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F:\MunicipaILaw\Share\LAWS\JL\UUT Emergency Ordinance 7-14-06.doc
City Council Meeting 7-25-06 Santa Monica, California
ORDINANCE NUMBER 2203 (CCS)
(City Council Series)
AN EMERGENCY ORDINANCE OF THE CITY COUNCIL OF THE CITY OF
SANTA MONICA AMENDING SECTIONS 6.72.010 AND 6.72.020 OF THE SANTA
MONICA MUNICIPAL CODE RELATING TO THE UTILITY USERS TAX AND
CLARIFYING THE APPLICATION OF EXISTING LAW FOR TELEPHONE
COMMUNICATION SERVICES AND
DECLARING THE PRESENCE OF AN EMERGENCY
WHEREAS, the City of Santa Monica has imposed a Utility Users Tax (UUT) on
a wide variety of telephone communication services since 1969;
WHEREAS, for uniformity, 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 for guidance on
the scope and application of the City's UUT with respect to telephone communication
services;
WHEREAS, 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 and stated its intention
effective August 1, 2006 to revoke Revenue Ruling 79-404, upon which the City has
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relied for more than twenty years and with which the City has long agreed allowed for a
correct application of the UUT;
WHEREAS, if the City acquiesced to IRS Notice 2006-50, the City could
potentially face an annual loss in UUT revenue related to telephone communication
services of in excess of $8 million, which loss in revenue is substantial and if it occurred,
the revenue loss would severely harm the public health, welfare and safety including the
City's provision of essential public services;
WHEREAS, the City disagrees with IRS Notice 2006-50 and its interpretation of
the Federal Excise Tax, and if applied to the City's UUT, IRS Notice 2006-50 would
conflict with the City's UUT and its application;
WHEREAS, the City desires to continue calculating UUT tax in accordance with
its longstanding practice and does not desire to make any change in the way such tax is
calculated, imposed or administered;
WHEREAS, the City desires to clarify the City's UUT calculation practice to avoid
confusion arising as a result of IRS Notice 2005-50;
WHEREAS, the City does not intend to make any change in the way in which the
UUT is calculated, imposed or administered but instead wishes to clarify the City's UUT
to avoid confusion arising as a result of IRS Notice 2006-50; and
WHEREAS, in order to further avoid confusion, the City desires to make this
clarification on an expedited basis before or shortly after August 1, 2006, the effective
date of the IRS Notice 2006-50.
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NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF SANTA MONICA
DOES HEREBY ORDAIN AS FOLLOWS:
SECTION 1. Section 6.72.010 of Article VI of the Santa Monica Municipal Code
is amended to read as follows:
6.72.010 Definitions.
Except where the context otherwise requires, the
definitions given in this Section govern the construction of
this Chapter.
(a) Billing Address. "Billing address" shall mean
the mailing address of the service user where the service
supplier submits invoices or bills for payment by the
customer.
(b) Cable Television Service. "Cable television
service" shall mean any and all services related to the
providing of television, video or origination programming or
services, including any communications that are. ancillary,
necessary or common to the use or enjoyment of the
programming or service, provided to premises located in the
City through any cable, or any other similar medium, in part
or exclusively, that is used to transmit television or video
signals, regardless of the content of the video programming
or communications. However, cable television service shall
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not include services for which a tax is paid under Section
6.72.020 of this Chapter.
(c) Cable Television Supplier. "Cable television
supplier" shall mean any person, company or service which
provides one or more channe Is or signals of video or
television programming or services, including any
communications that are ancillary, necessary or common to
the use or enjoyment of the programming or services, to or
from a business, home, condominium or apartment, where
some fee is paid, whether directly or indirectly, whether or
not the public rights-of-way are utilized in the delivery of the
video or television programming or communications and
regardless of the content of such video or television
programming or communication. A "cable television supplier"
includes, but is not limited to, multichannel video
programming distributors, as defined in 47 U.S.C. Section
522(13), open video systems (OVS) suppliers, suppliers of
cable television, master antenna television, satellite master
antenna television, multichannel multipoint distribution
services, direct broadcast satellite, and other suppliers of
video programming or communications including two way
communications, whatever their technology, to the extent
allowed by law.
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(d) City. "City" shall mean the City of Santa
Monica.
(e) Electrical Corporation. "Electrical
corporation" shall have the same meaning as it is defined in
Section 218 of the California Public Utilities Code. "Electrical
corporation" shall be construed to include any municipality or
franchised agency engaged in the selling or supplying of
electrical power to a service user.
