HomeMy WebLinkAbout05-09-2021 - Tracfone Final Decision
TracFone Appeal – Final Decision
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THE HEARING EXAMINER OF THE CITY OF RENTON
RE: TracFone Wireless, Inc.
Administrative Appeal
FINDINGS OF FACT, CONCLUSIONS
OF LAW AND FINAL DECISION
OVERVIEW
TracFone is entitled to a refund of $66,513.50 with per diem interest of $5.20 accruing
from 5/27/21. The TracFone utility tax assessment is modified as set forth in Ex. H2.
The TracFone appeal has raised multiple issues and lead to multiple revisions. The
parties were ultimately able to agree upon the resolution to most of the issues raised.
The only outstanding issue subject to reasonable disagreement is whether TracFone
sales to its retailers is exempt from the utility tax under a utility tax resale exemption
authorized by RCW 35A.82.060, i.e. “charges for network telephone service that is
purchased for the purpose of resale.” That issue was resolved in summary judgment.
The summary judgment ruling of this appeal concluded that TracFone was not selling
its airtime service to retailers for resale, because TracFone never actually sells airtime
service to its retail agents. Between TracFone, its retail agents and the consumer, only
TracFone has the right to provide airtime service (aka network telephone service) and
that service is only provided by TracFone to the consumer.
Beyond summary judgment issues, there was only one remaining issue upon which the
parties could not agree. Specifically, whether the City’s estimates of TracFone gross
TracFone Appeal – Final Decision
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income should have been reduced by a retail margin factor. TracFone did not give the
City any data on how much it made from sales to its retail agents and distributors.
Instead, TracFone only provided information on total company sales and the proportion
of revenues from TracFone direct sales to its consumers verses total company revenues.
From this information, the City determined that over the audit period, TracFone made
roughly $4 from sales to its distributors and retail agents for every dollar made from
direct sales to its consumers. The City was able to estimate TracFone direct sales to
consumers within the City of Renton from zip code sales data provide by TracFone.
The City then applied a direct consumer sales/sales to retail agents/distributers
multiplier (i.e. about 4) to convert direction consumer sales to sales to retail
agents/distributers.
TracFone asserted that the multiplier used to convert direct consumer sales to retail
agent/distributor sales was inaccurate because it failed to incorporate the mark up in
sales price that its retail agents added to the airtime cards that TracFone sold to them.
This Decision finds that position unavailing, since the markup was never included in the
multiplier to begin with. The revenue sales used to derive the multiplier were based
upon the revenues received by TracFone, not its retail agents. As previously noted, in
simplified terms, the multiplier assigns $4 of retail agent/distributor income to TracFone
for every $1 of direct consumer sales income. The retail markup added by TracFone’s
retail agents is entirely irrelevant to this conversion factor.
The only other significant issue raised at the appeal hearing was the late payment
interest rate. The City adopted a new interest rate after the end of the audit period but
before TracFone paid the amount under appeal. The new interest rate is substantially
less than the rate that applied before. The City only applied the new, lower rate
prospectively from the date of adoption. TracFone asserted that the rate should apply to
all of its accrued tax liability. Case law comports with the TracFone position.
According to that case law, late payment interest is a remedy that is applied at the time
of assessment and is therefore to be entirely based upon the rate in effect at the time of
assessment. The City ultimately agreed with this position and the newly adopted, lower
rate is what is applied by this Decision to the entirety of TracFone’s utility tax liability.
Testimony
A computer generated transcript has been prepared of the appeal hearing to provide an
overview of the hearing testimony. The transcript is provided for informational
purposes only as Appendix A. Since the transcript is computer generated, it is not 100%
accurate, but does provide a good indication of what testimony was presented during the
hearing.
TracFone Appeal – Final Decision
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Exhibits
Exhibit C -: All exhibits identified in the City’s Exhibit List dated May 20, 2021, using
the numbering of that list. All City exhibits are preceded with “C,”, e.g. “Exhibit C1.”
Exhibit T -: All exhibits identified in TracFone’s Exhibit list dated May 20, 2021,
except Exhibits 31and the terms and conditions1 of Ex. 37. All TracFone exhibits are
preceded with “T,” e.g. “Exhibit T1.”
Prehearing Exhibits: All prehearing briefs and motions along with associated exhibits.
No exhibit numbers are assigned. These exhibits will be identified by the title of the
document.
Exhibit H -: These are additional exhibits admitted after the appeal hearing, as follows:
Exhibit H1: June 3, 2021, email chain from Kari Sand to hearing parties.
Exhibit H2: June 7, 2021, email from Scott Edwards with attached 2021
“TracFone Calculation of Refund Due,” no retail margin included.
Glossary
Audit Period: The period of time subject to the City’s audit of TracFone, which was
January 1, 2007, through May 31, 2013.
City: City of Renton.
COL: Conclusion of Law.
Direct Sales: Network telephone sales from TracFone directly to the consumer.
Final Determination: The $336,442.72 tax assessment under appeal, issued on
October 17, 2019.
FOF: Finding of Fact.
Non-Direct Sales: Sales made by TracFone to its Retail Agents and distributors.
1 At hearing Mr. Edwards argued that the terms and conditions were presented in support of his retail
margin argument. The terms and conditions were excluded on the basis t hat they were not relevant to that
argument.
TracFone Appeal – Final Decision
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Primary Tax Amount: The base tax amount due from application of the City’s 6% tax
rate, exclusive of penalties and interest. The Final Determination Primary Tax Amount
was $147,108.72. Prior to the appeal hearing the City reduced the Primary Tax Amount
to $126,701.21 after it discovered errors in its computation of Direct Sales.
Retail Agents: Companies that purchase air cards from TracFone and sell them to
consumers. Examples include Walmart, Circle K and Fred Meyer.
SJ Ruling: The summary judgment ruling issued for this appeal, dated March 12,
2021.
Tr.: Transcript, followed by transcript page number.
TracFone: TracFone Wireless Inc., Appellant.
TRS: Tax Recovery Services, LLC. TRS conducted the audit under appeal. TRS
works as a contractor for the City.
TRS Multiplier: The conversion factor formulated by TRS to convert total Direct
Sales within the City to total Non-Direct Sales within the City.
Findings of Fact
Procedural:
1. Appellant. TracFone Wireless Inc., 9700 NW 112th Ave., Miami, FL 33178.
2. Hearing. A virtual hearing on the TracFone appeal was held via Zoom on May
27, 2021, at 8:30 am.
3. Appeal Description. TracFone challenges a $336,442.72 utility tax assessment
issued by the City for TracFone airtime sales within the City of Renton. The Audit
Period was for January 1, 2007, through May 31, 2013. Ex. C7. The assessment was
first issued by the City on February 14, 2019, for a Principal Tax Amount of
$147,108.72, $36,7777.30 in penalties and $142,108.72 in interest. Ex. C5. As
authorized by RMC 5-26-18A, TracFone requested a correction and conference on the
amount of the assessment. A conference was held and the City subsequently issued a
Final Determination on the assessment on October 17, 2019. The Final Determination
affirmed the February 14, 2019, assessment and added another $10,297.66 in penalties
and interest to arrive at the $336,442.72 Final Determination. Ex. C7. TracFone’s
appeal challenges the October 17, 2019, Final Determination. TracFone filed its appeal
on November 6, 2021. Ex. T23.
TracFone Appeal – Final Decision
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TracFone’s written appeal was focused upon two legal issues, specifically (1) that the
City does not have statutory authority to impose a utility tax on the type of telephone
business conducted by TracFone; and (2) even if TracFone is subject to the utility tax,
most of its revenues are exempt from the tax under a state statute resale exemption
clause.
4. Payment of Assessment. TracFone paid the $336,442.75 assessment under
protest on November 4, 2019. Tr. 29.
5. Final Determination Adjustments. On May 15, 2021, the City sent a $95,334.64
partial refund to TracFone for the $336,442.75 TracFone paid on November 4, 2019.
Ex. C23. The refund served as a correction of two errors. TRS acknowledged that it
had omitted the population from the 98178 zip code in its population estimates and also
that it had not applied a newly adopted late payment interest rate that went into effect on
January 1, 2016. Ex. C12. The refund total included “applicable interest of
$4,078.64.” Ex. C23.
TRS had initially miscalculated the refund amount due to miscommunication with
Renton on the outstanding interest paid. TRS advised TracFone it was recommending a
refund of $80,958. Ex. C12. The actual amount of the refund, as previously noted, was
$95,334.64. Ex. C23. Ms. Crisp testified that the reason for the increase in refund was
because her $80,958 refund estimate was based upon an interest schedule that Renton
ultimately didn’t use to issue its final TracFone assessment. Tr. 20. Ms. Crisp had
mistakenly believed that Renton’s Final Determination was based upon a corrected
interest schedule that she had sent after the one used by Renton to assess its Final
Determination. Id.
6. Summary Judgment. The two legal issues raised in the TracFone appeal were
resolved in the City’s favor by a summary judgment ruling issued on March 12, 2021.
Both parties moved for summary judgment on January 29, 2021, and oral argument was
heard on February 23, 2021. The summary judgment ruling determined that (1)
TracFone’s gross revenues from sale of airtime was subject to the utility tax authorized
by RCW 35A.82.060 and (2) that TracFone’s gross revenues from sales to its Retail
Agents and distributors were not exempt under a proviso of RCW 35A.82.060
exempting purchases of network telephone service for resale. Upon TracFone’s motion
for reconsideration, the summary judgment ruling was revised in a reconsideration
decision dated April 19, 2021. The reconsideration decision acknowledged that sales of
TracFone handsets was not subject to the scope of the summary judgment motions or
the relief requested by the parties. TracFone’s request for reconsideration on other
issues addressed in the summary judgment ruling were denied.
TracFone Appeal – Final Decision
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7. Appeal Hearing Issues. At the appeal hearing, TracFone challenged how the
City computed TracFone’s gross income and how it computed late payment interest.
On the gross income issue, TracFone contended that the gross revenue assigned to it by
the City should be reduced by the retail markup added to it by its Retail Agents. The
City took the position that the gross revenue figures given to it by TracFone didn’t
include the retail markup so no reduction was warranted. The merits of the markup
issue are addressed in FOF No. 8 below.
On the late payment interest issue, TracFone asserted that all past due interest should
have been computed pursuant to the rates imposed by a City ordinance that went into
effect after much of the late interest had accrued. The City took the position that the
newly adopted rates only applied prospectively to accrued late interest after adoption of
the ordinance. After the close of the hearing, the City agreed with TracFone’s position
that the newly adopted rates should apply to all late payment interest. TracFone and the
City further agreed that under the gross income amounts assigned by the City, the late
payment interest under the newly adopted rate would total $12,085.01 (down from
$156,556.67 in the Final Determination) and late penalties would total $43,078.41 (up
from $35,777.30 in the Final Determination). Ex. H2.
The two appeal hearing issues raised by TracFone were not identified in its written
appeal, Ex. T23. The City did not object to the two issues being beyond the scope of
the appeal.
8. TracFone Gross Income Methodology. TRS reasonably and rationally estimated
TracFone’s gross income for the Audit Period. Schedule 4 of Exhibit C19 provides the
most useful mathematical depiction of the TRS methodology for calculating gross
income for each month of the Audit Period. The narrative below explains the basis for
the computations.
The TRS methodology is somewhat complex because TRS had to estimate gross sales
from incomplete information. TracFone was unable to provide the City with direct data
on how much it made in gross sales of network telephone service within the City of
Renton. According to TracFone testimony, it does not keep records of sales made
within Renton city limits as opposed to sales without. Tr. 73-742. Instead, TracFone
provided revenue data on its Direct Sales per zip code partially or entirely within the
2 More specifically, Mr. Dillon testified that TracFone doesn’t have records of when Retail Agents sell its
products or when consumers use it. In contrast, Ex. C6, which was apparently written by TRS, provides
that for prepaid utility taxes, companies typically provide state-wide gross income amounts and those
figures are then proportionately assigned to the city imposing the tax. According to Ex. C6, TracFone
“declined” to provide that type of information. TracFone did not specifically identify why it does not
keep statewide sales figures and/or why it didn’t want to provide those figures to TRS.
