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FIN CMD sd\F \FINANCE\ADMIN\STFRPTS\SR1614 WPD JUl 2 2 1997
CouncIl Meeting July 22, 1997 Santa MOnica, CalifornIa
TO Mayor and City Council
FROM City Staff
SUBJECT Recommendation to Adopt Resolution Opposing Assembly Bill 1614 as
Currently Drafted and Recommendmg Various Changes
INTRODUCTION
Assembly Bill (AS) 1614, as currently drafted, would prohibit any local tax on
telecommunication services, Including VOice, that would occur over the Internet This staff
report recommends adoption of the attached resolution opposing AB1614 as currently
drafted, and recommendmg vanous changes
DISCUSSION
The CIty's UtilIty User's Tax (UUT) has long been applIed to tradItIonal vOIce
telecommunication services to the extent that those services are subject to the Federal
EXCise Tax The capacity of the Internet IS expanding to accommodate
telecommUnications, including VOice, currently provided by traditional service providers,
and persons are shifting telecommumcatlons from the traditional service prOViders to the
Internet As thiS happens, City UUT revenues Will be lost unless such Internet
telecommumcatlon services are taxable by the City The attached copy of AB1614 would
prohibit applYing the City'S UUT to such telecommunications proVided over the Internet
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In addItion, to apply the City'S UUT to some telecommunication services providers and not
to others violates the long established principal of tax neutrahty, wherein all similar service
providers are to be treated In the same fair and equitable manner for tax purposes
Staff recommends that AB1614 be amended to Indicate that It would not apply to local
Utility User's Taxes on telecommUnication services occurring over the Internet to the extent
that such Internet services are also subject to the Federal Excise Tax
BUDGET AND FINANCIAL IMPACT
Approval of the attached resolution does not have an Immediate budget or financial Impact
However, If AB1614 becomes law as presently written, and if only about 10% of
telecommUnication services proVided In the City are shifted from traditional service
proViders to the Internet, the CIty would lose about $1 1 million/year In UUT revenue
RECOMMENDA TION
It IS recommended the Council adopt the attached resolution opposmg AB1614 as currently
drafted and recommending vanous changes
Prepared by Mike Dennls, Director of Finance
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CAUFORNIA LEGlSLATt.'RE-1991-98 REGULAR SESSION
ASSEMBLY BILL No. 1614
Introduced by Assembly Members Lempert, Cunneen,
Alquist, Bowe~ Calde~ KaJoogian, Pera~ Sweeney, and -
Wayne
June 3. 1997
An act to add Part 32 (commencmg WIth Section 65001) to
Dlvlsion 2 of the Revenue and Taxanon Code. relanng to
taxatIon. and declanng the urgency thereof, to take effect
ImmedIately.
LEGISLATIVE COUNSEL'S DIGEST
AB 1614. as introduce~ Lempert. California Internet Tax
Freedom Act.
EXIsnng law unposes vanous state income. franchise.
property. and eXCIse taxes and various user. regulatory, and
franchIse fees in connection WIth activity or property witbia
the junsdicnon of this state. Existing law authorizes counties.
ClUes. and other local agenCIes to rmpose various taxes and fees
m connectIon WIth acnVIty or property WIthin those
Junsdicttons.
ThIs bill would enact the "California Internet Tax Freedom
Act" to proh1btt the imposition. assessment, or attempt to
collect any tax or fee directly or indirectly on, or in connection
With, the Intern~ any interaCtive computer services" or the-
use of the Internet or any interactive computer services. The
blll would make spectfied legislative findings and declarations
In connection With that prolubitioD...
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TIlls blll would declare that 1 t IS to take effect munedlatel y
as an urgency statute.
Yote' 2/3 Appropnanon; no. Fiscal conuructee: no.
State-mandated local program: no.
nte people of the Stare of CalifornIa do enact as follows:
1 SECTION 1 Part 32 (commencmg WIth Seco.on .
2 65001) IS added to DIVIsIon 2 of the Revenue and Taxation
3 Code, to read:
4
5 PART 32. CALIFORNIA INTERNET TAX
6 FREEDOM ACT
7
8 6500 L nus act shall be known and may be cited as the
9 "Caltforma Internet Tax. Freedom Act:'
10 65002. The LegIslature finds and declares all of the
11 followmg:
12 (a) As a massIve global network spannmg not only
13 state but mtemao.onal borders. the Internet IS mherently
14 a matter of interstate and foreIgn commerce WIthin the
15 JUTIsc:hCo.on of the Uruted States Congress under Secnon
16 8 of ArtIcle [ of the U filted States Consotuo.on.
