HomeMy WebLinkAbout3-12-2021 - HEX Admin Appeal Ruling for Partial Summary Judgment1
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Tracfone Appeal - 1
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BEFORE THE HEARING EXAMINER FOR THE CITY OF RENTON
RE: TracFone Wireless, Inc.
Administrative Appeal
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FINDINGS OF FACT, CONCLUSIONS OF
LAW AND RULING ON TRACFONE AND
CITY MOTIONS FOR PARITAL SUMMARY
JUDGMENT
Tracfone Wireless, Inc. (Tracfone) and the City of Renton (City) have both filed motions for
summary judgment. The City’s motion is granted and Tracfone’s motion is denied. This Ruling
concludes that Tracfone has been engaging in the telephone business in the City of Renton and that its
gross income/receipts from that activity are subject to the City’s utility tax. The gross income subject
to tax includes that derived from sales to retail sellers of Tracfone’s handsets and airtime cards.
Evidence Relied Upon
1. Tracfone’s Motion for Summary Judgment dated January 29, 2021, along with City Response
and Tracfone Reply and all supporting exhibits and declarations.
2. Respondent City of Renton’s Motion for Partial Summary Judgment dated January 29, 2021,
along with Tracfone Response, City Reply and all supporting exhibits and declarations.
3. Oral argument held on February 23, 2021.
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Findings of Fact
Procedural:
1. Appellant. Tracfone Wireless Inc., 9700 NW 112th Ave., Miami, FL 33178.
2. Hearing. A virtual hearing on the summary judgment motions was held via the Zoom
application on February 23, 2021, Meeting ID No. 878 2491 0213.
3. Motion Descriptions. Both Tracfone and the City filed motions for summary judgment on
January 29, 2021. Tracfone filed a motion for complete summary judgment and the City filed for
partial summary judgment. The issues raised in both motions are largely the same. Tracfone argues
that it’s business activity in Renton is not subject to the City’s utility tax because it is not engaged in
the telephone business under RCW 35A.82.060. Under RCW 35A.82.060, Tracfone’s gross receipts
is only subject to the utility tax if Tracfone’s business qualifies as a telephone business. Since Tracfone
does not believe any of its business qualifies as telephone business, Tracfone asserts that it owes no
utility tax. Tracfone also requested that if it was found to be engaged in the telephone business that
most of its gross income be exempt under RCW 35A.82.060 as sales to retailers for resale. The City
partial motion for summary judgment requested that Tracfone’s business operations within Renton be
considered a telephone business and that none of that business should be considered exempt even if
some of Tracfone’s business involved sales to retailers.
3. Tracfone Business Model. Tracfone provides wireless services by purchasing it at wholesale
from wireless network carriers and reselling it to consumers both directly via its website and toll free
number and indirectly via retailers such as Walmart and 7-Eleven.
TracFone has contracts for the purchase of wireless services with various wireless network carriers (
e.g., Verizon, T-Mobile, Sprint, AT&T, etc.). Tracfone sells the access it has purchased from these
network carriers to consumers via handsets and plastic airtime cards (collectively called “equipment”).
See Declaration of Garth Ashpaugh (“Ashpaugh Decl.”) at Par. 10. TracFone sells the equipment to
retailers such as Walgreens and 7-Eleven, who resell the equipment to the consumer. See Declaration
of Nate Malone (“Malone Decl.”) at Par. 8. Tracfone sometimes uses distributors to sell the equipment
to retailers. See Second Declaration of Chesley Dillon (“2nd Dillon Decl.”) Par. 5. Tracfone also sells
the equipment and wireless services directly to consumers via its website and its customer care toll free
number. Malone Decl. at Par. 11.
4. Tracfone Control over Wireless Services. Tracfone controls final consumer access to network
carrier facilities, imposes terms of usage for the wireless service, is responsible for customer service
and has the authority to terminate the wireless service. These rights are not transferred to retailers and
distributors who sell Tracfone’s equipment.
