13. Utility User Tax
Ci ty Hall
10300 Torre Avenue
Cupertino, CA 95014-3255
Telephone: (408) 777-3220
FAX: (408) 777-3366
CITY OF
CU PEIQ"INO
DEP ARTMENT OF ADMINISTRATIVE SERVICES
SUMMARY
Agenda Item No. 13
Meeting Date: July 3, 2007
SUBJECT AND ISSUE
Receive a report on the proposed amended utility user tax.
BACKGROUND
The City's existing utility users tax (DUT) on telephone, electricity, and natural gas was
approved by the voters in 1990 for twenty-five years. It was extended for another fifteen years by
voters in 2002. The tax is 2.4% of the utility charges assessed on residential and commercial
service addresses within the City limits. The tax is on the users' monthly utility bills. Residential
users 65 and over are exempt.
The telephone portion of the tax employs language that was common to ordinances existing in
other cities at the time and reflected the universal use of ordinary landline telephone service. For
administrative purposes, that common language included references to certain federal taxes..
Since then the means of communications has exploded into various other devices and media such
as sending voice, data, audio, and video, through cellphones, computers, wireless, and
broadband, supplanting the traditional voice over landlines..
Twenty-seven percent or $764,000 of the City's $2.8 million in UUT received in 2005-06 came
from telephones and wireless telecommunication services, with the rest coming from electricity
and gas. Just under on~-half of the $764,000, or $365,000 came from wireless and cellphone
providers; The $365,000 from wireless and cellphone is undergoing legal challenges in various
courts and the City has received protest letters and taxability inquiries from the cellphone
providers this year, citing a 2006 Internal Revenue Service notice directing telephone companies
to discontinue collecting a certain federal tax on long distance service. Furthermore, the City has
seen lower remittances related to traditional landlines with growth in cellphone and other new
wireless technologies.
To address the problem of revenue losses with these litigation and technology changes, a number
of California cities have adopted or are attempting to adopt modem UUT ordinances
incorporating current and future ways of communications and eliminating the language subject to
current litigation. Updating the UUT for the November ballot is part of the Council's Fiscal
Strategic Plan. Staff has been discussing the issue with the community and had decided on a
version which keeps the tax base on traditional wired, cellular, voice over internet and messaging
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Printed on Recycled Paper
Utility Users Tax .
July 3, 2007
Page 2 of2
services, with a slight expansion to capture stand alone messaging services. Staff has also polled
voters.
While extrapolation of the voter survey results indicated possible passage with maintaining the
same tax base and reducing the rate to 2%, with the idea that there was some equity in including
cellphones and voice-over-internet along with landlines, the thin margin of passage in the
sample, ma4e a realized affirmative vote somewhat precarious. A reduction to 2% will result in
an up front loss of $120,000 in revenues per year, and staff does not recommend this.
Postponement of the measure until the 2009 general election to see other cities' experiences with
the concept is possible, however; such a postponement will put $400,000 per year or $1.2 million
in. revenues over 3 years at risk. However, if this alternative is chosen, the current budget
projection excludes these re~enues, so no .change in the current budget is. needed.
Based .on direction from Council, a first reading of ~e proposed ordinance would be presented
on July 17th. A second reading and adoption of a resolution submitting the measure to the voters
. at the November election would occur at a special meeting before the August 19 deadline for.
submi~sion to the County.
~y: . .
David Woo
Finance Director
Approved for submission:
~L
David W. Knapp -
City Manager
Attachments:
Existing and updated tax comparison chart
Revenue statistics
Rate comparisons with other cities
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EXISTING TELEPHONE
USERS' TAX
1. TRADITIONAL WIRED (LOCAL,
INTRASTATE, INTERSTATE,
INTERNATIONAL)
2. ,CELLULAR
3. VOICE OVER INTERNET, if .
se aratel 'char ed
4. MESSAGING SERVICES (Paging,
text, voicemail) as part of a bundle
UPDATED'
TELECOMMUNICATION
USERS' TAX
1. TRADITIONAL WIRED (LOCAL,
INTRASTATE, INTERSTATE,
INTERNATIONAL)
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TELEPHONE USERS TAX
REVENUE STATISTICS
UUT from all telecom companies
2005-06 (annual)
Residential. popu lation-Cuperti no
Number of employees in City
Less: Number of senior citizens with
. UUT exemptions
Total residential & daytime population
Annual telecom UUT revenue per
person
53,840
.27r747
(1,384)
$ 763J986
80,203
$
10
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UUT RATES IN OTHER CITIES WITH A UUT
Santa Clara County Rate San Mateo County Rate
Sunnyvale 2.0% Menlo Parle 160%
Cupertino 2.4% Portola Valley 4.50/0
Mountain View 3.0% Daly City 5.00/0
Los Altos 3.5% East Palo Alto 5.00/0
Gilroy 5.00/0 Redwood City . 5.0%
Palo Alto 5;0% -
San Jose 5.0%
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