Southwestern Bell Telephone Co. v. Combs

• Decision Date: 28 October 2008
• Docket Number: No. 07-07-0172-CV.,07-07-0172-CV.
• Parties: SOUTHWESTERN BELL TELEPHONE COMPANY, Appellant, v. Susan COMBS, Successor-in-Interest to Carole Keeton Strayhorn, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General for the State of Texas, Appellees.
• Court: Texas Court of Appeals

270 S.W.3d 249

SOUTHWESTERN BELL TELEPHONE COMPANY, Appellant, v. Susan COMBS, Successor-in-Interest to Carole Keeton Strayhorn, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General for the State of Texas, Appellees.

No. 07-07-0172-CV.

Court of Appeals of Texas, Amarillo.

October 28, 2008.

Rehearing Overruled December 30, 2008.

Ray Langenberg, Mark W. Eidman, Scott, Douglass & McConnico, L.L.P., Austin, TX, for Appellant.

Greg Abbott, Attorney General, Christine Monzingo, Assistant Attorney General, Austin, TX, for Appellees.

Before QUINN, C.J., and CAMPBELL and PIRTLE, JJ.

OPINION

PATRICK A. PIRTLE, Justice.

Appellant, Southwestern Bell Telephone Company (Bell), appeals from entry of summary judgment in favor of Appellees, Susan Combs, successor in interest to Carole Keeton Strayhorn, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas, on Bell's claim seeking a refund of franchise taxes. The parties filed competing motions for summary judgment below. The trial court granted the State's motion and denied Bell's motion. Bell appeals the trial court's ruling and seeks summary judgment in its favor. In support, Bell asserts the trial court erred in finding (1) Bell's end user common line charges, special access charges, and operator assistance charges are Texas receipts for state franchise tax apportionment purposes; (2) the Comptroller's application of the franchise tax apportionment statute and rules to Bell did not violate equal protection guarantees; and (3) certain testimony by Bell's experts was properly excluded. We affirm.

Background

In December 2002, Bell filed suit to recover $43,136,577.39 in franchise taxes and interest paid under protest to the Comptroller.¹ For calendar years 1996-2001,² the Comptroller apportioned Bell's charges for customer access to its local telephone network to complete long distance calls and pay-per-use services such as operator assistance as Texas receipts. Bell asserts these charges are exempt from apportionment as Texas receipts because they constitute "receipts from interstate calls" or "revenues from calls in interstate commerce."

This case necessarily involves technical and legal issues unique to the telephone industry. Events that occurred in the telephone industry nationwide and in Texas from the early 1980s through 2001 comprise the backdrop for understanding the issues underscoring this appeal. As a result, it is necessary that we describe in greater detail Bell's operation during the period at issue as well as the applicable regulatory history underlying the franchise tax exemptions sought by Bell.

I. The Antitrust Consent Decree

Before 1982, American Telephone and Telegraph Company (AT & T) dominated the national telecommunications industry. AT & T Corp. v. Iowa Utilities Bd., 525 U.S. 366, 414, 119 S.Ct. 721, 142 L.Ed.2d 835 (1999). AT & T and its corporate affiliates, known as the "Bell System," virtually controlled all long-distance telephone service, most local telephone service, and a substantial amount of all telephone equipment manufacturing. See United States v. American Tel. & Tel. Co., 552 F.Supp. 131, 222-23 (D.D.C.1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983). However, in 1982, AT & T entered into an antitrust consent decree, known as the Modification of Final Judgment (MFJ) that ended its industry dominance. 552 F.Supp. at 160-170, 222-234.

Under the MFJ, AT & T was required to divest itself of local exchange subsidiaries and was grouped into regional operating companies which became known as the "Bell Operating Companies (BOCs)." See 47 U.S.C. § 153(4) (2001); SBC Communications, Inc. v. F.C.C., 154 F.3d 226, 230 (5th Cir.1998). Bell was a BOC and provided telecommunications services for customers physically located in Kansas, Arkansas, Oklahoma, Missouri, and Texas. The United States was then divided into 161 Local Access Transport Areas (LATAs)³ within which BOCs were permitted to operate and provide local telephone service. 154 F.3d at 231. Within each LATA were local exchange carriers (LECs)⁴ that connected their customers' telephones to their networks and facilities. Bell operates as an LEC in LATAs in Texas and other states.

