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The Tax Man Calleth

The City of St. Louis and scores of other municipalities across the state are slated to get a whole lot richer in coming months thanks to lawsuits filed against a half-dozen cell-phone carriers. As reported here last week, several wireless companies have begun settlement negotiations with more than 300 Missouri municipalities seeking unpaid "license" taxes. Statewide those back taxes -- in dispute since 2001 -- could eclipse $500 million.

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On Thursday, August 30, Verizon Wireless became the first of the cell-phone companies to settle. The company will pay $26 million in fees going back two years. St. Louis, which charges one of the highest telephone license tax rates in the state (10 percent), will receive $3.3 million from the settlement. University City will snag $416,000.

At issue in all the lawsuits is whether wireless phones can be taxed at the same rate as traditional phones. Landline phone companies pay local governments anywhere from 2 to 11 percent of a customer's monthly bill in a license tax. The tax was initially designed to compensate municipalities for allowing a monopoly phone company the right to erect telephone lines on public property. Cell phones, on the other hand, transmit their signals from towers constructed on private property.

"Wireless has always been a competitive industry that doesn't use the public right-of-way," argues Joe Farren, a spokesman for CTIA -- The Wireless Association, an industry trade group that's kept a close eye on the Missouri litigation. "Policymakers have realized that wireless was a way to raise revenue without leaving fingerprints. They put all these fees and taxes on cell phones and hope no one will notice. The average cell-phone user now pays 14 percent of his monthly bill in taxes."

University City attorney John Mulligan Jr. says that as cell phones have increased in popularity, the amount of revenue generated from the city's telephone license tax has dropped dramatically. Last year the telephone tax generated less than $500,000 in University City. In 2000 the same tax brought in nearly $800,000. He dismisses the notion that cell phones are not subject to the license tax.

"Why should one technology in the phone business not have to pay a tax when another does?" posits Mulligan. "Those cell-phone calls to a landline phone still travel over the telephone lines. If we pulled those poles out of the ground, the wireless companies would be out of business tomorrow."

In 1999 a state appeals court ruled that that wireless companies could be taxed as traditional phone companies. Two years later Mulligan sued on behalf of University City and twenty other municipalities after failing to get the companies to fork over the tax voluntarily. The suits have since stalled in litigation, with several companies paying the tax under protest and depositing the payments into escrow accounts. Although technically a business fee similar to an income tax, state law allows cell-phone companies (and other utilities) to list the tax on customers' bills, betraying the obvious: that the cost is being directly passed on to consumers.

In 2005 state representative Shannon Cooper, a Republican from Clinton in western Missouri, pushed through legislation that would have thrown out the lawsuits and capped the amount cities can tax wireless companies. The Missouri Supreme Court overturned the legislation last year. This past spring Cooper drafted another bill that would have stopped the lawsuits and brought the issue to voters. The measure passed the House but never made it to the floor of the Senate.

Cooper endorses a plan that would reduce the tax for people who have both landlines and cell phones. "As it stands now, those people are paying the same tax twice each month," argues Cooper. "In St. Louis, that's 10 percent on your cell phone and 10 percent of your landline. Cities shouldn't lose money on these taxes, but they shouldn't be a windfall either."

More concerning to Cooper is how little public outcry there's been concerning the cell phone taxes in St. Louis and other municipalities. "You'd think people would be fired up about this, but unfortunately that hasn't been the case," says the representative. "You got a bunch of lawyers who are getting rich off the litigation and they've convinced the cities that they can get rich, too."

The Verizon settlement provides the attorneys representing the municipalities (Mulligan, Howard Paperner and the law firm Korein Tillery) with $5 million in fees. Separate suits against AT&T, Sprint, Vodafone and Alltel could rack up similar buckage.

"We submitted our fees to the court and the judge has approved them as fair," counters Mulligan. "The fact is, we've incurred significant expenses litigating this since 2001. Six years ago if the cell-phone companies had agreed to pay the tax going forward, they wouldn't have paid a cent toward our legal fees. But that wasn't the case."

-Chad Garrison

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