HomeMy WebLinkAboutTracFone - Reply in Support of TracFone Motion for Reconsideration1
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125110.0001/8410475.2
REPLY IN SUPPORT OF TRACFONE’S MOTION FOR
RECONSIDERATION - 1
LANE POWELL PC
1420 FIFTH AVENUE, SUITE 4200
P.O. BOX 91302
SEATTLE, WA 98111-9402
206.223.7000 FAX: 206.223.7107
BEFORE THE HEARING EXAMINER OF THE CITY OF RENTON
RE: TracFone Wireless, Inc. Administrative Appeal
REPLY IN SUPPORT OF TRACFONE’S MOTION FOR RECONSIDERATION
SUMMARY OF ARGUMENT
Renton agrees with TracFone that the sale of “equipment” is not “network telephone
service” and that TracFone’s income from the sale of “equipment” therefore cannot be included
in the measure of utility tax. City Recon. Resp. at 6 (“sales of equipment” and “sales of
network telephone service … are different transactions and are taxed differently”). Renton
also acknowledges that there is no distinction between the sale of “airtime cards” and the sale
of “airtime.” City Recon. Resp. at 4 and Attachment A (striking through “cards” to alter
“airtime cards” to “airtime”). Renton has suggested these two points of agreement are trivial,
but in fact they affirm the foundation of TracFone’s motion for reconsideration.
The measure of utility tax authorized by RCW 35A.82.060(1) is limited to a portion of
“network telephone service” income—specifically, that portion “derived from intrastate toll
telephone service,” and expressly excluding “charges for network telephone service that is
purchased for the purpose of resale.” Consequently, if TracFone’s sales of “airtime cards” to
retailers and distributors were sales of “equipment” instead of sales of airtime (as the Ruling
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125110.0001/8410475.2
REPLY IN SUPPORT OF TRACFONE’S MOTION FOR
RECONSIDERATION - 2
LANE POWELL PC
1420 FIFTH AVENUE, SUITE 4200
P.O. BOX 91302
SEATTLE, WA 98111-9402
206.223.7000 FAX: 206.223.7107
holds in some places), then none of TracFone’s income from the sale of “airtime cards” would
be subject to utility tax, because this income would not be from “network telephone service.”
This is the same reason the City has agreed that none of TracFone’s income from the sale of
handsets—whether at resale or wholesale—is subject to utility tax. City Recon. Resp. at 1
(“gross revenues from handset sales are not included in the measure of tax”).
However, if the sale of “airtime” is “network telephone service” (as the Ruling also
holds), then TracFone’s income from wholesale sales of airtime to retailers and distributors—
who purchase the airtime for the purpose of resale—is specifically excluded from the measure
of utility tax by RCW 35A.82.060(1), which expressly prohibits cities from measuring utility
tax by “charges for network telephone service purchased for the purpose of resale.”
To put it bluntly, when TracFone makes a wholesale sale of prepaid wireless airtime to
a retailer or distributor, the income from TracFone’s sale to the retailer or distributor is either
(1) “network telephone service” income, in which case the income is expressly excluded from
the statutorily authorized measure of tax because it is a “charge for network telephone service
purchased for the purpose of resale”; or (2) it is not “network telephone service income,” in
which case the income is not subject to utility tax because cities are only authorized to measure
utility tax by the portion of “network telephone service” income that is “derived from intrastate
toll telephone service.”1
The City’s effort to manufacture a third possibility necessarily creates genuine issues
of material fact that cannot be resolved in the City’s favor on summary judgment. The City
essentially argues that TracFone’s wholesale sales of airtime to retailers and distributors are
neither sales of equipment nor “network telephone service,” while simultaneously arguing that
a retailer’s subsequent retail sale of airtime to a consumer somehow converts TracFone’s
wholesale sale to the retailer (or to the distributor from whom the retailer purchased the airtime)
1 While Renton is not authorized to impose utility tax on such income, it is authorized to impose B&O tax on
income excluded from the measure of utility tax. RCW35A.82.065. Statutory limits on city B&O tax rates and
standards for sourcing B&O taxable income are set forth in Ch. 35.102 RCW.
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125110.0001/8410475.2
REPLY IN SUPPORT OF TRACFONE’S MOTION FOR
RECONSIDERATION - 3
LANE POWELL PC
1420 FIFTH AVENUE, SUITE 4200
P.O. BOX 91302
SEATTLE, WA 98111-9402
206.223.7000 FAX: 206.223.7107
into a retail sale by TracFone “indirectly” to the consumer via a “retail agent.” City Recon.