(f) Exempt Wholesale Generator. "Exempt
wholesale generator" shall have the same meaning as set
forth in the Federal Power Act (15 U.S.C. Section 79z-5a)
and regulations thereunder.
(g) Gas. "Gas" shall mean natural or manufactured
gas or any alternate hydrocarbon fuel, which may be
substituted therefor.
(h) Gas Corporation. "Gas corporation" shall
have the same meaning as it is defined in Section 222 of the
California Public Utilities Code.
(i) Month. "Month" shall mean a calendar month.
U) Non-Utility Service Supplier. "Non-utility
service supplier" shall mean:
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(1 ) A service supplier 7 other than a supplier of
electric distribution services to all or a significant portion of
the City, which generates electricity for sale to others, and
shall include, but is not limited to, any publicly-owned electric
utility, investor-owned utility, cogenerator, exempt wholesale
generator, municipal utility district, federal power marketing
agency, electric rural cooperative, or other supplier or seller
of electricity;
(2) An electric service provider (ESP), electricity
broker, marketer, aggregator, pool operators, or other
electricity supplier other than a supplier of electric
distribution services to all or a significant portion of the City,
which sells or supplies electricity or supplemental services to
electricity users within the City; or
(3) A gas service supplier, aggregator, marketer or
broker, other than a supplier of gas distribution services to all
or a significant portion of the City, which sells or supplies gas
or supplemental services to gas users within the City.
(k) Person. "Person" shall mean, . without
limitation, any domestic, nonprofit or foreign corporation,
firm, association, syndicate, joint stock company,
partnerships of every kind, limited liability company, joint
venture, club, estate, trust, Massachusetts business or
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common-law trust, society, any natural individual,
cooperative, receiver, trustee, guardian or other
representative appointed by order of any court, municipal
district, or a municipal corporation other than the City.
(I) Service Address. "Service address" shall
mean the residential street add ress or the business street
address of the service user's primary place of usage.
(m) Service Supplier. "Service supplier" shall
mean any entity or person including the City, that provides
telephone communication, electric, gas, cable, water or
wastewater service to a user of such services within the City.
The term shall include an entity or person required to collect,
or self-collect under Section 6.72.045 of this Chapter, and
remit a tax imposed by this Chapter, including its billing
agent in the case of electric, gas, cable, water or wastewater
service suppliers.
(n) Service User. "Service user" shall mean a
person required to pay a tax imposed by this Chapter.
(0) Tax Administrator. "Tax Administrator" shall
mean the Director of Finance-City Controller of the City of
Santa Monica or his or her authorized designee.
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(p) Telephone Communication Services.
"Telephone communication services" shall mean to the
extent practicable "communication services" 38 defined in
Sections 4251 and 4252 of the Internal Revenue Code aRG
as interpreted bv the applicable regulations and
administrative rulinqs thereunder issued prior to Mav 25,
2006, and shall include any telephonic quality
communication that is interconnected to a public switched
network, and shall include, without limitation, for the purpose
of transmitting messages or information (including, but not
limited to, voice, telegraph, teletypewriter, data, facsimile,
video or text) by electronic, radio or similar means through
"interconnected service" with the "public switched network,"
as these terms are commonly used In the Federal
Communications Act, 47 U.S.C.A. Section 332(d), and the
regulations of the Federal Communications Commission,
whether such transmission occurs by wire, cable, fiber-optic,
light wave, laser, microwave, radio wave, including, but not
limited to, cellular service, commercial mobile service,
personal communications service (PCS), specialized mobile
radio (SMR), and other types of personal wireless service
telecommunications (see 47 U.S.C.A. Section
332(c)(8)(C)(i)) regardless of radio spectrum used, switching
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facilities, satellite or any other similar facilities and
reqardless of whether charqes fo r such service are based on
time. distance or any other basis.
(q) Telephone Corporation. "Telephone
corporation" shall have the same meaning as defined in
Section 234 of the California Public Utilities Code.
SECTION 2.Section 6.72.020 of Article VI of the Santa Monica Municipal Code is
amended to read as follows:
6.72.020 Telephone tax.
(a) There is hereby imposed a tax upon every
person using telephone communication services in the City,
other than a telephone corporation, including intrastate,
interstate, and international telephone communication
services. The tax imposed by this Section shall be at the rate
of ten percent of all charges made for such telephone
communication services and shall be collected from the
service user by the telephone communication services
supplier or its billing agent. To the extent allowed by law, the
tax on telephone communication services shall apply to a
service user if the billing or service address of the service
user is within the City's boundaries. If the billing address of
the service user is different from the service address, the
service address of the service user shall be used.
