Bosworth v. Pledger
| Decision Date | 03 June 1991 |
| Docket Number | No. 89-345,89-345 |
| Citation | 810 S.W.2d 918,305 Ark. 598 |
| Parties | Hugh H. BOSWORTH, Jr., et al., Appellants, v. James C. PLEDGER, Commissioner of Revenues, et al., Appellees, City of Fayetteville, Arkansas, Arkansas Telephone Association, Inc., Intervenors. |
| Court | Arkansas Supreme Court |
Eugene G. Sayre, Little Rock, Ark., for appellants.
Rick L. Pruett, Carol Arnold, Robert K. Jackson, Gregory Hopkins, Michael C. O'Malley, N.M. Norton, W.W. Elrod, II, Little Rock, Arthur Hudkins, Springfield, Mo., Frank J. Wells, III, Joseph Morphew, Lawrence R. Chisenhall, Little Rock, James M. McCord, Fayetteville, Scotty Shively, Larry Vaught, Nelwyn Davis, Amy Stewart, Pat Moran, Charles L. Schlumberger, Little Rock, for appellees.
This case involves the constitutionality of the 1987 Arkansas legislative enactment which extended the state sales tax to certain types of long distance telecommunications service while excepting others. In this class action challenge, the appellants, who are telephone subscribers upon whose telephone service the tax was imposed, argued that the tax was unconstitutional, on both First Amendment and Equal Protection Clause grounds. Appellees represented the state and local governmental agencies responsible for collecting the disputed tax as well as those providers of the long distance service involved, e.g., AT & T Communications, Inc., MCI Telecommunications Corporation, and U.S. Sprint Communications Company. The chancellor held that the law was a valid and legitimate exercise of the state's power to tax and upheld its constitutionality. We affirm.
Prior to the enactment of Section 2 of Act 27 of 1987 [Ark.Code Ann. § 26-52-301(3) (Supp.1989) ], the Arkansas Gross Receipts Tax, or sales tax, was imposed only on intrastate long distance service. Interstate and international service were not subjected to the tax. In 1987 the law was changed, and the tax was imposed on all long distance telephone service billed to an Arkansas telephone number, excepting from the tax, however, two types of service: (1) private line service which is not accessible by the public, and (2) that service commonly known as WATS service. The relevant portions of section 26-52-301 provide as follows:
There is levied an excise tax of three percent (3%) upon the gross proceeds or gross receipts derived from all sales to any person of the following:
...
(3)(A)(i) Service by telephone, telecommunications, and telegraph companies to subscribers or users, including transmission of messages or images, whether local or long distance.
(ii) Taxable services shall include basic local service and rental charges, including all installation and construction charges and all service and rental charges having any connection with transmission of any message or image.
(iii) Except as provided in subdivision (3)(iv) of this section, taxable long distance services shall include:
(a) Long distance messages which originate and terminate within this state:
(b) Interstate long distance messages which originate within this state and terminate outside this state and are billed to an Arkansas telephone number or customer location;
(c) Interstate long distance messages which originate outside of this state and terminate within this state and are billed to an Arkansas telephone number or customer location.
(iv) However, the following services shall not be subject to the tax:
(a) Any interstate private communications service which is not accessible by the public;
(b) Any interstate service which allows access to private telephone lines and which is not accessible by the public; or
(c) Any interstate-wide area telecommunications service or other similar service which entitles the subscriber to make or receive an unlimited number of communications to or from persons having telecommunications service in a specified area which is outside the state in which the station provided with this service is located.
(v) This tax shall apply to all customer access line charges billed to an Arkansas telephone number. Access line charges are those charges associated with or for access to the long distance network. However, access or other telecommunication services provided to telephone, telegraph, or telecommunications companies which will be used to provide telecommunications services shall not be subject to this tax.
Appellants do not challenge the exception for private line service, contending only that the tax was improperly imposed on, and thus discriminated against, Arkansas subscribers to long distance telephone service not of the WATS variety.