Resp. at 2, 9.2 Put simply, Renton contends that when Nate Malone walked into a Fred Meyer
store, purchased a 30-day TracFone-branded prepaid wireless airtime card from Fred Meyer
for $19.99, paid Fred Meyer $19.99 for the airtime, and received a receipt from Fred Meyer
for $19.99, that Mr. Malone actually purchased the airtime from TracFone, not from Fred
Meyer, and that part of the $19.99 that Fred Meyer charged Nate Malone was actually
TracFone’s income from TracFone’s sale of airtime to Mr. Malone, not Fred Meyer’s income
from Fred Meyer’s sale to Mr. Malone.
This position is both factually and legally wrong. As the Fred Meyer receipt shows,
Fred Meyer made a sale of “prepaid wireless telecommunications service” to Mr. Malone in a
“retail transaction,” with Fred Meyer collecting both sales tax and E-911 tax as the “seller.”
RCW 82.14B.020(8),(12),(13); RCW 82.14B.030(6)(b); RCW 82.08.050(1).
ARGUMENT
A. The City agrees with TracFone that utility tax does not apply to income from equipment sales.
RCW 35A.82.060 provides limited authority to tax only certain elements of gross
revenue from engaging in the telephone business. The statute’s title, “License fees or taxes on
telephone business—Imposition of certain gross revenues authorized—Limitations,” makes
that clear. When authorizing cities to impose utility tax on companies engaged in the
“telephone business,” the legislature only authorized utility tax to be measured by the portion
of the company’s gross income from “network telephone service” derived from “intrastate toll
telephone service,”3 and expressly excluded “charges for network telephone service purchased
2 The City’s characterization of retailers as TracFone’s “retail agents” is a disputed fact that is directly
contradicted by the plain language of the contracts whose interpretation Mr. Ashpaugh opined about.
Moreover, whether TracFone’s sales of airtime to retailers and distributors are wholesale sales is a factual issue
that was the subject of a two day trial in the City of Springfield, Missouri case, at the conclusion of which the
judge found as a matter of fact, that they are “true wholesale sales.” The two Declarations of Chesley Dillon
constitute admissible evidence in support of that fact, precluding a contrary finding on summary judgment.
3 This is why the TRS assessment made adjustments to TracFone’s retail sales of airtime to Renton residents to
back out the portion of the retail selling price to those residents derived from data (internet), international calls,
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125110.0001/8410475.2
REPLY IN SUPPORT OF TRACFONE’S MOTION FOR
RECONSIDERATION - 4
LANE POWELL PC
1420 FIFTH AVENUE, SUITE 4200
P.O. BOX 91302
SEATTLE, WA 98111-9402
206.223.7000 FAX: 206.223.7107
for the purpose of resale” from the measure of utility tax. RCW 35A.82.060(1).
Thus, the City agrees with TracFone that the Ruling erred when it held that sales of
handsets and airtime cards are “equipment” whose sale was “network telephone service”
subject to utility tax. Specifically, the City has acknowledged that “gross revenues from
handset sales are not included in the measure of tax.” City Recon. Resp. at 1. The City also
has also recognized—correctly—that “a distinction must be made between TracFone’s sales
of equipment (handsets) and TracFone’s sales of network telephone service (airtime),” and
that “[t]hese are different transactions and are taxed differently.” Id. at 6 (emphasis added).4
The Hearing Examiner has asked the parties to discuss Activate v. Dep’t of Revenue,
150 Wn. App. 807 (2009), a case involving the application of use tax to promotional items
given away for free as an incentive to induce prospects to sign up for AT&T service. As the
City’s counsel observed in her email of April 2, 2021, Activate deals with use tax on “tangible
goods … given away for free as a promotion and is not a case about utility tax.” Activate sold
cell phones and accessories at mall kiosks. 150 Wn. App. at 810. It was undisputed that
Activate’s sales of cell phones were sales of “competitive telephone service” subject to sales
tax, and that Activate collected sales tax on its “competitive telephone service” income.5 Id.
at 811.
In addition, Activate was also a sales representative for AT&T and solicited prospective
consumers to sign up directly with AT&T for AT&T wireless service, receiving a commission
and interstate calls. Both (1) the Ruling’s finding that 100 percent of all gross income of a “telephone business”
from whatever source is subject to utility tax, and (2) the City’s assertion that “total gross revenue from
[network telephone service]” is subject to utility tax, City Recon. Resp. at 4, are wrong, and ignore the plain
language of RCW 35A.82.060(1) limiting the authorized measure of tax.
