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HomeMy WebLinkAbout50B - ORD UTILITY USERS TAX CITY COUNCIL MEETING DATE: CLERK OF COUNCIL USE ONLY: REQUEST FOR COUNCIL ACTION JULY 17, 2006 TITLE: APPROVED ORDINANCE AMENDING UTILITY USERS' TAX DUE TO CHANGE IN INTERNAL REVENUE SERVICE INTERPRETATION OF FEDERAL D As Recommended D As Amended D Ordinance on 1" Reading D Ordinance on 2Cd Reading D Implementing Resolution D Set Public Hearing For CONTINUED TO --- FILE NUMBER RECOMMENDED ACTION Adopt an ordinance amending Sections 35-153 and 35-155 of the Santa Ana Municipal Code related to the Utility Users' Tax for telephone services. DISCUSSION In 1975, the City of Santa Ana first adopted a Utility Users' Tax ("UUT") . The impetus for the tax was the need to implement an enhanced crime prevention program and to establish the City's first paramedic service. The UUT 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 UUT references the Federal Excise Tax on telephone services found in 26 United States Code !l!l 4251, 4252, and particularly the exemptions found in !l4253 (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. It is important to point out that the FET is not a basis or authority for the City's imposition of the UUT. The UUT is levied pursuant to the City's inherent powers as a charter city found in Article XI, Section 7 of the California Constitution. Over the years, the UUT has been amended to address evolutionary changes in the delivery of particular utility services subject to the tax. In the case of telephone communication services, the tax was amended in 1991 to encompass wireless telephone technologies and to tax interstate and international telephone communications as well as intrastate calls. With the growth of wireless communications, regarding the application of the FET to long The FET defined long distance or "toll" calls varied according to both the elapsed time of between the persons on the call. Unlike a national dispute arose distance cell phone calls. as those for which charges the call and the distance traditional "land line" 508-1 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 JWF 7/5106 ORDINANCE AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF SANTA ANA AMENDING SECTIONS 35- 153(n) AND 35-155 OF THE SANTA ANA MUNICPAL CODE MAKING CERTAIN TECHNICAL MODIFICATIONS TO THE UTILITY USERS TAX ON TELEPHONE SERVICES DUE TO CHANGES IN INTERPRETATION OF FEDERAL LAW. THE CITY COUNCIL OF THE CITY OF SANTA ANA DOES ORDAIN AS FOLLOWS: Section 1. The City Council of the City of Santa Ana hereby finds, determines and declares as follows: A. Since 1975 the City of Santa Ana has collected a Users Utility Tax ("UUT") on telephone communication services. Since 1991, the tax rate has been 6%. B. When first adopted, the UUT was enacted with reference to Federal Excise Tax, 26 United States Code ~~ 4251, 4252 and 4253, ("FET") upon local and long distance telephone communication services, as the FET was interpreted by the IRS the Internal Revenue Service's ("IRS"). C. The reference to the FET in the UUT was intended to be used as a benchmark for purposes of identifying the types of telephone communication services subject to the tax, and those taxpayers exempt from the tax. The FET was not a basis or authority for the City's imposition of the UUT. D. On May 25, 2006, the IRS issued its Revenue Notice 2006-50 which announced that the IRS was no longer interpreting the FET as applying to wireless communications which were billed based on time only, and not both time and distance. This revenue ruling reversed the historical interpretation and practice of the IRS as it relates to wireless telephone services and further reversed prior IRS Revenue Ruling 79-404 which held that telephone services which are billed based only on time are subject to the FET, and upon which the City relied in collecting the UUT. As a result of Revenue Notice 2006-50, effective August 31, 2006, the FET will Ordinance No. NS-XXX Page 1 of 6 508-3 no longer be applicable to long distance calls billed on time only, and certain other "bundled" services. E. The City of Santa Ana does not want to apply the new IRS interpretation to the UUT, but rather continue to apply its UUT to all telephone services as it has historically and consistent with the IRS Ruling 79-404. F. The amendments continue to recognize and retain the prior FET exemptions that existed prior to May 25, 2006. G. Santa Ana has always taxed all types of telephone communication services and has amended its ordinances in the past only to keep up with the advances in technology in order to continue to capture UUT for the range of telephone services already taxed. H. The proposed amendments restate the telephone communication services that are subject to the UUT. Only those telephone communications services that were taxed before Revenue Notice 2006-50 