SR-212-002 (5)~_
City Council Report
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Santa MonicaW
City Council Meeting: July 25, 2006
Agenda Item: - ('~'i
To: Mayor and City Council
From: Marsha Moutrie, City Attorney
Subject: Emergency Ordinance Amending Santa Monica Municipal Code Section
6.72.010 and 6.72.020 Relating to the Utility Users Tax and Clarifying the
Application of Existing Law for Telephone Communication Services
Recommended Action
It is recommended that Council adopt an emergency ordinance amending Santa
Monica Municipal Code Section 6.72.010 and 6.72.020 relating to the Utility Users Tax
(UUT) and clarifying the application of existing law for teiephone communication
services and declaring the presence of an emergency.
Executive Summary
On May 25, 2006, the Internal Revenue Service announced through Notice 2006-50
that it had changed its long standing interpretation of some of the definitions and terms
contained in the Federal Excise Tax (FET) and stated its intention effective August 1,
2006 to revoke Revenue Ruling 79-404, upon which the City has relied for more than
twenty years and with which the City has long agreed allowed for a correct application
of UUT. If the City acquiesced to the ruling, the city could potentially face an annual
loss in UUT revenue related to telephone communication services in excess of $8
million. The potential loss in revenue is substantial and if it occurred, the revenue loss
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would severely harm the public health, welfare and safety including the City's provision
of essential public services.
The City wishes to clarify the City's UUT to avoid confusion arising as a result of IRS
Notice 2006-50 and staff recommends the Council adopts this emergency ordinance.
Discussion
Background
The City of Santa Monica has imposed a Utility Users Tax (10%) on a wide variety of
telephone communication services since 1969. For the ease of administration and for
the convenience of telephone communication service providers, since the adoption of
the UUT the City has generally looked to federal interpretation of the Federal Excise
Tax (FET) for guidance on the scope and application of the City's UUT with respect to
telephone communication services. As explained in the Information Item of June 13,
2006, on May 25, 2006, the IRS issued a notice, effective August 1, 2006, that it
intended to stop applying FET to nearly all telephone communication s~rvices, except
local exchange services, which leaves only about 25% of all the telecommunication
services as federally taxable.
Given the IRS' recent Notice and the bills pending in Congress to repeal the FET, the
City's UUT's reference to the FET has the potential to create confusion and adds a
degree of uncertainty to the application of the UUT. To avoid these, to clarify the scope
of the City's UUT and to protect the City's UUT from being interpreted contrary to its
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intent and purpose, the proposed amended has been drafted. It is presented as an
emergency ordinance so that it can take effect immediately upon adoption, ahead of the
effective date of IRS 2006-50, which is August 1, 2006, thereby protecting the City from
any revenue loss. If the logic of IRS Notice 2006-50 was applied to the City's UUT, the
City could potentially face an annual loss in UUT revenue related to telephone
communication serviced in excess of $8 million, with is both substantial and harmful to
the public health, welfare and safety, including the City's provision of essential public
services.
By adopting the emergency ordinance, the City does not make any change in the way in
which the UUT is calculated, imposed or administered but instead clarifies the City's
UUT with respect to telephone communication services to avoid confusion arising as a
result of IRS Notice 2006-50. IRS Notice 2006-50 revokes IRS revenue ruling 79-404.
The changes to the Santa Monica Municipal Code in this emergency ordinance clarify
that the City will continue to abide by Revenue Ruling 79-404 in administering the City's
UUT and that the City's Tax Administrator's interpretative rulings issued with respect to
the UUT should be consistent with IRS revenue ruling 79-404 and other similar
applicable rulings, but that the Tax Administrator should not follow IRS Notice 2006-50.
Budqet/Financial Impact
The total amount of Utility User Taxes on telecommunication services collected by the
City of Santa Monica is estimated to be approximately $12 million in FY 2006/07. As
mentioned above, if the IRS Ruling applies with equal force to the City's UUT ordinance,
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the City could permanently lose approximately $8 million of its total $12 million
telecommunications UUT.
Prepared by:
Joseph Lawrence, Assistant City Attorney
roved:
M sha M ri
Cit Attorn' y
City Attorney's Office
Forwarded to Council:
~mont E~
Manage
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