Gonzalez v. City of Norwalk, 120417 CAAPP2, B276871

Court:California Court of Appeals
Attorney:Girardi & Keese, Thomas V. Girardi, Howard B. Miller, Robert Finnerty, and Alexandra T. Steele; Law Offices of Martin N. Buchanan and Martin N. Buchanan; Slovak, Baron, Empey, Murphy & Pinkey, Thomas S. Slovak and Stephen J. Schultz for Plaintiffs and Appellants. Richards, Watson & Gershon, B. Ti...
Judge Panel:We concur: LAVIN, J., BACHNER, J.
Opinion Judge:EDMON, P. J.
Party Name:ALFRED A. GONZALEZ et al., Plaintiffs and Appellants, v. CITY OF NORWALK, Defendant and Respondent.
Case Date:December 04, 2017
Docket Nº:B276871
 
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ALFRED A. GONZALEZ et al., Plaintiffs and Appellants,

v.

CITY OF NORWALK, Defendant and Respondent.

B276871

California Court of Appeals, Second District, Third Division

December 4, 2017

         APPEAL from a judgment of the Superior Court of Los Angeles County No. BC553119, John Shepard Wiley, Jr., Judge. Affirmed.

          Girardi & Keese, Thomas V. Girardi, Howard B. Miller, Robert Finnerty, and Alexandra T. Steele; Law Offices of Martin N. Buchanan and Martin N. Buchanan; Slovak, Baron, Empey, Murphy & Pinkey, Thomas S. Slovak and Stephen J. Schultz for Plaintiffs and Appellants.

          Richards, Watson & Gershon, B. Tilden Kim and Saskia T. Asamura; Daley & Heft, Scott Noya and Lee H. Roistacher for Defendant and Respondent.

          EDMON, P. J.

         In 2003, Norwalk voters approved a 5.5 percent user tax on all municipal utilities, including telephone service. As adopted, the telephone user tax applied to most telephone service, but expressly excluded services “exempt from or not subject to... the tax imposed under Section 4251 of the Internal Revenue Code.” (Norwalk Municipal Code, § 3.36.060, subd. (D).)

         When the voters approved the telephone user tax in 2003, Internal Revenue Code section 4251 exempted some very limited categories of telephone users (such as service members in combat zones and certain nonprofit organizations), but otherwise applied to all telephone service. (26 U.S.C. § 4253.) By 2006, however, the federal courts and the Internal Revenue Service had interpreted section 4251 to exclude many cell phone and landline plans from the federal tax. Accordingly, in 2007, the Norwalk City Council (City Council) adopted Ordinance No. 07-1586 (the 2007 ordinance), which deleted the reference to Internal Revenue Code section 4251 from the Norwalk Municipal Code in order “to impose the utility user tax on telephone communication services in a manner that is consistent with how it has been historically imposed.”

         Plaintiffs Alfred Gonzalez and David Reynoso (plaintiffs) are residents of the defendant City of Norwalk (Norwalk or City) who pay the telephone user tax through their cellular telephone providers. In 2014, plaintiffs filed a complaint asserting that the 2007 ordinance violated Propositions 62 and 218, which prohibit local governments from imposing, extending, or increasing taxes without voter approval. Plaintiffs urged that when Norwalk voters approved a utility user tax in 2003, they “specifically voted not to tax services that were exempt from taxation under” Internal Revenue Code section 4251. Thus, plaintiffs suggested, eliminating the ordinance's reference to the Internal Revenue Code had the effect of imposing, extending, or increasing taxes within the meaning of Propositions 62 and 218.

         The City demurred, asserting that the 2007 ordinance did not violate Propositions 62 or 218 as a matter of law. The trial court sustained the demurrer without leave to amend and subsequently entered a judgment of dismissal.

         We affirm. While the 2007 ordinance made a technical change to the Norwalk Municipal Code, it did not impose, extend or increase the telephone tax. Accordingly, as a matter of law the 2007 ordinance did not violate Propositions 62 or 218.

         BACKGROUND

         I. In 2003, Norwalk Voters Adopt Municipal Code Section 3.36.060, Which Imposes a 5.5 Percent Tax on Telephone User Fees

         In 1992, the City enacted a user tax on various utilities, including telephone service (utility user tax).

