Rancho Palos Verdes City Council
   

AUGUST 15, 2006 RANCHO PALOS VERDES CITY COUNCIL AGENDA- CONSIDERATION OF AN ORDINANCE AMENDING CHAPTER 3.30 OF THE RANCHO PALOS VERDES MUNICIPAL CODE RELATING TO THE APPLICATION OF THE CITY’S TELEPHONE USER TAX AUGUST 15, 2006 RANCHO PALOS VERDES CITY COUNCIL AGENDA- CONSIDERATION OF AN ORDINANCE AMENDING CHAPTER 3.30 OF THE RANCHO PALOS VERDES MUNICIPAL CODE RELATING TO THE APPLICATION OF THE CITY’S TELEPHONE USER TAX AUGUST 15, 2006 RANCHO PALOS VERDES CITY COUNCIL AGENDA- CONSIDERATION OF AN ORDINANCE AMENDING CHAPTER 3.30 OF THE RANCHO PALOS VERDES MUNICIPAL CODE RELATING TO THE APPLICATION OF THE CITY’S TELEPHONE USER TAX

TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL

FROM: Carol Lynch, City Attorney

DATE: August 15, 2006

SUBJECT: CONSIDERATION OF AN ORDINANCE AMENDING CHAPTER 3.30 OF THE RANCHO PALOS VERDES MUNICIPAL CODE RELATING TO THE APPLICATION OF THE CITY’S TELEPHONE USER TAX

RECOMMENDATION

Read Ordinance No. ____ "AN ORDINANCE OF THE CITY OF RANCHO PALOS VERDES AMENDING CHAPTER 3.30 OF THE RANCHO PALOS VERDES MUNICIPAL CODE RELATING TO THE APPLICATION OF THE CITY’S TELEPHONE USER TAX" by title only, waive further reading, and introduce the ordinance.

Read Ordinance No. ____-U "AN ORDINANCE OF THE CITY OF RANCHO PALOS VERDES AMENDING CHAPTER 3.30 OF THE RANCHO PALOS VERDES MUNICIPAL CODE RELATING TO THE APPLICATION OF THE TELEPHONE USER TAX AND DECLARING THE URGENCY THEREOF" by title only, waive further reading, and adopt the ordinance.

EXECUTIVE SUMMARY

For years, the City has been imposing a utility user tax on a variety of public utilities, including telephone communication services. The telephone user tax is imposed on all telephone calls (or their functional equivalent) irrespective of what technology is utilized to transmit the call and regardless of whether the charges for such telephone service are based on time, distance or any other basis. For ease of administration and the convenience of the telephone communication service providers, the City’s ordinance cross-referenced federal statutory definitions from and relied on the Internal Revenue Service’s ("IRS") interpretation of the Federal Excise Tax ("FET") for guidance on the scope and application of the City’s utility user tax on telephone communication services (hereafter the "telephone user tax"). The FET and the IRS’ application thereof appeared to be consistent with the City’s legislative intent with respect to the telephone user tax.

On May 26, 2006, however, the IRS issued Revenue Notice 2006-50, which reversed the IRS’ historical position with respect to the application of the FET to long distance or "toll" telephone services that were billed based on time only. This means that the federal government will no longer be collecting the FET on long distance or toll telephone services that are billed on a time only basis. This new construction of the FET departs from the City’s intent and historical practice with respect to application of the City’s telephone user tax because the City has been collecting both and local and long distance charges. Accordingly, several amendments are necessary to the City’s existing utility user tax on telephone communication services to allow the tax to continue to be imposed in a manner that is consistent with the City’s original legislative intent and the City’s historical practice. The proposed amendments merely re-state the type of telephone service that is subject to the tax without reliance on the federal cross-references, which are being deleted. No change is proposed to the type of telephone service subject to the tax, and the tax is not being increased. Like Rancho Palos Verdes, the vast majority of other California cities with telephone user taxes also referred to the FET within their ordinances and relied upon IRS interpretations of the FET in implementing their ordinances. Accordingly, the majority of those cities also are in the process of amending their ordinances to address this issue.

