Court: Court of Appeals of Arizona; June 11, 2013; Arizona; State Appellate Court
The Arizona Department of Revenue is tasked with valuing "centrally assessed property," which includes telecommunications companies. In 2009, the Department determined that Cable One, Inc. qualified as a telecommunications company due to its provision of telephone service via Voice over Internet Protocol (VoIP). Cable One contested this ruling in tax court, which initially favored the company. However, upon review, the judge concluded that Cable One's VoIP service constituted the provision of telephone service, as advertised to customers, and reversed the tax court's decision.
Cable One operates nine cable systems in Arizona and began offering VoIP service in 2006, using its cable broadband network to deliver this service alongside cable television and Internet access. For the 2010 tax year, the Department assessed Cable One’s property at a full cash value of $14 million, asserting it met the definition of a telecommunications company under A.R.S. 42-14401. Although the parties agreed on the statutory definition, they disputed whether Cable One’s VoIP service fulfilled the necessary criteria. The matter has been remanded for further proceedings consistent with this opinion.
The Department contends that Cable One’s VoIP service qualifies as telephone service under A.R.S. 42-14401, asserting that it enables users to make and receive calls to and from the public switched telephone network (PSTN). The Department claims Cable One possesses "communications transmission facilities" through its cable broadband network and provides customers with access for compensation, thereby categorizing it as a telecommunications company subject to central assessment.
In contrast, Cable One argues that its VoIP service is an "Internet protocol enabled service," distinct from traditional telephone service, as it does not interconnect with the PSTN. Cable One relies on Level 3 Communications, Inc. for PSTN services, asserting it doesn't own communications transmission facilities or provide PSTN services, thereby disputing its classification as a telecommunications company.
VoIP service is defined as an Internet application that transmits voice communications via a broadband Internet connection, which contrasts with circuit-switched technology traditionally used by the PSTN. VoIP employs packet-routed technology, converting voice communications into digital data packets through an embedded multimedia terminal adapter (EMTA) at the customer’s location. These packets are routed over Cable One’s network to a "headend."
For calls involving other telephone service providers or different Cable One systems, Cable One hands off the data packets to Level 3, which converts them from IP format to time-division multiplexing (TDM) format for PSTN transmission. Such calls are termed "external calls." Conversely, calls between Cable One customers within the same system remain on Cable One’s network without being handed off, referred to as "internal calls."
The tax court ruled in favor of Cable One based on its relationship with Level 3, determining that while Cable One owned "communications transmission facilities" by using its cable network to connect to customers' phones, it did not qualify as a telecommunications company. The court reasoned that the essential function of telephone service—connecting callers to recipients—was performed by Level 3, not Cable One, leading to the conclusion that Cable One was not subject to central assessment by the Department.
The Department contended that A.R.S. 42-14401, which does not explicitly reference the Public Switched Telephone Network (PSTN), applies broadly to any provider transmitting voice communications, including Cable One's VoIP services over its cable network. They argued that Cable One met the definitions of "communications transmission facilities" and "telecommunications exchange or inter-exchange access," thus categorizing it as a telecommunications company under the statute.
In contrast, Cable One maintained that the statutory terms specifically relate to PSTN-based services. They defined "communications transmission facilities" and "telecommunications exchange or inter-exchange access" as solely pertaining to services connected to the PSTN.
The analysis indicates that both the Department and Cable One have valid points. While some terms in A.R.S. 42-14401 have clear meanings, others have developed technical definitions over time that complicate the statute's interpretation. The court's responsibility is to construct A.R.S. 42-14401 in a manner that fulfills legislative intent, utilizing standard principles of statutory construction. This includes considering the statute's context, language, historical background, and purpose, as well as how words are commonly understood and how they have been defined within the law.
A.R.S. 42-14401 applies broadly and is not restricted to companies directly connecting to the Public Switched Telephone Network (PSTN). Cable One's VoIP service qualifies as providing "telecommunications exchange or inter-exchange access" for compensation, facilitating two-way communications within the state. Prior to 1985, the statutory framework allowed the Department to centrally assess telephone companies, defined as businesses transmitting telephonic messages within the state. The framework also covered microwave services, although those services were not explicitly defined, despite their use for long-distance communications. Property owned by telephone companies was classified as class two property; however, microwave services lacked a specific classification, raising uncertainty about their tax status. In 1985, the Legislature repealed the previous definitions and statutes, creating a unified definition for "telecommunications company" that encompasses any entity owning communications transmission facilities and providing telecommunications services for compensation.
