High Court OKs Taxes on Telecommunications : Ruling Gives States, Local Governments Lucrative New Source of Revenue

The Supreme Court cleared the way Tuesday for states and cities to levy taxes on the rapidly increasing flow of interstate phone calls, computer data and facsimile transmissions, ruling that such fees do not put an undue burden on interstate commerce.

The unanimous decision was a significant victory for state and local governments that have begun to look to the $60-billion-a-year long-distance telecommunications industry as a lucrative source of new revenue.

The city of Los Angeles, along with 10 states (not including California), are the only major jurisdictions that now tax phone calls between states, but lawyers in the case expect others to follow soon.

“This is an open invitation to the states,” said Walter A. Smith Jr., a Washington attorney who represented Illinois taxpayers challenging a new tax by that state on phone call charges. “It is our understanding that a lot of jurisdictions were waiting on the outcome of this case.”

Los Angeles imposed a 10% tax in July, 1987. City officials estimated that it generated $45 million in its first year.

The Illinois tax reviewed by the court was a 5% levy enacted in 1985 on the cost of communications carried by telephone lines, including local and long-distance calls, computer transmissions and telecopied material billed to addresses in the state. With interstate transmissions growing by 13% per year, the state said it already was collecting $10 million a month through its new tax.

A group of taxpayers filed a lawsuit against the long-distance charges, contending that they were an improper tax on interstate commerce.

Lawyers for the taxpayers cited as a model the trucking industry and argued that Illinois’ action was akin to charging a tax on the entire cost of shipping freight from, say, Chicago to Los Angeles, rather than just on the part of the trip that runs through Illinois.

A GTE Corp. affiliate, viewing this as a key test case, filed a separate suit against the state.

But the state’s supreme court upheld the tax, and the two suits were appealed to the Supreme Court.

The National Conference of State Legislatures and U.S. Conference of Mayors, among other groups, came to the defense of Illinois in the high court.

Telecommunications “are a potentially important source of future state revenues . . . and the states are especially concerned that they not be deprived of the power to tax the new products and activities that the telecommunications, computer and information industries are developing,” they told the justices.

Illinois lawyers argued that telephone calls no longer move in straight lines between cities, but instead, bounce off satellites, so it is no longer possible to levy taxes based on the distance the signal travels in Illinois. For simplicity’s sake, a tax on telephone transmissions should be treated as a sales tax, they said.

The Supreme Court, in an opinion written by Justice Thurgood Marshall, adopted the state’s view of the case (Goldberg vs. Sweet, 87-826, and GTE Sprint vs. Sweet, 87-1101).

“The tax has many of the characteristics of a sales tax,” Marshall wrote. “It is assessed on the individual consumer, collected by the retailer and accompanies the retail purchase of an interstate telephone call. Even though such a retail purchase is not a purely local event . . . the (Illinois law) reasonably reflects the way that consumers purchase interstate telephone calls.”

It would be “infeasible”, Marshall added, to limit Illinois to taxing only the part of a phone transmission that moves through the state.

He wrote that the “limited possibility” of calls being subject to multiple taxation if some other state also imposes a tax on them would not unduly interfere with interstate commerce.