BACKGROUND

Since 1993, the City of Rancho Palos Verdes has imposed a telephone users’ tax on every person (including businesses) in the City. The City’s telephone user tax applies to intrastate calls, interstate calls, and international calls, and applies equally to traditional as well as wireless telephone communication services. Presently, the tax is imposed at a rate of three percent (3%) of the charges billed.

For ease of administration and for the convenience of the telephone communication services providers, the City’s ordinance included references to the federal statutory definitions from the Federal Excise Tax (FET) rather than listing the definitions and exclusions from the FET. In addition, the City has generally looked to the federal interpretation of the Federal Excise Tax for guidance on the scope and application of the City’s utility users’ tax on telephone communication services. Until recently, the FET and the IRS’ application thereof appeared to be consistent with the City’s legislative intent with respect to the telephone user tax.

With the growth of wireless communications, a national dispute arose regarding the application of the FET to long distance cell phone calls. In defining taxable "toll telephone service" in the FET, Congress, through the Excise Tax Reduction Act of 1965 [Pub. L. No. 89-44, § 302, 79 Stat. 136 ("1965 Act")], sought to define the method of service provided by telephone companies. At the time of enactment, AT&T held a monopoly on all long-distance telephone services. Prior to the 1965 Act, "toll telephone service" was defined as "a telephone or radio telephone message or conversation for which (1) there is a toll charge, and (2) the charge is paid within the United States." [Pub. L. No. 85-859, § 133(a), 72 Stat. 1275, 1290 (1958).] In 1965, it appears Congress amended the definition to its current language in an effort to modify and update it "in order to reflect and to meet the changing technology and market conditions of the industry." [Trans-Lux Corp. v. United States, 696 F.2d 963, 967 (Fed.Cir.1982).] AT&T's long distance service, at that time, charged long distance telephone services on the basis of both the elapsed time of each individual call and distance between callers. Moreover, at the time of the 1965 Act, it was likely inconceivable that toll charges would ever be made without reference to distance, as is the case today. Despite advances in technology and the evolution of long distance billing practices, the FET has not been amended since the enactment of the 1965 Act, and its provisions continue to define long distance or "toll" calls as those for which charges vary according to both the elapsed time of the call and the distance between the persons on the call. Unlike traditional landline services, wireless 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 issued Revenue Ruling 79-404 determining that a variable for distance was not necessary for a toll call to be subject to the FET. 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, in response to several circuit court decisions holding that the FET does not apply to a toll charge varying only with elapsed transmission time, the IRS reversed its position under Revenue Ruling 79-404 and issued Revenue Notice 2006-50. Revenue Notice 2006-50 states that the IRS will no longer interpret the FET as applying to wireless communications which are billed based on time only, rather than both time and distance as required by the applicable provisions of the FET. Revenue Notice 2006-50 goes on to create a new service category called "bundled service" which could extend the reach of this interpretation to different billing practices by traditional telephone companies as well as wireless providers. Consequently, effective August 1, 2006, the IRS no longer applies 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. Bundled service includes, for example, Voice over Internet Protocol service, prepaid telephone cards, and plans that provide both local and long distance service for either a flat monthly fee or a charge that varies with the elapsed transmission time for which the service is used. Telecommunications companies provide bundled service for both landline and wireless (cellular) service. However, in Section 3.30.130 H, the City’s existing Code, the City imposes its tax on bundled services, unless, upon the request of the customer, the service provider can reasonably identify the non-taxable component of the bundled charge to the City’s Tax Administrator pursuant to one of the methodologies set forth in that Section. Because the City’s tax applies to bundled services, except as provided in paragraph H, the City should not follow the IRS ruling and thereby forego the payment of all of the tax on certain bundled services.

The IRS’ May 25th reversal of its prior Revenue Rulings and interpretation of the FET, which the City has relied upon in applying its telephone users’ tax to telecommunication services, leaves only the "local calls," which is about twenty-five percent (25%) of all telecommunications services, federally taxable. If the City were to apply its telephone user tax in a manner consistent with Revenue Notice 2006-50 it would stand to lose annual revenues in excess of $460,000.

