Taxation & Interstate Commerce in a Monitoring Case
The customers of the taxpayer paid to the taxpayer a flat monthly monitoring fee after the security systems were installed in their homes. The taxpayer did not pay a transaction privilege tax to any jurisdiction based upon gross income earned from security or burglar alarm service charges billed to Arizona customers. The municipal transaction privilege tax is a tax levied by the city on revenue received by the taxpayer from the security systems installed in the cities involved.
Two of the cities assessed the transaction privilege tax against the taxpayer pursuant to their city codes. The taxpayer protested the cities’ assessments. A hearing officer resolved the protests in taxpayer’s favor, concluding that the statutes precluded taxation of gross income earned from the alarm monitoring business in the cities in Arizona.
The cities appealed to the Arizona Tax Court. The Tax Court granted summary judgment in favor of the cities. The taxpayer appealed to the Arizona Court of Appeals.
The issue on appeal was whether the taxpayer’s monitoring service was subject to the transaction privilege tax. Arizona law grants cities broad authority to impose transaction privilege taxes and the cities adopted the model city tax code provision on transaction privilege taxes.
The taxpayer contended that it was exempt from the transaction privilege tax as it supplied interstate telecommunications services and that the Arizona laws prohibits cities from levying a transaction privilege tax on interstate telecommunications services. The taxpayer further contended that the imposition of the transaction privilege tax was inappropriate because each step of the monitoring service was a separate interstate telecommunications transmission.
The court of appeals disagreed stating that the taxpayer’s service, viewed in its entirety, was a telecommunications service loop that began in Arizona and ended in Arizona. Without a home alarm triggered in Arizona, the calls from Arizona to Texas and back to Arizona would not occur. That the taxpayer’s monitoring facility is located outside Arizona had no impact on the intrastate telecommunications service bargained to begin and end in Arizona.
The court therefore rejected the taxpayer’s assertion that it was solely interstate rather than intrastate, holding that the information transmitted originated and terminated in the state and therefore did not preclude the tax because taxpayer was providing intrastate telecommunication services. The court further pointed out that the taxes did not discriminate against interstate commerce, as by upholding the tax, all monitoring companies share the tax burden equally irrespective whether the phone bank was in Arizona or elsewhere. The court stated, “Indeed, were we not to uphold the tax on the taxpayer, businesses with Arizona monitoring stations monitoring Arizona homes would be placed at a competitive disadvantage.”
A dissenting judge pointed out that, in her opinion, Arizona statutes bar the cities from imposing transaction privilege taxes on income a taxpayer receives for performing its own security monitoring services because the transmission by which taxpayer performs its monitoring services is, in fact, interstate telecommunications.