Proposition 218 and Your Utility Users Tax Ordinance: - League of ...

Proposition 218 and Your Utility Users Tax Ordinance:
Meeting the Challenge of Change
Introduction
Over the past decade, the one constant feature of the telephone, electric, gas and CATV
industries has been dramatic and frequent change. These utility industries have seen remarkable
change in their numbers, the services they provide, and in the manner in which the services are
marketed and priced. Today, all cities with utility users tax ordinances now face the challenge of
keeping apace with those changes without running afoul of the limitations of Proposition 218 and
its statutory implementation provisions. This paper will discuss the nature of these industry
changes, why frequent updates of your UUT ordinance are essential, and how to make those
updates without transgressing the limited constraints of Proposition 218.
New Wine in an Old Wineskin – Is Your UUT Ordinance about to Burst
About thirty-five years ago, a small number of California cities 1 began imposing an excise tax,
known as a utility users tax or UUT, on the use of certain utility services within their cities.
Significantly, just a handful of monopoly utilities provided these services. The initial UUT
ordinance was jointly written by the League and a few utility representatives, based on historical
industry practices. Many of the cities that initially adopted UUT ordinances followed this simple
five or six page “model” ordinance, which served its purpose well, both in practice and in
meeting legal challenges. Rivera v. Fresno (1971) 6 Cal.3rd 132, 98 Cal.Rptr. 281 [Sustained
validity of UUT ordinance]; City of San Jose v. Donohue (1975) 51 Cal.App.3d 40, 123
Cal.Rptr. 804 [UUT that did not apply to municipality did not violate equal protection]; City of
Modesto v. Modesto Irrigation Dist. (1973) 34 Cal.App.3d 504, 110 Cal.Rptr. 111 [Collection
responsibility of ordinance applied to state agencies]; Hospital Service of California v. City of
1 Initially, in the late 1960’s, the utility users taxes were imposed by charter cities such as Los
Angeles and San Jose. Ainsworth v. Bryant (1949) 34 Cal.2d 465, 469, 211 P.2d 564 [San
Francisco, a Charter City, has all the power of the sovereign state in the matter of exacting taxes
for revenue, except as it is limited by constitution or charter]. In 1982, Government Code
Section 37100.5 and Revenue and Tax Code Section 7284.2 made clear that general law cities
and counties could enact UUT ordinances as well. Today, over 150 public agencies (cities and
counties) have enacted utility users tax ordinances, imposing a UUT on such services as
electricity, gas, water, telephone, telegraph, CATV, and garbage service. These California public
agencies receive in excess of $1.2 billion from this significant tax revenue source to help pay for
essential governmental services. A complete listing of these UUT public agencies can be found
at www.uutinfo.org.
1

Oakland (1972) 25 Cal.App.3d 402, 101 Cal.Rptr. 800 [Nonprofit corporations not exempt from
UUT by state statute]; Fenton v. City of Delano (1984) 162 Cal.App.3d 400, 208 Cal.Rptr. 486;
Campen v. Greiner (1971) 15 Cal.App.3d 836, 93 Cal.Rptr. 525 [UUT not subject to
referendum].
However, in the 1980s, major changes were on the horizon, with the essential character of the
monopoly utility provider beginning to unravel. These events also forebode the possibility of
future problems for the cities’ UUT ordinances, and their ability to reflect such major changes
without some amendatory language.
The Times, They Are A’Chang’n
In the 1980's, the monolithic gas and telephone industries experienced dramatic institutional
changes. First, the state and federal regulatory commissions began employing competition and
market pricing as alternatives to micro-managing the regulated monopoly utilities. The Federal
Energy Regulatory Commission broke open the interstate pipeline/gas supply market, and soon
thereafter, the California Public Utilities Commission introduced competition in the sale of
natural gas to retail customers. Many new third party marketers, such as ENRON and
Broadstreet, could now compete with the regulated monopoly providers (PG&E, SoCalGas and
SDG&E) in the retail sale of the commodity of natural gas. The result was more utility providers,
more competition, and, more complicated gas bills, resulting in more opportunity for noncompliance
in the collection of the UUT.
Second, the scope of the UUT also began to expand. A U.S. Supreme Court decision [Goldberg
v. Sweet (1989) 488 U.S. 2520] removed a previously-thought constitutional impediment to
imposing the UUT on interstate and international telephone service (instead of just intrastate).
In response, many cities amended their ordinances and began imposing a UUT on interstate and
international telephone services. This produced increased tax revenues for those cities, but it also
expanded the number of tax collectors of their UUT on telecommunications from one or two to
several (e.g., SPRINT, MCI appeared following the court-imposed breakup of Ma Bell].
