Verizon New Jersey, Inc. v. Borough of Hopewell ( 2024 )

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-2909-18
VERIZON NEW JERSEY, INC.,
Plaintiff-Appellant/
Cross-Respondent,
v.
BOROUGH OF HOPEWELL,
Defendant-Respondent/
Cross-Appellant.
____________________________
STATE OF NEW JERSEY,
Intervenor.
____________________________
Argued November 1, 2021 – Decided June 14, 2023
Before Judges Accurso, Rose and Enright.
On appeal from the Tax Court of New Jersey, Docket
No. 012215-2009, whose opinions are reported at 26
N.J. Tax 400 (Tax 2012) and 31 N.J. Tax 49 (Tax
2019).
Peter G. Verniero argued the cause for appellant/
cross-respondent (Sills Cummis & Gross PC, and
McCarter & English, LLP, attorneys; Peter G.
Verniero and Susan A. Feeney, of counsel and on the
briefs; Katherine M. Lieb and Farhan Ali, on the
briefs).
Joseph C. Tauriello and Gregory B. Pasquale argued
the cause for respondent/cross-appellant (Joseph C.
Tauriello and Shain Schaffer PC, attorneys; Sarah E.
Fitzpatrick, Xiaosong Li, and Gregory B. Pasquale, of
counsel and on the briefs; Joseph C. Tauriello, on the
briefs).
Michelline Capistrano Foster, Deputy Attorney
General, argued the cause for intervenor (Matthew J.
Platkin, Attorney General, attorney; Melissa H. Raksa,
Assistant Attorney General, of counsel; Michelline
Capistrano Foster, on the brief).
Gregory B. Pasquale argued the cause for amicus
curiae New Jersey State League of Municipalities
(Shain Schaffer PC, attorneys; Joel L. Shain, of
counsel and on the brief; Gregory B. Pasquale and
Sarah E. Fitzpatrick, on the brief).
The opinion of the court was delivered by
ACCURSO, J.A.D.
Verizon New Jersey, Inc., inheritor of New Jersey Bell Telephone
Company's local exchange service telephone network, has been locked in a
battle with the Borough of Hopewell for more than a decade over whether
Verizon has to pay the municipal tax for 2009 on its business personal
property in the Borough under N.J.S.A. 54:4-1. In two published decisions,
the Tax Court determined: (1) the statute's 51% market-share calculation must
be performed annually, and an annual market-share calculation, as applied to
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Verizon, does not violate the State and federal equal protection guarantees,
N.J. Const. art. I, § 1, and U.S. Const. amend. XIV, § 1, the State prohibition
of special legislation, N.J. Const. art. IV, § 7, ¶ 9, or the Uniformity Clause,
N.J. Const. art. VIII, § 1, ¶ 1(a), Verizon New Jersey, Inc. v. Hopewell
Borough, 26 N.J. Tax 400, 414-32 (Tax 2012) (Verizon I), and (2) that Verizon
is subject to the tax imposed for tax year 2009 because it provided dial tone
and access to 51% of the Hopewell telephone exchange in 2008, Verizon New
Jersey, Inc. v. Borough of Hopewell, 31 N.J. Tax 49, 70-76 (Tax 2019)
(Verizon II). Finding no flaw in either of the Tax Court's thorough and
thoughtful opinions, we affirm.
The Telephone Companies
A little background — both as to the telecommunications industry and
New Jersey's approach to taxing it — will make the case easier to understand.
Before the break-up of AT&T in 1984, it monopolistically "dominated the
national telecommunications industry," controlling "virtually all long-distance
telephone service, most local telephone service, and a substantial amount of all
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telephone equipment manufacturing."1 AT&T Corp. v. Iowa Utils. Bd., 525
U.S. 366, 413 (1999) (Breyer, J., concurring in part and dissenting in part).
The federal consent decree resolving the government's antitrust action against
the company divested it of its local-exchange carriers, the "Baby Bells,"
"leaving AT&T as a long-distance and equipment company, and limiting the
divested carriers to the provision of local telephone service." Verizon
Commc'ns, Inc. v. FCC, 535 U.S. 467, 475 (2002)).
The decree had the intended effect of rapidly bringing competition to
AT&T from the likes of MCI and Sprint for long-distance service and likewise
encouraged competition for telephone equipment. Iowa Utils. Bd., 525 U.S. at
413. "The decree did nothing, however, to increase competition in the
persistently monopolistic local markets," Verizon Commc'ns, Inc., 535 U.S. at
475, as each local retail telephone market generally remained "in the hands of
a single state-regulated local service supplier, such as NYNEX in New York,"
Iowa Utils. Bd., 525 U.S. at 414 (Breyer, J.), or New Jersey Bell, Verizon's
1
The consent decree ending the government's antitrust suit against AT&T was
entered on August 24, 1982, United States v. Am. Tel. & Tel. Co., 552 F.
Supp. 131, 196 (D.D.C. 1982), aff'd sub nom. Maryland v. United States, 460
U.S. 1001 (1983), the court approved the plan of reorganization in 1983,
United States v. W. Elec. Co., 569 F. Supp. 990, 993 (D.D.C. 1983), and
divestiture occurred on January 1, 1984, id. at 994 n.11.
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predecessor, here.2 As Justice Souter succinctly put it: "The upshot of the
1984 divestiture . . . was a system of regional service monopolies (variously
called 'Regional Bell Operating Companies,' 'Baby Bells,' or 'Incumbent Local
Exchange Carriers' (ILECs)), and a separate, competitive market for long-
distance service from which the ILECs were excluded." Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 549 (2007).
"Until the 1990's, local phone service was thought to be a natural
monopoly," Iowa Utils. Bd., 525 U.S. at 371, owing to the high costs of entry
to an aspiring competitor in a local retail telephone market. "The physical
incarnation of such a market, a 'local exchange,' is a network connecting
terminals like telephones, faxes, and modems to other terminals within a
geographical area like a city." Verizon Commc'ns, 535 U.S. at 489.
The incumbent local carrier either built or, more likely, inherited "the
local loops (wires connecting telephones to switches), the switches (equipment
directing calls to their destinations), and the transport trunks (wires carrying
2
Although "[t]he Bell System provide[d] basic telephone service to 80 percent
of all telephone subscribers in the Continental United States" at the time of the
breakup, independent telephone companies also existed. W. Electric, 569 F.
Supp. at 993 n.8. New Jersey was served by two, United Telephone Company
of New Jersey and Warwick Valley Telephone Company, both of which still
exist. Verizon I, 26 N.J. Tax at 409 n.2.
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calls between switches) that constitute a local exchange network," Iowa Utils.
Bd., 525 U.S. at 371, which the Supreme Court once likened to "a
transportation network for communications signals, radiating like a root
system from a 'central office' (or several offices for larger areas) to individual
telephones, faxes, and the like," Verizon Commc'ns, 535 U.S. at 490.
"A newcomer could not compete with the incumbent carrier to provide
local service without coming close to replicating the incumbent's entire
existing network, the most costly and difficult part of which would be laying
down the 'last mile' of feeder wire, the local loop," connecting "the thousands
(or millions) of terminal points in individual houses and businesses " to the
aspiring competitor's new network. Ibid.
Enter Congress, which passed the Telecommunications Act of 1996,
aimed at eliminating "the monopolies enjoyed by the inheritors of AT&T's
local franchises" by requiring those incumbent local exchange carriers to share
their networks with new competitors, id. at 476, called, aptly enough,
competitive local exchange carriers or CLECs. Telecommunications Act of
1996, Pub. L. No. 104-104, 110 Stat. 56 (codified in separate sections within
15 U.S.C., 18 U.S.C., and 47 U.S.C.). See 47 U.S.C. §§ 251-53, 271.
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The 1996 Telecommunications Act permitted a new requesting carrier to
gain access to an incumbent's network by purchasing "local telephone services
at wholesale rates for resale to end users," Iowa Utils. Bd., 525 U.S. at 371, by
leasing elements of the incumbent's network "'on an unbundled basis' — i.e., a
la carte —" making "it easier for a competitor to create its own network
without having to build every element from scratch," and by interconnecting
its own facilities with the incumbent's network, thus ensuring "customers on a
competitor's network can call customers on the incumbent's network, and vice
versa," Talk Am., Inc. v. Mich. Bell Tel. Co., 564 U.S. 50, 54 (2011).
The 1996 Telecommunications Act "fundamentally restructure[d] local
telephone markets," Iowa Utils. Bd., 525 U.S. at 371, and new competition
ushered in new systems and technologies, including voice-over-internet
protocol (VoIP), which allowed large commercial customers to use telephone
numbers connected over a network internet cable rather than dial tone and
access lines, transforming modes of service, Verizon II, 31 N.J. Tax at 59 &
n.7. Deregulation also changed New Jersey's approach to taxing
telecommunication companies.
Taxation of the Telephone Companies
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In the years before the breakup of AT&T, telephone and telegraph
companies in New Jersey were subject to Chapter 4 of the Franchise and Gross
Receipts Tax, N.J.S.A. 54:30A-16 to -29, repealed by L.1997, c. 162, § 77 (eff.
Jan. 1, 1998), a comprehensive annual franchise and excise tax imposed on the
gross receipts of public utilities "using or occupying public streets, highways,
roads and other public places," N.J.S.A. 54:30A-18. In 1945, when the
Legislature passed the Corporation Business Tax Act, N.J.S.A. 54:10A-1 to
-40, requiring domestic and foreign corporations not otherwise exempt to pay
an annual state franchise tax "in lieu of all other State, county or local
taxation" on intangible business personal property, N.J.S.A. 54:10A-2, it
expressly exempted all corporations subject to the Franchise and Gross
Receipts Tax's Chapter 4, N.J.S.A. 54:10A-3(a) (excluding from the CBT
those corporations subject to a tax assessed on the basis of gross receipts).
And in 1966, when the Legislature adopted the Business Personal
Property Tax Act, L. 1966, c. 136, §§ 1-21 (codified as N.J.S.A. 54:11A-1 to
-21), repealed by L. 1993, c. 174, § 1, ending the taxation of business personal
property at the local level, it expressly excluded the "goods and chattels used
or held for use in business by any . . . corporation subject to taxation under
chapter 4 of the laws of 1940 [the Franchise and Gross Receipts Tax's Chapter
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4], as amended." L. 1966, c. 136, § 2(b)(5). Verizon I, 26 N.J. Tax at 410-12
(explaining the events leading up to the law's passage). The Legislature also
simultaneously amended the local property tax law, N.J.S.A. 54:4-1, to provide
that personal property taxable locally included "only tangible goods and
chattels, exclusive of inventories, used in business of telephone, telegraph and
messenger systems, companies, corporations or associations subject to tax
under chapter 4, laws of 1940, as amended." L. 1966, c. 138, § 1.
Thus, instead of subjecting telecommunication companies to state
franchise and business personal property taxes, the Legislature retained a local
franchise tax imposed on the business personal property of "[t]he telephone
and telegraph companies," the companies having "suggested that the taxation
of their personal property remain on a local basis." N.J. Bell Tel. Co. v. Laurel
Springs Borough, 1 N.J. Tax 619, 627 (Tax 1980) (quoting State of N.J.,
Report of the Governor's Comm. on Loc. Prop. Tax'n 53 (Dec. 15, 1965)).
As Judge Menyuk more fully explains in Verizon I, 26 N.J. Tax at 412-
13, the Legislature responded in 1989 to the breakup of AT&T by adding the
qualifier "local exchange" to "telephone companies" in N.J.S.A. 54:4-1 and by
defining a "local exchange telephone company" to essentially exclude "certain
interexchange and interstate telecommunications companies." Id. at 412
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(quoting S. Revenue, Fin. & Appropriations Comm. Statement to A. 135 (Oct.
20, 1988)). That is, after AT&T's divestiture, but before deregulation of the
local markets, the Legislature amended N.J.S.A. 54:4-1 by limiting the
statute's applicability to local exchange telephone companies, which it defined
as "a telecommunications carrier providing dial tone and access to
substantially all of a local telephone exchange." L. 1989, c. 2, § 4. Judge
Lasser described the effect as "shift[ing] the local personal property tax from
AT&T to New Jersey Bell which had become the local exchange company."
N.Y. SMSA Ltd. P'ship v. E. Hanover Twp., 13 N.J. Tax 564, 568 (Tax 1994).
The Legislature also adopted N.J.S.A. 54:4-2.49a that same year, which
provides:
Notwithstanding the provisions of chapter 4 of Title
54 of the Revised Statutes [the Franchise and Gross
Receipts Tax], there shall be no payment of the
personal property taxes required by
telecommunications carriers other than local exchange
telephone companies that would be paid during the
year in which this section takes effect, based on the
prior January 1 assessment date of that property.
[L. 1989, c. 2, § 6.]
Consequently, the long-distance carriers, AT&T and its competitors, were no
longer subject to the Franchise and Gross Receipts Tax, or to local taxation of
business personal property under N.J.S.A. 54:4-1. Instead, they became
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taxable as ordinary corporations under the CBT, rather than as public utilities.
Verizon I, 26 N.J. Tax at 412-13. Only the incumbent local exchange carriers,
New Jersey Bell and the State's two independent local exchange carriers,
United Telephone and Warwick Valley, remained subject to the Franchise and
Gross Receipts Tax. Id. at 413.
Following the restructuring of the local markets in the wake of the 1996
Telecommunications Act, the Legislature in 1997 passed an act to "revis[e] the
taxation of gas and electric public utilities and certain telecommunications
companies . . . in order to preserve certain revenues under transitions to more
competitive markets in energy and telecommunications." L. 1997, c. 162, §§
1-78. The relevant changes to N.J.S.A. 54:4-1 in Section 60, L. 1997, c. 162,
§ 60 were twofold.
First, the Legislature amended N.J.S.A. 54:4-1 by adding the April 1997
"as of" date in the following sentence: "Personal property taxable under this
chapter shall include . . . the tangible goods and chattels, exclusive of
inventories, used in business of local exchange telephone, telegraph and
messenger systems, companies, corporations or associations that were subject
to tax as of April 1, 1997 under L. 1940, c. 4 (C.54:30A-16 et seq.) as
amended," L. 1997, c. 162, § 60, i.e., New Jersey Bell, then called Bell
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Atlantic – New Jersey, United Telephone, and Warwick Valley. 3 Verizon II,
31 N.J. Tax at 52; Verizon I, 26 N.J. Tax at 413 & n.6.
Second, it amended N.J.S.A. 54:4-1 by redefining a local exchange
telephone company from its 1989 version — "a telecommunications carrier
providing dial tone and access to substantially all of a local telephone
exchange," L. 1989, c. 2, § 4 — to "a telecommunications carrier providing
dial tone and access to 51% of a local telephone exchange," L. 1997, c. 162,
§ 60.
The Legislature also made three other pertinent changes in L. 1997, c.
162. It repealed L. 1940, c. 4, that is, the Franchise and Gross Receipts Tax's
Chapter 4, L. 1997, c. 162, §§ 77-78, and ended the CBT Act's exemption in
N.J.S.A. 54:10A-3 for the three telephone companies that remained subject to
Chapter 4 at its repeal, L. 1997, c. 162, § 1. And, to address the revenues lost
by repeal of the Franchise and Gross Receipts Tax, the Legislature created the
Uniform Transitional Utility Assessment Act, N.J.S.A. 54:30A-114 to -126,
"to provide a complete framework and method for the making of a uniform
3
New Jersey Bell changed its name to Bell Atlantic – New Jersey, Inc. in
1994. Following the merger of Bell Atlantic – New Jersey's parent company
with GTE Corporation, the company changed its name to Verizon New Jersey,
Inc. in 2000. United Telephone now operates as CenturyLink. Warwick
Valley does business as WVT Communications.