The Legislature amended A.R.S. 42-791 (later A.R.S. 42-14401) to achieve two main objectives: first, to ensure that any company transmitting communications, regardless of the technology, is classified as a telecommunications company and subject to uniform tax treatment; second, to align the classification with evolving industry standards regarding local and long-distance telephone services. By 1985, the use of microwave transmission for long-distance voice communications created ambiguity in property classification, as existing statutes designated property used by telephone companies as class two property, leaving the status of microwave services unclear. The Legislature addressed this by repealing the microwave services statute and establishing that property used by telecommunications companies would be classified as class two property, subject to central assessment. The definition of a telecommunications company was refined to focus on its function and products rather than the specific technology used, emphasizing "communications transmission facilities" and the provision of telecommunications exchange or inter-exchange access. Supporting this interpretation, a summary by the House of Representatives Research Staff indicated that H.B. 2157 aimed to clarify the classification of telecommunications companies due to technological advancements, which had previously caused confusion in property tax categorization. This legislative change specifically targeted businesses utilizing microwave services for long-distance communications.
In 1985, the Legislature defined telecommunications companies in response to significant changes in the industry concerning local and long-distance telephone services. This definition, under A.R.S. 42-791 (1985), was influenced by an antitrust case against AT&T, which resulted in a consent decree mandating AT&T's divestiture of its local service operating companies. These companies were permitted to provide "exchange telecommunications," essentially local service, but were prohibited from handling "interexchange telecommunications," or long-distance service. Only designated interexchange carriers could offer long-distance services. The Legislature's terminology, while not identical to the court's terms, adopted similar concepts, defining telecommunications companies as entities providing either local telephone service ("telecommunications exchange") or long-distance service ("inter-exchange access"). The use of "or" in this definition indicates that companies could focus on either service type, reflecting the evolving nature of the telecommunications market.
Beginning in 1986 and continuing for 12 years, the Legislature differentiated tax burdens between property used for local versus long-distance telecommunications services while maintaining the 1985 definition of telecommunications company. The Department was required to centrally assess all property of telecommunications companies, irrespective of the type of service provided. This framework remained unchanged until 1998, when the Legislature amended A.R.S. 42-14401 to eliminate the distinction between local and long-distance telecommunications companies for classification and assessment, although the original definition of telecommunications company from 1985 was preserved with minimal alteration.
Key conclusions drawn include: the Legislature’s decision for centralized assessment of all telecommunications company properties; the intention for assessment regardless of service type; the functional description of telecommunications companies as providers of "communications transmission facilities"; and the acknowledgment that the definition, while technical, relates to familiar services like local and long-distance telephone service.
The discussion shifts to the argument regarding whether Cable One qualifies as a telecommunications company under A.R.S. 42-14401, particularly focusing on "communications transmission facilities." Cable One utilizes its cable broadband network to transmit data packets to and from a headend, which contains essential equipment like a cable modem termination system (CMTS). This setup confirms that Cable One does own communications transmission facilities, as the term "facility" pertains to any setup created to facilitate a function, such as telecommunications transmission. Therefore, Cable One's assertion that it lacks communications transmission facilities due to not interfacing directly with the Public Switched Telephone Network (PSTN) is incorrect, as the legislative description emphasizes the functional aspect of the facilities rather than their specific technological interfaces. Thus, "communications transmission facilities" encompasses a broader range, including but not limited to PSTN facilities.
Cable One is confirmed to provide both local (telecommunications exchange) and long-distance (inter-exchange access) telephone services to its customers. The relationship with Level 3 is deemed irrelevant for local service, as Cable One does not utilize Level 3 for internal calls between its VoIP customers. For long-distance service, while Cable One hands off external calls to Level 3, it still qualifies as the provider of that service to its users. The law does not differentiate between direct service provision and service through third-party technology. This is likened to a wholesaler-retailer dynamic, as described by Cable One's telecommunications expert in tax court, who identified Level 3 as a wholesale provider. Moreover, a precedent from *Mayor and City Council of Baltimore v. Vonage America Inc.* supports the notion that VoIP providers are responsible for providing telecommunications lines to their customers, regardless of third-party involvement. The court emphasized that the VoIP provider sells a service that includes necessary telecommunications connections, asserting that the provider—not the contracted carriers—delivers the service to customers. Additionally, the FCC has classified interconnected VoIP providers as suppliers of interstate telecommunications, reinforcing the idea that these providers deliver telecommunications services whether they own transmission facilities or rely on third-party services.
Cable One provides customers with access to the Public Switched Telephone Network (PSTN) through its Voice over Internet Protocol (VoIP) service, which the company markets as "phone service" with "UNLIMITED local, long-distance calling in the continental U.S." Consequently, Cable One qualifies as a "telecommunications company" under A.R.S. 42-14401, making it subject to central assessment by the Department.
In response to the tax court’s ruling, Cable One raises five arguments against its classification. First, it claims it cannot be centrally assessed as a telecommunications company because its Arizona property is predominantly used for cable television services. However, A.R.S. 42-14403 mandates the valuation of all telecommunications companies regardless of predominant use.
