Missouri Supreme Court sides with cities in dispute over phone taxes

JEFFERSON CITY, Mo. -- A state law changing the way local governments tax telephone services was tossed out Tuesday barely five weeks after it took effect.

The Missouri Supreme Court sided with several cities in their challenge to a new law adjusting tax rates on telephone service and invalidating cities' lawsuits against various phone companies.

Last year, the legislature passed a law attempting to resolve the dispute between cities and phone companies.

That measure wiped out cities' legal quest for back taxes but clarified that wireless phone companies must pay the local taxes going forward. That provision began in July.

The law also imposed a cap on local telephone taxes that applies to both landline and wireless phone companies. The result was expected to be lower taxes for wireline phones and higher taxes for cell phones -- and a revenue-neutral outcome for local governments.

But the Supreme Court found the law unconstitutional because the Legislature created a special law, rather than a general law, treating certain cities differently than others without "substantial justification."

The Missouri Constitution says it's up to the judicial branch, not legislators, to determine if a special law is appropriate.

Under the law, the tax cap did not apply to cities that were specifically taxing wireless phone service before November 1980 or to those whose voters approved a cell phone tax -- if the cities were collecting it -- before Jan. 15, 2005. The bill passed in May 2005, so the court found that Springfield, among the cities that sued, or any others that wanted to avoid the law's provisions had no window to do so.

"What is constitutionally fatal here is the fact that the statute's classifications are, and were, based on immutable characteristics," the court said in a unanimous opinion written by Judge Laura Denvir Stith.

As the Legislature tied the cancellation of the lawsuits to the new tax rate provisions, all of them are tossed out as unconstitutional, the court said, reversing a trial court's decision that dismissed the cities' suit in light of the new law.

As it ruled on the general law claim, the court said there was no need to delve into other constitutional concerns raised by the cities.

Attorneys for the cities and the phone companies did not immediately return calls seeking comment Tuesday.

But the Missouri Municipal League said it was pleased with the decision, though it now means additional work for city officials who just adjusted their taxes to comply with the law. About 330 cities tax telephone service, according to the Department of Revenue.

"Sorting that out again is going to be a chore for the Department of Revenue and cities," Municipal League deputy director Richard Sheets said. "A lot of cities will be frustrated because they had to jump through hoops. You go back to your bosses and say never mind."

Revenue Department spokeswoman Maura Browning said the agency wasn't due to receive any of the taxes collected under the new law until October, so it's up to phone companies to figure out how to respond.

Also, cities that had sued phone companies seeking back taxes can now proceed, though the Legislature could revisit the issue next year.

During last year's legislative debate, city officials lobbied hard against the bill, fearing the tax caps could limit their future revenues while the ban on lawsuits would deny them a chance to pursue millions of dollars in back taxes.

Nearly all Missouri cities that tax telephone companies used ordinances written before cell phones became common. They impose gross receipts taxes on companies providing such things as "local exchanges" or "telephone services."

But after a 1999 appeals court decision placed cell phone providers in the category of "telephone companies" for a separate tax, more cities have tried to collect local gross receipts taxes from cell phone companies.

Many cell phone companies balked at paying the taxes, saying their mobility disqualifies them from city ordinances, or arguing that cell phones are a radio transmission -- not a phone service.

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Main case is City of Springfield v. Sprint Spectrum, SC87238.

Supreme Court: http://www.courts.mo.gov/sup/index.nsf