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CITY COUNCIL MEETING DATE: CLERK OF COUNCIL USE ONLY: REQUEST FOR COUNCIL ACTION AUGUST 7, 2006 TITLE: APPROVED URGENCY ORDINANCE AMENDING UTILITY USERS' TAX DUE TO CHANGE IN INTERNAL REVENUE SERVICE INTERPRETATION OF FEDERAL LAW. {)JJ1?r:2 CITY MANAGER o As Recommended o As Amended o Ordinance on 1" Reading o Ordinance on 2"' Reading o Implementing Resolution o Set Public Hearing For CONTINUED TO FILE NUMBER RECOMMENDED ACTION Adopt an urgency ordinance amending Sections 35-153 and 35-155 of the Santa Ana Municipal Code related to the Utility Users' Tax for telephone services to cover the referendum period for enactment of Ordinance No NS- 2721. This matter requires a 2/3 vote of the City Council. DISCUSSION In 1975, the City of Santa Ana first adopted a Utility Users' Tax ("OUT"). The OUT was imposed on the use of telephone, electrical and gas utility services in the City. Since 1991, the tax rate has been 6%. The telephone tax portion of the OUT references the Federal Excise Tax on telephone services found in 26 United States Code !Hi 4251, 4252, and particularly the exemptions found in ~4253 (the "FET"). The FET is levied upon local and long distance telephone communication services, and the reference to the FET was for the purpose of adopting by reference the limitations and exemptions found in the FET in 1975. The FET defined long distance or "toll" calls as those for which charges varied according to both the elapsed time of the call and the distance between the persons on the call. Cell phone providers have begun offering long distance service on a flat or monthly rate without consideration to the distance of the calls made. The IRS has 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 OUT 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 .extent the reach of this interpretation to different billing practices by traditional phone companies as well as the wireless providers. 508-1