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CITY OF SAN BERNARDINO - REQUEST FOR COUNCIL ACTION
From: JAMES F. PENMAN Subject: AN ORDINANCE OF THE CITY OF
City Attorney SAN BERNARDINO AMENDING SECTION
3.44.030 OF THE SAN BERNARDINO
Dept: CITY ATTORNEY MUNICIPAL CODE CHAPTER 3.44,
Date: September 12, 2007 TELEPHONE USERS TAX TO CLARIFY
ORIGINAL INTENT.
MCC: September 17,2007
Synopsis of Previous Council Action:
Discussed at the Legislative Review Committee meeting on July 17, 2007.
Recommended motion:
That said ordinance be laid over for final adoption.
Signature
Contact person: James F. Penman Phone: 5255
Supporting data attached: Staff Report Ward:
FUNDING REQUIREMENTS: Amount:
Source:
Finance:
Council Notes:
Agenda Item No.
9 . 17-07
STAFF REPORT
Council Meeting Date: September 17,2007
TO: Mayor and Common Council
FROM: James F. Penman, City Attorney
DATE: September 17, 2007
AGENDA ITEM: UUT Ordinance
For many years the City has imposed a Utility Users Tax(UUT)on a variety of public utilities,
including long distance telephone service. For administrative ease, our existing UUT ordinance refers
to certain provisions of the Internal Revenue Code to assist in applying our UUT to telephone
communication service.
Since 1979, the IRS has imposed the federal excise tax on long distance service if the charges
for the service were based on either time or distance. The City's UUT has relied on the IRS's
interpretation of the federal excise tax for its definition of long distance service since 1984.The City has
been billing based on this interpretation. On May 25,2006,the IRS announced that it will only impose
the federal excise tax("FET")on long distance service if the charges for the services are based on time
and distance. Since most of the 150 UUT ordinances in California reference the FET, it is unclear
whether this means that the UUT is subject to the IRS' ruling regarding long distance. This issue is
being litigated in four other California jurisdictions. As a result of these lawsuits,and other changes in
technology, it is clear that the City's UUT revenue from telephone communication services is at risk.
Two possible approaches address these risks. First, the City may present to the electors of the
City a new and modern ordinance that addresses the IRS issue and modernizes the ordinance in other
respects. The Cities of Compton, Daly City, Eureka, Menlo Park and Tulare were recently successful
in elections adopting such modern ordinances. Eight cities are seeking voter approval of similar
ordinances this November. Even more are planning similar actions for 2008.
The City's consultant and expert on the UUT, Don Maynor strongly favors seeking voter
approval of a modern ordinance,as this approach leaves the City in better position to implement its UUT
on future technologies. Further,a voter approved ordinance would remove the legal basis for the various
lawsuits challenging the validity of the UUT on telecommunication services. Some cities have
conducted polling to confirm whether such an approach is politically viable.
A second approach would be for the City to amend its current ordinance clarifying that the City would
continue to collect the UUT as it has done for many years. This approach would not seek voter approval.
Several cities have adopted such clarifications, including three of the four jurisdictions that are in
litigation. The plaintiffs allege that such"clarifications"require voter approval under Proposition 218.
About two months ago,the City of Sacramento"clarified"its ordinance in the manner suggested above,
and it was sued by the Howard Jarvis Association and two named taxpayers, alleging that such a
clarification requires voter approval. It is certainly possible that the City could encounter similar
litigation if it were to follow this second approach.
