Cоurtney M. KAY-DECKER, Director, Iowa Department of Revenue, Appellant, v. IOWA STATE BOARD OF TAX REVIEW and Cable One, Inc., Appellees.
No. 13-0925.
Supreme Court of Iowa.
Dec. 19, 2014.
216-229
MANSFIELD, Justice.
In addition, as a condition to any reinstatement, Baldwin shall satisfy this court that all client property has been returned to Candace, including all her files and records in his possession. Further, Baldwin shall return to Candace the $218 in unearned fees he withdrew from the trust account, but has not yet returned. Finally, Baldwin shall be required to make restitution to whomever is currently entitled to the $3135.30 in attorney fees assessed against Candace by the court in the modification action.
Costs are taxed to Baldwin pursuant to Iowa Court Rule 35.27.
LICENSE SUSPENDED.
Thomas J. Miller, Attorney General, Donald D. Stanley Jr., Special Assistant Attorney General, and James D. Miller, Assistant Attorney General, for appellant.
Bryan S. Witherwax of Witherwax Law, P.C., West Des Moinеs, for appellee Iowa State Board of Tax Review.
Chérie R. Kiser of Cahill Gordon & Reindel, LLP, Washington, D.C., and Christopher E. James of Davis, Brown, Koehn, Shors & Roberts, P.C., Des Moines, for appellee Cable One, Inc.
This administrative review proceeding requires us to decide whether a company providing Voice over Internet Protocol (VoIP) service on cable wires in Iowa is subject to central assessment as a “telephone company operating a line in this state” or, otherwise stated, a company “that operates . . . any . . . telephone line.”
I. Background Facts and Proceedings.
Cable One, Inc. is an Arizona-based company operating in nineteen states, including Iowa. In the Sioux City area, it offers cable television, internet access, and VoIP, the subject of the present dispute.
VoIP is a service that enables two-way voice communications over a broadband Internet cоnnection. Cable One‘s VoIP service is “fixed,” meaning, as with a traditional landline, the customer must make the call from a telephone permanently located in his or her residence. This is in contrast to “nomadic” VoIP, in which the customer is free to make the call from any location, much like a cellular telephone.
With both Cable One‘s VoIP and traditional landline telephone service, the customer dials a seven- or ten-digit phone number from his or her home telephone and is connected to a person on the receiving end. Both VoIP and traditional phone service offer features such as voicemail, caller ID, call waiting, call transfer, call blocking, and conference calling. Cable One‘s VoIP service is “interconnected,” meaning its customers can send and receive calls to custоmers of other telephone companies, not just to and from other Cable One subscribers.
The difference between Cable One‘s VoIP and traditional phone service lies in the manner by which the voice signal is initially transmitted. With traditional telephone service, the voice call travels from the customer‘s phone to the telephone company‘s central office via a closed circuit of copper wire lines. More recently, fiber optic cables have been replacing these traditional copper cables. At the central office, the company has a switch to connect the caller to the public switched telephone network (PSTN) (unless the call is merely going to another customer served by the same central office).
Traditional telephone service is provided by a variety of carriers. Traditional telephone companies frequently “hand off” calls to other providers so they can reach their final destination. Traditional telephone service also can involve transmissions over wireless microwave systems, in addition to copper wire and fiber optic cable.
With VoIP, Cable One utilizes its combination of fiber and coaxial cable, the same system over which its cable television and internet services are deployed, to provide the first leg of its telephone service.1 Thus, a caller places a call from his or her residence using his or her preexisting corded or cordless telephone. An embedded multimedia terminal adaptor (EMTA) unit then translates the voice communication into the data format necessary to transmit the signal over Cable One‘s network. The call proceeds in data packets along the coaxial cable that runs into and out of the customer‘s home. It continues on coaxial cable until it gets to a “node,” whereupon it travels on fiber optic cable until it reaches a “headend,” a station owned by Cable One. From the headend, Cable One can transmit the call directly to another Cable One customer in the Sioux
However, if the caller is attempting to reach someone who is not a Cable One telephone customer in the Sioux City area, the data packets are transferred to a third-party company, Level 3, that translates them into a different format so they can be sent over the PSTN. Thereafter, the voice signals proceed over the PSTN in the same manner as other telephone сalls.