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transitional utility assessment on telephone companies that were subject to the
provisions of L. 1940, c. 4 (C.54:30A-16 et seq.) [the Franchise and Gross
Receipts Tax's Chapter 4] as of April 1, 1997, . . . or their corporate or non-
corporate legal successor or assignee." L. 1997, c. 162, § 50(b).
The Dispute
With that backdrop, a few additional facts will help put the dispute
between Hopewell and Verizon in context. In addition to the poles, cables,
conduit systems and electronic equipment Verizon maintains in every
municipality to allow it to provide telephone services, Verizon owns land and
a building on Broad Street in Hopewell it uses as a switching station. The
business personal property Verizon maintains there, the fiber optic cables,
electronic equipment, circuits and computers, are also included in the business
personal property tax assessment at issue here.
Verizon's switching station, however, also houses the business personal
property of a competitive local exchange carrier, as it is required to do by
federal law, an arrangement known as "collocation." 47 U.S.C. §§ 251, 259;
47 C.F.R. § 59.1 (1997). The CLEC's cables, circuits and computers inside
Verizon's Hopewell switching station are not subject to the tax imposed by
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N.J.S.A. 54:4-1, because the CLEC was not a local exchange telephone
company that was subject, as of April 1, 1997, to Chapter 4 of the Franchise
and Gross Receipts Tax. Verizon I, 26 N.J. Tax at 405.
Following the legal and business changes we've described, Verizon
every September filed with Hopewell Borough a Form PT-10, Return of
Tangible Personal Property Used In Business by Local Exchange Telephone
Companies, reporting the value of its business personal property in the
Borough as of January 1, which the assessor used to set the assessment for the
following year in accordance with N.J.S.A. 54:4-2.48. In August 2008,
however, Verizon wrote to Hopewell's mayor and tax assessor advising it
would not be filing a return for the 2009 tax year because it no longer provided
"dial tone and access to at least 51% of the local telephone exchange" within
the Borough.
Verizon came to that conclusion somewhat fortuitously. Verizon is the
administrator of the Automatic Location Identification database for New
Jersey's Enhanced 911 (E911) system. The E911 system automatically reports
the telephone number and the geographical location of the telephone used to
place any 911 call made on a wireline phone. N.J.S.A. 52:17C-1(g) (defining
"Enhanced 9-1-1 service"); see also Wilson ex rel. Manzano v. City of Jersey
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City, 209 N.J. 558, 574-75 (2012) (explaining the history of the public and
private partnership between government agencies and the telecommunications
companies supporting the statewide E911 system).
The E911 database is the source of the information linking a telephone
number with a specific location. As Judge Brennan noted in Verizon II, the
local exchange carriers are obligated to timely provide their customer records
to the E911 database administrator to ensure the accuracy of the database at all
times. 31 N.J. Tax at 57. "For public safety reasons and privacy concerns, the
E911 database is strictly confidential, and the information contained within it
is accessible only to the administrator." Id. at 58; see Section 222 of the
Communications Act of 1934, 47 U.S.C. § 222.
It was through its role as administrator of the E911 database that Verizon
learned in 2008 that Neustar, the North American Numbering Plan
Administrator, had recently issued a slug of 10,000 telephone numbers with
the area code 609 and three-digit exchange code 274, one of the exchange
codes associated with the Hopewell rate center in the Hopewell telephone
exchange.4 Neustar issued the block at the behest of a competitive local
4
The North American Numbering Plan was devised "by AT&T and Bell
Laboratories . . . to standardize telephone dialing" in the 1940s and maintained
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exchange carrier providing phone service to Merrill Lynch's Hopewell
Township campus on Scotch Road, a large three-building complex housing
approximately 5,600 employees, physically located within the geographic
boundaries of the Pennington Telephone Exchange as represented on Verizon 's
tariff maps and having a Pennington mailing address.
Verizon, knowing the new 609-274-xxxx listings in the E911 database
were not Verizon listings, and that the block of new numbers was assigned to
the Hopewell rate center, concluded it no longer provided dial tone and access
to 51% of the Hopewell exchange. It thus wrote the letter to the Borough
advising it would not be filing a business personal property tax return for the
2009 tax year and did not do so.
Hopewell maintained Verizon remained subject to the tax. Using the
information Verizon provided on its 2008 PT-10 return, the Borough's assessor
established an assessment for tax year 2009 of $1,897,655 and tax of
$38,655.23. Verizon paid the tax and appealed the assessment to the Mercer
____________________
by AT&T until its breakup in 1984 when the FCC outsourced its
administration to Neustar. New York v. FCC, 267 F.3d 91, 95 (2d Cir. 2001).
Under the plan, all "telephone numbers are ten digits in length: the first three
digits are called the numbering plan area ('NPA' or 'area') code, the second
three are called the central office code, or prefix, and the final four digits are
the individual line numbers," referenced as NPA-NXX-XXXX. Ibid.A-2909-18
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County Board of Taxation, which affirmed the assessment without prejudice,
leading to this decade-long appeal resulting in two published opinions of the
Tax Court issued several years apart.
The Summary Judgment Motions
Verizon initially alleged the assessment was improper because it no
longer provided dial tone and access to 51% of the Hopewell local telephone
exchange, and thus was no longer a local exchange telephone company subject
to the tax. The Borough counterclaimed, contending "the Legislature intended
the 51% test be applied just once — on April 1, 1997." Verizon I, 26 N.J. Tax
at 406. As it is undisputed Verizon provided dial tone and access to
substantially all of the Hopewell telephone exchange in 1997, the Borough
maintained Verizon remained obligated to file returns and pay the business
personal property tax annually.
In response, Verizon amended its complaint to add that even if the
statute is construed as requiring the 51% test to be applied annually, as it
believes is required, and that it would not be subject to the tax if it provided
dial tone and access to less than 51% of a local exchange, N.J.S.A. 54:4-1, as
applied to it, nevertheless violates: (1) the State and federal equal protection
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guarantees, N.J. Const. art. I, § 1; U.S. Const. amend. XIV, § 1; (2) the State
prohibition of special legislation, N.J. Const. art. IV, § 7, ¶ 9; and (3) the
Uniformity Clause, N.J. Const. art. VIII, § 1, ¶ 1(a). Verizon I, 26 N.J. Tax at
406.
Judge Menyuk addressed those competing claims on cross-motions for
summary judgment in 2012, with the State having intervened pursuant to Rule
4:28-4(d), and the court having granted leave to the New Jersey State League
of Municipalities to appear as amicus curiae pursuant to Rule 1:13-9(a).
Verizon I, 26 N.J. Tax at 404. The judge assumed arguendo, for purposes of
the motion, Verizon no longer met the 51% test. That is, Verizon would not be
subject to the tax in 2009 if the 51% test was an annual one and would always
be subject to the tax if the test was applied only on April 1, 1997.
The Parties' Interpretations of When the 51% Test is to be Applied
Hopewell, supported by the League, argued the Legislature intended the
statute to be forever revenue generating as it had been for decades, and the
practical difficulty and burden on the assessor of quantifying Verizon 's share
of the local exchange market made it highly unlikely the Legislature intended
such a calculation to occur on an annual basis. Id. at 415. Hopewell also
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claimed imposition of a perpetual tax on the incumbent local exchange carrier
made sense given the federal requirement that Verizon permit its CLEC
competitors to share its network. Because Verizon was being compensated by
those competitors while reducing its own provision of dial tone and access to
the local telephone exchange, Hopewell reasoned Verizon could pass on some
part of the tax in the rates it charged its competitors sharing its facilities. Ibid.
The League supported Hopewell's arguments, adding that if the 51% test
was an annual one, payment of the tax "would eventually cease" if Verizon's
CLEC competitors, which were not subject to the tax, continued to provide
more of the dial tone and access to the local telephone exchange. Ibid.
Moreover, even if Verizon was under the 51% threshold, the company's poles
and lines were still utilizing the public's right-of-way and creating an
imposition on the Borough and its citizens for which Hopewell was entitled to
compensation and revenue by virtue of a fee or tax. 5
5
Judge Menyuk noted the League also relied on a letter from the Office of
Legislative Services expressing the view that "the purpose of the statutory
language and legislative intent of the amendments made by Section 60," L.
1997, c. 162, § 60, the 1997 amendments to N.J.S.A. 54:4-1, was only to
describe
the then existing ILECs and to grandfather their
business personal property into the local property tax
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Verizon, for its part, argued the plain language of N.J.S.A. 54:4-1
defining "a local exchange telephone company as a 'telecommunications
carrier providing dial tone and access to 51% of a local telephone exchange,'"
clearly augured for an annual assessment of whether an ILEC continued to be a
local exchange telephone company as defined by the statute. Id. at 417-18
(quoting N.J.S.A. 54:4-1). Verizon claimed it did not use collocation fees as
reimbursement for the tax assessed under N.J.S.A. 54:4-1, and argued there
was no basis for the League's contention that the Legislature enacted the
statute to compensate municipalities for the imposition of telephone poles and
lines in the public right-of-way. Id. at 428-29.
____________________
base. Any change in their dial tone and access/local
exchange business after the 1997 grandfathering was
not meant to change whether their property was in or
not in the local property tax base.
[Verizon I, 26 N.J. Tax at 416.]
The judge deemed the letter "not particularly persuasive" as it did not rely on
any legislative history for its position. Ibid. ("We neither give special
deference to the OLS opinion, nor do we disregard it. We are mindful that no
current member of the Legislature has intervened in this matter, and that the
legal opinion of OLS may not necessarily reflect the views of the entire
legislative body." (quoting Commc'ns Workers of Am., AFL-CIO v. Christie,
413 N.J. Super. 229, 250 n.13 (App. Div. 2010))).
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The State took no position on the construction of N.J.S.A. 54:4-1 or the
validity of Verizon's 2009 tax assessment, but maintained if the court agreed
with Verizon as to the meaning of the statute, it "should defer deciding the
constitutional issues" the company raised until after Verizon proved it didn't
meet the 51% test for tax year 2009. Id. at 406. The State reasoned if Verizon
established it was not subject to the tax, it would not have standing to
challenge its constitutionality, making it premature, and thus unnecessary, to
reach Verizon's constitutional challenge on the motion. Id. at 422.
Judge Menyuk agreed with Verizon the plain language of the statute, and
indeed "the entire design of the local personal property statutes[,] evidences
that the 51% test is to be performed annually rather than once." Id. at 418. In
a carefully reasoned opinion, the judge explained N.J.S.A. 54:4-1 "[i]n its first
sentence . . . subjects property to taxation annually." Ibid. (emphasis in
original). The judge noted N.J.S.A. 54:4-2.46 likewise provides "[t]he true
value of tangible personal property used in business subject to taxation shall be
determined . . . as of January 1 annually . . . , which date shall be the date as of
which the assessment is made with respect to the taxes payable in the
succeeding calendar year," and N.J.S.A. 54:4-2.48 requires "the annual filing
of tax returns on or before September 1 by 'any person owning tangible
A-2909-18
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personal property used in business subject to taxation on the preceding
assessment date.'" Ibid. (first quoting N.J.S.A. 54:4-2.46 (alterations in
original); and then quoting N.J.S.A. 54:4-2.48).
In other words, the entire design of the personal
property tax is based upon an annual determination of
which companies are subject to tax, the value of their
personal property and the appropriate assessment.
There is no indication, either in the statute itself or in
the legislative history, that the amendment of N.J.S.A.
54:4-1 by Section 60 [L. 1997, c. 162, § 60] was
intended to change that statutory design.
[Ibid.]
The judge also found it "significant" that the Legislature amended the
language of N.J.S.A. 54:4-1 in Section 60 to substitute "51% of a local
telephone exchange" for the prior phrasing "substantially all of a local
telephone exchange." Ibid. Judge Menyuk concluded
[t]here was no reason to make that change unless the
Legislature intended for the personal property tax to
come to an end at the point when local telephone
exchange service was competitive to the extent that at
least half of the service provided with respect to a
local telephone exchange was being provided by a
company other than an ILEC.
[Ibid.]
Relying on "publicly available FCC data" in the record, the judge noted
that in 1997 when the Legislature adopted the 51% language, "'substantially
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22
all' of the local exchange service and access was still being provided by the
ILECs (Baby Bells and other small independent companies) that had
previously enjoyed a monopoly within their service areas." Ibid. Judge
Menyuk noted the Board of Public Utilities didn't "even begin to investigate
whether local exchange competition should be permitted in New Jersey until
1996, 28 N.J.R. 247(b) (Jan. 16, 1996)," and hadn't proposed regulations
addressing "local exchange competition prior to the effective date of L. 1997,
c. 162." Id. at 418-19.
Because "[t]he same three New Jersey ILECs would have been subject to
the personal property tax regardless of whether the test was 'substantially all'
or '51%' of the local exchange service in a given municipality," Judge Menyuk
concluded there would have been no purpose in changing "the language if the
test was to have been applied only once, in 1997." Id. at 419. The judge found
the Legislature, by "[l]imiting taxation" to only those companies subject to the
Franchise and Gross Receipts Tax's Chapter 4 as of April 1, 1997, ensured "no
new competitors would be subject to the tax" as the Franchise and Gross
Receipts Tax "was repealed by L. 1997, c. 162, § 77." Ibid.
In other words, after Verizon or one of the other two
ILECs became something other than the dominant
service provider for a local telephone exchange, no
company would be subject to the local personal
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23
property tax: the tax would cease to exist with respect
to personal property used in servicing that local
exchange.
[Ibid.]
The judge thus concluded the Legislature's employment of the 51% test
indicated its expectation "the monopolies that had been enjoyed by the three
ILECs would be phased out through competition," and the personal property
tax "would suffer a slow death by attrition whenever Verizon or another ILEC
ceased providing 51% of the dial tone and access of an exchange."6 Id. at 419-
20.
Although finding the plain language of the statute dispositive, making a
review of the statutory history unnecessary, see Koch v. Dir., Div. of Tax'n,
157 N.J. 1, 7 (1999), Judge Menyuk found it also supported an annual
6
Judge Menyuk acknowledged it was "possible to construe N.J.S.A. 54:4-1"
to provide the possibility that an ILEC failing the 51% test could again become
subject to the tax if it regained 51% market share in a local exchange, but
rejected Hopewell's argument that possibility supported its one-time test theory
on the ground a municipality would never know the ILEC had again become a
local exchange carrier subject to the tax. Verizon I, 26 N.J. Tax at 420. In
addition to noting the question of whether an ILEC falling below 51% market
share could again become subject to the tax was not before her, the judge
expressed confidence the Director of the Division of Taxation had "ample
statutory authority" to ensure assessors had the information they needed to
make assessments in the event of "such an eventuality." Ibid. See
N.J.S.A. 54:4-2.45, -2.48, -2.50.
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24
determination that an ILEC remained subject to the personal property tax.
Verizon I, 26 N.J. Tax at 420-22. Again reminding "the title of L. 1997, c. 162
indicated that the purpose of the legislation was to 'revise the taxation' of
electric and gas public utilities and certain telecommunications companies,
namely the ILECs, 'in order to preserve certain revenues under transitions to
more competitive markets,'" the judge examined the history of the 1997
amendments to N.J.S.A. 54:4-1 in L. 1997, c. 162 in detail, finding it
"instructive" of the Legislature's intent. Id. at 420.
That history reinforced for the judge "the Legislature did not intend to
perpetuate the personal property tax on local telephone companies." Id. at 421.