4 It is worth noting that the City’s Response makes no reference to the structural error in the Ruling, the
“finding” that sales of handsets and airtime cards are both sales of equipment, while the proposed revisions in
its Attachment A strike that finding (“Tracfone sells … handsets and plastic airtime cards (collectively called
‘equipment’). See Declaration of Garth Ashpaugh … at Par. 10”).
5 Both “competitive telephone service” and “network telephone service” are subject to sales tax, RCW
82.04.050(5), but only income from “network telephone service” can be subjected to city utility tax. RCW
35A.82.060(1).
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125110.0001/8410475.2
REPLY IN SUPPORT OF TRACFONE’S MOTION FOR
RECONSIDERATION - 5
LANE POWELL PC
1420 FIFTH AVENUE, SUITE 4200
P.O. BOX 91302
SEATTLE, WA 98111-9402
206.223.7000 FAX: 206.223.7107
from AT&T for signing up new customers. Id. at 810. Activate did not buy or sell wireless
airtime, and no one asserted that Activate provided “network telephone service” (a term that
does not appear anywhere in the opinion). To induce prospects to sign up for AT&T service,
Activate ran promotions where it gave away handsets entirely free of charge. It was only these
free, promotional handsets that were at issue in Activate. Id. at 811.
The Department assessed use tax against Activate on handsets that Activate gave away
for free as a promotion on the grounds that Activate was the consumer of the handsets that it
gave away for free. In other words, the Court found that Activate did not purchase the give-
away handsets “for the purpose of resale” since it did not resell them, but instead gave them
away. The Court’s ruling did not turn on the fact that Activate was giving away phones as
opposed to some other product, id. at 816, because the application of use tax to promotional
give-aways does not depend on the nature of the product that is given away. See WAC 458-
20-17803(1) (“Persons who distribute or cause to be distributed any article of tangible
personal property, except newspapers, the primary purpose of which is to promote the sale of
products or services, are subject to use tax on the value of the property” (emphasis added)). If
Activate had given away free toasters to induce customers to open a new bank account as a
sales representative for a bank, it would have been subject to use tax on the toasters.
In addition to the general sale for resale use tax exclusion, Activate argued that it
purchased the give-away handsets to be “provided … as part of competitive telephone service”
excluded from the definition of retail sale under RCW 82.04.050(1)(e) (essentially a more
specific form of purchase for resale). The Court rejected this alternative argument, noting that
in order to be provided “as part of competitive telephone service,” Activate would need to
charge for the phones because “competitive telephone service” is defined in relevant part as
“the providing … of [telecom] equipment … for which a separate charge is made” (emphasis
added). Since Activate did not charge for the free phones, its activity of giving the phones
away was not “competitive telephone service,” and its purchase of phones for the purpose of
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125110.0001/8410475.2
REPLY IN SUPPORT OF TRACFONE’S MOTION FOR
RECONSIDERATION - 6
LANE POWELL PC
1420 FIFTH AVENUE, SUITE 4200
P.O. BOX 91302
SEATTLE, WA 98111-9402
206.223.7000 FAX: 206.223.7107
giving them away did not fall within the “exclu[sion] from the definition of … ‘retail sale.’”
Id. at 823. Thus, while Activate’s purchase of phones that it actually sold were purchases for
use in providing “competitive telephone service” (with the result that Activate did not owe use
tax on the purchase of those handsets, but was required to charge sales tax for them), Activate
was the consumer of the phones that it gave away for free. Id. at 816.
In the present case, TracFone does not give away either handsets or airtime cards, but
charges for both. To the extent that the Ruling held that TracFone’s sales of “equipment”
(defined by the Ruling to include both handsets and airtime cards) were “network telephone
service” subject to city utility tax, it is undisputed by the City that the Ruling erred.6
Given the Ruling’s conclusion that the sale of airtime is “network telephone service,”
it follows that (subject to correction of acknowledged errors in TRS’s computations) TracFone
would be subject to Renton utility tax on its income from “intrastate toll telephone service”
sold to Renton residents, which the assessment characterized as “direct” sales. To be clear,
while TracFone disagrees with the Ruling on this point, it is not seeking reconsideration of that
part of the Ruling. Rather, TracFone’s motion for reconsideration is focused on the Ruling’s
expansion of the measure of tax to include income from “competitive telephone service” and
income from “network telephone service” sold to purchasers for the purpose of resale, both of
which directly conflict with the plain language of the authorizing statute, RCW 35.82.060(1).