         In about 2003, pursuant to a stipulation entered into in Howard Jarvis Taxpayers Ass'n and Jerry Ori v. City of Norwalk, et al., Case No. VC038845, the Norwalk City Council (City Council) agreed to submit the utility user tax to the voters for ratification. Thereafter, on July 1, 2003, the City Council adopted Resolution No. 03-40, setting a special election and providing that Ordinance No. 1541 (referred to in the ballot materials as Measure A) would be submitted to the voters for approval.

         In pertinent part, Ordinance No. 1541 (hereafter, Measure A or the 2003 initiative) provided as follows:

         “The People of the City of Norwalk do ordain as follows:

         “Section A. Chapter 3.36 of the Norwalk Municipal Code (‘Code') entitled ‘Utility User Tax' which applies a five and one-half percent (5½%) tax rate on all telephone, electric and gas charges in the City of Norwalk is hereby ratified and approved as set forth in Chapter 3.36 of the Code as of July 1, 2003, attached hereto as Exhibit ‘A' and incorporated herein by this reference[, ] and the City is hereby authorized to continue to impose and collect the utility tax as provided by the terms set out in Chapter 3.36 of the Code.

         “Section B. In no event may the City Council alter the provisions of section 3.36.060, 3.36.070, and 3.36.080 to increase the five and one-half percent (5½%) rate on telephone, electric and gas use without the approval of a majority of voters of the City, voting on the question of the tax rate; provided, however, the City Council is hereby authorized to amend any other provisions of Chapter 3.36 of the Code by three (3) affirmative votes of its members to, without limitation, carry out the general administrative purposes of Chapter 3.36 of the Code to reasonably implement the collection of the utility user tax through public utilities and other service suppliers as authorized in Chapter 3.36 of the Code.

         “Section C. It is the intent of the voters to apply the provisions of Chapter 3.36 of the Code to the fullest extent permitted by the law to ratify the City's previous and continued collection of the tax.”

         On September 30, 2003, 64.6 percent of Norwalk voters approved Measure A, which was codified in pertinent part as Norwalk Municipal Code section 3.36.060. Two provisions of section 3.36.060 are relevant here:

         (1) Section 3.36.060, subsection A provided: “There is imposed a tax on the amounts paid for any interstate, intrastate and international telephone communication services, including cellular telephone services and other telephone services that gain access to the public switched network (PSN) by means of various technologies, by every person in the City using such services. The tax imposed by this section shall be at the rate of five and one half percent of the charges made for such services.”

         (2) Section 3.36.060, subsection D provided: “Notwithstanding the provisions of subsection A of this section, the tax imposed under this section shall not be imposed upon any person for using intrastate, interstate and international telephone communication services to the extent that the amounts paid for such services are exempt from or not subject to... the tax imposed under Section 4251 of the Internal Revenue Code.”

         II. Internal Revenue Code Sections 4251 and 4252

         When the City of Norwalk adopted Measure A in 2003, section 4251 of the Internal Revenue Code (IRC) imposed a tax (sometimes referred to as a “federal excise tax”) on, among other things, “local telephone service” and “toll telephone service.” (26 U.S.C. § 4251(b)(1)(A)-(B).) Section 4252(b) of the IRC defined “[t]oll telephone service” as:

         “(1) a telephonic quality communication for which (A) there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication and (B) the charge is paid within the United States, and

         “(2) a 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.” (26 U.S.C. § 4252(b), italics added.)1

         Until 2006, the Internal Revenue Service (IRS) interpreted sections 4251 and 4252 of the IRC to apply to all telephone service, with the limited exception of those services specifically exempt pursuant to IRC section 4253.2 (Notice 2005-79, 2005-46 I.R.B. 952-953.) In 2005 and 2006, however, telephone service providers and customers challenged the application of IRC sections 4251 and 4252 to long distance telephone plans whose fees did not vary according to both “the distance and elapsed transmission time of each individual communication”-e.g., to cell phone plans that charged customers according to the length of calls, without regard to the distance of the transmission. Five federal circuit courts agreed with the challengers, holding that IRC sections 4251 and 4252 did not apply to such plans. (Reese Bros., Inc. v. United States (3d Cir. 2006) 447 F.3d 229; Fortis,...

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