City of Culver City, California
City Council Agenda Item Report
RECOMMENDATION:
That the City Council adopt an urgency ordinance and introduce an ordinance for
first reading amending Chapter 3.08 of the Culver City Municipal Code, “Utility Users
Tax” clarifying the City's application of the telephone users’ tax to telephone
communications services.
BACKGROUND:
Since 1969, the City of Culver City has imposed a telephone users' tax on every
person (including businesses) in the City. As of 1988, the tax applied to intrastate
calls, and as of 1994, the tax applied to wireless telephone communication services.
Presently, the tax is imposed at a rate of 11% of the charges billed. Some
exemptions are given as provided by law, including to low income seniors and
certain persons with disabilities.
For the ease of administration and for the convenience of the telephone
communication services providers, the City has generally looked to federal
interpretation of the Federal Excise Tax for guidance on the scope and application of
the City’s utility users’ tax with respect to telephone communication services. The
City's tax has been applied consistent with the application of the Federal Excise Tax
(FET) upon local and long distance telecommunication services as the FET is
interpreted by the Internal Revenue Service (IRS), which was clarified in a 2000
amendment to the City’s utility users’ tax ordinance.
Meeting Date: 07/24/06 Item Number: A-9
AGENDA ITEM: Adoption of an Urgency Ordinance and Introduction of an Ordinance
for First Reading, Amending Chapter 3.08 of the Culver City Municipal Code, “Utility
Users Tax” relating to application of the Telephone Users Tax.
Contact Person/Dept.: Crystal C.
Alexander, City Treasurer
Phone Number: 310-253-5865
Fiscal Impact: Yes [X] No [] General Fund: Yes [X] No []
Public Hearing: [] Action Item: [X] Attachments: [X]
Public Notification: Master Notification List (07/21/06)
Department Approval: Crystal C.
Alexander (07/21/06)
City Manager Approval: Jerry B. Fulwood
(07/21/06)
City Controller Approval:City of Culver City, California
City Council Agenda Item Report
With the growth of wireless communications, a national dispute arose regarding the
application of the FET to long distance cell phone calls. The FET defined long
distance or "toll" calls as those for which charges varied according to both the
elapsed time of the call and the distance between the persons on the call. Unlike
traditional "land line" services, cell phone providers began to offer long distance
service on a flat or monthly rate without consideration of the distance of the calls
made.
In 1979, the IRS had issued a Revenue Ruling (79-404) determining that a variable
for distance was not necessary for a toll call to be subject to the tax. The IRS
defended lawsuits around the country challenging the application of Revenue Ruling
79-404 and the FET to such phone charges.
On May 25, 2006, the IRS issued Revenue Notice 2006-50 which announced that
the IRS was reversing its position held since 1979, and would no longer interpret the
FET as applying to wireless communications which were billed based on time only,
and not both time and distance. Revenue Notice 2006-50 goes on to create a new
service category called "bundled services" which could extend the reach of this
interpretation to different billing practices by traditional phone companies as well as
the wireless providers. Consequently, effective August 1, 2006, the IRS will no
longer apply the FET to long distance and bundled service.
Bundled service is local and long distance service provided under a single plan that
does not separately state the charges for local telephone service. The Treasury
Department's May 25th Notice reversed its prior Revenue Rulings and interpretation
of the FET, which the City has relied upon in applying its telephone users’ tax to
telecommunication services. This leaves only about 25% of all the
telecommunications services as federally taxable.
In addition to conceding that the FET no longer applies to wired and wireless long
distances (and other bundled services) 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 telecommunications industry. There are
Congressional amendments pending which would accomplish that total repeal.
DISCUSSION:
Since the May 25, 2006 interpretation of the FET by the IRS is not binding on the
City of Culver City for purposes of levying or collecting the UUT on telephone
communications services, staff recommends that the UUT be amended to clarify that
the reference to the FET in the utility users’ tax ordinance is as interpreted by the
IRS prior to the issuance of Revenue Notice 2006-50. In doing so, the City will City of Culver City, California
City Council Agenda Item Report
continue to apply its UUT to telephone services as it has historically, consistent with
IRS Ruling 79-404. This proposed amendment will also prevent future ad hoc
reaction to changes in Federal law that otherwise do not affect the City's ability to
levy the UUT.
The proposed ordinances are not intended to be construed as imposing a new tax,
or extending or increasing an existing tax and therefore, Proposition 218 does not
apply to these ordinances. Instead, by this amendment to the telephone users’ tax,
the City reaffirms that it will continue its long-standing practice of applying its tax in a
manner consistent with the IRS' interpretation of the FET prior to Notice 2006-50
issued by the U.S. Treasury Department on May 25, 2006.
