Illegal Cell Phone Taxes — Can you hear us now?

A young man graduated law school passed the bar rented an office ran an ad and opened for business. For three days no one showed up. Finally the next morning he saw a man approaching his door. Wanting to impress his first potential client the young lawyer picked up the phone. He motioned the man in while shouting "Absolutely not! You tell those clowns in New York that I won’t settle for less than a million. We’re ready for trial and I’ll take this case to the Supreme Court if necessary. Fine. I expect an answer within 24 hours." The lawyer replaced the handset and turned to the man. "Sorry about that" he said "What can I do for you?" The man replied "I’m from AT&T. I came to hook up your phone."

There’s a lot of bluffing going on by lawyers and politicians pretending that they have a connection to a phone when there’s really no connection. We’re talking about cell phones and whether a city’s utility tax applies to them. Many city attorneys in California know that the past and present collection of their city’s utility tax on cell phone bills is illegal absent voter approval. But they and the politicians they represent are trying to bluff their way out of holding an election. Here are the details:

A utility tax is a tax on utility usage. The tax varies in percentage from city to city usually between 2 to 10 percent of the utility bill. Depending on the city the utilities taxed may include electricity natural gas water sewer refuse collection telephone and cable television.

The idea of taxing utility usage first became popular in California during the 1960s before cell phones. Many cities rather than write their own ordinance adopted (or plagiarized) a uniform Utility Tax Ordinance based on federal law that was in circulation at the time.

However because of changes in technology many phone services no longer fit neatly into the federal definition of fifty years ago. Because they do not limit subscribers to a local area nor charge for calls based on both time and distance most cell phone services do not legally qualify as taxable.

In a series of decisions beginning in 2005 five federal courts of appeal across the country held that that wireless cellular services for which charges are based on time but not distance do not qualify as taxable telephone services under the definition contained in the Federal Excise Tax statute.

To comply with these rulings in 2006 the IRS ended the practice of collecting the Federal Excise Tax on cell phone bills.

Now that the law has been clarified no California city (to our knowledge) has simply ceased collecting its utility tax on cell phones.

Some cities are ignoring the change in federal law and are continuing to apply their existing ordinance to cell phone bills hoping no one notices. The rest have amended their ordinances to delete the reference to federal law and redefine telephone service to include cell phones. Most of the latter group have not sought voter approval. The few cities such as Los Angeles that are putting their amended tax up for a vote are engaged in campaigns of deception. For example the measure may lower the percentage of the utility tax by half a point while backers advertise the election as a tax reduction.

Cities that dupe their voters aggravate us but not as much as cities who deny the right to vote altogether. Even in a deceptive campaign there is a chance the local newspaper or taxpayer group will bring the true facts to light. It’s worse when a city believes that it is above the law and can decide for itself what matters shall be trusted to the electorate. No city is above the state constitution which — thanks to Proposition 218 authored by the Howard Jarvis Taxpayers Association — requires voter approval for any new tax or the extension of any existing tax to new circumstances.

As a test case we filed suit against the City of Sacramento in June. Sacramento amended its ordinance in October 2006 to remove the former reference to federal law and redefine taxable telephone service in order to impose the tax on cell phones. This amendment we charge required voter approval and without it application of the tax to cell phones is illegal. To the Sacramento City Council which apparently believes that Proposition 218 can be ignored we say "Can you hear me now?"

Tim Bittle is the Director of Legal Affairs and Jon Coupal is the President of Howard Jarvis Taxpayers Association — California’s largest taxpayer organization — which is dedicated to the protection of Proposition 13 and promoting taxpayers’ rights.