California Court of Appeal Rejects Proposition 218 Challenge to City Cell Phone Tax

Gonzalez v. City of Norwalk, 17 Cal.App.5th 1295, Cal. App. 2 Dist., Dec. 04, 2017, as modified on denial of rehearing (Jan 03, 2018), review denied (Mar 14, 2018)

Scott Noya and Lee Roistacher of Daley & Heft, LLP prevailed for the City of Norwalk in a class action challenge to its voter-approved utility user tax (UUT) on cell phone usage alleging violations of Proposition 218 and Proposition 62. The Court of Appeal decision has potentially significant benefits for other cities with similar cell phone tax ordinances.

The City of Norwalk first adopted the UUT in 1992 and the voters ratified and approved the 5.5% UUT at an election in 2003. For administrative convenience, like many other California cities, the 2003 ordinance incorporated definitions from the Federal Excise Tax (FET) and provided that persons who were exempted from the FET were also exempt from the City’s UUT. In 2006, the IRS issued a notice declaring the FET was unlawful as it applied to long distance telephone plans which charged customers according to the length of the call without regard to distance (such as cell phone plans). In response, like many other cities, the City adopted an ordinance in 2007 deleting the FET reference from the City’s UUT ordinance.

In the lawsuit, Plaintiffs contended that the 2006 IRS notice invalidated the UUT and that the City’s 2007 ordinance violated Proposition 218 and Proposition 62 because it “imposed, increased or extended” the UUT without voter approval. After the lawsuit was filed against City of Norwalk, in November 2014, voters again resoundingly approved the UUT at another election at the same 5.5% rate.

In a published decision issued on December 4, 2017, the Second District Court of Appeal upheld the trial court’s judgment and held that the City’s deletion of the FET reference did not “impose, extend, or increase” the UUT and, therefore, did not violate Proposition 218 or Proposition 62. The California Supreme Court denied review of the decision.

Gonzalez v. City of Norwalk is the first published California appellate authority rejecting a class action tax refund challenge alleging Proposition 62 and Proposition 218 violations based on City’s removal from its UUT tax ordinance, without voter approval, the FET limitations on the scope of taxable telephone charges.

Daley & Heft attorneys Scott Noya and Lee Roistacher represented the City of Norwalk, serving as co-counsel with Norwalk’s City Attorneys Saskia Asamura and B. Tilden Kim of Richards, Watson & Gershon.

Noya and Roistacher also represented the City of Rancho Palos Verdes in an identical UUT phone tax class action refund case, prevailing in an unpublished Second District Court of Appeal decision. Yarber v. City of Rancho Palos Verdes, 2017 WL 5988602, Cal. App. 2 Dist., Dec. 04, 2017, unpublished (Dec 04, 2017), as modified on denial of rehearing (Jan 03, 2018), review denied (Mar 14, 2018).