Instead, Judge Menyuk concluded
the legislative history confirms the intent gleaned
from the plain words of the statute, namely that the tax
was intended to continue through the transitional
period of deregulation until there was healthy
competition in a local telephone exchange market, at
which point no company would be subject to the tax.
[Id. at 421-22.]
Acknowledging an amendment adding "a section directing the Board of
Public Utilities to conduct a review of 'all telecommunications taxes, including
an analysis of alternative taxes, and evaluate their potential for providing
property tax relief and their impact under the on-going transition to a more
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25
competitive and technologically diverse market,'" indicated the Legislature
may have wished to at some point consider the effect of Section 60's changes
"to the taxation of telecommunications companies on the local property tax
burden," the judge found "nothing in the legislation that support[ed] the
contention . . . that the local personal property tax on the three ILECs was
intended to be permanent." Id. at 421-22 (quoting First Reprint, A. No. 2825,
§ 76 (with Assembly APR committee amendments adopted June 12, 1997)).
Convinced "N.J.S.A. 54:4-1 subjects a local telephone exchange
company to tax on its business personal property located in a municipality
when it provides dial tone and access to 51% of a local exchange, with the
51% test to be performed annually as of the assessment date," id. at 407, the
judge proceeded to consider Verizon's as applied constitutional claims. 7
Verizon's Constitutional Claims
7
Judge Menyuk rejected the State's contention the court could properly avoid
consideration of Verizon's constitutional claims, finding a genuine controversy
over "whether Verizon may be constitutionally subjected to the tax, without
regard to whether it provides dial tone and access to 51% of an exchange ," the
resolution of which in Verizon's favor could avoid a lengthy trial involving
"quite technical issues." Verizon I, 26 N.J. Tax at 423. See also In re Ass'n of
Trial Laws. of Am., 228 N.J. Super. 180, 184 (App. Div. 1988) (discussing the
actual controversy requirement "in the context of a challenge to the
constitutionality of a statute").
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26
Verizon argued N.J.S.A. 54:4-1 contains two discriminatory
classifications not serving any legitimate revenue-raising purpose, rendering
them violative of the state and federal equal protection guarantees: a "time
classification," which makes the personal property tax applicable only to local
exchange carriers subject to the Franchise and Gross Receipts Tax at the point
in time of April 1, 1997; and a "size classification" making the tax applicable
only to incumbent local exchange carriers providing dial tone and access to
51% of a local telephone exchange, although other local exchange carriers,
namely the CLECs, provide the same services in the same exchange. Id. at
426-28.
Judge Menyuk agreed the statute separates local telephone exchange
companies into two classes: (1) companies (CLECs) that would never be
subject to the personal property tax under N.J.S.A. 54:4-1 because they were
not subject to the Franchise and Gross Receipts Tax's Chapter 4 as of April 1,
1997; and (2) three companies (ILECs), including Verizon, "subject to the tax
as of the effective date of the amendments, but able to leave the class if there
is sufficient competition so that the taxpayer no longer serves 51% of the local
telephone exchange." Id. at 426. But she rejected Verizon's contention the
classifications violated equal protection guarantees. Id. at 428.
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27
Analyzing the various changes the Legislature made to the way local
telephone exchange companies were taxed after Congress ended the local
telephone market monopolies in the 1996 Telecommunications Act, Judge
Menyuk found
the Legislature apparently contemplated that
deregulation would result in the former public utilities
being on substantially the same tax footing as their
new competitors, as indicated not only by the eventual
extinction of the personal property tax on local
telephone companies . . . but also by the repeal of
[Chapter 4 of the Franchise and Gross Receipts Tax]
and subjection of the former public utilities to the
CBT.
[Id. at 427-28.]
The judge concluded the statute's effect of distinguishing between ILECs
and CLECs thus presented "a real and substantial relationship to a permissible
legislative purpose." Id. at 430 (citing Taxpayers Ass'n of Weymouth Twp. v.
Weymouth Twp., 80 N.J. 6, 44 (1976)). That is, in addition to the legislative
intent "to continue to raise revenue for municipalities from local telephone
companies," id. at 426, there is a discernible rational basis for the Legislature's
decision to continue to impose a personal business tax on only "those local
telephone companies that had, for many years, enjoyed a monopoly over the
provision of local telephone service in their franchise areas," id. at 428.
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28
Judge Menyuk noted telephone companies had been subject to a personal
property tax under N.J.S.A. 54:4-1 since 1966, and thus "[c]learly, the purpose
of [the 1997 amendments] was to do something more than simply raise
revenue." Id. at 427. As the judge explained:
The Legislature could reasonably assume that the
three ILECs enjoyed a substantial competitive
advantage as a result of their former monopolies; that
they continued to be the dominant users of public
rights of way and facilities; and that, as a transitional
measure, it was reasonable to continue to impose the
tax on only those companies until such time as they no
longer enjoyed a competitive advantage, as evidenced
by the fact that they were no longer providing 51% of
the dial tone and access to an exchange.
[Id. at 428.]
In contrast, Judge Menyuk pointed out there would be
no rational basis for a distinction between the three
ILECs and their competitors if N.J.S.A. 54:4-1 is
construed to require a one time "51% test," so that the
three companies would perpetually be subject to tax,
even if they eventually held only a small share of the
market, and their successful competitors would never
be subject to tax. Such a construction would limit
potential revenue rather than raise it; new dominant
competitors would make greater use of public rights of
way and facilities than the former monopolies; and, a
perpetual tax would not serve the purpose of providing
a transition to deregulated, competitive local
telephone exchange service.
[Ibid.]
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29
The judge also rejected Verizon's claim that N.J.S.A. 54:4-1 is
unconstitutional special legislation because it created a closed class of
taxpayers (ILECs) while impermissibly excluding similar companies (CLECs)
that belonged in the class. Id. at 430. Applying the three-part Vreeland 8 test,
Judge Menyuk found the "purpose and object" of the 1997 amendments to
N.J.S.A. 54:4-1 "was to continue the revenue from the personal property tax
during the transition to a deregulated market." Ibid. She found the statute
accomplished its "purpose by continuing the tax on the companies that
formerly enjoyed a monopoly in the provision of local telephone exchange
services until such time as they were no longer the dominant provider of such
service, as measured by the 51% test." Ibid. Applying that purpose, the court
found it clear "no other provider of local telephone exchange services was
irrationally excluded from the tax." Ibid.8
Vreeland v. Byrne, 72 N.J. 292, 300-01 (1977). The Vreeland Court
described the test this way:
[T]he method of analysis is this: we first discern the
purpose and object of the enactment. We then
undertake to apply it to the factual situation presented.
Finally we decide whether, as so applied, the resulting
classification can be said to rest upon any rational or
reasonable basis relevant to the purpose and object of
the act.
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30
Finally, the judge rejected Verizon's claim that N.J.S.A. 54:4-1 violates
the Uniformity Clause because it improperly relies on status as a taxpayer
subject to the Franchise and Gross Receipts Tax's Chapter 4 on April 1, 1997,
and not on any characteristic of the property or the use to which it is put. Id. at
431. Judge Menyuk rejected the premise of that argument as unsound, because
the cases construing the Uniformity Clause require "only that the Legislature's
classifications are reasonable." Ibid.Noting the Supreme Court's unequivocal holding that "[t]he Legislature
is free to tax personal property in any way so long as the classification is
reasonable and the property is assessed under general laws and by uniform
rules," the judge reiterated her view that this classification based on the status
of the taxpayer "is rational, where that taxpayer continues to enjoy a
competitive advantage by virtue of its former monopoly . . . provided that the
tax to which the property is subjected is a transitional one that will end at the
point that the competitive advantage is ended." Id. at 431-32 (quoting Gen.
Motors Corp. v. City of Linden, 150 N.J. 522, 526 (1997)).
Based on her conclusion that N.J.S.A. 54:4-1 requires an annual
determination "as to whether a local telephone exchange company provides
dial tone and access to 51% of a telephone exchange" as of the assessment
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31
date, and that the statute is not unconstitutional as applied to Verizon, Judge
Menyuk denied the Borough's motion and partially granted and partially
denied Verizon's cross-motion and further ordered Verizon to present evidence
and argument "that as of 2008 Verizon was not a 'local exchange telephone
company' with respect to defendant, as that term is used in N.J.S.A. 54:4-1."
Appeal of the Summary Judgment Motions
The parties appeal Judge Menyuk's rulings on their summary judgment
motions, with Hopewell contending the court erred in finding N.J.S.A. 54:4 -1
requires the 51% test to be applied annually and Verizon contending the court
erred in rejecting its as-applied challenge to the statute, each reprising the
arguments they made to the Tax Court. Verizon further contends N.J.S.A.
54:4-1 is unconstitutional on its face.
We review the trial court's decision on summary judgment de novo,
using the same standard the Tax Court applied, Branch v. Cream-O-Land
Dairy, 244 N.J. 567, 582 (2021); Shechtel v. Dir., Div. of Tax'n, 32 N.J. Tax
180, 190-91 (App. Div. 2020), certif. denied, 245 N.J. 258 (2021), without
deference to any interpretive conclusions of statutes we believe mistaken,
Waksal v. Dir., Div. of Tax'n, 215 N.J. 224, 231 (2013).
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32
"The goal in cases of statutory construction is simple. It is the court 's
duty to seek and give effect to the Legislature's intent," Nw. Bergen Cnty.
Utils. Auth. v. Donovan, 226 N.J. 432, 443-44 (2016), the best indicator of
which is, ordinarily, the statute's language, DiProspero v. Penn, 183 N.J. 477,
492 (2005). Although it's well-settled tax laws are "strictly construed against
the state," Stryker Corp. v. Dir., Div. of Tax'n, 168 N.J. 138, 155 (2001)
(quoting 3A Norman J. Singer, Sutherland Statutory Construction § 66.01 (5th
ed. 1992)), they nevertheless "also must be construed reasonably so that the
Legislature's purpose in enacting the statute is not destroyed," ibid. (citing
Sutherland, § 66.02). "[B]ecause tax liability is established by way of revenue
legislation, all the rules of statutory construction are relevant in the
interpretation of revenue measures." Ibid. (internal quotation marks omitted)
(quoting Sutherland, § 66.03).
Having reviewed the parties' arguments and those of the State and the
League of Municipalities, the language of the statute and Judge Menyuk's
tracing of its history "in the context of the deregulation of public utilities that
commenced with the breakup of [AT&T] in 1984," Verizon I, 26 N.J. Tax at
407, we are convinced N.J.S.A. 54:4-1 is "susceptible to only one
interpretation," In re Passaic Cnty. Utils. Auth., 164 N.J. 270, 299 (2000) —
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33
that is the 51% test for whether a telecommunications carrier qualifies as a
"local exchange telephone company" must be applied annually. We have little
to add to her careful analysis.
We acknowledge the argument that Verizon's lines and poles are still
strung through the Borough even if other service providers are using them and
that telephone companies have been required to pay franchise or license fees
for those lines since the Legislature first began taxing telephone and
messenger companies. But those facts cannot trump the plain language of
N.J.S.A. 54:4-1, nor the Legislature's clear intent by the 1997 amendments to
continue the local revenues from the personal property tax on those incumbent
local exchange carriers who formerly enjoyed a monopoly over local telephone
exchange service only during the transition to a competitive local market, that
is "until such time as they were no longer the dominant provider of such
service, as measured by the 51% test." Verizon I, 26 N.J. Tax at 430.
"In attempting to discover legislative intention in any law," Key Agency
v. Cont'l Cas. Co., 31 N.J. 98, 103 (1959), a reviewing court "take[s] into
consideration the entire scheme of which a provision is a part." Rozenblit v.
Lyles, 245 N.J. 105, 122 (2021) (quoting Headen v. Jersey City Bd. of Educ.,
212 N.J. 437, 450-51 (2012)). "In reading '[a]n enactment that is part of a
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34
larger statutory framework,' we are mindful of that context 'so that a sensible
meaning may be given to the whole of the legislative scheme.'" Ibid. (quoting
Manzano, 209 N.J. at 572.
It's also appropriate "to consider other laws which pertain to a similar
subject matter and especially those which were enacted during the same
legislative session as the law in question." Key Agency, 31 N.J. at 103; see
Liapakis v. State Dep't of Treasury, Div. of Tax'n, 363 N.J. Super. 96, 105-06
(App. Div. 2003) (explaining in the event of a perceived "inconsistency among
statutes addressing the same subject, we must strive to interpret those statutes
in harmony with each other"). That rule of statutory construction is
appropriately "applied even when the statutes were adopted at different times
and make no reference to each other." Mimkon v. Ford, 66 N.J. 426, 434
(1975). It "derives from the reasonable presumption that legislators are aware
of relevant prior legislation." Id. at 433.
Consideration of the plain language of N.J.S.A. 54:4-1 together with the
statute's legislative history in the context of related provisions, as carefully
mapped by Judge Menyuk, leads ineluctably to the Tax Court's conclusion that
the 51% test is an annual determination. As Judge Menyuk explained, "the
entire design of the personal property tax is based upon an annual
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35
determination of which companies are subject to tax, the value of their
personal property and the appropriate assessment." Verizon I, 26 N.J. Tax at
418. Nothing suggests the Legislature intended to change the statutory design
by the 1997 amendments and one important fact — the ILECs' share of the
local market in 1997 — strongly suggests the contrary. Id. at 418-19.
Simply stated, if the Legislature intended to make the 51% test a one-
time calculation to occur on April 1, 1997, and not an annual determination, as
Hopewell and the League maintain, the amendment was completely
unnecessary as there is no dispute the three incumbent local exchange carriers
in 1997 were providing "substantially all" of the local exchange service, as
Judge Menyuk noted. Ibid. Verizon, United Telephone and Warwick Valley,
the three incumbent local exchange carriers, would've been subject to the "tax
regardless of whether the test was 'substantially all' or '51%' of the local
exchange service in a given municipality." Id. at 419. The Legislature, of
course, "is presumed not to do a vain thing and enact useless legislation."
Asbury Park Press, Inc. v. City of Asbury Park, 19 N.J. 183, 196 (1955).
Thus, courts "should not easily conclude that a legislative enactment is
surplusage" or adopt "a construction which would make a statutory provision
redundant." In re Att'y Gen.'s "Directive on Exit Polling: Media & Non-
A-2909-18
36
Partisan Pub. Int. Grps.", 402 N.J. Super. 118, 128 (App. Div. 2008). We will
not do so here.
In addition, courts are under a "duty" to construe a statute "as to render it
constitutional if it is reasonably susceptible to such interpretation. " Whirlpool
Props., Inc. v. Dir., Div. of Tax'n, 208 N.J. 141, 172 (2011) (quoting State v.
Profaci, 56 N.J. 346, 350 (1970)). " [W]hen a statute's constitutionality is
drawn into question or placed in serious doubt, [courts] should ascertain
whether a construction of the statute is possible that avoids the constitutional
problem." Ibid.Judge Menyuk found N.J.S.A. 54:4-1 easily survived Verizon's equal
protection, special legislation and Uniformity Clause challenges — so long as
the statute was construed as Verizon contended it should be to require an
annual determination of whether a local telephone exchange company provides
dial tone and access to 51% of a local telephone exchange as of the assessment
date. Verizon I, 26 N.J. Tax at 428, 430-32. If, on the other hand, N.J.S.A.
54:4-1 were construed to require a one-time 51% test, thus making Verizon,
United Telephone and Warwick Valley subject to the personal property tax
forever, notwithstanding their competitors, who would never be subject to the
tax, might enjoy a comparatively greater share of a local market, the statute
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37
would lack even a rational basis, see Sojourner A. v. N.J. Dep't of Hum.
