The Attorney General of Texas
November 30. 1978
JOHN L. HILL
Attorney General
Mr. Homer A. Foerster Opinion No. H- 12 6 5
Executive Director
State Board of Control Re: Whether state agencies
L.B.J. Building may pay the “special municipal
Austin, Texas 787lt tax or charge” on telephone bills.
Dear Mr. Foerster:
You ask whether state agencies may pay a “municipal franchise charge”
which appears on telephone bills. Utilities frequently enter into franchise
agreements with cities authorizing them to use the city’s streets in exchange
for the payment of a percentage of the gross receipts received for rendering
services locally. The percentage of gross receipts paid to the city varies
according to the individual agreement. The Public Utility Commission has
required Southwestern Bell Telephone Company to file a tariff which provides
that the municipal franchise charge will be passed on to the utility customers
within the particular municipality. Telephone bills sent to state agencies now
include a “special municipal tax or charge. v You question whether this charge
can be exacted from a state agency and ask whether it is actually a tax.
Article 1175, section 12, V.T.C.S., prevents telephone companies from
using the streets or grounds of a home rule city without first obtaining the
consent of the governing authorities and paying a prescribed compensation.
Article ll81, V.T.C.S., details other conditions relating to the grant by a home
rule city of a “franchise to use or occupy the public streets, avenues, alleys or
grounds” of the city. Pursuant to these provisions, home rule cities may grant
utility companies franchises to use the public streets in exchange for
compensation measured by a percentage of gross receipts. City of Tyler v.
, 493 S.W.2d 322 (Tex. Civ. App. - Tyler 1973,
slaco v. General Telephone Company of the
Southwest, 359 S.WmTex. Civ. App. - San Antonio 1961, writ ref’d
n.r.e.)me rule city may authorize local telephone service by franchise).
General law cities have authority under article 1016, V.T.C.S., to grant
franchises to telephone companies conducting a local business. Fleming v.
Houston Lighting & Power Co., 138 S.W.2d 520 (Tex. 1940), cert. denied, 313
U.S. 560 (1941);Southwestern Telegraph & Telephone Co. v. City of Dallas, 174
S.W. 636 (Tex. Civ. App. - Dallas 1915, writ ref’d) (construing special charter
provision granting substantially same authority as art. 1016). See also V.T.C.S.
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Mr. Homer A. Foerster - Page 2 (H-1265)
art. 1446c, S 21 (preserves right of municipality to grant franchise and charge
therefore).
The Supreme Court has described these franchise charges collected from
utilities as charges in the nature of rentals for the use of city streets. Fleming v.
Houston Lighting & Power Co., m. It expressly distinguished between such
rental charges imposed by the city and a tax on the privilege of doin business.
Fleming v. Houston Lighting & Power Co., 143 S.W.2d 923 (Tex. 1940) 7overruling
motion for rehearing). The court relied on the leading case of St. Louis v. Western
Union Telegraph Co., 148 U.S. 92 (1893), which earlier held that such charges were
rentals, and not taxes.
Decisions from other states generally hold that the percentage of gross
receiots which a citv collects from a utilitv oursuant to a franchise ameement does
not cbnstitute a tax. City and County of San Francisco v. Market St’. Ry. Co., 73
P.2d 234 (Cal. 1937); Hanford Gas & Power Co. v. City of Hanford, 124 P. 727 (Cal.
1912); City of Hartford v. Connecticut Co., 140 A. 734 (Conn. 1928); City of
Portland v. Portland Ry., Light & Power Co., 156 P. 1058 (Ore. 1916); City of
Mitchell v. Dakota Cent. Telephone Co., 156 N.W. 63 (S.D. 1916); Nashville Gas &
Heating Co. v. City of Nashville, 152 S.W.2d 229 (Tenn. 1941). Cf. Heerwagen v.
Crosstown St. Ry. Co. of Buffalo, 71 N.E. 729 (N.Y. 1904) (paymentof percentage of
gross receipts is tax within particular statute). These courts emphasized that the
payments were contractual obligations created by voluntary agreement rather than
enforced contributions exacted by the government. See Nashville Gas & Heating
Co. v. City of Nashville, m; City of Hartford v. Connecticut Co., E. See
also Conlen Grain and Mercantile, Inc. v. Texas Grain Sorghum Producers, 519
S.W.2d 620 (Tex. 1975) (enforced contribution to provide revenue for state is a tax).
