HomeMy WebLinkAbout02. City of Renton's Motion for Partial Summary Judgment1
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RESPONDENT CITY OF RENTON’S MOTION FOR PARTIAL
SUMMARY JUDGMENT - 1
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
BEFORE THE HEARING EXAMINER OF THE CITY OF RENTON RE:
TracFone Wireless, Inc.
Administrative Appeal
RESPONDENT CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY JUDGMENT
I. INTRODUCTION
This is a telephone utility tax case. TracFone Wireless, Inc. (“TracFone”) is a reseller of
wireless services and engages in telephone business in the City of Renton (“the City”). During the
audit period at issue, January 1, 2007 through May 31, 2013, TracFone provided network
telephone service (“network telephone service” or “NTS”) to consumers within the City. Under
the telephone utility tax provisions in Renton Municipal Code (“RMC”) chapter 5-11, which are
consistent with the statutory provisions of RCW 35A.82.060, the gross income of a telephone
business is taxable at a rate of six percent (6%). TracFone claims that it is not a telephone business,
and even if it is, it further claims that its gross income from retailers is exempt from the City’s
telephone utility tax under the so-called “resale proviso” in RCW 35A.82.060(1).
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 2
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
The City submits this limited motion for partial summary judgment to resolve two
threshold issues pertaining to TracFone’s liability for telephone utility tax, specifically: (1)
whether TracFone is a “telephone business” under the applicable RMC and RCW provisions and
(2) whether TracFone’s gross income from its retail agents is taxable and not exempt under the so-
called “resale proviso” in RCW 35A.82.060(1).
As explained in this motion, TracFone is subject to the City’s telephone utility tax as a
telephone business because it provides NTS to its end user customers both directly and through
various retailers (e.g., Walgreens, 7-Eleven, Walmart, etc.). The below graphic shows how
TracFone provides telecommunications service to end users in Renton by purchasing it at
wholesale from network carriers and reselling it retail to end users both directly via its website and
toll free number and indirectly via its retail agents.
The City reserves for hearing issues relating to the audit performed by the City’s contract
auditor, as well as issues relating to the amount of telephone utility tax, penalty, and interest due
to the City.
/ / /
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 3
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
II. STATEMENT OF FACTS
A. TracFone’s Telephone Business Model.
TracFone sells TracFone-branded cellular phones and prepaid wireless telephone services.
See Declaration of Nate Malone, Renton Tax & License Manager (“Malone Decl.”) at ¶ 8 and
Declaration of Garth Ashpaugh (“Ashpaugh Decl.”) at ¶¶ 3-11. TracFone provides NTS by
purchasing cellular radio service at wholesale from network carriers and then reselling it at retail.
Ashpaugh Decl. at ¶ 12. TracFone has contracts for the purchase of cellular radio service with various
wireless network carriers (e.g., Verizon, T-Mobile, Sprint, AT&T, etc.), and TracFone then resells
the service to end users. TracFone resells the service at retail both directly and through various retail
agents (e.g., Walgreens, 7-Eleven, Walmart, etc.). Malone Decl. at ¶ 8.
TracFone sells its prepaid wireless services and branded handsets through more than 80,000
retail locations nationwide, as well as through its website and customer care toll free number. Malone
Decl. at ¶ 8 & Ex. 2 (TracFone marketing brochure). TracFone is the largest provider of prepaid
wireless telephone service in the United States. Declaration of Kari Sand (“Sand Decl.”) at ¶ 2 & Ex.
1 (excerpt from the Deposition of C. Dillon, taken December 23, 2020) at 22:19-22.
TracFone’s retail agents also sell airtime cards/codes for use with TracFone’s cell phones.
Malone Decl. at ¶ 9. The retail agents do not offer access to telephone networks; TracFone does. End
users who buy TracFone airtime cards and TracFone-branded handsets from third party retailers must
still go through TracFone to “activate” and then use the wireless service. See Ashpaugh Decl. at ¶ 9.
The airtime cards/codes have no value until activated by TracFone upon sale to the end user, which
is a two-step process. Id. at ¶ 7. The TracFone-branded equipment is not capable of providing NTS,
including commercial mobile radio services and wireless service, until “activated” by TracFone and
cannot be used to provide service through any wireless service provider except TracFone. Id.
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 4
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
The activation process starts with the purchase of the equipment. Ashpaugh Decl. at ¶ 12.
