Verizon Fights N.Y. Mandate for Tax Refunds

ALBANY, N.Y. (CN) — Verizon claims in court that New York is treating $8 million in property tax refunds as "found" money that the telecom provider should put toward service and network improvements.

Verizon New York, part of telecom giant Verizon Communications Inc., says the demanded investment is arbitrary and amounts to unwarranted confiscation of its property. Last week, the company sued the New York Public Service Commission to block the order.

According to the lawsuit, Verizon notified the commission of the anticipated refunds, as all regulated utilities are required to do under state public service law.

The company says it received the refunds in late 2014 as the result of tax certiorari proceedings in New York City and in the Long Island towns of Oyster Bay and Hempstead.

Verizon sought commission approval to retain the intrastate portion of the refunds: $1 million from New York City, $2 million from Oyster Bay and $5 million from Hempstead.

But contrary to past practice, the commission conditioned retention on Verizon using the refunds "to increase capital expenditures to address purported service quality and network reliability concerns about its New York network," the company contends in the Albany County Supreme Court lawsuit.

"The tax refunds do not constitute new income to Verizon; rather, for accounting purposes, they are treated as 'contra-expenses,' i.e., they are booked on the company's books as reversals of previously booked tax expenses," the complaint states.

In other words, "they replace dollars that the company temporarily expended and reasonably anticipated being returned after completion of litigation and/or negotiations with the taxing authorities," according to Verizon.

Verizon New York, once known as New York Telephone Co., dates to the 1890s. Today, according to Bloomberg, it provides wire line, fiber and wireless telecommunication and Internet services in New York and a portion of Connecticut.

In 2000, the company became part of Verizon Communications, one of the "Baby Bells" created after the government's breakup of the AT&T monopoly in 1984.

The lawsuit notes that since the breakup, the once staid residential landline market "has been transformed into a highly competitive mixture of voice, video and data communications offered by a number of providers, including local exchange carriers, cable companies, satellite providers and, increasingly, wireless carriers that offer a multitude of services on portable smartphones and tablets."

Some of the changes, though, have not been easy for incumbent providers like Verizon, which have bled wire-line customers.

According to the lawsuit, the New York Public Service Commission recognized the changing marketplace and "found that a lightened regulatory approach for traditional incumbent telephone carriers was warranted and necessary in order to level the playing field and enable them to remain viable providers in the future."

Verizon says it was singled out "as a provider needing particularly lightened regulation due to its significant loss of market share, dramatically lower earnings and operating losses."

By December 2014, according to a commission assessment, Verizon's wire-line network was down to less than 200,000 core customers, half the number seen just four years earlier.

Against that backdrop, the lawsuit says, the commission decided that telephone utilities facing significant competitive pressure could retain tax refunds and gains from the sale of assets.

As a result, the commission granted many requests from Verizon to keep tax refunds, finding such approval to be "a proper regulatory response to the financial stress Verizon claims it is and will be under as it continues its transition to an increasingly competitive market," according to the complaint.

Early last year, though, the commission approved a Verizon refund request "with a slight variation": an expectation that the company would put the money toward system improvements, according to Verizon.

Verizon claims that sentiment became more direct for the requests submitted to retain the New York City, Oyster Bay and Hempstead refunds.

"The commission did something it had never done before — it allowed Verizon to retain the refunds as it had in the past but this time also imposed a spending mandate which required Verizon to use the funds for a particular purpose," the company claims.

Verizon says it was told to submit a compliance filing describing how the refunds would be used "incrementally" to "address unspecified service quality and network reliability concerns."

Verizon has been dogged in recent years by complaints about service. Earlier this year, the commission initiated a formal look into the company's service quality and network investment to see whether its recent regulatory light touch should continue.

Minutes from a meeting in March show the commission questioning whether competition from other carriers was keeping Verizon on its toes.

"...[T]here may be an unwillingness on the part of Verizon to compete to retain and adequately serve its regulated wireline customer base, and warrants further investigation into Verizon's service quality processes and programs," the minutes state.

A commission spokesman declined comment, citing the pending litigation.

Verizon asks the court to find the spending mandate invalid. The company is represented by Marshall Beil of McGuireWoods in Manhattan.

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