The changes in the 1980s were soon followed by even more dramatic changes in the 1990's. The
California Public Utilities Commission (CPUC) essentially deregulated the long distance
telephone industry, resulting in hundreds on new long distance resellers. Also, a brand new
telecommunication industry, called “cellular” or “wireless”, prominently appeared on the scene
in the early 1990s. Today, there are over six hundred wired and wireless telecommunication
providers licensed by the CPUC, providing telecommunication services by wires, radio waves
(using various bands of the radio spectrum), fiber optics, satellite, and microwave. Through
mergers, acquisitions, and name changes, the identity of these companies present enormous tax
enforcement problems for the UUT tax administrators and tax auditors of the cities.
In the late 1990’s, based on the success of its telecommunications and gas deregulation efforts,
the CPUC next directed its deregulation initiative to the electric industry. In 2000, the state
legislature enacted implementation legislation to formalize the electric deregulation process.
Like the gas industry, the main area of new competition was in the sale of the commodity of
2

electricity, and 150 new electric service providers (ESPs) suddenly appeared with little or no
understanding of their obligation to collect local taxes.
Although California’s experience in the deregulation of the electric commodity market has
largely failed due to record high “commodity” prices in 2001, the break-up of the traditional
monopoly electric provider continues 2 . The result is more and more electric “companies”
providing diverse, “unbundled” services, with more opportunities to improperly collect the
UUT.
Taken together, the above described developments of the past thirty years have greatly
complicated the collection of the cities’ UUT, with many new utility providers offering new or
differentiated services. To further exacerbate the problem, many California cities have neglected
to update their UUT ordinances to keep pace with these dramatic changes. This oversight is
likely due to the complicated and arcane nature of utilities and their regulation, and also the fear
of triggering an election requirement under Proposition 218. These reasons for inaction are
certainly understandable, but not without the following risks:
• First, UUT ordinance language that fails to reflect new technologies for
delivering traditional utility services may result in ambiguity that produces
loopholes and unintended tax subsidies for those new technologies and services,
at the expense of citizens that can least afford the new technologies and services.
Importantly, ambiguities in tax ordinances are strictly construed in favor of the
taxpayer, and against the public agency. 3
• Second, through such neglect, UUT ordinances may become legally invalid, in
part or in whole, when similar utility services (though delivered through different
means, e.g., wired versus wireless telecommunication services) are treated
differently without a rationale 4 for such different treatment.
2 The CPUC required PG&E and Edison to “divest” of many of their power generation resources.
PG&E, through the bankruptcy process, has recently created new legal entities for providing its
transmission and distribution services, which were previously provided by a single integrated
utility.
3 Los Angeles Brewing Co. v. City of Los Angeles (1935) 8 Cal.App.2d 379, 48 P.2d 65.
4 Public agencies must be able to establish some rationale for taxing similar services differently.
[Louisville Gas Co. v. Coleman (1928) 277 U. S. 32: while the state may classify broadly the
subjects of taxation, it must do so on a rational basis so that all persons similarly circumstanced
shall be treated alike].
Once a rationale is established, however, cities have a great deal of latitude as evidenced by the
following case law: City of San Jose v. Donohue (1975) 51 Cal.App.3d 41; Willingham Bus
Lines, Inc. v. Municipal Court (1967) 59 Cal.Rptr. 618, 428 P.2d 602 [Absolute uniformity or
equality in the application of tax measures can never be obtained]. Ladd v. State Bd. of
Equalization (1973) 106 Cal.Rptr. 885 [A tax statute or ordinance which distinguishes between
parties does not violate the equal protection or due process clause if the distinction rests upon a
3

• Third, ambiguously worded UUT ordinances will invite legal challenges
regarding the scope 5 of a UUT or the collection responsibilities 6 of the collecting
party, resulting in possibly avoidable litigation. In the case of an adverse judicial
decision, it may even result in a refund obligation and a permanent reduction in
UUT revenues.
If It’s Broke, Better Fix It!
How can these legal controversies best be avoided Clearly, ambiguities in ordinance language
that define the “scope” of each UUT must be carefully removed and substituted with appropriate
clarifying language that does not expand the tax, but rather clarifies it.
However, as previously mentioned, many cities are reluctant to make any change to their UUT
ordinances out of fear of triggering the election requirement of Proposition 218. But is
Proposition 218 that all-encompassing No, it is not. Only those ordinance changes that
increase the UUT rate or “revise the methodology” (e.g., expansion of the tax base) are subject to
an electoral approval under Proposition 218. Government Code Section 53750 et seq. Although
there are no appellate court decisions explaining the meaning of a “revision in methodology”,
and opinions may differ as to when a “clarification” becomes a “revised methodology”, the
touchstone will inevitably be, does a tax increase result. Therefore, it is reasonable to assume
that a city may update its UUT ordinance, without triggering a Proposition 218 election, by
enacting: i) clarifications regarding the scope of its existing tax base (especially where the
clarification does not increase the tax but merely clarifies historical practices) 7 ; ii) clarifications
regarding the tax collection obligations of utility providers and utility customers regarding an
existing tax; and, iii) amendments that provide procedural and administrative improvements to
the thirty year old UUT ordinance. This paper will offer examples of updates in each of those
areas.
rational basis, and it must be presumed to rest on that basis if there is any conceivable state of
facts which would support it.] Stevens v. Watson (1971) 94 Cal.Rptr. 190 [A legislature is not
bound to tax every member of a particular class or none]. Henry's Restaurants of Pomona, Inc. v.
