Qwest Corp. v. Iowa State Bd. of Tax Review

• Decision Date: 12 April 2013
• Docket Number: No. 11–1543.,11–1543.
• Citation: 829 N.W.2d 550
• Parties: QWEST CORPORATION, Appellee, v. IOWA STATE BOARD OF TAX REVIEW, Appellant.
• Court: Iowa Supreme Court

829 N.W.2d 550

QWEST CORPORATION, Appellee,

v.IOWA STATE BOARD OF TAX REVIEW, Appellant.

No. 11–1543.

Supreme Court of Iowa.

April 12, 2013.

Thomas J. Miller, Attorney General, Donald D. Stanley, Jr., Special Assistant Attorney General, and James D. Miller, Assistant Attorney General, for appellant.

Bruce W. Baker of Nyemaster Goode, P.C., Des Moines, Richard G. Smith of Hawley Troxell Ennis & Hawley LLP, Boise, Idaho, and Roy A. Adkins, Denver, Colorado, for appellee.

MANSFIELD, Justice.

This administrative review proceeding requires us to decide whether imposing a tax on the Iowa-based personal property of incumbent local exchange carriers, but not on that of competitive long distance and wireless service providers, violates article I, section 6 of the Iowa Constitution. We conclude it does not. The differential tax treatment of these enterprises is rationally related to legitimate state interests in encouraging the development of new competitive telecommunications infrastructure, while raising revenue from those providers that historically had a regulated monopoly and continue to enjoy some advantages of that monopoly. Accordingly, we reverse the judgment of the district court and uphold the Iowa State Board of Tax Review's assessment on Qwest Corporation.

I. Background Facts and Proceedings.

The facts in this case are largely undisputed. A generation ago, the American Telephone & Telegraph Company (AT&T) had a dominant position nationally in both local and long-distance telephone service. In Iowa, it did business under the name Northwestern Bell. Most Iowans obtained their local and long-distance phone service through Northwestern Bell. The company owned and maintained lines that ran from Iowa residences and businesses into central offices, where switching equipment was used to route phone calls toward their ultimate destination. Those Iowans who did not get their phone service from Northwestern Bell primarily relied on another local monopoly, such as GTE.

As the result of a lengthy antitrust case, a consent decree was entered in 1982, which ended AT&T's national industry dominance. The decree took effect in 1984 and required AT&T to divest its local telephone businesses. This led to the formation of seven independent regional Bell operating companies, one of which was U S West, Inc., the predecessor to Qwest Corporation. U S West thereafter provided local landline telephone service in fourteen states, including Iowa and the rest of the former Northwestern Bell territory.

Although the divestiture was the death knell for a single telephone company's predominance in this country, it did leave in place a system where local phone service was generally provided by monopoly carriers that had the existing infrastructure to do so (e.g., central offices, switches, and customer phone lines). To address this situation, Congress and the states enacted legislation in the mid-1990s. The Telecommunications Act of 1996 (Telecom Act) required incumbent local exchange carriers (ILECs) like U S West to provide interconnection to their networks and to offer their network elements, such as the hardwired phone lines that entered homes, on an “unbundled” basis to other carriers (CLECs) that sought to enter the marketplace and compete with them. See Telecommunications Act of 1996, Pub.L. 104–104, 110 Stat. 56 (codified in scattered sections of 47 U.S.C.)

Complementing the Telecom Act was House File 518, which had been passed by our general assembly the year before. See 1995 Iowa Acts ch. 199 (current version at Iowa Code §§ 476.95–.101 (2013)). Like the Telecom Act, House File 518 required any ILEC to provide “interconnection” and to make available the “unbundled essential facilities of its network.” See id.§ 12 (current version at Iowa Code § 476.101(4)( a )(1)). The section entitled “Findings—statement of policy,” expressly sets forth certain purposes of the act, as follows:

1. Communications services should be available throughout the state at just, reasonable, and affordable rates from a variety of providers.

2. In rendering decisions with respect to regulation of telecommunicationscompanies, the board shall consider the effects of its decisions on competition in telecommunications markets and, to the extent reasonable and lawful, shall act to further the development of competition in those markets.

3. In order to encourage competition for all telecommunications services, the board should address issues relating to the movement of prices toward cost and the removal of subsidies in the existing price structure of the incumbent local exchange carrier.

4. Regulatory flexibility is appropriate when competition provides customers with competitive choices in the variety, quality, and pricing of communications services, and when consistent with consumer protection and other relevant public interests.

