Bipartisan Bills Introduced to Correct Tax Law Hindering Rural Co-op Broadband

Last November, we reported on a change to the tax code that is deterring rural telephone and electric cooperatives from leveraging government funding to expand broadband access. We were alerted to the issue by the office of Senator Tina Smith (D-MN), who sent a letter to Treasury Secretary Steven Mnuchin and IRS Commissioner Charles Rettig requesting that they remedy the issue and announcing her intention to introduce corrective legislation.

Federal elected officials have introduced such a measure, called the Revitalizing Underdeveloped Rural Areas and Lands (RURAL) Act. Senator Smith together with Senator Rob Portman (R-OH) introduced the Senate version of the bill, S. 1032, in early April, followed by Representatives Terri Sewell (D-AL) and Adrian Smith (R-NE), who introduced a companion bill, H.R. 2147, in the House a few days later. The RURAL Act would ensure that co-ops, which are many rural communities’ only hope for better connectivity, could take full advantage of federal and state funding for broadband networks.

Addressing Legal Ambiguity

As we explained last year, a tax policy change included in the 2017 Tax Cuts and Jobs Act carelessly put rural co-ops at risk of losing their tax-exempt status if they accepted government funding for broadband projects or disaster relief, among other things. Traditionally, these government grants were excluded from the requirement that electric and telephone cooperatives obtain at least 85 percent of their income from members (often referred to as the member income test) to maintain their tax exemption. The 2017 law threatened this precedent by changing the tax code so that “any contribution by any governmental entity or civic group” is now included in a corporation’s gross income. This has made some co-ops hesitant to apply for programs like the U.S. Department of Agriculture’s ReConnect Pilot Program for fear of jeopardizing their tax-exempt status.

To end the legal uncertainty that electric and telephone co-ops are now facing, the RURAL Act would explicitly exclude government funding for broadband infrastructure and other important investments from the member income test. Specifically, the bill would exclude the following funding sources from a co-op’s gross income for the purposes of determining tax-exempt status:

“any grant, contribution, or assistance provided pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act or any similar grant, contribution, or assistance by any local, State, or regional governmental entity for the purpose of relief, recovery, or restoration from, or preparation for, a disaster or emergency” or “any grant or contribution by any governmental entity . . . the purpose of which is substantially related to providing, con­struct­ing, restoring, or relocating electric, communication, broadband, internet, or other utility facilities or services.”

The two bills are currently in the Senate Finance Committee and House Ways and Means Committee.

Rural Broadband a Bipartisan Issue

Republicans and Democrats united to introduce the RURAL Act in a show of bipartisan support for better rural connectivity. In a press release announcing the new legislation, Senator Smith stated:

“These bipartisan bills are good for people in rural Minnesota, rural Ohio, rural Wyoming—and rural communities across the country. Democrats and Republicans alike supporting efforts to allow rural broadband to keep expanding . . . shows what we can accomplish when we come together with commonsense fixes to make life better for Americans.”