Court OKs tax on cell phones

Firms had called local levies illegal

July 04, 2006|By DOUG DONOVAN | DOUG DONOVAN,SUN REPORTER

The Maryland Tax Court has ruled that Baltimore City and Montgomery County did not overstep their authority by imposing cell phone taxes, a decision that rejects an attempt by four wireless providers to overturn the levies.

The court's decision may end the initial legal fight over the levy, but the city's cell phone fee is just beginning to stoke a major point of political contention between Mayor Martin O'Malley and Gov. Robert L. Ehrlich Jr. - taxes.

The city imposed a $3.50 per month tax on cell phones and land lines in 2004 as part of O'Malley's plan to plug a budget deficit with several new fees. Montgomery County's $2 per wireless line tax took effect three years ago.

The city's tax generated nearly $26.2 million in its first year, with $9.98 million coming from the wireless portion, city officials said. The city projects it will collect $28.6 million for the fiscal year that ended June 30. The Montgomery tax is estimated to have generated $45 million since August 2003.

Four companies - T-Mobile, Verizon Wireless, Sprint and Cingular Wireless - challenged the taxes in December 2004, demanding a $14.8 million refund from the two jurisdictions. Two months later, in February 2005, the companies filed a lawsuit, arguing that the fees on cell phones were really sales taxes, which only the state can impose.

The court sided with Baltimore and Montgomery County, declaring that the cell phone levies could not be considered sales taxes.

"The tax is not measured by the number of minutes that a customer uses his or her phone, or even by the number of calls made," the court wrote in its June 29 decision. "A flat tax on a telephone line, which does not vary depending on customer usage, is an excise tax rather than a sales tax under Maryland law."

Attorneys for the companies could not be reached for comment yesterday to say whether they would appeal the decision.

Regardless of what the companies decide to do, Republicans intend to seize on the cell phone tax to counter O'Malley's attempt to portray himself as a fighter for an overtaxed middle class in his gubernatorial race against Ehrlich. They will also highlight two other fees O'Malley championed in 2004 - doubled taxes on real estate sales and a 2 percent energy tax on residents and manufacturers.

"The cell phone tax is yet another example of Martin O'Malley taxing his way out of everything," said Audra Miller, a spokeswoman for the Maryland Republican Party. "Back in 2001, [O'Malley] said the best way to get the state out of debt was to raise sales and income taxes."

Ehrlich will try to convince voters that electing O'Malley for governor in the Nov. 7 election with a majority-Democrat General Assembly will return Annapolis to a Democratic monopoly that will embark on a tax-and-spend agenda, GOP officials say.

But O'Malley has long anticipated such a strategy.

"I don't think Governor Ehrlich or the Republican Party has much credibility when it comes to protecting Maryland families from tax increases," said Rick Abbruzzese, an O'Malley campaign spokesman.

Since the mayor pushed the cell phone tax through the City Council in 2004, he began trying to portray Ehrlich as the big taxer and spender. At the time, O'Malley carried reference materials that showed two numbers. One was $16.50, the average amount that he said residents will pay each month in new state taxes and fees. The other, $6.75, was the amount they would pay in new city levies.

Ehrlich has backed increases in numerous fees, including a $2.50-a-month sewer bill surcharge that critics called a "flush tax." He also raised car registration fees, with most car owners paying an additional $23.50 a year.

The mayor's campaign Web site states that "Bob Ehrlich placed $3 billion in taxes, tolls and fees on the backs of everyday Maryland families." It goes on to highlight Ehrlich's veto of minimum wage increases, and claims he has done little to reduce increasing costs of health care and higher education.

O'Malley has said the cell phone tax and other new city fees were needed to help diversify a budget that is largely dependent on property taxes, which are the state's highest. The new fees in 2004 helped generate budget surpluses that allowed O'Malley to twice cut the property tax rate since then - part of a five-year plan to reduce the rate by a total of 10 cents.

But those reductions have been outpaced by growing real estate assessments that have resulted in even higher property tax bills for many residents.

doug.donovan@baltsun.com

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