Discriminatory taxes against telephone companies were struck down in two states

Discriminatory taxes against telephone companies were struck down in two states

May 01, 1999 | By Keith Martin in Washington, DC

The US Supreme struck down an Alabama tax in late March in the case South Central Bell Telephone Co. v. Alabama. Alabama collects franchise taxes from all companies doing business in the state, but the tax on domestic companies is tied to the par value of their shares, while the tax on foreign companies is tied to the value of the actual amount of capital they employ in the state. The court said this meant the average domestic corporation paid only one-fifth the franchise taxes paid by foreign companies. The tax was an unconstitutional infringement on interstate commerce.

In a separate case, the Iowa Supreme Court agreed with US West that a town had no right to levy a 3% “user fee” on gross revenues of any utility operating in town after the town decided to bounce US West as the telephone company and start its own rival service. The town argued the “tax” was rent for using public rights of way. The court said it was a tax that the town had no right under Iowa law to levy.


People’s Gas System set up a number of energy conservation programs as required by Florida law with the aim of reducing electricity and oil consumption. For example, it paid builders to install gas appliances in new houses. It subsidized the purchase of new appliances that are more energy efficient than the ones they are replacing. The Florida Public Service Commission let the utility raise funds for the program by building an extra charge into utility rates. The utility was barred from separately stating the charge on customer bills. However, the utility collected the funds subject to a statutory obligation to spend them only for this purpose, and it was required to refund any money not used on the program to ratepayers. It kept separate records, but the funds were not physically segregated in separate bank accounts.

The utility argued it was merely a conduit for the receipts. The IRS said they were income. The US Tax Court agreed with the IRS in March.

The court said to avoid income, the utility would have had to put the money in a trust subject to a restriction that it be spent only for a particular purpose, and the utility would have had also to show that it did not profit, gain or benefit from the spending. People’s Gas failed on both counts. There was no trust, and the utility benefited from the spending since the program tended to increase its rate base, number of customers and sales.


MCI and Telecom*USA both qualified for investment tax credits in 1986. The credit was 10% of the cost of new equipment put into service that year. Each company had to reduce its tax basis for depreciation by an amount tied to the credit. However, neither was able to use its tax credit immediately and carried it forward to a later year. The credit was reduced to 6.5% for the year it was used. The two companies filed refund claims in 1994 seeking to recover the lost basis for depreciation. They lost in federal district court. The case is now before the US appeals court for the DC circuit.


Scott Paper Company spent money in the late 1980’s on improvements, equipment and furnishings at its headquarters in Philadelphia. In 1986, Congress repealed an investment tax credit for such spending on new equipment, but it added what it thought was a “rifle shot” transition rule to allow Merrill Lynch to complete work on its world headquarters and still claim investment credits after the repeal.

Unfortunately for Congress, the transition rule was vaguely worded. Other companies have claimed the same relief. There is a split among US appeals courts about whether others can qualify. The 7th circuit court of appeals said in Kjellstrom that the transition rule covers only Merrill Lynch, notwithstanding the poor drafting. However, the 9th circuit court of appeals said in Airborne that the provision applies to anyone who can satisfy its terms.

A federal district court in Wisconsin said in March that Scott Paper qualifies potentially. The court denied a motion by the government for a judgment in its favor without the need to go to trial.

The case is interesting because the Wisconsin court is in the 7th circuit.

Keith Martin