You state in your request letter that the payments are authorized by article
11.06, Taxation-General, which imposes a state gross receipts tax on telephone
companies. Section 2 of article 11.06 provides:
No city or other political subdivision of this State, by
virtue of its taxing power, police power, or otherwise, shall
impose an occupation tax or charge of any sort, for the
privilege of doing business, upon any person, corporation, or
association required to pay an occupation tax under this
Article; provided, that nothing in this Article shall be
construed to prohibit the collection of ad valorem taxes as
provided or not prohibited by law, or any tax now imposed by
franchise, and provided further that this Article shall not
affect any contract now in existence or hereafter made
between a city and the holder of a franchise.
The Supreme Court discussed the predecessor to article 11.06 in overruling a motion
for rehearing in Fleming v. Houston Lighting & Power Co., 143 S.W.2d 923 (Tex.
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Mr. Homer A. Foerster - Page 3 (~-1265)
1940), and concluded that the city had not imposed a prohibited charge for the
privilege of doing business. The statute preserves the city’s right to collect
payments pursuant to franchise agreements. Even though article ll.06, section 2
refers to “any tax now imposed by franchise,” we do not believe the Legislature
meant to treat the franchise payments as taxes. Article 8, section 3 of the Texas
Constitution requires that taxes be levied by general laws. County of Harris v.
Shepperd, 291 S.W.2d 721 (Tex. 1956). A tax cannot be imposed by franchise
agreement. Nashville Gas & Heating Co. v. City of Nashville, m (dissenting
opinion) (statute exempting utilities from tax “required by municipal . . .
franchise”).
These authorities hold, and we conclude, that the franchise charge is not a
tax. However, in some cases, part of the franchise charge may constitute a
payment in lieu of taxes. Home rule cities have authority to assess the franchise of
a public corporation using the city streets separately from its tangible property.
V.T.C.S. art. 1175, S 8; City of Fort Worth v. Southwestern Bell Telephone Co., 80
F.2d 972 (5th Cir. 1936) (telephone company’s franchise in streets is property
subject to ad valorem tax). See Texas & Pacific Ry. Co. v. City of El Paso, 85
S.W.2d 245 (Tex. 1935). The staard agreement which Bell Telephone has entered
into with many municipalities provides that the franchise charge shall be paid in
lieu of any franchise tax levied as an ad valorem tax or any imposition other than
the usual ad valorem taxes. Thus it is possible that the franchise charge includes a
payment in lieu of ad valorem tax on the franchise assessed pursuant to article ll75,
section 8. However, since article ll75, section 8 does not require the home rule
city to assess the franchise separately, e Texas & Pacific Ry. Co. v. City of El
Paso, a at 249, the franchise charge does not necessarily include any payment
inu of ad valorem taxes. Such oavments are not singled out to be DaSSed on to
the consumer, but are merged in ihe’ total franchise &arge which appears on the
phone bill. Although the economic burden of any payment in lieu of ad valorem tax
rests on the consumer, we believe its legal incidence remains on the telephone
company. See United States v. Tax Commission of Mississippi, 421 U.S. 599 (1975);
Attornev General Ooinion H-957 (1977): Annot. 44 L.Ed 2d 719 (1976). Thus, the
possibili-ty that the franchise charge maywrt constitute a payment in lieu of
taxes does not raise the issue of a city tax being imposed upon the state.
Therefore, we need not answer your second question regarding legal prohibitions
against the payment of a tax by state agencies.
You finally ask whether the Constitution or statutes prohibit state agencies
from paying the franchise charge, which we have determined not to be a tax. The
charge is part of the telephone rate set by the Public Utilities Commission pursuant
to article 1446~. See § 3(d). We find no constitutional or statutory prohibition
against the payment of properly established telephone rates by state agencies.
Article 606a, V.T.C.S., authorizes the Board of Control to pay for telecommuni-
cations services used by state agencies, and an appropriation is available for that
purpose. Acts 1977, 65th Leg., ch. 872, at 2856.
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Mr. Homer A. Foerster - Page 4 (H-1265)
SUMMARY
The “municipal franchise charge” which appears on tele-
phone bills represents a rental payment for the use of city
streets and not a tax. Even if in some instances the charge
includes a payment in lieu of ad valorem tax on the
telephone company’s franchise, the legal incidence of that
tax is not on the consumer. We find no constitutional or
statutory prohibition against a state agency’s payment of a
“municipal franchise charge” which is not a tax as part of
the telephone rate established by the Public Utilities
Commission.
JOHN L. HILL
Attorney General of Texas
APPROVED: w
C. ROBERT HEATH, Chairman
Opinion Committee
P. 5013