Chula Vista Fights Cell Phone Taxes: Update

Chula Vista’s Cell Phone Tax Woes: Checking Up

By Will Carless

In the latest of our posts checking up on past stories, I’m taking a quick look at the legal fight over taxes on cell phone calls in Chula Vista.

The tax, introduced in 1970, charges a small fee on users of telephones, electricity and other utilities within the South Bay city. As cell phones came into popular use, Chula Vista started allowing phone companies to tax cell phone calls too, and for years it collected and spent that tax money.

The tax on cell phone calls was always on rather shaky ground. It was loosely based on Internal Revenue Service rules governing what can and can’t be taxed. But in the mid-2000s, the IRS lost a number of court cases over whether it could tax cell phone calls and, in 2006, a cell phone carrier wrote to the city of Chula Vista saying it didn’t think it still needed to collect the taxes.

But Chula Vista didn’t stop taking the tax money. The city argues that the tax is legal, though in recent years it’s been carefully stashing away the proceeds from the cell phone taxes in case it loses in court one day.

That day might be coming soon. Let’s take a look at how this has played out:

Where we left it:

The last time we wrote about this was back in June 2011. A pair of law firms had just filed suit against the city of Chula Vista over the tax.
It was a tough time for the city to get slammed with a multimillion-dollar lawsuit. Chula Vista had just gone through a couple of years of financial misery, laying off staff and closing down city services.

The city had about $5.6 million stashed away in case in was ever sued on the tax, but attorney Thomas D. Penfield, who is suing the district, told me at the time that he would be seeking far more in damages.

What’s happened since?

The lawsuit was certified as a class action on Sept. 14. That basically means that a judge has ruled that the plaintiffs in the case are the members of a class of people who have a claim against the city.

The city had originally challenged the lawsuit, arguing that a class action suit couldn’t legally be used to seek a tax refund. That challenge was dismissed by Superior Court Judge Richard E. Strauss in January.

Since the case was certified, the lawyers challenging the tax have been preparing to give notice to all the Chula Vista residents who might be a member of the class action. That involves sending out postcards to residents and setting up a website on the lawsuit. If any member of the class doesn’t believe he or she is being adequately represented in the suit, that person can choose to file a separate lawsuit, Penfield said.

Chula Vista’s city attorney and outside attorneys did not respond to calls for comment. The city’s finance director, Maria Kachadoorian said via email that the city’s financial situation has improved since the dark days of 2011.

“We are seeing modest improvements in our major revenue streams and the housing market seems to be settling down,” Kachadoorian wrote. “We anticipate that we will continue to see some challenges but nothing like what we experienced over the past four years.”

What happens next?

The case is set to go to trial on Feb. 8, 2013, before Strauss. Both sides of the lawsuit have proposed a two-stage hearing process, Penfield said. First, the judge will hear arguments as to whether the tax violates the law, and if so, whether damages should be awarded. The second stage, if necessary, will deal with how much the city will have to pay in damages.

As long as the city has continued to stash away the taxes and not spend them, the overall impact to Chula Vista’s bottom line shouldn’t be too damaging. If the city wins, it could potentially have a sorely needed windfall after years of cuts.

Penfield’s firm, CaseyGerry, partnered on the lawsuit with Orange County-based Capretz & Associates. The firm’s lawyers will be paid a contingency fee if the lawsuit is successful, and Chula Vistans who have paid the taxes will be entitled to damages.

Penfield said the amount of damages, and the method by which they will be paid, will have to be worked out in court.

In this case, the payoff amount per resident is pretty small. Cell phone users were likely taxed a few dollars a month by the city and they may have to go back through their bills to establish how much they are owed.

Penfield said the city is liable for the taxes for up to one year before the lawsuit was filed. That means Chula Vista is potentially on the hook for taxes it collected going back to April 2010.

I’ll write another update when there’s a verdict.