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Iowa Court Upholds Equal Protection Challenge

Taxpayers frequently challenge tax laws based on equal protection grounds, but states generally prevail on the rather easily met rational basis test. In a noteworthy Iowa decision, Qwest, an incumbent local exchange telecommunications company (ILEC),

October 17, 2011

Taxpayers frequently challenge tax laws based on equal protection grounds, but states generally prevail on the rather easily met rational basis test. In a noteworthy Iowa decision, Qwest, an incumbent local exchange telecommunications company (ILEC), successfully argued that the application of two property tax exemptions resulted in unconstitutional discrimination against it in favor of competitive long distance companies (CLDCs) and wireless companies. Qwest Corp. v. Iowa State Bd. of Taxation and Revenue, Docket No. CV008413 (Iowa Dist. Ct. Aug. 17, 2011).

The first subject of Qwest’s challenge was an exemption for personal property acquired by CLDCs after 1995 that was available to “long distance telephone companies,” the definition of which specifically excluded ILECs like Qwest. The second aspect of Qwest’s challenge involved the state’s central assessment property tax scheme. Iowa law exempts all personal property from tax, but for centrally assessed telephone companies like Qwest, the state treats all property as “real property.” All “telephone companies” operating a telecommunications line in the state are subject to central assessment. The state did not classify wireless companies as telephone companies, because the wireless companies use radio wave technology and not a network of cable and wires. Therefore, Qwest paid tax on the value of all of its property, while wireless companies did not pay tax on personal property.

With respect to the first exemption, the court first held that Qwest’s central office equipment was similarly situated to the property of CLDCs. The court looked to the primary use of the property, noting that the switches and cable used by CLDCs for the long distance part of the call transport was similar—if not identical—in character, function, and use to that employed by Qwest for part of the call transport. The court also found that Qwest and CLDCs compete with one another as both deliver commercial voice communication services to the public.

With respect to the second exemption, the court held that Qwest’s central office equipment was similarly situated to wireless companies’ mobile switching telecommunications offices (MSTOs) because significant parts of each of the relevant networks are very similar in terms of routing calls, such property is intended to accomplish the same purpose or main activity, and primary use of such property is similar or the same. 

The court found that no rational basis existed for the discrimination against Qwest. The Iowa State Board of Tax Review argued that the differential treatment existed to increase competition in the local exchange market by incentivizing long distance companies to provide service and to encourage the construction of wireless infrastructure in the state, respectively.  The court noted that while such rational bases and legitimate governmental purposes may have existed at the time Iowa enacted the statutes, they are now obsolete (Qwest no longer dominated the market and there are more wireless customers than landline customers in Iowa).

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