F ACALKfNS\SUT\TelephoneUsersTax.StaffReport2.wpd
1 ORDINANCE NO.
2 AN ORDINANCE OF THE CITY OF SAN BERNARDINO AMENDING SECTION
3.44.030 OF THE SAN BERNARDINO MUNICIPAL CODE CHAPTER 3.44,TELEPHONE
3 USER'S TAX TO CLARIFY ORIGINAL INTENT.
4 THE MAYOR AND COMMON COUNCIL OF THE CITY OF SAN BERNARDINO
5 DO ORDAIN AS FOLLOWS:
6 SECTION 1. The Mayor and Common Council finds and declares:
7 Whereas, since 1968, the City of San Bernardino has imposed a telephone users tax on
every person in the City using intrastate, interstate, and international telephone communication
8 services, and such revenues are critical to the public peace, health and safety in that such revenues
9 pay the costs associated with essential municipal services such as public safety; and,
Whereas, on May 25, 2006, the Treasury Department announced in Notice 2006-50 that
10 it will no longer apply the Federal Excise Tax ("FET") to long distance and bundled long distance
and local services provided under a single plan that does not separately state the charges for local
11 telephone service; and,
12 Whereas, the Treasury Department's May 25 Notice reversed its prior Revenue Rulings
and long-held interpretation of the FET,ignored its own statutory and administrative bundling rules,
13 and contravened the intent and purpose of the City's ordinance in imposing a local tax on intrastate,
interstate and international telephone communication services; and,
14
Whereas, there are also bills (S.140 and S.170) before Congress to repeal. the federal
15 excise tax on telecommunications in its entirety, which raises ambiguity regarding the current
reference to the federal excise tax law in the City's ordinance; and,
16
Whereas, the City reaffirms that it will continue its long-standing practice of applying its
17 service users tax to telephone communication services in a manner consistent with the intent and
purpose of the City's service users tax ordinance and consistent with the IRS' interpretation of the
18 FET prior to Notice 2006-50 issued by the Treasury Department on May 25, 2006; and,
19 Whereas, the City wishes to remove any ambiguity in the event of repeal of the PET law
by clarifying its telephone communication services ordinance; and,
20
21 Whereas, the City's clarifications will not result in an increase of existing tax revenues.
SECTION 2. Section 3.44.030 of the San Bernardino Municipal Code is hereby amended
22 to read as follows:
23 3.44.030 Telephone Users Tax.
24 A. A tax is imposed upon every person in the City using telephone communication services,
including services for intrastate, inter-state, or international calls, and using any
25 teletypewriter exchange services in the City. The tax imposed by this section shall be at
the rate of 7.83 percent (7.83%) of the charges made for such services and shall be paid
26 by the person paying for such services. Interstate calls shall be deemed to include calls
to the District of Colombia.
27
B. As used in this Section, "charges" for"telephone communication services" shall include
2_8 (but are not limited to): i)monthly service charges for the providing of cellular telephone
l
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1 communication services to a person whose billing address is in the City; and, ii)
"communications services"as defined in Sections 4251 and 4252 of the Internal Revenue
2 Code, and the IRS regulations and rulings pertaining thereto, rendered prior to May 25,
2006, whether charges for such service are based on time,distance,or on any other basis.
3 It shall not include charges for services paid for by inserting coins in coin-operated
telephones except that where such coin-operated telephone service is furnished for a
4 guaranteed amount, the amounts paid under such guarantee plus any fixed monthly or
other periodic charge shalt be included in the base for computing the amount of tax due;
5 nor shall the words"telephone communication services"include maritime mobile services
as defined in Section 2.1 of Title 47 of the Code of Federal Regulations or"private mobile
6 radio service" [as defined in Part 20.3 of Title 47 of the Code of Federal Regulations] or
"private mobile service" [as defined in 47 U.S.C.A. Section 332(d)(3)] which is not
7 interconnected to the public switched network. In the event that the federal excise tax on
"communication services" as provided in Sections 4251, 4252 and 4253 of the Internal
8 Revenue Code is subsequently repealed, any reference in this section to such law shall
refer to such law that existed as of the date of repeal, and as it was interpreted by the
9 Internal Revenue Service through its federal regulations, rulings, and other opinions,
which were rendered prior to May 25,2006. The Tax Administrator shall thereafter apply
10 such law in rendering his or her administrative rulings as provided in this subsection B.
11 C. The tax imposed in this section shall be collected from the service user by the person
providing the telephone communication services or the teletypewriter exchange services.
12 The amount of tax collected in one month shall be remitted to the Director of Finance on
or before the twentieth day of the following month.
13
D. The tax imposed under subsection A above, shall not be imposed upon any person for
T_ 14 using telephone communication services to the extent that, pursuant to Sections 4252(d)
1 and 4253 of the Internal Revenue Code, the amounts paid for such communication
15 services are not subject to or are exempt from the tax imposed under Section 4251 of the
Internal Revenue Code. The Tax Administrator may issue and disseminate to telephone
16 communication service suppliers,which are subject to the tax collection requirements of
this Chapter,an administrative ruling identifying those telephone communication services,
17 or charges therefor, that are subject to or not subject to the tax of subsection A, above.