Because the MFJ permitted BOCs and/or LECs to retain their state-regulated, local service monopolies, they became subject to various restrictions on their lines of business. The restrictions were intended to ensure that the BOCs would not use their monopoly control over LECs to impede competition in other markets. United States v. Western Elec. Co., 12 F.3d 225, 229 (D.C.Cir.1993). For instance, an LEC might find it particularly easy to attract local customers to contract for its long distance service and use its control of local service to place its long distance competitors at a disadvantage. Iowa Utilities Board, 525 U.S. at 416, 119 S.Ct. 721. Thus, one such restriction prohibited LECs from offering any long distance service between LATAs, or interLATA service.⁵ See Id.; SBC Communications, 154 F.3d at 230; Western Elec. Co., 12 F.3d at 228. Thus, during the relevant time period, Bell was prohibited from providing any long distance telephone services.⁶

II. Long Distance Telephone Service

Because LECs such as Bell were prohibited from providing long distance telephone service, long distance calls or interLATA calls were transmitted by interexchange carriers (IXCs).⁷ AT & T Communications of Texas, L.P. v. Southwestern Bell Telephone Co., 186 S.W.3d 517, 521-22 (Tex.2006). Under the MFJ, each LEC was allowed to transmit telecommunications information only between points within a single LATA, providing what is, basically, the traditional local telephone service. The MFJ required LECs to provide their customers and IXCs equal exchange access⁸ to their network facilities for the purpose of permitting IXCs to carry on their long distance telephone business.

Thus, when a customer dialed a number in another LATA, the customer's LEC would first transmit the signal to an IXC's Point of Presence (POP). In a typical interLATA long distance call, the originating caller's LEC transports the signal from the caller's telephone over the local loop⁹ to the LEC's central office where the call is switched and transported by a trunk line to the IXC's POP. This occurs nearly instantaneously. Typically, the LEC has switched the caller to their IXC before the caller has completed dialing the long distance number. Once the signal reaches the IXC's long distance switch, the IXC then switches the signal to its trunk facilities for transmission out-of-state to the local switch of a second LEC serving the receiving party. The second LEC switches the signal to its local loop and ultimately the call is received. The second LEC then reverses the process and a circuit is established over which the two parties can communicate.

III. Access and Operator Charges

An IXC's cost of replicating Bell's local network and facilities to provide long distance service from the LEC's premises was prohibitive. Thus, IXCs needed access to Bell's network in order to sell long distance services to their customers, and the IXC's customers needed access to the LEC's network to complete long distance services purchased from IXCs. To recompense Bell for costs associated with maintaining its facilities and equipment utilized by IXCs and the IXCs' customers, the Federal Communications Commission¹⁰ adopted uniform access charge rules. The FCC's rules required LECs to record their revenues in accordance with specified accounting rules and deposit accounts, determine what fraction of the LEC's regulated expenses and investments in its facilities or network should be allocated to providing interstate access, and set charges or tariffs¹¹ Bell could charge its customers and IXCs. See Access Charge Reform, CC Docket No. 96-262, First Report and Order, 12 FCC Red 15982, 15998-99 (1997) (Access Charge Reform Order), aff'd, Southwestern Bell Telephone Co. v. F.C.C., 153 F.3d 523 (8th Cir.1998).

At issue, here, are Bell's revenues deposited in two FCC denominated deposit accounts for Network Access Revenues¹² and a customer account for various pay-per-use services as follows:

A. End User Common Line Charges

The End User Common Line Charge (EUCL) is a flat rate charge designed to recover a portion of Bell's cost of providing the local loop to transport customers' long distance calls to IXC POPs. Bell's EUCL revenues are recorded in its 5081 Account.¹³ See 47 C.F.R. § 32.5081 (2001). The EUCL charge is paid by local subscribers whether any long distance call is actually made or received.

B. Special Access Charges

Bell also charges a fixed monthly fee for access to dedicated telephone lines or circuits installed by Bell within the local exchange network that are used to transport long distance calls directly from customers to their IXC POP. Dedicated lines transport a customer's long distance call directly through Bell's central office to the IXC's POP without being switched. Bell's revenues from customer access to dedicated lines is accounted for in Account 5083.¹⁴ See 47 C.F.R. § 32.5082 (2001).

C. Operator Assistance Charges

Although Bell is prohibited from offering long distance telephone service, Bell is permitted to offer directory and operator assistance to customers making long distance calls. For instance, these charges occur when a customer located in Texas using a Texas phone facility while placing an interstate intraLATA call dials a Bell operator for directory assistance or assistance to complete the long distance call. The charges are pay-per-use charges. These revenues are deposited in Account 5160.1.¹⁵ 47 C.F.R. § 32.5160 (1995).

IV. Texas's Franchise Tax and Current Controversy

Texas's franchise tax is imposed upon all domestic and foreign corporations doing business in Texas. § 171.001. The...