Businesses Face Surprise Tax on High-Tech Telecom Lines

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Tens of thousands of Los Angeles businesses will start paying additional taxes in the next 90 days thanks to voter passage last week of the city’s revamped phone tax.

That’s the most sweeping local business impact from last week’s primary election in which voters also approved a series of Indian gaming measures but rejected a term-limits overhaul and turned down increased funding for community colleges.

Voters in Pasadena and Huntington Park also approved phone tax measures, but those are not likely to result in additional taxes on businesses at least for now.

But the L.A. phone tax measure, which city leaders placed on the ballot in anticipation of court rulings striking down the existing tax, will require for the first time that businesses and consumers receiving phone service over high-capacity T1 lines or through “voice over internet protocol” providers pay a tax to the city. The measure also reduces the phone tax rate from the current 10 percent to 9 percent.

City leaders campaigned for the tax initiative, known as Measure S, arguing that if the existing tax were struck down, the city would be deprived of at least $270 million at a time when the city is already facing a $150 million deficit and that vital services would have to be cut. Measure S passed on Feb. 5 with 66 percent to 34 percent.

While business leaders do not object to continuing the existing phone tax, they are decrying application of the tax to new technologies that currently aren’t taxed, including T1 lines that businesses use to receive both phone and Internet service.

“Most businesses use T1 lines for both phone and Internet access and they are not going to be happy at all with this new tax,” said Greg Lippe, a Woodland Hills certified public accountant who is also chair of the Valley Industry and Commerce Association, which opposed the measure. “It’s an additional cost that businesses in L.A. will have that make us less competitive with surrounding cities.”

Especially hard hit will likely be technology, media and entertainment companies, which rely heavily on T1 lines to download and transmit large packets of data over the Internet. Other professional service companies, such as law and accounting firms, have increasingly turned to T1 lines.

City officials respond that the newly passed phone tax is actually more fair than the current system, in which companies that get phone service through T1 lines pay no city tax while companies with conventional land lines pay a 10 percent tax. “We will now be treating all small businesses equally,” said Janelle Erickson, spokeswoman for Mayor Antonio Villaraigosa.

The new tax is expected to be incorporated into phone bills that go out after the City Council gives final certification to the vote, expected some time late next month.


Pasadena keeps rate

The situation is different in Pasadena, where T1 customers are already taxed for phone-related service, according to Michael Colantuono, the consulting attorney who helped the city craft its Measure D phone tax, which won by a 16-point margin. Pasadena’s phone tax rate will remain at the current 8.28 percent.

Colantuono said that there will be no change in how T1 lines are taxed in Pasadena as a result of Measure D’s passage. However, the Measure D may result in better enforcement of a law requiring businesses pay tax on VOIP services.

While existing federal law bans taxing Internet access directly, it does not address the common practice by telecommunications providers of bundling Internet and phone service over high-capacity T1 lines. It’s up to individual cities to decide whether to require telecom companies to separate out the Internet and phone service portions on customers’ bills or to do it in their back offices.

Both Pasadena and Los Angeles have chosen to let the telecommunications providers determine whether they display the tax on customers’ bills or break out the tax internally.

In Los Angeles, the amount of tax each customer pays will vary, primarily because the proportion of phone calls and Internet use routed through T1 lines varies widely. What’s more, in many cases, this additional tax may be offset by the reduction in the phone tax rate for conventional land lines.

Whatever the case, local business leaders say the city should tread carefully before going ahead and actually collecting the tax.

“The city should do all it can to cut elsewhere before imposing new taxes,” said Sam Garrison, vice president of public policy for the Los Angeles Area Chamber of Commerce. “The city should be very conservative in how they choose to expand this tax. They need to be aware of the negative impact this could have on businesses throughout Los Angeles.”

The Chamber did not take a position on the measure before the election, as its board could not reach consensus, Garrison said.

Meanwhile, the Chamber and the Valley Industry and Commerce Association were generally pleased with the results on the statewide measures. Both groups opposed Proposition 93, the term limits overhaul, saying it should have been accompanied by redistricting reform. Proposition 93 went down to defeat by a 54 percent to 46 percent margin.


Indian gaming

The business groups also supported the Indian gaming measures that passed, saying they would bring in much-needed revenues to the state. The four measures ratified compacts reached between the state and four Southern California Indian tribes for the installation of up to 17,000 additional slot machines in exchange for a greater share of those revenues.

The compacts were placed on the ballot by racetrack owners, unions and others opposed to provisions within them. Racetrack operators, including the owners of the Santa Anita and Hollywood Park racetracks here in L.A. County, claimed the compacts contained restrictions on certain types of gaming machines, including video lottery terminals, that could be placed at racetracks. The operators have said such gaming machines are essential revenue generators in an era of declining racetrack attendance.

Stockbridge Real Estate Fund LP, the Bay Area real estate investment firm managed by Terrance Fancher that owns the Hollywood Park track in Inglewood and the Bay Meadows racetrack in San Mateo County, had put up nearly half of the $30-plus million raised by compact opponents. But opponents were outspent more than 3-to-1 by the Indian tribes.

With the passage of the gaming compacts, the future of Hollywood Park as a racetrack has grown dimmer. There have been plans in the works for years to bulldoze the racetrack and replace it with housing and some shops. The current real estate downturn has delayed a decision, but passage of the compacts could put this issue back on the front burner.

Meanwhile, Rick Caruso, developer of the popular Grove shopping center, is developing a similar shopping mall next to the Santa Anita racetrack. Initial plans had also called for housing and a slots casino but those have been dropped.

Last year, Toronto-based Magna Entertainment Corp., which owns the racetrack, was reportedly considering selling the track as part of a companywide restructuring. If the decision was made to sell, Caruso has said he is interested in buying the property.

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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