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Santa Barbara Telephone Tax: Hang Up or Hang On?

City may ask voters to decide fate of longtime tax. At stake is $4 million slice of annual budget.

Attention local voters: In the November election, the fate of the local telephone tax could be in your hands.

City staff warned the Santa Barbara City Council on Thursday that if it doesn’t put a measure on the ballot updating the local telecom-tax ordinance, Santa Barbara runs the risk of getting sued by cell-phone companies.

At stake is $4 million annually in police, fire, park, youth and street services. That’s 2 percent of the general-fund budget, and 14 percent of the streets budget.

Ultimately, the end game from Santa Barbara’s standpoint would be not about raising or lowering taxes, but breaking even, city officials say.

This means the city probably must seek permission from local voters to continue collecting most of the telephone taxes that it has for years. Also, the city may seek to broaden the definition of which services are taxable, largely to ensure that people using new technologies to communicate are not skirting the local tax, city officials said.

The issue surfaced in May 2006, when the IRS dropped the federal excise tax on long-distance calling for land lines and cell phones. Put another way, people no longer pay federal taxes on their long-distance calls.

In the 1970s, many cities, including Santa Barbara, cited the old federal law in the language of their own telephone-tax ordinances.

But now that the federal tax law is defunct, the old city ordinances are out of date, leaving municipalities like Santa Barbara vulnerable to litigation. In the worst-case scenario, a judge could rule that Santa Barbara must forfeit the vast majority of its phone-tax proceeds, which amounts to nearly $4 million annually.

The threat is more than merely hypothetical. Already, five lawsuits are under way. Two are in the city of Los Angeles, and the others in Long Beach, Los Angeles County and Sacramento. Cell-phone providers filed most of the suits, but the Sacramento plaintiff is the Howard Jarvis Taxpayers’ Association.

If the council decides to float a ballot measure, it most likely would seek permission to continue the city’s tax — currently at 6 percent — on cell-phone and long-distance bills.

Also, with an eye toward ensuring equitable taxation, the city may seek to expand the definition of what is taxable to include Internet-based phone services. These include Vonage, which offers flat, cheap rates to users.

But the city also may seek to expand the tax in another way that has little to do with cutting-edge technology. For whatever reason, Santa Barbara’s long-distance tax only applies to in-state calls. So while calls made to, say, San Diego are taxed, calls made to Phoenix — or England — are not. On Thursday, city officials said the out-of-state calls could be added to the list of taxable calls.

Finally, to sweeten the deal, the city of Santa Barbara may ask voters to lower the current 6 percent rate. (In Los Angeles, a measure approved by voters earlier this month reduced the rate to 9 percent from 10 percent.)

On Thursday, city officials repeatedly warned the council about a widespread misconception in some other communities that the cities were seeking to tax the Internet.

“We are not going to tax e-mail, or Internet access, or any of those things,” city Finance Director Bob Peirson said.

Thus far, of the 20 or so cities that have floated an updated ordinance on phone taxes, just one — Covina — has failed to pass the ballot measure, officials said. Cities that succeeded include Ventura, Compton, Los Angeles and Menlo Park.

In Santa Barbara, should such a ballot measure fail, it would not necessarily mean the city would start losing $4 million a year. This is because the old ordinance would probably remain in place, and the city, in effect, would simply have to hope it wouldn’t get sued.

On Thursday, several City Council members seemed to favor the idea of putting an initiative on the November ballot over a later date, because voter turnout is typically high for presidential elections.

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Das Williams
If twice as many people are going to vote in the 2008 election than the 2009 election, we should give a voice to those people, who will be paying the tax,” Councilman Das Williams said.

Councilman Grant House said the tax-equity issue is important to him.

If the Internet-based phone services are not taxed, he said, “those who don’t have the new technology are going to be the only ones left paying the tax.”

Interestingly, applying the tax to voice-over-Internet services would not apply to the free versions, such as Google Talk and Skype, Peirson said. This is because free services can’t be taxed.

“Six percent of zero is zero,” he said.

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