When the equipment is scanned for the purchase, TracFone is notified electronically. Id. This is the
first step in the activation. Id. The purchaser is not a wireless customer or end user until they contact
TracFone via its website or toll-free number to finally activate the equipment. Id. Activation requires
that the end user provide TracFone with the cell phone’s serial number and the zip code in which the
subscriber will primarily use the cell phone. Sand Decl. at ¶ 2 & Ex. 1 at 38:17-21. Once a TracFone
cell phone is active, a subscriber may purchase additional airtime minute cards in increments of 30 to
400 minutes or by contacting TracFone and adding additional time or purchasing airtime cards from
a retailer, which then need to be activated. Sand Decl. at ¶ 2 & Ex. 1 at 69:19-24. Based on its terms
and conditions of service with its customers, TracFone retains the right to modify or cancel the service
for any reason at any time. Malone Decl. at ¶ 10. It is clear from the relationship between TracFone
and the retailers described in these agreements that TracFone, not the retailers, provides NTS. Id. &
¶ 12 & Ex. 6; see also, Ashpaugh Decl. at ¶¶ 9-12 & Ex. 3; ¶ 15 & Ex. 4. The relationship between
TracFone and the retailer is more akin to an agent relationship. Id.
B. The City Audited TracFone for the Period January 1, 2007 through May 31, 2013;
TracFone Paid No Telephone Utility Tax.
The City engaged Taxpayer Recovery Services, LLC (“TRS”) to perform an audit of
TracFone with respect to telephone business activities engaged in by TracFone within the City. The
methodology and findings of the audit are not at issue in this motion.
There is no dispute that the City assessed tax and penalties against TracFone for the audit
period January 1, 2007 through May 31, 2013. See Malone Decl. at ¶ 7 & Ex. 1 (Final Determination
by the City of Renton Administrative Services Department, dated October 17, 2019). The assessment
includes principal, penalties, and interest. Id. In association with the audit, the City’s Tax and
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 5
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
License Manager found that TracFone is taxable as a “telephone business” for providing “network
telephone service” on six percent (6%) of its total gross income as those terms are defined in RMC
Section 5-11-1(A)(2). Id. at ¶ 8. TracFone did not pay any telephone utility taxes to the City. Malone
Decl. at ¶ 6.1 In response to the City’s tax assessment, TracFone appealed to the City’s Administrative
Services Administrator who issued a final determination that TracFone is liable to the City for
telephone utility tax, plus interest and late penalties. Id. at ¶7 & Ex. 1. TracFone then appealed to the
Hearing Examiner. See generally, TracFone’s Appeal of Utility Tax Assessment, dated November 6,
2019, on file herein (hereinafter “TracFone’s Appeal Letter”).
III. QUESTIONS PRESENTED
1. Is TracFone a “telephone business” subject to Renton’s telephone utility tax, chapter 5-11
RMC, because it provides NTS to its customers? Yes
2. Is TracFone’s gross income from its retail agents properly included within the City’s tax
base and not exempt under the so-called “resale proviso” in RCW 35A.82.060(1)? Yes
IV. EVIDENCE RELIED UPON
This motion is based on the pleadings and other documents on file with the Hearing
Examiner, the Declarations of Nate Malone, Garth T. Ashpaugh, and Kari Sand, and exhibits
thereto, in Support of the City’s Motion for Partial Summary Judgment, Appendices A through C
filed herewith, and the law as set forth herein.
/ / /
/ / /
/ / /
1 On November 4, 2019, TracFone paid the amount assessed merely to initiate and maintain a tax appeal. RMC 5-26-
18(B).
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 6
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
V. LEGAL AUTHORITY AND ARGUMENT
A. Partial Summary Judgment Is Warranted Here.
A party may move for summary judgment on all or part of a claim. CR 56(b). When the
moving party meets its initial burden of showing the absence of an issue of material fact, the burden
then shifts to the non-moving party. Young v. Key Pharmaceuticals, Inc., 112 Wn.2d 216, 225,
770 P.2d 182 (1989). Summary judgment is then required unless the non-moving party sets forth
“specific facts which sufficiently rebut the moving party’s contentions and disclose the existence
of a genuine issue as to a material fact.” Meyer v. Univ. of Wash., 105 Wn.2d 847, 852, 719 P.2d
98 (1986). Any affidavits must be based on personal knowledge which is admissible at trial and
must not be based on mere conclusory allegations, speculative statements, or argumentative
assertions. Las v. Yellow Front Stores, 66 Wn. App. 196, 198, 831 P. 2d 744 (1992). The non-
moving party must show more than “[t]he mere existence of a scintilla of evidence” for elements
on which he bears the burden of proof. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986).
Instead, the non-moving party must present evidence that “set[s] forth specific facts showing that
there is a genuine issue for trial.” Devereaux v. Abbey, 263 F.3d 1070, 1076 (9th Cir. 2001)
(quotation omitted). An “inference based upon a speculation or conjecture does not create a
material factual dispute sufficient to defeat entry of summary judgment.” Robertson v. Allied
Signal, 914 F.2d 360, 382 n.12 (3d Cir. 1990).