TracFone Appeal – Final Decision
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City. See Ex. C5, Data Sheet; Ex. C14. TracFone was also able to provide TRS with
data on its yearly total gross income verses its total Direct Sales income. See Ex. C17.
From this data, TRS was tasked with formulating two major conversions. First, it had
to convert the Direct Sales per zip code to Direct Sales within the City. Second, it then
had to convert the Direct Sales within the City to Indirect Sales within the City. Adding
the Direct and Indirect Sales resulted in the taxable gross income subject to the City’s
6% utility tax. The conversions are more specifically addressed below.
A. Direct Sales Conversion. To convert the Direct Sales per zip code into
Direct Sales for the City, TRS divided the total City population by the total
population of all zip codes partially or entirely within the City of Renton . It
then multiplied this factor against the total TracFone direct network
telephone sales of all zip codes partially or entirely within the City of Renton
to determine how much of those Direct Sales were made within the City of
Renton. See Ex. C19, Schedule 2; Schedule 4, Column D. As a simplified
example, TRS determined that if half of the City’s population was located
within the zip codes located partially or completely within the City, then
approximately half of the TracFone sales within those zip codes were made
within the City. TRS was able to derive population data for the zip codes
and city population for each of the seven years of the Audit Period and
applied a different multiplier for each of those seven years based upon the
differences in population ratios for each of those years. Id; Ex. C22.
B. Non-Direct Sales Conversion. To convert Direct Sales to Non-Direct Sales,
TRS aligned the proportion of Non-Direct to Direct Sales within Renton to
the proportion that applied to the company as a whole. TracFone provided
TRS with the company-wide proportion of Non-Direct Sales verses Direct
Sales for each of the seven years of the Audit Period. See Ex. C6, C17 and
C18. The proportion overall very roughly averaged out to about 4:1 of
Non-Direct verses Direct Sales for the duration of the Audit Period.
Applying this ratio, TRS would multiply the Direct Sales for a particular
year by about 4 to arrive at its estimate for Non-Direct Sales.
In practice, TRS applied a ratio specific to each audit year (the TRS
Multiplier) to come up with an Non-Direct Sales estimate for each of the
Audit Period years. The TRS Multiplier varied from 2.70 to 4.88. Ex. C19,
Schedule 4. TRS then added the Direct Sales figures to the estimated Non-
Direct Sales to arrive at a total gross income amount for each of the audit
years3. See Ex. C19, Schedule 4.
3 Direct Sales were actually converted to Non-Direct Sales on a monthly basis, but the TRS Multiplier
was kept the same for the entire year.
TracFone Appeal – Final Decision
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C. Exclusions from Direct Sales. Before multiplying the Direct Sales figures to
arrive at the yearly Non-Direct Sales, the Non-Direct Sales were reduced to
exclude sales revenues that were not subject to the utility tax, specifically
data usage, interstate network service and sales of handsets and accessories.
See Ex. C19, Schedule 4, Columns B and C and Schedules 7 and 8.
TracFone provided the data necessary for this determination. See Ex. C15
and C16. Interstate calls are exempt from the utility tax by operation of
RCW 35A.82.060. According to the testimony of Ms. Crisp, uncontested by
TracFone, data usage is exempt by operation of the Internet Tax Freedom
Act. Tr. 12. The parties were in agreement that TracFone revenue from sale
of handsets and accessories (other than air cards) was not subject to the
utility tax. See Ex. C6, p. 3. TRS asserts that the sales of handsets and
accessories were not included in the gross income it computed for the utility
tax. Id. TracFone has not disputed this position.
D. Retail Margin Deduction. One of the two most contested factual issues
raised by TracFone during the appeal hearing was whether Non-Direct Sales
should be reduced by a retail margin4 factor. It is determined that Non-
Direct Sales need not be adjusted for retail margin, since the margin was
never included in the revenue sales reported by TracFone to begin with.
At the hearing, TracFone spent considerable time demonstrating the fairly
self-evident principle that retailers who sell TracFone airtime and TracFone
handsets sell them at a higher price than they paid to TracFone to purchase
them. Mr. Edwards summed up his position at hearing as “[a] retail
number, multiplied by something by a factor, gets you a retail end result.”
There are two ways to interpret Mr. Edwards’ argument, neither of which is
compelling.
The first way to assess his position is to translate his summation into the
City’s terminology, i.e. “a Direct Sales number, subject to the TRS
Multiplier, gets you a Direct Sales end result.” Cast in this light, Mr.
Edwards is pointing out that TracFone airtime sold directly to consumers is
sold at different prices than that sold by TracFone’s Retail Agents such as
Walmart and Circle K. Presumably, TracFone sells its airtime at higher
prices directly to consumers than what it sells to Retail Agents so it won’t
undercut the sales of its Retail Agents. While this may be true, there is no
need to add an adjustment for the mark up made for TracFone Direct Sales
because that markup is already built into the TRS Multiplier. With the
4 “Retail margin” and “retail markup” have been used interchangeably in this Decision.
TracFone Appeal – Final Decision
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rough approximation that the TRS Multiplier overall is 4:1, it is to be
understood to provide that for every dollar TracFone makes for the prices it
sells directly to the consumer, it makes four dollars for the lower prices at
which it sells to its Retail Agents and distributers. The fact that TracFone
may sell its units at a higher price in its Direct Sales than Non-Direct Sales
is already empirically factored into the TRS Multiplier. It should further be
noted that there is no inconsistency used in the units of measurement in the
TRS Multiplier. TRS was not comparing inches to miles, it was comparing
taxable revenues to taxable revenues5.
The second interpretation of Mr. Edwards’ position was articulated by the
City, which focused on the TRS Multiplier as opposed to TracFone’s
monthly Direct Sales. As previously noted, the multiplier was derived by
dividing TracFone’s company-wide Non-Direct Sales revenues by its
company-wide Direct Sales revenues. The City understood TracFone to be
asserting that its company-wide Non-Direct Sales revenues leads to an
artificially high TRS Multiplier because those revenue figures include the
retail markup. Tr. 62. It that is indeed the TracFone position, the City
effectively derailed it from this one question to Mr. Dillon:
Ms. Sand:
So, is it your testimony that this, that airtime revenue [used for the TRS
Multiplier] includes retail margins from third-party retailers?
Mr. Dillon:
No.
Tr. 102.
5 At hearing, Mr. Dillon testified that the company-wide revenues of TracFone included proceeds from
other than phones, airtime and SIM cards. He noted that TracFone’s revenues arose from “some”
different revenue streams, such as internet advertising. Tr. 4 7. If these other revenue streams comprised
a significant part of company-wide sales that TRS used for the TRS Multiplier, then those sales would
render the multiplier inaccurate if those other revenue streams were not reflected in the Direct Sales data.
Given that TRS has the burden of proof, see COL No. 3, i n the absence of objection from TracFone, it is
presumed that if the other revenue streams were included in the company-wide revenues used for the TRS
Multiplier, the amount of those other revenue sources was not materially significant.
TracFone Appeal – Final Decision
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As testified by Ms. Crisp, see Tr. 28, TracFone would have no reason to
maintain records of revenue that its retailers make from their retail markup
of TracFone airtime cards. There is no basis for offsetting a retail margin in
the TRS Multiplier because the margin was never included in the multiplier
to begin with. The TracFone position, as understood by the City, is devoid
of merit.
9. TracFone Business Model. At hearing, TracFone did not present any contract
that established a materially different business model for some of its revenue than that
established by the City in its summary judgment motion.
The SJ Ruling determined that TracFone operated under a business model that subjected
the full amount of its airtime sales to the utility tax authorized by RCW 35A.82.060.
The parameters of the business model, in turn, were largely based upon a declaration
submitted by Garth Ashpaugh. Mr. Ashpaugh based his assessment of TracFone’s
business model upon a handful of contracts between TracFone and its Retail Agents.
The SJ Ruling recognized that it was possible that TracFone may derive some of its
revenues from contracts that set a different business model than that found by Mr.
Ashpaugh, as follows:
In his declaration, Mr. Ashpaugh does not expressly state that he believes
the contracts to be representative of all the carrier contracts entered into
with TracFone. If TracFone has some contractual arrangements that
materially differ, it is free to bring those up during the final 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.
SJ ruling, p. 3-4.
In short, TracFone was still free to present contracts at hearing establishing that some of
its revenues were acquired under a different business model than that found by Mr.
Ashpaugh and thus may not be subject to the RCW 35A.82.060 utility tax. The material
facts of why the revenues of the Ashpaugh derived business model were subject to
RCW 35A.82.060 were laid out at Page 9 of the April 19, 2021, reconsideration
decision to the SJ Ruling. Those material facts established that under the contracts
reviewed by Mr. Ashpaugh, TracFone and not its Retail Agents served as the telephone
network service provider to the consumer. None of the contracts presented by TracFone
at the hearing changed TracFone’s role as the ultimate service provider to the
consumer6. Per the reasoning of the SJ Ruling and associated ruling upon
6 This includes the QVC contract referenced by Mr. Dillon in his testimony. Tr. 67. Under the QVC
contract, TracFone sells directly to the consumer instead of to its Retail Agents or distributors. This is a
TracFone Appeal – Final Decision
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reconsideration, all the revenue derived from the contracts presented by TracFone
(excluding handset sales etc.) are subject to the RCW 35A.82.060 utility tax.
10. Late Payment Interest. As confirmed at hearing by Ms. Crisp, with the FOF No.
5 Final Determination adjustments, TRS imposed a late interest charge of 12 percent
pursuant to former RMC 5-11-2 for late payments accruing prior to January 1, 2016,
and the late interest rates required by RCW 82.32.050 for late payments accruing after
that date. Tr. 29. Mr. Malone, the City’s tax and license manager, testified that it was
his understanding that the RCW 82.32.050 late payment interest rate only applied to
past due amounts accruing after the rate was adopted and went into effect, which was
January 1, 2016, under Renton Ordinance No. 5756. Tr. 115. Subsequent to the close
of the appeal hearing, the City acknowledged that the late payment interest adopted by
Ordinance No. 5756 (imposed by RCW 82.32.050) should apply to all of the tax
liability accrued by TracFone during the Audit Period and that the City was in error for
imposing 12% interest on any of that liability. See Ex. H1. On June 7, 2021, the parties
then submitted an agreed upon late payment schedule that would apply if the City’s
position on the primary tax amount ($147,108.72) prevailed. Ex. H2. The agreed upon
interest totaled $12,085.01. Id.
11. Penalties. The parties are in agreement that the late payment penalties are
governed by RMC 5-26-14 and that the penalties total $43,078.41.
The penalty imposed in the Final Determination was based upon the version of RMC 5-
11-2 that was in effect immediately prior to the January 1, 2016, effective date of
Chapter 5-26 RMC. Tr. 116. That penalty was assessed at the maximum total amount
allowed, 25% of the primary tax amount assessed in the Final Determination, equaling
$36,7777.30. As noted in FOF No. 5, $5,101.84 of this penalty amount was refunded to
TracFone as a result of the population error identified in that FOF, reducing the total
penalty amount to $31,675.46.
As identified in FOF No. 10, the City ultimately agreed that the version of RMC 5-11-2
in effect immediately prior to the January 1, 2016, effective date of Chapter 5-26 RMC
did not apply to any assessment of late payment interest. In turn, TracFone agreed that
the penalties of former RMC 5-11-2 also did not apply and that RMC 5-26-14 governed
penalties. See Ex. H2. This agreement resulted in an increase in penalty amount from
the FOF No. 5 $31,675.46 amount to the final agreed upon amount of $43,078.41. Ex.
