Gonzalez v. City of Norwalk, B276871M

Background

In 2003 Norwalk voters ratified a 5.5% utility user tax (Measure A / Norwalk Mun. Code § 3.36.060) that on its face applied to “all telephone … charges,” but subsection D excluded amounts “exempt from or not subject to … the tax imposed under Section 4251 of the Internal Revenue Code.”
At the time of the 2003 vote the IRS and courts treated IRC § 4251 as applying to virtually all telephone service (with limited statutory exemptions).
Between 2005–2006 several federal courts narrowed the federal excise tax’s reach for certain long‑distance and bundled cellular/landline plans; the IRS issued notices adjusting collection practice accordingly in 2006–2007.
In March 2007 the Norwalk City Council adopted Ordinance No. 07‑1586 deleting the § 4251 reference from the municipal code, stating the change was to preserve the City’s historical taxation of telephone service and would not increase the tax.
Plaintiffs (Norwalk residents who pay the tax) sued in 2014, alleging the 2007 ordinance imposed, extended, or increased a general tax without voter approval in violation of Propositions 62 and 218; the trial court sustained the City’s demurrer without leave to amend and dismissed.
The Court of Appeal affirmed, holding that Measure A (as adopted in 2003) already imposed a 5.5% tax on all telephone service as the voters intended, that the 2006 federal developments did not retroactively change the meaning of the municipal code’s incorporation of IRC § 4251, and that the 2007 ordinance therefore did not impose/extend/increase a tax.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether deleting the IRC § 4251 reference in 2007 unlawfully imposed, extended, or increased a general tax without voter approval under Propositions 62/218	Gonzalez: The 2003 measure exempted services not taxable under IRC § 4251; the 2006 federal rulings meant many cell/ bundled plans were not tax‑able under § 4251, so removing the reference in 2007 expanded the municipal tax to new services without voter approval	City of Norwalk: Measure A ratified a 5.5% tax on all telephone charges; the 2007 deletion was a technical change to restore historical application and did not change tax rate or tax base actually paid by taxpayers	The court held the 2007 ordinance did not impose/extend/increase a tax — Measure A already covered all telephone service as voters intended; federal reinterpretation in 2006 did not retroactively alter the municipal code’s meaning, so the deletion did not create a new tax
Whether a post‑enactment change in federal interpretation of an incorporated statute retroactively alters an adopting municipal ordinance	Gonzalez: The federal courts’ narrowed interpretation in 2005–06 changed what was “exempt … under § 4251,” thereby changing the municipal exemption retroactively	Norwalk: An adopting ordinance incorporates the referenced statute as it existed at the time of adoption; later changes in interpretation do not retroactively alter the municipal law	The court held that when a local ordinance incorporates another statute by reference it adopts the referenced provisions as they existed at the time of adoption; subsequent reinterpretation of the referenced federal statute did not retroactively change Measure A’s meaning

Key Cases Cited

AB Cellular LA, LLC v. City of Los Angeles, 150 Cal.App.4th 747 (Cal. Ct. App.) (tax methodology revision that increases revenue is a tax increase under Prop. 218)
California Cannabis Coalition v. City of Upland, 3 Cal.5th 924 (Cal. 2017) (principles for interpreting voter initiatives)
Palermo v. Stockton Theatres, 32 Cal.2d 53 (Cal. 1948) (statute or ordinance that adopts another law by reference incorporates it as it exists at time of reference)
National Railroad Passenger Corp. v. United States, 431 F.3d 374 (D.C. Cir.) (discussion of historical federal excise tax coverage of telephone services)
Reese Bros., Inc. v. United States, 447 F.3d 229 (3d Cir.) (federal circuit decisions limiting scope of IRC § 4251)