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<br />outcome, the lesson to be learned is that ex-
<br />pensive lawsuits can be avoided if a city's UU
<br />ordinance is amended to include proper defi-
<br />nitions of the scope of the tax. One might add,
<br />this does not mean expanding the tax base
<br />(and triggering Prop. 218), but rather clarify-
<br />ing the existing scope of the tax with clear
<br />definitions. The UUT ordinances of the cities
<br />of Vallejo and Richmond are examples of prop-
<br />erly defining the terms "electricity," "gas" and
<br />"telecommunications" in a deregulated or re-
<br />structured utility environment (see "For More
<br />Information," facing page).
<br />Nexus and Tax Collection Responsibility
<br />In order for a tax or collection responsibility to
<br />be imposed legally, "nexus" must exist Nexus
<br />simply means there are sufficient contacts or
<br />activities between the city and the taxpaying
<br />or tax-collecting parties to justify the imposi�
<br />tion of the tax obligation. Clearly, in the rase of
<br />the UUT, there is adequate nexus for impos-
<br />ing the tax, since the tax is based upon the
<br />physical use of the utility service within the city,
<br />and thus, physical presence (often a common
<br />trait of nexus) exists. Regarding the taxcolleo-
<br />tion responsibility, however, adequate nears
<br />can be more problematic. Without question,
<br />nexus exists for the local distribution compa-
<br />nies that have physical facilities within the
<br />streets ofthe city However, whataboutthe new
<br />third -party commodity marketers, such as
<br />ESPs, that have no physical presence within
<br />the city, and may in fact, be located outof state?
<br />Can they be required to collect a city+s 1RTI7
<br />That depends on whether one subscribes to
<br />the physical presence versus economic pres-
<br />ence or agency theories of legal nexus. Unfor-
<br />tunately, until the U.S. Supreme Courtprovides
<br />clear direction, this is a gray area of the law. To
<br />deal with this potential problem, a UUT ordi-
<br />nance should be amended to specify that the
<br />collection obligation falls to the taxpayer (i.e.,
<br />self - collection) in the event that insufficient
<br />nexus exists to require the utility marketer (or
<br />ESP) to do so.
<br />Enforcement Programs: Notice and
<br />Compliance Reviews
<br />Without question, the opportunity for UUT
<br />'leakage" is great due to ambiguities in the or-
<br />dinances, the large number of providers and
<br />services, human error and other causes. The
<br />best antidote for this malady is an updated UUT
<br />ordinance coupled with a good enforcement
<br />program. Enforcement begins by simply giv
<br />ing accurate information to the hundreds of
<br />potential utility providers regarding the re-
<br />quirements of the UUT ordinance. One method
<br />is sending aletter, alongwith acopyofthe city's
<br />UUT ordinance, advising every potential pro-
<br />vider of the city's local tax requirements. An-
<br />other approach is to place the city's ordinance
<br />and other pertinent information on a website.
<br />For an example, the League has a special aec-
<br />tion on its website that allows your city to pro-
<br />vide pertinent information to the ESP& It is also
<br />important to keep in mind that state law now
<br />requires the city to give written notification to
<br />the utility service providers of any UUT rate
<br />change or tax base change (see Cal. Pub. Utd.
<br />Code section 799).
<br />Another means of enforcement is through a
<br />compliance review or audit of the UUT pay-
<br />ments from the various responsible parties. A
<br />thorough compliance review will:
<br />• Verify whether the customer is correctly
<br />identified as residingwithin or outside of the
<br />taxing jurisdiction;
<br />• Determine whether exempt customers are
<br />actually entitled to an exemption;
<br />• VerdythattheUUrispropelybeingapphed,
<br />calculated and remitted according to the
<br />UUT ordinance; and
<br />• Assure thatallserviceproviders and seJ €rn4
<br />lectors are properly collecting and remitting
<br />the UUT to the city.
