The judge in the City of Palo Alto's lawsuit against Verizon Wireless this week reversed her earlier ruling, and the case will now go to trial later this year. The case is important to the city, because a loss threatens millions of dollars of the city's annual revenue.

Earlier this year, Santa Clara County Superior Court Judge Jamie Jacobs-May issued an interim ruling against the city, saying it could no longer charge a 5 percent tax on each cell phone call Verizon customers make.

The judge cited recent appeals-court rulings that said the 100-year-old Federal Excise Tax applies only if phone companies charge customers by the length of the calls and distance of their callers. Many cell phone plans, including Verizon's, do not charge by the distance of the callers, just the time. The city's tax only applies to calls charged the federal tax.

This week, however, the judge reversed her earlier decision, granting the city's motion for a trial. The city argued some of Verizon's calls and services are taxable because they are subject to another provision of the federal tax dealing with local calls, according to the city's attorney in the case, Mark Strombotne.

A few years ago, the city auditor's office discovered Verizon was not paying the tax. The city sued to retrieve $2.4 million in 2004. Since the lawsuit was filed, Verizon has begun paying the tax, Strombotne said.

The trial is expected to begin in the fall. A spokesperson for Verizon, Heidi Flato, confirmed the judge's reversal but said she could not comment further.

The next court date is a pretrial conference in May.

City voters narrowly approved the Utility Users Tax, which also includes a 5 percent tax on electricity, gas and water, in 1987. The city gets about $2 million per year in revenue from phone calls.

After the judge's initial ruling, a computer consultant filed a class-action lawsuit against the city, claming it's been improperly collecting the tax on all cell phone calls within the city. The city has yet to respond to the case, but believes it was improperly filed as a class-action lawsuit.

The judge's new decision "creates further complications for them in terms of trying to proceed," Strombotne said.