REVISED Report of Examination Consolidated City of Indianapolis, IN Video Service Franchise Fee

Indiana Bell Telephone Company, Inc. d/b/a AT&T

Examination Period: January 1, 2015 through December 31, 2017

Issued: May 2, 2019

City of Indianapolis Office of Audit & Performance 200 E. Washington St. Indianapolis, IN 46204

Examination Performed by:

Audit Division Avenu Insights & Analytics, LLC 600 Beacon Parkway West, Suite 900 Birmingham, AL 35209 Avenu Insights & Analytics, LLC Audit Division Indiana Bell Telephone Company, Inc. Page 2

REPORT OF AUDIT FINDINGS

Executive Summary: This report presents the results of Avenu Insights & Analytics, LLC, d/b/a MuniServices, LLC (herein referred to as “MuniServices”), audit of Indiana Bell Telephone Company, Inc. (herein referred to as “AT&T”) operating within the Consolidated City of Indianapolis and Marion County, Indiana (herein referred to as the “City”). MuniServices was contracted by the City as a third party to conduct a compliance review of its video service franchise agreement with AT&T for the period January 1, 2015 through December 31, 2017.

The objectives of this audit were to determine if video service franchise fees (herein referred to as “franchise fees”) had been properly calculated and to ensure that all appropriate revenues were included in those calculations. The audit specifically addressed: AT&T’s system for calculating gross revenues for the purpose of remitting franchise fees to the City, substantiation of the quarterly franchise fee filings, and recommendations to the City.

During the audit period, AT&T paid the City $10,379,231 in franchise fees. The remittances of the franchise fees were accompanied by documentation listing the various categories of gross revenue that are included and excluded from the franchise fee calculation. The total under-reported franchise fees due to the City for the period reviewed are $93,233. The variance is attributable to the exclusion of equipment charges, administrative charges, termination fees, and AT&T TV Outlet charges from the gross receipts reported to the City. Additional franchise fees due, including interest, is calculated as follows:

*Audit Results Summary Gross Receipts Understatement $ 1,864,656 Franchise Fee Rate 5% Total Additional Franchise Fees Due $ 93,233 Interest [Indianapolis-Marion County Code §285-107(b)(3)] $ 24,048 Total Amount Due $ 117,281

*Amounts rounded to the nearest dollar

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Current Methods: AT&T did not have, nor were they a successor of a company that had, a local franchise agreement with the City prior to 2006. Due to not having a legacy franchise agreement with the City, AT&T holds a state certificate of franchise within the City as detailed in IND. CODE ANN. § 8-1-34-23(a). For purposes of calculating gross revenues, AT&T must determine which revenues should be included based on guidance provided for in IND. CODE ANN. § 8-1-34-23(c) (included revenues) and IND. CODE ANN. § 8-1-34-23(d) (excluded revenues). In order to comply with the Indiana Local Video Service Franchise, AT&T remits five percent (5%) of their “gross revenues” to the City at the end of each quarter. Gross revenues are defined as, “all consideration of any kind or nature, including cash, credits, property, and in-kind contributions: (1) received by a holder from the operation of a video service system in a particular unit in Indiana; and (2) calculated by the holder under section 23 of this chapter.” IND. CODE ANN. § 8-1-34-5.

AT&T utilizes a third-party vendor, who maintains an address database, to assign new customers to the correct service area. New customers provide AT&T their service address; which is verified, by AT&T, using the third party’s address database. Once the address is verified, the customer’s zip code is used to assign a GEO code (that is service area specific). AT&T uses the GEO code to calculate the franchise fee for video service customers in each service area. The City is in the Marion County Service Area, which is comprised of several GEO codes.

At the end of each quarter, AT&T uses a quarterly summary report to calculate the franchise fees for the respective period. The quarterly summary reports detail the accounts and associated gross revenues that are both included and excluded from the franchise fee calculation.

