Title: GTE North, Inc. v. Zaino

State: ohio

Issuer: Ohio Supreme Court

Document:

[Cite as GTE North, Inc. v. Zaino, 96 Ohio St.3d 9, 2002-Ohio-2984.] 
 
 
GTE NORTH, INC., APPELLANT, v. ZAINO, TAX COMMR., APPELLEE. 
[Cite as GTE North, Inc. v. Zaino, 96 Ohio St.3d 9, 2002-Ohio-2984.] 
Taxation — Public utilities — Constitutionality of assessment rates prescribed in 
R.C. 5727.111(B) — Telephone company is not similarly situated to an 
interexchange telecommunications company for purposes of the Equal 
Protection Clauses of the Ohio and United States Constitutions. 
(No. 2001-0694 — Submitted February 27, 2002 — Decided July 3, 2002.) 
APPEAL from the Board of Tax Appeals, No. 98-P-893. 
__________________ 
SYLLABUS OF THE COURT 
A “telephone company,” as defined in R.C. 5727.01(D)(2), is not similarly situated to 
an “interexchange telecommunications company,” as defined in R.C. 
5727.01(H), for purposes of the Equal Protection Clauses of the Ohio and 
United States Constitutions. 
__________________ 
 
MOYER, C.J. 
{¶1} 
This cause originated as a challenge by appellant taxpayer GTE 
North, Inc., now known as Verizon North, Inc. (“GTE”), to a final determination of 
Roger Tracy, predecessor of Thomas Zaino, appellee, the Tax Commissioner of 
Ohio.  GTE challenged the commissioner’s tax assessments of its public utility 
property for four tax years, including 1997, and ultimately appealed to the Board of 
Tax Appeals (“BTA”).  GTE challenged the constitutionality of the assessment rates 
prescribed in R.C. 5727.111(B).  GTE contended that application of that statute 
resulted in a violation of the Equal Protection Clauses of the Ohio and United States 
Constitutions. 
SUPREME COURT OF OHIO 
2 
{¶2} 
The BTA held a hearing and received evidence submitted by both 
parties.  Thereafter, pursuant to Cleveland Gear Co. v. Limbach (1988), 35 Ohio 
St.3d 229, 520 N.E.2d 188, and MCI Telecommunications Corp. v. Limbach 
(1994), 68 Ohio St.3d 195, 625 N.E.2d 597, the BTA affirmed the 
commissioner’s determination based on its recognition that it lacked jurisdiction 
to determine GTE’s constitutional challenge.  The cause is before this court upon 
an appeal as of right. 
{¶3} 
The statute challenged by GTE, former R.C. 5727.111, provided 
for tax year 1997 as follows:  
{¶4} 
“The taxable property of each public utility * * * and of each 
interexchange telecommunications company shall be assessed at the following 
percentages of true value: 
{¶5} 
“* * * 
{¶6} 
“(B) In the case of a telephone * * * company, the percentage 
provided under (D) of section 5711.22 of the Revised Code for taxable property 
first subject to taxation in this state for tax year 1995 or thereafter, and eighty-
eight per cent for all other taxable property; 
{¶7} 
“* * *  
{¶8} 
“(G) The percentage provided under division (D) of section 
5711.22 of the Revised Code in the case of an interexchange telecommunications 
company.”  146 Ohio Laws, Part I, 1664. 
{¶9} 
R.C. 5711.22(D), referred to in the foregoing statute, established a 
twenty-five percent assessment rate.  146 Ohio Laws, Part I, 1659. 
{¶10} The commissioner determined that GTE is a “telephone company” 
subject to R.C. 5727.111(B).  Accordingly, its taxable personal property that was 
first subject to tax after 1994 is assessed at twenty-five percent; the remainder is 
assessed at eighty-eight percent.  Id.  In contrast, all the taxable personal property of 
January Term, 2002 
3 
interexchange telecommunications companies, with which GTE competes for 
certain segments of telephone business, is assessed at twenty-five percent of true 
value.  Former R.C. 5727.111(G) and 5711.22(D).  GTE claims that it is thereby 
denied equal protection of the law. 
{¶11} In the property tax report filed by GTE for tax year 1997, the value 
of its property assessed at eighty-eight percent of true value was $418,874,324 and 
the value of its property assessed at twenty-five percent of true value was 
$233,842,764.  GTE estimates that assessing some of its property at eighty-eight 
percent instead of twenty-five percent resulted in an additional tax liability of $16.8 
million for tax year 1997. 
{¶12} The 
terms 
“telephone 
company” 
and 
“interexchange 
telecommunications company” as used in R.C. 5727.111 are defined in R.C. 
5727.01.  “Public utility” is defined in R.C. 5727.01(A) as including each “person 
referred to as a telephone company.”  R.C. 5727.01(D) defines “telephone 
company” as follows: 
{¶13} “(D) Any person: 
{¶14} “* * * 