State Bd. of Equalization (1973) 106 Cal.Rptr. 867 [It is constitutionally permissible to subdivide
the class on the basis of the tax collectibility problem]. Carmichael v. Southern Coal Co. (1937)
301 U.S. 495, 511 [Administrative convenience and expense in the collection or measurement of
a tax are alone a sufficient justification for treating some taxpayers differently than others].
5 Balikov v. Southern California Gas Co. (2001) 94 Cal.App.4 th 816 [Taxpayer challenged
applicability of UUT to “regulatory surcharges” on gas bills]..
6 Eastern Mun. Water Dist. V. City of Moreno Valley (1995) 31 Cal.App.4 th 24, 36 Cal. Rptr.2d
823; City of Modesto v. Modesto Irrigation Dist. (1973) 34 Cal.App.3d 504, 110 Cal.Rptr. 111.
7 A city may also make clarifications to the “scope” of a tax through the adoption of
administrative rulings. See pp. 6-7 below.
4

Clarity to Avoid Unnecessary Legal Risks
The following are three suggestions for removing ambiguity and achieving ordinance clarity,
without triggering a Proposition 218 election:
Broad Functional Description of the Utility Service with Examples. In my view, much
controversy with taxpayers and their tax (avoidance) counselors over ordinance language can be
averted if the UUT ordinance is amended with language that provides a “functional” description
of the utility service, using broad language that will capture future changes in technology for
delivering the services. For example, in the area of telecommunications, it would be prudent to
define “telecommunication service” to include any use of the “public switched network 8
regardless of the technology used to deliver the service”.
In addition to using a generally worded functional definition of the taxable utility service,
ambiguity can be further avoided by including a list of examples that fall within the functional
definition. The list of examples should be preceded by the key words “including but not limited
to”. The Cities of San Gabriel, San Leandro, and La Verne have recently adopted updated UUT
ordinance language that employs this technique.
TELEPHONE COMMUNICATION SERVICES. “Communications services” as defined in Sections
4251 and 4252 of the Internal Revenue Code, and the regulations thereunder, and shall include
any telephonic quality communication for the purpose of transmitting messages or information
[including but not limited to voice (both analog and digital – including the use of Internet
Protocol (IP) or other similar means for digitization and/or packetization of telephonic quality
communications for transmission via digital networks, in part or in whole), 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 and the regulations of the Federal Communications Commission
- see 47 U.S.C.A. Section 332(d)], whether such transmission occurs by wire, cable, cable
modem or digital subscriber line (DSL), internet, fiber-optic, light wave, laser, microwave, radio
wave [including, but not limited to, mobile telecommunications service, cellular service,
commercial mobile service and commercial mobile radio service (see 47 U.S.C. Section 332(d)(1)
and Part 20.3 of Title 47 of the Code of Federal Regulations), personal communications service
(PCS), specialized mobile radio (SMR), and other similar services regardless of radio spectrum
used], switching facilities, satellite or any other similar facilities (emphasis added).
“Unbundle” Your Ordinance Language. In addition to using broad, functional definitions of
the “utility service” with examples, it is also helpful to describe the components of such service,
again citing a list of components with the key words: “including but not limited to”. Why is this
“unbundling” language necessary In years past, a utility customer would receive a single utility
bill with a single charge for the utility service based upon a rate tariff approved by the California
Public Utilities Commission. Then, various taxes, including the UUT, would be applied to the
utility charge. With deregulation and the break-up of the monopoly utility companies, however,
the trend is to “unbundle” the single charge into numerous “line items” costing out the various
8 The public switched network or PSN generally refers to the interconnected networks of the
telephone companies that allow individuals to make voice quality calls to other individuals with
telephone sets connected to those networks.
5

components of the previously bundled utility service so that the customers receives more pricing
information. Supposedly, all of this “pricing” information is essential to the customer to make
informed choices, as more and more of the different components of traditional utility service are
opened up to competition. In addition, a customer may receive multiple bills as the utility service
is now provided by different types of utility service providers.