In addition to conceding that the FET no longer applies to wired or wireless long distance charges (an other bundled services), the Treasury Secretary has further urged Congress to repeal the FET in its entirety, arguing that it does not make sense to continue the tax on such a small segment of the telecommunications industry. Amendments effecting a total repeal of the FET are currently pending before both houses of Congress.

Lawsuits challenging the application of utility user taxes, which were filed by various providers of telephone service, are pending against several California cities. Previous staff reports to the City Council (i.e. Budget, Mid-Year Report, Five-Year Financial Model) have included a warning that the legislative and litigation environment have been moving in the direction that would cause a reduction of the City’s telephone user tax revenue. Staff will continue to advise the City Council regarding the potential loss of telephone user tax revenue as legislative and litigation activities proceed.

DISCUSSION

Although the May 25th interpretation of the FET by the IRS is not binding on the City for purposes of levying or collecting the City’s telephone user tax, Staff recommends that the City amend its utility user tax on telephone communication services to remove the cross-references to the statutory provisions of the FET and to clarify that the references to the FET in the utility users’ tax ordinance were solely for ease of administration and the convenience of the telephone communication services providers. In doing so, the City will continue its longstanding application of its utility user tax to telephone communication services in a manner that is consistent with previous IRS Ruling 79-404. The proposed amendments will also prevent future ad hoc reaction to changes in federal law that otherwise do not affect the City’s ability to levy its telephone user tax.

The proposed ordinance is not intended to nor should it be construed as imposing a new tax, or as extending or increasing and existing tax; therefore, Proposition 218 does not apply to the proposed amendments. Instead, by this amendment to the telephone user tax, the City reaffirms that it will continue its long-standing practice of applying its tax to all telephone communication services irrespective of what technology is utilized to transmit the call and regardless of whether the charges for such telephone services are based on elapsed time, distance, or any other basis. This practice is consistent with IRS’ interpretation of the FET prior to Notice 2006-50 and the manner in which the City’s telephone user tax has always been applied. To eliminate the reference to the FET, the ordinance also incorporates into the Municipal Code the telephone services that were exempt from FET, which likewise were exempt from the City’s telephone user tax (i.e. users of coin-operated telephones, calls originating in a combat zone, calls from non-profit hospitals and education organizations). The same telephone uses and users will continue to be exempt from the City’s UUT if this proposed Urgency Ordinance is adopted by the City Council.

The proposed ordinance clarifies that the City is not changing its application of its telephone user tax based on the IRS’ decision to discontinue taxing long distance and bundled service in order to resolve legal disputes with telephone customers. Rather, the City wishes to continue to tax local, long distance, and bundled service as it always has – consistent with upon the IRS’ interpretation of the FET prior to May 25, 2006.

Further, the ordinance clarifies that when the City limited its tax base to charges "subject to" the FET, 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 (Section 3.30.130 H) 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 is currently done, obligatory. This provision of the local ordinance would take precedence over federal law and regulations.

In the meantime, the Director of Finance, as the Tax Administrator, will be notifying the companies that collect the City’s telephone user tax that they should continue to collect the tax on behalf of the City, and that the City’s tax is not being discontinued as a result of the IRS ruling concerning the FET.

Urgency Ordinance

In addition to the regular ordinance adopting the above-described amendments, the Council is also being asked to adopt an urgency ordinance effecting the same amendments. Because of the confusion created by the May 25th IRS ruling and to avoid the potential loss of revenue that would result if telephone communication services providers suspend collection of the City’s telephone user tax, staff recommends that the Council take immediate action to implement the regulations discussed above by adopting an urgency ordinance. To ensure no interruption in the collection of the City’s telephone user tax the urgency ordinance must take effect immediately. Thus, the City Council must adopt the proposed urgency ordinance by at least a four-fifths vote and further must find that it is necessary that the proposed ordinance take immediate effect for the preservation of the public health, safety and welfare. Staff believes the following facts, which are set forth in Section 4 of the urgency ordinance, provide the legal basis for making these findings:

"The City of Rancho Palos Verdes has lawfully imposed a telephone users’ tax on every person (including businesses) in the City since 1993. The City’s telephone user tax applies to intrastate calls, interstate calls, and international calls, and applies equally to traditional as well as wireless telephone communication services. The projected revenues from the telephone user tax for Fiscal Year 2006-2007 are anticipated to be approximately $690,000 dollars for Fiscal Year, if the telephone users tax continues to be applied in a manner consistent with the original legislative intent and the City’s long-standing practices. For ease of administration and for the convenience of the telephone communication services providers, the City’s ordinance cross-referenced federal statutory definitions from the Federal Excise Tax (FET). In addition, the City historically looked to the federal interpretation of the Federal excise Tax for guidance on the scope and application of the City’s utility users’ tax on telephone communication services. Until recently, the FET and the IRS’ application thereof appeared to be consistent with the City’s legislative intent with respect to the telephone user tax. However, a recent notice from the IRS (Notice 2006-50) interpreting the FET now jeopardizes collection of the City’s telephone user tax. 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 $460,000 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 revenues pay the costs associated with essential services, including public safety. For these reasons, it is necessary for the City to immediately adopt amendments to its utility user tax ordinance with respect to telephone communication services in order to remove all cross-references to the FET and to reaffirm that it will continue its long-standing practice of applying its tax to all telephone communication services irrespective of what technology is utilized to transmit the call and regardless of whether the charges for such telephone services are based on elapsed time, distance, or any other basis. Allowing the IRS Notice to apply to the City’s telephone user tax will risk the public health, safety and welfare of the City’s residents and the general public. It is therefore urgent that the enactment of modifications to the City’s utility user relating to telephone communication services become effective immediately to prevent adverse impacts to the public health, safety and welfare that result from unregulated peddling. Based on the foregoing, the City Council hereby finds that this ordinance is necessary for the immediate preservation of the public health, safety and welfare, hereby declares the facts constituting the urgency, and passes this ordinance by at least a four-fifths vote of the City Council. Accordingly, this measure is adopted immediately upon introduction pursuant to Government Code Section 36934 and shall take effect immediately pursuant to Government Code Section 36937(b)."

CONCLUSION

If the City Council concurs with Staff’s recommendation, the City Council should read the attached Ordinance by title only, waive further reading, and introduce the Ordinance and read the attached Urgency Ordinance by title only, waive further reading, and adopt the Urgency Ordinance.

ALTERNATIVES

The City Council could give Staff additional direction about these issues, which could be incorporated into a revised ordinance, or the City Council could decline to adopt the Ordinance.

Respectfully submitted,

Carol Lynch, City Attorney

Reviewed by,

Les Evans, City Manager

Attachments:

Draft Ordinance

Draft Urgency Ordinance

RPVMC Chapter 3.30 (Utility Users Tax)

ORDINANCE NO. ___

AN ORDINANCE OF THE CITY OF RANCHO PALOS VERDES AMENDING CHAPTER 3.30 OF THE RANCHO PALOS VERDES MUNICIPAL CODE RELATING TO THE APPLICATION OF THE TELEPHONE USER TAX

WHEREAS, the City of Rancho Palos Verdes has lawfully imposed a utility user tax on telephone communication services since 1993; and

WHEREAS, for ease of administration and the convenience of the telephone communication service providers, the Rancho Palos Verdes 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; and

WHEREAS, administration and application of the Federal Excise Tax has been and continues to be the purview of the Internal Revenue Service; and

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 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; and

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-distance unless the charges vary in amount with both distance and elapsed transmission time; and

WHEREAS, it has always been and continues to be the City’s intent that its tax on telephone communication services be applied to: (1) long-distance charges which vary in amount either by elapsed transmission time or with distance, or both, and (2) to bundled long-distance and local charges provided under a single plan that does not separately state the charges for local telephone services; and

WHEREAS, the interpretation of the Federal Excise Tax embodied in IRS Notice 2006-50 is inconsistent with both the original legislative intent of the City’s telephone user tax and the manner in which the City has historically imposed its telephone user tax; and