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(b) "Telephone communication seNices" shall not
include "private mobile radio service," as defined in Part 20
of Title 47 of the Code of Federal Regulations, or "private
mobile seNice," as defined in 47 U.S.C.A. Section 332(d),
which is not interconnected to a public switched network.
The tax imposed under this chapter shall not be imposed
upon any person for using telephone communication
seNices to the extent that, pursuant to Sections 4252 and
4253 of the Internal Revenue Code, the amounts paid for
such communication seNices are exempt from or are. not
subject to the tax imposed under Section 4251 of the Internal
Revenue Code as the exemption was interpreted by the
Internal Revenue SeNice in Revenue Rulinq 79-404 and
otherwise prior to May 25. 2006. In the event that the federal
excise tax on "communication seNices" as provided in
Sections 4251,4252 and 4253 of the Internal Revenue Code
is subsequently repealed or is amended, ~my reference in
this Chapter shall continue in effect and shall be interpreted
by the Tax Administrator consistent with IRS. Revenue
Rulinq 79-404 and other applicable rulinqs that further the
purposes of this Articleor in ::1ny administrative ruling to such
l::1w, including any related feder::11 regulations, private letter
rulings, case law and other opinions interpreting these
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Soctions, sh311 refer to th3t body of 13'11 th3t oxistod prior to
the d3to of repeal as '.veil 3S to 3ny judicial or administr3tive
docision interpreting such foder~1 excise tax law which is
publishod or rendered 3ftor tho d3te of repeal.
(c) The Tax Administrator may, from time to time,
issue and disseminate to telecommunication service
suppliers, which are subject to the tax collection
requirements of this Chapter, an administrative ruling
identifying those telecommunication services that are subject
to taxation under this Chapter. These administrative rulings
shall remain in effect unless altered or amended by the Tax
Administrator and these administrative rulings shall continue
to be consistent with the purposes of this Article and any
applicable legal requirements, including any federal excise
tax rules and, regulations and laws pertaining to
"communications services.,." issued by the Internal Revenue
Service prior to May 25. 2006. In issuinq any administrative
rulinqs. the Tax Administrator shall not rely upon Internal
Revenue Service Notice 2006-50 in interpretinq this Article
but shall rely upon IRS Revenue Rulinq 79-404 and such
other requlations or Revenue Rulinqs consistent with
Revenue Rulinq 79-404.
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(d) As used in this Section, the term "charges"
shall include the value of any other services, credits,
property of every kind or natu re, or other consideration
provided by the service user in exchange for the telephone
communication services. If a non-taxable service and a
taxable service are billed together under a single charge, the
entire charge shall be deemed taxable unless the service
supplier can reasonably identify charges not subject to the
utility users tax based upon its books and records that are
kept in the regular course of business, which shall be
consistent with generally accepted accounting principles. As
used in this Section, the term "charges" shall not include
charges for services paid for by inserting coins in coin-
operated telephones, except that where such coin-operated
telephone service is furnished for a guaranteed amount, the
amounts paid under such guarantee plus any fixed monthly
or other periodic charge shall be included in the base for
computing the amount of tax due.
(e) To prevent actual multi-jurisdictional taxation of
telephone communication services subject to tax under this
Section, any service user, upon proof to the Tax
Administrator that the service user has previously paid the
same tax in another state or city on such telephone
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communication services, shall be allowed a credit against
the tax imposed to the extent of the amount of such tax
legally imposed in such other state or city; provided,
however, the amount of credit shall not exceed the tax owed
to the City under this Section. For purposes of establishing a
sufficient legal basis for the imposition and collection of utility
users tax on charges for telephone communication services
pursuant to this Chapter, "minimum contacts" shall be
construed broadly in favor of the imposition and collection of
the utility users tax to the fullest extent permitted by
California and federal law, and as it may change from time to
time.
(f) The tax on telephone communication service
imposed by this Section shall be collected from the service
user by the service supplier. The amount of tax collected in
one (1) month shall be remitted to the Tax Administrator, and
is due to the Tax Administrator on or before the twentieth
(20th) day of the following month.
SECTION 3. This Ordinance is not intended to impose a new tax or to extend or
to increase an existing tax.
SECTION 4. In accordance with City Charter section 615 this Ordinance is
declared to be an emergency ordinance necessary to preserve the public health,
13
welfare and safety as the potential loss in City revenue caused by misapplying the UUT
in accordance with IRS Notice 2006-50 could exceed $8 million annually, which would
potentially harm the public health, welfare and safety and result in reduced essential
public services.
SECTION 5. Any provision of the Santa Monica Municipal Code or appendices
thereto inconsistent with the provisions of this Ordinance, to the extent of such
inconsistencies and no further, is hereby repealed or modified to that extent necessary
to effect the provisions of this Ordinance.
