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services, cell phone providers began to offer long distance service on a flat or monthly rate without consideration to the distance of the calls made. In 1979, the IRS had issued a Revenue Ruling (79-404) determining that a variable for distance was not necessary for a toll call to be subject to the tax. The IRS defended lawsuits around the Country challenging the application of Revenue Ruling 79-404 and the FET to such phone charges. On May 25, 2006, the IRS issued Revenue Notice 2006-50 which announced that the IRS was reversing its position held since 1979 (and upon which the City relied in applying the UUT to all long distance calls) and would no longer interpret the FET as applying to wireless communications which were billed based on time only, and not both time and distance. Revenue Notice 2006-50 goes on to create a new service category call "bundled services" which could extend the reach of this interpretation to different billing practices by traditional phone companies as well as the wireless providers. Since the interpretation of the FET by the IRS is not necessarily binding on the City of Santa Ana for purposes of levying or collecting the UUT on telephone communications services, Staff recommends that the UUT be amended to clarify that the reference to the FET in the UUT is as interpreted by the IRS prior to the issuance of Revenue Notice 2006-50. In doing so, the City will continue to apply its UUT to all telephone services as it has historically, and consistent with the IRS Ruling 79- 404. At the same time, the proposed amendments continue to recognize and retain the prior FET exemptions found in 26 U.S.C. ~4253 as they existed prior to May 25, 2006. This proposed amendment will also prevent future ad hoc reaction to changes in Federal law that otherwise do not affect the City's ability to levy the UUT. Proposition 218 does not apply to these amendments because they do not increase, extend or create a new tax on telephone communication services. Pending this proposed ordinance becoming effective, the Finance Director will issue an administrative ruling consistent with this action notifying all telephone communications service providers to continue to apply the UUT to all long distance bills irrespective of the impact of Revenue Notice 2006-50 on the FET. FISCAL IMPACT There is no fiscal impact associated with this action. -::""":.;~:-' ';:,.r- .~,~~:-: ~ Franc~sco Gut~errez Executive Director Finance & Management Services Agency 508-2