5. The board should respond with speed and flexibility to changes in the communications industry.

6. Economic development can be fostered by the existence of advanced communications networks.

Iowa Code § 476.95. Thus, the legislature's stated purposes for the act can be interpreted as enhancing the availability of affordable communication services throughout the state, encouraging competition for all telecommunication services, and fostering economic development.

Prior to 1995, ILECs in Iowa like Northwestern Bell/U S West had been subject to rate-base/rate-of-return regulation. See 1963 Iowa Acts ch. 286, § 1 (current version at Iowa Code § 476.8 (2013)). Under this system of regulation, the incumbent carrier essentially received a guarantee that its costs plus a reasonable rate of return would be covered by the tariffs paid by Iowa customers, so long as the company's costs were reasonable. See id. House File 518, however, gave local phone companies the option of exiting from this form of regulation by submitting a “price regulation plan” that, if approved, would set forth the price for “basic communications services” subject to permitted adjustments. See 1995 Iowa Acts ch. 199, § 8 (current version at Iowa Code § 476.97). In 1998, U S West opted for such a voluntary price regulation plan and, consequently, was no longer subject to rate-base/rate-of-return regulation.

The Telecom Act and its Iowa counterpart resulted in an increased CLEC presence in Iowa. From 2000 to 2006, for example, CLEC access lines in Iowa increased from 193,000 to 260,000. But, in the meantime, other competitors for local residential and business service entered the marketplace—cable telephony, voice over internet protocol (VOIP), and wireless service. While the record here does not detail the actual inroads made by each of these competitors on traditional landline service, it is clear that a number of Iowans have swapped their ILEC service for one of these three alternatives. From 2000 to 2006, ILEC access lines declined from 1,759,000 to 1,422,000—a greater decline than the corresponding increase in CLEC lines.

As Iowans know from their personal experience, the wireless industry has grown significantly in recent years. From 2000 to 2006, the number of wireless service subscriptions in Iowa increased from 975,000 to 1,821,000. A wireless phone is essentially a two-way radio. Wireless communication is based on radio signals as it travels from the handset to the cell tower (or vice versa). After reaching the cell tower, the signal travels by high-speed data circuit ¹ to a mobile switching office (MSO). The wireless provider's MSO uses switches to route calls; those switches, however, may contain additional functionality that an ILEC's switches do not need to have. From the MSO, the communication may travel on the ILEC's network—and will definitely do so if the person being spoken to is an ILEC customer.

Historically, Iowa has centrally (i.e., at the state level) assessed for property tax purposes both the real and the personal property of traditional telephone companies such as Northwestern Bell and its successors U S West and Qwest. This system dates back approximately a century and continues to this day. See Iowa Code § 1330 (1913) (“Said assessment shall include all property of every kind and character whatsoever, real, personal, or mixed, used by said companies in the transaction of telegraph and telephone business....”); id. § 433.4 (2013) (containing similar language). Thus, ILECs are required to pay property tax in Iowa on the switches, computers, and other equipment and personal property they use to provide local telephone service in Iowa. Historically, this tax regime applied to “[e]very telegraph and telephone company operating a line in this state.” See id. § 1328 (1913) (current version at id. § 433.1 (2013)).

As we noted in Heritage Cablevision v. Marion County Board of Supervisors, “In times past Iowa statutes provided for an extensive personal property tax.” 436 N.W.2d 37, 37 (Iowa 1989). However: “In 1973 the general assembly adopted a scheme under which most personal property would no longer be taxed.” Heritage Cablevision, 436 N.W.2d at 37;see also 1973 Iowa Acts ch. 255, § 1 (codified as Iowa Code § 427A.11 (1975)) (phasing out personal property tax). Yet this phaseout did not apply to telephone companies and certain other enterprises. SeeIowa Code § 427A.1(1)( h) (2013) (indicating that “[p]roperty assessed by the department of revenue pursuant to sections 428.24 to 428.29, or chapters 433, 434, 437, 437A, and 438” shall be assessed as real property). Northwestern Bell, GTE, and other telephone companies continued to have to pay property tax on their switches, computers, and other equipment and personal property in Iowa. Nonetheless, as Qwest's counsel acknowledged at oral argument in this case, so long as the telephone company remained subject to rate-base/rate-of-return regulation, it was allowed to include those tax obligations in its rate base and, thus, ultimately to pass them along to Iowa consumers.

House File 518...