's predecessor US West, the state's biggest residential phone company, and one of the new Baby Bell companies formed after the Justice Department filed an anti-trust lawsuit against Ma Bell (AT&T).

“When AT&T was divested, there was no cable, no satellite, no wireless,” recalls Carlyle, an executive with McCaw Cellular and AT&T Wireless before he won election to the House in 2008. “The language written in the statute was incredibly generic.” Referring broadly to “home phone lines,” it carved out a sales-tax exemption for residential customers.

The intent, says Carlyle, was to make it easier for “grandma to afford service out in the hinterlands” and not get pounded with taxes.

But as technology advanced, and more and more people “cut the cord” by turning to cell phones or other technologies, Sprint decided it was time to challenge CenturyLink’s exemption. The wireless carrier contended that it, too, was a residential phone service. A Thurston County Superior Court judge agreed, putting taxpayers at extreme financial risk. Suddenly, the state had to confront the fact that it might have to pay back Sprint — or reimburse its customers — for all the years the state had discriminated against them by making Sprint customers pay a tax that CenturyLink’s didn’t have to.

The state Department of Revenue, which had been collecting the residential phone sales tax from most carriers (satellite phone providers are a continuing exception), ran the numbers. It determined that if the state fought tooth and nail and lost, not only would it be on the hook to reimburse Sprint, it could also be obliged to pay back all the other wireless carriers and cable and Internet-based telecom providers, waiting in the wings, ready to pounce if Sprint triumphed.

The total tab would be on the order of $1 billion — a check that Carlyle and other lawmakers and the telecom industry itself recognized the state was in no position to write.

The state reached a confidential settlement with Sprint. On the legislative front, it moved to rescind the sales-tax exemption for Century Link. To further even the playing field, the legislation also removed minor taxes the Century Link customers were paying that the wireless carriers’ customers weren’t. Other provisions authorize the state general fund to cover the cost of programs that help subsidize low-income and hard-of-hearing customers, which had been added to most phone bills.

The bottom line for the state is a roughly $31 million net gain in this biennium. That’s a way better outcome for Washington taxpayers than a potential $1 billion blow. The timing, however, was less than ideal from a customer notice point of view. The House initially passed its version of the bill in January, the first month of the legislative session. Due to what Carlyle described as “painfully inappropriate” politics on the part of the state Senate, the bill failed to win final approval until the last day of the legislative session in June.

As a result, CenturyLink had no opportunity to give its more than one million residential customers advance notice about the bigger bills they’d be seeing come August. “Nobody knew if this bill was going to go or not,” says CenturyLink lobbyist Walker. “We had to scramble to get an explanation. ... This is not the way we would have wanted to have done it.”

No doubt a number of CenturyLink customers will stick with the company because they are satisfied with the service, have no other telephone options or perhaps like the fact that traditional wired phones carry their own power and therefore usually work during electrical outages.

Those diehards saw a slight dip in the increase starting in September 2013, because the August bill had to include taxes retroactive to first of the month.


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