Thursday, May 10, 2007
C.A.: L.A. Cell Phone Tax Boost Invalid Without Voter Approval
By Tina Bay, Staff Writer
The City of Los Angeles violated the state Constitution when it acted to boost taxes on cell phone use without voter approval, the Court of Appeal for this district ruled yesterday.
Affirming a ruling by Los Angeles Superior Court Judge David P. Yaffe, Div. Two granted a writ of mandate sought by cell phone carriers who contended a 2002 increase in the cell tax was invalid.
First implemented in 1993 through the adoption of Municipal Code Sec. 21.1.3(a), the cell tax was set at 10 percent and applied to all cell phone charges for users of cell phones in the city when the owner or lessee of the cell phone had a Los Angeles billing address. The city and carriers agreed that based on apparent constitutional limitations at the time, the tax could only be imposed on calls that originated or terminated in the city.
Because the carriers did not yet have the technology to track the origination or termination of calls, however, the city agreed to calculate the cell tax based on users’ monthly charges rather than airtime.
In 2002, the city unilaterally changed the method of calculating the tax base to include all of the customer’s cell phone charges without regard to where individual cell phone calls originated or terminated. Carriers were instructed to collect the cell tax from their customers in accordance with the city’s decision.
The change followed Congress’ passage of the 2000 Mobile Telecommunications Sourcing Act, which the city maintained altered the constitutional limitations applicable to the cell tax. The MTSA provides that all mobile phone services may be taxed by the jurisdiction “whose territorial limits encompass the customer’s place of primary use, regardless of where the mobile telecommunications services originate, terminate, or pass through.”
Suing the city, AT&T Wireless, Verizon Wireless and other carriers claimed the inclusion of airtime in calculating the cell tax base amounted to a tax increase that should first have been submitted for voter approval pursuant to Proposition 218.
That measure, adopted by California voters in 1996, amended the state constitution to provide that no local government could impose, extend or increase any taxes unless the increase was first submitted to the electorate and approved—by a majority vote for a general tax and a two-thirds vote for a special tax. Subsequent related legislation, Government Code Sec. 53750, specified that a tax increase occurs when an agency’s decision revises the “methodology” by which a tax is calculated and the revision results in increased taxes being levied.
By virtue of the 2002 change in tax base calculation, the city’s tax revenues were anticipated to increase by $1 million in 2003 and by $4 million in 2004, according to Office of Finance estimates.
At trial, Yaffe found that the city’s inclusion of airtime in calculating the cell tax was a change in methodology that resulted in increased tax revenue, and thus constituted a tax increase within the meaning of Proposition 218.
The judge ordered the city to stop demanding that carriers calculate the cell tax according to its 2002 decision and to reinstate previously applicable instructions to follow the 1993 ordinance.
The Court of Appeal upheld Yaffe’s order, but modified it to include a declaration that the city’s increased cell tax violated Proposition 218’s requirement that a proposed tax increase be submitted to the voters for approval.
Writing for Div. Two, Justice Judith M. Ashmann-Gerst said that “methodology” under Sec. 53750 referred to “a mathematical equation for calculating taxes that is officially sanctioned by a local taxing entity.”
“Proposition 218 was passed, and it arrested the cell tax’s maturation over time,” she wrote, rejecting the city’s position that its local government’s tax calculation methodology could “evolve” with the evolution of constitutional parameters.
“[T]he City wants us to interpret Proposition 218 so that it permits a fluctuating local government tax if the fluctuation is due to expanding constitutional boundaries. The voters of California stand in the City’s path.”
Dismissing the city’s contention that such a restriction on its tax authority was “unreasonable policy,” she noted:
“This case goes to the heart of direct democracy in California and the rights of citizens to circumvent lawmakers and pass initiatives that will be honored by the executive and judicial branches.”
Presiding Justice Roger W. Boren and Justice Victoria M. Chavez concurred in the opinion.
The City was represented on appeal by Michael G. Colantuono, Sandra J. Levin, Lawrence G. Permaul and Amy C. Sparrow, of the Los Angeles firm Colantuono & Levin.
They referred calls to the Los Angeles City Attorney’s Office, which declined to comment on the ruling.
Plaintiffs’ appellate counsel, Stuart N. Senator and Michelle Friedland of Munger, Tolles & Olson in Los Angeles, could not be reached for comment.
Oakland attorney Benjamin P. Fay, who represented League of California Cities, appearing as amicus curiae on behalf of the defendant, told the METNEWS he hoped the ruling would be modified or reversed.
“From my perspective, what I find particularly troubling about this decision is it in effect sets the rule that if you’re a city and if you have an ambiguity in a tax, you have to litigate it. I don’t think that is good policy.”
The league had argued that the city, faced with uncertainty about whether taxing calls originating or terminating outside the city was constitutional, should have been allowed to agree to a temporary compromise in the application of the law—calculating taxes based on monthly charges—until the law became clarified.
The case is AB Cellular LA, LLC v. City of Los Angeles, B185373.
Copyright 2007, Metropolitan News Company