Los Angeles Imposes Tax on VoIP Phone Service

Published April 1, 2008

Los Angeles voters have imposed a 9 percent tax on Internet phone calls, known as VoIP (Voice over Internet Protocol). VoIP calls had been tax-free in the city.

Voters also enacted a 1 percentage point reduction in the tax on all other phone calls, from 10 percent to 9 percent. Most phone calls are still made over traditional wireline or wireless phones, but Internet phone service is a rapidly growing segment of the telephone market.

Measure S appeared on the February 5 ballot in Los Angeles and won by nearly a two-thirds margin. Voters were promised if they supported Measure S, the tax money would go toward police protection.

Critics of the new VoIP tax say there is no guarantee any of the money will go to police or other public safety services, as the proceeds will simply go into the city’s general fund.

Tax Called Illegal

Last fall, Congress passed a seven-year extension of the federal moratorium protecting Internet access services from federal, state, and local sales or excise taxes. President George W. Bush signed the bill November 1.

Huffman said Measure S was sprung on voters with almost no notice, which bothered several taxpayer and business organizations, including VICA.

“We were disappointed at how the Los Angeles City Council placed this measure on the ballot. It came out of nowhere,” said Huffman, leaving almost no time for opponents to muster arguments against it.

Huffman said association members are also upset the new VoIP tax was proposed barely two weeks after the Los Angeles City Council granted 20 to 25 percent pay raises for all city employees, making them the highest-paid city employees in California.

City officials should have simply acknowledged they needed more revenue to pay for those high salaries and benefits instead of arguing it was a matter of public safety, Huffman said.

“It’s a matter of honesty,” Huffman said. “They should have been upfront with us.”

Public Safety Cited

Los Angeles city officials said public safety was the central issue behind Measure S.

“In the past, large cities have been able to rely on the state and federal government to assist in providing necessary funding for public safety. Today, however, the state of California and the federal government have allocated far less money to all cities and particularly to Los Angeles for public safety, education, and traffic relief, which is why Measure S is essential,” said William Bratton, the city’s police chief, in a guest editorial in the February 3 issue of the Los Angeles Daily News, urging voters to support the measure.

An especially annoying provision of Measure S for Huffman is the inclusion of a 50 percent tax break for telemarketers.

“Telemarketers will pay half of what everyone else will pay,” Huffman said. “This offends a lot of people. If anyone should pay this tax, it’s telemarketers.”

Steve Stanek ([email protected]) is managing editor of Budget & Tax News and a research fellow at The Heartland Institute.