A significant point of disagreement between the City and Tracfone for transactions involving third-
party retailers is whether it is the retailer or Tracfone who “activates” consumer access to network
carrier service and thereby provides final network access to the consumer. Tracfone’s Vice-President
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for Corporate Taxation, Chesley Dillon, asserts that some prepaid wireless airtime that Tracfone sells
to retailers is “active” at the time the cards are shipped to the retailers, while other sales wireless airtime
is activated at the register of the retailer immediately prior to the sale to the consumer. Dillon 2nd Dec.
Par. 12.
The City’s expert on utility taxation, Garth Ashpaugh, asserts that “activation” of network access is a
two step process. The first step involves the activities identified in the Chelsey declaration, supra. The
second step involves clearance through Tracfone. Ashpaugh Decl. Par. 12. The second step is the
consumer contacting Tracfone via Tracfone’s website or toll-free number. Id. With this second step,
Tracfone assigns a purchased Tracfone phone to a network carrier and sends a signal to the equipment
making it available to send and receive wireless calls. With the airtime cards, Tracfone’s signal
downloads the prepaid minutes to the assigned phone of the consumer.
On the issue of activation, the only recognizable disagreement between parties appears to be the
understanding of what “activation” means. Tracfone believes that activation occurs in the first step
described in the Ashpaugh declaration. The City believes that activation doesn’t occur until the second
step. Whatever definition the parties have in mind for “activation” is immaterial to the issue of whether
Tracfone controls consumer access to wireless network carriers. More significant is the City’s evidence
and assertion that consumers are not able to use their equipment until Tracfone grants network access
through its website or phone line. Tracfone does not dispute this fact, so it is taken as a verity.
Nate Malone, the City’s Tax and License Manager, notes that the “TracFone Wireless Terms and
Conditions of Service,” posted at Tracfone’s website provides that Tracfone retains the right “at any
time and without prior notice to [consumers], modify, cancel, and/or deactivate your Service and/or
take other corrective action, for any reason in our sole discretion, including, your violation of these
Terms and Conditions of Service.” Malone Decl. par. 10. This fact is uncontested by Tracfone and
taken as a verity.
Garth Ashpaugh, a City expert witness who is a CPA with expertise in utility tax issues, has examined
two of Tracfone’s network carrier contracts and found that Tracfone is contractually responsible, not
its retailers, for ensuring that the retailers abide by the terms of the agreement between network carriers
and Tracfone. Ashpaugh Decl. par. 7. The contracts also provide that Tracfone is responsible for all
risks, expenses and liabilities incurred in connection with its sale of cellular radio service including
consumer claims. Ashpaugh Decl. par. 8. The contracts further require Tracfone to provide all customer
service to its consumers. Id. In his declaration, Mr. Ashpaugh does not expressly state that he believes
the contracts to be representative of all the carrier contracts entered in to with Tracfone. If Tracfone
has some contractual arrangements that materially differ, it is free to bring those up during the final
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appeal hearing to argue that some of its contractual arrangements should be excluded from the utility
tax due to the RCW 35A.82.060 resale exemption.
Conclusions of Law
1. Authority. RMC 5-26-18B authorizes the hearing examiner to hear appeals on the levy of
utility taxes.
2. Tracfone Provides Network Telephone Service. In the business model described in Finding of
Fact No. 4, Tracfone provides “network telephone service” as referenced in RCW 35A.82.060 and
defined by RCW 82.16.010(7)(b)(ii). RCW 82.16.010(7)(b)(ii) defines “network telephone service”
as “providing by any person of access to a telephone network…” It is uncontested that
telecommunications companies such as Sprint and Verizon have the infrastructure that comprises a
telephone network and that these companies sell access to Tracfone. As identified in FOF No. 4,
Tracfone in turn maintains final control over consumer access to the network by granting access in the
second step of what the City terms the two step activation process. Under the business model described
in FOF No. 4, consumers do not gain access to telephone networks until they contact Tracfone via
Tracfone website or toll-free number. In this regard Tracfone is construed as providing access to a
telephone network as contemplated in RCW 82.16.010(7)(b)(iii).