B. Taxpayers Have the Burden of Proof on Appeal.
Pursuant to RMC 5-26-18(B)(5), “[t]he appellant taxpayer shall have the burden of proving
by a preponderance of the evidence that the determination of the Department is erroneous.” Placing
the burden of proving the assessment wrong upon the taxpayer is consistent with law established
in this state and throughout the country. According to McQuillin,
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 7
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
The burden of proving the illegality of an assessment is on the
one who contests its validity, generally the taxpayer, and it is
incumbent upon him to sustain his contentions by adequate proof…
16 McQuillin, Municipal Corporations, § 44.124, 3rd Ed. Revised (emphasis added). Other texts
set out the same idea:
[T]axes are presumed to be just and legal, and the burden rests upon one assailing the tax to show its invalidity . . . . With respect to questions strictly involving burden of proof, it has been held that one who seeks a recovery of a tax already paid has the burden of establishing the facts which show its invalidity, and the same is true with respect to one seeking to enjoin the collection of a tax. Further, the burden of proof is upon one claiming that a statute authorizing the imposition of a tax is unconstitutional . . .
72 Am. Jur. 2d, “State and Local Taxation,” § 1151 (emphasis added). See also Nathan v. Spokane
County, 35 Wash. 26, 34, 76 Pac. 521 (1904), Pier 67, Inc. v. King County, 89 Wn.2d 379, 384,
573 P.2d 2 (1977), and cases cited therein.
Here, the burden rests on TracFone to show it is not a telephone business for purposes of
the City’s telephone utility tax, and if it is a telephone business, then TracFone also bears the
burden to show that the resale proviso applies and excludes from the City’s tax base all gross
income from TracFone’s retail agents. As demonstrated herein, there are no genuine issues as to
any material fact regarding TracFone’s business model and income streams, and the City is entitled
to partial summary judgment on the two utility tax liability questions it has presented.
C. Renton Has Taxing Authority to Impose a 6% Utility Tax on Telephone Businesses, and the Proper Tax Measure Is 100% of Gross Income from All Sources.
The City’s tax system, like any other, can fundamentally be described as follows:
To any tax system, there are three basic elements. First, there must
be an incident that triggers the tax; a taxable incident is an
identifiable activity that the legislature has designated as taxable.
The second element, the tax measure, is the base upon which the
amount of tax is determined. Finally, there is the tax rate that is
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 8
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
multiplied by the tax measure, to determine the amount of the tax
due.
1B Wash. Prac. § 72.3 (1997) (Emphasis added). As explained below, under the City’s telephone
utility tax scheme, the incident of the tax is the privilege of conducting a “telephone business”
within the City limits.
Under Washington’s constitutional framework, the legislature delegates authority to local
governments to levy excises for the dual purpose of regulation or revenue. Lakehaven Water and
Sewer District v. City of Federal Way, 195 Wn.2d 742, 752-53, 466 P.3d 213 (2020) (citing Watson
v. City of Seattle, 189 Wn.2d 149, 167-68, 401 P.3d 1 (2017)); see also, Wash. Const. art. VII, § 9
(“[A]ll municipal corporations may be vested with authority to assess and collect taxes.”) and
Wash. Const. art. XI, § 12.
RMC 5-11-1(A)(1) authorizes the City to levy and collect a utility tax “for the privilege of
conducting a telephone business within the City limits.” A copy of chapter 5-11 RMC in effect
during the audit period at issue is filed herewith as Appendix A. RMC 5-11-1(A)(2) defines
“Telephone Business” in relevant part as:
The providing by any person of access to the local telephone network ... cellular
telephone service, … or the providing of telephonic, video, data or similar
communication or transmission for hire, via a local telephone network, toll line
or channel, cable, microwave, or similar communication or transmission system.
…
RMC 5-11-1(A)(2) (Emphasis added). Further, the RMC defines “Cellular Telephone Service” in
relevant part as:
… [A] two-way voice and data telephone/telecommunications system based in
whole or substantially in part on wireless radio communications … This includes
cellular mobile service. The definition of “cellular mobile service” includes other
wireless radio communications services such as specialized mobile radio (SMR),
personal communications services (PCS), and any other evolving wireless radio
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 9
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
communications technology which accomplishes a purpose similar to cellular
mobile service.
Id. (Emphasis added.) Finally, RMC 5-11-1(A)(1) mandates a tax rate of six percent (6%) be
applied to Telephone Businesses.
Consistent with the City’s utility tax code, the Washington State Legislature has granted
cities broad, express authority to tax telephone businesses for intrastate services and has actively
discouraged competitive disadvantage within the telephone business industry. See, e.g., Western
Telepage v. City of Tacoma, 140 Wn.2d 599, 603 n.2, 998 P.2d 884 (2000) (“[I]t is the intent of
the legislature to place telephone companies and nonregulated competitors of telephone companies
on an equal excise tax basis with regard to the providing of similar goods and services.”