17 (b) Even within the United States. the Internet does
18 not respect state lines and operates mdependently of
19 state boundanes. Addresses on the Internet are designed
20 to be geograph.1cally indifferent. Internet transmissions
21 are lDseositive to physical distance and can have multiple
22 geograplucal addresses.
23 (c) Because transInlssions over the Internet are made
24 through packet-switching. it is impossIble to determine
25 WIth any degree of certainty the precise geographic route.
26 or endpomts of specific Internet transmiSSlOns,.. and
27 mfeasible to separate intrastate. from interst~r~, and
28 do mesne from foreign. Internet tranSmissions.
29 (d) Inconsistent and un9rlmini!3trablc taxes imposed.
30 on Internet actIVIty by state. and local governments
31 threaten not only to- subject consumers. businesses. and
32 other users engaged in interstate and foreIgn commerce
33 to mulo.ple. confusing.. and burdensome taxation. but also
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1 to restnct the growth and connnued technologIcal
2 mawranon of the Internet itself. and to call mto questIon
3 the contInued Viability of th.1s dynanuc medtum.
4 (e) Because me tax laws and regulanons of so many
5 Junsdicuons were estabhshed before the Internet or
6 mteractive computer services. therr apphcauon to Uns
7 new medium in umntended and unpredictable ways
8 threatens every Internet user, access provIder, vendor.
9 and mteracnve computer service provider.
10 (I) The electI'omc marketplace of services, products.
11 and Ideas aVatlable through the Imerner or mteracnve
12 computer serviCes can be espeCIally benefiCial to semor
13 cluzens. che phYSically challenged. cltlzens In rural areas.
14 and small busmesses. It also offers a vanety of uses and
15 benefits for educauonal msututIons and chamable
16 orgamzanons.
17 (g) Consumers. bUSInesses, and others engagIng In
18 mterstate and foreIgn commerce through the Internet or
19 mteractIve computer services could become subject to
20 more than 30.000 separate taxIng Junsdtctlons m the
21 Urnted States alone.
22 (h) The consistent and coherent nanonal policy
23 regarding taxanon of Internet actIvity that is needed co
24 aVOid burdemng this evolvmg form of interstate and
25 foreign commerce can best be achieved by the United
26 States exel'Clsmg its authonty under clause 3 of Article I
27 of SectIon 8 of the United States ConstitutIon.
28 65003. For purposes of this part:
29 (a) "Internet" meanlt the global information system
30 that is lOgIcally linked together by a globally umque
31 address space based on the Internet Protocol (IP), or Its
32 subsequent extensIOns; and is able to support
33 commumcations using the Transmission Control
34 ProtocollIntemet Protocol (TCPIIP) suite. or Itr
35 subsequent extensions. or other- IP-compauble protocols~
36 and provides. uses. or makes accessible, either publicly or
37 pn vately. lugh level services layered on the
3 g commumcations and. related. infrastructure descnbed
39 herem.
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L (b) "Interacuve computer service" means any
., mformauon. service. system. or access software provider
..
3 that provides or enables computer access by multIple
4 users to a computer server. mc1udmg specIfically a
5 service or system that proVIdes access to the Internet and
6 such systems operated or senrices offered by l1branes or
7 educauonal mstltunons.
8 (c) "Tax" .
means any enforced proportlonal
9 conlI1bunon Imposed for the support of the state or any
10 polmcal SUbdlVJ.slon of the state.
11 (d) "Fee" means any franchIse fee or regulatory fee
12 Imposed by the state or any polItIcal SubdlVlslon of dte
13 state. "Fee" does not mc1ude any user fee Imposed by any
14 state or local agency that provides Internet semces or
15 access to a user.
16 65004. (a) Except as provided In subdivIsion (b),
17 neither the state nor any local government., mcludtng any
18 pohacal subchvlslon, may Impose, assess, or attempt to
19 collect any tax or fee directly or mdrrectly on, or in
20 connection With. any of the followmg:
21 ( 1) The Internet.
22 (2) Any mteracnve computer seIV1ces~
23 (3) The use of the Internet or any interactive
24 computer services.
25 (b) The prolubitIon m subdivision (a) again~t the
26 Imposlnon of taxes or fees shall not apply to any of the-
27 follOWIng:
28 (1) Taxes Imposed on, or measured by, net income
29 denved from the Internet or- tnteractive computer
30 services.
