Appeals Court Upholds Local Taxes on Phone Users

Wednesday, December 6, 2017

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Appeals Court Upholds Local Taxes on Phone Users

Says Voter Approval Not Needed Where Amendment to Ordinance Maintains Status Quo

By a MetNews Staff Writer

Two cities in Los Angeles County that amended their ordinances under which telephone services are taxed each properly determined that the matter did not need to be submitted to voters because the excising of a reference to a recently reinterpreted federal statute maintained the status quo, the Court of Appeal for this district has held in a pair of cases.

The actions were each brought by cellphone users who paid the taxes through their cellular service providers.

A case involving a Norwalk ordinance was ordered published, and the other, dealing with the Rancho Palos Verdes ordinance, was not. The opinions, filed Monday, were authored by Presiding Justice Lee Edmon of Div. Three.

Each opinion affirms a judgment of dismissal following an order by Los Angeles Superior Court Judge John Shepard Wiley Jr. sustaining a demurrer to all causes of action without leave to amend.

The respective plaintiffs each asserted that an ordinance amendment was invalid in light of Propositions 62 and 218, which provide that local governments must gain voter approval of any new general tax. Proposition 62—the “Voter Approval of Taxes Act”—was enacted at the polls in 1986 and adds statutes requiring that new or boosted taxes be approved by a two-thirds vote of the relevant legislative body and a majority vote of the electorate; Proposition 218, enacted in 1996, amends the state Constitution to provide:

“No local government may impose, extend, or increase any general tax unless and until that tax is submitted to the electorate and approved by a majority vote.”

Norwalk Ordinance

In Norwalk, voters in 2003 assented to a 5.5 percent user tax on all municipal utilities with the exception of services “exempt from or not subject to...the tax imposed under Section 4251 of the Internal Revenue Code.” At the time, exemptions from the federal excise tax were extremely narrow, applying, for example to service members in combat zones and certain types of nonprofit organizations.

Since then, federal courts and the IRS found that many cellphone and landline plans are exempt. To avoid lifting the Norwalk tax on phones, the city council in 2007 simply snipped out reference in the ordinance to §4251.

Norwalk residents and cellphone users Alfred Gonzalez and David Reynoso sued the city in 2014, arguing that voters in 2003 “specifically voted not to tax services that were exempt from taxation under” §4251, so that the removal of the exemption constituted a new tax, invalidly imposed in light of the lack of voter consent.

‘Logic Is Incorrect’

Their “logic is incorrect,” Wiley declared, explaining:

“The City Council’s 2007 deletion of the federal reference changed an invisible legal detail in an old and voter-approved tax. The deletion did not impose a new tax.”

There was no tax increase, he declared, noting that the plaintiffs’’ lawyer conceded at oral argument that “[b]efore and after the 2007 deletion…, the 5.5% tax on monthly cellphone bills remained the same.” Wiley remarked:

“As far as taxpayers were concerned, then, the deletion had no practical or discernible effect. The Norwalk City Council thus did not ‘impose’ a phone tax in 2007.”

He also said the city did not “extend” a tax, which also would have required permission of the electorate, reasoning:

“This tax was a permanently ongoing tax when the voters approved it in 2003. So it remained in 2007. The 2007 action did not extend the period of the tax. Nor did the 2007 action extend the tax to more taxpayers or to more tax bills. As far as taxpayers paying tax bills could see in 2007, nothing changed.”

Wiley did not discuss whether ratification of the utility tax, as reworded, took place in the Nov. 4, 2014 election. Norwalk voters approved a measure declaring that an ordinance was to be adopted “[w]ithout raising current tax rates…modernizing the City’s utility users tax ordinance to require equal treatment of taxpayers by ensuring the tax applies regardless of technology used.”

An “impartial analysis” by Norwalk City Attorney Steven L. Dorsey, of Richards, Watson & Gershon, said the measure responds to “changes in interpretation of federal law and to protect the 2003 voters’ intent.”

Rancho Palos Verdes

The situation in Rancho Palos Verdes was nearly identical. Its tax—of three percent—was approved by voters in 1996; in 2006, the city amended the ordinance to remove reference to §4251, declaring as the purpose, just as Norwalk had “to impose the utility user tax on telephone communication services in a manner that is consistent with how it has been historically imposed.”