(Legislative history of RCW 82.16.010, as amended in 1981). See also, Sprint Int’l
Communications Corp. v. Dep’t of Revenue, 154 Wn. App. 926, 936, 226 P.3d 253 (2010) (the
legislative history surrounding taxation of the telephone industry indicates the Legislature’s intent
for a broad reach: “The legislature was aware that technology in the telecommunications industry
was advancing rapidly, but it chose to provide specific exemptions for emerging businesses instead
of limiting the statute’s scope.”); RCW 35.21.712 (requiring that the telephone utility tax be
imposed “at a uniform rate on all persons engaged in the telephone business in the city.”).
Here, RCW 35A.82.060 supplies the required taxing authority, as follows:
License fees or taxes on telephone business—Imposition on certain gross
revenues authorized—Limitations.
(1) Any code city which imposes a license fee or tax upon the business activity
of engaging in the telephone business which is measured by gross receipts or
gross income may impose the fee or tax, if it desires, on one hundred percent
of the total gross revenue derived from intrastate toll telephone services
subject to the fee or tax: PROVIDED, That the city shall not impose the fee or tax
on that portion of network telephone service which represents charges to another
telecommunications company, as defined in RCW 80.04.010, for connecting fees,
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 10
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
switching charges, or carrier access charges relating to intrastate toll telephone
services, or for access to, or charges for, interstate services, or charges for network
telephone service that is purchased for the purpose of resale, or charges for mobile
telecommunications services provided to customers whose place of primary use is
not within the city.
(2) Any city that imposes a license tax or fee under subsection (1) of this section
has the authority, rights, and obligations of a taxing jurisdiction as provided in
RCW 82.32.490 through 82.32.510.
(3) The definitions in RCW 82.04.065 and 82.16.010 apply to this section.
RCW 35A.82.060 (emphasis added). The pertinent RCW provisions are filed herewith as
Appendix B.
RCW 35A.82.055 provides that “[a]ny code city which imposes a license fee or tax upon
the business activity of engaging in the telephone business, as defined in RCW 82.16.010, which
is measured by gross receipts or gross income from the business shall impose the tax at a uniform
rate on all persons engaged in the telephone business in the code city.” RCW 82.16.010 defines
“Telephone business” as “the business of providing network telephone service.”
RCW 82.16.010(7)(b)(iii). The term “Network telephone service” means, in pertinent part: “the
providing by any person of access to a telephone network, telephone network switching service,
toll service, or coin telephone services, or the providing of telephonic, video, data, or similar
communication or transmission for hire, via a telephone network, toll line or channel, cable,
microwave, or similar communication or transmission system.” RCW 82.16.010(7)(b)(ii)
(emphasis added).
Both chapter 5-11 RMC and RCW 35A.82.055 allow for the imposition of utility taxes on
telephone businesses and telephone services. Likewise, both RMC 5-11-1(A)(2) and RCW
82.16.010(7)(b) substantively define “telephone business” as providing access to various
telephone services to its customers. As further explained in the next section, TracFone’s business
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 11
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
activities fall squarely within the plain meaning of the City’s utility tax code and the authorizing
state statute.
D. TracFone Is a Telephone Business Because It Provides NTS To Its End Users.
1. TracFone meets the definition of a “telephone business.”
The City of Renton’s telephone utility tax is a tax on the privilege of engaging in the
“telephone business” in the City. RMC 5-11-1(A). The tax is not an income tax. Instead, it is an
excise tax imposed on “every person” engaged in “telephone business” in the City. RMC 5-11-
1(A)(1). The tax code states that the tax is imposed:
The utility tax for the privilege of conducting a telephone business within the City
limits shall be six percent (6%) . . .
RMC 5-11-1(A). The City broadly defines “telephone business” in relevant part as:
The providing by any person of access to the local telephone network ... cellular
telephone service, … or the providing of telephonic, video, data or similar
communication or transmission for hire, via a local telephone network, toll line
or channel, cable, microwave, or similar communication or transmission system.
RMC 5-11-1(A)(2) (Emphasis added). Further, the RMC defines “cellular telephone service” in
relevant part as:
… [A] two-way voice and data telephone/telecommunications system based in
whole or substantially in part on wireless radio communications … This includes
cellular mobile service. The definition of “cellular mobile service” includes other
wireless radio communications services such as specialized mobile radio (SMR),
personal communications services (PCS), and any other evolving wireless radio
communications technology which accomplishes a purpose similar to cellular
mobile service.
Id. (Emphasis added.) The City’s definition of “telephone business” is fully consistent with the
State’s authorizing statute, which provides:
“Telephone business” means the business of providing network telephone
service. It includes cooperative or farmer line telephone companies or associations
operating an exchange.
