Change in tax could mean $1 million or more lost from the city’s
$36-million operating budget
Gilroy – Legal challenges evolving technology and special interest legislation threaten to erode $1 million or more of Gilroy’s annual tax revenues, according to city officials grappling with a revolution in the telecommunications industry.
For years, cities have relied on the Utility Users Tax as a stable source of revenue. California municipalities charge phone and cable companies tax rates of 1 to 11 percent, a fee passed on to end-users in their monthly bills.
But old formulas used to calculate those fees no longer apply in an era when cable companies are offering phone service, and phone companies are entering the television and video business. At least that’s what Verizon and other telecommunications giants are claiming in federal court as they seek to stop assessing the utility users tax. Specifically, they say fees based on time of calls and distance between parties makes no sense in an era of nationwide, flat-rate calling plans.
“The core issue is this: old ordinances versus new technology,” City Administrator Jay Baksa said. “They’re saying, ‘Your ordinances don’t cover this, so we don’t have to pay it.’ ”
That argument threatens to rob Gilroy’s $36-million operating budget of a revenue source that has skyrocketed in recent years. In 2000, the majority of UUT – roughly $660,0000 – came from charges on traditional phone lines, with an additional $199,000 coming from wireless phone taxes. By 2005, the rapid growth in cell phone use had diminished taxes from traditional phone use to $493,000, while wireless service accounted for $817,000.
“We’re going to have to wait and see how this thing pans out to see what the real impact is,” Councilman Craig Gartman said. “But it still looks like it’s up to the courts to decide what is a fair tax on these communications services. We have ventured into an uncharted territory with new communications. With people being so mobile, it’s not like picking up a phone at your house and placing a call any more. Who gets the taxes generated? The old methodology just doesn’t apply anymore.”
The city can get ahead of the courts by modernizing its own ordinances to fit new technology, though that would require a vote of all Gilroyans. Baksa said such a change could actually lower overall tax rates since fees would be spread across a larger number of service providers. Officials plan to explore that option during informal policy talks in January.
Even if they change local ordinances, governments across the nation will have to beat back challenges from a well-heeled industry that lobbies heavily in Washington. Telecom companies have already succeeded in banning state and local taxes on broadband services such as cable modem and Digital Subscriber Lines, when those services are bundles with Internet access. Now they hope to extend that moratorium, or make it permanent, before it expires in Nov. 2007. Telecom companies also are backing legislation that would prohibit cities from modernizing ordinances to tax new technologies.