Audit Procedures and Testing Methodology: Preliminary activities performed by MuniServices included: a review of the franchise fee agreement between AT&T and the City, review of the applicable sections of the Indiana Code, review of AT&T’s tariff and other applicable documents, and review of the remittance history. An initial Request for Information (RFI) was sent to AT&T, which included a list of the documents required to perform the examination. An opening interview was conducted by telephone to discuss the RFI and obtain an understanding of AT&T's general business operations, products and services offered, and customer base. AT&T's accounting practices, billing systems used, and types of electronic data available for the review were also determined through the initial discussion and request for records.

Upon receipt of the materials requested, revenue accounts were examined to ensure all gross revenue associated with video services were included in the franchise fee calculation. The “Video Revenue Billed” spreadsheet was used to select sample invoices, and the sample invoices were examined to ensure various service and miscellaneous charges were included in the franchise fee calculation. This was accomplished by dividing the franchise fee on the sample invoice by the five percent (5%) franchise fee rate to calculate the gross receipts included in the billed franchise fee. The charges on the customer’s invoice were reconciled to the gross receipts included in the franchise fee calculation. The charges excluded from the franchise fee computation were identified and verified as permissible or non-permissible exclusions per the Indiana Code.

An analysis of customer addresses within the City's service area was conducted. The analysis included a review of AT&T's internal procedures related to coding customers to the proper jurisdiction and any subsequent changes to the service area during the period under review. Subscriber addresses coded outside of the City were sent to the City’s GIS staff for validation. The City confirmed the addresses were in the “excluded cities” in Marion County and thus were properly excluded from the City’s franchise fee calculations. AT&T subscribers in the following cities/districts, in Marion County, reside in an excluded city and are therefore excluded from the City’s franchise fee: City of Lawrence, City of Beech Grove, City of Southport, and Speedway.

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The following work papers were used during the audit: Video Franchise Fee Billed.xlsx, Revenues Not Billed.xlsx, Video Franchise Fee billed by charge code.xlsx, ETF331 and OUTCOX revenue for audit period.xlsx, Indianapolis-Marion County Quarterly Summaries.xlsx, Marion County GEOs not paid to consolidated.xlsx.

Audit Findings and Recommendations: For the period January 1, 2015 through December 31, 2017, AT&T generally followed the terms and conditions required by its state certificate of franchise with the City. However, AT&T erroneously excluded gross revenues associated with the following video products/services: New Receiver(s) Fee (RCVINS), Point Anywhere Remote Control (RFREMT), Standard Remote Control (STDREM), U-verse TV IR Remote (REMIR), Non-Returned Gateway (RGNRTN), Non- Returned Receiver (STNRTN), Early Termination Fee (ETF 331), and AT&T TV Outlet (OUTCOX). The exclusion of the video services/charges, listed above, resulted in an underpayment of franchise fees to the City.

AT&T failed to include revenue associated with certain video services/products subject to the franchise fee. These charges are taxable pursuant to IND. CODE ANN. §§ 8-1-34-23 (c). All the revenue accounts cited above are either directly related to service orders (i.e. equipment charges and/or installation charges); termination charges (i.e. charging customer for non-returned equipment after service has been terminated); or recurring charges for video services.

IND. CODE ANN. §§ 8-1-34-23 (c)(1)(A): “Recurring monthly charges for video services.”

IND. CODE ANN. §§ 8-1-34-23 (c)(1)(D): “Service charges related to the provision of video service, including activation, installation, repair, and maintenance charges.

IND. CODE ANN. §§ 8-1-34-23 (c)(1)(E): “administrative charges related to the provision of video service, including service order and service termination charges”.

The listing of revenues included in the franchise fee calculation, IND. CODE ANN. § 8-1-34-23(c), is not an “all inclusive” list; therefore, if there is not a specific exemption to allow for the exclusion, those additional revenues must be considered taxable. IND. CODE ANN. § 8-1-34-23(c)(1) clearly conveys this as the last three words are “… include the following:”. By using these words, the code clearly holds open the idea that other revenues that are not specifically enumerated, may be included. In contrast, IND. CODE ANN. § 8-1-34-23(d) states that “The holder shall not include the following in determining the gross revenues received during the quarter with respect to a particular unit:” The difference between these two code sections is that the revenues included are open-ended whereas the revenues excluded are specifically stated.