Servs., 177 N.J. 318, 330 (2003) (explaining the rational basis test), and would
thus violate federal and State equal protection guarantees, fail the Vreeland
test for special legislation, and run afoul of the Uniformity Clause. Verizon I,
26 N.J. Tax at 428, 430-32.
We agree. And the obvious need to construe the statute so as to "avoid[]
the constitutional problem," Whirlpool, 208 N.J. at 172, recommends the
interpretation consistent with N.J.S.A. 54:4-1's plain language and legislative
history, that the 51% test be applied annually and not on a one-time basis.
Because the statute operates constitutionally by subjecting Verizon to tax on
its business personal property so long as it provides dial tone and access to
51% of a local exchange as of the annual assessment date, the statute survives
Verizon's as-applied challenge.
That finding is likewise dispositive of Verizon's facial challenge to the
statute. Because "[a] taxing statute is not facially unconstitutional if it
operates constitutionally in some instances," id. at 175 (quoting GMC, 150
N.J. at 532), and we agree with Judge Menyuk the constitution is not violated
by continuing the business personal property tax on those companies that
formerly enjoyed a monopoly in the provision of local telephone exchange
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38
services until such time as they are no longer the dominant providers, it
follows N.J.S.A. 54:4-1 is not facially invalid.
The Trial
The sole issue for resolution at trial was whether Verizon "provided dial
tone and access to 51%" of the Hopewell local telephone exchange as of
January 1, 2008. N.J.S.A. 54:4-1; Verizon II, 31 N.J. Tax at 51. Complicating
the question is that the statute does not define "local telephone exchange" or
provide a means for calculating 51% of it. 9 There are no regulations
implementing this aspect of the statute. Verizon II, 31 N.J. Tax at 61 n.8. The
9
The statute doesn't define "dial tone" or "access" either, but the parties do
not differ in their understanding of the plain meaning of those terms. Thus,
they agree "dial tone" refers to the audible tone sent from an automatic
switching system to a customer to indicate the equipment is ready to receive
dial signals, and "access" means the use of the local exchange network over a
phone line or access line to connect to the Public Switched Telephone
Network, the global network of circuit-switched public telephone networks.
Those definitions limit the market being measured to wireline telephones and
related devices, such as fax machines and dial up modems, accessing the
Public Switched Telephone Network via an actual copper or fiber optic
transmission line that travels on telephone poles or underground, colloquially
referred to as landlines. They necessarily exclude cellular phones or other
"wireless" devices.
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39
parties and their experts disagree on how to define a local exchange and how
to calculate market share within one. Id. at 51.
The United States Supreme Court defined a "local exchange" in 2002 as
"a network connecting terminals like telephones, faxes, and modems to other
terminals within a geographical area like a city." Verizon Commc'ns, 535 U.S.
at 489. Verizon's own 1993 tariff10 approved by the Board of Public Utilities
and effective through July 2014, and thus as of the January 1, 2008 assessment
date, similarly defines an exchange as "a unit established by the Company for
the administration of communication service in a specified area which usually
embraces a city, town or village and its environs. It consists of one or more
central offices which may be located within or without the territorial
boundaries of the exchange." New Jersey Bell Telephone Company Tariff
B.P.U.-N.J.-No.2, § 2.1 (5th revised 1993). Verizon's tariff defined "the
territorial boundaries" of the Hopewell local exchange by reference to a map
10
Verizon's internal expert, who formerly headed the group responsible for
the company's tariff maps, described its tariff as containing "all the services
that Verizon provides," as well as "the rates that Verizon charges for those
services, and it explains the terms and conditions under which Verizon offers
those services."
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40
filed with BPU.11 The parties and their experts agree the Merrill Lynch
complex in Hopewell Township is physically located outside the territorial
boundaries of the Hopewell exchange as depicted on Verizon's tariff exchange
map. Verizon II, 31 N.J. Tax at 60.
Hopewell relies on that traditional definition of a local exchange as one
having clearly demarcated territorial boundaries. Its expert, Michael Starkey,
a telecommunications consultant previously employed by three different state
public utility commissions and specializing in telecommunications markets,
prepared several reports admitted in evidence and testified at trial that "[l]ocal
telephone exchanges are well-defined, geographical areas with known
boundaries that can be mapped with specificity." Id. at 68. He claimed those
defined geographical local exchanges "are the building blocks of the local
telephone marketplace from a network, service and regulatory standpoint ."
Ibid.
11
Verizon's 1983 tariff section 5.1.7 contained the same map, New Jersey Bell
Telephone Company Tariff, Verizon N.J. Inc., B.P.U. N.J. No. 2, Second
Revised Page No. 25, section 5.1.7. Verizon's product guide on file with BPU,
which superseded Verizon's tariff in 2014, includes the same map depicting the
Hopewell local exchange. See Verizon II, 31 N.J. Tax at 54 (quoting the
product guide's statement that "the maps which are part of this section of the
product guide show the territorial boundaries of each exchange area").
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41
Starkey testified local exchanges are "grouped together" based on
"communities of interest" to form local service areas,12 which are further
aggregated into local access and transport areas (LATAs), and those "LATAs,
and the local telephone exchanges that comprise them, are an important aspect
of the U.S. telecommunications regulatory framework."13 Indeed, he claimed
"the geographic nature of the entire local exchange and LATA paradigm is
woven throughout the telecommunications industry."
12
Using Verizon's 1993 tariff as an example, Starkey explained the local
service area for Verizon's Hopewell exchange consisted of the Hopewell
telephone exchange as well as the Belle Mead, Lambertville, Lawrenceville,
Neshanic, Pennington and Princeton exchanges. A Verizon customer located
in the Hopewell exchange could call anyone in the same service area without a
toll charge. The local service area thus defined the customer's local calling
area. See W. Elec., 569 F. Supp. at 995 (defining a local calling area as "those
areas, typically combining more than one local exchange, within which
subscribers may place telephone calls without paying an extra charge").
13
While local exchanges have existed from the start of the public telephone
system, LATAs came about only after the breakup of AT&T. W. Elec., 569 F.
Supp. at 993. In addition to dismantling AT&T's Bell telephone system, the
consent decree also entailed a plan of reorganization for the Baby Bells
effective January 1, 1984, defining how and where they would operate. Id. at
992, 995 n.11. That reorganization entailed dividing "all Bell territory in the
continental United States," consisting of 7,000 local exchanges, into LATAs,
contiguous geographic areas, "generally centering upon a city or other
identifiable community of interest." Id. at 993-94, 993 n.8 (footnote omitted).
Because the LATA boundaries would define what would be intra-LATA and
inter-LATA "traffic after reorganization, establishment of the LATAs [was] a
necessary predicate to the division of Bell System assets." Id. at 994 n.14.
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42
Starkey explained, in accordance with the case law, that LATAs defined
where the regional Bell operating companies, the incumbent local exchange
carriers, could operate after divestiture and before Congress opened the local
markets to competition in the 1996 Telecommunications Act. After January 1,
1984, and continuing through the period they operated as local monopolies,
those local exchange carriers could "engage in exchange telecommunications,"
that is, send calls between telephones within the same LATA or "provide
exchange access within a LATA," i.e., "link a subscriber's telephone to the
nearest transmission facility of AT&T" or one of its long-distance competitors
such as MCI or Sprint. W. Elec., 569 F. Supp. at 994.
What those incumbent local carriers, like New Jersey Bell, could not do,
"because of their local monopoly position," was carry traffic across LATA
boundaries. Ibid. As Judge Greene, who entered the consent decree,
explained, "[m]ost simply, a LATA marks the boundaries beyond which a Bell
Operating Company may not carry telephone calls." Ibid. (footnote omitted).
Starkey testified "AT&T got the long lines, the long-distance market," and
"[t]he Bell operating companies kept the local exchanges and local toll, but
only toll within a LATA." He explained because the final decree didn't allow
the Bell operating companies "to carry traffic over a LATA boundary," and
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43
"the FCC enforced it," there's been "probably about twenty years of regulation
that basically is all about enforcing these LATA boundaries."
New Jersey is divided into three LATAs: 224 — North Jersey, 220 —
Atlantic Coastal, and 222 — Delaware Valley.14 W. Elec., 569 F. Supp. at
1020-21. According to Verizon's 1993 tariff, its 180 local exchange areas are
divided among the State's three LATAs as follows:
[t]he Atlantic Coastal LATA encompasses eighteen
(18) exchange areas in the southeastern portion of
New Jersey; the Delaware Valley LATA encompasses
fifty-three (53) exchange areas in the southwestern
and west-central portions of New Jersey; and the
North Jersey LATA encompasses one hundred and
nine (109) exchange areas in the northern and east-
central portions of New Jersey.
Starkey explained with reference to public information maintained by
the National Exchange Carrier's Association that the Hopewell exchange is in
Delaware Valley LATA 222, its location identified by exact Vertical and
Horizontal (V&H) coordinates, that Verizon is the incumbent local exchange
14
"The North Jersey LATA runs from Passaic and Bergen counties in the
north to Toms River in the south." W. Elec., 569 F. Supp. at 1021 n.155. "The
Delaware Valley LATA includes the counties of Mercer, Burlington, Camden,
Salem, Gloucester, and Cumberland, and the western portions of Middlesex,
Monmouth, and Ocean counties." Id. at 1021 n.154. The Atlantic Coastal
LATA "includes the southern half of Ocean County and the counties of
Atlantic and Cape May." Id. at 1021 n.156.
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carrier and that as of January 2008, it assigned to the Hopewell exchange by
area code and exchange code, otherwise known as NPA/NXX code, all of
exchange codes 466 and 639 (i.e., 609-466-0000 to 466-9999 and 609-639-
0000 to 639-9999) and 609/333 numbers 0000-0999, 1000-1999, 8000-8999,
9000-9999.15 In sum, Starkey maintained local telephone exchanges are
documented geographic areas with well-defined boundaries on which the
telecommunications industry relies "for numerous network, routing and
regulatory purposes," and, consistent with that definition, the Hopewell
exchange in LATA 222 is defined, as Verizon has done for many years, by the
Hopewell exchange map made a part of its 1993 tariff and 2014 product guide.
Verizon's "internal" expert, Harold E. West, III, recently retired from the
company after having started his career at New Jersey Bell before the breakup
of the Bell system, testified his "definition of local telephone exchange is a
result of thirty-five years of experience working with local telephone
exchanges and a synthesis of language contained in [Verizon's] New Jersey
tariffs." He maintained a "local telephone exchange is the array of customers
15
Stated differently, Verizon was assigned full NPA-NXX blocks of 10,000
telephone numbers for exchange or NXX codes 466 and 639, and 4,000
telephone numbers for NXX code 333, the other 6,000 telephone numbers
being assigned or available to other carriers.
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that are served by any of the NPA-NXX code combinations that are associated
with a particular rate center."
According to West, it is the NPA-NXX code combination that controls
the assignment of a line to a specific local telephone exchange. He explained
that although there are often numerous NXX codes within a local exchange,
"all of the NXX codes are tied into a single rate center." West testified a rate
center is "a geographically specific point. . . . defined by these vertical and
horizontal coordinates," based on "a grid system developed by AT&T to
precisely locate" each one, that is "used to determine mileage between local
telephone exchanges and to calculate rates for calls made between local
telephone exchanges."16 According to West, "[t]he local telephone exchange
16
West explained the Local Exchange Routing Guide (the LERG) is "a
compendium of all the switch information" for every exchange across the
country. It provides a list of all the switches, "which carriers operate those
switches," and the "NPA-NXX . . . down to the thousands block number, they
load in those switches," as well as "what rate centers are associated with those
NPA-NXXs." West maintained "[t]he network reflects the information that's
in the LERG and it's organized that way so that this call instantaneously from
609-466-1111 will find Jane Q when John Q dials 609-434-1234." West and
Starkey agree the LERG is the definitive guide for the routing and rating of
calls.
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drives from that rate center,"17 and thus it's the rate center that defines the local
exchanges.
West explained "[a]ll the NXX codes that are assigned to [the Hopewell]
rate center have customers," and the "array of customers is what comprises the
Hopewell local telephone exchange." According to West, "the rate center is a
point, it's a regulatory construct. It's there to calculate distance between these
two points and to set rates per the tariff. The Hopewell local telephone
exchange is a physical thing. It's the array of all these customers."
West explained "there were ten different NPA-NXX code combinations
[609-274, -309, -333, -466, -527, -564, -639, -644, -925 and -979] assigned to
the Hopewell rate center" as of January 1, 2008, "being used by a total of
17
West testified the rate centers are not specific to Verizon but define "the
local and toll relationships" for all carriers because "the rate centers, the local
telephone exchanges and the relationships between them, which ones are local
points to one another and which ones are toll points to one another is the same "
for all carriers. He explained that even if a customer's calling plan provided
unlimited calling for one monthly charge, in essence treating all calls as local,
carriers are billing one another for "reciprocal compensation" or "switch
access" based on whether the calls are rated as local calls or local toll calls,
depending on whether they originate and terminate within a local service area
as defined by Verizon's tariff or between local service areas in the same
LATA, which is wholly dependent on the NPA-NXX code combinations
associated with each rate center. West testified it's the NPA-NXX code
combinations associated with each rate center that determine the route and
wholesale billing of every call.
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eleven carriers to provide dial tone and access," only three of which, 609-466,
-639 and -333 were associated with Verizon. He testified that when New
Jersey Bell was the monopoly carrier, its exchange area maps, showing where
numbers associated with the particular local telephone exchange were
assigned, "were tied solely to New Jersey Bell's NPA-NXX numbers" and thus
could accurately reflect where its customers' assigned numbers were located.
West testified Verizon's Hopewell exchange area map, however, had not
been updated since 1974, when AT&T built all the local exchange switches
and assigned the NXX codes, and New Jersey Bell decided whether a
particular customer located near an exchange area boundary would be served
by the switch in one local exchange or another — often driven by which
exchange offered the easiest route to string wire to reach the customer. West
maintained that in 1974, and until the advent of local competition, the maps
"were very good representations of the local telephone exchanges," that is "the
exchange area map boundaries coincided with the true exchange boundaries —
the reach of the NPA-NXXs assigned to the exchange."
West contended, however, that by 2008, "twelve years into local
competition," when Neustar was assigning the NPA-NXX codes and CLECs
had placed some of their own switches, "of course not duplicating Verizon's
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network architecture," Verizon's exchange area map boundaries no longer
"coincided with the true exchange boundaries — the reach of the NPA-NXXs
assigned to the exchange." He contended that given the age of Verizon's
exchange maps and "the increase in competition since deregulation and
divestiture, an NPA-NXX and rate center-oriented approach is the only way to
accurately reflect the dynamics of today's telecommunications marketplace."
By way of example, West cited the Johnson & Johnson campus in
Skillman and the Merrill Lynch complex in Hopewell Township, both of which
are served by competitors of Verizon. West maintained the Johnson &
Johnson campus and its associated 1,200 listings, although located within the
boundaries of Verizon's Hopewell exchange map, was properly excluded from
the Hopewell exchange because it is assigned a 908-874 NPA-NXX code not
associated with the Hopewell rate center but with the neighboring Belle Mead
rate center. Whereas the Merrill Lynch complex in Hopewell Township and its
associated 10,000 listings, served by AT&T, was properly included in the
Hopewell exchange, although located outside the boundaries of the exchange
map, because it was assigned a 609-274 NPA-NXX code associated with the
Hopewell rate center.
