Taxable Talk

The City of Los Angeles’ telephone tax used to be based on the Federal telephone excise tax. The federal tax, collection of which began to fund the Spanish-American War (Remember the Maine?), ended when almost every circuit Court of Appeal ruled the tax unconstitutional.

So a gentleman named Estuardo Ardon sued the City of Los Angeles claiming that its phone tax was just as unconstitutional; he asked that it be made a class action suit. The city objected, claiming that each resident must sue separately per the California constitution. Today, the California Supreme Court ruled unanimously that the case can proceed as a class action.

The case now reverts back to the Superior Court, where presumably the amount of damages (that is, the amount that must be refunded to residents) must be calculated. Eventually, residents of Los Angeles will likely get some money back. This impacts other California cities, too, as several other cities have been sued for similar reasons in class actions.

Hat Tip: The Tax Foundation

Many cities (and a few states) in the United States have business and professions taxes. The tax rate usually depends on what occupation you’re in. The taxes can be low, or high.

I used to run West Coast operations for two different telecommunications companies. When I joined the first business, I urged the ownership to move from Sherman Oaks (part of Los Angeles) to Burbank. The business would face a flat $150 license fee rather than spending thousands on taxes. It was a no brainer. The second company was, at one point, looking at acquiring a business in Los Angeles and moving into that office. But the city’s high taxes kept us out.

Creators Syndicate is a Los Angeles based distributor of content; they syndicate newspaper columns, comic strips, and similar material. Its owner isn’t happy with the City of Angels.

As the column I’ve linked to notes, several years ago Creators fought a battle with Los Angeles as to which occupation they should be considered to be in. They won. Now, years later, bureaucrats in Los Angeles have changed their mind. Creators has filed a lawsuit against the city and will likely end up moving if the lawsuit is unsuccessful.

The whole article deserves your reading. Here are two quotes from it:

We work with hundreds of outside agents, consultants, independent contractors and support services — many of whom pay taxes to the city of Los Angeles. This spurs a job-creating ripple effect on the city’s economy. Yet I suspect many companies like ours already have quietly left town in the face of the city’s taxes and regulations. This would help explain the erosion of jobs….

As long as City Hall operates like a banana republic, why is anyone surprised that jobs have left the city in droves and Los Angeles is teetering on the brink of bankruptcy?

When I counsel entrepreneurs about where to locate their businesses, I stress that you have to investigate local taxes. It can mean the difference between success and failure.

The California Court of Appeals upheld a District Court ruling that the City of Los Angeles increase in their tax on cellular phone service was invalid. The City will likely appeal the decision to the State Supreme Court. The case is interesting because the Court told California cities that if you change the methodology of a tax, you need to submit it to the voters under Proposition 218.

The decision involves two issues: Proposition 218 and the methodology used in the tax. Proposition 218, passed by the voters in 1996, states that voters must approve all new taxes (and extensions of existing taxes) by a majority vote (a 2/3 vote is required for “special” taxes). As the Court noted, “In 1997, the Legislature passed the Proposition 218 Omnibus Implementation Act (Omnibus Act) (Gov. Code, § 53750 et seq.) and, in Government Code section 53750, subdivision (h)(1)(B), provided that a tax increase occurs when a decision by an agency revises the methodology by which a tax is calculated and the revision results in increased taxes being levied on any person or parcel. [footnote omitted]”

The methodology of the tax changed in 2002 after Congress passed the Mobile Telecommunications Sourcing Act. The City of Los Angeles felt that, “…it had the authority to unilaterally impose the cell tax on all airtime and thereby increase cell taxes.”

The City argued that the goal was to have the tax cover everything permissible; given that the law changed, it was the City’s right to change the methodology of the tax. The Court noted that the City could do this…if they submitted the change to the voters, as per Proposition 218. “And if Proposition 218 had not passed, the City could collect an increased cell tax based on the evolved constitutional parameters. But Proposition 218 was passed, and it arrested the cell tax’s maturation over time. This restriction on local tax authority is of course characterized by the City as an unreasonable policy that is sure to create numerous administrative headaches. This fear is unjustified.”

The Court’s conclusion is worth printing in full:

“In sum, the City wants us to interpret Proposition 218 so that it permits a fluctuating local government tax if the fluctuation is due to expanding constitutional boundaries. The voters of California stand in the City’s path. They demanded the right to approve increased local taxes after finding that such increases “threaten . . . the California economy.” We are obligated to uphold that right and adhere to that finding despite the City’s protestations. To be sure, the City must be credited for offering thoughtful arguments on a complex issue, but those arguments cannot carry the day, which leaves us to but one conclusion: The trial court properly granted the carriers’ petition for writ of mandate.”

Appeals Court Decision: AB Cellular LA, LLC v. City of Los Angeles, B185373

News Story: Metropolitan News-Enterprise