AT&T disagrees with the inclusion of the Non-Returned Gateway (RGNRTN) and Non-Returned Receiver (STNRTN) accounts as they claim the charges are for the sale of surplus equipment which is specifically exempt at IND. CODE ANN. § 8-1-34-23(d)(9)(B), which states that “revenue from the sale of : Surplus equipment that is not used by the purchaser to receive video service from the holder”. However, AT&T is not selling the equipment, this charge is a termination fee charged to customers that do not return their equipment. It is apparent within the name of these accounts that the charge is based on not returning the equipment rather than making an out-right sale. This is further illustrated by the fact that, if a customer is charged these “non-returned” fee and subsequently sends the items back to AT&T, AT&T will write- off/adjust the fees from the customer’s account. If these were truly sales, as AT&T claims, the amounts would not be adjusted off upon the customer returning said equipment. AT&T provided all revenues, account adjustments, write offs, Avenu Insights & Analytics, LLC Audit Division Indiana Bell Telephone Company, Inc. Page 5 and write off recoveries for these “non-returned” accounts so that the proper revenues amounts could be calculated. Although they are not in agreement with these two “non-returned” fees being included, AT&T is accepting the charges to close out the audit amicably.

AT&T provided the actual revenues for the entire audit period for the revenue accounts that should have been included within the franchise fee calculations. A breakdown of the revenue codes in which actual revenues were provided are presented below based on the quarters in which the revenues were received:

*Actuals Revenues for accounts provided by AT&T Period RCVINS RFREMT STDREM REMIR ETF331 OUTCOX RGNRTN STNRTN Total Q1 - 2015 $18,518 $2,124 $439 $30 $930 $895 $8,250 $208,500 $239,686 Q2 - 2015 $16,164 $1,488 $440 $60 $300 $825 $77,700 $121,950 $218,927 Q3 - 2015 $16,203 $1,099 $300 $15 $210 $1,485 $81,450 $226,800 $327,562 Q4 - 2015 $18,387 $1,534 $500 $60 $0 $1,045 $63,000 $246,900 $331,426 Q1 - 2016 $17,640 $590 $380 $15 $0 $1,045 $7,350 $162,900 $189,920 Q2 - 2016 $12,526 $826 $200 $0 $0 $495 $62,550 $161,550 $238,147 Q3 - 2016 $13,608 $531 $260 $30 $0 $715 $82,200 $55,200 $152,544 Q4 - 2016 $11,662 $1,003 $320 $0 $0 $440 $35,400 $20,250 $69,075 Q1 - 2017 $9,927 $944 $100 $0 $0 $605 $4,350 $41,550 $57,476 Q2 - 2017 $7,437 $1,023 $240 $0 $0 $385 $32,550 $25,650 $67,285 Q3 - 2017 $7,400 $944 $120 $15 $0 $660 $118,350 $67,950 $195,439 Q4 - 2017 $7,399 $1,341 $240 $15 $0 $825 ($142,800) ($89,850) ($222,830) Additional Revenues (provided by AT&T) $1,864,656

Summary of the combined excluded revenues and the subsequent franchise fees are summarized below:

*Franchise Fee Summary Combined Excluded Additional Franchise Fee Due Period Revenues (5% of Excluded Revenues) Q1 - 2015 $239,686.38 $11,984.32 Q2 - 2015 $218,926.65 $10,946.33 Q3 - 2015 $327,561.80 $16,378.09 Q4 - 2015 $331,426.48 $16,571.32 Q1 - 2016 $189,919.50 $9,495.98 Q2 - 2016 $238,146.80 $11,907.34 Q3 - 2016 $152,543.82 $7,627.19 Q4 - 2016 $69,075.00 $3,453.75 Q1 - 2017 $57,476.00 $2,873.80 Q2 - 2017 $67,285.00 $3,364.25 Q3 - 2017 $195,438.72 $9,771.94 Q4 - 2017 -$222,829.73 -$11,141.49 Total Franchise Fees Due $93,233

Interest is charged on these under-reported amounts per Indianapolis-Marion County Code § 285-107(b)(3). This code section provides that “The operator shall pay simple interest at the rate of eight (8) percent per annum on all franchise fees which remain unpaid after the date they are due until the fees are paid.” Avenu Insights & Analytics, LLC Audit Division Indiana Bell Telephone Company, Inc. Page 6