A Cable One customer can also receive a call originating from outside Cable One‘s Sioux City network. In that case, the system works in reverse with the outside caller placing the call with his or her service-provider that transmits the call over the PSTN, ending with Level 3 transmitting the signal to Cable One for conversion and delivery to its customer via the hybrid fiber-coaxial cable network.
VoIP is complementary to preexisting telephone service because it permits companies like Cable One to expand access to the PSTN without having to install dedicated copper wire or fiber optic connections. Fixed VoIP of the type Cable One offers is generally of high quality due to the fact its calls are transmitted over physical lines just like traditional landline calls. In contrast, wireless providers that transmit signals via satellitе frequently experience lower call quality than servicers using wired connections.
In mid-2006, Cable One began offering VoIP service to its residential customers in the Sioux City area, including parts of Plymouth and Woodbury Counties. It provided a brochure to its subscribers entitled “Your New Cable ONE Phone Service.” This stated that Cable One‘s VoIP service would operate in a similar manner to landline services, with the same processes for dialing numbers, operating caller ID, enabling three-way calling, and receiving voicemails. A new subscriber of Cable One‘s VoIP service would be able to transfer her or his existing home telephone number to the new Cable One service and could purchase Cable One‘s VoIP without also buying broadband internet or cable television services.
The Iowa Department of Revenue became aware of Cable One‘s VoIP operations and, on November 12, 2008, issued a notice of assessment based on its authority to tax telephone property under
In October of 2009, the Department sent Cable One another notice of assessment under
Iowa Code chapter 433 is entitled “Telegraph and Telephone Companies Tax.” It reads, in relevant part, as follows:
433.1 Statement required.
Every telegraph and telephone company operating a line in this state shall, on or before the first day of May in each year, furnish to the director of revenue a statement verified by its president or secretary showing:
1. The total number of miles owned, operated, or leased within the state, with a separate showing of the number leased. 2. The average number of poles per mile, and the whole number of poles on its lines in this state.
3. The total number of miles in each separate line or division thereof, also the average number of separate wires thereon.
. . . .
6. Thе gross receipts and operating expenses of said company for the year ending December 31 next preceding, on business originating and terminating in this state.
. . . .
8. The total capital stock of said company.
. . . .
11. All real estate and other property owned by such company and subject to local taxation within this state.
12. The specific real estate, together with the permanent improvements thereon, owned by such company and situated outside this state and taxed as other real estate in the state where located. . . .
13. All mortgages upon the whole or any part of its property, together with the dates and amounts thereof.
14. The total length of the lines of said company.
15. The total length of the lines of said company outside this state.
433.4 Assessment.
The director of revenue shall on the second Monday in July of each year, proceed to find the actual value of the property of these comрanies in this state, taking into consideration the information obtained from the statements required, and any further information the director can obtain, using the same as a means for determining the actual cash value of the property of these companies within this state. The director shall also take into consideration the valuation of all property of these companies, including franchises and the use of the property in connection with lines outside the state, and making these deductions as may be necessary on account of extra value of property outside the state as compared with the value of property in the state, in order that the actual cash value of the property of the company within this state may be ascertained. The assessment shall include all propеrty of every kind and character whatsoever, real, personal, or mixed, used by the companies in the transaction of telegraph and telephone business; and the property so included in the assessment shall not be taxed in any other manner than as provided in this chapter.
. . . .
433.12 Definitions.
. . . .
”Company” as used in this chapter means any person, copartnership, association, corporation, or syndicate that owns or operates, or is engaged in operating, any telegraph or telephone line, whether formed or organized under the laws of this state or elsewhere. ”Company” includes a city that owns or operates a municipal utility providing local exchange services pursuant to
chapter 476 .