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 12
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
RCW 82.16.010(7)(b)(iii) (emphasis added).2 The definition of “telephone business” incorporates the
defined term “network telephone service,” which is defined at RCW 82.16.010(7)(b)(ii) in pertinent
part as:
“Network telephone service” means the providing by any person of access to a
telephone network . . . or the providing of telephonic, video, data, or similar
communication or transmission for hire, via a telephone network, toll line or channel,
cable, microwave, or similar communication or transmission system. . . .
RCW 82.16.010(7)(b)(ii) (emphasis added).
TracFone makes the strained argument that it “is not engaged in the ‘telephone business’ as
defined by RCW 82.16.010,” and that it does not “provide ‘access to’ a telephone network within
the meaning of RCW 82.16.010.” See TracFone’s Appeal Letter at p. 3. However, applying these
broad definitions, TracFone clearly engages in telephone business when it provides its end users
“access to a telephone network,” thereby enabling telephonic communication. Indeed, TracFone
provides a service that allows its Renton customers to place and receive telephone calls and text
messages to people in Washington state. Further, as contemplated in RCW 82.16.010(7)(b)(ii) and
(iii), TracFone provides “telephone, video, data, or similar communication or transmission for hire,
via a telephone network.” In addition to selling handsets and airtime cards, TracFone’s “Terms and
Conditions of Service” with its customers describes the services that TracFone provides as follows:
Your Service (i.e., voice, text, or data services) and any phone using TracFone Service
may only be used for the following purposes: (a) person to person voice calls, text,
and picture messaging and (b) personal web browsing, email, ordinary content
downloads and uploads, video and audio streaming without excessively contributing
to network congestion.
See generally, Malone Decl. at ¶ 10 & Ex. 4. These activities of TracFone constitute engaging in a
telephone business. Without TracFone’s services, TracFone’s customers would not be able to place
or receive these calls and texts or access the Internet. TracFone’s customers are making and receiving
telephone calls and texts in Renton using services and equipment provided by TracFone. Moreover,
2 RCW 35A.82.060(3) expressly incorporates RCW 82.16.010’s defined terms.
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 13
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
in a prior case involving TracFone’s challenge of the state E-911 excise tax 3, the Washington state
supreme court found the following facts determinative in holding TracFone liable for the state E-911
excise tax: “TracFone sells cell phones and prepaid wireless telephone services.” See, TracFone
Wireless, Inc. v. Dep’t of Revenue, 170 Wn.2d 273, 278-80, 242 P.3d 810 (2010) (emphasis added),
filed herewith as Appendix C. Based on these undisputed material facts, reasonable minds must agree
that TracFone is a telephone business as a matter of law.
2. The Hearing Examiner should disregard TracFone’s focus on proviso language regarding
charges to “another telecommunications company.”
Despite these undisputed facts that TracFone is a “telephone business,” in TracFone’s Appeal
Letter, TracFone argues that it is not a telephone business. See TracFone’s Appeal Letter at p. 3.
TracFone does so by ignoring the broad definitions of “telephone business” and “network telephone
service” and instead relying on language in a statutory proviso. Specifically, TracFone relies on a
proviso clause in RCW 35A.82.060(1) that exempts from taxation “that portion of network telephone
service which represents charges to another telecommunications company, as defined in RCW
80.04.010. . .” RCW 35A.82.060(1) (emphasis added). TracFone argues that the inclusion of the word
“another” in the proviso must mean that TracFone can only be subject to utility tax if it itself is a
“telecommunications company,” and TracFone argues that it is not. TracFone is wrong on both
counts.
First, the proviso’s exemption is not at issue here and applies to charges imposed by one
telecommunications company on another. For example, the exemption applies to sales by the wireless
network carriers (e.g., Verizon, AT&T and T-Mobile) to TracFone for access to their networks.
However, the exemption is not relevant here, where TracFone’s gross income from direct retail sales
to its customers and through retailers in Renton – who are not “another telecommunications company”
– are well within the scope of the telephone utility tax and properly included within the tax base. Thus,
the exemption does not restrict the application of the telephone utility tax to TracFone, which is
3 “The purposes of the state E-911 excise tax on radio access lines are to promote public safety and ensure adequate
funding to support E-911 services.” TracFone Wireless v. Revenue, 170 Wn.2d at 280.
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 14
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
conducting a “telephone business” when it provides its Renton customers “access to a local telephone
network.” RMC 5-11-1(A)(2).
Second, TracFone is recognized as a telecommunications company by the Federal
Communications Commission (“FCC”) and is subject to FCC regulation as such. See Ashpaugh Decl.
at ¶ 14 & Ex. 5. RCW 80.04.010(28) defines a “telecommunications company” in pertinent part to
include “every corporation, company, . . . owning, operating or managing any facilities used to
provide telecommunications for hire, sale, or resale to the general public within this state.”