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West testified that treating the Merrill Lynch complex as if in the
Pennington local exchange, as Starkey advocated, resulted in a "tariff
mismatch" between where the "customer has been placed in this local
telephone exchange and the rating of the telephone call" from a Verizon
customer outside the Hopewell local service area, in Ewing, for instance "to
that AT&T Pennington customer," i.e., Merrill Lynch. West explained if
Merrill Lynch is considered in the Pennington exchange as Starkey asserted,
then Verizon should expect to pay AT&T only a reciprocal charge of "a tenth
of a penny per minute" for the call placed by a Verizon customer in Ewing.
But because "the network keys off of the 274" exchange code associated with
the Hopewell exchange, it "recognizes this as a toll call and AT&T bills
[Verizon] a penny a minute, because the network recognizes it as a toll call not
a local call, so AT&T bills switch access not reciprocal compensation."
West testified placing Merrill Lynch in the Pennington exchange instead
of the Hopewell exchange based on Verizon's old tariff map would result in
"two mismatches going on between how these calls are actually rated, as they
flow through the network and how they appear in the tariff with respect to their
local telephone exchange designations." He claimed if one instead "adopt[ed]
a more dynamic definition of local telephone exchange," relying "on the NPA-
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50
NXXs that are assigned to the relevant rate center, you don't run into this
problem." West explained
the cleanest way to avoid mismatches between tariff
expectation and the actual way a call is rated, both at
the retail level and the wholesale level is to use — I
don't want to say I invented it, but that use the
definition of local telephone exchange that I advocated
and explained in my expert report.
On cross-examination, West was forced to admit he could cite no
authority for his definition of a local telephone exchange, and Verizon's 1993
tariff did not employ it but instead defined basic exchange service as
"telecommunication service furnished to individual line business and residence
customers within a specified geographical area." He was also forced to
acknowledge a customer living in Trenton or Atlantic City to whom a
competitor like AT&T had assigned a telephone number from one of the ten
Hopewell NPA-NXX codes "would be picked up in [his] definition as being
part of the Hopewell local telephone exchange."
Using his definition of local exchange as "the array of customers that are
served by any of the NPA-NXX code combinations . . . associated with a
particular rate center," West calculated Verizon only provided dial tone and
access to 47.9% of the Hopewell local telephone exchange as of the January 1,
2008 assessment date. Relying on Verizon's Access Line Reporting and
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51
Forecasting System (ALRFS), West testified Verizon had 5,13418 residential
lines and 1,534 business lines for a total of 6,668 lines in the Hopewell
exchange as of the end of 2007.
West used the E911 database to calculate the number of telephone
listings the CLECs maintained in the Hopewell exchange. He testified
Verizon's competitors had 728 residential listings and 10,372 business listings,
including the 10,000 listings assigned to the Merrill Lynch complex, for a total
of 11,100 E911 listings in the Hopewell exchange as of the end of 2007.
All the experts agreed there is not a one-to-one relationship between
business listings and lines in the E911 database as there generally is with
residential lines. West testified most residential customers have only one or
perhaps two telephone lines, and those lines are ordered separately with each
having a listing in the E911 database. He explained "[t]here's no equipment
for a [home] that would tie those residential lines together, so they very much
act independently, which means the listings to line relationship is one-to-one."
West testified the same is not true for "high end business lines."
18
West included in that number three residential lines serviced by MCI
because MCI had merged with Verizon in 2006.
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West explained large businesses often have sophisticated equipment on
the premises, such as a private branch exchange or PBX, to service their
internal communications. Each person who has a telephone will have a listing
in the E911 database but not a dedicated line to the switch. PBX equipment
allows a business to use fewer phone lines by splitting those lines into multiple
private extensions, thereby allowing the customer to save a large amount of
money by reducing the number of access lines it needs to purchase. Because
there are fewer access lines than listings, West explained one would need "to
convert those listings" to achieve "a meaningful line count." He referred to
that conversion as a "business line to listing ratio, BLLR."
In order to convert the CLEC listings in the E911 database to lines, West
used Verizon's own statewide ratio of business lines to listings of 0.63. West
multiplied the 10,372 CLEC business listings, including the 10,000 Merrill
Lynch listings he included in the Hopewell exchange, by Verizon's 0.63 lines
to listings ratio, yielding 6,534 CLEC business lines. He then added the 6,534
business lines to the 728 residential lines for total CLEC lines of 7,262.
Adding the 7,262 CLEC lines to Verizon's 6,668 lines, West concluded there
were 13,930 lines in the Hopewell Exchange as of January 1, 2008, 6,668 of
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53
which belonged to Verizon, thus giving it a 47.9% share of the exchange as of
the assessment date.
Verizon also presented the testimony of an "outside" expert, Nicholas
Vantzelfde, head of a "global strategy consulting firm" working "exclusively
in telecommunications," including "quantifying market opportunity [and]
relative market share of competitors within designated geographies."
Vantzelfde testified the term "local telephone exchange" was a "highly
nuanced" term of art within the telecommunications industry, agreeing with
West it was "essentially . . . a group of customers that are assigned a specific
set of NPA-NXX codes that are attached to a rate center." He testified that
"Neustar assigns numbering codes to rate centers. Those rate centers have
customers associated with them. Those customers are part of that exchange
associated with the rate center and ultimately, it doesn't matter where those
customers are, it is what their phone numbers are."19
In addition to endorsing West's definition of a local telephone exchange,
Vantzelfde agreed with West's business lines to listing ratio, which Vantzelfde
19
After hearing this testimony repeated by Verizon's experts in rebuttal, Judge
Brennan asked West whether Neustar was the entity now defining New
Jersey's local telephone exchanges. He responded "Neustar is the one that is
making a determination about the rate center that this code is associated with."
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referred to as "an active line conversion factor." Vantzelfde, however,
performed his "own analysis to estimate the total market lines" within the
Hopewell exchange not relying on the E911 database. He explained he "took
the specific demographics" and what he called "firmographics," a term he
testified he didn't "think [he] invented" but doesn't "hear many other people
use" to define the "unique characteristics of the businesses within a given area"
and used "that to build up [his] estimate of market lines" in the Hopewell
exchange.
Vantzelfde explained that instead of "taking Verizon lines and
estimating competitor lines" as West did, he estimated "how many lines the
entire market buys. And so, we're calculating how many phone lines we think
all of the households have and we're calculating how many phone lines all of
the businesses have" using publicly available data from sources including the
U.S. Census Bureau, Nielsen, the CDC and the Pew Research Center.
Vantzelfde explained he used "very specific information about the types of
households that are part of the Hopewell local telephone exchange and the
types of businesses that are part of the Hopewell telephone exchange,"
including the industry they were in, "how many employees they have, and
other relevant factors" he'd found over the course of "several decades in this
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55
business to be very good predictors of the number of voice lines" those
businesses would have.
Vantzelfde testified that "for as much as we talked about the fact that
maps aren't perfectly relevant for this case, [he] still needed to use a map to do
[his] analysis." Specifically, he explained based on his "experience in these
cases," that he could "take the geographic representation or approximation of
Verizon's service area and . . . calculate the specific firmographics and
demographics in that area." Vantzelfde explained that "Verizon knows where
its boundaries are," although "[i]t doesn't necessarily know where the CLECs'
customers and boundaries of exchanges are." He testified, however, that what
his "experience has been is that the geography is a fair representation" of the
local exchange — "sometimes there are customers located in that geography
that are part of a different exchange" — "[s]ometimes there are customers
located outside of that approximate boundary that are actually part of that
exchange." But, he claimed "those tend to balance out with the exception that
you need to care for, very specifically, large businesses," such as Johnson &
Johnson and Merrill Lynch here.
Vantzelfde testified that there were 4,767 households "within the
Hopewell local telephone exchange," and, using demographic characteristics
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such as age, ethnicity and education, he estimated 12.8% of them had no
landline, meaning there were 4,157 voice lines in the exchange as of the
January 1, 2008 assessment date. Using the same demographic data, he
estimated there were 184 dial-up and 1,052 other secondary access lines in the
Hopewell exchange for a total of 5,393 residential lines, 4,597 of which
belonged to Verizon according to West's count, giving Verizon 85.2% of the
residential market.
Turning to the business lines, Vantzelfde testified he relied on InfoUSA,
which sells information on businesses by zip code, which allows him "to see
every business, and where they're located, what they do, how many employees
do they have." Vantzelfde testified the information he requests from InfoUSA
is "over-inclusive," meaning he "make[s] sure we not only include zip codes
that are within the approximate boundary of the Hopewell local exchange that
we got [from] Verizon, but also cover the surrounding area."
Vantzelfde again explained "in general, in [his] experience, . . . there's
some small businesses or a subset of businesses that are located within the
geographic boundary that are actually part of a different exchange, and another
subset of businesses that are located outside of that approximate boundary and
part of the Hopewell exchange," expressing the view that "those tend to
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balance out, except for very large businesses." He testified he geotags "each
business, whether it's in or out of that approximate geographic boundary, and
then we find the big businesses and we make sure that we appropriately care
for those as based on their phone number whether they're in or out of an
exchange."
Vantzelfde explained the Merrill Lynch complex, for example, with
"5,600 employees or so, . . . was located outside of the approximate geographic
. . . boundary of Verizon's customers, but it's part of the exchange." He
testified the Merrill Lynch complex was "one that we had to make sure that
when we went through our geotagging . . . that it actually counts as part of the
local telephone exchange." Vantzelfde testified the same was "true with
Johnson & Johnson, that is one that is physically located within Verizon's
approximate boundary of its customers, but it's not part of the exchange. It is a
different set of telephone numbers that is served [by] . . . Embarq."
Vantzelfde testified that once he isolated the businesses he thought
appropriately included in the local exchange, he applied his proprietary model,
which he explained was "a little bit how [he's] made [his] career is coming up
with this," taking "every type of business and how many employees we have
that exist at that location and we categorize them" by their "relative
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communications needs" and from that "calculated how many [telephone] lines
we think they have at that location." Applying his model, Vantzelfde
estimated there were 7,818 business lines in the Hopewell local telephone
exchange, 250 fewer lines than Verizon estimated in its analysis using the
E911 database.
Vantzelfde tested his model using data collected by the FCC on a
statewide basis. Every local exchange company in the country — the ILECs
and the CLECs — is required to report the actual number of access lines it
serves per state twice a year. The FCC uses the data to calculate the market
share of the ILECs, thereby monitoring the success of competition in the local
markets. The FCC publishes the data annually in its "Local Telephone
Competition Reports." See Verizon II, 31 N.J. Tax at 66 n.13 (describing the
reports).
Vantzelfde testified that allocating the total number of business access
lines statewide, based on FCC data, to Hopewell and its 0.3% share of the
State's employees, yields 6,402 business access lines, 18.1% less (1,416 fewer
business lines) than his model predicts. In his report, Vantzelfde attributed the
difference solely to the presence of Merrill Lynch, "a large, communications-
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59
intensive business," having "an above-average number of lines per employee"
in the Hopewell local exchange.
At trial, Vantzelfde testified there was "a pretty simple explanation" for
the difference between his model and a straightforward calculation based on
FCC and employee data. He explained "if you look at the types of businesses
that are in Hopewell, they tend to either be . . . relatively small or very large,
but highly telecom intensive." He explained "small businesses tend to have
more phone lines per employee than large businesses." Because there were
more small businesses in the Hopewell exchange, Vantzelfde contended "they
should get an over-allocation of phone lines per employee." He added the
exchange also has "one very important highly telecom intensive business
which is the Merrill Lynch campus that also drives that figure to be higher than
a straight employee allocation."
According to Vantzelfde's model, Verizon had 15.7% of the business
lines in the Hopewell exchange as of the assessment date, a half percentage
point less than West calculated. Adding the 7,818 estimated business lines to
the 5,393 residential lines Vantzelfde estimated were in the exchange based on
demographic data, Vantzelfde testified that in his opinion there were 13,211
total lines in the Hopewell exchange. Comparing that estimate to his count of
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Verizon's lines, 5,823 (845 fewer lines than West counted), Vantzelfde
concluded Verizon had a 44.1% market share in the Hopewell local telephone
exchange, almost four percentage points less than West's estimate. On cross-
examination, Vantzelfde conceded if Merrill Lynch "was determined to be not
part of the exchange then Verizon would have more than 51 percent" of the
market according to his model.
Hopewell's expert Starkey testified that while West and Vantzelfde
claimed Verizon had less than a 51% market share in the Hopewell local
telephone exchange as of the January 1, 2008 assessment date, the FCC put the
ILEC market share for the entire State of New Jersey, which Verizon
dominated, at 82.8% at the end of 2007. Starkey acknowledged the FCC data
is statewide, included the State's two other incumbent local carriers with their
4% of the market, and because it's based on information from the carriers,
didn't require resort to the E911 database and a conversion of listings to dial
tone and access lines employing a "business lines to listing ratio."
Nevertheless, he testified those factors did not adequately account for so
substantial a difference between West's estimate that Verizon had 47.9% of
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61
dial tone and access of the Hopewell local exchange, and the FCC's finding
that Verizon still had 82.8% of the local market statewide.20
Starkey insisted the FCC's data was "the most reliable information we
have in the case," because it came directly from Verizon and its competitors,
whom the FCC required provide a detailed certification of their statewide line
counts twice each year. Starkey testified Verizon's numbers differed so
substantially from the FCC's for two reasons: Verizon incorrectly defined the
local telephone exchange and the BLLR it applied to its competitors' listings in
the E911 database was faulty.
20
Starkey rejected Vantzelfde's 44.1% market share for Verizon because
Vantzelfde not only excluded from Verizon's line count the three residential
MCI lines West included based on MCI having been part of Verizon for two
years as of the assessment date, but also the 842 resale and wholesale lines
West specifically included in his Verizon line count. West explained he
included access lines Verizon sold to CLECs for resale to their customers in
Verizon's line count because "in terms of market share, what we're calculating
here is who is providing the underlying facility. In the case of the resale and
the Wholesale Advantage, we do that but we don't face the customer," in other
words, "Verizon switching is involved in both of those lines." Vantzelfde
excluded those 845 lines from Verizon's total, reflecting them as CLEC lines.
Re-running Vantzelfde's calculations with those lines shifted to Verizon,
Starkey concluded Vantzelfde's model "yields a notably higher market share
for Verizon than did Verizon's initial calculations — i.e., 6,668 Verizon lines /
13,211 market lines equals 50.47%" — without accounting for Merrill Lynch's
placement, erroneously in Starkey's opinion, in the Hopewell exchange.
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Specifically, Starkey asserted West and Vantzelfde defined the Hopewell
local exchange in a way that allows them to "grab that Merrill Lynch facility,
which is clearly outside the boundaries" of the exchange "and include it in
their analysis because if you take that Merrill Lynch facility out, if you take
those roughly 5,600 employees and their access lines out of the analysis, . . .
it's obvious" Verizon serves "more than 51 percent in the Hopewell local
telephone exchange." Starkey contended "[t]hat is a key reason why Hopewell
appears to be so different than the state average." Starkey noted West relied
on his own experience for his definition of a local telephone exchange, could
cite no other authority for it, and Verizon never used West's definition in its
tariff or product guide, or anywhere else for that matter.
According to Starkey, excluding Merrill Lynch and leaving everything
else in West's analysis the same resulted in Verizon having an 87.4% market
share of the Hopewell Exchange, much closer to the FCC's assessment of
Verizon's 82.8% share of the local market statewide.
The other reason for the large discrepancy between West's assessment of
Verizon's share of the Hopewell exchange and the FCC's assessment of
Verizon's share of the local market statewide, in Starkey's view, was West's
decision to apply Verizon's own business lines to listing ratio to its
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competitors' businesses. Verizon calculated its BLLR by taking Verizon's
business listings statewide from the E911 database, divided by the company's
total number of business lines statewide. Starkey testified "that gives us a
good sense . . . of how many listings [Verizon] has per line, but it really
doesn't tell us very much about competitors because their business model, the
way in which they approach the market is very different."
