MAYORS AND COUNCILMEMEBRS EXECUTIVE FORUM

Home Browse Search

Colantuono & Levin, PC 11406 Pleasant Valley Road Michael G. Colantuono Penn Valley, CA 95946-9024 MColantuono@CLLAW.US Main: (530) 432-7357 (530) 432-7359 FAX: (530) 432-7356 WWW.CLLAW.US League of California Cities Mayors & Councilmembers Executive Forum San Diego, California May 28, 2008 CURRENT DEVELOPMENTS UNDER PROPOSITION 218 Silicon Valley, Assessments, Utility Fees, and More Utility Users Tax Litigation Until recently, most utility users taxes ordinances in California dated from a model ordinance developed by the League of California Cities in the mid-1980s in negotiations with the major utilities. Since that time, the telecommunications industry has been completely transformed with the break up of Ma Bell, the demise of telegrams, and the internet revolution. Now that Propositions 62 and 218 require voter approval of any change in the "methodology" by which a tax is administered (Gov't Code § 53750(h)), the telephone carriers are suing to reduce utility taxes on their services. Federal Excise Tax Challenges to UUTs on Telephony. A number of federal courts have concluded that telephone service packages which provide a mix of local and long-distance calling for a flat rate per minute or a fixed fee for unlimited dialing are neither "local" nor "long distance" telephone calls taxable under the Federal Excise Tax on Telephones (FET), 42 U.S.C. § 4251 et seq. The FET taxes three categories of calls based on AT&T's 1967 billing structure — local calls, a category which assumes a fixed monthly fee for unlimited dialing in a defined geographical area; long-distance calls billed on the basis of both the duration of the call and the distance between the two telephones served; and Wide Area Telephone Service or WATS service, which provided unlimited or large volumes of calls to and from defined geographic areas for a fixed monthly fee. The League's 1980s model ordinance exempts from the local utility tax telephone calls — such as those paid by coin in phone booths — which are exempt from the FET. Thus, because calls which are not charged based on both time and distance are not taxable under the FET, carriers and their customers argue that they are not taxable under local UUT ordinances which reference the FET. The IRS issued its Notice 2006-50, effective July 1, 2006, which acquiesced in these federal court rulings, and determined that the FET does not apply to long distance calls which are not billed on both the bases of time and distance (distance is frequently excluded from nationwide, "one -rate" plans). However, the IRS notice went further, and narrowed the FET to 73647, 18