{¶15} “(2) Is a telephone company when primarily engaged in the 
business of providing local exchange telephone service, excluding cellular radio 
service, in this state; 
{¶16} “* * * 
{¶17} “As used in division (D)(2) of this section, ‘local exchange telephone 
service’ means making available or furnishing access and a dial tone to all persons 
within a local calling area for use in originating and receiving voice grade 
communications over a switched network operated by the provider of the service 
within the area and for gaining access to other telecommunication services.” 
(Emphasis added.)   
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{¶18} The term “interexchange telecommunications company” is 
separately defined in R.C. 5727.01(H): 
{¶19} “ ‘Interexchange telecommunications company’ means a person 
that is engaged in the business of transmitting telephonic messages to, from, 
through, or in this state, but that is not a telephone company.” 
{¶20} Thus, 
while 
interexchange 
telecommunications 
companies 
(“interexchange companies”) are assessed and taxed under R.C. Chapter 5727, they 
are not considered to be telephone companies for the purposes of that chapter. 
{¶21} It is well settled that the assessment of taxes is fundamentally a 
legislative responsibility and that a taxpayer challenging the constitutionality of a 
taxation statute “must negate every conceivable basis which might support it.”  
Lyons v. Limbach (1988), 40 Ohio St.3d 92, 94, 532 N.E.2d 106; Weed v. 
Franklin Cty. Bd. of Revision (1978), 53 Ohio St.2d 20, 21, 7 O.O.3d 63, 372 
N.E.2d 338.  We have acknowledged that, generally, “ ‘legislatures are presumed 
to have acted within their constitutional power despite the fact that, in practice, 
their laws result in some inequality.’ ” MCI Telecommunications Corp. v. 
Limbach (1994), 68 Ohio St.3d 195, 199, 625 N.E.2d 597, quoting McGowan v. 
Maryland (1961), 366 U.S. 420, 425-426, 81 S.Ct. 1101, 6 L.Ed.2d 393. 
{¶22} A taxpayer is denied equal protection when a similarly situated 
competitor is allowed to grossly undervalue its property for tax purposes, the former 
is not authorized to assess its property in the same manner, and there is no rational 
basis for the disparate treatment.  Boothe Financial Corp. v. Lindley (1983), 6 Ohio 
St.3d 247, 250, 6 OBR 315, 452 N.E.2d 1295; Allegheny Pittsburgh Coal Co. v. 
Webster Cty. Comm. (1989), 488 U.S. 336, 109 S.Ct. 633, 102 L.Ed.2d 688.  The 
comparison of only similarly situated entities is integral to an equal protection 
analysis.  That is, legislative tax classifications must not have the effect of “ ‘treating 
differently persons who are in all relevant respects alike.’ ”  MCI, 68 Ohio St.3d at 
January Term, 2002 
5 
199, 625 N.E.2d 597, quoting Nordlinger v. Hahn (1992), 505 U.S. 1, 10, 112 S.Ct. 
2326, 120 L.Ed.2d 1.  But the Equal Protection Clause “does not require things 
which are different in fact * * * to be treated in law as though they were the same.”  
Tigner v. Texas (1940), 310 U.S. 141, 147, 60 S.Ct. 879, 84 L.Ed. 1124. 
{¶23} Accordingly, in determining whether R.C. 5727.111 deprives GTE 
of the constitutional right of equal protection we must first determine whether GTE, 
a local exchange telephone company (“local company”), is similarly situated to the 
interexchange telecommunications companies with which it competes. 
{¶24} Prior to the enactment of the federal Telecommunications Act of 
1996, P.L. 104-104, 110 Stat. 56, GTE provided its customers with traditional local 
residential and business phone service, along with optional features like call-waiting 
and caller ID.  It was classified by the Public Utilities Commission of Ohio 
(“PUCO”) as an incumbent local exchange company.  It is undisputed, however, 
that GTE now competes with interexchange companies such as AT & T 
Communications and MCI Worldcom for what is known as “intraLATA toll call” 
business, as described below. 
{¶25} A customer of GTE can place two types of toll calls to someone 
outside the customer’s local exchange area: an intraLATA call and an interLATA 
call.  The root “LATA” is an acronym for the term “local access and transport 
area,” a concept that arose in the litigation that resulted in the breakup of the Bell 
system.  The LATA concept divides the entire country into geographical local 
access and service areas beyond which Bell local exchange companies are not 
permitted to carry telephone calls.  A LATA may include all or part of one or 
more area codes.  However, any correlation between the LATA boundaries and 