The proposed ordinances clarify that the City is not changing its application of its
telephone users’ tax based on the IRS' decision to discontinue taxing long distance
and bundled services in order to resolve legal disputes with telephone customers.
Rather, the City wishes to continue to tax local, long distance, and bundled services
as it always has - consistent with upon the IRS' interpretation of the FET prior to May
25, 2006.
Further, the ordinances clarify that when the City limited its tax base to charges
“subject to” the Federal Excise Tax, it did not intend, and did not adopt, either federal
law or federal enforcement policy as to how to treat bundled charges, some of which
are “subject to” the FET and some of which are not. The current, in place
ordinance’s provisions regarding the taxation of bundled plans (when a non-taxable
service and a taxable service are billed together under a single charge) makes
collection of the tax, as currently done, obligatory. This provision of the local
ordinance would take precedence over federal regulations and law.
Pursuant to Culver City Charter Section 614 and Cal. Gov't Code § 36937, the
proposed urgency ordinance will become effective immediately upon its adoption by
a four-fifths vote. Adoption of the proposed urgency ordinance is necessary for the
immediate preservation of public peace, health or safety. The revenues from the
telephone users tax are significant and critical to the continuation of essential
services, including public safety.
Also before you tonight is the introduction of a regular ordinance adopting the same
amendment.
FISCAL ANALYSIS:
The revenues from the telephone users’ tax are anticipated to be approximately $5.2
million dollars for Fiscal Year 2006-2007 if the telephone users’ tax is applied City of Culver City, California
City Council Agenda Item Report
consistent with the IRS' interpretation of the FET prior to the issuance of Notice
2006-50. In the event that the City's telephone users’ tax were to be applied
consistent with Notice 2006-50, staff projects that the total telephone users’ tax
revenues for Fiscal Year 2006-07 could decrease by approximately $3.9 million
dollars. The revenues from the telephone users’ tax are critical to the public peace,
health and safety in that these revenues pay the costs associated with essential
services, including public safety. Both the proposed urgency ordinance and the
regular ordinance are attached to this agenda report.
Were the aforementioned action to occur, the immediate cash flow impact would be
negligible, given the level of current holdings in the City’s investment portfolio.
However, so as not to cause a quick and substantial drain on the City’s reserves, the
City Council would need to take immediate action to adjust the City’s budget
expenditures to the reality of substantially reduced projected revenues, noted above
at approximately $3.9 million.
ATTACHMENTS:
1. Proposed Urgency Ordinance.
2. Proposed Ordinance.
MOTION:
That the City Council:
1. Adopt and waive further reading of the urgency ordinance amending Chapter
3.08 of the Culver City Municipal Code, “Utility Users Tax” clarifying the City's
application of the telephone users’ tax to telephone communications services.
2. Introduce and waive further reading of an ordinance amending Chapter 3.08 of
the Culver City Municipal Code clarifying the City's application of the telephone
users’ tax to intrastate telephone communications services.
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ORDINANCE NO. 2006-
AN URGENCY ORDINANCE OF THE CITY OF CULVER CITY,
CALIFORNIA, AMENDING CHAPTER 3.08 OF THE CULVER
CITY MUNICIPAL CODE “UTILITY USERS TAX” RELATING TO
APPLICATION OF THE TELEPHONE USERS TAX.