Here is the problem: since the old UUT ordinance typically imposes a tax on the “bundled”
charge for the use of gas or electricity, arguments can arise when the various components of gas
or electric service (e.g., commodity, transmission, storage, metering, etc.) are separately stated or
arrive on multiple bills. A taxpayer might argue that, under the language of old ordinance, the
UUT only applies to the commodity charge (“use of electricity or gas”) and none of the other
charges necessary to deliver the commodity to the customer (e.g., charges for transmission and
gas storage). Some “creative” customers (or more likely their tax avoidance counselors) have, in
fact, already raised this argument. In a case involving the City of Torrance and a gas customer, a
Superior Court summarily dismissed the taxpayer’s argument that the UUT ordinance did not
apply to “transmission” charges and found in favor of the City, but not after lengthy, expensive
litigation. Again, the UUT ordinances of the cities of San Gabriel, LaVerne, and San Leandro
are good examples of identifying the specific components of utility services, including a catch-all
phrase:
“and other charges, fee and surcharges which are necessary to or common for the receipt, use or
enjoyment of electric service; and all other annual and monthly charges, fees, or surcharges for
electricity services or programs, which are mandated by the California Public Utilities Commission
or the Federal Energy Regulatory Commission, whether or not such charges, fees, or surcharges
appear on a bundled or line item basis on the customer billing.”
To show your intent to comply with the constraints of Proposition 218, it would not hurt to
include a “whereas” clause in your amending ordinance that states:
WHEREAS, while modifying the utility users tax ordinance of the City of in the manner provided
herein, it is not the intent of the City Council either to increase the tax percentage imposed on charges
for utility use, or to expand the base of the tax.
Administrative Ruling: Another Tool for Addressing Change. As an alternative to frequent
updates to your UUT ordinance to address new, unanticipated changes, another effective tool is
the use of the administrative ruling. Merely place a provision in the UUT ordinance that
authorizes the “tax administrator” (as defined by statute) to periodically issue “administrative
rulings” to address questions of tax applicability of new utility services and charges. Of course,
the provision needs to establish some standards that the “tax administrator” must adhere to.
Also, it would be wise to include an “administrative” procedure that the taxpayer must follow to
appeal the ruling.
AUTHORIZING PROVISION. The Tax Administrator may adopt administrative rules and regulations
not inconsistent with provisions of this chapter for the purpose of carrying out and enforcing the
payment, collection and remittance of the taxes herein imposed. A copy of such administrative rules
and regulations shall be on file in the Tax Administrator’s office.
6

EXERCISE OF AUTHORITY. The Tax Administrator, from time to time, may survey the electric
Service Suppliers to identify the various unbundled billing components of electric retail service that
they commonly provide to residential and commercial/industrial customers in the City, and the charges
therefor, including those items that are mandated by State or federal regulatory agencies as a
condition of providing such electric service. The Tax Administrator, thereafter, may issue and
disseminate to such electric Service Suppliers an administrative ruling identifying those components
and items which are: i) necessary for or common to the receipt, use or enjoyment of electric service;
or, ii) currently, or historically have been, included in a single or bundled rate for electric service by a
local distribution company to a class of retail customers. Charges for such components and items
shall be subject to the tax of subsection (A) above.
Such provisions would require the challenging tax payer to focus on the “ruling” under an
administrative procedure, rather than filing a lawsuit challenging the specific wording of your
UUT ordinance. If the challenging party fails to exhaust his or her administrative remedy, then
no legal challenge could be made. In the event that a court determined that an administrative
ruling exceeded the “scope” of the ordinance, the city tax administrator would merely rescind the
ruling, and the UUT ordinance would remain unscathed.
“Bundle” Your Ordinance Too. As the gas and electric industries began “unbundling” their
previously integrated services, the wireless telephone and CATV industries found that it was
more effective to market their service by “bundling” a variety of different services into
“packages” designed to attract certain customer classes. Often times, both taxable and nontaxable
services would be included in the “bundled”, single-priced packages. How are these
“packages” to be taxed According to a federal excise tax statute [26 USC §4254(a)] 9 , if the
various services are grouped together, and are not separately stated on the bill, then the entire
“package” is taxed. There is also a dubious IRS Ruling 69-152 (which the IRS contends is its
current position) that permits the telecom provider to internally “unbundle” the taxable and nontaxable
services, and then apply the tax to the imputed value of only the taxable services using
normal accounting practices. This ruling appears to contradict the statutory language of 26 USC
§4254(a).
In any event, it may be prudent to amend the UUT ordinance to specifically deal with the
“bundling” of taxable and non-taxable services. Here is one approach.
35.086 EFFECT OF COMMINGLING NON-TAXABLE ITEMS WITH TAXABLE ITEMS.
If one or more non-taxable items are bundled or billed together with one or more taxable items (as
provided for by this subchapter) under a single charge on a customer’s bill, the entire single
charge shall be deemed taxable unless, upon the written request of the customer, the service
supplier can reasonably identify the non-taxable component of the single charge based upon one
or more of the following methodologies, as selected by the Tax Administrator: i) the average
9 Sec. 4254. Computation of tax. (a) GENERAL RULE – If a bill is rendered the taxpayer for local
telephone service or toll telephone service -(1) the amount on which the tax with respect to such services
shall be based shall be the sum of all charges for such services included in the bill; except that (2) if the
person who renders the bill groups individual items for purposes of rendering the bill and computing the
tax, then (A) the amount on which the tax with respect to each such group shall be based shall be the sum
of all items within that group, and (B) the tax on the remaining items not included in any such group shall
be based on the charge for each item separately.