Interest Summary Rate of Simple Interest 8% Months in a Year 12 Monthly interest rate 0.667%

*Interest Calculation Summary Monthly Months Rate of Franchise Interest Per Period Interest Rate Late Interest Fee Due Quarter Q1 - 2015 .667% 48 32.00% $11,984 $3,835 Q2 - 2015 .667% 45 30.00% $10,946 $3,284 Q3 - 2015 .667% 42 28.00% $16,378 $4,586 Q4 - 2015 .667% 39 26.00% $16,571 $4,309 Q1 - 2016 .667% 36 24.00% $9,496 $2,279 Q2 - 2016 .667% 33 22.00% $11,907 $2,620 Q3 - 2016 .667% 30 20.00% $7,627 $1,525 Q4 - 2016 .667% 27 18.00% $3,454 $622 Q1 - 2017 .667% 24 16.00% $2,874 $460 Q2 - 2017 .667% 21 14.00% $3,364 $471 Q3 - 2017 .667% 18 12.00% $9,772 $1,173 Q4 - 2017 .667% 15 10.00% -$11,141 -$1,114 Total Interest Due $24,048

*Audit Results Summary Franchise Fees Due $ 93,233 Interest $ 24,048 Total Audit Findings $117,281

*Amounts in tables have been rounded to the nearest dollar

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References:

IND. CODE ANN. § 8-1-34-5 "Gross revenue"

Sec. 5. As used in this chapter, "gross revenue" means all consideration of any kind or nature, including cash, credits, property, and in kind contributions: (1) received by a holder from the operation of a video service system in a particular unit in Indiana; and (2) calculated by the holder under section 23 of this chapter.

IND. CODE ANN. § 8-1-34-23 Gross revenue; determination under existing local franchise; determination when no local franchise exists; unincorporated areas; annexed territory

Sec. 23. (a) Except as provided in subsection (b), the holder of a certificate under this chapter shall, at the end of each calendar quarter, determine under subsections (c) and (d) the gross revenue received during that quarter from the holder's provision of video service in each unit included in the holder's service area under the certificate.

(b) This subsection applies to a holder or other provider providing video service in a unit in which a provider of video service is required on June 30, 2006, to pay a franchise fee based on a percentage of gross revenues. The holder's or provider's gross revenue shall be determined as follows: (1) If only one (1) local franchise is in effect on June 30, 2006, the holder or provider shall determine gross revenue as the term is defined in the local franchise in effect on June 30, 2006. (2) If: (A) more than one (1) local franchise is in effect on June 30, 2006; and (B) the holder or provider is subject to a local franchise in the unit on June 30, 2006; the holder or provider shall determine gross revenue as the term is defined in the local franchise to which the holder or provider is subject on June 30, 2006. (3) If: (A) more than one (1) local franchise is in effect on June 30, 2006; and (B) the holder is not subject to a local franchise in the unit on June 30, 2006; the holder shall determine gross revenue as the term is defined in the local franchise in effect on June 30, 2006, that is most favorable to the unit. (c) This subsection does not apply to a holder that is required to determine gross revenue under subsection (b). The holder shall include the following in determining the gross revenue received during the quarter with respect to a particular unit: (1) Fees and charges charged to subscribers for video service provided by the holder. Fees and charges under this subdivision include the following: (A) Recurring monthly charges for video service. (B) Event based charges for video service, including pay per view and video on demand charges. (C) Charges for the rental of set top boxes and other equipment. (D) Service charges related to the provision of video service, including activation, installation, repair, and maintenance charges. (E) Administrative charges related to the provision of video service, including service order and service termination charges. (2) Revenue received by an affiliate of the holder from the affiliate's provision of video service, to the extent that treating the revenue as revenue of the affiliate, instead of revenue of the holder, would have the effect of evading the payment of fees that would otherwise be paid to the unit. However, revenue of an affiliate may not be considered revenue of the holder if the revenue is otherwise subject to fees to be paid to the unit. (d) This subsection does not apply to a holder that is required to determine gross revenue under subsection (b). The holder shall not include the following in determining the gross revenue received during the quarter with respect to a particular unit: (1) Revenue not actually received, regardless of whether it is billed. Revenue described in this subdivision includes bad debt. (2) Revenue received by an affiliate or any other person in exchange for supplying goods and services used by the holder to provide video service under the holder's certificate. (3) Refunds, rebates, or discounts made to subscribers, advertisers, the unit, or other providers leasing access to the holder's facilities. (4) Revenue from providing service other than video service, including revenue from providing: Avenu Insights & Analytics, LLC Audit Division Indiana Bell Telephone Company, Inc. Page 8