Suit against that city was brought by resident and cellphone user Sharon Yarber, an attorney for First American Title Insurance Company in downtown Los Angeles. She sued in 2014, after the action against Norwalk was filed.

Yarber was quoted, at the time, by the Daily Breeze as saying:

“For the city to knowingly collect illegally about $5.6 million in taxes is disgraceful.”

Yarber sought refunds for tax payments going back eight years. Rancho Palos Verdes’s then-city attorney, Carol Lynch, also of Richards, Watson & Gershon, was quoted by the newspaper as arguing that a “claim for a refund of taxes under the city’s code only goes back one year, so anything before Aug. 13 of 2013 is untimely.”

Wiley heard arguments on demurrers in connection with Yarber’s action together with those pertaining to the Norwalk ordinance. In sustaining a demurrer without leave to amend to the pleading in her case, he incorporated the reasoning set forth in the related case and said:

“The same analysis invalidates Sharon Yarber’s case against the City of Rancho Palos Verdes. The briefs in the two case[s] are, for the part, word-for-word identical. There are some factual differences between the two cities, of course, but they are immaterial to the legal analysis.”

Appeals Court’s Affirmance

In each of her two opinions affirming Wiley, Edmon said that the “unstated premise” of the appeal “is that the change in the interpretation of federal law retroactively changed the meaning” of the municipal code, so that an amendment of it without voter approval was unauthorized.

Edmon responded in each opinion that from the time the city’s voters approved a utility charge to the time of the amendment eliminating reference to §4251, the municipal code section “meant precisely what the voters understood and intended it to mean—that the…utility user tax applied to all telephone service.”

“Accordingly,” she said, the amendment “did not ‘impose,’ ‘extend,’ or ‘increase’ a general tax within the meaning of Propositions 62 or 218.”

The cases are Gonzales v. City of Norwalk, 2017 S.O.S. 5986, and Yarber v. City of Rancho Palos Verdes, B272288.

In each case, Thomas V. Girardi, former State Bar President Howard Miller, Robert Finnerty, and Alexandra T. Steele, all of Girardi | Keese, along with sole practitioner Martin N. Buchanan and Thomas S. Slovak and Stephen J. Schultz of Slovak, Baron, Empey, Murphy & Pinkey argued unsuccessfully for reversal.

Scott Noya and Lee H. Roistacher of Daley & Heft represented both cities. B. Tilden Kim and Saskia T. Asamura of Richards, Watson & Gershon, were also attorneys for Norwalk, but not Rancho Palos Verdes, which had replaced Lynch, after 25 years of service as city attorney, based on a lower bid for providing legal representation.

Lawyers Comment

Each of the lawyers who argued before Div. Three had a comment yesterday.

Buchanan, who argued for the plaintiffs, said:

“While we respect the Court of Appeal’s decision, we believe it reached the wrong result and are evaluating our options for further review.”

Asamura commented, on behalf of Norwalk:

““The City of Norwalk applauds the unanimous decision by the Second District Court of Appeal, which rejected the Proposition 218 class action challenge to the City’s cellphone tax. This tax helps pay for vital public services. The City’s voters have twice overwhelmingly voted in favor of the tax, in 2003 and 2014, and the 5½ percent tax on cellphone usage has never changed since the voters first approved it. Both the trial court and the Court of Appeal correctly found no merit to the lawsuit’s unsupported claim that the cellphone tax was ‘imposed, extended or increased’ without voter approval. The Court of Appeal’s decision is firmly grounded in California’s constitutional and statutory law, and judicial precedent. The decision allows the City to continue to provide the essential municipal and community services that the voters want and have come to expect.”

Noya said, speaking for Rancho Palos Verdes:

“The Court of Appeal applied a common sense, practical approach in finding the class action claims asserted in these cases lack merit and that the City of Rancho Palos Verdes effectuated no change in the existing tax rate, amount of tax, or the scope of taxable telephone services. The election ballot materials established the voters approved a tax on all telephone services billed to city residents. The trial and appellate courts both correctly found City of Rancho Palos Verdes did not violate Proposition 218 because the city’s actions merely served to continue taxing telephone services in the same manner as the voters previously approved.”