7

industry charges for the individual non-taxable items included in the entire single charge; ii) the
amount of the entire single charge less the average industry charges for the individual taxable
items included in the entire single charge; or, iii) the service supplier’s books and records that are
kept in the regular course of business, which must be consistent with generally accepted
accounting principles.
Substantial Nexus for Imposition of Telecom UUT
Two Out of Three Rule – Goldberg v. Sweet. In order for a tax to be legally imposed, “nexus”
must exist. “Nexus” simply means there is sufficient “contacts” or activities between the
taxpayer or tax collecting party and the city to justify the imposition of the tax obligation. With
respect to the UUT, there is clearly adequate nexus for imposing the tax, since the UUT is based
upon the use of the utility service by a person in the city. Thus, the physical presence (often a
common trait of nexus) of the customer normally exists.
But what about the case of wireless telecommunications where the taxpayer is “mobile” and the
call’s origination or termination is difficult if not impossible to determine by the tax collecting
wireless company 10 Is there sufficient nexus to impose a UUT on charges for wireless calls
The answer is not without considerable controversy and complexity.
In the early 1990’s when cellular telecommunication services began using the “public switched
network”, this burgeoning industry contended that public agencies could only impose a UUT on
the non-call portion of the cellular bill (originally, a “monthly access fee” that must be paid
whether or not any calls were made). The cellular industry representatives cited the case of
[Goldberg v. Sweet (1989) 488 U.S. 252] in support of the “two out of three” rule as the
applicable law, i.e,. to apply an excise tax on interstate telecommunications 11 , the call must either
originate or terminate within the taxing jurisdiction and the billing address must also be in the
taxing jurisdiction. Interestingly, Goldberg did not directly address the nexus issue, but rather, as
dicta, acknowledged that the “two out of three” rule of the Illinois state statute was not
challenged by any of the parties as lacking substantial nexus. Subsequent cases, however, have
cited Goldberg as a “nexus” case. Oklahoma Tax Commission v. Jefferson Lines (1995) 115
U.S. 1331.
10 In the near future, handheld phones will include the capability of interacting with satellites or
other geo-locational systems to identify the locations of 911 emergency calls within a few
hundred yards. FCC Docket CC No. 94-102 (See: www.fcc.gov/911/enhanced).
11 Prior to Goldberg, public agencies did not apply a UUT on interstate and international
telecommunication calls believing that such a tax was prohibited by federal law (Commerce
Clause). When Goldberg clarified how a public agency might properly apply an excise tax to
interstate and international calls, many California UUT ordinances were amended to include
interstate and international calls. A number of public agencies failed to make this change, and
now can only do so with a Proposition 218 election.
8

It was not long after the wireless industry began offering services that it stopped using a
“monthly access” fee, and began marketing its services primarily as “packages” with pricing
based on the number of included “free minutes”. Importantly, the fixed monthly charge for the
package must be paid by the customer regardless whether any of the included minutes were used.
As a temporary accommodation, some cities allowed the early cellular companies to use an
imputed value as a surrogate for the former “monthly access” charge. AT&T Wireless and
Verizon Wireless persist in following that dubious practice today.
Agreement, Payment and Delivery – Jefferson Lines. Today, there are new reasons to
contend that wireless companies should be applying the UUT on the entire “package”, in the
same manner as the federal excise tax is applied to wired and wireless telecommunications. In
1995, the U.S. Supreme Court decided Oklahoma Tax Commission v. Jefferson Lines (1995) 115
U.S. 1331. The Court held that the state of Oklahoma could impose a tax on a bus ticket
purchased in Oklahoma, even though some of the services would be provided out of the taxing
jurisdiction. Here are some pertinent excerpts from the Jefferson Lines case:
So, too, in addressing the interstate provision of services, we recently held that a State in which
an interstate telephone call originates or terminates has the requisite Commerce Clause nexus to
tax a customer's purchase of that call as long as the call is billed or charged to a service address,
or paid by an addressee, within the taxing State. Goldberg, supra, at 263. Oklahoma's tax falls
comfortably within these rules. Oklahoma is where the ticket is purchased, and the service
originates there. These facts are enough for concluding that "[t]here is `nexus' aplenty here."
Interstate activity may be essential to a substantial portion of the value of the services in the first
case and essential to performance of the services in the second, but sales with at least partial
performance in the taxing State justify that State's taxation of the transaction's entire gross
receipts in the hands of the seller.
