California Cities Keep Collecting Phone Tax, Ignoring Federal Law

Published June 1, 2008

Many city attorneys in California know that the past and present collection of their city’s utility tax on cell phone bills is illegal without voter approval, but they and the politicians they represent are trying to bluff their way out of holding a vote.

A utility tax is a tax on utility use. The tax varies in percentage from city to city, usually between 2 and 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 services.

The idea of taxing utility usage first became popular in California during the 1960s, before cell phones. Instead of writing their own ordinances, many cities adopted or copied a uniform Utility Tax Ordinance, based on federal law, that was in circulation at the time.

New Technology, Old Definition

Because of changes in technology many phone services no longer fit neatly into the federal definition of 50 years ago. Because they do not limit subscribers to a local area or 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 wireless cellular services for which charges are based on time but not distance do not qualify as taxable telephone services under the definition in the Federal Excise Tax statute.

To comply with those rulings, in 2006 the IRS ended the practice of collecting the Federal Excise Tax on cell phone bills. Despite the clarification of the law, to our knowledge no California city has 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. The rest have amended their ordinances to delete the reference to federal law and to redefine telephone service to include cell phones. Most of the latter have not sought voter approval.

Unconstitutional Extensions

The California state constitution, as amended by 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, the association filed suit against the City of Sacramento in June 2007. 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. That amendment, the suit charges, required voter approval and, without it, application of the tax to cell phones is illegal. The suit is awaiting a state trial court date.

Tim Bittle ([email protected]) is director of legal affairs and Jon Coupal ([email protected]) is president of the Howard Jarvis Taxpayers Association, California’s largest taxpayer organization.