will continue to be taxed. I. The amendments do not increase or create a new tax on telephone communication services. J. The amendments neither extend the effective period of the UUT, nor modify any sunset provision or expiration date of the UUT. Section 2. Section 35-153 (n) of the Santa Ana Municipal Code is hereby amended such that it reads as follows (new language in bold, deleted language in strikeout for tracking purposes only): "(n) Telephone C6ommunication SselVices shall mean any telephonic quality communication that is interconnected to the public switched network [as defined in 47 U.S.C.A. Section 332(d), as amended from time to time, and the regulations of the Federal Communications Commission], and shall include, without limitation, the transmission of messages or information (including but not limited to voice, telegraph, teletypewriter, data, facsimile, video, or text) or any other transmission of messages or information by electronic, radio or similar means through "interoonneoted servioe" with the "publio switohed network" [as these terms me oommonly used in the Federal Communioations ,^.ct and the regubtions of the Federal Communioations Commission see 47 U.S.CA Section 332(d) as amended from time to time]. whether such transmission occurs by wire, cable, fiber-optic, light wave, laser, microwave, radio wave [including, but not limited to, cellular service, personal communications service (PCS), specialized mobile radio (SMR), and other types of mobile telecommunications regardless of radio spectrum used]. switching facilities, satellite or any other Ordinance No. NS-XXX Page 2 of 6 508-4 similar facilities. Except where inconsistent with the foregoing, Te/ephone Communication Services shall also mean a "communications service" as defined in Sections 4251, 4252 and 4253 of the Internal Revenue Code (the "Federal Communications Excise Tax" or "FET"). Telephone Communication Services shall not include "private mobile radio service" [as defined in Part 20 of Title 47 of the Code of Federal Regulations as amended from time to time], which is not interconnected to the public switched network." Section 3. Section 35-155 of the Santa Ana Municipal Code is hereby amended such that it reads as follows (new language in bold, deleted language in strikeout for tracking purposes only): Sec. 35-155. Telephone users tax. "(a) There is hereby imposed a tax upon every person in the City of Santa Ana using Ttelephone CGommunication Sservices as defined in Section 35-153(n), above, including services for intrastate, interstate or international calls. The tax imposed by this section shall be at the rate of six (6) percent of all charges made for such telephone communicotion services and shall be collected from the service user by the telephone communication services supplier or its billing agent. To the extent allowed by law, the tax on telephone communication services shall apply to a service user if the billing or service address of the service user is within the city's boundaries. If the billing address of the service user is different from the service address, the service address of the service user shall be used. (b) Except os otherwice provided herein, the 'Nords "telephone communiootion services" sholl meon "oommunicotions servioes" as defined in Sections 1251 ond 1252 of the Internal Revenue Code, ond the regulations thereunder, regordless of the meons or technology used to provide such services. "Telecommunicotion services" sholl not include "privote mobile radio service" [os defined in Port 20 of Title 17 of the Code of Federal Regulations os omended from time to time], which is not interconnected to the public switched network. The tax imposed under subsection (a), above, shall not be imposed upon any person for using Ttelephone Ceommunication Sservices to the extent that, pursuont to Sections 1252 ond 1253 of the Internol Revenue Code, the amounts paid for such communication services are exempt from or are not subject to the tax imposed under Section 1251 of the Internol Revenue Codethe Federal Communications Excise Tax as it was interpreted by the Internal Revenue Service prior to May 25, 2006. In the event that the Ffederal Communications Eexcise Ttax 00 "communicotion services" os provided in Sections 1251, 1252 and 1253 of the Internai RcvenueCode is subsequently repealed, any reference in this section to such law, including ony related federal regulotions, privote letter rulings, cose low, ond other opinions interpreting these sections, shall refer to that body of law, Ordinance No. NS-XXX Page 3 of 6 508-5 interpret3tions, that existed immediately prior to the date of repeal., 3S well 3S any judioi31 or 3dministrati'/e decision interpreting such federal exoise tax 13W, which is published or rendered 3fter the d3te of repeal. (c) The tax administrator, from time to time, may issue and