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1 AN ORDINANCE OF THE CITY OF SAN BERNARDINO AMENDING
SECTION3.44.030 OF THE SAN BERNARDINO MUNICIPAL CODE CHAPTER 3.44,
2 TELEPHONE USER'S TAX TO CLARIFY ORIGINAL INTENT.
3 I HEREBY CERTIFY that the foregoing Ordinance was duly adopted by the Mayor and
4 Common Council of the City of San Bernardino at a meeting thereof, held on the
5 day of , 2007, by the following vote, to wit:
6 COUNCIL MEMBERS: AYES NAYS ABSTAIN ABSENT
ESTRADA
7
8 BAXTER
9 BRINKER
10 DERRY
KELLEY
11
12 JOHNSON
13 MC CAMMACK
14
15 Rachel Clark, City Clerk
16
17 The foregoing Ordinance is hereby approved this day of , 2007.
18
19 PATRICK J. MORRIS, Mayor
i
20 City of San Bernardino
21
22
23 Approved as to form:
2 4 JAMES F. PENMAN
City Attorney
25
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NNOW 28
\\Sbcaw2k\sys\CALKINS\SUT\TelephoneUsersTax.Ord3.wpd 3
i
CITY OF SAN BERNARDINO - REQUEST FOR COUNCIL ACTION
From: JAMES F. PENMAN Subject: AN ORDINANCE OF THE CITY OF
City Attorney SAN BERNARDINO AMENDING SECTIONS
3.44.010 AND 3.44.030 OF THE SAN
Dept: CITY ATTORNEY BERNARDINO MUNICIPAL CODE
Date: July 31, 2007 CHAPTER 3.44, TELEPHONE USER'S TAX
TO CLARIFY ORIGINAL INTENT AND
REMOVE OBSOLETE REFERENCES
MCC: August 6,2007
Synopsis of Previous Council Action:
Recommended for Approval at the Legislative Review Committee Mtg on July 17, 2007.
Recommended motion:
That said ordinance be laid over for final adoption.
i ature
Contact person: James F. Penman Phone: 5255
Supporting data attached: Staff Report Ward:
FUNDING REQUIREMENTS: Amount:
Source:
Finance:
Council Notes: 0 -36
' 1 jt 2— 0
Agenda Item No.. 3
81707
STAFF REPORT
Council Meeting Date: August 6, 2007
TO: Mayor and Common Council
FROM: James F. Penman, City Attorney
DATE: August 6, 2007
AGENDA ITEM: AN ORDINANCE OF THE CITY OF SAN BERNARDINO
AMENDING SECTIONS 3.44.010 AND 3.44.030 OF THE SAN
BERNARDINO MUNICIPAL CODE CHAPTER 3.44, TELEPHONE
USER'S TAX TO CLARIFY ORIGINAL INTENT AND REMOVE
OBSOLETE REFERENCES
For many years the City has imposed a Service User's Tax ("SUT") on a variety of public
utilities,including long distance telephone service. Recent rulings by the Internal Revenue Service
("IRS")and court decisions have made the telephone provision of the City's SUT inconsistent with
the manner in which the tax is in fact collected.
Since 1979,the IRS has imposed the federal excise tax on long distance service if the charges
for the service were based on either time or distance. The existing SUT ordinance defines the type
of telephone service that pays the tax by making reference to sections of the Internal Revenue Code.
The City has relied on the IRS's interpretation of the federal excise tax for its definition of
long distance service since 1984 and has been billing based on this interpretation. On May 25,2006,
the IRS announced that it will only impose the federal excise tax on long distance service if the
charges for the services are based on time and distance. Action must be taken to delete the obsolete
reference to the Internal Revenue Code which is no longer interpreted consistently with the City's
SUT.
Under the proposed amendment, the City would continue to collect the SUT in the same
manner as it has done for many years. This action will not in anyway increase the amount of the tax.
The ordinance would simply re-state the type of telephone service subject to the SUT without the
references to the Internal Revenue Code. In addition, the definition of telephone communication
services has been modernized to make the definitions consistent with past practice.
In sum,it is important to reiterate that the City will be collecting the same tax, at the same
rate and in the same manner as it has in the past, and currently does.