(Emphasis added.) RCW 80.04.010(27) further defines “telecommunications” as “the transmission of
information by wire, radio, optical cable, electromagnetic, or other similar means.” (Emphasis
added.) RCW 80.04.010(24) defines a “radio communications service company” to include in
pertinent part: “every corporation, company, … making available facilities to provide radio
communications service, radio paging, or cellular communications service for hire, sale, or
resale.” RCW 80.04.010(24). Thus, a radio communications service company is a type (subset) of
telecommunications company based on the applicable definitions. In any event, TracFone meets the
RCW 80.04.010 definition of a “telecommunications company” because it “own[s],” “maintain[s],”
and/or “manage[s]” “facilities,” such as handsets and airtime cards and SIM codes, to ensure that its
handsets can only be used with its wireless service. See RCW 80.04.010(28) (definition of
“telecommunications company”) and RCW 80.04.010(13) (definition of “facilities”). Further, in
TracFone Wireless, Inc. v. Dep’t of Revenue, 170 Wn.2d 273, 278-80, 242 P.3d 810 (2010), the
Washington state supreme court found TracFone to be a “radio communications service company”
within the meaning of RCW 80.04.010, as follows:
TracFone prepaid wireless is a “two-way local wireless voice service available to the
public for hire from a radio communications service company” and the telephone
number assigned to/used by a TracFone subscriber is a “radio access line” within the
meaning of RCW 82.14B.020(5). RCW 82.14.B.030(4) says that the tax must be
remitted to the Department by radio communications service companies, “including
those companies that resell radio access lines.” TracFone buys up airtime from other
companies and sells it under its own name to its customers, clearly bringing
TracFone’s business within the scope of the statutes.
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 15
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
TracFone Wireless, 170 Wn.2d at 282 (emphasis added).
Finally, TracFone’s Senior Vice President of Corporate Taxation, Chesley Dillon, admitted
in his deposition that TracFone pays utility tax to other cities in Washington. Sand Decl. at ¶ 2 & Ex.
1 at 52:11-15. The wireless service TracFone provides in Renton is the same it provides throughout
the state of Washington, and it is inconceivable that the same services in other Washington cities are
subject to utility tax, but not in Renton.
E. TracFone’s Gross Income from Its Retailers Is Subject to Renton’s Telephone
Utility Tax.
TracFone asserts that even if TracFone were engaged in the telephone business, and therefore
generally subject to local utility taxation, the City’s authority is limited to taxing TracFone for its
income received from direct sales to end users (which TracFone refers to as its “retail” sales) and that
the City cannot tax TracFone for its income received through its retailers (which Tracfone refers to
as its “wholesale” sales). As support for its assertion, TracFone relies on RCW 35A.82.060(1), which
prohibits taxing gross income from “charges for network telephone service that is purchased for the
purpose of resale” – the so-called “resale proviso” or “resale exemption.” TracFone argues that
income from its retailers is exempt from tax. See TracFone Appeal Letter, at p. 4. This argument
fundamentally misunderstands the applicable law and attempts to skew it in favor of TracFone.
TracFone’s position is not supported by the plain language of the statute, the legislative history of
RCW 35.21.714 4, nor by any case law.
First, the plain language of the statute states that the proviso exempts income on resales of
“network telephone service.” RCW 35A.82.060(1). TracFone’s retailers do not purchase “network
4 Renton is an optional municipal code city, and thus, RCW 35A.82.055 and .060 apply; however, for first-class cities
such as Seattle, RCW 35.21.712 and .714 apply. The two sets of provisions contain similar language (other than the
reference to “code” cities in the RCW 35A provisions). See Vonage Am., Inc. v. City of Seattle, 152 Wn. App. 12, 23
n.8, 216 P.3d 1029 (2009) (confirming that the statutes are identical in substance).
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 16
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
telephone service” for the purpose of reselling it. Rather, the retailers purchase handset units and
plastic card units, and the retailers do not ever “own the airtime” through agreements with TracFone
or the major carriers. See Malone Decl. at ¶¶ 10 & 12 & Exs. 4 & 6; see also, Ashpaugh Decl. at ¶¶
9-12 & Exs. 3. As an example, a resale certificate with Kmart shows that Kmart purchased for resale
“cellular telephones, accessories and prepaid airtime cards;” Kmart did not purchase “network
telephone service.” Ashpaugh Decl. at ¶ 13 & Ex. 4.5 In sum, it is TracFone itself, not the retailers,
that remains the provider of “network telephone service” when it activates the handsets and provides
access to the telephone network for its end user retail customers.
Next, the legislative history indicates that the purpose of the proviso was to avoid double
taxation, not create a loophole. The legislature added this exemption in 1989 in response to the AT&T
breakup and for the purpose of avoiding double taxation. Ashpaugh Decl. at ¶¶ 16-17 & Ex. 6 (Final
B. Rep. on S.B. 5990, Reg. Sess., Wash. 1989). Specifically, the final senate bill report explained that
resellers of telephone service would be exempt from tax on their gross income under RCW 35.21.7146
because they were being taxed on “retail B&O tax” instead, so they should not be taxed once as an
excise tax and a second time as a sales tax. Id. In other words, this prohibition on taxing charges for
“resale” was only adopted because the same charges were already being taxed.
