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REPORT 8E Page 1 To the Honorable Mayor and City Council From the City Manager July 9, 2007 Subject Introduction of Ordinance No._ adding Article VIII to Chapter 32 of the Redwood City Municipal Code with respect to a Communication Users Tax. Adoption of resolution authorizing submission of Ordinance No._ adding Article VIII to Chapter 32 of the Redwood City Municipal Code with respect to a Communication Users Tax to the voters of the City of Redwood City at the Consolidated General Municipal Election of November 6,2007. Direct the City Attorney to prepare impartial analysis with respect to Ordinance No. Authorize Council Members to sign ballot arguments in favor of Ordinance No._, Recommendation 1. Introduce Ordinance No._ adding Article VIII to Chapter 32 of the Redwood City Municipal Code with respect to a Communication Users' Tax. 2. Adopt a resolution authorizing submission of Ordinance No._ adding Article VlIl to Chapter 32 of the Redwood City Municipal Code with respect to a Communication Users Tax to the voters of the City of Redwood City at the Consolidated General Municipal Election of November 6,2007. 3. Direct the City Attorney to prepare an impartial analysis with respect to Ordinance No. 4. Authorize Council Members to sign the ballot arguments in favor of Ordinance No._. Background The City's Utility Users Tax was first enacted in 1983, the proceeds of which have been used to maintain the storm drain system, repair and replace broken sidewalks, repaving of city streets, planting and preserving of street trees and other capital projects. The current tax rate of 5% is applied to gas, electricity, cable television and intrastate telephone charges. Approximately 33% of all revenues from the utility user's tax are derived from taxable telecommunication and video services. For the past several years, there have been a number of challenges at both the federal and state levels concerning the legal viability of portions of the telecommunication component of the city's utility user's taxes. In May 2006, the Treasury Secretary issued an expansive ruling that held that the Federal Excise Tax (FET) only applies to local exchange services, and specifically found that the FET dos not apply to long distance wired service and other services that bundle local and long distance service such as VoIP, wireless, and credit card calls. The key legal issue is whether the reference to the FET in the city's ordinance means that the City's UUT is also subject to the May 2006 ruling, which would cause the City to lose about 75% of its existing $2.9 million of telecommunications UUT. This issue is now being litigated in at least three class action lawsuits in the Los Angeles area. 1