H2.
different business model than that reviewed by Mr. Ashpaugh, but it does not change the material facts,
i.e. TracFone maintains its role as the provider of network telephone service to the consumer.
TracFone Appeal – Final Decision
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12. Final Agreed Upon Tax Liability. The City and TracFone have agreed upon a
tax refund due of $66,513.50 plus $5.20 per diem overpayment interest accruing from
May 27, 2021, if this Decision concludes that no retail margin adjustment is warranted
as described in FOF No. 8.
As identified in FOF No. 10, after the close of the appeal hearing the City agreed that it
had assessed an incorrect amount of late payment interest. The City stated it agreed
with TracFone’s late payment methodology. As a result, the Examiner asked the parties
to submit an agreed upon tax liability schedule based upon an Examiner determination
that no retail margin adjustment was warranted7. The agree upon tax liability schedule
was submitted by TracFone on June 7, 2021. Ex. H2. The schedule includes the agreed
upon penalty and late payment interest identified in FOF No. 10 and 11.
13. TRS Credibility. TracFone has devoted a significant part of its challenge
attacking the credibility and expertise of TRS. The information provided by TracFone
has not proven to make a material difference in any conclusions drawn regarding the tax
liability ultimately imposed by this Decision. TracFone has had ample opportunity to
identify any shortcomings in the work done by TRS. Ultimately, as noted in the
Conclusions of Law, TracFone has the burden of proof in establishing any errors in the
methodology or computations of TRS. TracFone has not identified any grey areas in
methodology or computation where the credibility or expertise of TRS would have
made a substantial difference in assessing accuracy or reasonableness. It is clear that
TRS was saddled with the responsibility of extrapolating and interpolating a significant
amount of data provided by TracFone. TracFone has not identified any methodology
that would have provided more accurate results than that presented by TRS.
Even if TRS expertise and competence were a material factor, TracFone has not
established that TRS was lacking in either. As testified by Mr. Malone, who has years
of experience conducting tax audits, an audit is an interactive process that involves
numerous adjustments as the City and taxpayer work together in reaching a Final
Determination. Tr. 112. Throughout the appeal proceeding, TracFone constantly
referred to the errors identified in FOF No. 5, presumably to cast doubt as to the
accuracy of its assessment. However, there is nothing to suggest that errors of this
nature were unreasonable for an assessment of this complexity. Notably, TracFone
produced no witnesses of its own to claim that these errors were unusual or below the
standard of care expected of a tax audit. Most important, TracFone ultimately has not
identified any other potential errors in the TRS assessment.
7 TracFone had already submitted a tax liability schedule based upon an Examiner determination that a
retail margin adjustment was warranted, although the schedule didn’t include an agreed upon penalty
amount.
TracFone Appeal – Final Decision
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To the City’s credit on the credibility issue, the City has proven a strong good faith
effort to arrive at an accurate assessment. Ms. Crisp readily acknowledged all of her
mistakes and there is no evidence that she, TRS or the City made any attempt to conceal
or mischaracterize any mistakes. Further, the City has shown that its overriding interest
is an accurate assessment as opposed to a large one. The City could have objected to
TracFone’s appeal hearing issues (FOF No. 7) on the basis that they were beyond the
scope of TracFone’s written appeal, but it did not, resulting in a substantial reduction in
late payment interest.
Finally, the soundness of the methodology employed by TRS speaks for itself. The
formulation of the TRS Multiplier and conversion of zip code population to City
population were the most accurate and equitable means of deriving TracFone gross
income from the limited data that TracFone was willing to provide to the City. No
better method was discernable from the record or identified by TracFone.
For all the reasons above, the TRS errors identified by TracFone are not found to make
any material difference regarding the accuracy of the final tax liability imposed by this
Decision.
14. Failure to Meet In Person. Another point repeatedly made by TracFone was that
TRS refused to meet in person to discuss the audit despite allegedly several requests to
do so. Tr. 37. TRS arguably should have agreed to meet in person with TracFone at
least once as requested by TracFone. Ms. Crip testified that she didn’t see such a
meeting as beneficial because she believed TracFone just wanted to debate the legal
applicability of the tax. Id. However, the audit involved hundreds of thousands of
dollars in potential taxes and could set a precedent in Renton as well as the rest of the
state that would cost TracFone tens of millions of dollars. Given the significance of the
legal issues, TRS arguably should have been able to defend its legal position in an in-
person meeting itself or should have invested in a lawyer to do that for it.
TracFone ultimately did successfully identify a couple errors in the audit, specifically
the missing zip code population identified in Finding of Fact No. 5 and the inaccurate
interest rate identified in Finding of Fac No. 10. These errors conceivably could have
been identified earlier if TRS had agreed to meet with TracFone in person. Ultimately,
however, the appellate review process resulted in the correction of error. Further,
there’s no reason that TracFone couldn’t have identified the errors just as quickly
through email correspondence as it could have via an in-person meeting. TRS’s refusal
to meet in person might have been unreasonable, but ultimately it cannot be construed
as having prejudiced TracFone in any material manner.
TracFone Appeal – Final Decision
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15. Appeal Issues Limited to FOF No. 3 and 7. The appeal issues identified in FOF
No. 3 and 7 are all of the issues raised by TracFone in the course of the appeal.
16. Summary Judgment Findings Adopted by Reference. The findings of fact of the
summary judgment ruling and associated reconsideration decision are adopted by
reference.
Conclusions of Law
1. Authority. RMC 5-26-18B authorizes the hearing examiner to hear appeals of
utility tax assessments.
2. Summary Judgment Conclusions Adopted by Reference. The conclusions of
law of the SJ Ruling and associated reconsideration decision are adopted by reference.
3. TracFone Has Burden of Proof. TracFone has the burden of proof to establish
that the Final Determination was erroneous.
RMC 5-26-18(B)(5) provides that the “appellant taxpayer shall have the burden of
proving by a preponderance of the evidence that the determination of the Department is
erroneous.”
The City’s burden is similar to that placed upon taxpayers contesting state excise taxes.
See Smith v. State, 64 Wn. 2d 323 (1964). The Smith case serves as a good indication of
how the burden of proof is to be applied in circumstances of incomplete data, such as
TRS faced in this case. Smith dealt with application of Washington’s business and
occupation tax. At issue in Smith was the levy of business and occupation taxes upon a
tugboat company that derived part of its revenue from renting out its tugboats and other
maritime equipment on the Columbia River. Gross revenue was difficult to estimate
from this business activity because the rented maritime equipment was operated in both
Washington and Oregon waters. Tax liability depended on where the rented vessels
happened to be located in relation to the centerline of the Columbia River. The
centerline serves as the boundary between Washington and Oregon. The Washington
State Tax Commission appears to have thrown its hands up on this issue and simply
determined that 50% of the rental revenue could be attributable to renting activity
happening in Washington waters “where appellants' books and the vagaries of
navigation on the Columbia make a precise mathematical formula impossible.” Id. at
339.
RCW 82.32.180, applicable to the Smith tax at issue, like RMC 5-26-18(B)(5), requires
that “the burden shall rest upon the taxpayer to prove that the tax as paid by the
taxpayer is incorrect, either in whole or in part, and to establish the correct amount of
TracFone Appeal – Final Decision
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the tax.” With this statutory background, the State Supreme Court upheld the 50%
apportionment as follows:
Passing now to the question of apportionment at 50 per cent where appellants'
books and the vagaries of navigation on the Columbia make a precise
mathematical formula impossible, we consider that the state acted fairly and
reasonably. The burden of segregating taxable income from exempt income rests
upon the taxpayer.
Thus, where an apportionment cannot, because of one reason or another, be
made with reasonable mathematical certainty from the books and records of the
taxpayer , and the tax commission, acting with reasonable prudence and
circumspection with regard to all of the circumstances of the taxpayer's
business, declares an apportionment which it deems to be reasonable, the
burden then rests upon the taxpayer to show that the apportionment fixed by the
tax commission is unreasonable, excessive, or has been arbitrarily and
capriciously achieved. Nothing in the record shows us that the 50 per cent
apportionment where employed by the tax commission was either unreasonable,
excessive, arbitrary or capricious.
64 Wn.2d at 339-40 (citations omitted).
The TRS methodology was much more precise and data based than assigning a 50%
apportionment where data was unavailable, as was done in Smith. For the reasons
identified in the FOF, the TRS/City methodology and final adjusted and agreed upon
computations were not unreasonable, excessive, arbitrary or capricious.
4. Primary Tax Amount is $126,701.21. The Final Determination properly
calculated the Primary Tax Amount as revised in FOF No. 5. The revised primary tax
amount was properly calculated as $126,701.21.
As identified in Finding of Fact No. 7, TracFone’s challenge to the Primary Tax
Amount was focused upon how TRS estimated revenues from Non-Direct Sales.
Specifically, as outlined in Finding of Fact No. 8, TracFone asserted that the TRS
Multiplier for gross income was inaccurate because it failed to address the retail markup
added by TracFone’s Retail Agents. As outlined in Finding of Fact No. 8, the TRS
Multiplier did not need to include the markup because the TracFone revenues used to
compute the multiplier didn’t include markup revenues. In short, the multiplier was not
found to be inaccurate due to failing to include a retail markup factor. TracFone did not
identify any other potential or actual material inaccuracy in the TRS estimates of
TracFone gross income or any other part of TRS computations for the Primary Tax
Amount.
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The record clearly establishes that TRS methodology used the best and most accurate
information available to it to compute primary tax income. TracFone has not identified
any compelling alternative methodology to arrive at a more accurate assessment.
TracFone has not made any showing that the TRS computation was unreasonable,
excessive, arbitrary or capricious. For these reasons, the TRS estimate for the primary
tax amount is found to be sufficiently accurate and appropriate for setting the utility tax
liability of TracFone for the Audit Period at issue.
5. Late Payment Interest Totals $12,085.01. Late payment interest for the Audit
Period totals $12,085.01. This a substantial reduction from the $152,556.67 late
payment interest assessed in the Final Determination and the $86,810.02 late payment
interest imposed in the revised assessment identified in FOF No. 5.
As noted in FOF No. 7, one of the two appeal hearing issues raised by TracFone was
whether 12% late payment interest from former RMC 5-11-2 applied to any of the
utility tax debt that accrued from the Audit Period. It is concluded that none of that
accrued debt is subject to the 12% interest rate. All of the accrued debt is subject to the
interest rates imposed by RCW 82.32.050(2), which the parties agree to be $12,085.01.
The 12% interest rate of RMC 5-11-2 was repealed by Renton Ordinance No. 5944 in
November 2019. Ordinance No. 5944 went into effect after TracFone paid off the
assessment under review in October 2019. However, effective January 1, 2016, Renton
adopted Ordinance 5756. Ordinance 5576 imposed a much lower interest rate that was
generally applicable to most if not all Renton taxes, expressly including utility taxes. In
short, the 12% interest rate of RMC 5-11-2, which only applied to the City’s utility tax,
conflicted with the much lower interest rate adopted by Ordinance 5756. For the
reasons outlined below, it is concluded that: (1) the lower interest rate of Ordinance No.
5756 supersedes the 12% interest imposed by RMC 5-11-2; and (2) the lower interest
rate adopted by Ordinance 5756 applies to all of TracFone’s accrued tax liability from
the Audit Period, including debt accruing prior to the January 1, 2016, effective date of
Ordinance No. 5756.
A. RMC 5-11-2 Interest Superseded by Ordinance 5756. As previously noted,
the Ordinance No. 5756 interest rate is substantially less than the RMC 5-
11-2 interest rate. The Ordinance No. 5756 interest rate prevails as a matter
of legislative intent.
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The 12% interest rate adopted into RMC 5-11-2 was adopted by Renton
Ordinance No. 5367 in 2008. Ordinance 5367 adopted RMC 5-11-2B,
which provided that “…any late payment of utility tax shall bear interest at
the rate of 12% per annum until paid.” This provision was repealed by
Renton Ordinance No. 5944 in November 2019.