WHEREAS, the City of Culver City has for many years imposed a tax on
telephone communication services since 1969;
WHEREAS, for ease of administration by the telephone communication
service providers, the Culver City Municipal Code defines “telephone communications
services” by referring to federal excise tax law administered by the Internal Revenue
Service and has for many years administered its tax on telephone communication
services consistent with the application of the Federal Excise Tax;
WHEREAS, administration and application of the Federal Excise Tax has
been and continues to be the purview of the Internal Revenue Service;
WHEREAS, until May 25, 2006, the Internal Revenue Service had
administered and applied the Federal Excise Tax in a manner consistent with both
Revenue Ruling 79-404 and the manner in which the City of Culver City intended to
administer and apply its tax on telephone communication services, including applying
the Federal Excise Tax to long-distance charges which varied in amount with either
distance or elapsed transmission time of the involved communication;
WHEREAS, on May 25, 2006, the Internal Revenue Service issued Notice
2006-50 which announced that after July 31, 2006, the Internal Revenue Service would
no longer apply the Federal Excise Tax to long-distance charges and bundled long--2- |101010101010101010 10
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distance unless the charges vary in amount with both distance and elapsed
transmission time;
WHEREAS, it has always been and continues to be the City of Culver City’s
intent that its tax on telephone communication services be applied to long-distance
charges which vary in amount with either distance or elapsed transmission time and to
bundled long-distance and local charges provided under a single plan that does not
separately state the charges for local telephone service;
WHEREAS, the City Council does not wish to adopt the Internal Revenue
Service’s new interpretation of the definitions of the F.E.T., but rather wishes to continue
to impose the UUT as it has been historically imposed;
WHEREAS, Culver City Municipal Code Section 3.08.210(C) expressly
requires application of the utility users tax to bundled charges and that provision is not
changed by this ordinance; and
WHEREAS, this ordinance is presented as an urgency ordinance because
the above-referenced facts increase the possibility of a sudden and unplanned
reduction of the tax on telephone communication services, and is therefore, necessary
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NOW, THEREFORE, the City Council of the City of Culver City DOES ORDAIN
as follows:
SECTION 1. Section 3.08.210(B) of Chapter 3.08 of the Culver City
Municipal Code is hereby amended to read as follows:
B. Except as otherwise provided herein, TELEPHONE COMMUNICATION
SERVICES shall include local and long-distance telephone service for which there is a
charge, regardless of the means or technology used to provide such services. The tax
imposed under subsection (a), above, shall not be imposed upon any person for using
the following TELEPHONE COMMUNICATION SERVICES:
1. Service paid for by inserting coins in coin-operated telephones
available with respect to local telephone service, or with respect to toll
telephone service if the charge for such toll telephone service is less
than 25 cents; 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 subject to the tax.
2. Except with respect to local telephone service, services used in the
collection of news for the public press, or a news ticker service
furnishing a general news service similar to that of the public press, or
radio broadcasting, or in the dissemination of news through the public
press, or a news ticker service furnishing a general news service
similar to that of the public press, or by means of radio broadcasting,
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3. Services furnished to an international organization, or to the American
National Red Cross.
4. Any toll telephone service which originates within a combat zone and
is from a member of the Armed Forces of the United States
performing service in such combat zone; provided a certificate, setting
forth such facts as the Secretary may by regulations prescribe, is
furnished to the person receiving such payment.
5. Any toll telephone service which entitles the subscriber, upon
payment of a periodic charge (determined as a flat amount or upon
the basis of total elapsed transmission time), to the privilege of an
unlimited number of telephonic communications to or from all or a
substantial portion of the persons having telephone or radio telephone
stations in a specified area which is outside the local telephone
system area in which the station provided with this service is located,
that is for use by a common carrier, telephone or telegraph company,
or radio broadcasting station or network in the conduct of its business
as such.
6. The installation of any instrument, wire, pole, switchboard, apparatus,
or equipment as is properly attributable to such installation.
7. Amounts paid by a nonprofit hospital for services furnished to such
organization. -5- |101010101010101010 10
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8. Services or facilities furnished to the government of any State, or any
political subdivision thereof, or the District of Columbia.
9. Services or facilities paid for by a nonprofit educational organization
and furnished to such organization. For purposes of this subsection,
the term NONPROFIT EDUCATIONAL ORGANIZATION means an
educational organization described in Section 170(b)(1)(A)(ii) of the
Internal Revenue Code which is exempt from income tax under
Section 501(a) of the same code. The term also includes a school
operated as an activity of an organization described in Section
501(c)(3) of the Internal Revenue Code which is exempt from income
tax under Section 501(a) of the same code, if such school normally
maintains a regular faculty and curriculum and normally has a
regularly enrolled body of pupils or students in attendance at the
place where its educational activities are regularly carried on.
SECTION 2. This Ordinance is declared by the City Council to be
an urgency measure necessary for the immediate preservation of public peace, health
or safety. The facts constituting such urgency are as follows: The revenues from the
telephone users tax are anticipated to be approximately $5.2 million dollars for Fiscal
Year 2006-2007 if the telephone users tax continues to be applied in a manner
consistent with the IRS' interpretation of the FET prior to the issuance of Notice 2006-
50. In the event that the City's telephone users tax were to be applied consistent with
Notice 2006-50, it is projected that the total telephone users tax revenues would
decrease by millions of dollars for Fiscal Year 2006-07. The revenues from the
telephone users tax are critical to the public peace, health and safety in that these
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SECTION 3. Pursuant to Sections 614 and 619(d) of the City
Charter, this ordinance shall take effect immediately upon its adoption and, as required
by Section 616 of the City Charter, prior to the expiration of fifteen (15) days from the
adoption hereof, the City Clerk shall cause this Ordinance or a summary to be
published in a newspaper circulated in the City and designated by the City Council.