SECTION 6. If any section, subsection, sentence, clause, or phrase of this
Ordinance is for any reason held to be invalid or unconstitutional by a decision of any
court of competent jurisdiction, such decision shall not affect the validity of the
remaining portions of this Ordinance. The City Council hereby declares that it would
have passed this Ordinance and each and every section, subsection, sentence, clause,
or phrase not declared invalid or unconstitutional without regard to whether any portion
of the ordinance would be subsequently declared invalid or unconstitutional.
SECTION 7. The Mayor shall sign and the City Clerk shall attest to the passage
of this Ordinance. The City Clerk shall cause the same to be published once in the
official newspaper within 15 days after its adoption. This Ordinance shall become
effective upon its adoption.
APPROVED AS TO FORM:
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MAR A JONESiMOUTRIE:
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City Attorney .. '
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. .-
~C,tY()l Information Item
Suntu ~Io..i<m
Date: June 13, 2006
To: Mayor and City Council
From: Steve Stark, Chief Financial Officer
Subject: Utility Users Tax - Telecommunications
Introduction
In the City Manager's budget message we mentioned that legal challenges in other
jurisdictions could potentially reduce or eliminate the City's Utility Users Tax (UUT) on
telecommunication services. A recent Internal Revenue Service ruling that dramatically
reduces the scope of the Federal Excise Tax (FET) on telecommunications will
undoubtedly introduce more legal questioning regarding our telecommunications UUT,
as the City's ordinance (like nearly all other UUT ordinances in California) references
the FET. This Information Item generally discusses the status of these legal actions
and what prudent steps the City may take to minimize the effect on its General Fund
and budgetary planning in the event of one or more adverse legal rulings in the future.
Nothing in this information item, however, is intended to predict the outcome of any
litigation or should be construed as assessing the validity of any particular legal claim or
theory.
1
Background
The Utility Users Tax (UUT) is a 10% tax applied to electricity, natural gas, telephone
(both hardwire and wireless), cable and water/wastewater services. The total UUT
generates over $31 million in revenue for the City's General Fund and represents
approximately 13% of the General Fund revenue budget. The total telecommunication
service portion of UUT revenue collections represents $12 million or 5% of General
Fund revenue, and 75% to 100% of this amount is potentially at risk.
Discussion
Leqal Issues
On May 25, 2006, the IRS issued a notice that it intended to stop applying the FET to
nearly all telephone communication services, except local exchange services, which
leaves only about 25% of all the telecommunication services as federally taxable. The
IRS' action followed a series of federal court losses involving taxpayer challenges to the
archaic statutory definition of "toll telephone service" (or long distance) in the FET. In
addition to conceding that the FET no longer applies to wired and wireless long distance
(and other bundled services such VolP, prepaid cards), the Treasury Secretary has
further urged Congress to repeal the FET, arguing that it does not make sense to
continue the tax on such a small segment of the telecommunication industry. There are
two bills that would accomplish that repeal (H R1898 and SB1321).
Like 150 other California cities, Santa Monica imposes a Utility Users Tax on
telecommunication services. Also, like the vast majority of these cities, Santa Monica's
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UUT ordinance refers to the FET and its many exemptions, in response to the
telephone companies' request of many years ago to do so to achieve administrative
ease. The legal question now arises, does the FET reference in the City's ordinance
mean that the City's UUT ordinance automatically incorporates the recent IRS ruling,
even though the City never adopted the FET definition of "toll telephone service" in its
UUT ordinance?
The answer would appear to be no. However, because of less than precise UUT
language some uncertainty exists, especially since there is no final appellate court
decision on this issue in California. In the meantime, it is expected, but not completely
assured, that the telephone companies will continue to collect the City's UUT as
directed by the City until a California appellate court issues a final ruling on these
complicated matters.
Litigation is pending elsewhere in California that raises similar although not identical
issues. For instance the City of Palo Alto and Verizon Wireless are involved in a lawsuit
over the scope of Palo Alto's UUT and whether it can be applied to wireless carriers.
This lawsuit is presently at the trial level, with an appellate ruling, if any, being a few
years away.
In addition to the Palo AltoNerizon Wireless lawsuit, there is a lawsuit between the City
of Los Angeles and Verizon Wireless and A T& T Wireless that if applied to Santa
Monica, it could potentially affect up to 50% of the City's wireless UUT or $4M annually.
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This lawsuit is currently being briefed before the Court of Appeal with an argument
being anticipated later this year. Again, until a final appellate court decision is rendered
it impossible to know the exact impact, if any, on the City's wireless UUT.