Ordinance No. 5756, with an effective date of January 1, 2016, adopted
Chapter 5-26 RMC, the “Tax Administrative Code.” RMC 5-26-2 provided
that “…the provisions of this chapter shall apply with respect to the taxes
and fees imposed by Chapter 5-5 (Business Licenses), 5-6 (Admission Tax),
5-8 (Gambling Tax), 5-11 (Utility Tax), and 5-25 (Business and Occupation
Tax Code).” (emphasis added). RMC 5-26-11A provided that late payment
interest was to be governed by RCW 82.32.050. RCW 82.32.050(2)
imposes late interest at “an average of the federal short-term rate as defined
in 26 U.S.C. Sec. 1274(d) plus two percentage points.” In 2007 the RCW
82.32.050(2) interest rate was 7% and this amount steadily declined to over
subsequent years down to 2% for the years 2012 through 2016. See Ex.
C20.
In short, as outlined in the two preceding paragraphs, the late payment
interest rate imposed by RMC 5-26-11A conflicted with the late payment
interest imposed by RMC 5-11-2 from January 1, 2016 (the effective date of
RMC 5-26-11A) through November 2019 (the date the 12% interest rate
was repealed). RMC 5-26-11A was the more general of the two conflicting
provisions, since it applies to several City types of taxes whereas RMC 5-
11-2 only applies to utility taxes. The RMC 5-26-11A tax was also the
most recently adopted late payment interest for utility taxes, since it went
into effect in 2016 and the 12% rate went into effect in 2008.
Fortunately, there is case law that directly addresses conflicting statutory
provisions in circumstances where the most recently adopted statute was
also the more general of the two. As summarized in one court opinion:
Under the general-specific rule, a specific statute will prevail over a
general statute. Wark v. Wash. Nat'l Guard, 87 Wn.2d 864, 867, 557
P.2d 844 (1976) ("It is the law in this jurisdiction, as elsewhere, that
where concurrent general and special acts are in pari materia and
cannot be harmonized, the latter will prevail, unless it appears that
the legislature intended to make the general act controlling."). As
this court recognized in Wark, "It is a fundamental rule that where
the general statute, if standing alone, would include the same matter
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as the special act and thus conflict with it, the special act will be
considered as an exception to, or qualification of, the general
statute, whether it was passed before or after such general
enactment." Id.; see State v. Conte, 159 Wn.2d 797, 803, 154 P.3d
194, cert. denied, 552 U.S. 992 (2007). Furthermore, if the general
statute was enacted after the specific statute, this court will construe
the original specific statute as an exception to the general statute,
unless expressly repealed. Wark, 87 Wn.2d at 867 ("If it was passed
before the general statute, the special statute will be construed as
remaining an exception to its terms, unless it is repealed by express
words or by necessary implication."); State ex rel. Dep't. of Pub.
Serv. v. N. Pac. Ry., 200 Wash. 663, 668, 94 P.2d 502 (1939) ("`It is
elementary that a general statute or rule, though subsequently
enacted or promulgated, does not affect a special statute or rule.'"
(internal quotation marks omitted) (quoting In re W. Barton St.
Sewer, 163 Wash. 645, 647, 1 P.2d 858 (1931))).
Residents v. Site Evaluation Council, 165 Wn. 2d 275, 309 (2008)(emphasis
added).
As discussed in the Residents case, specific code provisions prevail over the
general even if the general is the later adoption, unless contrary to
legislative intent. For late interest payments, it must be concluded that the
legislative intent in adopting Chapter RMC 5-26 was to have a uniform
code of taxation apply to City taxes. The last whereas clause to Ordinance
No. 5756, which adopted Chapter 5-26, provides that “the Council wishes
the City to administer all tax codes of the City including Chapter 5-5, 5-6,
5-7, 5-8, 5-11 as well as 5-25 consistently.” The Council followed through
on this intent by expressly subjecting all of its tax codes to Chapter 5-26 in
RMC 5-26-2. It would be contrary to this intent to construe RMC 5-11-2 as
still applying a yearly 12% tax after the adoption of Chapter 5-26 RMC.
Indeed, there is no apparent reason why the Council would want to subject
late utility payments to a higher interest rate than any of its other taxes. The
retention of the 12% interest rate after the adoption of Chapter 5 -26 RMC
appears to have been an oversight, as evidenced by the fact that the City
Council ultimately repealed the 12% tax by Ordinance No. 5944 in
November 2019. For these reasons, it is concluded that the City Council
did not intend the 12% interest rate to remain in place upon the effective
date of Chapter 5-26 RMC. The 12% interest rate is found to be implicitly
repealed upon the effective date of Chapter 5-26 RMC.
TracFone Appeal – Final Decision
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B. 12% Interest Inapplicable to Tax Debt Accruing Prior to January 1, 2016.
At the appeal hearing, TracFone and the City disagreed as to whether the
interest rate set by Ordinance 5756 only applied prospectively to late
payments accruing after the effective date of the ordinance. After the
hearing, the City acknowledged that TracFone was correct that the
Ordinance 5756 interest applied to all of TracFone’s late payment debt. It is
concluded that the current position of TracFone and the City is correct and
that the Ordinance 5756 interest rate applies to all late payment liability
accrued by TracFone during the Audit Period.
The determinative case on the late payment interest issue is Group Health v.
City of Seattle, 146 Wn. App. 80 (2008). The Group Health cases involved
a challenge to Seattle’s imposition of business and occupation taxes upon
Group Health. One of the issues in Group Health was whether a newly
adopted overpayment interest provision applied to overpayments that were
made prior to enactment. Seattle argued that the newly adopted
overpayment interest operated prospectively only and that applying the
higher overpayment interest prior to the date of enactment would be an
unauthorized retroactive application of the new rate. The Group Health
court disagreed, holding that the overpayment interest rate should not be
construed as applying retroactively, but rather should be construed as a
remedy that is applied at the time of assessment. 146 Wn. App. at 101-103.
In reaching this conclusion, the Group Health court relied in part upon
Henry v. McKay, 164 Wash. 526 (1931). The Henry court held that a newly
enacted statutory interest rate applied to tax assessments made in years
before the interest rate was changed. Id. at 534.
Under Group Health, the City was correct in agreeing that the
underpayment interest rate adopted into RMC 5-26-11 on January 1, 2016,
applied to all late payment liability accruing prior to that date. The City
assessed late payment interest for the Audit Period in 2019, which was after
the date that RMC 5-26-11 went into effect. Consequently, the interest rate
adopted by RMC 5-26-11 applies to all late payment liability that accrued
during the Audit Period.
C. Late Payment Interest is $12,085.01. Applying the late payment interest rate
required by RCW 82.32.050(2), the late payment interest due from TracFone
on the date of its November 4, 2019, payment was $12,085.01. The
computation of the late payment is broken down by year in Ex. H2. As
outlined in FOF No. 10, Ex. H2 was agreed upon by the parties. The Ex.
H2 computations appear to be consistent with RCW 82.32.050(2), which as
TracFone Appeal – Final Decision
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concluded in COL No. 5B sets the applicable late payment interest rate for
all late payment interest liability.
6. Underpayment Penalty is $43,078.41. The penalty for underpayment of utility
tax should be 34% of the Principal Tax Amount as opposed to the 25% assessed in the
Final Determination. This results in an increase in the penalty amount from $31,675.46
to $43,078.41.
As determined in FOF No. 11, the penalty amount for the Final Determination was
based upon the version of RMC 5-11-2 in place prior to the effective date of Chapter 5-
26 RMC. For the same reasons that the late payment interest rate of RMC 5-26-11
applies to the Primary Tax Amount, RMC 5-26-14(1) and (2) sets the underpayment
penalty amount. Under the Group Health decision, the penalty, like late interest, is a
remedy that should be considered imposed at the time of assessment. RMC 5-26-14A
and B adopts by reference the penalty provisions of RCW 82.32.090(1) and (2).
RCW 82.32.090(1) imposes a total penalty of 29% of the primary tax amount if
payment is not made within the last day of the second month of the date the tax is due.
RMC 5-26-6A provides that utility taxes are due quarterly by the end of the month
following the reporting period. TracFone didn’t pay its utility tax until more than six
years after the end of its reporting period. The full 29% penalty is due.
RCW 82.32.090(2) imposes an additional 5% penalty if taxes are “substantially
underpaid.” “Substantially underpaid” is defined by RCW 82.32.090(2) to be that “the
taxpayer has paid less than eighty percent of the primary tax amount and the amount of
underpayment is at least $1,000.00.” TracFone had failed to pay any of the Principal
Tax Amount by the date it was due and that amount was well over $1,000.00. For these
reasons, the 5% penalty applies as well, bringing the total tax penalty under RCW
82.32.090(2) to 34%.
The Principal Tax Amount in the October 19, 2019, Final Determination was
$147,108.72. As modified by the Direct Sales correction in FOF No. 7, this amount
was reduced to $126,701.21. 34% of this amount is $43,078.41, which constitutes the
tax penalty required by RCW 82.32.090(2). That amount has also been agreed upon by
the parties if this Decision finds a retail margin adjustment described in FOF No. 8
doesn’t apply to Non-Direct Sales. Ex. H2.
7. $66,513.50 Refund Due. TracFone is due a refund of $66,513.50 plus an
additional per diem rate of overpayment interest of $5.20 per day from May 28, 2021, to
the date of payment.
TracFone Appeal – Final Decision
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As determined in FOF No. 5, TracFone paid $336,442.75 on November 4, 2019. The
Primary Tax Amount due at that time was $126,701.21 as concluded in COL No. 4. Per
COL No. 5 the late interest for that amount was $12,085.01 and per COL No. 6 the
penalty was $43,078.41. Adding the Principal Tax Amount, late interest and penalty
amount, the amount due on November 4, 2019, was $181,864.63, resulting in an
overpayment by TracFone on that date of $154,578.06. As determined in FOF No. 5,
the City sent TracFone a $95,334.64 refund on May 15, 2021, for errors in the Final
Determination based upon inaccurate population and incorrect interest. This reduced
TracFone’s overpayment as of that date to $63,322.06. The $63,322.06 overpayment
has been accruing overpayment interest since the refund made on May 15, 20218. RMC
5-26-13E provides that overpayment interest shall be governed by RCW 82.32.060,
which in turn provides that the overpayment interest rate shall be the same as the
underpayment rate set by RCW 82.32.050(2). The parties agreed upon an overpayment
interest amount of $3,191.43 through May 27, 2021, with a per diem rate beyond that
date of $5.20. Ex. H2.
DECISION
The Final Determination is modified as set forth in Ex. H29. TracFone is entitled to a
refund of $66,513.50 with per diem interest of $5.20 accruing from 5/27/21.
DATED this 9th day of May 2021.
City of Renton Hearing Examiner
RMC 5-26-19: JUDICIAL REVIEW OF HEARING EXAMINER DECISION
The decision of the hearing examiner is final, subject to review by either party under the provision of
RCW 7.16.040, so long as the appealing party files and serves up on all necessary parties the petition for
granting a writ of review within twenty (20) days of the date of issuance of the hearing examiner’s
decision.
8 The refund made on May 15, 2021, included “applicable interest of $4,078.64” according to the letter
accompanying the refund. See Ex. 23. Presumably, this was overpayment interest was correctly
assessed, as it was part of the final refund calculation agreed upon by the parties if this Decision found no
retail margin necessary. See Ex. H2.
9 Note that Ex. H2 only includes the Excel spreadsheet for gross income calculated without the retail
margin adjustment advocated by TracFone as described in FOF No. 8D.
TracFone Appeal – Final Decision
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.
