Cities and towns are banding together to stop Cox Communications from collecting millions of dollars in past sales tax levied on cable services.
The case is shaping up as a battleground for what will happen in the future between cities and the telecommunication industry.
Cox has demanded refunds from Scottsdale, Mesa, Chandler, Gilbert, Tempe and Paradise Valley for sales taxes collected on cable services from December 1998 to November 2002.
Since 2002, Cox has contended that cities and towns cannot charge tax on cable services. City officials have disagreed, and point out they have been doing it for years.
A source familiar with the case said the rebate at stake could exceed $5 million. Neither Cox nor the cities would specify a figure.
Earlier this month, the city councils of Mesa, Scottsdale and Chandler agreed to spend up to $260,000 on a legal defense team to challenge Cox's claims.
The money will hire local firm Ryan, Rapp & Underwood, and the Washington, D.C., firm Miller and Van Eaton. The East Coast firm is known nationally for representing cities on telecommunications issues, and is viewed by the telecommunication industry as a persistent foe.
Paradise Valley and Gilbert already have employed the firms. Gilbert has spent $68,000 on its legal defense, town officials said. Paradise Valley officials did not provide figures Wednesday.
Marlene Pontrelli, Tempe's city attorney, said lawyers employed by the city will handle the matter.
City reports indicate that Mesa, Scottsdale and Chandler have the most at stake. Mesa would pay 30.9 percent of the total refund claim, Scottsdale 30.8 percent, Chandler 28.6 percent, Gilbert 7.2 percent and Paradise Valley, 2.6 percent.
Kevin Moran, the director of public affairs for Cox Communications, said the goal is to return the tax money to customers. Any unclaimed money would go to the state, he said. Cox has spent hundreds of hours developing a database of customers eligible for refunds, Moran said. Cox officials were caught off guard this week by news the cities were committing hundreds of thousands of dollars for their legal defense.
The Municipal Tax Hearing Office is overseeing the matter. The agency, in Phoenix's tax office, is the step below tax court.
All aspects of the hearings are confidential, including the identity of companies or individuals involved in tax disputes and details about their cases.
But because of the ramifications to taxpayers, the Tribune pieced together a number of details about the issue through public records and interviews.
The immediate issue dates back about two years.
For years, some Arizona municipalities have required Cox and other cable companies to collect the local sales tax rate from cable customers. Cox would then turn the money over to municipalities.
But in November 2002, Cox claimed state law prohibited the the practice and stopped requiring its customers to pay sales tax.
The company cited a May 2002 Arizona Supreme Court ruling barring Tucson from charging sales tax on microwave television service. Cox officials said the ruling also applied to cable services.
Since, the company has not paid sales tax on cable services.
A number of East Valley officials disagree, including Gilbert Town Manager George Pettit.
"Cable companies have misapplied the interpretation of the court as it relates to sales tax and microwave television," Pettit said. "That's completely different."
Mesa City Manager Mike Hutchinson said the cities will ask the courts to overrule Cox's position.
"We've always thought that was a misinterpretation," Hutchinson said.
"We respectfully disagree," Moran said. "The Supreme Court was very clear this an illegal tax."