3. Tracfone is a Telephone Business. In the business model described in Finding of Fact No. 4,
Tracfone engages in the “telephone business” as defined by RCW 82.16.010 (7)(b)(iii). RCW
82.16.010 (7)(b)(iii) defines telephone business as “the business of providing network telephone
service.” As concluded in COL No. 2, Tracfone provides “network telephone service” to consumers
by the sale of both airtime cards and handsets. In this regard, Tracfone is engaged in the “business”
of providing “network telephone service” and therefore this activity qualifies as “telephone business”
under RCW 82.16.010 (7)(b)(iii).
4. City Authorized to Impose Utility Tax on Tracfone. The City is authorized to impose a utility
tax on Tracfone. RCW 35A.82.060 authorizes the City to impose a utility tax on 100% of the gross
income upon the “business activity of engaging in the telephone business.” As concluded in COL No.
3, Tracfone is engaged in the telephone business.
5. Tracfone Not Exempt Because It Doesn’t Operate Network Facilities. Tracfone doesn’t need
to operate or manage any network telephone facilities to be subject to the RCW 35A.82.060 tax.
RCW 35A.82.060 prohibits imposition of the utility tax on “on that portion of network telephone
service which represents charges to another telecommunications company, as defined in RCW
80.04.010…” (emphasis added). RCW 80.04.010(28) defines telecommunications company as
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including businesses that own, operate or manage “facilities used to provide telecommunications for
hire, sale, or resale to the general public within the state.”
Tracfone asserts that use of the term “another” in RCW 35A.82.060 implies that the utility tax can only
be levied upon telecommunications companies. Tracfone further asserts that it does not qualify as a
telecommunications company because it doesn’t own, operate or manage any network facilities.
Tracfone’s interpretation of the exemption does not prove very compelling. RCW 35A.82.060 broadly
authorizes the levying of the utility tax upon the “business activity of engaging in the telephone
business.” Tracfone reduces this broad based authority to activity engaged in by telecommunications
businesses by implication solely by inclusion of the term “another.” Had the legislature intended to
narrow application of the tax in this manner, it could have simply provided that the tax can be levied
upon the “business activity of telecommunications businesses engaging in the telephone business.”
Given that the opening line of RCW 35A.82.060 grants cities the authority to impose the utility tax on
any entity engaged in the telephone busines, it is unlikely that the legislature would then so drastically
reduce the qualifying businesses through highly ambiguous implication via inclusion of “another.”
Even if RCW 35A.82.060 limits the tax to telecommunications businesses, it still applies to Tracfone.
Tracfone qualifies as a telecommunications business. RCW 80.04.010(28) defines a
telecommunications company to include entities that own, operate or manage “facilities” used to
provide telecommunications for hire, sale or resale to the general public. RCW 80.04.010 (13) defines
facilities to include instrumentalities, all devices, real estate, apparatus and property to facilitate the
provision of telecommunications service. RCW 80.04.010 (27) defines telecommunications to include
the transmission of information by electromagnetic or similar means. Tracfone owns, manages and/or
operates websites, phone lines and the offices and property necessary to support them to control
consumer access to telephone networks in the second step of what the City characterizes as Tracfone
activation as identified in Finding of Fact No. 4. The handsets and airtime cards that Tracfone sells to
retailers and consumers also meets the broad definition of facility as devices, instrumentalities and/or
simply property. All of these facilities are used to facilitate access to the phone network supplied by
the network carriers identified in FOF No. 4, which in turn is part of the provision of
telecommunications service.
6. Tracfone Transaction Not Exempt as Resale. The sale of Tracfone’s handsets and airtime cards
to retailers is not exempt as a sale of telephone service for purposes of resale.
RCW 35A.92.060 exempts “charges for network telephone service that is purchased for the purpose
of resale.” Tracfone asserts that its sales of handsets and airtime cards to retailers such as Walmart and
Walgreens is exempt from the utility tax under this provision. The City asserts that the provision does
not apply because the retailer is only purchasing the equipment from Tracfone, not network telephone
service.
The applicability of the exemption is not as easily resolved as either party asserts. The sales transaction
between Tracfone and its retailers has the characteristics of both just an equipment sale as well as a
sale of telephone service. The most obvious factor supporting Tracfone is that the sales price between
Tracfone and its retailers and presumably distributors includes the price of network telephone service.