In the context of taxation of wireless “packages”, a strong argument can be made that a public
agency should have sufficient nexus under the Jefferson Lines case to impose the UUT on the
entire wireless “package” since the “package” is purchased and paid within the public agency and
some of the services (calls) occur there.
The taxable event comprises agreement, payment, and delivery of some of the services in the
taxing State; no other State can claim to be the site of the same combination. The economic
activity represented by the receipt of the ticket for "consumption" in the form of commencement
and partial provision of the transportation thus closely resembles Berwind-White's "delivery of
goods within the State upon their purchase for consumption," id., at 58, especially given that full
"consumption" or "use" of the purchased goods within the taxing State has never been a condition
for taxing a sale of those goods. Oklahoma Tax Commission v. Jefferson Lines.
One ordinance feature that is important to satisfy federal Commerce Clause concerns under
Goldberg and Jefferson Lines is a crediting provision to avoid taxation of the same transaction by
multiple taxing jurisdictions. Although this is merely a theoretical problem, and does not occur
in practice, it is wise to include the following provision in your UUT ordinance:
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 communication services,
shall be allowed a credit against the tax imposed to the extent of the amount of such tax legally
9

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.
Primary Place of Use – Federal Wireless Telecommunications Sourcing Act of 2000. Given
the mobile nature of its service, the wireless industry was plagued with a number of tax and cost
allocation problems. It decided to get some help through federal legislation, known as the federal
Wireless Telecommunications Sourcing Act of 2000. Among other things, the act authorizes the
imposition of state and local excise taxes on wireless communication charges irrespective of the
call’s origination or termination. In other words, for wireless telecommunications, taxable nexus
is based upon the customer’s “primary place of use”, and not the call’s origination or termination
(as required under the “two out of three” rule of Goldberg).
In anticipation of the effective date of this new federal law (August, 2002), a number of public
agencies adopted “instructions” directing the wireless providers to collect the UUT consistent
with the “sourcing rules” of the federal law. See www.uutinfo.org “Best Practices Policy 1.0”.
Many UUT ordinances, including those enacted prior to January 1, 1995 (Proposition 218), have
specific language that imposes the UUT of telecommunication charges, regardless of whether the
call originated or terminated within the city. Other city ordinances did not address the issue one
way or the other.
By issuing such “administrative” rulings, the local tax administrators intended to follow the
federal sourcing rules, and thus standardize the tax collection practices of the wireless industry 12
To the chagrin of these public agencies, however, they received “friendly” letters from AT&T
Wireless in June, 2002, threatening to file lawsuits against them, characterizing such instructions
as “revisions in methodology resulting in an increased tax” requiring an authorizing election
under Proposition 218 13 . After months of negotiations between AT&T Wireless/Verizon
Wireless and a voluntary public agency group known as the Utility Users Tax Technical Task
Force or UUT TTF, the UUT TTF (upon receiving advice from League City Attorneys
Department ad hoc utility tax committee) determined that AT&T Wireless’ argument was
doubtful, at best.
The City Attorneys Department ad hoc utility tax committee concluded that most UUT public
agencies possessed a variety of legal arguments to counter the position of AT&T Wireless, and
that individual UUT public agencies should decide, after carefully reviewing their UUT
12 AT&T Wireless and Verizon Wireless collect approximately 40% of the entire charges, still
using the old “imputed” monthly access charge approach. The other three major companies
(Nextel, SPRINT and Cingular) collect at the 100% level, as if the federal souring rules applied.
13 In the view of the author and many other City Attorneys, AT&T Wireless legal contention is
incorrect. In our view, a “revision in methodology” refers to a revision in the actual language of
the UUT ordinance as it existed on January 1, 1995, that results in an increased tax. It does not
apply to an administrative or tax enforcement decision by the tax administrator to collect less
than the full amount that is authorized by the UUT ordinance due to practical difficulties in
tracking call origination and termination or for other administrative reasons. Ultimately, this
disputed issue may require a judicial ruling to satisfy AT&T Wireless’ attorneys.
10

ordinances and administrative histories, whether to: 1) seek judicial guidance on this matter
(through a self-initiated declaratory relief action or in defense of litigation brought by wireless
carriers or taxpayers); 2) negotiate an acceptable resolution with the wireless carriers; 3) seek a
legislative cure; 4) take a wait and see approach, and do nothing; or, 5) seek approval of the
electorate of clarifying language in the UUT ordinance that specifically follows the “source
rules” of the federal law.
If your public agency has a UUT ordinance that applies its UUT to wireless telecommunications,
you may receive additional information on this subject, including legal analyses, by contacting
JoAnne Speers of the League Legal Department and by executing a joint confidentiality
agreement.
Substantial Nexus for Tax Collection
Nexus comes into play not only in the imposition of the UUT, but also in its collection.