TracFone Utility Tax Appeal
Transcript by Rev.com
Page 1 of 146
Appendix A
May 27, 2021 Hearing Transcript
Tracfone Utility Tax Administrative Appeal
Note: This is a computer generated transcript provided for informational purposes only. The reader should
not take this document as 100% accurate or take offense at errors created by the limitations of the
programming in transcribing speech. A recording of the hearing is available at the City’s hearing examiner
website should anyone need an accurate rendition of the hearing testimony.
[Summary for excluded audio: The examiner’s recording missed the beginning of the hearing so this
summary is provided in lieu of the computer generated transcript (the City Clerk’s Office has a complete
recording). The hearing commenced with argument on the City’s motion in limine. The examiner ruled
that prehearing motions and associated exhibits would be considered part of the appeal hearing record if
brought up, but that the parties could still object on grounds of relevancy when the prehearing motions
are referenced. This ruling specifically addressed Mr. Malone’s Fred Meyer receipts. Contracts and resale
certificates would be admissible to the extent they are relevant to addressing the TRS methodology of
computing the tax. The admissibility of the contracts, resale certificates and depositions were to be
deferred until they’re brought up during the hearing to assess relevancy at that time. In summary, all
documents identified in the final exhibit lists were to be considered admitted into the record except for
those documents identified in the City’s motion in limine. The admissibility of those documents would be
assessed when they’re presented during the hearing.]
Mr. Edwards: [inaudible 00:00:01] in interest and over $36,000 in penalties. Even under the city's theory
of liability, the assessment was calculated incorrectly. There were multiple mistakes in the computation,
some of which tax recovery services and the city have admitted, and some of which they have not yet. In
a letter dated March 18, 2020, identified as Track Phone Exhibit 24, and just days after the summary
judgment decision was issued, [Ms. Crisp 00:00:43] sent a letter to Mr. [inaudible 00:00:47] and I admitting
that she had omitted including data from a written zip code, 98178 in her calculations. And that the
correction of that error reflected an overpayment, over assessment, of $20,407 in tax. This error had been
pointed out to her during her deposition in December and in computations of Track Phone's expert Tom
Hilton, which were received in early January. The correction of that error matches the computations
provided by Mr. Hilton.
Mrs. Crisp also admitted that TRS had miscalculated interest on the assessment, and as a result,
indicated that the combined change in the computation of tax and the computation of interest resulted
in an overpayment of $80,958. Two months later, on May of this 15th, the city sent Track Phone a refund
check that was for over $95,000. The refund amount jumped from 80 to 91 thousand, and there was an
additional $4,000 of refund interest added to that.
Track Phone believes that there are at least two more errors in the assessment methodology.
Again, even under the city's theory of liability. One goes to the computation of tax and the other goes to
the computation of interest. First, we will demonstrate that the TRS methodology overstates t he
wholesale or non-direct sales on which tax was calculated. And secondly, that the interest continues to
be computed incorrectly, and there remains a significant over-computation of interest. We'll show that
the refund amount actually owed to Track Phone, again, under the city's own theory of liability, is an
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additional roughly 92,000 over and above the 95,000 that the city has recently submitted. And with that,
I am ready to call Ms. Crisp as the first witness.
Mr. Olbrechts: Okay. Miss Crisp, I'll need to swear you in, if you could raise your right hand. Do you swear
firm to tell the truth, nothing but the truth in this proceeding?
Ms. Crisp: I do.
Mr. Olbrechts: Okay, great. All right. Go ahead, Mr. Edwards.
Mr. Edwards: So Miss Crisp, can you please tell us what your role with tax recovery services is.
Ms. Crisp: I'm co-founder and Vice President. My title is Vice President of Administration and
Technical Analysis. I've been doing [inaudible 00:04:18] or tax recovery service for some time.
Mr. Edwards: Am I correct in understanding that you performed the majority of the work on the Track
Phone audit?
Ms. Crisp: Yes.
Mr. Edwards: Your degree is in mechanical engineering. Is that correct?
Ms. Crisp: Yes, it is.
Mr. Edwards: And you don't have any formal training as an auditor, correct?
Ms. Crisp: No. I was trained on the job. My audit supervisor is President of Tax Recovery Services,
and [inaudible 00:04:50] a lot of experience. And he walked me through and worked with me very
carefully to make sure I was properly trained.
Mr. Edwards: And he trained in the computation of utility tax on pre-paid cellular service sold by not
facilities-based companies?
Ms. Crisp: We have worked through that, but that's a pretty new phenomenon. And so we have to
learn, just like any auditor. We're not experts in every field that we audit. We become knowledgeable
enough to do the audit properly as we go along.
Mr. Edwards: Do you understand what I mean if I use the term network carrier?
Ms. Crisp: Yes. That would be like AT&T, T-Mobile.
Mr. Edwards: And you would agree that Track Phone is not a network carrier, correct?
Ms. Crisp: I believe so. I mean they're a mobile, virtual telephone operator. And you use the network
carriers. You have a contract with them to provide network telephone access to your customers.
Mr. Edwards: Do network carriers sell prepaid wireless?
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Ms. Crisp: Yes. They do.
Mr. Edwards: Yeah. Is the data available to Track Phone different than data available to network carriers
with respect to prepaid wireless?
Ms. Crisp: If they're different in any way, I don't think it's material to their taxability.
Mr. Edwards: That's not the question. The question is whether the data is different, not the materiality
of the difference in the data. Is the data different? Yes or no?
Ms. Crisp: I think that's far too technical of a question to be asking an auditor. An expert, the science
might be able to tell you. But whether your activity is still taxable. That's what an auditor cares about.
Mr. Edwards: Do you have any experience auditing network carriers?
Ms. Crisp: You mean tax them?
Mr. Edwards: Network carriers.
Ms. Crisp: Network carriers. Well T-Mobile and AT&T, yes. I mean, those kinds of companies, we've
done quite a few audits. By the time Track Phone went out, I had audited 26 telephone companies.
Mr. Edwards: Isn't it true that the information that you got in your audits of network carriers is different
than the type of information you were able to get from Track Phone?
Ms. Crisp: Yes. They hire vendors to keep track of what their taxability is in a city in question. Track
Phone did not keep any of that information. We basically had to do Track Phone's tax to support them.
We had to come up with scant information and then come with an estimate in the best of our ability,
because Track Phone didn't keep the information that is required to do their city taxes.
Mr. Edwards: What is the information you believe is required to be able to do the city taxes?
Carrie Sand: Objection. [inaudible 00:08:49].
Mr. Olbrechts: Overruled. Please answer the question, Miss Crisp.
Ms. Crisp: All right. A tax payer needs to understand that they need to pay the city taxes and they
need to keep track somehow to the best of the ability of the gross income that they're making inside of
the city. They need to keep track, or find a really good way to estimate it in the regular course of business
according to the code.
They need to have information on all... They have to be able to separate out what's interstate,
known as interstate and international, at the local level. Track Phone didn't' do that. You did keep your
equipment separate, so that was good. That came through. Sorry, when I get nervous, my mind just goes
blank. So you have equipment, you have interstate-owed data. The data information, how much of it is
internet access that's not taxable. At a local level, you didn't keep that. So you didn't have the income
calculated. You didn't have the data separated out in the regular course of business. You aggregated your
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long distance and your local, I mean your interstate and your intrastate, and your international, all in one
big lump sum. And it took us months, well, over a year, to find out that you even had zip code date for us
to work with.
As auditors, we're supposed to audit your taxes and how you calculate your taxes, and we were
put in a position where with scant information, co-mingled information, that we had to do your taxes for
you. That's not what we're hired to-
Mr. Edwards: Mrs. Crisp, you're going well beyond the question that I've asked and making a speech.
I'm going to ask you to please limit your responses to the questions that I ask you.
Ms. Crisp: You asked a very general question. I gave a general answer.
Mr. Edwards: You told me that Track Phone did not maintain the records that it was required to
maintain. I asked you identify what records were required to be maintained.
Ms. Crisp: And I gave that to you.
Mr. Edwards: And more. Did you ever request copies of any contracts between Track Phone and any of
the network carriers?
Ms. Crisp: No, we did not.
Mr. Edwards: Did you any contracts between track phone and retailers such as Walmart?
Ms. Crisp: No.
Mr. Edwards: Did you ever request any contracts between Track Phone and distributors?
Ms. Crisp: No.
Mr. Edwards: Did you prepare the spreadsheet that Tax Recovery Service used to calculate the tax that
it believes was owed by Track Phone?
Ms. Crisp: Yes, I did.
Mr. Edwards: Okay. Would it be fair for me to characterize there being basically three main versions of
that spreadsheet? Which had been labeled Prelim, Prelim Two, and Prelim Three?
Ms. Crisp: We made several different stabs at it, trying to come up with something that would work.
We needed something that would be easy to check for errors in those kinds of things. So, I sent you quite
a few of the preliminary spreadsheets. I don't know if I would characterize that as one, two, three, because
there were several improvements that we made. We would make something and we would say, oh. This
is [inaudible 00:13:30]. We would make something and say that this could be improved this way or that
way. So by the time we sent it out, it had been checked over several times and improved in many ways,
but before you received it.
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Mr. Edwards: Is the answer to my question, no, there were more than three versions?
Ms. Crisp: Yeah. I don't know what your definition of versions are, but you asked for the whole thing
and everything we did to get to the point where we were ready to send it out. Every improvement we
made and then the previous version to that improvement.
Mr. Edwards: Well, I would like to share my screen now to show you what has been... What was listed
on our exhibit list as, I guess, exhibits five, six and seven, which collectively were exhibit 12 to your
deposition. Oops. It looks like the screen sharing is disabled.
Carrie Sand: I was just going to able you, but I am not sure how to do that, Mr. Edwards. Give me one
second.
Mr. Olbrechts: Mm-hmm (affirmative).
Carrie Sand: Okay.
Mr. Olbrechts: Yeah. I think if you make them a host, that usually takes care of it.
Carrie Sand: Okay. I will do. Double check now, Mr. Edwards.
Mr. Edwards: Yeah. Okay. It looks like that will work, so hopefully-
Mr. Olbrechts: Yeah. I can see it now.
Mr. Edwards: ... you can now see my screen. I'm going to blow this up a little bit so it's a little bit easier
for people to read. Miss Crisp, can you see the document?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: And this is an email from Tax Recovery Services to the city of Renton, dated June 30th of
2017. You see that up top here?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: And it has two different attachments to it. You'll see one of them is identified as Excel
Prelim Renton Track Phone.xls. Do you see that?
Ms. Crisp: Yes.
Mr. Edwards: Do you recognize this as an email transmitting a version of the schedule that you've
prepared?
Ms. Crisp: Yes.
Mr. Edwards: And the narrative here provides a summary of the methodology that was used?
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Ms. Crisp: Yes.
Mr. Edwards: And then the other attachment, Renton Track Phone Methodology.doc, it was a written
Word document that had a lengthier narrative description of the mechanics of the computation on the
Excel spreadsheet?
Ms. Crisp: Yes.
Mr. Edwards: Is that correct?
Ms. Crisp: Yes.
Mr. Edwards: Okay. And so, as I scroll down below the email, I'm now showing, it says Track Phone Audit
Methodology. Is this the Word document that was attached to that email?
Ms. Crisp: I would think so.
Mr. Edwards: And this was produced by the city and was identified in production as being the
attachment to the email and is consecutively numbered in the base numbering. And then as I scroll past
that, I get to a print-out that appears to be a print-out of a spreadsheet. Do you recognize this?
Ms. Crisp: Yeah. That's a corrupted copy that you [inaudible 00:17:19] snipped. It's not printed out
at all like it should be.
Mr. Edwards: Was this Excel file created in Microsoft Excel?
Ms. Crisp: No. We use LibreOffice, probably OpenOffice at this time, and then we can save it as an
Excel sheet. I think the problem comes in, it gets corrupted when the [inaudible 00:17:52] company takes
it to a metadata analysis. And there's just so many macros in here, when we created the spreadsheets. It
just freaks out their security system, and that's how you ended up with the corrupted copies, as much as
we can tell.