Starkey testified Verizon's competitors such as AT&T, "don't go into a
market to try to serve one and two-line businesses." He claimed "[t]hey're out
for the Merrill Lynch's" or at least the Johnson & Johnson-size campus,
especially during the 2008-time frame because they were employing different
technology than Verizon's built-out copper wire network. Starkey testified
Verizon's competitors in the local market were deploying fiber optic cable,
which "isn't economically viable for one- and two-line businesses." Starkey
testified that because of their different approach to the market, the CLECs'
ratio of telephone listings to lines was "very different" from "what you would
see for Verizon" and applying Verizon's own lines to listings ratio to the
disparate business model of its competitors was "another way in which
Verizon overstates competitor market share and understates its own market
share in the analysis."
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Explaining what he perceived to be the two main errors in Verizon's
market share analysis in greater detail, Starkey testified he agreed with West
about rate centers, how Verizon built out its network, how telephone numbers
were not formerly assigned outside the geographic area of the rate center with
which they were associated and how "[a]ll of that has changed dramatically
over time" with local competition. West maintained, however, that "[w]hat
doesn't change is the definition of a local telephone exchange."
Starkey explained that while Verizon maintains one or more switches in
each exchange in which it's loaded the Verizon NPA-NXX codes associated
with the exchange's rate center, CLECs do not operate in the same fashion.
Starkey testified, and West acknowledged, that AT&T, for example, has not
replicated Verizon's network with a switch in every exchange. 21 Instead,
21
Starkey explained:
The way the telephone system works is, if I make a
call from Missouri to someone in Hopewell and they
have a 609-274-1111 number, it looks at the first three
digits and it says, okay, what area code is that going
to? It's going to 609. That's New Jersey. All right?
So, I'll send it to the closest switch I have nearest to
New Jersey. Now, what's the 274? That's the central
office code, the NXX, . . . which central office is
assigned that code and as we saw from the LERG, the
Local Exchange Routing Guide, it has all that
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65
AT&T deploys far fewer switches serving much larger geographic areas ,
which it's able to do because it relies on fiber optic cable that can carry signals
much farther than the copper wire of Verizon's legacy local exchange
networks.
West and Starkey agreed the 10,000 block of 609-274 numbers AT&T
assigned to Merrill Lynch is served out of AT&T's switch in Camden. While
West testified Verizon, as a matter of "a mixture of policy and actual network
design," would not permit a landline customer moving from Hopewell to
another exchange to keep her 609-466-XXX number, because the company
"doesn't like to mix and match [NPA-NXX] codes," he acknowledged "that's a
Verizon thing. It's not a CLEC thing." Starkey testified Verizon's
competitors, such as AT&T, have no such qualms "because it knows that it can
____________________
information listed and it — the LERG will tell you,
okay, 274 — this isn't the case here but I'm just using
it as an example — 274 sits in this Verizon switch in
Hopewell. So, I'm going to send the call there. It's
then Verizon's job to say, okay, what are the last four
digits? The last four digits are 1111. In my records, I
know that 1111 is Customer A. So, I'll extend the call
from there. So, each one of these switches into each
one of these exchanges for Verizon is going to have
NPA-NXX codes, resident programed into that switch.
AT&T on the other hand is going to have all of its
numbers in its big switch and it can assign them
anywhere it wants across this region.
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assign numbers anywhere it wants on its network without regard to the local
telephone exchange." Starkey testified "[t]he bottom line is the telephone
numbers have no significance in today's telecommunications environment
relative to location."
When asked by Judge Brennan whether that meant the CLECs didn't
have local exchanges, Starkey responded by saying that Verizon's local
exchange map in its tariff represents "the local telephone exchange for
everybody. If . . . someone says what's the Hopewell local exchange? They'll
say, I need to see the map. . . . [A]re you asking me what geographic region
does it cover? I need to see the map."
When the judge followed up by asking how then "do you measure
AT&T's or any CLEC's presence within any specific local telephone
exchange," Starkey responded "[t]he address of where the facility is
terminated. The access line address," which is readily available in the E911
database. Starkey acknowledged West was correct that "[t]he way the network
knows whether [a call is] a toll call or a local call is it looks at the rate
centers," but he claimed "that doesn't have anything to do with where your
access line is going to be . . . or your service address is." Starkey insisted
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"[t]hat's going to be based on [the customer's] . . . service address associated
with the dial tone and access line facility to service the line."
Starkey testified the geographic boundaries of the local exchanges
continued to be important to Verizon after the advent of local competition as
evidenced by its inclusion of its local exchange maps in its 1993 tariff and
2014 product guide and that it defined a local exchange with reference to
territorial boundaries in both documents. He maintained that Verizon is the
incumbent local exchange carrier responsible for the Hopewell exchange, "but
the exchange is an industry geography, an industry building block that we all
use."
Starkey drove home that point by calling attention to Vantzelfde's self-
acknowledged need to use the geographical boundaries of Verizon's Hopewell
exchange to conduct his analysis of Verizon's market share. Starkey testified
that although Vantzelfde claimed that "[l]ocal exchanges are not easily defined
by a specific geographic boundary," his own analysis refutes that statement
because "he relied on a very specific geographic boundary and then made two
exceptions" for Merrill Lynch and Johnson & Johnson.
Starkey also testified the geographic boundaries of the local exchanges
were important for circumscribing the area where an incumbent local exchange
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carrier such as Verizon had "carrier of last resort obligations." See N.J.S.A.
48:2-23. Starkey explained if someone were to build a house in a less-
inhabited area of a local exchange with no nearby wireline facility, a CLEC is
free to decline service because its facilities don't reach the customer. An
incumbent, however, is required to provide wireline service to anyone seeking
service in its local exchange, building out a new wireline facility if necessary.
Starkey testified Verizon, however, "is only required to do that if you are in
one of their exchanges," thus the geographic boundaries of a local exchange
are important for defining the company's carrier of last resort obligations.
Finally, Starkey emphasized how large an impact including the Merrill
Lynch facility in the Hopewell exchange had on Verizon's market share.
Starkey noted West calculated there were 10,372 CLEC business listings in the
Hopewell exchange; 10,000 of those listings were for the Merrill Lynch
facility.22 Starkey testified "you can imagine what it does to the calculation if
you take out that number. It is the only thing that really matters at the end of
the day in the analysis because it dictates that [Verizon] serve[s] far more than
22
Actually 9,997 or 9,998 of the 10,000 block of 609-274 numbers. Starkey
explained carriers always hold a few numbers back from any 10,000-block
assignment for routing and administrative purposes.
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51%, really closer to 85%," or precisely 87.37% if Merrill Lynch is excluded
from West's calculation.
Starkey ran the calculation excluding Merrill Lynch but including
Johnson & Johnson's 1,200 listings. He testified that when you include
Johnson & Johnson's 1,200 listings in the Hopewell exchange and apply
Verizon's 0.63 business lines to listings ratio, Verizon still has 79.5% of the
market as of the January 1, 2008 assessment date, again, much closer to the
FCC's assessment of Verizon's 82.8% of the local market statewide. He
testified that running the calculation without a BLLR, thus assuming a one -to-
one ratio between Johnson & Johnson's 1,200 listings and access lines, which
almost certainly vastly overstates the number of access lines the facility
employs, results in Verizon having a 75.5% share of the Hopewell local
exchange as of the assessment date.
As already noted, Starkey testified that in addition to erroneously
including the Merrill Lynch facility in the Hopewell exchange, Verizon's
market share analysis is flawed by employing its own business lines to listing
ratio to its competitors' listings. Starkey explained Verizon inherited a copper
network, and "there's only so far you could push a signal from the central
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office switch out on copper before it became so weak you couldn't hear it
anymore."
Although noting "it depends on a lot of different circumstances," Starkey
estimated the "engineering reality" is that a carrier could generally extend a
copper wire for only approximately 20,000 feet and maintain acceptable sound
quality. While acknowledging the network could be supplemented with fiber
optic cable, Starkey testified the limitations of "how far they [could] push
[copper]" when the Bell System "built these exchanges and they built these
networks" explains these exchange boundaries and why "there's 180 of them in
Verizon's territory in New Jersey in large part."
Starkey testified that by the time the CLECs entered the local market,
"technology had changed somewhat dramatically." Because fiber optic cable
was more available, the CLECs "could build networks that extended miles, 20
miles, 100 miles depending on how they built it." He testified "AT&T puts a
switch in Camden and then serves entire portions of New Jersey and perhaps
the entirety of New Jersey with that single switch. It does that with fiber optic
cable that it extends and generally puts into buildings or large campuses."
According to Starkey, "[t]hat's what its business model is." He claimed AT&T
is "not looking to serve your barber shop . . . or your salon that has one line.
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It's looking for somebody who has 1,000 lines, 5,000 lines, 10,000 lines to
substantiate the investment it has to make in fiber associated with reaching
those places."
According to Starkey, that business model makes applying Verizon's
business lines to listing ratio to the CLECs inappropriate. Starkey testified
Verizon, because it is the incumbent local exchange carrier and the carrier of
last resort "is going to have a lot of those single-line businesses. Competitors
are not." Using the digital GIS (geographic information system) mapping
coordinates Verizon provided to Vantzelfde defining the Hopewell local
telephone exchange and the E911 data, Starkey was able to plot the dial tone
and access lines Verizon included in its market share analysis. The graphic
bears out that Verizon provides dial tone and access to many more small
customers than its competitors in the Hopewell exchange. A fact Verizon's
experts did not dispute.
Starkey concluded Verizon's competitors, on average, are going to have
"substantially" "fewer lines per number [listing] than Verizon,"23 making
23
Vantzelfde made essentially the same point in his testimony explaining why
the higher number of small businesses in the Hopewell exchange results in "an
over-allocation of phone lines per employee" as compared to a statewide
average.
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Verizon's lines to listing ratio higher than what a CLEC's BLLR would be.
Starkey explained Verizon's 0.63 BLLR means Verizon calculates a business
customer with 100 telephone numbers listed in the E911 database will have 63
corresponding business access lines. He testified that number is roughly four
times higher than the "trunk equivalency tables" the company has published in
other parts of the country to estimate the number of dial tone access lines
serving a PBX.24 Those tables assume only 16 access lines would be needed
for a PBX customer with 100 telephones, and thus 100 listings in the E911
database, resulting in a BLLR of 0.16 — not 0.63, and also much higher than
the FCC's standard for estimating the average number of stations or telephones
per line for PBX service, which is 9.
Starkey testified Verizon's error in applying its own BLLR to its
competitors' customers without accounting for the CLECs' business model of
seeking out "the largest and most lucrative customers" in a local market, i.e.,
"cherry-picking" or "skimming," is well illustrated in Verizon's treatment of
the Merrill Lynch complex. Assuming for purposes of argument that it was
____________________
24
Starkey explained "dial tone access lines serving PBXs are referred to as
'trunks' because they connect the Verizon switch and a private switch — e.g.,
the customer's private branch exchange — PBX."
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within the Hopewell local exchange, a point Starkey disputed, he noted that
applying Verizon's 0.63 BLLR to Merrill Lynch's 10,000 block of numbers
resulted in attributing 6,298 lines to the complex, which is likely a significant
overstatement of its access lines given both parties agree Merrill Lynch had
only 5,600 employees there as of the January 1, 2008 access date. 25
Starkey further claimed Verizon's application of its 0.63 business lines
to listings ratio to its competitors' listings, which he claimed overestimates
competitor lines as in the Merrill Lynch example, has a disproportionate
impact on its market share analysis because "the vast majority of competitor
lines are business lines while the vast majority of Verizon lines are residential
lines." Starkey contended "[t]hat means that to the extent Verizon's 'Business
Lines-to-Listings Ratio' overstates the number of dial tone access lines per
listing, it has a tendency to substantially increase Verizon's competitors' lines
versus its own lines."
Judge Brennan's Decision
25
Starkey buttressed his point with reference to comments AT&T filed in an
unrelated matter with the FCC, assailing the use of E911 data to determine its
market share in a local exchange based on its likely effect of overstating the
number of access lines of its largest customers.
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After hearing the testimony of the parties' experts over three full days of
trial, Judge Brennan determined Hopewell's understanding of a "local
telephone exchange" was more aligned with the Legislature's intent in N.J.S.A.
54:4-1 than Verizon's understanding of the term. She reasoned:
Although not defined in N.J.S.A. 54:4-1, the term
"local telephone exchange" is a common and historical
concept in the telecommunications industry. It is a
geographically defined area serviced by a physical
construct that functions as the building block for
service delivery, call routing and the regulatory
infrastructure that has dominated the
telecommunications industry for decades.
[Verizon II, 31 N.J. Tax at 74.]
Judge Brennan further found that "Verizon's tariff maps are publicly
available and define with specificity the boundaries of its Hopewell Telephone
Exchange," and "[t]hat the business personal property being taxed is physically
located within the boundaries of the exchange bearing its name demonstrates a
geographic component to the definition of a 'local telephone exchange.'" Id. at
74-75. That "connection to a geographically identifiable area also serves as a
foundation for the boundaries of competition and the LATA system ," and
employing "a geographic definition permits the usage of public and transparent
data sources when calculating market share, such as data from the FCC, United
States Census Bureau, Nielsen, PEW, and InfoUSA." Id. at 75. Finally, Judge
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Brennan found the court's interpretation of the phrase "local telephone
exchange" in N.J.S.A. 54:4-1 was consistent with the Supreme Court's 2002
description of a "local exchange" in Verizon Communications, 535 U.S. at
489-90. Ibid.
Because there was no dispute that Verizon provided dial tone and access
to more than 51% of the Hopewell local telephone exchange as of the
January 1, 2008 assessment date, defined in accordance with the territorial
boundaries of Verizon's tariff exchange map, thereby excluding the Merrill
Lynch complex, the Tax Court entered judgment after trial to Hopewell,
affirming imposition of the tax under N.J.S.A. 54:4-1 for tax year 2009. Id. at
75-76.
Verizon's Appeal From the Final Judgment
Verizon appeals, reprising its arguments to the trial court as to the
meaning of the statutory phrase "local telephone exchange" and adding that the
Tax Court's adoption of a "geography-based test for the 51% threshold"
created "an unworkable test that cannot be applied without rendering N.J.S.A.
54:4-1 fatally ambiguous." Verizon further argues the Tax Court erred by
failing to properly evaluate the expert testimony and concluding Verizon bore
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the ultimate burden of proof; by accepting Hopewell's definition of a local
telephone exchange and rejecting the "definition offered by the industry leader,
Verizon"; by failing to adopt "the methodology and calculations of Verizon's
experts" for measuring the 51% threshold and accepting the "net opinion"
offered by Hopewell's expert; and by failing to consider "the practicality of
implementing its holding or providing guidance to future litigants on how to
calculate the 51% threshold." We reject its arguments because we agree with
Judge Brennan that "local telephone exchange" as used in N.J.S.A. 54:4-1
means a local telephone network within a defined geographical area as
depicted on Verizon's tariff exchange maps.
Our Analysis
The scope of appellate review of a Tax Court decision after trial "is the
same as that applicable to a non-jury determination of any other trial court."
Yilmaz, Inc. v. Dir., Div. of Tax'n, 390 N.J. Super. 435, 443 (App. Div. 2007).
"The 'court's interpretation of the law and the legal consequences that flow
from established facts are not entitled to any special deference,'" and "[w]e
apply a de novo review to a trial judge's legal conclusions." City of Newark v.
