Los Angeles could pay as much as $92.5 million to resolve a long-standing lawsuit over a city telephone tax under a class-action settlement that was granted preliminary approval by a Superior Court judge Thursday.
The $92.5-million figure is a cap: The final amount that Los Angeles would pay depends on how many people seek and obtain refunds for telephone taxes paid during a roughly 21/2-year period that ended in 2008. Any money not claimed would revert to the city.
City Administrative Officer Miguel Santana said the settlement marks an important step toward Los Angeles resolving looming liabilities that could threaten its financial stability if they were left unaddressed.
“We’d much rather be in a position of planning for them and resolving them than allowing a court to make a decision that puts the city in a tailspin,” Santana said Thursday.
The legal battle over the phone tax has lasted nearly nine years. Taxpayer Estuardo Ardon filed a suit against the city, arguing that its telephone users tax was illegally collected because it had been levied on services that were not subject to a federal tax. Ardon demanded a refund for himself and other taxpayers.
City officials have previously estimated that if Ardon prevailed in court, the possible liability for Los Angeles — once believed to be as high as $750 million — would have been less than $300 million, according to Assistant City Administrative Officer Benjamin Ceja.
“I’m very pleased we’ve solved what for nine years had been one of the city’s most significant legal challenges — in a way that both limits the potential impact on basic city services and allows for appropriate refunds to Los Angeles telephone customers,” City Atty. Mike Feuer said in a written statement Thursday.
Under the settlement plan, the city will deposit a payment of $50 million into an escrow account — a sum that Los Angeles officials had already set aside this year for the tax case.
If the demand for refunds exceed that amount, however, Los Angeles must raise more money, possibly through a judgment obligation bond or by drawing from reserves.
It is unclear exactly how many Angelenos could be eligible: The order issued Thursday says that there were about 1.6 million residents and roughly 569,000 businesses registered with the city during the period affected by the case, “most of which are likely members of the class.”
However, the order also states that attorneys representing Ardon and other taxpayers believe the claims rate will range between 20% and 30% of those eligible. An outside company will be notifying Angelenos who might be able to claim refunds.
Taxpayers will have to submit claims to get either a flat rate or full refund: The flat rate will be $30 for customers with residential land line service and $50 for either a business land line or mobile service. To get a full refund, taxpayers will have to submit copies of their telephone bills. Taxpayers can also choose to donate money they could have claimed to groups that support city libraries, parks, the zoo or animal shelters.
Refunds will only be offered to people who paid such taxes between Oct. 19, 2005, and March 15, 2008. That was before the telephone users tax was replaced with a new, slightly lower tax approved by Los Angeles voters seven years ago.
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