Both parties moved for summary judgment, and the ALJ issued a proposed decision on June 24, 2011, to enter judgment in Cable One‘s favor. The ALJ stated,
Cable One does not fit the historical context of a “telephone company.” Ca-
ble One built its network of cable in order to provide cable television services. It is undisputed that Cable One‘s network of cable lines was not subject to chapter 433 prior to offering telephone services in the second quarter of 2006. Cable One has been subject to property tax and locally assessed since the time it began operation in Iowa. Cable One has not built a second system of cable or wires to offer telephone services—rather, it is offering telephone services on the same cable network it uses to offer television services. Cable One has only connected with the PSTN by contracting with Level Three. Level Three is a telephone company that is subject tochapter 433 .
(Footnote omitted.)
The ALJ went on to conclude,
The [D]epartment spent considerablе time and effort in its brief trying to convince me that Cable One‘s phone service is not fundamentally different than phone services provided by traditional telephone companies. I do not disagree with that point, but believe that the point misses the mark. I agree that, no matter what technology is used, Cable One offers a service by which its customers talk [to] others by telephone. Traditional telephone companies have used different and enhanced technologies to provide services over the years, but the nature of [a] telephone call has not really changed. Cable One is similarly offering a telephone service, even though its technology is different. Notwithstanding this finding, the focus of the statute is whether Cable One is a “telephone company,” as that term is used in
chapter 433 . For reasons stated above, I find it is not.
The Department appealed the proposed decision to the Iowa State Board of Tax Review. On its review, the Board agreed with the ALJ that Cable One was not subject to assessment under
In considering both the Department and Cable One‘s arguments, the Board analyzed the applicable case law provided by both parties. The Board determined that unlike the telegraph and telephone cases that had been previously litigated, there is such a substantial difference between traditional telephone and VoIP that Iowa precedent allowing for the inclusion of emerging technologies into existing law could not be properly applied in this instance. The Board concluded that the service provided by Cable One is sufficiently distinct from the phone services described in
§ 433 that it cannot properly be taxed under the existing law as writtеn. The Board agrees with Cable One that the language of§ 433 is too narrowly written to impose a tax on their VoIP service.
The Board also stated the primary use test would apply to determine the manner of assessment even if Cable One were subject to taxation as a telephone company. The Board further declined to find that federal law preempted taxation of VoIP service.
The Department petitioned for judicial review of the Board‘s order. After a hearing, the Polk County District Court issued a ruling on May 9, 2013, affirming the Board‘s decision. The court stated,
In this case, the intent of the legislature as to what constitutes a telephone company is clear: it requires that whatever entity is in question own or operate, or be engaged in the operation of, a telephone line. It is undisputed on this record thаt Cable One undertakes none of these required activities. The provision of the services in question is not through a network of lines, but rather through a cable broadband network which is completely independent of the
PSTN. This distinction is best highlighted by the fact that Cable One must contract with a third-party in order to connect to the PSTN. Based on a plain reading of § 433.12[] and the undisputed record before this court, Cable One does not come within the statutory classification of a “telephone company” for purposes of the assessments in question. . . .The Department has repeatedly urged that Cable One is subject to taxation as a telephone company because it provides a “telephone service.” As the Board concluded, that fact is essentially undisputed, but irrelevant. The legislature has chosen to classify whаt a telephone company is not by reference to the services it provides, but the infrastructure through which those services are provided. Had the legislature chosen to use such a service-focused methodology in the classification of telephone companies, the Department‘s argument would most likely have merit. Based on the unambiguous wording of
chapter 433 , however, the Department‘s argument is lacking; any relief consistent with its position on assessment as applied to the present case should be directed to the legislative rather than the judicial branch.
(Citation omitted.)
