A new city tax on out-of-state telephone calls took effect in Culver City Saturday. But the City Council has already decided to reduce the tax, after complaints from the Chamber of Commerce and four biggest businesses in town.
That sounds like good news for taxpayers, but it is causing headaches for telephone companies, whose representatives say the city’s action has created an administrative nightmare.
“I break out in a sweat every time I think about it,” said Julie Lane, an accountant with Pacific Bell in San Francisco.
Faced With Deficit
It started in June when the City Council, faced with a $400,000-budget deficit, hastily decided to impose an 11% tax on out-of-state phone calls. The council also raised the existing tax on local telephone calls from 9.5% to 11%.
The rates were scheduled to take effect Oct. 1, to accommodate the telephone companies, which said it would take about 90 days to program the new rates into their computerized billing systems.
Meanwhile, the Culver City Chamber of Commerce and the city’s four largest employers complained that the new tax was too high and that the four companies would be paying much more than anyone else.
Steven Rose, executive vice president of the chamber, said he did not have enough advance notice of the proposed tax in June to adequately fight it during the budget hearings. The tax, which had been discussed last year but dropped, was brought back before the council this year with only three days notice. Rose complained at the time, but was told that the tax would be reviewed in about six months.
“In six months, this tax could have had a big impact on some of our members,” Rose said. “We understood the city’s budgetary problems, but we wanted to make it fair for everyone.”
Not willing to give up, the chamber did a study that found that at the 11% rate, the four largest companies combined would pay about $300,000 annually.
Rose said the companies are Hamilton/Avnet Electronics Corp., the nation’s largest computer components firm; Westwood One, the second-largest radio network in the country, and MGM/UA Communications Co. and Lorimar-Telepictures Corp., both motion picture and television producers.
The chamber’s survey indicated that the 11% tax rate on all businesses and residents would raise $900,000 annually, or more than double the amount needed to make up the deficit in the city budget.
Rose said the city’s goal of raising at least $400,000 from the new tax could be reached with a 7% rate instead.
Bob Norquist, assistant to the city’s chief administrative officer, said the 11% figure originally was selected to make the tax uniform with the other utility-user taxes. He said preliminary figures provided by some of the phone companies indicated that the 11% rate would bring in at least $400,000.
The chamber study persuaded the council to lower the tax rate on out-of-state calls.
“There is no question that this kind of tax could have been oppressive, almost confiscatory for some companies,” Mayor Paul Jacobs said. “It could have triggered a reconsideration of what I call some of our corporate residents remaining in the city.
“It is a fact of life that 65% of our city services are funded by commercial use. They supplement the services that we residents enjoy. I don’t mind saying that I look closely at those things that affect businesses.”
On Sept. 13, the City Council directed its staff to prepare a new ordinance that would lower the tax on out-of-state calls from 11% to 7%, establish a $15,000 maximum for any one taxpayer and exclude out-of-state calls made outside the state on credit cards. The council left intact the 11% rate on local calls.
“We do most of our business on the telephone calling long-distance,” said Ted Hatfield, a spokesman for MGM/UA, one of the oldest companies in the city. “If the rate was not changed, we were prepared to move our telecommunications systems to another city. I think that as a resident of Culver City and a representative of MGM that this is a fair compromise.”
The compromise may be fair, but it is proving to be difficult to work out.
“If cities would only come to the telephone companies first,” Pacific Bell’s Lane said, “it would be so much easier than passing the ordinance and then having the cities ask us why we can’t do this.”
Lane, whose company is the primary local telephone company in the city and the one that bills out-of-state calls for AT & T, said the first problem is creating a computer program that can bill local calls at the 11% tax rate and out-of-state calls at 7%.
“That’s a complex change,” she said. “We can do it, but it’s a matter of when we can do it.”
Billed at Higher Rate
Until the program can be developed, customers will be billed at the higher rate for long-distance calls.
Lane said the bigger problems lie in determining when a customer reaches the $15,000 cap and identifying out-of-state calls made on a credit card outside the city limits.
“We currently can’t track a cap on our system,” Lane said. “We also do not differentiate between interstate and intrastate calls made on credit cards. In recent years, cities have been trying to get real creative with their tax rates. It is creating a real strain on our system.”
Other long-distance carriers, such as U S Sprint Communications Co. and MCI Telecommunications Corp., expressed similar concerns.
Rene Dunn, a spokeswoman for U S Sprint, said the company last week was still researching the matter, but she said, “at the very least it is going to cause some administrative problems.”
Fran Zone, a spokeswoman for MCI, said lowering the tax rate from 11% to 7% will be easy to do, but keeping track of when a taxpayer has reached the $15,000 cap and excluding some credit card calls will be difficult.
“I just don’t know at this point how we would do that,” she said.
Norquist said that if the phone companies cannot keep track of the cap and the calls made on credit cards, the individual taxpayers may be responsible for keeping tabs.
Rose said that only five or six companies are expected to reach the $15,000 limit. Norquist said those companies could apply for an exemption from the tax when they reach the maximum, or they could pay the money up front and be exempt from the monthly billing.