The total annual revenue collected by local government agencies through UUT is approximately $1.8 billion per year.

Utility Users Tax (UUT) is currently collected by 163 agencies in California including 158 cities, one special district, and four counties, and encompasses several different utility services which include telecommunications, video/cable, electricity, gas, water, sewer, various forms of refuse/sanitation and cogeneration in at least one agency. The annual revenue generated ranges from several hundred thousand dollars to tens of millions. There are two primary drivers of the revenue are the rates charged (currently ranging from 1% to 11%) and the services on which the UUT is collected. The total annual revenue collected by local government agencies through UUT is approximately $1.8 billion per year. Although the revenue ranges vary by agency, average UUT collections are approximately 15% of general fund revenues.

It’s important to note that this revenue source has significant oversight from multiple agencies. The Telecommunications Act of 1934, and the overhaul in 1996, is the basis for oversight specifically for the communications companies at the federal level, and that the Federal Communications Commission (FCC) has oversight specific to interstate communications. Why does that matter?

The Telecommunications Act has two primary components, Title I and Title II, that regulate wire and radio communication services. Title II is often referred to as telecommunication services and Title I is often referred to as information services. How the FCC classifies various services provided by communications companies has a significant impact on local government agency revenues.

The Internet Tax Freedom Act of 1998 in part prohibited new taxes on internet access fees. The general purpose was to encourage the use of the internet as something more than just an e-mail service. The law was extended in 2007 and included a new definition for internet access which means “a service that enables users to connect to the Internet to access content, information, or other services.” This extension was in effect until 2014 and was made permanent in late 2016.

The FCC adopted the term Net Neutrality in 2005 which meant that all data on the internet should be treated equally by corporations. This categorized ISPs in the Title II/Common Carrier classification making them regulated and therefore taxable. In late 2017, the FCC changed its stance and Net Neutrality ended which meant a loss of UUT revenue to local governments.

The FCC then reclassified data (broadband internet access) to Title I/information services status which meant that it was no longer regulated as a common carrier and therefore no longer taxable. With this new classification, local government agencies saw a significant decline in UUT revenue. The FCC also reclassified voicemail and text messaging to information services which caused another decline in UUT revenue to local government.

In addition to the FCC, the California Public Utilities Commission (CPUC) is also involved in the regulation of communications companies. The CPUC regulates communications companies with respect to intrastate activity as well as other public utilities. The regulatory process at both the federal level and the state level operates in a legalistic, quasi-judicial, environment.

Both Commissions approve applications for communications companies to operate. When applications to operate in the U.S. are approved, the company is assigned a unique identifier by the North American Numbering Plan Administrator (NANPA). Through the application process with the FCC, these companies must also declare their intent to operate in each of the 50 states.

Applications to operate in California go through a similar process with the CPUC. When applications are approved, the CPUC assigns a Certificate of Public Convenience and Necessity (CPCN), a Registration License, or a Wireless Identification Registration, which is essentially a permit to operate in California. Non-facilities-based (resellers) interconnected Voice over Internet Protocol (VoIP) operators are also required to register but are not assigned a CPCN.

To fully understand UUT, it’s important to know how this revenue source has evolved, and the impact those decisions have had on agencies collecting this tax. Part 2 of this series will focus on the current effects of the COVID-19 pandemic and some of the issues that are arising in the current environment.

Additionally, more information will be available at the CSMFO Annual Conference in San Diego in a session titled “A Practical Approach – Utility Users Tax Administration and Lessons Learned.” Vikki will be joined by Brigitte Elke, Finance Director from the City of San Luis Obispo to share experiences, perspectives and learn some best practices for managing the UUT portfolio in your agency.

Ms. Beatley has over 23 years of local government experience and more than 30 years of experience in finance and treasury/cash management. She was most recently the Director of Finance/City Treasurer for the City of Seal Beach where she had responsibility for all accounting operations, treasury management, financial analysis, and financial statement preparation, utility user’s tax, and parking permit program. Additionally, she was responsible for cashiering, meter reading, and utility billing for the City’s Water and Sewer.

She was also responsible for the financial oversight of the Successor Agency. Prior to that, she was the CFO for Mesa Consolidated Water District and an Investment/Revenue Officer for the City of Orange. Ms. Beatley is also an Adjunct Lecturer in the Master of Public Administration program at California State University Long Beach where she teaches Government Budgeting and Finance. She holds a Bachelor of Arts in Finance from California State University Fullerton and an Executive MBA from the University of Phoenix.