Mr. Edwards: Do you recall, during your deposition, how I demonstrated to you that if I open the
allegedly corrupted copy with Microsoft Excel we get the same problem. But if I open that exact same file
in LibreOffice, the alleged corruption does not show?
Ms. Crisp: Oh, I'm sorry. I don't remember that at all.
Mr. Edwards: Well, I'm going to move now to what's exhibit eight, which is [inaudible 00:18:53].
Mr. Olbrechts: Yeah. I think just for audio record, the last document we were looking at was Exhibit Five,
I believe.
Mr. Edwards: Yeah. It's actually five, six, and seven.
Mr. Olbrechts: Okay. That was all six. Five, six and seven.
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Mr. Edwards: In our witness list, the email in each of the attachments were identified as separate
incidents. But it turns out that the deposition exhibit had combined them all as one so that that's how it
had played out.
Mr. Olbrechts: Okay.
Mr. Edwards: So are you able to see the electronic file that has been opened on my screen?
Mr. Olbrechts: I'm not yet. Are the parties having, seeing it? I'm just seeing a gray screen.
Mr. Edwards: Okay. Let me if I do a new share, it looks like. Okay.
Mr. Olbrechts: Okay, yeah. I see a spreadsheet now.
Mr. Edwards: So I had opened this in Excel. As I was opening it, I got an error message that indicated
that there were problems with the file and asked me if I wanted to continue. I said yes. And you'll notice
at the top, it says there's a problem with the file. And as we look at the summary sheet, the information
for the individual years is not reflecting in the various cells. Do you see that?
Mr. Olbrechts: Yes.
Ms. Crisp: I thought we fixed all of these things. So you're saying you never got good copies of these
things? I thought we sent you good copies of it. [crosstalk 00:20:45] understand.
Mr. Edwards: The problem has nothing whatsoever to do with the file filters. It has to do with the fact
that this was created in OfficeLibre. If I were to open the program, OfficeLibre, and open the same file,
you would see all of this material. So I've been able to observe the material, but anybody opening those
files using Microsoft Excel, a program that I understand that you don't have, this is what they end up
seeing.
Ms. Crisp: Excuse me. I'd like to object to that. We've been in [crosstalk 00:21:32] since 2004, and
we've never-
Mr. Edwards: Miss Crisp-
Mr. Olbrechts: Okay. Yeah. Miss Crisp, just let your counsel, Miss [Sand 00:21:40] will do cross
examination and will let you raise that issue at that point.
Ms. Crisp: Sorry.
Mr. Edwards: But the main focus I wanted here is this affects pulling through information to the
summary, but you can still see, if I go to the unreported revenue tab, this is where the primary work for
the assessment was done. Is that correct?
Ms. Crisp: Yes. That's the unreported revenue data sheet.
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Mr. Edwards: Yeah, okay. So I am going to ask you a series of questions about this to walk through, so
that we can all understand the mechanics of what was done to compute these figures. So if I go over here
to column U, where it says internet sales, can you confirm that this is the retail sales data provided to TRS
from Track Phone, for specific zip codes that TRS identified as being at least partly within the city of
Renton?
Ms. Crisp: Yeah.
Mr. Edwards: And column V, it is similarly retail sales that come out of a second system of Track Phone?
That they have two different systems for different types of retail sales?
Ms. Crisp: Yes. I'm not sure whether those numbers from this particular sheet, because you reached
way back to when we didn't send to Track Phone, when it was just preliminary and we were working with
the City of Renton on it. So whether or not these were updated to include that zip code that Track Phone
did not send us or not, I can't tell you that. But [crosstalk 00:23:49] from this zip code data as [inaudible
00:23:52].
Mr. Edwards: Well, I'm going to try to make this a lot more streamlined. This exact same file was also
sent to Track Phone. This, the data in columns U and V, are exactly the same in this file. In a second file
that you sent to the city, it is called Excel Prelim Two Renton Track Phone, and exactly the same as a third
file that you sent to both the city and Track Phone in August, that is titled Excel Prelim Three Renton Track
Phone. And part of the focus of my question is going to be how this is computed and the one difference,
the only difference, that is between this version and those other two.
Carrie Sand: Excuse me. We have to strike everything that Mr. Edwards just said, because he is
essentially testifying, and there was not even a question posed to Mrs. Crisp.
Mr. Olbrechts: Okay. I'm going to overrule. I'm going to say Mr. Edwards is alleging that, and he's going
to bring that out in his testimony is my understanding, so.
Mr. Edwards: That is correct.
Mr. Olbrechts: Yeah.
Mr. Edwards: I'm trying to help make this run more smoothly, to try to get us through this in less than
15 hours.
Mr. Olbrechts: Okay. All right. Yeah. Yeah. I'll allow it, taken essentially an opening statement argument.
That kind of thing. Okay, go ahead.
Mr. Edwards: An offer of proof-
Mr. Olbrechts: Yeah, yeah.
Mr. Edwards: ... for it. So let me start by looking at cell U7, where it shows the number $5,169.09. Do
you see that?
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Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: So am I correct in understanding that reflects the January 2007 retail sales figure provided
by Track Phone?
Ms. Crisp: Apparently, this early version doesn't have the dates next to it. If were in Prelim Three,
the one that we sent [crosstalk 00:26:14] before these proceedings, it would have the date. But I think it's
a good assumption that it's the first month of the audit, because it's at the top.
Mr. Edwards: Okay. I believe that column W actually is the date, and this is the Microsoft Office,
OfficeLibre issue of the date code being transformed to project differently, but-
Carrie Sand: Again, Mr. Edwards is testifying.
Mr. Olbrechts: Okay, yeah. At this point, yeah. Let's not get into arguing with the witness. Sustained.
Mr. Edwards: Well, are you going to make me go through and show that this number is in fact January
2007 sales data? Because I can do that.
Ms. Crisp: So that top one ought to be the first month of the audit, so we'll go with that.
Mr. Edwards: Okay. And you'll see in column A, where it says in row six, MO-Year, that presumably
stands for month, year?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: You'll see that the number 39083 seems to be very similar to the number in the other
column of 39089. And as we go down those, A and W change again in nearly identical sequences.
Ms. Crisp: That's hard to say.
Mr. Edwards: Let-
Ms. Crisp: [crosstalk 00:27:57] to read like this. I've never seen such a thing.
Mr. Edwards: Let me focus. This is a document that was produced by you, directly to me.
Ms. Crisp: No. We have worked with so many companies. Unless you have a macro protection thing
going on in your office like [inaudible 00:28:20]. We've been doing interactions with cities for years, and
we've never had this issue.
Mr. Edwards: I want to focus on how the mechanics of this were put together. So let's, if we are starting
with $5,169.09 as the January 2007 retail sales of Track Phone into specified zip codes, I'm going to come
over to column H, and you'll see in the box up above that column H is a formula that starts with the sales
figure in column U and multiples it by three different things. Do you see that?
Ms. Crisp: Yes.
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Mr. Edwards: Okay. What I want to focus on is, what are the three different things that are being
multiplied by here? And if we go down to cell J10, or I guess let's start with J9, there's a notation that says,
note, sales amounts are reduced by three factors. Do you see that?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: You wrote that, correctly. You put that in this file?
Ms. Crisp: I should have.
Mr. Edwards: And right below that, in row, in C10, the note one says data is removed. Do you see that?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: Is that a reference to making an adjustment to the sales figure to adjust for data?
Ms. Crisp: Yes.
Mr. Edwards: Okay. And if we go down a little bit, there's a basically, I put a box around it. It says data,
year and a data percentage.
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: And so we would see the data percentage for the year 2007 is in cell K-16. Correct?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: So if I go back up to cell H7, the first item says, times one minus K16. That is making the
data adjustment that is referred in note one, correct?
Ms. Crisp: Yes. Yes.
Mr. Edwards: If I look at cell J11, it's note two, and it says interstate and international are removed. Do
you see that?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: I mean, I apologize. I have a problem there.
And if we go, now, I'm going to put another box down below here, around an area that shows
intrastate, and then each of the years. And then there's a row for intrastate, international, and interstate
that total up to one. Is this data reflecting the percentage of international, interstate and intrastate?
Ms. Crisp: Yes. So all of these data points were obtained from Track Phone.
Mr. Edwards: I'm not asking you where they came from. I'm asking you what they are.
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Ms. Crisp: Okay.
Mr. Edwards: I'm trying to walk systematically through the methodology, so that everybody is on the
same page and understands the mechanics of what's being done here.
Carrie Sand: In the interest of time, it seems like you're spending so much time on a preliminary
spreadsheet rather than the final. Are we going to have to walk through all of the iterations of the
spreadsheet?
Mr. Edwards: As I mentioned, Carrie, there is no change to any of these things that I'm talking about
here. It is exactly the same in all versions from this point on. So the sales data, the data adjustment, and
the interstate adjustment never change. That's all the same. So, this is laying a foundation for showing
what does change and where the errors are.
Mr. Olbrechts: Okay. All right. Just let's keep going.
Mr. Edwards: Yeah. So if I look at intrastate for 2007, that's in cell L22. Is that correct?
Ms. Crisp: Yes.
Mr. Edwards: Okay. So if I go back up to our January, and I look at these adjustments, I see that the
second adjustment multiplies by cell L22. So the second piece of the formula is making this intrastate
adjustment, correct?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: Okay. And then if we go down below, yeah. There's now another box that says population
ratio. Do you see that?
Ms. Crisp: Yes. Now, this did change.
Mr. Edwards: This did change, yes. And if we go back up to the notes, it indicates the third change is
item three, a factor to proportion sum of zip population down to city population. Okay. Would it be fair
to characterize this adjustment as identifying the portion of the sales to those identified zip codes that
are in Renton because only part of the identified zip code is in Renton?
Ms. Crisp: The purpose is to remove the population outside of Renton from the taxable... I mean,
the revenues from the population outside the city, leaving only a proportion that represents the
population of Renton.
Mr. Edwards: Okay. And in this particular version, there were two different ratios. One, for the years
prior to 2010 and a second one for 2010 forward, correct?
Ms. Crisp: Yeah. This is one thing that we made tremendous improvement in the spreadsheet on,
[crosstalk 00:35:46] the population.
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Mr. Edwards: And in this version, that percentage for all of the years prior to 2010 is in cell O34, correct?
And would it help if I made this a little bit bigger?
Ms. Crisp: No. I'm good. I guess so. For this version, we just had two population proportions.
Mr. Edwards: And so, if I go back up to H7 again, and I see the third item that the sales figure is multiplied
by, the cell is O34, which we have just identified as the adjustment for the zip code population?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: So to summarize, these three items that the sales data is multiplied by, make the three
adjustments that are identified in notes one, two and three, correct?
Ms. Crisp: Right. The three reductions to remove those items.
Mr. Edwards: Okay. You talked about the reason for the adjustment for the zip code population. What
is the reason for the data adjustment?
Ms. Crisp: Because the Federal Internet Freedom Act precludes the taxation of any charges for
internet access. So anything that is identified as a charge for internet access was removed.
Mr. Edwards: And then, the second adjustment, the removal of interstate and international, why was
that adjustment made?
Ms. Crisp: Because the taxation is only allowed on intrastate. For cities, they can only tax intrastate.
So that means that any calls that were made interstate or international needed to be removed, and that's
according to [35A.8 00:38:00]. RCW 35A.82 [inaudible 00:38:07] .60, this says intrastate, and also it says
only city population can be taxed by the city.
Mr. Edwards: Does the city's ordinance address either the internet or the interstate international
prohibitions?
Ms. Crisp: Could you restate that?
Mr. Edwards: Yeah. In the city ordinance, is there anything in the city ordinance that reflects the reality
that the city is prohibited from taxing internet under the Internet Tax Freedom Act?
Ms. Crisp: No. That's just in the federal [inaudible 00:38:50]. I mean, they do have some mentions
of it, but it's really clearly outlined in the Federal Internet Freedom Act. It's title 47, chapter 5, sub-chapter
1101, and we just didn't tax those amounts because of that.