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The money that Tracfone acquires from this transaction is how Tracfone is compensated for the service
it ultimately provides to the consumer. The retailer (and at times distributor) may never actually be
purchasing telephone service, but the price it’s paying is the right to that service from Tracfone, which
is ultimately resold to the consumer. In the terminology of RCW 35A.82.060, Tracfone sells the
entitlement to its telephone service to its retailers “for the purpose of resale.”
There are also strong factors in support of the City’s position. The most compelling factor is that
Tracfone’s retailers and distributors aren’t engaged in the “resale” of network telephone service
because they never at any point have purchased that service from Tracfone. As outlined in FOF No. 4,
as between Tracfone and its retailers/distributors, it is only Tracfone that has a contractual relationship
with the network carriers, only Tracfone that gives consumers final authorization to connect to the
carrier networks, only Tracfone that imposes terms of use, and only Tracfone that can terminate service
for violating those terms of use. In this regard, there is no “resale” of network telephone service when
a retailer sells Tracfone equipment to the consumer. Tracfone’s ability to provide network telephone
service is ultimately based upon the access and usage rights it contractually acquires from network
carriers. Tracfone never sells those access and usage rights to the distributors and retailers.
Consequently, there can be no “resale” of those rights as contemplated in RCW 35A.82.060.
The conclusion that Tracfone is not selling cell phone service is moderately supported by a case heavily
referenced by the City, Tracfone Wireless v. the Dept. of Revenue, 170 Wn. 2d 273 (2010). The
pertinent issue in Tracfone was whether Tracfone’s sale of equipment to its retailers qualified as a sale
to consumers under RCW 82.14B.042. The Tracfone court found that the retailers did not qualify as
consumers (called subscribers in the opinion) because the retailers do not use the telephone numbers
for the cell phones, “nor are they the recipients of the cell phone service provided by Tracfone.” Id. at
295. The Tracfone case is distinguishable because it dealt with RCW 82.14B.042 and not RCW
35A.82.060. The Tracfone case also was not applying the RCW 82.16.010 definition of network
telephone service, but instead was assessing whether Tracfone was supplying “cell phone service” to
its retailers. However, there is no discernable pertinent difference between what the Tracfone court
considered to qualify as “cell phone service” and the RCW 82.16.010 definition. Nor is there any
difference in the business model between that addressed in the Tracfone case and that identified in FOF
No. 4.
Tracfone presents its own case supporting its position on the resale exemption, specifically Tracfone
Wireless, Inc. v. City of Springfield, 557 S.W.3d 439 (Mo. Ct. App. 2018). Unfortunately, the published
court opinion doesn’t provide sufficient information to assess its applicability to the resale exemption
relied upon by Tracfone. In his second declaration, Chelsey Dillon noted that at the trial level the
Springfield court found that Tracfone’s wholesale sales of prepaid wireless sales were “legitimate
wholesale sales” of prepaid wireless airtime and that the court rejected the City of Springfield’s factual
contention that Tracfone’s sales to retailers are consignment sales rather than wholesale sales. 2nd
Dillon Dec. Par. 13 and 14. These factual determinations do serve to undermine the City position that
Tracfone retailers are not re-selling network telephone service. However, nothing more can be taken
from this ruling because Tracfone (Appellant of this case) and the published court opinion do not
identify how the trial or appellate court applied any resale exemption or even what how the exemption
is worded. Footnote 2 of the appellate court decision identifies the City of Springfield provision that
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imposes the utility tax, but that language doesn’t contain any exemption for network telephone service
sold for resale.
The conflicting interpretations and case law above confirm that the resale exemption is ambiguous.
There are compelling reasons supporting the positions taken by both Tracfone and the City. In this
regard, legislative history and statutory construction proves to be a necessary and determinative tool in
resolving the ambiguity.
Fortunately, there is case law that has proven highly useful in applying legislative intent to telephone
utility tax provisions. In construing the “network telephone service” definition incorporated into RCW
35A.82.060, one court noted that as follows:
Until 1981, the Legislature imposed a public utility tax on traditional telephone services.