Although the record below contains much evidence on the complex aspects of telecommunications technology and rate structure, the chancellor found that the differences between the two types of service, one taxed and the other not, could be described as follows:
(1) "Regular" long distance service (sometimes called MTS service) is billed on a per call basis with the charge for each call generally depending on the day of the week and the time of the day at which the call is made, the geographic distance of the call, and the temporal length of the call. This is the most common type of long distance service and is usually subscribed to by those who may, in addition, use WATS service. This service is subjected to the sales tax.
(2) Wide-area telecommunications service, commonly known as WATS, is where the subscriber is charged a flat fee for the service, receiving then a lower rate for each call made or received. This category is broken down between incoming WATS, or "800 service," and outgoing WATS. This service is not subjected to the tax.
The chancellor also found that "[t]he main difference between WATS and MTS is in rate design," and that both services are available to any customer, with no eligibility requirements. Appellants, plaintiffs below, all subscribe to "regular" long distance service and none to WATS service. All parties generally agreed that a customer must have a high volume of telephone usage in order to justify economically the use of WATS.
Appellants' constitutional challenge to Section 2 of Act 27 of 1987 is based upon the state's purported violation of the equal protection provisions of both the Arkansas 1 and U.S. 2 Constitutions. Their argument, made in the trial court, that the statute violated the Commerce Clause of the U.S. Constitution, was definitively decided against them during the course of this litigation by the U.S. Supreme Court in Goldberg v. Sweet, 488 U.S. 252, 109 S.Ct. 582, 102 L.Ed.2d 607 (1989) and was not argued on appeal. Appellants' argument that their due process rights under the U.S. and Arkansas Constitutions were violated because the statute was unclear, or void for vagueness, was not properly presented at the trial court level, nor addressed by the chancellor in her findings of fact and conclusions of law. Likewise, the chancellor did not address appellants' point, argued on appeal, that the statute was ambiguous. Thus, neither of these latter issues will be addressed by this court. Shamlin v. Shuffield, 302 Ark. 164, 787 S.W.2d 687 (1990).
We are called upon to answer three questions in resolving the constitutional issues presented by this case: (1) Does the imposition of the tax discriminate against or among individuals? (2) If so, what standard is to be applied in testing the legitimacy of the law, a "rational basis" standard or one which requires the showing of a compelling state interest? (3) And, finally, does the statute meet the requisite standard? These questions will be addressed in turn.
In deciding whether an equal protection challenge is warranted, there must first be a determination that there is a state action which differentiates among individuals. "No state shall ... deny to any person within its jurisdiction the equal protection of the laws." U.S. Const. amend. 14. Appellees argue that the threshold element of classification of individuals is not met because the only distinction made by the statute is between services, not people. Appellees cite Potts v. McCastlain, 240 Ark. 654, 401 S.W.2d 220 (1966), cert. denied, 385 U.S. 946, 87 S.Ct. 319, 17 L.Ed.2d 225 (1967), where this court upheld a privilege tax imposed on taxicabs but not on other vehicles using the same streets. They argue that as long as all "regular" long distance subscribers are taxed the same, just as all taxicab operators were taxed the same, there is no differentiation among individuals, all being treated equal. In addition, appellees cite the chancellor's finding that "all three types of service--MTS, private line, and WATS--are available to any customer; there are no eligibility requirements," to bolster their argument that this is a tax imposed on services, not individuals.
Although it is true that the tax is imposed on one type of long distance service and not another, it is also true that taxes are paid by individuals, and the record reflects that subscribers to "regular" long distance service pay the tax, while subscribers to WATS service do not. This disparate treatment under the statute of classes of individuals is sufficient to raise the equal protection challenge and require our further analysis.
Once equal protection is invoked, we must then decide what standard of analysis applies. In other words, we must determine whether it is necessary only to show some rational basis for the classification, or whether the statute impinges on a fundamental right or is based on a suspect criterion, in which case the state is required to prove not only that the statute is reasonable but also that it promotes a compelling state interest. Appellants argue for the application of the stricter standard because their constitutional rights of free speech are imperiled; appellees contend reasonableness alone is required.
The U.S. Supreme Court recognized the broad discretion legislatures have in formulating tax policy in Madden...
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