Finally, TracFone’s position would create a tax loophole because this so-called “wholesale”
income would never be taxed: TracFone would not be taxed on the income it receives from its retailer
partners like Walmart and Target; in turn, Walmart and Target (and similar retailers) are not subject
to utility tax because they are not “telephone businesses” under RMC 5-11-1(A)(2) and RCW
5 Such a resale certificate pertains to sales and use tax, not utility tax. Ashpaugh Decl. at ¶ 13 & Ex. 4. Thus, the City offers
the resale certificate merely for the point that Kmart (and other retailers) are purchasing equipment from TracFone, not
NTS.
6 RCW 35.21.714 and RCW 35A.82.060 are identical except that the latter applies to code cities like Renton.
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 17
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
35A.82.060(1). The loophole TracFone seeks is not supported by the specific legislative history
discussed above, nor by the more general legislative history discouraging unfair competition within
the telephone industry. It is simply an effort by TracFone to gain a competitive edge in the offering
of wireless service and to increase its profit margin. The Washington Supreme Court has criticized
previous attempts by TracFone to place others in the telephone business industry at a competitive
disadvantage due to its choice of business model. TracFone Wireless, Inc. v. Dep’t of Revenue, 170
Wn.2d 273, 283, 242 P.3d 810 (2010) (“In effect, TracFone is seeking a decision that whether the tax
is owed depends upon how a company decides to market and charge for its service or, to put it another
way, whether the tax must be paid depends entirely upon the individual company’s business model.”).
See also, Id. at 296-97 (“[T]axation is the rule and exemption is the exception, and where there is an
exception, the intention to make one should be expressed in unambiguous terms.”) (citations omitted);
infra, at p. 19.
F. The Washington Supreme Court Has Previously Held that TracFone Is Subject
to Taxation Regardless of Its Choice of Business Model.
In 2010, TracFone attempted to avoid taxation in a similar effort as it is here. In TracFone v.
Washington Department of Revenue (hereinafter “Tracfone Wireless”), TracFone alleged that it was
not subject to taxation from the State of Washington because it believed its business model, selling
to subscribers prepaid wireless telephone services through third party retailers, was not
contemplated by the controlling statutes. The Washington Supreme Court rejected TracFone’s
position and found that TracFone was liable for taxation regardless of how it decided to market and
charge for its service. TracFone Wireless, Inc. v. Washington Dep't of Revenue, 170 Wn.2d 273,
297-98, 242 P.3d 810, 812 (2010) (Appendix C). While the tax at issue in TracFone Wireless, the
state enhanced 911 excise tax (E-911), is different than the utility tax at issue here, the arguments
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 18
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
made by TracFone mirror those in the present case, and thus, the Court’s analysis is both instructive
and persuasive. In TracFone Wireless, TracFone's arguments were premised chiefly on the way in
which it conducts its business, marketing its wireless service as prepaid service involving the sale
of blocks of airtime minutes, rather than as traditional, billed wireless service. 170 Wn.2d at 283.
The Court recognized that “[i]n effect, TracFone is seeking a decision that whether the tax is owed
depends upon how a company decides to market and charge for its service or, to put it another
way, whether the tax must be paid depends entirely upon the individual company's business
model.” Id. at 283. In holding that TracFone was subject to taxation, the Court explained
“[w]hether prepaid or not, cell phone service is what is involved in this case. The plain language
of the controlling statutes requires payment of the state E–911 excise tax on TracFone's prepaid
wireless service. We do not find compelling any of TracFone’s arguments to the contrary” Id.
(Emphasis added.)
Specifically, TracFone made various arguments to avoid taxation, and the Court found each
of its numerous arguments to be unpersuasive. First, TracFone alleged that the subject statute’s
imposition of tax on radio access lines whose “place of primary use” is within Washington State
does not include prepaid wireless service because TracFone does not collect its subscriber’s
addresses. Id. at 283-86. The Court dismissed this argument, explaining that:
[W]hile TracFone does not require much in the way of personal information for its
prepaid wireless service, it does require, at a minimum, the zip code of the place
where the phone will be primarily used. For those cell phones for which a
Washington State zip code is provided, the place of primary use is sufficiently
shown to be within Washington State.
Id. at 285-86.
TracFone then argued that the subject statute references billing statements, illustrating that
prepaid plans were therefore not contemplated under the statute. Id. at 289-90. Again, the Court
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 19
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
explained that the taxable event does not change merely because a radio communications company
chooses to not mail out billing statements. Id. at 290. “The fact that TracFone does not send
monthly billing statements is a consequence of the way in which it chooses to conduct its business.
