[author: Christopher E. James]
On August 28, 2012 the Iowa State Board of Tax Review ruled in favor of Cable One, Inc. (Cable One) in a case dealing with the question as to whether the Iowa Department of Revenue (the Department) could treat Cable One as a telephone company for purposes of property tax. [1] For tax years 2008 and 2009, the Department assessed Cable One pursuant to Iowa Code § 433 as a telephone company due to Cable One's implementation of a Voice over Internet Protocol (VoIP) service. Cable One remained subject to local assessment as a cable company on all of its assets; however, the Department attempted, in addition to local assessment, to centrally assess Cable One as a telephone company on what the Department maintained was Cable One's telephone operating property used in the provision of its VoIP services. Cable One appealed the Department's assessments for both years and the cases were consolidated.
Cable One prevailed on a summary judgment motion before an Administrative Law Judge (ALJ) on June 24, 2011. [2] The motion for summary judgment sought to preclude assessment as a telephone company on several grounds. Cable One argued that its VoIP service does not transform it from a cable company to meeting the definition of a telephone company under Iowa Code § 433. Cable One further asked the ALJ to find that the primary use of Cable One's property was dedicated to the provision of cable television and broadband internet access and as such, the property tax treatment of Cable One's property should correspond to its primary use, precluding taxation as a telephone company. Further, Cable One argued that classifying Cable One as a telephone company would result in discriminatory treatment in violation of the Iowa and US Constitutions. Cable One also argued that attempting to tax Cable One as a telephone company would violate federal law.
The Department appealed the ALJ's order granting summary judgment to the Iowa State Board of Tax Review (the Board). The Board agreed with Cable One's arguments and the findings of the ALJ and affirmed the ALJ's order granting summary judgment.
Specifically, the Board found that the language in Iowa Code § 433 was not broad enough to apply to a nascent technology that varies substantially from traditional telephone services. The Board determined that, "there is such a substantial difference between traditional telephone and VoIP that the service provided by Cable One cannot be taxed under the existing law as written. The Board agrees with Cable One that the language of § 433 is too narrowly written to impose a tax on their VoIP service." [3]
Although the Board found in favor of Cable One on the threshold question of initial classification, the Board went on to provide further determinations. Cable One, as set forth above, argued that the primary use of its property should dictate its tax treatment under Iowa law governing property tax assessment. The Board agreed with Cable One stating "the Board concluded that the primary use doctrine is controlling in terms of the assessment method used." [4] The Board noted that the threshold question rendered this issue moot. However, the Board did state that the primary use of Cable One's facilities was not the provision of VoIP. The Board further stated that it would be improper for the Department to assess Cable One on an enhanced value calculation method.
The Board also determined that a recent district court decision involving Qwest Corporation was controlling in this case and therefore held that "Cable One may not be subject to central assessment on equal protection grounds." [5] The Board did not hold that this issue was rendered moot by its decision on the threshold question. Thus, the Board held that treating Cable One as a telephone company under Iowa Code § 433 would be unconstitutional.
Although the Board held that the issue of federal preemption was rendered moot by its determination on the threshold question, the Board stated that the Department had failed to fully rebut the arguments of Cable One as it relates to federal law.
Essentially, the Board held that Cable One is a cable company that has offered an additional service to its customers over its existing cable television and broadband infrastructure. The additional service of VoIP does not transform Cable One's essential character as a cable company into a telephone company under Iowa law. The Board's decision also confirms that a company's primary use of its assets is controlling for the assessment methodology used for property tax purposes.