Having found that
II. Standard of Review.
Judicial review of agency decisions is governed by
We are not aware of any provision of Iowa law granting the Iowa Department of Revenue authority to interpret
III. Analysis.
A. Applicability of Chapter 433 to Cable One‘s VoIP Service.
We now address Cable One‘s claim that it should not be centrally assessed under
Finally, a statute can encompass technologies not in existence at the time of its promulgation. See Bruce Transfer Co. v. Johnston, 227 Iowa 50, 52-53, 287 N.W. 278, 280 (1939) (“[L]egislative enactments in general and comprehensive terms, prospective in operation, apply alike to all persons, subjects and business within their general purview and scope coming into existence subsequent to their passage.” (Internal quotation marks omitted.)); accord Kruck v. Needles, 259 Iowa 470, 477, 144 N.W.2d 296, 301 (1966). For example, in Bruce Transfer Co., we were charged with interpreting an 1872 statute that authorized lawsuits against, among others, “any railway corporation, the owner of stages, or other line of coaches or cars.” 227 Iowa at 52, 287 N.W. at 279. Noting that automobiles did not exist at the time the statute was written, we nevertheless interpreted the statute to apply to the trucking оperation in that case. Id. at 53, 287 N.W. at 280 (“Thus, an automobile may come within the provisions of an act relating to vehicles generally, although the statute was passed before the invention of automobiles.“). Similarly, in Kruck, we interpreted a statute banning tire protuberances to apply to safety spike winter tires, even though “tires of this particular type were not produced in 1937 when this statute was enacted and the legislature may not have had in mind prohibition of their use.” 259 Iowa at 477, 144 N.W.2d at 301.
We begin with the actual wording of
Cable One concedes that it provides telephone service, but disputes that it owns or operates a telephone line.4 Yet
This is supported by a dictionary definition of “line.” Merriam-Webster‘s preferred definition of line in this context is “a wire or pair of wires connecting one telegraph or telephone station with another or a whole system of such wires.” Merriam-Webster‘s Collegiate Dictionary 723 (11th ed.2003); see also Schaefer v. Putnam, 841 N.W.2d 68, 78 (Iowa 2013) (noting that we may refer to dictionary definitions when the legislature leaves a term undefined).5 Cable One‘s connections to its telephone service subscribers meet this definition. There is no requirement in
The Board decision, as we read it, never confronts these points. The Board asserts that “the language of
In contrast, the district court‘s judicial review decision does articulate a reason why, in the court‘s view, Cable One does not own or operate telephone lines. According to the district court, Cable One provides its service “through a cable broadband network which is completely independent of the PSTN. This distinction is best highlighted by the fact that Cable One must contract with a third-party in order to connect to the PSTN.”
But this observation does not seem to us dispositive.
While we are inclined to the view that
We similarly found a statute authorizing lawsuits against telegraph companies to apply to telephone companies. Franklin v. Nw. Tel. Co., 69 Iowa 97, 98–99, 28 N.W. 461, 462 (1886). We deemed telephone companies to be included in the statute, “based upon the substantial identity of telegraphic and telephonic modes of communication.” Id. at 99, 28 N.W. at 462.
These cases underscore the importance of functionality. In them, we focused on the fact that both the telegraph and the telephone achieved distant communication through wires, not on the methods of signal transmission.
As with automobiles in Bruce Transfer Co., 227 Iowa at 53, 287 N.W. at 280, and spiked snow tires in Kruck, 259 Iowa at 477, 144 N.W.2d at 301, the technology at issue here did not exist when the legislature enacted the statute. However, in both cases, we applied the language of the statute in a common-sense manner rather than assuming the legislature intended to capture only technologies that existed when the law was enacted.7
The conclusion that Cable One operates a telephone line is further bolstered by Cable One‘s own marketing material. Cable One‘s brochure, entitled “Your New Cable ONE Phone Service,” nowhere mentions the term “VoIP” but instead portrays Cable One‘s service as a standard telephone opеration. The publication discusses features like caller ID, three-way calling, and voicemail. It states that “[p]hone service with Cable ONE should be similar to other landline services.” It advises customers that they will still operate their phone by dialing a seven- or ten-digit number from a traditional, landline phone console. Thus, for the subscriber of Cable One‘s VoIP service, there is little discernible difference between VoIP and traditional telephone service.