the area code boundaries is more by coincidence than by design. 
{¶26} A call that originates and terminates in the same LATA is 
designated an intraLATA call.  An intraLATA call may or may not be a toll call, 
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depending on whether it goes outside the local calling area.  If the intraLATA call 
is between two phones within the same local calling area (and there is no per-call 
charge) the call is toll free.  However, if a call is made between two local calling 
areas in the same LATA it would be an intraLATA toll call.  A call that originates 
in one LATA and terminates in a different LATA is an interLATA call. 
{¶27} As a local company, GTE is authorized by the PUCO to provide 
intraLATA toll call service.  Competing with GTE for intraLATA toll call 
customers are interexchange companies.  In addition to intraLATA toll calls, the 
competing interexchange companies were also able to provide interLATA toll call 
service.  As a local company, GTE is not authorized to handle interLATA toll 
calls. 
{¶28} Before September 1996, all GTE customers who wanted to place 
an intraLATA toll call with a competing carrier were required to “dial around,” 
i.e., dial a series of numbers, such as 10-10-321, to be connected with a competing 
intraLATA carrier.  However, starting September 1996, as required by the PUCO 
and the Telecommunications Act of 1996, GTE began making equal access 
dialing (also referred to as “dialing parity”) available to its customers.  Using 
equal access a GTE customer had only to dial “1” plus the area code and local 
phone number and the intraLATA or interLATA toll call was switched 
automatically to a competing carrier, if one had been chosen by the customer.  By 
December 1998, GTE’s entire system allowed equal access dialing. 
{¶29} As the offices of GTE were converted to equal access, customers 
were given ninety days to switch carriers for their intraLATA calls without a charge. 
 For those customers who did not select another carrier, GTE continued as the 
default carrier for intraLATA toll calls. After GTE began implementing equal access 
dialing for intraLATA service in September 1996, more than two hundred thousand 
of its customers switched to competing interexchange companies, thereby 
January Term, 2002 
7 
decreasing GTE’s intraLATA toll revenue.  However, GTE does not dispute that it 
is a local exchange company and a telephone company for purposes of R.C. 
5727.111, and acknowledges that its primary business remains that of providing 
local telephone service. 
{¶30} There is a rational basis for differentiating between telephone 
companies and interexchange companies.  The interexchange companies with which 
GTE competes for intraLATA calls do not provide local telephone service, and, 
correspondingly, GTE is not authorized to provide interLATA toll calls.  
Interexchange companies do not enjoy the advantage, held by GTE, of being the 
default provider of intraLATA call service for customers who fail to take affirmative 
action to choose another provider.  Moreover, an interexchange company is required 
to pay the local exchange telephone company for access to its local lines.  In short, 
each type of company has separate and distinct areas in which it can operate but the 
other cannot.  They simply are not similarly situated, foreclosing GTE’s equal 
protection challenge. 
{¶31} GTE’s reliance on MCI, supra, is misplaced. At the time relevant 
to MCI, both the public utilities statutes and the tax statutes defined a telephone 
company as one “engaged in the business of transmitting telephonic messages to, 
from, through, or in this state.”  Former R.C. 4905.03(A)(2), 1980 Am.Sub.H.B. 
No. 21, 138 Ohio Laws, Part I, 1443, and former R.C. 5727.01(E)(2), 1982 
Am.Sub.H.B. No. 201, 139 Ohio Laws, Part I, 2052.  Thus, as they existed at the 
relevant time for MCI, neither the public utilities statutes nor the tax statutes 
distinguished between different types of telephone companies.  In addition, at the 
time relevant to MCI the PUCO had held in an order that resellers transmitting 
telephonic messages were also telephone companies.  MCI, 68 Ohio St.3d at 200, 
625 N.E.2d 597, citing In re Regulatory Framework for Telecommunications 
Serv. in Ohio (1985), 66 P.U.R.4th 572, No. 84-944-TP-COI.  The PUCO also 
SUPREME COURT OF OHIO 
8 
held that facilities-based carriers and resellers were in the same category as 
interexchange companies, and it regulated both in the same manner.  In MCI the 
