Litigation Prompts Telecommunication
Carriers To Pay Their Taxes

By KATHLEEN FIELD ORR and JAMES P. BARTLEY

Background

In 1982 much media attention was given to a modification of a judgment entered against American Telephone and Telegraph in the United States District Court for the District of Columbia requiring a complete reorganization and separation of ownership of all "Bell Operating Companies" in order to meet the anti-trust requirements of the Sherman Act. Suddenly, numerous new telecommunication companies commenced a national advertising campaign blitzing the consumer with the availability of new "discount" long distance telephone rates. While the growth of the new telecommunication carriers appeared to give the consumer a competitive choice, units of local government were concerned with the proper collection of utility taxes from all carriers.

In 1982 the Supreme Court of Illinois ruled that the tax upon the transmission of messages may not include revenues from interstate calls but applied only to revenues from calls which began and ended in the state. Consequently, the question arose as to whether the amount of tax liability from "long distance" telephone receipts for calls which began and ended within the state boundaries warranted action.

Over the next several months, numerous itemized bills to both individuals and businesses from independent telecommunication carriers were reviewed. On a single bill of a local business concern approximately one-third of the calls listed as "long distance" began and ended within the State of Illinois. It was apparent that the new telecommunication carriers were regularly being used for calls beyond the area code of the point of origination, but to points within the State.

The Lawsuit

On March 7, 1984 a Complaint for Declaratory Relief and Back Taxes was filed in the Circuit Court of Cook County by the Village of Park Forest against seven corporations in the business of transmitting messages for consideration within the State of Illinois. The Complaint alleged that the named defendants failed to pay Park Forest the utility tax on the gross receipts received in connection with the transmission of intra-state telephone messages as required by the Park Forest Municipal Utility Tax Ordinance. Within several months eight additional municipalities joined Park Forest as Co-Plaintiffs, each of such municipalities having adopted similar municipal utility tax ordinances.

The initial responses from several Defendants alleged that they were not subject to the tax as they were involved in interstate commerce and did not transmit messages by electricity as referenced in the ordinances but by satellite transmission. In addition, several of the named Defendants responded to the Complaint with the explanation that the failure to collect and remit the message tax was due to a lack of sufficient mechanical technology. Most telecommunication systems, as then in operation, required a caller to use the existing AT&T system to call to a regional point for further transmission via satellite to various points (which may have in fact been located beyond the boundaries of Illinois), until final transmission to the intended receiver. The Defendants alleged that technology did not exist to determine the point of origin of any call.

The Settlement

After months of meeting and negotiations, it was learned that an automatic number identification system (ANI) was in the process of implementation and would be available to the carriers for some regions within the state by as early as December of 1985. This system would advise the telecommunications carrier of the point of origin of each call. Demand was immediately made that as of the point in time that the ANI system was in place, collection and payment of utility taxes to all municipalities which had imposed such tax would be made. The issue of the back taxes was, however, yet to be resolved.

Page 22 / Illinois Municipal Review / June 1989

After further discussion and negotiation, a formula for payment of the back taxes to the named plaintiff municipalities was mutually agreed upon by one of the larger companies. The formula was based on an assumption that the billing address was the point of origin for any call within the State. The zip codes for each municipality were reviewed against the revenues collected from June of 1984 to the time of implementation of the ANI system for the same zip code areas. These revenues, when apportioned to the zip codes, gave the basis for the calculation of the back taxes.

To date Settlement Agreements have been executed with two of the named Defendants and negotiations are continuing with a third. Other Defendants have discontinued operations or moved operations into other areas. While the process has been long and has required substantial patience, the results have made the efforts worth while. At this time, it appears that all municipalities are receiving utility taxes from telecommunication carriers operating within the respective municipal boundaries. Further, the named plaintiff municipalities have recovered both taxes from two major carriers. Absent the litigation it is questionable as to when, if ever, the utility taxes would have been paid.

Current Status

It would appear that the number of telecommunication carriers within the State of Illinois is no longer increasing. For this reason some monitoring on the part of municipalities is possible. Confusion in the collection process has occurred however, in light of the numerous "traveling" telephones which raise issues with regard to the point of origination of any communication. Local ordinances should be forwarded to any telecommunication carrier servicing a municipality once its presence is made known. •

June 1989 / Illinois Municipal Review / Page 23