FA CALKINS\SL MTelephoneUsersTax.Staff Report.wpd
1 ,
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1 ORDINANCE NO.
2 AN ORDINANCE OF THE CITY OF SAN BERNARDINO AMENDING
SECTIONS 3.44.010 AND 3.44.030 OF THE SAN BERNARDINO MUNICIPAL CODE
3 CHAPTER 3.44, TELEPHONE USER'S TAX TO CLARIFY ORIGINAL INTENT AND
REMOVE OBSOLETE REFERENCES
4
THE MAYOR AND COMMON COUNCIL OF THE CITY OF SAN BERNARDINO
' 5
DO ORDAIN AS FOLLOWS:
6
SECTION 1. The Mayor and Common Council finds and declares:
7
A. Chapter 3.44 of the San Bernardino Municipal Code defines "telecommunications
8 services" by referring to definitions in the federal excise tax law administered by the
Internal Revenue Service. The common understanding of those definitions was set forth
9 in Revenue Ruling 79-404.
10 B. On May 25, 2006, the Internal Revenue Service (IRS) announced that it had changed its
interpretation of the definitions in the federal excise tax(F.E.T.)and specifically revoked
11 Notices adopted in 2005 which had reaffirmed Revenue Ruling 79-404.
12 C. The Mayor and Common Council does not wish to adopt the IRS'new understanding of
the definitions of the F.E.T. but rather wishes to continue to impose the telephone users
13 tax as it has been historically imposed.
14 D. The amendments are not intended to make any change in the way in which the tax is
calculated,imposed or administered. Therefore the changes made by this ordinance to the
15 definition of"telecommunications services"do not constitute a change in the methodology
of calculating the tax.
16
SECTION 2. That Section 3.44.010 of the San Bernardino Municipal Code is hereby
17 amended to read as follows:
18 3.44.010 Definitions.
19 The following words and phrases whenever used in this Chapter shall be construed as
defined in this section:
20
A. "Telephone communication services" shall mean any telephonic type and quality of
21 communication including that which is interconnected to the public switched network,
which allows people to talk to each other without the necessity of conversing in person.
22 In determining whether a service constitutes a telephone communication service, all
technology used to transmit voice communications from one person to another shall be
23 included irrespective of whether, for example, such technology utilizes computer
processing applications on the form,code or protocol of the content of the communication
24 or where the origination and/or termination points of the transmission, conveyance or
routing are not fixed. Such means of transmission shall include,without limitation for the
25 purpose of transmitting messages or information (including but not limited to voice,
telegraph, teletypewriter, data facsimile, video, or test) by electronic, radio or similar
26 means whether such transmission occurs by wire, cable, fiber-optic, light wave, laser,
microwave, radio wave [including, but not limited to, cellular service, personal
27 communications service (PCAS), specialized mobile radio (SMR), and other types of
personal wireless service regardless of radio spectrum used],switching facilities,satellite
28 or any other similar facilities.
F:\CALKINS\SUT\TelephoneUsersTax.Ord2.wpd 1
t
1 B. "Month" means a calendar month.
2 C. "Person" shall include, but is not limited to, any domestic or foreign corporation, firm,
association, syndicate,joint stock company,partnerships of any kind,joint venture,club,
3 Massachusetts business or common law trust, society, and individuals.
4 D. "Service user" means a person required to pay a tax imposed under the provisions of this
Chapter.
5
SECTION 3. Section 3.44.030 of the San Bernardino Municipal Code is hereby amended
6 to read as follows:
7 3.44.030 Telephone Users Tax.
8 A. A tax is imposed upon every person in the City using telephone communication services,
including services for intrastate, inter-state, or international calls, and using any
9 teletypewriter exchange services in the City. The tax imposed by this section shall be at
the rate of 7.83 percent (7.83%) of the charges made for such services and shall be paid
10 by the person paying for such services. Interstate calls shall be deemed to include calls
to the District of Colombia.
11
B. As used in this Section, "charges" shall include (but are not limited to) monthly service
12 charges for the providing of cellular telephone communication services to a person whose
billing address is in the City. It shall not include charges for services paid for by inserting
13 coins in coin-operated telephones except that where such coin-operated telephone service
is furnished for a guaranteed amount, the amounts paid under such guarantee plus any
14 fixed monthly or other periodic charge shall be included in the base for computing the
amount of tax due; nor shall the words "telephone communication services" include
15 maritime mobile services as defined in Section 2.1 of Title 47 of the Code of Federal
Regulations, or as that Section may be amended from time to time.