The IRS decision and the other lawsuits are being analyzed and monitored statewide by
the League of California Cities and by many individual cities. A clearer legal response
will be developed over the next few weeks.
One possible local response is to amend the City's UUT Municipal Code either in a
comprehensive fashion to modernize it completely or in a more limited manner to clarify
it by removing references to the FET and oth er language that is currently the focus of
litigation. With respect to the latter approach the City Attorney's Office is reviewing
whether clarifying changes in the City's UUT Municipal Code can be achieved by City
Council action alone or whether voter approval in accordance with Proposition 218 is
also necessary nevertheless, some California cities may conservatively decide to
pursue voter-approved UUT ordinance amendments so as immunize their General Fund
from future adverse court decisions, as descri bed above. The League is also exploring
other options such as state legislation.
Potential Revenue Impacts
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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and if the City did not or could not amend its UUT ordinance, then the City could
permanently lose approximately 75% or $8M of its total $12M telecommunications UUT.
If a final appellate court decision were issued in the City of Los Angeles case that was
adverse to that city and if the decision could be equally applied to the City of Santa
Monica's UUT ordinance, then in a worst case this City could potentially suffer a
permanent loss of up to 50% of its existing wireless UUT or $4M annually. Such a final
ruling could occur as early as one year from now. However, there are too many
potential variables at play now to predict with any certainty what would be the possible
effect, if any, on Santa Monica from this litigation.
Summary
Based on currently known facts, the City's revenues could potentially be impacted by:
Palo Alto case ($4 million), Los Angeles case ($4 million), IRS ruling ($8 million) or total
telecommunications ($12 million). Although it is unlikely that adverse legal precedents
will arise during this coming fiscal year (FY 2006-07), in reality, we cannot predict with
absolute certainty the timing and outcome of the numerous legal or other actions that
may occur. It is, therefore, prudent to establish at this time a reserve that is sufficient to
allow the City at least one year, without budgetary disruptions, to: i) find replacement
revenues; ii) make sensible budget/service reductions; and/or iii) pursue local or state
legislative solutions for the cities' existing telecommunications UUT, including deciding
whether it is necessary to place any local legislation on the ballot for voter-approval.
Accordingly, we recommend $8.2M as a reasonable reserve amount to off-set the risk
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of a sudden loss of tax revenue due to possible future adverse court rulings. This
approach is very similar to the method that the City used in 2004 to set aside money for
potential State takebacks.
During the next fiscal year, City staff will develop various budget scenarios for Council
consideration if the UUT revenue losses actually occur. In the adopting the City's
FY2006/07 budget that $8.2 million in one-time General Fund monies would used as a
designation to offset any potential revenue loss during this or the following fiscal year so
that on-going, essential services can be maintained. At the direction of the City
Manager, staff has identified $8.2 million available from the following sources:
$3.0 million: Reduction in the PCD 1 Permit Center CIP proposed for FY2006/07
budget from $5.0 million to $2.0 million
$2.2 million: Interest earnings on funds set-aside for bond payments on
Santa Monica Place parki ng structure
$1.0 million: Capital Improvements Projects Start-Up set-aside for projects
now completed ( courthouse mitigation, Main Library, Virginia
Avenue Park)
$2.0 million: Environmental Mitigation set-aside for capital projects
If ongoing actions are needed for future years, they can be considered at either mid-
year or for Fiscal Year 2007108.
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In addition to the $8.2 million set-aside, the City Manager has also asked City
departments to hold off on filling certain new positions authorized in the FY2006/07
budget for a six month period. As additiona I information becomes available regarding
the potential revenue loss, we will be better able to assess when the new positions can
be filled on a permanent basis.
We will continue to keep Council informed as new information becomes available and
will discuss the issue at our FY2006/07 budget adoption meeting on June 20, 2006.
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Approved and adopted this 25th day of July, 2006.
&-/-:- ~*!f_
Robert T. Holbrook, Mayor
State of California )
County of Los Angeles) ss.
City of Santa Monica )
I, Maria M. Stewart, City Clerk of the City of Santa Monica, do hereby certify that the
foregoing Ordinance No. 2203 (CCS) had its introduction on July 11, 2006, and was
adopted at the Santa Monica City Council meeting held on July 25, 2006, by the
following vote:
Ayes: Council members: Bloom, Katz, McKeown, O'Connor,
Mayor Pro T em Shriver, Mayor Holbrook
Noes: Council members: None
Abstain: Council members: None
Absent: Council members: Genser
ATTEST:
~
City Clerk