Twp. of Jefferson, 466 N.J. Super. 173, 180 (App. Div. 2021) (quoting
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Manalapan Realty, LP v. Twp. Comm. of Manalapan, 140 N.J. 366, 378
(1995)). Statutory interpretation, of course, is always a "question of law
subject to de novo review" on appeal. Saccone v. Bd. of Trs. of Police &
Firemen's Ret. Sys., 219 N.J. 369, 380 (2014).
As we've already noted in our discussion of Judge Menyuk's ruling that
the 51% test in N.J.S.A. 54:4-1 must be applied annually, a court faced with
having to interpret a statute is to apply the tools of statutory interpretation to
"effectuat[e] the legislative plan as it may be gathered from the enactment read
in full light of its history, purpose and context." Koch, 157 N.J. at 7 (quoting
State v. Haliski, 140 N.J. 1, 9 (1995)). We begin with the statute's language,
ascribing to the "words their ordinary meaning and significance," DiProspero,
183 N.J. at 492, that is "unless the Legislature has used technical terms, or
terms of art," Marino v. Marino, 200 N.J. 315, 329 (2009), "which are
construed 'in accordance with those meanings,'" Praxair Tech., Inc. v. Dir.,
Div. of Tax'n, 201 N.J. 126, 136 (2009) (quoting In re Lead Paint Litig., 191
N.J. 405, 430 (2007)). See 2A Norman J. Singer, Sutherland Statutory
Construction §§ 47:29, 47:30 (6th ed. 2002); N.J.S.A. 1:1-1 ("Technical words
and phrases . . . shall be construed in accordance with such technical or special
and accepted meaning.").
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Although we would normally note here our acknowledgment of the Tax
Court's expertise in explaining why we will not disturb its factual findings
"unless they are plainly arbitrary or there is a lack of substantial evidence to
support them," Yilmaz, 390 N.J. Super. at 443 (quoting Alpine Country Club
v. Borough of Demarest, 354 N.J. Super. 387, 390 (App. Div. 2002)), we need
not do so here as this was not an ordinary Tax Court trial. Verizon was not
challenging the assessor's valuation of its property in the Borough or the
amount of the tax the Borough imposed.
This trial, consisting only of the testimony of three telecommunications
industry experts, was geared almost entirely to assisting the court in
understanding the meaning their industry gives to "local telephone exchange,"
the term of art the legislature employed in N.J.S.A. 54:4-1, and how to
determine whether Verizon provided dial tone and access to 51% of the
Hopewell exchange, which in this particular case rested entirely on the
meaning ascribed to "local telephone exchange." The court, in essence, held a
trial to primarily decide a legal issue, which when decided left no factual
questions to resolve.
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Thus, we turn to consider how a court goes about interpreting a term of
art.26 In Norfolk Southern Railway Co. v. Intermodal Properties, LLC, 215
N.J. 142, 147 (2013), a case involving the eminent domain powers of a
railroad, our Supreme Court has provided us a good model. The question for
the Court, as it relates here, was "whether the railroad demonstrated that the
taking of defendant's property was occasioned by the 'exigencies of business'
within the meaning of that phrase as it is used in the statute that governs
takings by railroads." Ibid. (quoting N.J.S.A. 48:12-35.1).
The particulars of the case are not as important as the Court's approach
to determining the Legislature's understanding of the term. Rejecting the
condemnee's contention that the language required urgent or emergent
circumstances, we'd adopted the administrative law judge's dictionary
definition of "exigency," understanding the phrase to mean "'the need, demand,
or requirement intrinsic to a circumstance, [or] condition' such as 'the
exigencies of city life[.]'" Id. at 157 (quoting Random House Webster's
26
There can be little doubt the statutory phrase "local telephone exchange" is
a term of art. The dictionary definitions of the term tend to focus on the
building housing the switch and not the physical manifestation of the exchange
network implied in the statute. See, e.g., Webster's Third New International
Dictionary 2350 (1993) (defining "telephone exchange" as "a central office in
which the wires of telephones may be connected to permit conversation").
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Unabridged Dictionary (2d ed. 2006)). Employing the standard tools of
statutory construction, we were convinced "the Legislature did not intend to
limit the exercise of the condemnation power in N.J.S.A. 48:12-35.1 to
emergency situations," largely based on how long it took a railroad to
condemn property and comply with the statute's other requirements, which
implied to us the Legislature did not intend the railroad to have to demonstrate
an urgent need for the property. Id. at 157-58.
Although affirming our decision, the Court rejected our approach to
interpreting the statutory phrase, "exigencies of business." Id. at 166-67.
Writing for the Court, Justice Hoens acknowledged we'd relied on a dictionary
providing a definition "that apparently fits the overall statutory intent," but
noted it wasn't the only dictionary, and others "define exigency in terms of 'a
state of affairs that makes urgent demands[,]' or as a 'state of urgency; a
situation requiring immediate action.'" Id. at 167 (internal citation omitted)
(first quoting Webster's Ninth New Collegiate Dictionary 435 (1985); and then
quoting Black's Law Dictionary 655 (9th ed. 2009)).
The existence of conflicting "modern day definitions," which "are
inconsistent and lead to contrary conclusions," impelled the Court to conduct
its own interpretation of the statutory language, charting "a somewhat different
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course." Ibid. Justice Hoens wrote that "modern understandings of words or
phrases may not be appropriate guides in statutory interpretation, particularly
if a statute was crafted decades in the past," or "uses a term of art," requiring a
construction in accordance with that meaning. Id. at 167-68. Because the
phrase "exigencies of business" found in N.J.S.A. 48:12-35.1 was "not one of
recent vintage, but has deep roots in predecessor statutes governing the
formation of railroads and the creation of their routes," the Court looked to
where the phrase first appeared in a statute related to railroads in the 1870s and
traced the phrase forward through different statutes, drawing guidance from
court cases interpreting it. Id. at 168-72.
That review allowed the Court to conclude that "when courts have been
called upon to interpret the meaning of the phrase 'exigencies of business' in
the past, it has been regarded as a term of art," and "understood to describe
generally the needs of business, or the ordinary course of business, rather than
to allude to an emergent, urgent, immediate, or pressing need." Id. at 173.
The Court found it was "the influence of our modern jurisprudence in the
criminal context that has imbued the term with those notions." Ibid. The
Court concluded, "as [it] must, that the Legislature meant the phrase
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'exigencies of business' to be understood in accordance with the way in which
it was used at the time when the language was chosen." Ibid.The Court further found "that understanding of the phrase is the most
sensible one when considering the way in which railroads operate." Ibid.Justice Hoens wrote: "Simply put, demanding that the railroad demonstrate
that there is an urgency or an immediacy that motivates its exercise of eminent
domain to acquire a tract of land, as [the condemnee] suggests, would require
us to close our eyes to the reality of how railroads are developed and built. "
Ibid. Thus, the Court could "detect no basis on which to conclude that the
Legislature intended to demand that railroads prove urgency, immediacy or
emergency of their need for land as a prerequisite to exercising their statutory
condemnation power." Ibid.Applying the Court's method and insights in Norfolk Southern to this
matter, we return to the history of the telephone companies and New Jersey's
approach to taxing them offered in the first pages of this opinion. Although
"local telephone exchange" does not have the century-long history in our
statutes as "exigencies of business," having only first appeared in 1989, that
appearance is nevertheless significant because it was only five years after the
break-up of AT&T. Indeed, Judge Menyuk noted "the enactment of L. 1989,
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c. 2, which amended N.J.S.A. 54:4-1," as well as several other statutes, was the
first reflection in the tax statues of "[t]he changes to the telecommunications
industry following divestiture." Verizon I, 26 N.J. Tax at 412. See Sponsor's
Statement to A. 135 (pre-filed for introduction in the 1988 session) ("The
purpose of this bill is to restructure the method of taxing the
telecommunications industry in New Jersey to reflect the dramatic changes,
both technological and structural, that have occurred in that industry .").
The 1989 amendment to N.J.S.A. 54:4-1, which since 196627 had defined
the "[p]ersonal property taxable under this chapter" to include "the tangible
goods and chattels, exclusive of inventories, used in business of telephone . . .
companies" subject to Chapter 4 of the Franchise and Gross Receipts Tax,
added the qualifier "local exchange" to "telephone companies" and defined a
"local exchange telephone company," as "a telecommunications carrier
providing dial tone and access to substantially all of a local telephone
exchange." See L. 1989, c. 2, § 4.
27
See N.J. Bell Tel. Co. v. Laurel Springs Borough, 1 N.J. Tax 619, 628
(1980) (noting "[a]t the time N.J.S.A. 54:4-1 was amended in 1966 thereby
limiting the taxation of personal property thereunder to tangible personal
property of telephone companies, the mere ownership of tangible personal
property by a telephone company, subjected said property to be assessable
within the community where found on the assessing date").
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The purpose of the amendment, as Judge Menyuk found, was to reflect
the new reality of the break-up of AT&T and the Bell System: there was no
longer essentially only one telephone company or only one type of telephone
company. Verizon I, 26 N.J. Tax at 418. AT&T was now solely a long-
distance carrier, prohibited from competing in the local exchange markets, and
the "divested carriers," such as New Jersey Bell, were now local exchange
companies assigned "the provision of local telephone service," Verizon
Commc'ns, 535 U.S. at 475, their geographic reach limited by the newly drawn
LATA boundaries. See N.Y. SMSA, 13 N.J. Tax at 568 (noting the effect of
the 1989 amendment "after the AT&T divestiture, [was] to shift the local
personal property tax from AT&T to New Jersey Bell which had become the
local exchange company").
Critically, at the time of the 1989 amendment introducing the phrase
"local telephone exchange," New Jersey Bell was still an entrenched monopoly
in the local exchange market. Although Neustar was by then assigning the
telephone numbers, New Jersey Bell was allocating them to its customers as it
always had, assigning them with reference to the NPA-NXXs assigned to each
rate center. In other words, New Jersey Bell was assigning the 609-466, -639
and 333 codes it received from Neustar, which were assigned to the Hopewell
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rate center, to customers and subscribers within the territorial boundaries of its
Hopewell exchange. West testified the exchange maps included in Verizon's
tariff throughout "the 1970s, 1980s, the so-called pre-competition era, were
very good representations of the local telephone exchanges." That is, "the
exchange area map boundaries coincided with the true exchange boundaries —
the reach of the NPA-NXXs assigned to the exchange."
Thus, when the Legislature adopted the phrase "local telephone
exchange" in 1989, the term was unambiguously understood to refer to the 209
established local exchanges inside New Jersey's three geographically defined
LATAs, 180 of which were depicted in highly accurate exchange maps
available to the public in New Jersey Bell's tariff. There is nothing to suggest
the Legislature would have understood a local exchange to be anything other
than how it was then defined — and depicted — in New Jersey Bell's tariff
(and remains today in Verizon's product guide): "[a] unit established by the
Company for the administration of communication service in a specified area
which usually embraces a city, town or village and its environs. It consists of
one or more central offices which may be located within or without the
territorial boundaries of the exchange."
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By 1997 when the Legislature amended N.J.S.A. 54:4-1 to redefine a
local exchange telephone company from "a telecommunications carrier
providing dial tone and access to substantially all of a local telephone
exchange," L. 1989, c. 2, § 4, to "a telecommunications carrier providing dial
tone and access to 51% of a local telephone exchange," New Jersey Bell had
changed its name, but not its tariff definition of an exchange or its exchange
area maps, L. 1997, c. 162, § 60. Although the Company's Hopewell exchange
map had not been updated since 1974, West testified unequivocally that the
company's exchange maps remained accurate representations of the local
telephone exchanges until its monopoly was ended by Congress in the 1996
Telecommunications Act.28
Moreover, although Congress opened the local markets to competition in
1996, the legislation did not alter the configuration of New Jersey's exchange
28
West testified "[t]here was no local competition authorized in this territory"
prior to the federal 1996 Telecommunications Act, and that New Jersey Bell
was "a virtual monopoly in this space." In the Telecommunications Act of
1992, N.J.S.A. 48:2-21.16 to -21.21, the Legislature authorized BPU to permit
some competition in the local retail telephone market, which BPU had done
prior to the 1996 Telecommunications Act, although implementation did not
occur until after its passage. See Bell Atl.-New Jersey, Inc. v. Tate, 962 F.
Supp. 608, 614-16 (D.N.J. 1997); Verizon I, 26 N.J. Tax at 418-19 (noting
BPU "did not even begin to investigate whether local exchange competition
should be permitted in New Jersey until 1996").
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boundaries and local calling areas, which made up the LATAs. The territorial
boundaries of New Jersey's local exchanges and calling areas continued, as
they had before, to comprise the contiguous geographic areas of the State's
three LATAs.
Verizon doesn't dispute those points. West's argument is that Verizon's
Hopewell exchange map, like all of its exchange maps, was never more than a
reflection of "the array of customers that are served by any of the NPA-NXX
code combinations that are associated with a particular rate center." West
contends that because the routing, rating and billing of calls nationwide is
driven by the NPA-NXX code combinations assigned to a rate center, treating
CLEC customers assigned an NPA-NXX code associated with the Hopewell
rate center, who are physically located outside the boundaries of Verizon's
Hopewell exchange map, as belonging to another exchange would create
"distortions" and "mismatches" in how calls to and from that customer are
rated and billed at the wholesale and retail levels.
In his view, the way to avoid those mismatches, which become
"exponentially more likely post-competition," when CLECs assign NPA-NXX
numbers assigned to a particular rate center to customers located outside the
territorial boundaries of the exchange associated with that rate center, is to
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abandon the concept of an exchange map as an accurate depiction of the local
exchange market and instead adopt his more "dynamic definition of [a] local
telephone exchange," which relies on the NPA-NXXs that are assigned to the
relevant rate center, which he "advocated and explained in [his] expert report."
Verizon's argument for its definition of a local telephone exchange is not
frivolous, especially as West insists it represents the concept underlying
Verizon's exchange maps from the time in which New Jersey Bell operated as
a monopoly, but we find it unlikely to have been the Legislature's
understanding of the term when it amended N.J.S.A. 54:4-1 in 1989 and 1997.
First, West conceded he could cite no authority for his "dynamic definition" of
a local exchange, undermining Verizon's claim that West's definition is widely
shared throughout the telecommunications industry.
Second, it is the understanding of a local exchange, post-competition, by
a Bell engineer, exceedingly knowledgeable about the arcane and enormously
complicated subjects of telephone technology, the architecture of telephone
networks and competitive telecommunications markets. But it's inside
baseball, requiring a sophisticated understanding of rate centers, call routing,
and the differences between switch access and reciprocal compensation. West
testified he developed his definition by looking at various sections of Verizon's
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tariff and the Local Exchange Routing Guide and "just kind of think[ing]
through how these calls route and rate and that's how you come up with a
working definition of local telephone exchange that avoids the sort of
mismatches that occur when you assign Merrill Lynch to the Pennington local
telephone exchange."
There is nothing in the record to suggest the Legislature understood the
term "local telephone exchange" in the way West does when it amended the
local property tax law to define a "local exchange telephone company," as "a
telecommunications carrier providing dial tone and access to substantially all
of a local telephone exchange." And we reject Verizon's view that the Tax
Court judge should have afforded it and its experts the same deference a court
shows a state administrative agency by adopting the "definition offered by the
industry leader, Verizon." Verizon's vested interest in avoiding the tax makes
its comparison of itself to an administrative agency an inapt analogy.