31 (2) Any fairly apportioned business license tax applied
32 to any bUSIness that has a business location m the taxIng
33 Junsd.1cnon.
34 (3) Any ad valorem tax or fee imposed pursuant to
35 Arnc1e xm or Arncle xmA of the CalifQmia
36 Constttution.
37 (4) The authority of the sta~ or any political
38 SUbdivIsIon thereof. to impose a sales or use tax on any sale
39 or other transactiOIl effected. by use of the Internet or
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1 mteracnve computer semces If both of the followmg
2 apply:
3 (A) The taX IS the same as the taX imposed and
4 collected by the state. or polincal SubdiVIsion thereof. on
5 any sale or mterstate transacnon effected by ma1l order.
6 telephone. or other remote means WIth,n Its taxmg
7 J unsdictlon.
8 (B) The obliganon to collect the tax from sales or other .
9 transacttons effected by use of the Internet or tnteracnvc
10 computer services IS lIDposed on the same person or
11 ennty as in the case of sales or transactions effected by
12 mall order. telephone. or other remote means.
13 (5) Any other tax or fee that IS not specIally Imposed
14 on the Internet, interacnve computer sel'Vlces, or the use
15 of the Internet or mteracbve computer seIV1ces~
16 SEe. 2. Tb.1s act IS an urgency statute necessary for the
17 mlUlediate preservanon of the public peace. health, or
18 safety WltblD the meanmg of Article IV of the
19 Consntution and shall go mto imrnedtate effect. The facts
20 constituting the necessity are:
21 In order to mamtam the connnued viability of the
22 Internet and mamtam a umform policy of taxanon
23 relanng to Internet acn Vlty, It is necessary that this act
24 take effect immediately.
,
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July 21, 1997
City of Santa MOnica .... r." Ifj",
1685 Main Street I, .-11' ,
Santa MOnica, CA 90401
Subject City Council Resolution Opposing AS 1614
Dear Mayor O'Connor and CIty CouncIl
The CalifornIa Taxpayers' ASSOCiation urges rejectIOn of the Santa MOnica City Council
resolution opposing AS 1614, the Callforma Internet Tax Freedom Act This legislatIon IS
critically Important to secunng a prominent pOSitIOn for California In the global marketplace of
electronic commerce
Growth In Internet access and consumer online servIces IS creating an Important new
marketplace with Immense economic potential The California Taxpayers' ASSOCiation IS very
concerned, however, that actions by local governments to exploit this new Industry with taxes
or exactions would have a senous chlllmg effect on Its growth California should aVOid new
taxes on this technology that could stifle ItS growth
This state enJoys a posItion of world leadership In hIgh technology and faces an hlstonc
opportunity to also be a world leader In the marketplace of electronic commerce It IS cntlcal
that policy makers work proactlvely to prevent tax problems for this emergmg Industry,
enabling California to attract thIs new commerce, Investment, and related jobs
PreCIpItous actIon by local governments to begIn taxIng the Internet would frustrate rational
polIcy development This could do senous damage to thIs emergmg mdustry and the new
economic actiVity It would generate TaXing access to the Internet, as the city's draft resolution
promotes, would harm electronic commerce by Impeding consumers' access to this new
marketplace. It would also create great administrative difficulties for Internet service prOViders
that are not based In Santa MOnica
Assembly 81111614 IS a needed clear statement on this Important Issue Accordmgly,
California Taxpayers' ASSOCiation urges your rejection of this proposed resolution
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Business Coalition In Support of AS 1614
American AIrlines Pacific TelesIs
Amencan Electronics ASSOCiation Phasecom, Inc
Apple Computer Radius, Inc
AT&T Remedy Corp
Bank of Amenca San Diego Gas & Electnc
Bay Networks Showtlme
Bechtel Corporation SIlicon Valley Software Industry Coalition
Board of EqualizatIon Sprint
Brobeck, Phleger & Hamson Tandem
California Alliance for Consumer Protection Target
California Bankers ASSOCiation The Sports Channel
California Taxpayers' ASSOCiatIon Unocal Corporation
California Internet Industry Alliance USCS InternatIonal
California Cable Table TeleVISion Assn Vanan
California ASSOCIatIon of CompetItIve Wmk Communrcatrons
Telecommunications Companies Xerox Corporation
Contmental Airlines
Cox Communications
Crowley Mantlme Corporation
Daniels Cable VIsion, Inc
Dayton Hudson
Discovery Networks
EI Entertainment TeleVISion
Edison Select
Farmers Insurance Group