16
C. The tax imposed in this section shall be collected from the service user by the person
17 providing the telephone communication services or the teletypewriter exchange services.
The amount of tax collected in one month shall be remitted to the Director of Finance on
18 or before the twentieth day of the following month.
19 D. In order to prevent actual multi-state taxation the person paying the tax imposed in this
Section on interstate or international telephone communications services or teletypewriter
20 exchange services, may receive a credit therefore, upon presentation of proof to the
Director of Finance that the person has paid a tax in another State on the same telephone
21 call or service.
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F:\CALKINS\SUT\TelephoneUsersTax.Ord2.wpd 2
1 AN ORDINANCE OF THE CITY OF SAN BERNARDINO AMENDING SECTIONS
3.44.010 AND 3.44.030 OF THE SAN BERNARDINO MUNICIPAL CODE CHAPTER 3.44,
2 TELEPHONE USER'S TAX TO CLARIFY ORIGINAL INTENT AND REMOVE
OBSOLETE REFERENCES
3 I HEREBY CERTIFY that the foregoing Ordinance was duly adopted by the Mayor and
4 Common Council of the City of San Bernardino at a meeting thereof, held on the
5 day of , 2007, by the following vote, to wit:
6 COUNCIL MEMBERS: AYES NAYS ABSTAIN ABSENT
7 ESTRADA
8 BAXTER
9 BRINKER
10 DERRY
11 KELLEY
12 JOHNSON
13 MC CAMMACK
14
15
16 Rachel Clark, City Clerk
17 The foregoing Ordinance is hereby approved this day of , 2007.
18
19
PATRICK J. MORRIS, Mayor
20 City of San Bernardino
21
22
23 Approved as to form:
24 JAMES F. PENMAN
25 City Attorney
26
27
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F:\CALKINS\SUT\TelephoneUsersTax.Ord2.wpd 3
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t
CITY OF SAN BERNARDIN,Q�',;_ ,
CITY MANAGER'S OFFICE
INTEROFFICE MEMORANDUM,"R SAP
TO: Mayor and Co mon Council
FROM: Fred Wilson Manager
SUBJECT: Possible Utility User's Tax Ballot Measure—February 2008
DATE: September 17, 2007
COPIES: City Attorney; City Clerk
Background
As we have been discussing for several months, a number of issues related to advances in technology,
litigation, and changes in federal law have begun to or may soon impact utility user's tax (UUT)
revenues, particularly with regard to telecommunications services. In light of these issues, several
California cities have sought voter approval for updated utility tax ordinances that modernize the
ordinance's technical language in order to preserve this important source of revenue. It is important
to note that this is a complex, technical issue that has significant financial implications for the long-
term financial stability of the City.
In San Bernardino, UUT is the City's third largest source of General Fund revenue. At the current
rate of 7.83%, it is projected to generate roughly $25 million in FY 2007-2008. UUT on
telecommunications services generates approximately $9 million of that total.
The City Manager's Office commissioned a public opinion survey in May to determine voter views
in San Bernardino regarding a possible utility tax modernization measure. A copy of the initial
results from Fairbank, Maslin, Maullin & Associates (FMMA) was presented to the Council at the
June 21 workshop, at which time John Fairbank from FMMA provided an overview and analysis of
the survey results.
At the Council meeting of July 2, this office provided a summary of the issues and recommended that
the Mayor and Council consider and provide direction concerning which option to place before the
voters, and direct the City Manager to work with the City Attorney's Office to prepare a draft
revision of the UUT ordinance, along with other necessary documents, in order to place the matter on
the November 2007 ballot. The matter was continued to July 16, when the Mayor and Council
adopted an alternate motion directing that staff instead proceed with an update to the UUT ordinance
that could be adopted by the Mayor and Council.
Based on that direction, the City Attorney's Office prepared a draft ordinance that was discussed at
the Legislative Review Committee and recommended for approval in July. However, since that time
the city of Sacramento has been sued by a taxpayers' organization regarding its adoption of a
clarifying ordinance by action of their Mayor and Council, rather than by the voters.