Former RCW 82.16.010 (1965), amended by Laws of 1981, ch. 144, § 2. Recognizing the
impending revolution in telecommunications services and wishing to `level the pl aying
field' between regulated telephone businesses and emerging, nonregulated
telecommunications companies, the Legislature broadened the definition of companies
susceptible to the state public utilities tax by amending former RCW 82.16.010 [the
predecessor to the RCW 82.04.065 “network telephone service” definition].
Western Telepage v. City of Tacoma, 140 Wn. 2d 599, 602-03 (2000).
In its briefing Tracfone asserts that the legislative intent analysis of Western Telegraph is outdated
because of changes in the regulatory framework applicable to telephone taxation that occurred after the
adoption of the “network telephone service” definition in 1981. Tracfone cites to the breakup of AT&T
and amendments that resulted from that in 1983. Those regulatory changes are irrelevant as they
occurred well before the Western Telepage decision was issued and its construction of the legislative
intent of RCW 82.04.065.
In point of fact, as quoted above, the Western Telepage decision found that the legislature broadened
the definition because of the “impending revolution in telecommunications services.” The court cited
the AT&T break-up and other significant changes in the telecommunications industry as the type of
“unprecedented change” that the 1981 definition was designed to address. See 140 Wn.2d at 603-604.
Far from outdating the legislative intent cited in Western Telegraph, the industry upheaval cited by
Tracfone only serves to validate it. The legislative intent cited by Western Telegraph is further
supported by the broad based language in the definition of network telephone service and those
associated with it, as the language is written as broadly as possible to encompass advances in
telecommunications and its associated regulatory framework.
An equally useful aid to construction is the judicial rule that if ambiguity exists in an exception or
deduction provision, courts strictly construe the provision against the taxpayer. Lowe’s Home Centers,
LLC v. Dep’t of Revenue, 195 Wn.2d 27, 33 (2020). The resale exemption of RCW 35A.82.060 serves
as an exception to the utility tax applicable to telephone businesses. Consequently, the ambiguities of
the resale exemption must be construed against Tracfone.
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Applying the concepts of level playing field and strict construction to the ambiguities of the resale
exemption, it must be concluded that Tracfone’s sale of equipment to its retailers does not qualify as a
sale of network telephone service. The handsets and air cards sold by Tracfone are the modern day
equivalents of the poles and telephone lines several decades ago. They are the infrastructure used to
provide network telephone service, but they do not qualify as the service itself. Exempting Tracfone
from the utility tax because it chooses to subcontract out the sale of its equipment to retailers disrupts
the level playing field objective of the network telephone definition. It puts Tracfone at a competitive
advantage against network service providers who sell directly to consumers when there is no policy or
equitable reason to do so.
7. Incident Properly Identified. At hearing, Tracfone’s counsel argued that if the sale to retailers
isn’t considered the sale of network telephone service, then it can’t be taxed because “that’s the starting
point of the measure of the tax.” This argument relates to Tracfone’s summary judgment reply brief
argument that the City has not identified the incident that triggers the utility tax liability. The measure
of the tax and the incident of the tax are both identified in RCW 35A.82.060, which simply provides
in the first sentence that that the incident is “the business activity of engaging in the telephone business”
and the measure is “gross receipts or gross income.” Renton Municipal Code Section 5-11-4A sets the
tax rate at six percent. For equipment sales to retailers the gross income may be paid by the retailers,
but this doesn’t detract from the fact that Tracfone is getting compensated for engaging in the telephone
business in the City of Renton. Tracfone is taxed for engaging in the business of supplying network
telephone service to consumers in Renton. It gives the access for that service, provides some of the
facilities necessary for the service and regulates usage. Tracfone has not provided any reasonable
explanation or legal authority as to why the incident outlined in RCW 35A.82.060 and the City’s utility
tax regulations are legally insufficient to impose tax liability.
DECISION
The City’s motion for partial summary judgment is granted and Tracfone’s motion for summary
judgment is denied. This Ruling concludes that Tracfone has been engaging in the telephone business
in the City of Renton and that its gross income/receipts from that activity is subject to the City’s utility
tax. The gross income subject to tax includes that derived from sales to retail sellers of Tracfone’s
handsets and airtime cards.
DATED this 12th day of March 2021.
City of Renton Hearing Examiner