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Ninth
Circuit Court of Appeals Ruling In
Qwest Corporation V. City of Surprise,
434 F.3d 1176 (C.A.9)(ARIZ.)
The U.S. Ninth
Circuit Court of Appeals’ recently
rendered its decision regarding the
right of local governments to tax
telecommunications companies for
their use of municipal
rights-of-way. The cities of
Surprise, Tucson, Globe, Miami and
Nogales brought the case against
Qwest because they had enacted
local ordinances allowing them to
impose such a tax.
Several Arizona
municipalities had adopted similar
ordinances. However, in 1998, the
State legislature enacted A.R.S. §§
9-581 to 9-583, which prohibited a
political subdivision from levying
any tax, fee or charge on a
telecommunications corporation to
use its public rights-of-way. The
legislation, however, did allow the
municipalities to impose a
transaction privilege tax on the
business of providing
telecommunications services. After
the legislation was enacted, most
Arizona municipalities amended their
ordinances to comply with the State
legislation.
The primary
issue in both the Arizona and the
federal district courts was the same
– whether the “tax” imposed on
telecommunication companies for
placing their equipment in municipal
rights-of-way was appropriate.
In the Arizona
appellate court proceeding, Qwest
attacked Tucson’s imposition of a
transaction privilege tax calculated
as a percentage of the gross income,
value or proceeds of sale(s)
conducted by the telecommunications
provider. The Arizona appellate
court ruled that the tax is imposed
not on the use of the right-of-way,
but on providing the
telecommunication services, and is
therefore properly characterized as
a “transaction privilege tax.”
In the federal
court case, Qwest argued that the
Federal Telecommunications Act of
1996, rather than State law,
prevented cities from charging it to
use public rights-of-way. The
federal case focused on whether the
charge was a fee or a tax. The
federal court found that the charge
was a tax and that the federal
courts have no subject matter
jurisdiction to decide matters
relating to state taxes. It applied
a three-part test to determine
whether a certain charge is a fee or
a tax and found that two factors –
the entity that imposed the charge
and whether the charge is expended
for general public purposes – made
the charge a tax. Specifically, the
Ninth Circuit concluded that the
charges “are taxes because the
revenues from the charges flow into
the Cities’ general funds” rather
than a limited class of
individuals.
The Ninth Circuit also held that the
federal Tax Injunction Act barred
the Court from hearing the
dispute. Further, because Qwest’s
appeal sought to avoid paying taxes
to the municipalities and because an
adequate State remedy was available
(Qwest actually already exercised
this remedy – a challenge to the
imposition of the tax in State court
but lost), the federal court found
it was without jurisdiction to
invalidate the tax.
THE FOREGOING IS MERELY A
PARTIAL SUMMARY OF THE CASE
AND IS NOT INTENDED TO BE RELIED UPON AS A LEGAL
OPINION.
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