Mr. Edwards: So you recognize that as between the ordinance and state or federal law, state and federal
law controls, correct?
Ms. Crisp: The ordinance-
Carrie Sand: Objection.
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Ms. Crisp: ... doesn't mean we have to tax-
Mr. Olbrechts: Sorry, Miss Crisp, but Miss Sand?
Carrie Sand: I was going to say objection to the extent it calls for a legal conclusion. Miss Crisp is not
an attorney.
Mr. Olbrechts: Okay. No, yeah. I understand that, but I need to overrule because it affected how Miss
Crisp did the methodology, and her understanding of the law then is pertinent to this. Now, go ahead and
answer the question, Miss Crisp.
Ms. Crisp: Oh, I'm sorry.
Mr. Olbrechts: Yeah.
Ms. Crisp: I thought it was answered. Could you repeat the question, Mr. Edwards?
Mr. Edwards: Is it your understanding that, if there's a difference between what the ordinance says and
what a state or federal statute says, that the state or federal statute controls?
Ms. Crisp: I'm not aware of any place where they don't... Where they disagree. If the federal makes
a further reduction of taxability, we're going to go with that, but it doesn't disagree, no. Not that I know
of. In fact, I think that there is a statement, I can't tell you exactly where, that says that they... To the
extent that it's legally possible, this is available. (silence).
Mr. Edwards: And I'm going to stop sharing this. So I think we've accomplished what I'm trying to show
with this document, that is, the specific mechanics of the adjustments that were made for to retail sales,
to get the measure of tax that was identified by TRS as tax on direct sales.
Mr. Olbrechts: Okay.
Mr. Edwards: Maybe to be a little bit complete, if we go over to column E, we've got the same three
adjustments being made to the sales, the retail sales data from column B, correct?
Ms. Crisp: Right.
Mr. Edwards: And then, for our purposes, columns F and G are not relevant for the Renton assessment,
because the Page Plus platforms were not acquired by Track Phone until after this audit period. And so,
there were no Page Plus retail sales during this time period, correct?
Ms. Crisp: So the second part I know is correct. I can't verify the first part, but I do know that they
didn't have Page Plus for Renton.
Mr. Edwards: So these four columns, E through H, which are really just E and H, are the computation of
the measure of tax on what you're referring to as direct sales, and what Track Phone refers to as retail
sales, correct?
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Ms. Crisp: Correct.
Mr. Edwards: Okay. So I'm going to stop sharing my screen right now.
Mr. Olbrechts: Okay. For the record, in case we didn't get it in, that was Exhibit 8 we were looking at.
Mr. Edwards: Thank you.
Mr. Olbrechts: Okay.
Mr. Edwards: And then, I'd like to switch gears now and share Exhibit 10. And then, does everybody see
this?
Mr. Olbrechts: Yes.
Mr. Edwards: I'll blow that up a little. Do you recognize this exhibit, Mrs. Crisp, as an email from TRS to
the City of Renton on August 8 of 2017, a few weeks after the exhibits we were recently looking at?
Ms. Crisp: I believe so.
Mr. Edwards: Okay. And you'll notice here, as we had described before, you've got two attachments.
The Excel file is now named Excel Prelim. It has a three in it. Renton Track Phone.xls?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: And you make reference to revisions to the zip code computation. Is that correct?
Ms. Crisp: Yes.
Mr. Edwards: Okay. And you'll see, I've highlighted here a sentence in the middle of the second
paragraph. You've advised the City of Renton that this updated methodology gives an advantage to the
city?
Ms. Crisp: Yes. On the zip code side. We put this in here, because as it says in the [inaudible 00:45:02]
upper paragraph, that the... In a census in 2000, there were... A total zip code was completely missing,
and another one. It seemed awfully hard. And we're talking a very large zip code, no people, according to
the census. There was errors made. So we found something that looked more accurate. They were
estimating on more than just the census, and they were increasing the population year by year. It looked
really good.
Now, this statement here is designed to say we want to make Track Phone happy. All of the way
through here, we wanted to make Track Phone happy. We tried everything we could to get them to sense
that it was fair. That's what this is saying here. Whatever we can do to make them happy, as long as it's
fair. This is an estimate. And if they had an objection, we could find a site that does a different job. If they
could find it-
Mr. Edwards: Mrs. Crisp, I've already asked you to please [inaudible 00:46:06].
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Mr. Olbrechts: Oh, shoot. Oh, I'm sorry. There we go. Sorry about that. Okay. Go ahead.
Mr. Edwards: Sorry. I'm going to move now to the next exhibit, which is Exhibit 11. And I guess, the
thing is, Mr. [inaudible 00:46:40] before I do that, as a purely procedural matter, we've spoken to Exhibits
5, 6, 7, 8, and 10 so far. Do I need to formally move the admission of those exhibits?
Mr. Olbrechts: No. No. I mean, all of your exhibits are admitted, except the ones identified in the city's
motion and limine. Those need to be presented individually, and I don't think those were included in the
city's motion in the limine, right Miss Sand? I believe those are-
Carrie Sand: That is correct.
Mr. Olbrechts: Yeah, yeah. So they're admitted. Yeah.
Mr. Edwards: Okay. So I'm moving now to Exhibit 11, which is the electronic version of the file, Excel
Prelim Three Renton Track Phone.xls, and I'll share the screen here now. And then, does everybody see
the document?
Mr. Olbrechts: Yes.
Mr. Edwards: Okay. And if I go over to column U, we have the same... We see column U and V with the
data and column W now is displaying a date format in it. Is that correct?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: And if we look at that same cell we had been looking at before, we have the same sales
figure of 5,161.09 and the reflection that it's for January of '07?
Ms. Crisp: Yes.
Mr. Edwards: And again, if we go back to the cell H6, we see again a formula with three adjustments.
And if we look at K15 and L21, we see that K15 is the data for 2007, and L21 is the intrastate for L27? Or
for 2007. Is that correct?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: And then as we look down at the population ratio box, we've got a computation of a
population ratio for each of the years rather than just two, correct?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: And if we look at 2007, in cell N47, that's the population ratio that was computed for the
years 2007, correct?
Ms. Crisp: Yes.
Mr. Edwards: And that number is 45%, basically? We're going to round it.
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Ms. Crisp: Okay.
Mr. Edwards: Yes or no?
Ms. Crisp: Yes.
Mr. Edwards: Okay. And so again, if we go back up to H6, that third adjustment is N47, the 45%
population ratio, correct?
Ms. Crisp: Yes.
Mr. Edwards: So there was no change to the data elements here, correct? Or the data percentage
ratios?
Ms. Crisp: [crosstalk 00:50:19].
Mr. Edwards: Okay, yeah. I'm sorry. You were talking. You've indicated that that's correct? There were
no changes to the data ratio.
Ms. Crisp: Correct. And I know.
Mr. Edwards: And there were also no changes to the intrastate ratio?
Ms. Crisp: Correct.
Mr. Edwards: There were no changes to the sales data either, correct?
Ms. Crisp: At this point, there wasn't. Of course, later on, we improved it by adding the 98178.
Mr. Edwards: Isn't it correct that 98178 is already in here?
Ms. Crisp: I don't believe so. No. I don't know at this point. Yeah. I think that that was just the
revenue. Not the population. That's the error that we corrected more recently. You are right, that we left
that out. And we put in, and I believe that error's been correct, and you have been refunded the
difference, so.
Mr. Edwards: We're getting there,.
Ms. Crisp: Okay.
Mr. Edwards: So, okay. In columns U and V, the sales data includes sales to zip code 98178, correct?
Ms. Crisp: I believe so.
Mr. Edwards: The population ratio computation, however, excludes the population of zip code 98178,
correct?
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Ms. Crisp: Yes. That was a substitute there that has been corrected.
Mr. Edwards: And that's an error that was brought to your attention during your deposition?
Ms. Crisp: Yes. It was pretty traumatic. I had no idea.
Mr. Edwards: And it was an error that had not been identified by the City of Renton when they reviewed
your work product?
Ms. Crisp: We all missed it. Track Phone didn't find it before it was sent out, either.
Mr. Edwards: Does Track Phone have a duty to review the quality of your work product?
Ms. Crisp: They have a financial interest in reviewing it. Every tax payer we work with reviews them
carefully to make sure they're not overpaying. And we were never successful in getting Track Phone to do
that before the assessment.
Mr. Edwards: Is that because you refused to meet with Track Phone repeatedly?
Ms. Crisp: I'm pretty sure that Track Phone did not want to discuss the information that you're
talking about now. They wanted to discuss legal issues. (silence). A simple email coming and saying you
forgot this population would have produced the improvement that we made so late in the game, now.
Mr. Edwards: Mrs. Crisp, I'm going to ask you again to please stop giving speeches. (silence).
Going to move now to Exhibit 24. (silence). Do you recognize Exhibit 24 as a letter that you sent
Mr. [inaudible 00:55:10] and I on March 18th, 2021?
Ms. Crisp: Yes.
Mr. Edwards: And in it, you identified two corrections that needed to be made to the tax schedules that
we've been looking at?
Ms. Crisp: Yes.
Mr. Edwards: And the first one is the omission of the 98178 zip code population data?
Ms. Crisp: Yes.
Mr. Edwards: The second issue is a change with respect to the computation of the interest?
Ms. Crisp: Yes.
Mr. Edwards: I'm going to move from there to the spreadsheet that was attached to that email, or to
that letter, which was as identified as Exhibit 25. Can everybody see this on the screen?
Mr. Olbrechts: Yes.
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Mr. Edwards: Okay. And again, if I go over to columns U and V, we've got the same sales data here with
no change, and maybe the easy way to look at it, is that 516909 in January 2007 has not changed, correct?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: And if we again, the data ratios and the interstate ratios have not changed?
Ms. Crisp: Correct.
Mr. Edwards: We've still got the three different adjustments. What has changed is the addition of data
for zip code 98178, which has reduced the population ratio percentage.
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: So if I look at cell N47, which is the population ratio for 2007, it has dropped from 45% to
38.7%. Is that correct?
Ms. Crisp: Correct.
Mr. Edwards: And that one change reduced the computation of tax on this spreadsheet from 147,000
to 126,000?
Ms. Crisp: I believe it was about 14%.
Mr. Edwards: And that 14% figure that you're citing, comes from Mr. Hilton's declaration?
Ms. Crisp: No. I thought he was quoting us, but it's in my letter, isn't it?
Mr. Edwards: Did your letter come before or after Mr. Hilton's deposition and declaration?
Ms. Crisp: I believe it came before. You're talking about your CPA, right? That you hired?
Mr. Edwards: Yes.
Ms. Crisp: Yeah. So I didn't see that until after this was sent and after this spreadsheet was. And I
was so pleased to see that his numbers matched ours, our new ones.
Mr. Edwards: So you're testifying that nobody provided you with a copy of Mr. Hilton's work product
until after you sent us this letter in March of 2021?
Ms. Crisp: Yeah. It was well after that, that I got it. And I thought, that's a speech again. Okay.
Mr. Edwards: I'm going to show now City Exhibit C19. Do you see this?
Ms. Crisp: Mm-hmm (affirmative).
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Mr. Edwards: And do you see the row that's highlighted here, indicating roughly a 14% change as a
result of correction of the zip code error?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: And do you recognize this as the... Mr. Hilton's work product that was provided to the
City in connection with his deposition?
Ms. Crisp: Yes. I went over it [crosstalk 01:01:00].
Mr. Edwards: And his deposition occurred on January sixth?
Ms. Crisp: I don't know. I wasn't aware of when he did it. It was you that pointed out to me for the
first time, that 98178 was missing. And so, as soon as we got a chance, we redid it and sent the letter to
you.
Mr. Edwards: So you learned it in December, and March 18th was as soon as you got a chance, three
months later?