As discussed above, given the Ruling’s holding that the sale of airtime is “network telephone
service,” TracFone’s wholesale sales of airtime to retailers and distributors are “charges for
network telephone service that is purchased for the purpose of resale,” which income is
expressly excluded from the legislature’s “limited” statutory grant of utility tax authority.
6 Contrary to the City’s contention, Recon. Resp. at p. 9, it was the Ruling, not TracFone, that found TracFone’s
sales of airtime cards to be “equipment” separate and distinct from the sale of airtime. It is TracFone’s position
as reflected in the declaration of Chesley Dillon that TracFone’s sales to retailers and distributors are sales of
airtime. “TracFone purchases wireless airtime from facilities-based carriers and resells the airtime on a prepaid
basis at both retail (to end-users) and at wholesale (to businesses who purchase prepaid wireless airtime from
TracFone for the purpose of reselling it).” First Dillon Decl., ¶ 3.
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125110.0001/8410475.2
REPLY IN SUPPORT OF TRACFONE’S MOTION FOR
RECONSIDERATION - 7
LANE POWELL PC
1420 FIFTH AVENUE, SUITE 4200
P.O. BOX 91302
SEATTLE, WA 98111-9402
206.223.7000 FAX: 206.223.7107
B. The Ruling’s holding that TracFone’s income from the wholesale sale of airtime to retailers and distributors is subject to City utility tax is improperly based on resolving genuine issues of material fact on summary judgment.
As noted above, the City admits that “plastic airtime cards” are not “equipment,” City
Recon. Resp. at 4, and agrees with the Ruling that “sales of wireless airtime … are sales of
network telephone service,” id. at 5. And yet the City defends the Ruling’s conclusion that the
resale proviso in RCW 35A.82.060(1) does not apply here, on the ground that “retailers do not
purchase wireless airtime” from TracFone, and are “merely conduits for TracFone’s sales” of
airtime. City Recon. Resp. at 5.
At most, the City’s argument creates a genuine issue of material fact that cannot be
resolved on summary judgment. Unless the Hearing Examiner amends the Ruling to hold that
the amounts TracFone charges retailers and distributors for airtime are “charges for network
telephone service purchased for the purpose of resale” under RCW 35A.82.060(1), it is
necessary to deny both parties’ summary judgment motions regarding the application of that
statutory language to TracFone, pending a hearing at which both sides present their competing
evidence regarding the nature of TracFone’s sales of airtime to wholesalers and distributors.
It should be unnecessary to conduct a hearing on that topic because Renton’s position
is facially wrong as a matter of law, and contradicted by the evidence. After the issuance of
the tax assessment and the commencement of this appeal, the City’s tax manager, Nate Malone,
purchased prepaid wireless airtime from Fred Meyer for the retail price of $19.99; that Fred
Meyer charged Mr. Malone both sales tax and E-911 on the $19.99 retail selling price; and that
Fred Meyer issued Mr. Malone a receipt documenting the sale by Fred Meyer.7 Second
7 The City’s analogy to sales of gift cards is misplaced. City Recon. Resp. at 11. While gift card can be
presented as a form of payment to pay for goods or services (which goods or services may or may not be subject
to sales tax) “taxes do not apply to give gift cards and gift certificates at the time of sale” https://dor.wa.gov/get-
form-or-publication/publications-subject/tax-topics/gift-cards-gift-certificates-and-layaway-purchases-0 (last
visited April 6, 2021). Rather, a prepaid wireless airtime card is like a “digital code” both of which are taxed as
the underlying service itself. WAC 458-20-15503(204).
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125110.0001/8410475.2
REPLY IN SUPPORT OF TRACFONE’S MOTION FOR
RECONSIDERATION - 8
LANE POWELL PC
1420 FIFTH AVENUE, SUITE 4200
P.O. BOX 91302
SEATTLE, WA 98111-9402
206.223.7000 FAX: 206.223.7107
Degginger Decl., Ex. 10. The fact that Fred Meyer collected these taxes demonstrates that it—
not TracFone—was the seller.
As discussed in TracFone’s prior briefing (Opp. to Renton MSJ at 17-19), the “seller”
of “telecommunications service” to a “consumer” is required to collect sales tax from the
“buyer.” RCW 82.08.050. Similarly, the “seller” of “prepaid wireless telecommunications
service” in a “retail transaction” is required to collect E-911 tax from the buyer. RCW
82.14B.030(6)(b). Thus, the Fred Meyer receipt submitted by the City is undisputed evidence
that Fred Meyer, not TracFone, made a retail sale of “prepaid wireless telecommunication
service” to Mr. Malone when Fred Meyer sold Mr. Malone a 30-day TracFone-branded prepaid
wireless airtime card, and that the sum charged for that sale is Fred Meyer’s income, not
TracFone’s.