SECTION 4. To the extent the provisions of the Culver City
Municipal Code as amended by this ordinance are substantially the same as the
provisions of that Code as they read immediately prior to the adoption of this ordinance,
then those provisions shall be construed as continuations of the earlier provisions and
not as new enactments.
SECTION 5. If any section, subsection, sentence, clause, phrase
or portion of this ordinance is for any reason held to be invalid or unconstitutional by the
decision of any court of competent jurisdiction, such decision shall not affect the validity
of the remaining portions of this ordinance.
SECTION 6. The amendments herein are not intended to make
any change in the way in which the tax is calculated, imposed or administered.
Therefore the changes made by this ordinance do not constitute an increase in the tax
for purposes of Proposition 218. Further, if for any reason any section, subsection,
sentence, clause, phrase or portion of this is held to constitute an increase for purposes
of Proposition 218 or is otherwise held invalid or cannot be implemented according to
its terms, the City Council intends that the ordinance provisions which would have been -7- |101010101010101010 10
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amended or affected by this ordinance shall remain in effect as if this ordinance had not
been adopted.
SECTION 7. The City Council hereby declares that it would have
adopted this ordinance and each section, subsection, sentence, clause, phrase, or
portion thereof, irrespective of the fact that any one or more sections, subsections,
phrases, or portions be declared invalid or unconstitutional.
APPROVED and ADOPTED this day of , 2006.
GARY SILBIGER, Mayor
City of Culver City, California
ATTEST: APPROVED AS TO FORM:
CHRISTOPHER ARMENTA, CAROL A. SCHWAB,
City Clerk City Attorney
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ORDINANCE NO. 2006-
AN ORDINANCE OF THE CITY OF CULVER CITY,
CALIFORNIA, AMENDING CHAPTER 3.08 OF THE CULVER
CITY MUNICIPAL CODE “UTILITY USERS TAX” RELATING TO
APPLICATION OF THE TELEPHONE USERS TAX.
WHEREAS, the City of Culver City has for many years imposed a tax on
telephone communication services since 1969;
WHEREAS, for ease of administration by the telephone communication
service providers, the Culver City Municipal Code defines “telephone communications
services” by referring to federal excise tax law administered by the Internal Revenue
Service and has for many years administered its tax on telephone communication
services consistent with the application of the Federal Excise Tax;
WHEREAS, administration and application of the Federal Excise Tax has
been and continues to be the purview of the Internal Revenue Service;
WHEREAS, until May 25, 2006, the Internal Revenue Service had
administered and applied the Federal Excise Tax in a manner consistent with both
Revenue Ruling 79-404 and the manner in which the City of Culver City intended to
administer and apply its tax on telephone communication services, including applying
the Federal Excise Tax to long-distance charges which varied in amount with either
distance or elapsed transmission time of the involved communication;
WHEREAS, on May 25, 2006, the Internal Revenue Service issued Notice
2006-50 which announced that after July 31, 2006, the Internal Revenue Service would
no longer apply the Federal Excise Tax to long-distance charges and bundled long--2- |101010101010101010 10
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distance unless the charges vary in amount with both distance and elapsed
transmission time;
WHEREAS, it has always been and continues to be the City of Culver City’s
intent that its tax on telephone communication services be applied to long-distance
charges which vary in amount with either distance or elapsed transmission time and to
bundled long-distance and local charges provided under a single plan that does not
separately state the charges for local telephone service;
WHEREAS, the City Council does not wish to adopt the Internal Revenue
Service’s new interpretation of the definitions of the F.E.T., but rather wishes to continue
to impose the UUT as it has been historically imposed;
WHEREAS, Culver City Municipal Code Section 3.08.210(C) expressly
requires application of the utility users tax to bundled charges and that provision is not
changed by this ordinance; and
WHEREAS, this ordinance is important to the City because the above-
referenced facts increase the possibility of an unplanned reduction of the tax on
telephone communication services, which would result in a reduction in revenues that
are critical to the ensuring the public peace, health and safety, including public safety
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NOW, THEREFORE, the City Council of the City of Culver City DOES ORDAIN
as follows:
SECTION 1. Section 3.08.210(B) of Chapter 3.08 of the Culver City
Municipal Code is hereby amended to read as follows:
B. Except as otherwise provided herein, TELEPHONE COMMUNICATION
SERVICES shall include local and long-distance telephone service for which there is a
charge, regardless of the means or technology used to provide such services. The tax
imposed under subsection (a), above, shall not be imposed upon any person for using
the following TELEPHONE COMMUNICATION SERVICES:
1. Service paid for by inserting coins in coin-operated telephones
available with respect to local telephone service, or with respect to toll
telephone service if the charge for such toll telephone service is less
than 25 cents; 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 subject to the tax.
