Cities Pile On Fees to Telecom Providers

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Business-privilege taxes; rights-of-way fees; rent: Callthem what you will, but they are cropping up all over the country, layeringtelecommunications companies with another cut off the top of gross revenues.

Some municipalities stressed that the new fees do notaffect cable operators if they remain video providers only. But when they move into newbusinesses that rely on the use of public rights-of-way, they will have to pay theirshare. Other cities have applied the taxes whether the operator has moved into ancillarybusinesses or not.

Cities seem emboldened in their effort to design andimplement fees, in part because of their success last year in their battles with cableoperators over the computation of franchise fees. Attorneys successfully argued thatfranchise fees are rent that should be included in gross revenues. Operators failed toconvince the courts that such formulation resulted in double taxation -- a franchise feeon franchise fees.

Municipal attorneys said the rent argument is applicable tothis new class of fees, as well.

"[Cattlemen] pay for cows grazing on federal land.That's capitalism. Use of public property should be compensated," said StephaniePhillipps, an attorney with Washington, D.C., firm Arnold & Porter, who advisescities.

City officials have a constitutional responsibility toprotect and seek compensation for property under their jurisdiction. Failure to do soexposes them to suits from constituents, she said.

Some municipal attorneys argued that if the fee is rent,then it is not subject to the 5 percent franchise-fee cap in the 1992 Cable Act.

Cable attorneys, of course, see the fees differently.

"If [cities] prevail, then others can disguisefranchise fees with different names," said Howard Symon, Tele-CommunicationsInc.'s Washington, D.C.-based counsel.

Earlier this year, Symon filed suit against the city ofEugene, Ore., alleging that its 2 percent business-privilege tax violated federal caps onfranchise fees. Telephone companies have also filed suit against Eugene.

Although the federal Telecommunications Act of 1996specifically allows cities and other governments to charge for the use of rights-of-way,legal challenges are cropping up all over the country. Some telecommunications providershave challenged the rights of the governing bodies to assess the fees, but many saidprivately that the big issue is the amount of the fees.

Section 253 of the act supports governments seekingcompensation, but that charge must be "fair and reasonable." That phrase is thecrux in many disputes.

Arizona is a current hotbed of activity on this front.Telephone and cable companies met with a coalition of city governments in an effort todevelop a "reasonable charge" to be used throughout the state for rights-of-wayusage. The talks broke down and, by the end of 1997, cities including Phoenix, Mesa,Tempe, Peoria, Yuma and Gilbert approved their own ordinances. Fees ranged from 4.7percent of gross revenues in Phoenix's "rights-of-way-rental fee" to a 2percent business-privilege tax in Tucson.

Although most of the fees were approved last year, thecompanies are not paying. AT&T Corp. and U S West Inc. challenged the Phoenixassessment in tax court there, asserting that because the charge will be passed straightthrough to consumers, it is a tax, and not rent. The City Council has no constitutionalpower to levy taxes, the telcos claimed.

Mary Okoye, director of intergovernmental relations forTucson, said the cities believe that they adopted what the telecommunications providerssaid they wanted -- that is, the ordinances of each city have similar terms at rates that"are not excessive." Municipal legislators were close to a legislative solutionwhen "tempers flared up," she said. So, the cities went ahead and approved theirown policies.

"That's garbage," said Susan Bitter Smith,executive director of the Arizona Cable Telecommunications Association. "Yes, theordinances are uniform, but the fees are outrageous."

Two bills were floated to the state legislature -- one by US West, and one by a telecommunications coalition including the cable industry. U S Westhopes that the legislature will opt for a sales tax on telecommunications to compensatefor rights-of-way use. The coalition is also shooting for a sales tax at a rate similar tothat paid by other utilities, which averages 2 percent.

The camps are working on unifying their positions into asingle bill.

So far, telephone companies are leading the charge againstthe fees. Their arguments are varied: They violate state law, the governing body does nothave taxation authority and the laws are open to overly broad interpretation.

Regarding the latter, one attorney expressed fear that anauthority would demand tax on cellular-phone calls from a user traveling outside of thestate to a destination also outside of the state. Another noted that the language in theTelecommunications Act doesn't limit fees to cost of regulation. He noted that aPhoenix city councilman told local press that money above the cost of regulation therecould be used for desert-preservation projects.

"Now they're using us to buy cacti," theattorney grumbled.

Telco litigants include AT&T, Sprint Corp., U S Westand Ameritech Corp. The latter filed suit last month against the city of Gary, Ind., tooverturn a fee that it estimates will cost it $20 million a year. The levy there is not aflat percentage of gross revenue.

Gary has no authority, pre-existing the TelecommunicationsAct, to assess taxes, said Ameritech spokesman Dave Pacholczyk. Further, the tax isdiscriminatory because the telcos will pay more to use the streets than gas, water orother utilities, he argued.

Ameritech will pursue state legislation that will protecttelecommunications companies from "cash-strapped urban areas looking for ways toincrease revenues," he said.

This class of fees may not be the end of newexpenses for expanding telecommunications outfits, especially those that are still puttingtheir plant underground. Cities in California are abuzz over a new"trench-cut-recovery ordinance" that the city of Sacramento approved, which wasdesigned to help cities cope with street deterioration caused by construction cuts. Thecity now requires a fee of between $1 and $7 per linear foot from companies that cut intothe streets. The amount of the fee is contingent on whether the cut is parallel orperpendicular to the street. 

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