court held that two taxpayers owning or leasing the same type of equipment were 
being treated differently and, therefore, denied equal protection of the law.  The 
resolution was for MCI’s equipment to be taxed as general business property. 
{¶32} The facts in this case are different from those in MCI.  In 1987, 
after the time relevant to MCI, the General Assembly changed the definition of 
“telephone company” in the tax statutes.  R.C. 5727.01(E)(2), Am.Sub.H.B. No. 
171, 142 Ohio Laws, Part II, 2170, 2343.  As a result, the definitions of 
“telephone company” in the public utility statutes and the tax statutes are no 
longer the same.  Cf. R.C. 5727.01(E)(2) and 4905.03(A)(2).  Since 1987, only 
local companies providing local exchange service, such as GTE, have been 
classified for tax purposes as telephone companies; interexchange companies have 
been separately classified.  While GTE and the interexchange companies compete 
for intraLATA toll service, by definition the primary business of GTE, as a local 
exchange telephone service, is different from that of an interexchange company.  
R.C. 5727.01(D) and (H). 
{¶33} The PUCO regulations have also been changed since the decision 
in MCI. While the PUCO still regulates both the local companies and the 
intraexchange activities of the interexchange companies, it has changed its 
regulations to recognize the differences between the two types of companies.  For 
the year relevant to MCI, the PUCO regulations set forth in Ohio Adm.Code 
Chapter 4901:1-5 did not distinguish between the different types of telephone 
companies.  However, in 1988, after the time relevant for MCI, the PUCO revised 
Ohio Adm.Code Chapter 4901:1-5 to apply to “the furnishing of intrastate 
telecommunications service and facilities to the public by local exchange 
companies subject to the jurisdiction of the public utilities commission.”  Former 
January Term, 2002 
9 
Ohio Adm.Code 4901:1-5-01(A).  1988-1989 Ohio Monthly Record 633.  (Since 
the tax-listing date for tax year 1997, at issue here, the chapter has again been 
amended to further refine the differences between local exchange companies and 
interexchange companies.  1996-1997 Ohio Monthly Record 2602.)  The 
definition section of the 1988 regulations, former Ohio Adm.Code 4901:1-5-02, 
provided separate and different definitions for a “local exchange company” and an 
“interexchange carrier.”  1988-1989 Ohio Monthly Record 634.  In the 1988 
PUCO regulations a “local exchange company” is one providing local exchange 
telecommunications service.  Id., former Ohio Adm.Code 4901:1-5-02(VV).  The 
term “local exchange service” was then defined as: 
{¶34} “[T]elecommunications service provided within an exchange in 
accordance with an approved tariff.  Included is the use of exchange facilities 
required to establish connections of the following types: 
{¶35} “[1]  Between the premises of subscribers served within the same 
exchange; or 
{¶36} “[2]  Between the premises of subscribers of the exchange and 
intraexchange trunks serving the exchange.”  Former Ohio Adm.Code 4901:1-5-
02(WW). 
{¶37} The same definitional section of the 1988 PUCO regulations defines 
an “interexchange carrier” as “any common carrier, excluding local exchange 
companies, radio common carriers, and cellular telephone companies, authorized to 
carry subscriber transmissions between or within LATAs in the state of Ohio.”  
(Emphasis added.)  Former Ohio Adm.Code 4901:1-5-02(LL). 
{¶38} Thus, since the time relevant to MCI, both the tax statutes and the 
PUCO regulations have changed to differentiate between local companies and 
interexchange companies. 
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{¶39} We hold that a “telephone company,” as defined in R.C. 
5727.01(D)(2), is not similarly situated to an “interexchange telecommunications 
company,” as defined in R.C. 5727.01(H), for purposes of the Equal Protection 
Clauses of the Ohio and United States Constitutions.  The fact that one business 
competes with another does not, of itself, mean that the two companies are similarly 
situated for purposes of equal protection.  Nor does the fact that the General 
Assembly has determined that both telephone companies and interexchange 
companies should be subject to regulation by the PUCO preclude the General 
Assembly from differentiating between those companies for tax purposes. 
{¶40} Because application of R.C. 5727.111 does not deprive GTE of 
equal protection, the decision of the BTA is affirmed. 
Decision affirmed. 
 