WHEREAS, the City Council wishes to continue to impose the utility user tax on telephone communication services in a manner that is consistent with how it has been historically imposed; and

WHEREAS, the ordinance merely clarifies and restates the type of telephone service that is subject to the tax without reference to the Federal Excise Tax and does not increase the tax or change or expand the type of telephone services that are subject to the tax; and

WHEREAS, Rancho Palos Verdes Municipal Code Section 3.30.130 H expressly requires application of the utility user tax to bundled charges, and that provision is not changed by this ordinance;

NOW, THEREFORE THE CITY COUNCIL OF THE CITY OF RANCHO PALOS VERDES DOES HEREBY ORDAIN AS FOLLOWS:

Section 1. Title 2 of the Rancho Palos Verdes Municipal Code is hereby amended by amending Section 3.30.020(I) of Chapter 3.30 to read as follows:

"I. ‘Telephone communication services’ means any local or long-distance telephone service for which there is a charge, regardless of the means or technology used to provide such service, those services as defined in sections 4251 and 4252 of the Internal Revenue Code and the regulations thereunder and shall include any telephonic type -–and quality of communication for the purpose of transmitting messages or information [including but not limited to voice, both analog and digital, including the use of the Internet Protocol ("IP") or other similar means for digitization 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. 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 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, and irrespective of whether charges for such service are based on time, distance, or any other basis. ‘Telephone communications services’ shall not include "private mobile radio service" (as defined in Part 20.3 of Title 47 of the Code of Federal Regulations) or "private mobile service" (as defined in 47 U.S.C.A. Section 332(d)(3)) and any other service that is not interconnected to the public switched network."

Section 2. Title 2 of the Rancho Palos Verdes Municipal Code is hereby amended by amending Section 3.30.040 of Chapter 3.30 to read as follows:

"Section 3.30.040 Telephone user tax.

A. There is imposed a tax upon the amounts paid for intrastate, interstate, including the District of Columbia, or international telephone communication services, including cellular telephone services and other telephone services that gain access to the public switched network by means of various technologies, by every person using such services in the city. The tax imposed by this section shall be at the rate of three percent of the charges made for such services and shall be paid by the person paying for such telephone services. Said tax shall apply to all such charges billed to a telephone account having a situs in the city, irrespective of whether a particular telephone service originates or terminates within the city. The situs shall be the service address, if known, otherwise the situs shall be the billing address.

B. Notwithstanding the provisions of subsection A of this section, the tax imposed under this section shall not be imposed upon any person for using the following intrastate, interstate, or international telephone communications services to the extent that the amounts paid for such services are exempt from or are not subject to the tax imposed under Section 4251 of Title 26 of the United States Code.:

(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, 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.

(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.

(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 1 70(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 3. Because the provisions of the Rancho Palos Verdes Municipal Code, as amended by this ordinance, do not alter the amount of the City’s telephone user tax, do not expand the application of the tax, and are substantially the same as the previous provisions of the Code as they read immediately prior to the adoption of this ordinance, the amendments made by this ordinance shall be construed as continuations of the earlier provisions and not as new enactments.

Section 4. The City Council declares that, should any provision, section, paragraph, sentence, or word of this ordinance be rendered or declared invalid by any final action in a court of competent jurisdiction, or by reason of any preemptive legislation, the remaining provisions, sections, paragraphs, sentences and words of this ordinance shall remain in full force and effect.

Section 5. The City Clerk shall cause this Ordinance to be posted in three (3) public places in the City within fifteen (15) days after its passage, in accordance with the provisions of Section 36933 of the Government Code. The City Clerk shall further certify to the adoption and posting of this Ordinance, and shall cause this Ordinance and its certification, together with proof of posting, to be entered in the Book of Ordinances of the Council of this City.

PASSED, APPROVED and ADOPTED this _______ day of _______________, 2006.

