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Utility User Tax 2 BACKGROUND July 28, 2008 Originally adopted in 1987 the City's UUT currently imposes a rate of 6% on telephone, electrical, gas and video (cable TV) service. Revenues generated by the UUT on an annual basis total approximately $10.1 million. The UUT has been amended several times over the years with the most recent update taking place in 2004. Technological changes over the years in the telecommunication industry as well as significant legal challenges to the Federal Excise Tax (FET), which is an element of many of local UUT ordinances, including San Leandro's, put this revenue source at risk. More specifically, the City raises approximately $3.3 million from the Telephone Users tax of which $3.0 million could be at risk. Given these developments staff is recommending that the City update its UUT for both technological developments and to eliminate reference to the FET as a basis for applying the City's UUT for telephone services. The FET or Federal Excise Tax Issue In recent years the UUT on telephone services has come under legal challenge. More specifically, many California UUT ordinances, including the City of San Leandro's, are based on the League of California Cities model ordinance developed in the 1970's. For ease of administration, the model ordinance (and San Leandro's ordinance) referenced or mirrored the Federal Excise Tax (FET) and applied the tax to the same base (long distance and local) as the FET. This approach worked well for many years and the efficiencies gained served the taxpayers, the City and the telephone companies. Recent developments concerning the FET now place this model and the City's UUT for telephone services at risk. This is of particular interest to the City as the revenue raised from the UUT on telephone services is approximately $3.3 million annually. With the growth of wireless communications, anational dispute arose regarding the application of the FET to long distance calls. More specifically, several court cases at the federal level have determined that the FET does not apply to long distance calls unless the service is based on both time and distance. Today, many calls are based on time only, or in the case of cellular calls, they are based on a flat monthly rate. This development alone significantly reduces the value of the FET as a component of a local UUT. To further complicate matters, in May 2006, the Treasury Secretary issued an expansive ruling that held that the FET only applies to local exchange services, and specifically found that wireless; Voice over Internet Protocol (Vo1P), traditional long distance and credit calls are all no longer taxable. Whether or not this ruling applies to local UUT ordinances, and hence the City of San Leandro, is the subject of three class action lawsuits against UUT public agencies in the Los Angeles area (City and County of Los Angeles and City of Long Beach). A trial court decision could be reached in 2008, although appeals could take longer to resolve. The City has not been named in any such litigation, but could become the target of similar litigation. The City may also be subject to refund claims in the advent of an adverse court ruling on the FET issue.