Historically, nexus was not a serious issue with UUT because the monopoly utility service
providers installed their physical facilities within the taxing jurisdictions as a means of providing
their services, and “physical presence” has always satisfied the nexus requirement 14 . However,
what about the new third party commodity marketers, telecom resellers, and Internet telephony
providers, which arguably have no physical presence within the city, and, in fact, may be located
out of state. Can they be required to collect a city’s UUT That depends on whether you
subscribe to the physical presence versus economic presence or alter ego/agency 15 theories of
legal nexus. Unfortunately, until the U.S. Supreme Court provides clear direction, we find
ourselves in one of those “evolving” areas of the law.
To deal with the problem of nexus uncertainty, there are several ordinance actions worth
considering. First, the UUT ordinance should be amended to remove any language that arguably
is contrary to the broadest definition of substantial nexus for requiring the collection of the
public agency’s UUT. For example, the UUT ordinance should be amended to broadly impose
the tax collection responsibility on all utility service providers, whether or not they have a
physical presence in the public agency.
14 Quill Corp. v. North Dakota (1992) 504 U.S. 290, 315; National Bellas Hess, Inc. v.
Department of Revenue of Illinois (1967) 386 U.S. 753. The Due Process and Commerce
Clauses of the U.S. Constitution prohibit a state from imposing a use tax collection duty on a
seller whose only connection with customers in the state is by common carrier of the mail.
15 Tyler Pipe Industries v. Washington State Department of Revenue (1987) 483 U.S. 232;
National Geographic v. California Board of Education (1977) 430 U.S. 551; Scripto Inc. v.
Carson (1960) 362 U.S. 207. Robert C. Bricker, Agency and Affiliate Nexus For Sales and Use
Tax, 13 J.St.Tax’n 61 (1995); John P. Barrie, Attributional Nexus: Taxing Corporations That
Lack Sufficient In-State Presence, 4 J. Multistate Tax’n 18 (1994); R. Scot Grierson, State
Taxation of the Information Highway: A Proposal For Taxation of Information Services,
Institute of Property Taxation: Sales Tax Report; July-August, 1996, pp 23-31.
11

Second, in this writer’s opinion, the UUT ordinance should be amended to affirmatively state the
UUT ordinance’s intent to employ the broadest construction nexus allowed by law. Here is an
example of such language from the San Gabriel UUT ordinance:
For purposes of establishing substantial nexus for the imposition and collection of utility users tax
on charges for telephone communication services pursuant to this subchapter, “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 by judicial interpretation or by statutory enactment.
Finally, as a failsafe provision, the UUT ordinance should be amended to specify that the
collection obligation falls to the tax payer (i.e., self-collection and remittance) in the event that
insufficient nexus exists to require the utility provider to do so. This type of provision has been
an effective tool in collecting the UUT from non-core gas and direct access electric customers
when out of state marketers refuse to do so. Here is a sample provision:
35.085 SERVICE USERS RECEIVING DIRECT PURCHASE OF GAS OR ELECTRICITY.
(A) Any service user subject to the tax imposed by Sections of this subchapter, which produces
gas or electricity for self-use; which receives gas or electricity, including any related supplemental
services, directly from a non-utility service supplier not under the jurisdiction of this
subchapter; or which, for any other reason, is not having the full tax collected and remitted by its
service supplier, a non-utility service supplier, or its billing agent on the use of gas or electricity in
the city, including any related supplemental services, shall report said fact to the Tax
Administrator and shall remit the tax due directly to the Tax Administrator within thirty (30) days of
such use (emphasis added).
With respect to amending your UUT ordinance to clarify and arguably broaden the tax collection
responsibility (as opposed to tax imposition), keep in mind that such a change does not expand or
increase the tax burden on the taxpayer, since the tax already applies to such usage. Therefore,
such an amendment, clarifying the collection responsibility of the tax collector, should not
require a Proposition 218 approval by the electorate.
Reduce Legal Risks and Refund Exposure with Protective Provisions
Even if your city makes all of the recommended “updates” to its UUT ordinance discussed
above, there is no guarantee that a future court might not find that the city’s good faith
application of its UUT to a new utility technology or service has exceeded the permissible scope
of the UUT ordinance (as it existed on January 1, 1995). What can a city attorney do to reduce
the risk of litigation and the risk of associated refunds
Class Action Lawsuits. A city attorney can greatly reduce the threat of class action lawsuits
challenging the validity of the City by clearly stating the requirement that no lawsuit may be filed
unless an individual refund claim is first filed. Woosley v. State of California (1992) 3 Cal.4th
758, 13 Cal.Rptr.2d 30; American President Lines, Ltd. V. Zolin (1995) 38 Cal.App.4th 910
[Must pay tax and follow state or local refund procedures before bringing suit]; Hartman v. City
12

of Hawthorne, unpublished decision (2001), B136680. 2nd Appellate District. [No declaratory
relief in Prop. 218 challenge. Must first pay tax and bring suit on refund].
