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."