Neither the Ruling nor the City even attempt to explain how Fred Meyer’s sale to Mr.
Malone could be:
(1) for sales tax purposes, a “retail sale” by Fred Meyer of “telecommunications service” that Fred Meyer purchased for the purpose of resale (and did resell to Mr. Malone);
and
(2) for E-911 tax purposes, a sale by Fred Meyer of “prepaid wireless telecommunications service” that Fred Meyer purchased for the purpose of resale (and did resell to Mr. Malone);
but not
(3) for utility tax purposes, a sale by Fred Meyer of “network telephone service” that Fred Meyer purchased for the purpose of resale (and did resell to Mr. Malone).
If the Hearing Examiner does not amend the Ruling to hold on reconsideration that the
amount TracFone charges retailers and distributors for wholesale sales of airtime are “charges
for network telephone service purchased for the purpose of resale,” it must deny both parties’
motions for summary judgment on the grounds that there are genuine issues of material fact
that cannot be resolved on summary judgment regarding the application of the RCW
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125110.0001/8410475.2
REPLY IN SUPPORT OF TRACFONE’S MOTION FOR
RECONSIDERATION - 9
LANE POWELL PC
1420 FIFTH AVENUE, SUITE 4200
P.O. BOX 91302
SEATTLE, WA 98111-9402
206.223.7000 FAX: 206.223.7107
35A.82.060(1) to TracFone’s income, including the nature of TracFone’s wholesale sales.
Although the record from the Springfield, Missouri case is not part of the summary judgement
record here, the court in that case found after a two-day trial that TracFone’s wholesale sales
of airtime to retailers and distributors were “legitimate wholesale sales.” Mr. Dillon was one
of TracFone’s witnesses in that case, and his sworn declarations regarding TracFone’s
wholesale sales of airtime are sufficient evidence to preclude findings on summary judgment
that are contrary to his testimony. See, e.g., Wells Fargo Bank, N.A. v. Duma Video, Inc., 2017
WL 4150597, at *3 (Wash.App. Sept. 19, 2017) (“admissible evidentiary facts set forth in a
declaration that show the existence of a genuine issue [of material fact] are sufficient to defeat
summary judgment if (1) the affiant is competent to testify to matters stated in the declaration
and (2) the facts stated in the declaration are based on the affiant's personal knowledge”) (citing
CR 56(e) and Bernal v. Am. Honda Motor Co., Inc., 87 Wn.2d 406, 412–13 (1976)).
CONCLUSION
For the foregoing reasons, TracFone respectfully requests the Hearing Examiner
reconsider its Ruling, and either (a) amend the Ruling to confirm that TracFone’s income from
sales of airtime to retailers and distributors is not subject to Renton utility tax, scheduling a
hearing to address only the computation of utility tax on TracFone’s retail/direct sales of
airtime; or (b) deny both parties’ summary judgment motions regarding the application of
utility tax on TracFone’s income from sales of airtime to retailers and distributors, and schedule
a full hearing to address both parties’ evidence regarding TracFone’s sales of airtime and the
computation of tax.
Presented by: LANE POWELL PC By Scott M. Edwards, WSBA No. 26455 Grant S. Degginger, WSBA No. 15261 Attorneys for Plaintiff TracFone Wireless Inc.
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125110.0001/8410475.2
REPLY IN SUPPORT OF TRACFONE’S MOTION FOR
RECONSIDERATION - 10
LANE POWELL PC
1420 FIFTH AVENUE, SUITE 4200
P.O. BOX 91302
SEATTLE, WA 98111-9402
206.223.7000 FAX: 206.223.7107
CERTIFICATE OF SERVICE
I hereby certify under penalty of perjury of the laws of the State of Washington and the
United States that, on the date listed below, I caused to be served a copy of the attached
document to the following persons via electronic mail:
Kari L. Sand Ogden Murphy Wallace P.L.L.C. 901 Fifth Avenue, Suite 3500 Seattle, WA 98164 ksand@omwlaw.com Cynthia Moya Renton City Clerk 1055 So. Grady Way Renton, WA 98057 cmoya@rentonwa.gov Phil Olbrechts Renton Hearing Examiner 1055 So. Grady Way Renton, WA 98057 olbrechtslaw@gmail.com
Executed on the 7th day of April, 2021, at Seattle, Washington.
s/ Angela Craig Angela Craig, Legal Assistant