It does not relieve TracFone of its obligations under the taxing statutes nor does it convert a plainly
taxable event into a nontaxable event.” Id. The Court found this argument to be yet another
example of TracFone trying to circumvent rightfully sought taxation.
Finally, TracFone argued, as here, that even if it must collect tax based on its direct sales,
it is not responsible for collecting or paying the tax when its sales are to third party retailers who
then resell handsets and airtime cards to the subscribers. Id. at 295. In response to this, the Court
reasoned that “[t]here is no question here about whether TracFone must collect the tax from the
retail stores that sell its handsets and the airtime cards.” Id. The retail stores are not subscribers—
they are not assigned, nor do they use, the telephone numbers for the cell phones, nor are they the
recipients of the cell phone service provided by TracFone. As the state supreme court observed in
TracFone Wireless:
As the Department points out, while TracFone distributes handsets and airtime
cards through numerous mass market retail stores, TracFone itself provides
the use of [commercial mobile] radio access lines to the subscribers of
TracFone’s wireless service. As a [commercial mobile] radio communications
service company, TracFone is responsible for activation and assignment of
[commercial mobile] radio access lines to the subscribers. If there are
problems requiring service, TracFone, not the retail store, provides the
service.
Id. at 296, n.15 (emphasis added).
In sum, the Court held that TracFone effectively asked the court to find an implied
exemption for prepaid wireless service. Id. The Court squarely rejected this request, holding that
“taxation is the rule and exemption is the exception, and where there is an exception, the intention
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 20
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
to make one should be expressed in unambiguous terms.” Id. at 296-97 (citing Columbia Irrig.
Dist. v. Benton County, 149 Wash. 234, 240, 270 P. 813 (1928); accord Homestreet, Inc. v. Dep't
of Revenue, 166 Wn.2d 444, 455, 210 P.3d 297 (2009); Budget Rent–A–Car of Wash.-Or., Inc. v.
Dep't of Revenue, 81 Wn.2d 171, 174, 500 P.2d 764 (1972)). Again, while this case analyzes the
applicability of a different tax than the utility tax at issue here, this case illustrates TracFone’s
repeated strategy to avoid taxation based on arguments surrounding its chosen business model. As
in TracFone Wireless, TracFone’s arguments that it should not be subject to taxation as a telephone
business under RMC 5-11-1(A) and that its gross income from retail agents should be excluded
under the “resale exemption” both fail as a matter of law.
VI. CONCLUSION
As a matter of law, TracFone’s gross income is subject to the City of Renton’s six percent
telephone utility tax. TracFone is a “telephone business” and its income from its retailers is not
shielded from taxation under the resale proviso.
Based on the foregoing, the City seeks an order holding as a matter of law that: (1)
TracFone is conducting a telephone business in Renton and is therefore subject to the City’s six
percent telephone utility tax, and (2) Renton’s telephone utility tax base properly includes
TracFone’s gross income from its retail agents, as said income is not eligible for exemption under
the resale proviso in RCW 35A.82.060(1).
/ / /
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 21
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
VII. PROPOSED ORDER
A proposed form of Order is filed herewith.
DATED this 29th day of January, 2021.
OGDEN MURPHY WALLACE, PLLC
By /s/Kari L. Sand Kari L. Sand, WSBA #27355 Julia Norwood, WSBA #52876 Attorneys for Respondent City of Renton ksand@omwlaw.com jnorwood@omwlaw.com 901 Fifth Avenue, Suite 3500 Seattle, WA 98164-2008
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CITY OF RENTON’S MOTION FOR PARTIAL SUMMARY
JUDGMENT - 22
OGDEN MURPHY WALLACE, PLLC
901 5th Ave, Suite 3500
Seattle, WA 98164
Tel: 206-447-7000/Fax: 206-447-0215
CERTIFICATE OF SERVICE
I, Kenya Owens, an employee of Ogden Murphy Wallace, PLLC, certify that on the date
below, I filed and served the City of Renton’s Motion for Partial Summary Judgment, the
Declarations of Nate Malone, Garth T. Ashpaugh, and Kari Sand, and all exhibits thereto,
Appendices A through C, and the City’s Proposed Order via email on the following parties:
TracFone Wireless, Inc. Scott Edwards Lane Powell, PC 1420 5th Avenue, Suite 4200 Seattle, WA 98101 EdwardsS@LanePowell.com Grant S. Degginger Lane Powell, PC 1420 5th Avenue, Suite 4200 Seattle, WA 98101 DeggingerG@LanePowell.com
I declare under penalty of perjury under the laws of the State of Washington that the
foregoing is true and correct.
Executed at Seattle, Washington this 29th day of January, 2021.
/s/Kenya Owens
Kenya Owens
Legal Assistant