Gonzalez v. City of Norwalk
17 Cal. App. 5th 1295
| Cal. Ct. App. 5th | 2017Background
- In 2003 Norwalk voters ratified a 5.5% municipal utility user tax (Measure A) that on its face applied to “all telephone … charges” and incorporated the Municipal Code language in effect July 1, 2003. Measure A also included a subsection (D) exempting services "exempt from or not subject to ... the tax imposed under Section 4251 of the Internal Revenue Code."
- At the time (2003) the IRS interpreted 26 U.S.C. § 4251 to reach nearly all telephone service; that interpretation changed after federal courts (and IRS guidance) in 2005–2007 narrowed the federal excise tax’s coverage for some long‑distance and bundled cellular/landline plans.
- In 2007 the Norwalk City Council adopted Ordinance No. 07-1586 deleting the reference to IRC § 4251 from Norwalk Municipal Code § 3.36.060(D), stating the change merely clarified and restored the historical city practice and did not increase the tax.
- Plaintiffs (Norwalk residents who pay the telephone UUT) sued, alleging the 2007 deletion unlawfully imposed, extended, or increased a local tax without voter approval in violation of Proposition 62 (Gov. Code § 53723) and Proposition 218 (Cal. Const., art. XIII C, § 2).
- The trial court sustained the City’s demurrer without leave to amend and dismissed. The court of appeal affirmed, holding the 2003 Measure A already imposed a 5.5% tax on all telephone service as voters understood it in 2003, so the 2007 ordinance did not impose/extend/increase the tax.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the 2007 ordinance unlawfully imposed a new tax without voter approval | Deleting the IRC § 4251 reference expanded the tax to services voters had exempted (those not subject to federal tax), so City imposed a new tax | Measure A (2003) already ratified a 5.5% tax on all telephone service; 2007 change was technical clarification, not a new tax | Held: No new tax was imposed — Measure A already covered all telephone service as voters intended in 2003 |
| Whether the 2007 ordinance unlawfully extended or increased the tax under Prop 218 | Removing the federal reference extended/expanded taxation to services previously untaxed, thus extending/increasing the tax | The tax rate and taxable base (as voters understood them) remained the same; no increased burden resulted | Held: Not an extension or increase — the ordinance did not change the tax burden; Prop 218 not violated |
| Whether a subsequent federal change in IRS interpretation retroactively altered Measure A’s scope | Plaintiffs: Federal courts’ 2005–2006 holdings and IRS Notices meant Measure A never authorized taxing certain services, so the 2007 deletion changed the law | City: When Measure A incorporated IRC § 4251 it incorporated the statute as interpreted in 2003; later federal reinterpretation did not retroactively change the voters’ intent or the municipal code’s meaning | Held: Federal reinterpretation did not retroactively change the municipal code incorporated in 2003; the voters intended to ratify a tax on all telephone service then in effect |
| Whether AB Cellular compels a contrary result | Plaintiffs rely on AB Cellular to argue changes in tax methodology that increase revenue require voter approval | City distinguishes AB Cellular: there the city changed taxing methodology causing an increased burden; here no added burden resulted | Held: AB Cellular is consistent with this decision — only methodology changes that increase taxpayer burden trigger Prop 218; no such increase occurred here |
Key Cases Cited
- NRPC v. United States, 431 F.3d 374 (D.C. Cir. 2005) (federal courts narrowed scope of federal excise taxation of certain long‑distance/bundled services)
- Reese Bros., Inc. v. United States, 447 F.3d 229 (3d Cir. 2006) (federal excise tax did not apply to some plans charging only by elapsed time)
- Fortis, Inc. v. United States, 447 F.3d 190 (2d Cir. 2006) (same)
- OfficeMax, Inc. v. United States, 428 F.3d 583 (6th Cir. 2005) (same)
- American Bankers Ins. Group v. United States, 408 F.3d 1328 (11th Cir. 2005) (same)
- AB Cellular LA, LLC v. City of Los Angeles, 150 Cal.App.4th 747 (Cal. Ct. App. 2007) (revising tax calculation methodology that increases taxpayer burden requires voter approval under Prop 218)
- Lance W. v. Superior Court, 37 Cal.3d 873 (Cal. 1985) (presumption that voters are aware of existing law when enacting initiatives)
- Palermo v. Stockton Theatres, 32 Cal.2d 53 (Cal. 1948) (statutory adoption by reference incorporates text as it exists at time of reference)
- Greene v. Marin County Flood Control & Water Conservation Dist., 49 Cal.4th 277 (Cal. 2010) (courts may consult contemporaneous legislative constructions when interpreting constitutional provisions)