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Missouri Supreme Court affirms damages award for unpaid municipal license taxes

Updated: Jun 29, 2022

In a long-awaited decision, the Missouri Supreme Court has affirmed, and reversed in small part, judgment in favor of four Missouri Cities on their claims against CenturyLink telecommunications company. City of Aurora, et al. v. Spectra Communications Group, LLC, et al. The Cities filed suit in 2012, seeking unpaid license taxes, unpaid linear foot fees in one City, and seeking judgment requiring CenturyLink to abide by two Cities’ right-of-way (ROW) codes including by obtaining ROW agreements. After nineteen months of consideration, the Missouri Supreme Court finally issued its decision on December 24, 2019.

The Court upheld the judgment awarding unpaid license taxes to the Cities, and concluded that it was not error for the trial Court to hold that CenturyLink owed license taxes on all revenue CenturyLink receives in the Cities, unless there is an explicit exception for a certain type of revenue in a City’s ordinance. For years, CenturyLink has excluded multiple types of revenue from its tax base when calculating and paying municipal license taxes. The majority of those exclusions were held to be unlawful, with the exception of carrier access revenue (which the trial court excluded on the basis of the particular evidence in that case) and interstate revenue (which the court held was appropriately excluded in only one City because that City had an explicit exclusion of interstate in its ordinance). Accordingly, the Court affirmed judgment holding that CenturyLink had unlawfully underpaid its license taxes, and affirmed an award of damages to the Cities for unpaid taxes dating back to 2007.

Another significant result of the Aurora decision was the Court’s judgment holding that municipal ROW code requirements for ROW agreements are lawful. Two Cities in the case required ROW users to enter into ROW agreements. ROW agreements are important ROW management tools, which can help preserve public safety and ensure Cities are effectively managing their ROW. CenturyLink has refused, for years, to sign the ROW agreements, despite occupying the Cities’ ROW. CenturyLink argued that the ROW agreements were unlawful “franchise” agreements. Because § 67.1842.1(4) prohibits municipalities from requiring telecommunications “to obtain a franchise,” CenturyLink argued the agreements were unlawful. However, the Court rejected that argument, and held that not all “agreements” between municipalities and utilities constitute a “franchise,” and CenturyLink failed to show that the agreements here were prohibited franchises.

The Court also held that one City’s linear foot fee for ROW users was lawful, and that CenturyLink owed linear foot fees due to its presence in the ROW. The City’s linear foot fee is based on its statutory authority in § 67.1846.1 RSMo., which permits “grandfathered” Cities to impose linear foot fees. “Grandfathered” Cities include all those that enacted or had a policy of imposing linear foot user fees prior to May 1, 2001. CenturyLink challenged that statutory authority, arguing that the grandfathering provision in § 67.1846.1 was an unconstitutional special law because it created a “closed class,” meaning that no other Cities could join the class after May 1, 2001. The Court rejected this argument, and, overruling prior cases, held that the “closed class” consideration is not the appropriate test for determining special laws. Rather, the Court held that whether a law is unconstitutionally “special” under the Missouri Constitution, Art. III, Sec. 40(30), is based on whether the law has a “rational basis.” In this case, the Court held that the grandfathering provision “was a rational effort by the legislature to impose a new policy without disrupting the reasonable reliance of those that acted lawfully before the change in policy.” The Court’s return to a rational basis analysis for special laws was a significant change that will likely have a major impact, including by perhaps allowing the legislature to enact special laws with more ease. This pronouncement will have wide-reaching effects in Missouri, even beyond the municipal context.

The Court reversed and remanded two issues back to the trial court: the calculation of prejudgment interest, and the availability of certain statutory authority for attorneys’ fees. For those interested in learning more, the Court provided a detailed analysis of the manner in which to calculate prejudgment interest on unpaid municipal license taxes (during the periods of 2007 to 2013), in Section II.H of the Opinion.

* Please Note: The Court’s Opinion was extensive, and this article is merely intended to serve as a simple summary of some of the note-worthy points. If you have any further questions, please contact your City Attorney, or Dave Streubel or Maggie Eveker in our office.

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