AYES:

NOES:

ABSENT

______________________________

MAYOR

ATTEST:

__________________________________

CAROLYNN A. PETRU, CITY CLERK

I HEREBY CERTIFY that the foregoing is true and correct copy of Ordinance No. ___ approved and adopted by the City Council of the City of Rancho Palos Verdes at a meeting thereof held on the _____ day of August, 2006.

__________________________________

CAROLYNN PETRU, CITY CLERK

ORDINANCE NO. ___-U

AN ORDINANCE OF THE CITY OF RANCHO PALOS VERDES AMENDING CHAPTER 3.30 OF THE RANCHO PALOS VERDES MUNICIPAL CODE RELATING TO THE APPLICATION OF THE TELEPHONE USER TAX AND DECLARING THE URGENCY THEREOF

WHEREAS, the City of Rancho Palos Verdes has lawfully imposed a utility user tax on telephone communication services since 1993; and

WHEREAS, for ease of administration and the convenience of the telephone communication service providers, the Rancho Palos Verdes 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; and

WHEREAS, administration and application of the Federal Excise Tax has been and continues to be the purview of the Internal Revenue Service; and

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 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; and

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-distance unless the charges vary in amount with both distance and elapsed transmission time; and

WHEREAS, it has always been and continues to be the City’s intent that its tax on telephone communication services be applied to: (1) long-distance charges which vary in amount either by elapsed transmission time or with distance, or both, and (2) to bundled long-distance and local charges provided under a single plan that does not separately state the charges for local telephone services; and

WHEREAS, the interpretation of the Federal Excise Tax embodied in IRS Notice 2006-50 is inconsistent with both the original legislative intent of the City’s telephone user tax and the manner in which the City has historically imposed its telephone user tax; and

WHEREAS, the City Council wishes to continue to impose the utility user tax on telephone communication services in a manner that is consistent with how it has been historically imposed; and

WHEREAS, the ordinance merely clarifies and restates the type of telephone service that is subject to the tax without reference to the Federal Excise Tax and does not increase the tax or change or expand the type of telephone services that are subject to the tax; and

WHEREAS, Rancho Palos Verdes Municipal Code Section 3.30.130 H expressly requires application of the utility user 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 for preserving the public peace, health or safety;

NOW, THEREFORE THE CITY COUNCIL OF THE CITY OF RANCHO PALOS VERDES DOES HEREBY ORDAIN AS FOLLOWS:

Section 1. Title 2 of the Rancho Palos Verdes Municipal Code is hereby amended by amending Section 3.30.020(I) of Chapter 3.30 to read as follows:

"I. ‘Telephone communication services’ means any local or long-distance telephone service for which there is a charge, regardless of the means or technology used to provide such service, those services as defined in sections 4251 and 4252 of the Internal Revenue Code and the regulations thereunder and shall include any telephonic type -–and quality of communication for the purpose of transmitting messages or information [including but not limited to voice, both analog and digital, including the use of the Internet Protocol ("IP") or other similar means for digitization 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. 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 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, and irrespective of whether charges for such service are based on time, distance, or any other basis. ‘Telephone communications services’ shall not include "private mobile radio service" (as defined in Part 20.3 of Title 47 of the Code of Federal Regulations) or "private mobile service" (as defined in 47 U.S.C.A. Section 332(d)(3)) and any other service that is not interconnected to the public switched network."

Section 2. Title 2 of the Rancho Palos Verdes Municipal Code is hereby amended by amending Section 3.30.040 of Chapter 3.30 to read as follows:

"Section 3.30.040 Telephone user tax.

A. There is imposed a tax upon the amounts paid for intrastate, interstate, including the District of Columbia, or international telephone communication services, including cellular telephone services and other telephone services that gain access to the public switched network by means of various technologies, by every person using such services in the city. The tax imposed by this section shall be at the rate of three percent of the charges made for such services and shall be paid by the person paying for such telephone services. Said tax shall apply to all such charges billed to a telephone account having a situs in the city, irrespective of whether a particular telephone service originates or terminates within the city. The situs shall be the service address, if known, otherwise the situs shall be the billing address.