dissemin3te to telecommunication servioe suppliers, which 3re subject to the t3X oollection requirements of this code, on administrative rulings identifying clarifying those teleoommunioation Telephone Communication Sservices that are subject to the tax of subsection (a) above. Theseis administrative rulings shall be for the purpose of ensuring that despite changes in communications technologies and practices, or changes in body of federal law referred to in this Article, the tax remains applicable to all of those services intended by this Article, to the extent not preempted by the State of California or the United States of America. oonsistent with leg31 nexus 3nd the federal exoise tax rules, regulations, and lows pert3ining to "oommunioations servioes" and In no event, shall such administrative rulings be interpreted or sholl not have the effect of imposinge a new tax, revising anYe-aR existing tax methodology, or increasinge an existing tax. In the e'lent th3t the feder31 exoise tax on teleoommunications is repe3led, this administrative ruling sholl ref.or to the federal exoise tax low on teleoommunio3tions that existed immediately prior to the d3te of repe;)l, 3S 'Nell os any judioial or administrative deoision interpreting suoh f{)deral excise tax law, whioh is published or rendered after the d3te of repe31. (d) As used in this section, the term "charges" shall include the value of any other services, credits, property of every kind or nature, or other consideration provided by the service user in exchange for the telephone communication services. If a non-taxable service and a taxable service are billed together under a single charge, the entire charge shall be deemed taxable unless the service supplier can reasonably identify charges not subject to the utility users tax based upon its books and records that are kept in the regular course of business, which shall be consistent with generally accepted accounting principles. The term "charges" shall not include charges for services paid for by inserting coins in coin-operated telephones except that where such coin-operated telephone service is furnished for a guaranteed amount, the amounts paid under such guarantee plus any fixed monthly or other periodic charge shall be included in the base for computing the amount of tax due. (e) To prevent actual multi-jurisdictional taxation of telephone communication services subject to tax under this section, any service user, upon proof to the tax administrator that the service user has previously paid the same tax in another state or city on such telephone communication service, shall be allowed a credit against the tax imposed to the extent of the amount of such tax legally imposed in such other state or city; provided, however, the amount of credit shall not exceed the tax owed to the city under this section. For purposes of establishing sufficient legal nexus for the imposition and collection of utility users tax on Ordinance No. NS-XXX Page 4 of 6 508-6 charges for telephone communication services pursuant to this code, "minimum contacts" shall be construed broadly in favor of the imposition and collection of the utility users tax to the fullest extent permitted by California and federal law, and as it may change from time to time. (f) The tax imposed in this section shall be collected from the service user by the service supplier or its billing agent. The amount of tax collected in one (1) month shall be remitted to the tax administrator on or before the twentieth (20th) day of the following month in accordance with section 35-163 of this code." Section 4. If any section, subsection, sentence, clause, phrase or portion of this ordinance is for any reason held to be invalid or unconstitutional by the decision of any court of competent jurisdiction, such decision shall not affect the validity of the remaining portions of this ordinance. The City Council of the City of Santa Ana hereby declares that it would have adopted this ordinance and each section, subsection, sentence, clause, phrase or portion thereof irrespective of the fact that anyone or more sections, subsections, sentences, clauses, phrases, or portions be declared invalid or unconstitutional. ADOPTED this day of ,2006 Miguel A. Pulido Mayor APPROVED AS TO FORM: Joseph W. Fletcher, City Attorney AYES: Councilmembers NOES: Council members ABSTAIN: Councilmembers NOT PRESENT: Council members Ordinance No. NS-XXX Page 5 of 6 508-7 CERTIFICATE OF ATTESTATION AND ORIGINALITY I, PATRICIA E. HEALY, Clerk of the Council, do hereby attest to and certify that the attached Ordinance No. NS-XXX to be the original ordinance adopted by the City Council of the City of Santa Ana on , and that said ordinance was published in accordance with the Charter of the City of Santa Ana. Date: Clerk of the Council City of Santa Ana Ordinance No. NS-XXX Page 6 of 6 508-8