(A) telecommunications service (as defined in 47 U.S.C. 153(46)); (B) information service (as defined in 47 U.S.C. 153(20)), other than video service; or (C) any other service not classified as cable service or video programming by the Federal Communications Commission. (5) Any fee imposed on the holder under this chapter that is passed through to and paid by subscribers, including the franchise fee: (A) imposed under section 24 of this chapter for the quarter immediately preceding the quarter for which gross revenue is being computed; and (B) passed through to and paid by subscribers during the quarter for which gross revenue is being computed. (6) Revenue from the sale of video service for resale in which the purchaser collects a franchise fee under: (A) this chapter; or (B) a local franchise agreement in effect on July 1, 2006; from the purchaser's customers. This subdivision does not limit the authority of a unit, or the commission on behalf of a unit, to impose a tax, fee, or other assessment upon the purchaser under 47 U.S.C. 542(h). (7) Any tax of general applicability: (A) imposed on the holder or on subscribers by a federal, state, or local governmental entity; and (B) required to be collected by the holder and remitted to the taxing entity; including the state gross retail and use taxes (IC 6-2.5) and the utility receipts tax (IC 6-2.3). (8) Any forgone revenue from providing free or reduced cost cable video service to any person, including: (A) employees of the holder; (B) the unit; or (C) public institutions, public schools, or other governmental entities, as required or permitted by this chapter or by federal law. However, any revenue that the holder chooses to forgo in exchange for goods or services through a trade or barter arrangement shall be included in gross revenue. (9) Revenue from the sale of: (A) capital assets; or (B) surplus equipment that is not used by the purchaser to receive video service from the holder. (10) Reimbursements that: (A) are made by programmers to the holder for marketing costs incurred by the holder for the introduction of new programming; and (B) exceed the actual costs incurred by the holder. (11) Late payment fees collected from customers. (12) Charges, other than those described in subsection (c)(1), that are aggregated or bundled with charges described in subsection (c)(1) on a customer's bill, if the holder can reasonably identify the charges on the books and records by the holder in the regular course of business. (e) If, under the terms of the holder's certificate, the holder provides video service to any unincorporated area in Indiana, the holder shall calculate the holder's gross income received from each unincorporated area served in accordance with: (1) subsection (b); or (2) subsections (c) and (d); whichever is applicable. (f) If a unit served by the holder under a certificate annexes any territory after the certificate is issued or renewed under this chapter, the holder shall: (1) include in the calculation of gross revenue for the annexing unit any revenue generated by the holder from providing video service to the annexed territory; and (2) subtract from the calculation of gross revenue for any unit or unincorporated area: (A) of which the annexed territory was formerly a part; and (B) served by the holder before the effective date of the annexation; the amount of gross revenue determined under subdivision (1); beginning with the calculation of gross revenue for the calendar quarter in which the annexation becomes effective. The holder shall notify the commission of the new boundaries of the affected service areas as required under section 20(a)(7) of this chapter. As added by P.L.27-2006, SEC.58. Amended by P.L.1-2007, SEC.78; P.L.6-2012, SEC.63.