B. Notwithstanding the provisions of subsection A of this section, the tax imposed under this section shall not be imposed upon any person for using the following intrastate, interstate, or international telephone communications services to the extent that the amounts paid for such services are exempt from or are not subject to the tax imposed under Section 4251 of Title 26 of the United States Code.:

(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, 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.

(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.

(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 1 70(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 3. The City of Rancho Palos Verdes has lawfully imposed a telephone users’ tax on every person (including businesses) in the City since 1993. The City’s telephone user tax applies to intrastate calls, interstate calls, and international calls, and applies equally to traditional as well as wireless telephone communication services. The projected revenues from the telephone user tax for Fiscal Year 2006-2007 are anticipated to be approximately $690,000 dollars if the telephone users tax continues to be applied in a manner consistent with the original legislative intent and the City’s long-standing practices. For ease of administration and for the convenience of the telephone communication services providers, the City’s ordinance cross-referenced federal statutory definitions from the Federal Excise Tax (FET). In addition, the City historically looked to the federal interpretation of the Federal excise Tax for guidance on the scope and application of the City’s utility users’ tax on telephone communication services. Until recently, the FET and the IRS’ application thereof appeared to be consistent with the City’s legislative intent with respect to the telephone user tax. However, a recent notice from the IRS (Notice 2006-50) interpreting the FET now jeopardizes collection of the City’s telephone user tax. 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 $460,000 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 revenues pay the costs associated with essential services, including public safety. For these reasons, it is necessary for the City to immediately adopt amendments to its utility user tax ordinance with respect to telephone communication services in order to remove all cross-references to the FET and to reaffirm that it will continue its long-standing practice of applying its tax to all telephone communication services irrespective of what technology is utilized to transmit the call and regardless of whether the charges for such telephone services are based on elapsed time, distance, or any other basis. Allowing the IRS Notice to apply to the City’s telephone user tax will risk the public health, safety and welfare of the City’s residents and the general public. It is therefore urgent that the enactment of modifications to the City’s utility user relating to telephone communication services become effective immediately to prevent adverse impacts to the public health, safety and welfare that result from unregulated peddling. Based on the foregoing, the City Council hereby finds that this ordinance is necessary for the immediate preservation of the public health, safety and welfare, hereby declares the facts constituting the urgency, and passes this ordinance by at least a four-fifths vote of the City Council. Accordingly, this measure is adopted immediately upon introduction pursuant to Government Code Section 36934 and shall take effect immediately pursuant to Government Code Section 36937(b).

Section 4. Because the provisions of the Rancho Palos Verdes Municipal Code, as amended by this ordinance, do not alter the amount of the City’s telephone user tax, do not expand the application of the tax, and are substantially the same as the previous provisions of the Code as they read immediately prior to the adoption of this ordinance, the amendments made by this ordinance shall be construed as continuations of the earlier provisions and not as new enactments.

Section 5. The City Council declares that, should any provision, section, paragraph, sentence, or word of this ordinance be rendered or declared invalid by any final action in a court of competent jurisdiction, or by reason of any preemptive legislation, the remaining provisions, sections, paragraphs, sentences and words of this ordinance shall remain in full force and effect.

Section 6. The City Clerk shall cause this Ordinance to be posted in three (3) public places in the City within fifteen (15) days after its passage, in accordance with the provisions of Section 36933 of the Government Code. The City Clerk shall further certify to the adoption and posting of this Ordinance, and shall cause this Ordinance and its certification, together with proof of posting, to be entered in the Book of Ordinances of the Council of this City.

Section 7. This Ordinance shall go into effect and be in full force and effect immediately upon adoption.

PASSED, APPROVED and ADOPTED this _______ day of _______________, 2006.

AYES:

NOES:

ABSENT

______________________________

MAYOR

ATTEST:

__________________________________

CAROLYNN A. PETRU, CITY CLERK

I HEREBY CERTIFY that the foregoing is true and correct copy of Ordinance No. ___U approved and adopted by the City Council of the City of Rancho Palos Verdes at a meeting thereof held on the _____ day of August, 2006.

__________________________________

CAROLYNN PETRU, CITY CLERK