We also do not find the Tax Court erred in evaluating the testimony of
the experts or failed to make adequate factual findings. Matters of credibility
are within the unique province of the trial court, which is free to accept all,
some, or none of an expert's opinion. Todd v. Sheridan, 268 N.J. Super. 387,
401 (App. Div. 1993). Moreover, as we've already noted, the nature of the
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parties' dispute did not make it incumbent on the Tax Court to find facts in this
case.
The parties' experts, particularly West and Starkey, were offered to
provide their differing views on the telephone industry's understanding of a
local telephone exchange to assist the court in its interpretation of the statute.
This trial was devoted almost entirely to resolution of the statutory
interpretation of "local telephone exchange" in N.J.S.A. 54:4-1, an issue of law
we review de novo, which explains why we have so extensively quoted from
the experts' trial testimony to illustrate their different views of this term of art.
Like Judge Brennan, we find Starkey's testimony as to the telephone
industry's understanding of a local exchange more persuasive — and likely a
good deal closer to the understanding of the Legislature when it deployed the
term. Verizon II, 31 N.J. Tax at 74. Starkey agreed with West about the
importance of rate centers to the routing and rating of calls and West's
description about how Verizon built out its network. He agreed with West that
Verizon did not assign customers telephone numbers outside the geographic
area of the rate center with which the numbers were associated, and thus that
the territorial boundaries of Verizon's exchange maps were driven by the
assignment of telephone numbers to Verizon's customers, i.e., West's array of
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customers served by any of the NPA-NXX code combinations associated with
a particular rate center. He also agreed Verizon's competitors did not share its
policy about "not mix[ing] and match[ing] the local telephone exchanges," —
assigning a customer an NPA-NXX code combination assigned to a rate center
associated with one exchange to another exchange — and, thus, that there are
likely to be some CLEC customers with NPA-NXX codes associated with the
Hopewell rate center who are physically located outside the territorial
boundaries of Verizon's Hopewell exchange map.
What Starkey disagreed with West about was West's insistence that the
territorial boundaries of Verizon's exchange maps no longer have any meaning
in the post-competition era because they essentially capture only Verizon's
customers and not those of its competitors. Starkey acknowledged the
presence of competitors in the local markets and their use of remote switches
to serve vast swaths of the State using fiber optic cable represents a dramatic
change from the Bell System model of having a switch in every exchange
loaded with the NPA-NXX combinations associated with the exchange's rate
center. But he insisted those changes did not change "the definition of a local
telephone exchange."
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Starkey maintained AT&T's ability to load 10,000 NPA-NXX code
combinations associated with the Hopewell rate center into its Camden switch
to serve the Merrill Lynch complex in Hopewell Township located outside the
territorial boundaries of the Hopewell local exchange doesn't mean the
Hopewell exchange now encompasses the Merrill Lynch complex as Verizon
asserts. He explained that because AT&T can serve large portions of the State,
and maybe the entire State, from its single switch in Camden, it could assign
those numbers to customers anywhere on its network.
Applying West's "dynamic definition" of the Hopewell local exchange
would not only mean that Merrill Lynch, located within the territorial
boundaries of the Pennington exchange, would be included in the Hopewell
exchange, so would the customers in Trenton and Atlantic City to whom
AT&T had assigned NPA-NXX code combinations associated with the
Hopewell rate center — a point West was forced to concede. Indeed, West
contended AT&T's and its other competitors' ability to assign NPA-NXX code
combinations associated with the Hopewell rate center virtually anywhere
made it impossible to map the Hopewell exchange in 2008 or at the time of
trial.
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Like Judge Brennan, we agree a local telephone exchange that cannot be
mapped or defined by specific geographic boundaries because the array of
customers associated with the NPA-NXX codes assigned to a particular rate
center associated with the exchange of the same name are now scattered across
the State is completely at odds with the traditional understanding of local
exchanges as defined, geographical areas that can be mapped, which when
grouped together with other exchanges in local service areas form the
contiguous geographic areas of the LATAs. Id. at 74-75. It's also at odds with
the definition of "basic exchange service" in Verizon's pre- and post-
competition tariffs and product guide as "telecommunications service
furnished to individual line business and residence customers within a
specified geographical area for the purpose of local calling . . . and to gain
access to and from the telecommunications network" as well as the Company's
continued representation of its exchange maps as depicting "the territorial
boundaries of the exchange area." Id. at 54.
In addition to the federal and State case law defining local exchanges in
connection with the breakup of the Bell System and its aftermath and Verizon's
own explanation of its exchanges in its tariffs, exchange maps and 2014
product guide, perhaps the most telling indicator in this case of the generally
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accepted understanding of the idea of a local exchange as a "specified
geographical area" depicted on an exchange map, is that Verizon's expert,
Vantzelfde, based his entire analysis of Verizon's competitive market share in
the Hopewell local exchange on the territorial boundaries of Verizon's 1974
Hopewell exchange map.29
Although endorsing West's definition of a local exchange as essentially
"a group of customers . . . assigned a specific set of NPA-NXX codes that are
attached to a rate center," which Vantzelfde appeared to rely on only for
purposes of including Merrill Lynch in the Hopewell exchange and excluding
Johnson & Johnson, Vantzelfde testified unequivocally he "needed to use
[Verizon's exchange] map to do [his] analysis." Vantzelfde also testified he'd
used the same methodology relying on exchange map coordinates to establish
market share in local exchanges in other reports for Verizon and other
telecommunications companies as well as for state public utility commissions.
Vantzelfde testified he used the boundaries of Verizon's Hopewell exchange as
29
Verizon's repeated claim in its briefs that Hopewell and the Tax Court relied
"on an outdated, pre-competition understanding" of a local telephone exchange
based on an "obsolete" and "meaningless" 1974 exchange map ignores that
West testified the map remained a very accurate representation of the
Hopewell local exchange for another nearly twenty-five years, i.e., through the
end of the pre-competition era and the 1997 amendment of the statute, and that
it is on file today with BPU as part of Verizon's product guide.
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depicted on its exchange map as "the geographic area" of the Hopewell
exchange because although Verizon "doesn't necessarily know where the
CLECs' customers and boundaries of exchanges are," his "experience has been
. . . that the geography is a fair representation" of the local exchange.
Finally, going back to the Court's analysis in Norfolk Southern, we
consider the testimony offered by both West and Starkey about how Verizon's
New Jersey local telephone exchanges developed "to assist us in interpreting
the phrase in accordance with its intended meaning." 215 N.J. at 168. West
testified the purpose of the Hopewell exchange map "was to try to capture the
scope of the Hopewell local telephone exchange," and that "[t]he real scope,
the real end point of this Hopewell local telephone exchange is defined by how
far these lines reach."
Starkey's understanding was the same. He testified the legacy network
Verizon inherited was "largely based on its exchange boundaries." He
explained, as West had, that New Jersey Bell had a central office in each
exchange and sent cables out to the boundaries "and then a different central
office and a different exchange network handled exchanges that were beside
them."
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Thus, "the real scope" of the Hopewell exchange West described, "how
far these lines reach[ed]" when Bell built the system, was dictated by how "far
you could push a signal from the central office switch out on copper before it
became so weak you couldn't hear it anymore." Starkey explained it was that
"engineering reality" of the reach of copper wires to carry signals that
explained "why these exchange boundaries" existed and why there are "180
[local telephone exchanges] in Verizon's territory in New Jersey."
We reject West and Verizon's more modern and "dynamic"
understanding of a local telephone exchange as the array of customers served
by any NPA-NXX code combination associated with a particular rate center,
regardless of where those customers are located, as an appropriate guide for
understanding the meaning of the phrase as used by the Legislature when it
amended N.J.S.A. 54:4-1 in 1989 and 1997. The phrase "local telephone
exchange" has "deep roots" in the development of the public switched
telephone network and particular importance in the restructuring of the
telephone industry after the breakup of AT&T.
We are convinced by the centrality of the local exchanges to the
structure of the telephone industry in the wake of the break-up of AT&T and
New Jersey's changing approach to taxing the monopolies providing local
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exchange service, as well as by the testimony of the experts in this case, that
when the Legislature added the qualifier "local exchange" to "telephone
companies" and defined such as "a telecommunications carrier providing dial
tone and access to substantially all of a local telephone exchange" in 1989, it
intended the phrase "local telephone exchange" to be understood as a specified
geographical area, the territorial boundaries of which were as depicted on
exchange maps on file with BPU "in accordance with the way in which it was
used at the time when the language was chosen." Norfolk S., 215 N.J. at 173.
We are also convinced that understanding is the most sensible when
considering how New Jersey's 209 local exchanges were built and developed.
Ibid.
As Judge Menyuk found in recounting the history of New Jersey's
taxation of the telephone companies, when N.J.S.A. 54:4-1 was again amended
in 1997 as part of a legislative effort to revise the taxation of the local
exchange companies "in order to preserve certain revenues under transitions to
more competitive markets in . . . telecommunications," the Legislature plainly
anticipated that competition from CLECs would eventually end the entrenched
local monopolies of the incumbent local exchange carriers and "[t]he personal
property tax . . . would suffer a slow death by attrition whenever Verizon or
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another ILEC ceased providing 51% of the dial tone and access of an
exchange." Verizon I, 26 N.J. Tax at 413, 420.
The 51% test thus is intended to measure the penetration of the CLECs
into a local telephone exchange, understood in accordance with the way the
statutory phrase was used in 1989 at the time the language was first employed,
meaning as depicted on the local exchange maps. Defining the statutory
phrase as Verizon would have us do, not to a market having readily
identifiable territorial boundaries relative to the local municipality where
Verizon's switch is located but to one without territorial boundaries and
impossible to map, does not so much measure the local exchange market, in
our view, as redefine it.
According to the FCC, Verizon, Century Link and Warwick Valley's
statewide share of the local exchange market dipped below 51% in 2012.
Thus, the truly competitive local exchange markets the Legislature anticipated
may have already arrived in many of the State's local exchanges, with the slow
death Judge Menyuk predicted of the personal property tax on the incumbent
local exchange carriers already well underway. While we are convinced
Verizon served more than 51% of the Hopewell telephone exchange as of the
January 1, 2008 assessment date at issue here, the same may not be true in
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other exchanges. Merrill Lynch's presence in the Pennington exchange for
example, may mean Verizon no longer provides dial tone and access to 51% of
that exchange.
That brings us to how the 51% should be measured, and whose burden is
it to do so. Because Verizon conceded that defining the local exchange with
reference to the territorial boundaries of its exchange map would exclude
Merrill Lynch — and make clear it provided dial tone and access to more than
51% of the Hopewell local telephone exchange as of the January 1, 2008
assessment date, even including Johnson & Johnson's campus as part of the
Hopewell exchange as Hopewell contended was appropriate — Judge Brennan
did not consider the question of how to measure the 51%. We offer the
following brief comments only to address certain issues Verizon has raised and
as guidance for cases in which the issue will have to be litigated.
As Judge Brennan noted, evaluating any expert's "analysis and
methodology" in ascertaining the incumbent local exchange carrier's share of a
local telephone exchange "will be highly fact sensitive, will likely vary from
year to year, and may also be dependent on the characteristics of a specific
exchange." Verizon II, 31 N.J. Tax at 61. We have no hesitation in agreeing
with Judge Brennan that Verizon bore the ultimate burden of proof here to
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establish it is no longer a "local exchange telephone company," that is "a
telecommunications carrier providing dial tone and access to 51% of a local
telephone exchange." Our reasons are two-fold. First, telecommunications
carriers subject to the tax in N.J.S.A. 54:4-1 are initially required to self-
report, i.e., establish, the value of their taxable personal property. 30 See Little
Egg Harbor Twp. v. Am. Tel. & Tel. Co., 9 N.J. Tax 314, 328 (Tax 1987)
(noting "that N.J.S.A. 54:4-2.48 requires a taxpayer to self-report the value of
its taxable personal property does not relieve the assessor from performing his
statutory duty to independently value the property"), aff'd sub nom. Twp.
Comm. of Little Egg Harbor in Cnty. of Ocean v. Am. Tel. & Tel. Co., 10 N.J.
Tax 236 (App. Div. 1988).
Second, our Supreme Court has generally "imposed the burdens of
persuasion and production on the party best able to satisfy those burdens, "
reasoning "the party with greater expertise and access to relevant information
should bear those evidentiary burdens." J.E. ex rel. G.E. v. State, 131 N.J.
30We reject Hopewell's claim that Verizon should bear the burden of proof in
this proceeding because it is seeking an exemption from the local property tax.
We do not share the Borough's understanding. In our view, Verizon is simply
attempting to demonstrate it no longer meets the definition of a "local
exchange telephone company" subject to the business personal property tax.
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552, 569-70 (1993). The record here makes clear that party is Verizon.
Besides having access to the E911 database in its role as administrator of the
Automatic Location Identification database for New Jersey's E911 system,
which it apparently has used for years for performing competition analyses,
West testified he regularly conducted "wire line analyses proving the state of
competition" on Verizon's behalf before state utility commissions in regulatory
proceedings. He testified the analysis he conducted in this matter of Veri zon's
lines and competitors' lines in the Hopewell exchange was the same he'd
performed for a "competition case" before BPU in which the company
presented "market share calculations . . . for all 180 [of Verizon's] local
telephone exchanges."
We reject out-of-hand Verizon's argument that the Tax Court's adoption
of a "geography-based test for the 51% threshold" created an "unworkable test
that cannot be applied without rendering N.J.S.A. 54:4-1 fatally ambiguous."
In our view, Verizon presented two reasonable methods for establishing its
percentage share of dial tone and access provided to the Hopewell exchange as
of the assessment date. It's undisputed the E911 database provides up-to-date
information linking each listing to a specific location, and Vantzelfde relied on
Hopewell's exchange map and a host of publicly available information
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permitting him to estimate the "total market lines" within the Hopewell
exchange without relying on the E911 database.
Finally, we reject Verizon's contention the Tax Court erred in accepting
Starkey's opinion when he failed to conduct "his own analysis of the total
market share of dial tone and access provided by Verizon" in the Hopewell
exchange as of the January 1, 2008 assessment date, and did not suggest "an
alternative methodology that could have been used to establish Verizon's
market share in the absence of actual competitor data."
From our perspective, this trial provides an excellent example of how
these tax cases should be tried. The parties were represented by very able
lawyers presenting knowledgeable and well-prepared experts. As already
noted, Verizon presented two reasonable methods for calculating its market
share.
While Hopewell's expert might have presented his own analysis, we see
nothing amiss in the Borough's decision to instead rely on Starkey's critique of
the opinions offered by Verizon. In addition to expressing a different opinion
on the industry's understanding of a local exchange, Starkey also presented a
reasonable critique of Vantzelfde's line counts, West's business lines to listing
ratio and the significant difference between both experts' estimates of
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Verizon's market share in the Hopewell exchange and the FCC's determination
of the statewide market share for all three incumbent local exchange carriers as
of the end of 2007, data Vantzelfde also relied on to test his market analysis.
While we express no opinion on the validity of any of these calculations or
critiques, they represent the sorts of fact-sensitive issues the Tax Court will
have to resolve in other cases presenting similar challenges.
We affirm Judge Menyuk's 2012 decision finding N.J.S.A. 54:4-1's 51%
market-share calculation must be performed annually and that an annual
market-share calculation, as applied to Verizon, does not violate the State and
federal equal protection guarantees, the State prohibition of special legislation
or the Uniformity Clause, and Judge Brennan's 2019 decision that Verizon is
subject to the tax imposed for tax year 2009 because it provided dial tone and
access to 51% of the Hopewell Local Telephone Exchange in 2008. To the
extent we have not expressly addressed any of the parties' arguments, it is
because we have determined them to be without sufficient merit to warrant
discussion in a written opinion. R. 2:11-3(e)(1)(E).
Affirmed.
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