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Tax districts owe Qwest $40 million
Maricopa County must pay $26.9 mil
By Yvonne Wingett and Ryan Randazzo
The Arizona Republic
Sunday, July 13, 2008

Arizona's counties, cities, towns, school districts and other local taxing districts must pony up millions of dollars to help pay their portions of a complex settlement agreement with Qwest Communications International Inc. over how its telecommunications equipment was assessed over several years.

The budget hit comes as many communities are cash-strapped and struggling to make ends meet.

The $40 million settlement caps a years-long legal battle that began when Qwest filed a lawsuit in Arizona Tax Court challenging state Department of Revenue assessments on its property across Arizona.

The company claimed that the state ignored the fact that some of its assets were obsolete and argued that much of its equipment, such as old underground cable and switches that have been replaced with digital equipment, should have been assessed at a lower rate because the property was unusable.

"We overpaid, they overcollected, and we were entitled to a refund," said Jeff Mirasola, a Qwest spokesman.  "We're pleased with the fact that we feel it is a more equitable assessment."

Most of the $40 million must be paid by July 31.

"This is a settlement," Mirasola said.  "We thought we were due a lot more than this."

Each of Arizona's 15 counties is responsible for collecting taxes from property owners and distributing the money to local jurisdictions, said Cheryl Murray-Leyba, assistant director of the state Department of Revenue's Property Tax Division.  All 15 have agreed to pay their portions of the settlement, she said.

The impact varies depending on how much Qwest property is located within a jurisdiction, Murray-Leyba said.

The bulk of the settlement, $26.9 million, is owed by Maricopa County communities.

County Manager David Smith has sent letters notifying dozens of Valley towns, cities, school districts and other taxing districts that they must help pay for the settlement.  The refunds are in proportion to the tax revenues received by the jurisdictions at the time Qwest originally paid the taxes, he said.

With the July 31 deadline looming, Maricopa County will pay the entire bill for its communities, even though the county itself owes only about $2.8 million.  The other jurisdictions are expected to repay the county between November and May, when property-tax collections are due.

The county will lose about $635,000 in interest to front the payment, said Brian Hushek, deputy budget director at the county's Office of Management and Budget.

The state decided to settle the case, according to Smith's letter, because "a trial on the merits posed a risk to taxing jurisdictions and could have led to a refund of more than $300 million."

County Supervisor Andy Kunasek was unhappy with the settlement, saying, "It appears to me they could be double-dipping."

Qwest, like any utility, pays its bills with money collected from customers.  But utility regulators doubt that any of the $40 million will be refunded to customers.

"I assume that Qwest will argue that retroactive rate making will prevent the (Arizona Corporation Commission) from ordering an immediate refund of these payments to its customers," Commissioner Bill Mundell said in a letter to the commission's staff.

However, the commission should consider such tax issues when setting Qwest's rates in the future, he said.

Mirasola said that if Qwest had not been overpaying the taxes during the five years covered in the settlement, the company still would not have exceeded the profit margin it is legally allowed to earn from customers.

"We still wouldn't be close to what we are entitled to earn," he said.

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