2. Except with respect to local telephone service, services used in the
collection of news for the public press, or a news ticker service
furnishing a general news service similar to that of the public press, or
radio broadcasting, or in the dissemination of news through the public
press, or a news ticker service furnishing a general news service
similar to that of the public press, or by means of radio broadcasting,
if the charge for such service is billed in writing to such person.-4- |101010101010101010 10
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3. Services furnished to an international organization, or to the American
National Red Cross.
4. Any toll telephone service which originates within a combat zone and
is from a member of the Armed Forces of the United States
performing service in such combat zone; provided a certificate, setting
forth such facts as the Secretary may by regulations prescribe, is
furnished to the person receiving such payment.
5. Any toll telephone service which entitles the subscriber, upon
payment of a periodic charge (determined as a flat amount or upon
the basis of total elapsed transmission time), to the privilege of an
unlimited number of telephonic communications to or from all or a
substantial portion of the persons having telephone or radio telephone
stations in a specified area which is outside the local telephone
system area in which the station provided with this service is located,
that is for use by a common carrier, telephone or telegraph company,
or radio broadcasting station or network in the conduct of its business
as such.
6. The installation of any instrument, wire, pole, switchboard, apparatus,
or equipment as is properly attributable to such installation.
7. Amounts paid by a nonprofit hospital for services furnished to such
organization. -5- |101010101010101010 10
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8. Services or facilities furnished to the government of any State, or any
political subdivision thereof, or the District of Columbia.
9. Services or facilities paid for by a nonprofit educational organization
and furnished to such organization. For purposes of this subsection,
the term NONPROFIT EDUCATIONAL ORGANIZATION means an
educational organization described in Section 170(b)(1)(A)(ii) of the
Internal Revenue Code which is exempt from income tax under
Section 501(a) of the same code. The term also includes a school
operated as an activity of an organization described in Section
501(c)(3) of the Internal Revenue Code which is exempt from income
tax under Section 501(a) of the same code, if such school normally
maintains a regular faculty and curriculum and normally has a
regularly enrolled body of pupils or students in attendance at the
place where its educational activities are regularly carried on.
SECTION 2. Pursuant to Section 619 of the City Charter, this
Ordinance shall take effect thirty (30) days after the date of its adoption. Pursuant to
Section 616 of the City Charter, prior to the expiration of fifteen (15) days after the
adoption, the City Clerk shall cause this Ordinance, or a summary thereof, to be
published in the Culver City News and shall post this Ordinance or a summary thereof
in at least three places within the City.
SECTION 3. To the extent the provisions of the Culver City
Municipal Code as amended by this ordinance are substantially the same as the
provisions of that Code as they read immediately prior to the adoption of this ordinance,
then those provisions shall be construed as continuations of the earlier provisions and
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SECTION 4. If any section, subsection, sentence, clause, phrase
or portion of this ordinance is for any reason held to be invalid or unconstitutional by the
decision of any court of competent jurisdiction, such decision shall not affect the validity
of the remaining portions of this ordinance.
SECTION 5. The amendments herein are not intended to make
any change in the way in which the tax is calculated, imposed or administered.
Therefore the changes made by this ordinance do not constitute an increase in the tax
for purposes of Proposition 218. Further, if for any reason any section, subsection,
sentence, clause, phrase or portion of this is held to constitute an increase for purposes
of Proposition 218 or is otherwise held invalid or cannot be implemented according to
its terms, the City Council intends that the ordinance provisions which would have been
amended or affected by this ordinance shall remain in effect as if this ordinance had not
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SECTION 6. The City Council hereby declares that it would have adopted
this ordinance and each section, subsection, sentence, clause, phrase, or portion
thereof, irrespective of the fact that any one or more sections, subsections, phrases, or
portions be declared invalid or unconstitutional.
APPROVED and ADOPTED this day of , 2006.
GARY SILBIGER, Mayor
City of Culver City, California
ATTEST: APPROVED AS TO FORM:
CHRISTOPHER ARMENTA, CAROL A. SCHWAB,
City Clerk City Attorney