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Proposition H, which Chula Vistans rejected last November, had a tough row to hoe.

The proposition, which sought to modernize an outdated law that requires companies in the city to charge a small tax on users of telephones, electricity and other utilities, was complicated to explain. It also looked suspiciously like a measure to grab more taxes from residents at a time when the city’s economy continued to implode and California’s governor was pushing his own one-cent sales tax.

The Utilities User Tax was also being paid to a city government that had spent the last decade or so making promises to public employees it couldn’t keep, building buildings it couldn’t afford and eventually cutting back basic services like libraries and senior centers because it could no longer pay for them.

City officials claim the measure was vital to the city’s survival as an effective provider of those basic services. If it had passed, Chula Vista would have had nearly $6 million more revenue to spend next year, they say, meaning senior centers, libraries and recreation centers might have been able to open for longer hours and maybe, just maybe, fewer people would have been laid off.

But it didn’t pass, and the city had to cleave $5.6 million from its budget, laying off dozens of people and cutting services like tree-trimming and graffiti abatement.

The irony is that, so far, the failure of Proposition H hasn’t made itself felt. Chula Vista’s still collecting money from utilities companies, who charge consumers the tax. But now city leaders say they’re scared to spend a chunk of that money, and are squirreling it away, in case those companies challenge the outdated law and want their money back.

Here’s how it works:

Since 1970, the city of Chula Vista has collected a tax on the consumption of utility services like gas, electricity and telephone calls. These taxes are common. In California, they exist in 146 cities and four counties and are levied on 46 percent of the state’s population, according to Californiacityfinance.com.

In Chula Vista, the amount of revenue raised by the tax has swelled to around $9.1 million annually. Much of that money comes from levies on phone bills, more precisely, on intrastate and long-distance phone calls.

As utilities have evolved and internet- and wireless-based communications have become the norm, the 1970 law has become badly outdated. It doesn’t mention the internet, obviously, nor does it talk about cell phones.

Nevertheless, the city has been collecting the fees for cell phone calls for several years. Taxes on cell phone calls now constitute the most significant portion of the city’s utilities tax revenue, accounting for $5.1 million of the $9.1 million total collected last fiscal year, Chula Vista City Finance Director Maria Kachadoorian told me.

But it’s uncertain whether the law ever allowed Chula Vista to charge the tax on cell phone calls.

Back in 2006, Sprint Nextel sent the city a letter saying it didn’t think it needed to collect the taxes from its customers on behalf of the city any longer.

Company spokesman John Taylor said the company decided to make the move after the IRS lost a number of court battles over its right to collect federal excise duties on cell phone calls — something he said set a precedent for the utility tax, since the Chula Vista law defines which utilities can and can’t be taxed based on federal excise duties.

Taylor said Chula Vista sent Sprint Nextel back a letter saying it should continue collecting the tax as usual. So the company did, with one exception: Sprint Nextel argued that it shouldn’t have to pay the tax on one of its subsidiaries that offered pre-paid services. Taylor said his company has now entered into a confidential agreement with Chula Vista over that portion of the taxes.

But the validity of the city’s right to collect that $5.1 million remained in doubt after 2006, and since it was being challenged on the issue, last year the city decided to ask voters to update the law governing Chula Vista’s utility tax.

That was Proposition H.

With the failure of the proposition, the city now says it can no longer rely on the portion of funds that it collects on cell phone calls as a source of revenue. That’s estimated by the city’s Finance Department to be $5.6 million over the next fiscal year.

The cash is still rolling in, but the city’s being prudent and storing away that money in a separate account, Kachadoorian and City Manager Jim Sandoval told me. So, if the companies that paid it decide they shouldn’t have had to pay it and want their money back, the city’s covered.

The city’s leaders have used the threat of losing that income as their main justification for laying off dozens of people, freezing salary increases, closing recreation centers and continuing to limit the hours of the Norman Park Senior Center and libraries, so they presumably had good reason to believe that was actually going to happen.

It hasn’t yet, however — the money’s still flowing in. I asked Taylor why he thinks that is.

Taylor pointed out that in most cases the telecommunications companies don’t pay the tax themselves. They merely collect the taxes off their customers and pass them on to Chula Vista.

“We’re like the tax collectors,” he said.

So legal or other challenges would have to come from the customers that are paying the taxes, Taylor said. If cell phone customers don’t think the tax is legitimate, it’s essentially up to them to make that case to the city.

The exception is prepaid mobile phone services. The tax is only charged on certain types of phone calls, and it’s impossible for a cell phone company to know how many of the prepaid minutes it sells to customers are going to be used for the types of calls that are taxable.

So, Sprint Nextel, for example, has to estimate that amount and pay it out of the company’s pocket. The company essentially becomes the proxy taxpayer. So, when it comes to the prepaid portion of cell phone services that are being taxed, the telecommunications companies themselves might want to take action, legal or otherwise, against the city, Taylor said.

I asked him if Sprint Nextel plans to do that.

“We plan to honor our agreement with the city,” he said.

Please contact Will Carless directly at will.carless@voiceofsandiego.org or at 619.550.5670 and follow him on Twitter: twitter.com/willcarless.

Will Carless

Will Carless was formerly the head of investigations at Voice of San Diego.

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