<br />The compliance review can be performed
<br />by city staff or an outside firm, provided
<br />that they possess the technical expertise
<br />and are committed to the task Unquestion-
<br />ably, there are a number of hurdles that
<br />must be overcome, including confidential-
<br />ity of customer records, stonewalling tac-
<br />tics by uncooperative utilities, and gaining
<br />access to computerized data that can be
<br />meaningfully analyzed. Some compliance
<br />reviews can take years to complete. Nev-
<br />ertheless, a good enforcement program will
<br />greatly benefit a city by assuring that it is
<br />receiving its full share of UUT revenues,
<br />by avoiding large refund claims due to
<br />sloppy collection practices, and by acting
<br />as a deterrent to fraud and complacency
<br />by taxpayers and tax collectors.
<br />Watch for State and Federal Legislation
<br />Anotherthreatto acity's UUrrevenues is state
<br />and federal legislation offering specialtaxtreat
<br />ment to certain segments of a utility industry.
<br />Two years ago, the direct broadcast satellite
<br />industrysuccesshillylobbiedfor an exemption
<br />from local taxation in the federal Telecommu-
<br />nications Act of 1996. As a result, able televi-
<br />sion companies now complain to Congress that
<br />they are treated unfairly noting that while they
<br />are required to pay a franchise fee and their
<br />customers are subject to a UUT, the direct
<br />broadcast satellite firms and their customers
<br />are notsubiectto the same local requirements.
<br />This is a problem.
<br />This year, there are both state and federal
<br />bills (AB 1614, HR 1054, and S 442) that would
<br />exempt from state and local taxation all sorts
<br />of activity that is conducted over the Internet
<br />One area of particular concern is the use of
<br />the Internet for long distance telephone com-
<br />munication. Every indication is that this will
<br />be a major form of telecommunications for the
<br />future. However, if this service is given spe-
<br />cial tax treatment because it is related to the
<br />Internet, citizens who use traditional long dis-
<br />tance service (probably those who can least
<br />afford special computerized equipment) will
<br />be unfairly burdened with the local UUT.
<br />Again, care must be taken that legislation does
<br />not create special tax subsidies or exemptions
<br />under local law.
<br />Another bill this year, SB 1519, would ebnft
<br />nate the UUT on prepaid calling cards, an-
<br />other fast - growing telecommunications prod-
<br />uct, and make it subject to the state sales tax.
<br />Naturally, those cities with UUT will suffer a
<br />loss of net revenue if such legislation were
<br />enacted. Although the League has been very
<br />active in opposing such legislation, cities with
<br />UUT ordinances need to give special support
<br />to the Leagues efforts since their existing
<br />UUr revenues are at risk-
<br />Unwarranted Fear of Proposition 218
<br />Can Be Costly
<br />As previously mentioned, many cities are re-
<br />luctant to make any change to theirUUTordi-
<br />nances out of fear of triggering the election
<br />requirement of Prop. 218. The fact is, only
<br />those ordinance changes that increase the
<br />UUT or expand the tax base are subject to an
<br />electoral approval under Prop. 218. Ibis means
<br />a city can amend its UUT ordinance without
<br />triggering Prop. 218 by providing clarifications
<br />in the following areas:
<br />• The scope of the existing tax base, includ-
<br />ing an enumeration of unbundled service
<br />components;
<br />• The tax collection obligations of utility pro-
<br />viders, utility marketers and utility custom-
<br />ers; and
<br />• Procedural and administrative improve-
<br />ments to the UUT ordinance.
<br />Public officials should checkwifh the'rown
<br />legal counsel regarding the specific Prop. 218
<br />implications of any proposed amendments to
<br />any city or agency's UUT.
<br />Conclusion
<br />Clearly, cities need to enact such changes, and
<br />will likely need to do so on in ongoing basis
<br />to stay up with the constant changes in the
<br />various utility industries and to protect the vt
<br />ability of their UUT ordinances. It is a big chal-
<br />lenge, but the stakes — $1.2 billion in local
<br />tax revenue — are too high not to jealously
<br />guard and maintain this important local rev-
<br />enue source through occasionalordfnance up-
<br />dates, an effective enforcementprognun, and
<br />opposition to legislative threats.
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