Cable One notes that it contracts with a third party, Level 3, to provide transmission over the PSTN. Yet traditional landline telephone companies frequently contract with one another to send and receive signals to and from customers of other service-providers. These interconnection agreements, like Cable One‘s contract with Level 3, govern the financial and technical aspects of the relationships between companies, but do not affect their status as taxable telephone companies.
In a recent thorough and persuasive decision, the Arizona Court of Appeals held that Cable One should be centrally assessed for its VoIP service in that state, despite paying Level 3 to transmit signals over the PSTN. Cable One, Inc. v. Ariz. Dep‘t of Revenue, 232 Ariz. 275, 304 P.3d 1098, 1099-1100 (App.2013). The Arizona statute in question permits central assessment of telecommunications companies. Id. (citing
Cable One provides its customers with access to the PSTN. To assert otherwise “misstates the reality of the situation.”
. . . [T]hrough its VoIP service, it provides “telecommunications exchange or inter-exchange access,” which, using more familiar terms, is what it is advertising to the public: “[p]hone service” with “UNLIMITED local & long-distance calling in the continental U.S.” Cable One is, thereforе, a “telecommunications company” under
A.R.S. § 14-14401 and subject to central assessment by the Department.
Id. at 1107 (alteration in original) (quoting Mayor of Balt. v. Vonage Am. Inc., 544 F.Supp.2d 458, 472 (D.Md.2008)).
Like the Arizona court, we find that the fact Cable One uses a third-party for access to the PSTN does not affect its status as a telephone company for property tax purposes. Just as Cable One owns “communications transmissions facilities” and provides “public telephone . . . access” in Arizona, thereby subjecting itself to central assessment there, so too Cable One “operates [a] telephone line” in Iowa, thereby subjecting itself to central assessment here. Neither statute requires the company to own or operate the entire line.
Other courts have also determined that VoIP providers should be treated as telephone or telecommunications companies under their respective state taxation schemes. See, e.g., Vonage Am., Inc. v. City of Seattle, 152 Wash.App. 12, 216 P.3d 1029, 1033, 1036 (2009) (holding Vonage was subject to telephone utility tax for its VoIP service and was not exempt as an internet provider). The Montana Supreme Court held that a cable company providing VoIP service should be centrally assessed under a statute allowing taxation of “telecommunications services companies.” Bresnan Commc‘ns, LLC v. State, 373 Mont. 29, 315 P.3d 921, 924 (2013) (quoting
Perhaps the most direct analogue to the present case comes to us from the United States District Court for the District of Maryland. Mayor of Balt., 544 F.Supp.2d at 472. The federal court there held that Vonage‘s VoIP service was subject to the city‘s telecommunication tax. Id. The Baltimore City Code provision permitted a tax on “each person who leases, licenses, or sells a telecommunications line to any customer.” Id. at 461 (quoting Baltimore, Md. City Code art. 28, § 25-2). Vonage contended that it did not sell telecommunication lines to its customers because its VoIP service relied on contracts with third-party carriers to transmit calls over the PSTN. Id. at 469. The court rejected this argument and focused instead on the nature of the service Vonage provided to its customers. See id. at 472. “Although these third-party carriers provide the wired connection to Vonаge, it is Vonage, not these carriers, which provides this connection to Vonage‘s customers.” Id. “Selling a telecommunication line” in the Baltimore provision and “operating . . . [a] telephone line” in
Finally, it should be noted to the extent Cable One‘s property is centrally assessed, it cannot be taxed twice. “[T]he property so included in the assessment shall not be taxed in any other manner than as provided in this chapter.”
For the foregoing reasons, we conclude Cable One is a “telephone company operating a line in this state” and “operates . . . [a] telephone line.”
B. Primary Use.
Cable One argues that even if its VoIP service qualifies as a telephone line, the Department may not сentrally assess Cable One because it primarily uses its hybrid fiber-coaxial network to provide cable television service, not VoIP.