DOUGLAS, HANDWORK, F.E. SWEENEY and PFEIFER, JJ., concur. 
 
COOK, J., concurs in judgment. 
 
LUNDBERG STRATTON, J., dissents. 
 
PETER M. HANDWORK, J., of the Sixth Appellate District, sitting for 
RESNICK, J. 
__________________ 
 
LUNDBERG STRATTON, J., dissenting. 
{¶41} I respectfully dissent from the majority’s judgment affirming the 
decision of the Board of Tax Appeals. 
{¶42} The General Assembly clearly has the power to classify different 
kinds of property and designate different tax burdens for each, but such 
discrimination must not be arbitrary or capricious.  MCI Telecommunications Corp. 
v. Limbach (1994), 68 Ohio St.3d 195, 199, 625 N.E.2d 597, citing Allegheny 
Pittsburgh Coal Co. v. Webster Cty. Comm. (1989), 488 U.S. 336, 109 S.Ct. 633, 
102 L.Ed.2d 688.  Because I would hold that GTE (a local exchange telephone 
January Term, 2002 
11 
company) and its competitors (interexchange telecommunications companies) are 
similarly situated and that there is no rational basis for their unequal tax treatment, I 
would hold that R.C. 5727.111 deprives GTE of equal protection. 
{¶43} The Revised Code treats public utility taxpayers as similarly situated 
in many chapters.  R.C. 4905.03(A)(2) provides: 
{¶44} “(A) Any person, firm, copartnership, voluntary association, joint-
stock association, company, or corporation, wherever organized or incorporated, is:   
{¶45} “* * * 
{¶46} “(2) A telephone company, when engaged in the business of 
transmitting telephone messages to, from, through, or in this state and as such is a 
common carrier.” 
{¶47} Further, R.C. 4905.02’s expansive definition of “public utilities” 
includes 
local 
exchange 
telephone 
companies 
and 
interexchange 
telecommunications companies.  R.C. 4905.04 includes both local exchange 
telephone companies and interexchange telecommunications companies among 
those subject to regulation by the Public Utilities Commission.  R.C. 4905.10 
assesses 
both 
local 
exchange 
telephone 
companies 
and 
interexchange 
telecommunications companies in the same manner through tariffs in order to fund 
the Public Utilities Commission.  Finally, R.C. 324.01 defines “telephone company” 
in a way that includes both local exchange telephone companies and interexchange 
telecommunications companies.  The only place in the Revised Code where local 
exchange telephone companies and interexchange telecommunications companies 
were treated differently at the time of the filing of this case is in the tax assessment 
statute. 
{¶48} Moreover, I believe that the rationale behind MCI applies to this 
case.  In MCI, this court emphasized that both carriers in that case transmitted 
telephonic messages as “telephone companies” within the meaning of that term as 
SUPREME COURT OF OHIO 
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contained in the tax code in the disputed year.  Further, we examined whether the 
PUCO treated and regulated both carriers the same.  In this case, both local 
exchange telephone companies and interexchange telecommunications companies 
transmit telephonic messages, and the regulatory structure by the PUCO was 
primarily the same for both local exchange telephone companies and interexchange 
telecommunications companies. 
{¶49} In the name of leveling the playing field and quashing monopolies, 
the Telecommunications Act of 1996 mandated the unbundling of services by 
carriers like GTE, requiring them to lease their lines and equipment to competitors.  
But in my view, taxation at different rates for these similarly situated telephone 
companies in the name of removing competition violates equal protection. 
{¶50} Local 
exchange 
telephone 
companies 
and 
interexchange 
telecommunications companies provide the same services, the transmission of 
telephonic messages.  Even though R.C. 5727.01(D)(2) and R.C. 5727.01(H) define 
the two carriers differently for tax purposes than other parts of the Revised Code, I 
would hold that changing the name does not change the substance of what these 
carriers are: telephone companies.  I respectfully dissent and would reverse the 
decision of the Board of Tax Appeals and would enter judgment in favor of GTE. 
__________________ 
 
Thompson Hine, L.L.P., and John T. Sunderland, for appellant. 
 
Betty D. Montgomery, Attorney General, and James C. Sauer, Assistant 
Attorney General, for appellee. 
__________________