Following the Sacramento lawsuit, staff again recommends that this matter be brought before the
voters. Any ballot measures that the City intends to place on the February 5 ballot must be submitted
to the County no later than November 9th.
Ballot Measure Options
You may recall that at the June 21 workshop, John Fairbank of FMMA noted that the poll indicated
stronger support for a UUT modernization measure that did not include a reduction in the UUT rate.
However, given the track record of similar measures in other cities, a reduction in the UUT rate is
likely needed to ensure passage of the measure. The following table summarizes the cities in
California that have had recent UUT modernization measures, whether or not they included a rate
reduction, and the election results:
city Type of measure Rate reduction? % Yes % No
Compton Modernize UUT Yes, from 10% to 89.8% 10.2%
8.5%
Daly City Modernize UUT No 71.4% 24.6%
Fowler Modernize UUT No 65.9% 34.1%
Portola Valley Modernize UUT Yes, from 5.5% to 86.3% 13.8%
4.5%
Tulare Modernize UUT Yes, from 7% to 85.6% 14.4%
6%
While the experience will vary from city to city, the data indicates that measures are more likely to
pass by wider margins when accompanied by a UUT rate reduction. For that reason, staff
recommends that the Mayor and Council consider a modernizing ordinance that reduces the rate.
Given the City's fiscal challenges, including recent declines in sales tax, it is recommended that the
reduction be modest so that it can be absorbed without adverse impact upon the City's budget. The
attached information from the Finance Department indicates what the estimated corresponding loss in
revenue might be from various rate reductions.
If a rate reduction is desired, there exist essential two main options:
Option 1• Reduce UUT rate across all utilities
The City's ordinance currently applies utility tax to electricity, natural gas, video services (cable), and
telecommunications. A rate reduction from 7.83% to 7.75% across all utilities might result in a
$258,000 reduction in UUT revenue annually.
Option 2• Reduce UUT rate across only telecommunications
The City of Tulare recently adopted this approach, and reduced its rate only on telecommunications
while seeking voter approval for a modernized ordinance. The Mayor and Council could take a
similar approach to a ballot measure.
The advantage to this option is that it reduces the negative impact on revenue that would result from
the rate reduction. A rate reduction from 7.83% to 7.75% on only telecommunications (including
video) might result in a $91,600 reduction in UUT revenue annually.
While passage of a modernized UUT ordinance in conjunction with a modest UUT rate reduction will
result in some revenue reduction in the short term, it will stabilize UUT revenues into the future. I
recommend that the Mayor and Council discuss these matters and direct me to work with the City
Attorney's Office to prepare a draft revision of the UUT ordinance, along with other necessary
documents, in order to place the matter on the February 2008 ballot.
1 '
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UUT REDUCTION CALCULATION
Current City UUT Rate: 7.83%
FY 06-07 Estimated UUT Revenue: $25,250,000
Amt Rate Reduced New UUT Rate Est Rev Loss
.03% 7.80% $ 961700
.08% 7.75% $ 258,000
.10% 7.73% $ 3221500
7.70% $ 419,200
13%
.33% 7.50% $1,064,200
The estimated amount of UUT revenue that would be lost if the City's UUT rate were
decreased is based on the assumption that the current level of UUT collection would
continue. If in the future there are some legislative changes that impact the City's ability to
continue to collect the same UUT that is currently being collected, then the estimates above
would be impacted. There are also several other external factors (such as weather
conditions) that could also significantly impact the estimates above.
i TELECOMMUNICATIONS UUT
REDUCTION CALCULATION
Current Cit y UUT Rate: 7.83%
FY 06-07 Est Telecomm. UUT Revenue: $8,965,200
Telecommunications
Amt Rate Reduced New UUT Rate Est Rev Loss
.03% 7.80% $ 349,300
. .08% 7.75% $ 91,600
.10% 7.73% $ 114,500
.13% 7.70% $ 148,800
.33% 7.50% $ 3775800
The estimated amount of UUT revenue that would be lost if the City's Telecommunication
UUT rate was decreased is based on the assumption that the current level of
Telecommunication UUT collection would continue. If in the future there are some
legislative changes that impact the City's ability to continue to collect the same
Telecommunication UUT that is currently being collected, then the estimates above would
be impacted. There are also several other external factors (such as technology changes)that
could also significantly impact the estimates above in the future.
i