We believe a primary use test does not apply to
Furthermore, long ago, under chapter 433‘s predecessor, we declined to apply a primary use test to a railroad‘s lines that were “used in the ordinary manner for the transaction of railroad business” and only secondarily for “commercial telegraph business.” Chi., Burlington & Quincy R.R. v. Rhein, 135 Iowa 404, 404-05, 112 N.W. 823, 824 (1907).
The Arizona Court of Appeals similarly rejected a primary use test in its recent decision involving Cable One, observing, “Predominant or primary use is not an element of [the statutes] pertaining to central assessment of telecommunications companies. . . .” Cable One, Inc., 304 P.3d at 1107.
C. Preemption.
Finally, Cable One argues that federal law prevents the Department from taxing it as a telephone company. It cites to a number of FCC decisions and federal statutes and cases governing the regulation of VoIP providers and distinguishing them from traditional telephone companies. See, e.g., In re Vonage Holdings Corp., 19 FCC Rcd. 22404, 22404-05 (Nov. 12, 2004) (preempting Minnesota telephone regulations of Vonage‘s VoIP service because the interstate and intrastate elements could not be separated due to the mobility of nomadic VoIP callers). But these authorities pertain only to regulation of VoIP, not its taxation. See id. at 22405 (“We express no opinion here on the applicability to Vonage of Minnesota‘s general laws . . . , such as laws concerning taxation. . . .“).
It is well established that federal regulation of an activity does not generally preempt state taxation of companies operating in that area. The United States
Federal regulation of interstate land and water carriers under the сommerce power has not been deemed to deny all state power to tax the property of such carriers. We conclude that existent federal air-carrier regulation does not preclude the Nebraska tax challenged here.
Id.; see also U.S. Transmission Sys., Inc. v. Bd. of Assessment Appeals, 715 P.2d 1249, 1250, 1254-55 (Colo.1986) (en banc) (distinguishing between regulation and taxation and permitting the state assessment board to tax a utility‘s property despite the fact it was regulated by the FCC); Post-Newsweek Cable, Inc. v. Bd. of Review, 497 N.W.2d 810, 816, 818 (Iowa 1993) (holding that where federal law preempted local regulation of cable television rates, the state was nevertheless permitted to tax the cable company on its tangible property located in the state).
The Arizona Court of Appeals addressed a similar argument and declined to find federal law preempted taxation of VoIP providers:
[C]iting a host of federal statutes and FCC orders рertaining to a variety of telecommunications services, including VoIP service, and federal case law interpreting or applying these statutes, Cable One argues classifying it as a telecommunications company . . . is contrary to these authorities. We reject this argument. These authorities concern regulation, not taxation.
. . . Although Congress and the FCC have imposed various regulations on VoIP providers and have preempted a variety of efforts by the states to regulate VoIP providers, neither Congress nor the FCC has taken any action to preempt state taxation of VoIP providers.
Cable One, Inc., 304 P.3d at 1108.
The parties cite no additional authority that would indicate Congress has preempted taxation of VoIP providers in the time since the Arizona court addressed the issue. We therefore agree with its reasoning and conclude that federal law does not preempt state taxation of VoIP providers.
IV. Conclusion.
For the foregoing reasons, we reverse the judgment of the district court and remand for further proceedings consistent with this opinion.
JUDGMENT REVERSED AND CASE REMANDED WITH INSTRUCTIONS.
All justices concur except ZAGER, J., who takes no part.
Notes
Towers like the one in the instant case make it unnecessary to have a row of poles carrying wires from one point to another. They transmit by means of electronically induced waves in the air rather than physical lines, but the result is the same. . . . Obviously [the term “lines“] means more than just wires, for it includes poles and supports, etc., or in other words, a transmission system.
Id. (quoting Brannan v. Am. Tel. & Tel. Co., 210 Tenn. 697, 362 S.W.2d 236, 239 (1962)). The attorney general concluded, “‘Line’ is not the physical wire, but the transmission system or line of communication used by the company. As such, any substitutes for the wire-and-pole combination first used [are] to be included under the term ‘lines.‘” Id. at *3.