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IND. CODE ANN. § 8-1-34-24 Franchise fee; percentage of gross revenue; unincorporated areas; disputes over gross revenue calculation; pass through to subscribers; billing itemization; fee under local franchise

Sec. 24. (a) Subject to subsection (e), not later than forty-five (45) days after the end of each calendar quarter, the holder shall pay to each unit included in the holder's service area under a certificate issued under this chapter a franchise fee equal to: (1) the amount of gross revenue received from providing video service in the unit during the most recent calendar quarter, as determined under section 23 of this chapter; multiplied by (2) a percentage equal to one (1) of the following: (A) If a local franchise has never been in effect in the unit before July 1, 2006, five percent (5%). (B) If no local franchise is in effect in the unit on July 1, 2006, but one (1) or more local franchises have been in effect in the unit before July 1, 2006, the percentage of gross revenue paid by the holder of the most recent local franchise in effect in the unit, unless the unit elects to impose a different percentage, which may not exceed five percent (5%). (C) If there is one (1) local franchise in effect in the unit on July 1, 2006, the percentage of gross revenue paid by the holder of that local franchise as a franchise fee to the unit, unless the unit elects to impose a different percentage, which may not exceed five percent (5%). Upon the expiration of a local franchise described in this clause, the percentage shall be determined by the unit but may not exceed five percent (5%).

(D) If there is more than one (1) local franchise in effect with respect to the unit on July 1, 2006, a percentage determined by the unit, which may not exceed the greater of: (i) five percent (5%); or (ii) the percentage paid by a holder of any local franchise in effect in the unit on July 1, 2006. (b) If the holder provides video service to an unincorporated area in Indiana, as described in section 23(e) of this chapter, the holder shall: (1) calculate the franchise fee with respect to the unincorporated area in accordance with subsection (a); and (2) remit the franchise fee to the county in which the unincorporated area is located. If an unincorporated area served by the provider is located in one (1) or more contiguous counties, the provider shall remit part of the franchise fee calculated under subdivision (1) to each county having territory in the unincorporated area served. The part of the franchise fee remitted to a county must bear the same proportion to the total franchise fee for the area, as calculated under subdivision (1), that the number of subscribers in the county bears to the total number of subscribers in the unincorporated area served. (c) With each payment of a franchise fee to a unit under this section, the holder shall include a statement explaining the basis for the calculation of the franchise fee. A unit may review the books and records of: (1) the holder; or (2) an affiliate of the holder, if appropriate; to the extent necessary to ensure the holder's compliance with section 23 of this chapter in calculating the gross revenue upon which the remitted franchise fee is based. Each party shall bear the party's own costs of an examination under this subsection. If the holder and the unit cannot agree on the amount of gross revenue on which the franchise fee should be based, either party may petition the commission to determine the amount of gross revenue on which the franchise fee should be based. A determination of the commission under this subsection is final, subject to the right of direct appeal by either party. (d) A franchise fee owed by a holder to a unit under this section may be passed through to, and collected from, the holder's subscribers in the unit. To the extent allowed under 47 U.S.C. 542(c), the holder may identify as a separate line item on each regular bill issued to a subscriber: (1) the amount of the total bill assessed as a franchise fee under this section; and (2) the identity of the unit to which the franchise fee is paid. (e) A holder that elects under section 21(b)(1) of this chapter to continue providing video service under a local franchise is not required to pay the franchise fee prescribed under this section, but shall pay any franchise fee imposed under the terms of the local franchise. As added by P.L.27-2006, SEC.58. Amended by P.L.6-2012, SEC.64.

Sec. 285-107. - Provisions regarding holders. (a) Application. This section shall apply to any holder of a certificate ("holder") from the Indiana Utility Regulatory Commission that provides video service in the county, as those italicized terms are defined in IC 8-1-34.

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(b) Franchise fees payments. A holder shall pay to the city franchise fees pursuant to IC 8-1-34-24, which are based upon the holder's gross revenue, as defined in IC 8-1-34-5, derived quarterly from its operations to provide video services within the county.

(1) The city may conduct periodic audits of the operator's records to determine compliance with this provision pursuant to IC 8-1-34-24(c). The city's acceptance of the operator's franchise fee payments does not constitute an accord and satisfaction nor are such payments in lieu of any other fees, taxes, or payments owed by the operator.

(2) If the holder and city cannot agree on the amount of gross revenue on which the franchise fee should be based, city may petition the Indiana Utility Regulatory Commission according to IC 8-1-34-24(c).

(3) Interest on unpaid fees. The operator shall pay simple interest at the rate of eight (8) percent per annum on all franchise fees which remain unpaid after the date they are due until the fees are paid.