Second, Cable One contends it is not a "telecommunications company" since it primarily uses its cable broadband network for cable television. It misinterprets the prefatory phrase in A.R.S. 42-14401, "unless the context otherwise requires," arguing for exemption, but this phrase does not support excluding companies based on predominant usage, as such considerations are not included in the statutory language.
Third, Cable One asserts that A.R.S. 42-14401 should apply only to telecommunications companies directly connecting to the PSTN, referencing an excise tax statute concerning public service corporations. However, the court clarifies that statutes must be interpreted in relation to one another only when they are in pari materia, which does not apply in this instance as the statutes in question serve different purposes.
Overall, Cable One's arguments fail to demonstrate a valid exemption from the classification as a telecommunications company under the relevant statutes.
A.R.S. 42-14401 was enacted by the Legislature to create a statutory framework for central assessment, alongside excise tax statutes aimed at funding emergency telecommunications services, including 911. The interpretation of these statutes relies on the in pari materia rule, which suggests legislative intent may connect A.R.S. 42-14401 with the excise tax statutes; however, Cable One failed to present evidence supporting this influence. Additionally, the language in the excise tax statute about telecommunications lines differs significantly from A.R.S. 42-14401.
Cable One contended that classifying it as a telecommunications company under A.R.S. 42-14401 contradicts federal statutes and FCC regulations regarding telecommunications services, particularly VoIP. This argument was dismissed, as the relevant federal laws pertain to regulation rather than taxation, and neither Congress nor the FCC has preempted state taxation of VoIP providers.
Cable One also argued that the Department's central assessment violated the Uniformity Clause of the Arizona Constitution, noting that cable companies who separate their VoIP services into subsidiaries are not centrally assessed. This claim was rejected based on the need to evaluate whether Cable One and comparison taxpayers are direct competitors using the same equipment and services. The Department clarified that Cable One’s provision of VoIP service renders its property functionally distinct from that of cable companies without VoIP services.
Cable One is classified as a telecommunications company under A.R.S. 42-14401, making it subject to central assessment by the Department. The tax court's ruling favoring Cable One is reversed, and its request for attorneys' fees is denied since it did not prevail on appeal. The case is remanded for further proceedings consistent with this opinion, with the Department awarded costs on appeal, contingent on compliance with Arizona Rules of Civil Appellate Procedure Rule 21.
During litigation, the Department raised its full cash value assessment to $39,730,000 for tax year 2011, a figure that Cable One contested and which the tax court will need to review on remand. The definition of Cable One's VoIP service aligns with the federal definition of "interconnected VoIP service" as specified in the 2010 amendments to the Communications Act, requiring broadband connections and enabling two-way voice communications. Cable One specifically offers fixed VoIP service, which is used only from a designated location.
The financial implications of the Department's central assessment are significant, as Cable One claims this valuation exceeds the county assessors' valuation by more than five times for tax year 2009. Additionally, the parties continue to debate the interpretation of "public telephone" in the context of access provisions under A.R.S. 42-14401, with the Department contending that it modifies the term "access."
A "telecommunications company" encompasses entities providing "public telephone access." The case Phoenix Control Sys. Inc. v. Ins. Co. of N. Am. highlights the last antecedent rule regarding this definition. Cable One argues that "access" should not be linked to "public telephone," suggesting it refers to public service corporations under the Arizona Corporation Commission or to payphones. However, it is established that Cable One offers "telecommunications exchange or inter-exchange access," making it subject to assessment by the Department. The Legislature classifies property for tax purposes, as seen in A.R.S. 42-136 and its recodification in A.R.S. 42-162, with current classifications outlined in Title 42, Chapter 12. Judicial precedent indicates that statements from non-legislators hold little weight unless they reflect legislative intent. The summary emphasizes the legal ambiguity surrounding microwave services classification prior to H.B. 2157 and provides historical context about local telephone service competitiveness. The court noted that AT&T's control over local telephone service has historically hindered competition, with access to its local network being essential for long-distance carriers. The technical meaning of "exchange" is defined as the connection point between individual telephone users and the local switch, which has evolved from manual to automated systems. This service is also referred to as "in-traexchange service."
In 1992, the Legislature revised the revenue allocation formula to explicitly exclude cellular mobile service revenues from the definition of local services, aligning it better with the Legislature's definition of local telecommunications service. This amendment is recorded in the 1992 Arizona Session Laws. The valuation methods for different types of property were analyzed in the cases of Citizens Telecommunications Co. of White Mountains v. Arizona Department of Revenue and U.S. West Communications, Inc. v. Arizona Department of Revenue. Despite Cable One's use of Level 3 for internal calls, it was determined that Cable One was still indirectly providing local telecommunications service to its customers. Additionally, Cable One failed to present evidence in tax court demonstrating that its subsidiaries operated separately and independently from its corporate structure.