Nothing herein shall permit the filing of a refund claim on behalf of a class or group of taxpayers.
The filing of a written claim is a prerequisite to any suit thereon. Any action brought against the city
pursuant to this section shall be subject to the provisions of Government Code Sections 945.6
and 946.
Also, the UUT ordinance can discourage the filing of class action lawsuits by creating an
administrative process that must be first be exhausted by the claimant, including an appeal
process.
Any person aggrieved by any assessment, decision or administrative ruling of the Tax
Administrator, other than a decision relating to a refund, shall be required to comply with the
appeals procedure of this section. Compliance with this section shall be a prerequisite to a suit
thereon. [See Government Code Section 935(b).] Nothing herein shall permit the filing of a claim
or action on behalf of a class or group of taxpayers.
One Year Statute of Limitations – Refunds. Another essential protective provision in your
UUT ordinance is a one year statute of limitations for refunds. The original UUT ordinances
usually omitted to mention this important matter, and the three year statute of limitations of Code
of Civil Procedure Section 338(1) would automatically apply. This means that the city’s liability
for refunds on invalid taxes could be as much as three years from the date of accrual of the cause
of action. Can this three year statutory limitations period be reduced Yes, and by all means
should be, by specifically requiring the filing of a claim within one year of the alleged
overpayment.
The Tax Administrator may refund any tax that has been overpaid, paid more than once, or has
been erroneously or illegally collected or received by the Tax Administrator under this subchapter,
provided that no refund shall be paid under the provisions of this section unless the claimant or his
or her guardian, conservator, executor or administrator has submitted a written claim, under
penalty of perjury, to the Tax Administrator within one year of the overpayment or erroneous
or illegal collection of said tax. Such claim must clearly establish claimant's right to the refund
by written records showing entitlement thereto.
Importantly, the one year statute of limitations in your UUT ordinance will only apply to refund
claims that accrue in the future unless you also adopt a provision that makes the one year rule
applicable to past claims. Baldwin v. City of San Diego (1961)195 Cal.App.2d 236, 240. That
should be done as well.
It is the intent of the city that the one year written claim requirement of this section be given
retroactive effect; provided, however, that any claims which arose prior to the enactment of the
one year claims period of this section, and which are not otherwise barred by a then-applicable
statute of limitations or claims procedure, must be filed with the Tax Administrator as provided in
this division within ninety (90) days following the effective date of this ordinance.
13

A good practice tip is to amend all of the city’s tax ordinances (e.g., UUT, business license,
transient occupancy tax, etc.) to include these protective provisions. In fact, you may wish to
create a single set of refund/claim procedures, and simply reference them in each of the various
taxing ordinances.
Conclusion
Constant changes in the various utility industries pose real challenges for city attorneys that wish
to keep their UUT ordinances current, clear, and procedurally sound. Unfortunately, Proposition
218 prohibits “updates” that increase rates or revise methodologies that result in a tax increase,
without approval by the electorate. Notwithstanding this important constraint, city attorneys can
and should avail themselves of numerous other ordinance improvements that do not increase
or expand taxes.
With respect to the “scope” of the UUT ordinance, city attorneys should consider ordinance
amendments that remove ambiguities, add clarifying language with broad functional definitions
and numerous examples, and address new tax application issues with “administrative rulings” by
the tax administrator instead of ordinance changes.
Regarding “nexus”, city attorneys should be acquainted with the most recent federal cases and
statutes defining this constitutional prerequisite to the imposition and collection of local excise
taxes. Ordinance amendments should be considered that maximize “substantial nexus”,
especially as the courts explore alternatives to the traditional “physical presence” requirement in
response to the new ways that commercial services and products are being sold.
Finally, city attorneys are strongly urged to adopt protective provisions in their UUT ordinances
that limit class action lawsuits and reduce their cities’ exposure on refund claims.
As a final cautionary word, you should beware of “model” UUT ordinances. There is no such
thing. Do not make the mistake of updating your city’s UUT ordinance by simply copying
another city’s updated UUT ordinance, even if it is touted as a “model”, as you may
inadvertently adopt a change that requires a Proposition 218 election! To properly update
your UUT ordinance, you must carefully review its own unique language, and its own unique
legislative and administrative history, especially as it existed on January 1, 1995. Indeed, it is
highly doubtful that any two UUT ordinances will ever have the exact same language and
legislative/ administrative history. Also, what was considered an “updated” UUT ordinance a
year or two ago is now likely in need of more “updates” to reflect the latest changes in the
industry or in the law.
Clearly, there is no substitute for conducting a careful and thorough review of your city’s own
UUT ordinance, and then thoughtfully crafting appropriate amendments that will keep pace with
the frequent changes in the utility industries and protect the viability of your UUT ordinance for
the future. It is a big challenge, but the stakes ($1.2 billion in local tax revenue) are too high not
to jealously guard and maintain this important local revenue source.
14