Fireman's Fund Insurance Company
GST Telecom
GTE California
Georgia PaCific Corporation
Hewlett-Packard
Home Box Office
Home Network
Home & Garden TeleviSIon
Intel
Intuit
Jones InterCable
Mel
Med/aOne
Mervyn's
NBC Cable Network
Octel Communications Corporation
E -'.PRES-DNT'J..EGIS\Ae~61'" LST
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FINANCE MD sd \F \ATTY\USERS\CLAUDIA\BILl1614
Council Meeting July 22, 1997 Santa MOnica, California
RESOLUTION NUMBER 9170
(CITY COUNCIL SERIES)
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SANTA MONICA
OPPOSING ASSEMBLY BILL 1614 AS CURRENTLY DRAFTED AND
RECOMMENDING VARIOUS CHANGES
WHEREAS, the CIty of Santa Monica has adopted a Utility User's Tax (UUT)
Ordinance for the purpose of providing tax revenues to pay for essential mUnicipal
services, including police, fire, and numerous other valuable community services, and
WHEREAS, the City's Utility User's Tax applies to certain utility services,
regardless of the technology employed to deliver those services, and Since neutrality In
the application of a tax IS an essentIal pnnclple to assure fairness and equity among the
tax paYing citizens of the City, and
WHEREAS, the City of Santa Momca's Utility User's Tax (UUT) Ordinance Imposes
a tax on the use of telecommunication services within the City In the same manner as the
federal excise tax IS applied, regardless of the technology employed to deliver this service,
and
WHEREAS, access to the Internet over the public-switched network IS now offered
by all major telecommUnicatIon providers for a small monthly fee, and the Internet has
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become widely used by the publiC, for pnvate and commercial purposes, as a means of
commUniCations, and
WHEREAS, as a result of advances In digital technology, VOice quality
communications are now possible over the Internet, and when similar VOice qualIty
commUnications take place over the public-swItched network, they are taxable under the
federal excise tax rules and the City's Utility User's Tax ordinance, and
WHEREAS, to the extent that such VOice quality commumcatlons over the Internet
are deemed taxable under the federal excise tax, now or In the future, charges for access
to the Internet would be subject to the City'S Utility User's Tax, In the same manner as
charges for access to local and long distance wire and wireless networks are today, and
WHEREAS, Assembly 81111614 (CalifornIa) would propose to place a moratorium
on all sorts of local taxation of the Internet, Including taxation of telecommumcatlons
servIces over the Internet under the City's eXIstIng Utility User's tax ordInance, and
WHEREAS, such legislation, If adopted as presently worded, could result In an
unfair bias, faVOring the Internet telecommunication technology over numerous other
technologies, and could, therefore, Violate the taxation pnnclple of neutralIty, and such
legislation would create an economic Incentive to shift commUnications from a taxable
technOlogy to an exempted one, resulting In a loss of local tax revenues to the City,
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NOW, THEREFORE, THE CITY COUNCil OF THE CITY OF SANTA MONICA
DOES HEREBY RESOLVE AS FOllOWS
SECTION 1 Unless AS 1614 IS amended to permit neutrality of tax applicatIon
under the City's eXisting UtIlity User's Tax ordinance, the City opposes AB 1614
SECTION 2 If neutrality IS assumed under such legIslation, then to the extent that
the City's Utility User's Tax ordInance applies to telecommunication services over the
Internet, It would only apply to the access fee (or similar fees for transmission services),
and not to "content" or "commerce" taking place over the Internet
SECTION 3 The CIty Clerk shall certify to the adoptIon of thiS ResolutIon and
thenceforth and thereafter the same shall be In full force and effect
APPROVED AS TO FORM
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Marsha Jones Moutne
City Attorney
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Adopted and approved thIS 22nd of July 1997
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I. Mana!vi Stewart, Cny Clerk of the Cny of Santa MOllica. do hereby certIfy that the
foregomg Resolutlon 9170(CCS) was duly adopted at a meetmg of the Cny CouncIl held on the
22nd of July. 1997 by the follo\\~ng vote"
Ayes Councllmembers Femstem, Genser. Mayor Pro Tem Holbrook. Mayor
O'Connor. Rosenstem
:-.J oes Councilmembers Kane
Abstam Councllmembers ~one
Absent Councllmembers Ebner. Greenberg
ATTEST
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Mana M Stewart. Cny Clerk