Ms. Crisp: We [crosstalk 01:01:40] literally thousands of pages of material to you, that you
requested, all of it requiring redactions. It's been well over 100 hours or more just for one of the things
you requested. We've been pretty buried. So as soon as Renton and us were able, we did that.
Mr. Edwards: But you did that completely independent of Mr. Hilton's analysis, and without looking at
Mr. Hilton's analysis?
Ms. Crisp: Yes. I definitely did. I was so pleased last week when I looked at it and said, oh man. His
numbers agree with ours. Their CPA actually came up with exactly the same thing TRS did. That was a
good feeling. At least on that, we don't have a disagreement.
Carrie Sand: It's almost 10 o'clock. Would now be an acceptable time for a break, Mrs. Crisp? Or are
you ready to continue to plow forward?
Mr. Olbrechts: No. I was going to say, at about 10:15, at about every hour and a half would be good. And
that works out perfectly, because then we have a break until 10:30, and then go on for another hour and
a half until the lunch break, so.
Carrie Sand: Okay.
Mr. Olbrechts: And Mr. Edwards, do you have much further to go, or?
Mr. Edwards: I'm through this topic. I have another topic to go.
Mr. Olbrechts: I mean, do you think it's going to be a lot longer than 15 minutes, or?
Mr. Edwards: I think it will likely be more than 15 minutes.
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Mr. Olbrechts: Oh, okay. Okay. Yeah, because I was hoping that by the time we got to 10:15, you'd be
done. And that way, during break, they can prepare their cross. But I guess we can do the break now, if
that's what everybody wants to do. 10 o'clock?
Mr. Edwards: That is acceptable to me.
Mr. Olbrechts: Okay.
Mr. Edwards: So back at 10:15.
Mr. Olbrechts: 10:15. We'll do that, then. All right. We'll see you then.
[a few minutes of testimony not transcribed. In summary, Mr. Edwards referenced Ex.24, making
revisions. Letter recommended refund of 80k, confirmed by Ms. Crisp, and that 20k was correction due
to zip code plus a 5k reduction in penalty and the 55k in interest was a result of an interest error not yet
talked about. ]
Ms. Crisp: ... [inaudible 00:00:01] they paid on that schedule and not ours until after this letter went
out. In fact, they didn't realize that they ate there until last week, but I was happy to see that [Renton
00:00:13] caught it and they refunded according to the schedule you actually paid on, not the last one
that TRS sent you. They had sent it directly to Tracfone.
Mr. Edwards: Well, you may be anticipating my next question by answering questions that I'm not
asking yet. I'm going to show you what's been marked as City Exhibit C23, which is a cover of a
transmission by Renton to Tracfone for a refund of $95000, which this indicates is 91256 plus refund
interest of 95 and so my question was going to be, why is there this $10000 difference between the refund
paid by the city, 91256 and the refund that was recommended by you of 80000? Is your testimony that
the difference is there is more interest because the refund interest here was based on a lower amount of
interest paid by Tracfone that they actually paid 10000 more in interest than you had been thinking of
when you made this computation?
Ms. Crisp: You'll also see that in my deposition as well. I was under the impression that we sent the
higher interest schedule to Renton, that it was not sent out. I thought you paid your taxes based on the
last one we sent out. I'd never been told that they sent the higher interest one to you for your final
payment. I just hadn't been told, so.
Mr. Edwards: I just want to make sure it's clear. Is it your testimony that the difference between the
80000 and the 91000 is difference in the amount of interest that Tracfone paid pursuant to the
assessment?
Ms. Crisp: Actually paid, yeah. You paid a higher amount.
Mr. Edwards: If you could please answer just yes or no it would help make this clearer.
Ms. Crisp: Yes.
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Mr. Edwards: I'm going to now share the declaration that had been submitted by Mr. Hilton and I
wanted to do two things first. I'm going to go quickly to Exhibit B, to Mr. Hilton's declaration as the... Let
me see if I can-
Ms. Sand: Mr. Edwards?
Mr. Edwards: Yes?
Ms. Sand: Has this been given an exhibit number or is this already in the record from [crosstalk
00:03:31]?
Mr. Edwards: I believe this is already in the record because this was part of the [S. Jabery 00:03:37]
thing.
Ms. Sand: Just wanted to clarify.
Mr. Edwards: And I wanted to bring up an administrative point on this first part. This schedule two here
is identical to what we were looking at as City Exhibit C19. The only difference between the exhibit to Mr.
Hilton's declaration and the city's proposed exhibit is that the city's exhibit was marked "draft" because it
was provided to the city after his deposition and it was then the draft was taken off when it was attached
to his declaration and it seem to me, the record would be cleaner to only have the final version that's
attached to his declaration rather than what superficially looks like two different versions that are
identical except for the draft stamp.
Where I want to go in terms of questioning the witness here is to paragraph five of Mr. Hilton's
declaration, right after talking about the zip code error that he'd been talking about, he says, he identifies
an additional error that he has in calculating tax excluded amounts, TRS labels as indirect sales and he
then says, "Which do not reflect Tracfone's gross income, but are instead an estimate of the retail value
of prepaid air time that was sold by third parties such as Walmart or Fred Meyer, who purchased the time
at wholesale for the purpose of resale." Do you see that provision that I have highlighted Ms. [Crisp
00:05:50]?
Ms. Crisp: Yes.
Mr. Edwards: Do you understand what Mr. Hilton is saying here?
Ms. Crisp: Well first of all, I understand that he is saying Walmart/Fred Meyer purchased air time,
which I believe that this hearing has ruled on about it. So I disagree with that, that they purchased air
time. They purchased cards.
Mr. Edwards: I want to focus on this item, the retail value.
Ms. Crisp: Yeah, okay.
Mr. Edwards: Do you understand the difference between the amount that the retailer sold the air time
card for and the amount that the retailer paid for the air time card?
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Ms. Crisp: I understand the difference now, how we did the audit is salient here. I don't believe that
we used the retail value that they sold the cards for, but I understand what he's saying, but I don't agree
with it.
Mr. Edwards: You do agree that in computing the tax on what you labeled as "non-direct sales," that
that figure reflects the retail selling price of the air time cards?
Ms. Crisp: No, I don't believe so. I was given a chart from Tracfone that detailed for every year what
they considered their... Excuse me. The retail was what they made, their sales and what they called
wholesale was what they made, their sales. It didn't have anything to do with what the cards were
ultimately sold to the customer for. In my understanding, it was their bottom line, not the store's bottom
line that we were looking at.
Mr. Edwards: You didn't use dollar values at all for the indirect sales, did you?
Ms. Crisp: We were never given, never given the indirect sales values that Tracfone keeps track of
somewhere. Because you have the company wide figures, but we weren't given anything for the zip codes.
Mr. Edwards: I don't want to talk about what you were or weren't given. I want to focus on what you
did and the mechanics of how the assessment was calculated.
Ms. Crisp: Okay.
Mr. Edwards: So I'm back now at Exhibit 25, which we've identified as the most current version of the
computations, is that correct?
Ms. Crisp: I don't know.
Mr. Edwards: This is the attachment to the letter that you sent to Mr. [Deginger 00:08:58] and I in
March.
Ms. Crisp: Okay, yes.
Ms. Sand: You might need to refresh the screen sharing, Scott.
Mr. Edwards: Oh, okay. Are you not seeing it?
Ms. Sand: No, we're seeing the declaration of Mr. Hilton.
Mr. Edwards: Thank you for letting me know that. Are you seeing it now?
Ms. Sand: Yes.
Mr. Olbrechts: Yes.
Mr. Edwards: And again, to reorient everybody, no change in the sales figures, no change in the data
and intrastate ratios. There has been a change in the population ratio calculation and a change that we'll
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get to later occurs on this other tab about the interest calculation. But in terms of computing the tax, the
most recent change dealt just with the population ratio, correct?
Ms. Crisp: Well, population ratio and the tax, but yeah. On this page-
Mr. Edwards: But the population ratio, as a formulaic matter generates a change in the computation of
the tax, correct?
Ms. Crisp: Yes.
Mr. Edwards: So this number of 1685 is lower than what we saw before because this cell N47 is now
38% instead of 45%, correct?
Ms. Crisp: Yes.
Mr. Edwards: Now I want to focus on how the non-direct sales figure is computed. And if we look up
here it starts by summing Columns E through H, which are the retail or direct sales columns that we've
been focused on, how those are computed, right?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: And then it simply multiplies that retail sales number by a ratio, in this case .82 divided
by .18, correct?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: And so this is basically, and I understand that this is a result of data that you received from
Tracfone, correct?
Ms. Crisp: Yes.
Mr. Edwards: And that data showed that in the year 2007, 18% of the air time that was redeemed had
been sold at retail and 82% of the air time that had been redeemed had been sold at wholesale, correct?
Ms. Crisp: According to Tracfone.
Mr. Edwards: So this figure is not a wholesale sales figure, it is a gross up of a retail sales figure, correct?
Ms. Crisp: I guess, if I understand the term "gross up" as you're using it.
Mr. Edwards: The effect of multiplying this figure by the ratio of .82 divided by .18 essentially is
mathematically multiplying $1600 by 4.55, correct? Which 4.55 is 82 divided by 18.
Ms. Crisp: That sounds approximately correct, I can't do that in my head.
Mr. Edwards: And by grossing up, you're basically multiplying the retail sales number by a multiplier?
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Ms. Crisp: Yes.
Mr. Edwards: In this place, the multiplier is the percentage of redeemed air time that was sold at
wholesale and the percentage of redeemed air time that was sold at retail, correct?
Ms. Crisp: Uh-huh.
Mr. Edwards: You're aware that the selling price for wholesale sales and air time is different than the
selling price of retail sales of air time, correct?
Ms. Crisp: Well of course the Tracfone with self to store, definitely below the amount that was
charged by the store to the future Tracfone customer. Is that what you mean?
Mr. Edwards: Yes. And so for example, you're aware that after this appeal began, Mr. Malone purchased
a Tracfone air time card from Fred Meyer for 19.99, correct?
Ms. Crisp: I haven't seen that, but I've heard about it.
Mr. Edwards: Are you guys seeing my whole screen or is it staying on-
Mr. Olbrechts: It's on 25, yeah. Still on 25.
Mr. Edwards: Yeah, I...
Let me open and switch here. Are you now seeing our Exhibit 32, the Fred Meyer receipts?
Mr. Olbrechts: Yes, mm-hmm (affirmative).
Mr. Edwards: Do you see that, Ms. Crisp?
Ms. Crisp: A portion of it, yes.
Ms. Sand: At this point I'm going to renew the city's objection to these receipts as being outside the
scope of this hearing, which is about amounts due. This is going back to issues already decided about tax
liability.
Mr. Olbrechts: And I'll overrule. I think I see where Mr. Edwards is going here. He's addressing the
accuracy of the ratio that the city is using to derive the indirect sales, so I'll overrule.
Mr. Edwards: Thank you. So you see here that there was a sale of... Let me figure out which one is the
air time. On the right hand side right here, I can highlight, the air time card for 19.99?
Ms. Crisp: Okay.
Mr. Edwards: That's the amount that Fred Meyers sold that air time card to Mr. Malone for, correct?
Ms. Crisp: I would think so.
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Mr. Edwards: And that amount is going to be more than the amount that Fred Meyer paid to purchase
that air time card, correct?
Ms. Crisp: That's what I assume.
Mr. Edwards: Let's assume for our purposes that Tracfone sold that air time card for $16.99 instead of
$19.99. Wouldn't Tracfone's Renton utility tax liability be based off of the 16.99 for which Tracfone sold
the card rather than the 19.99 for which Fred Meyers sold the card?
Ms. Crisp: Yes.
Mr. Edwards: And if that wholesale price was 16.99, that's a 15% discount off of the retail selling price,
correct?
Ms. Crisp: Who knows? I don't have a calculator with me.
Mr. Edwards: 19.99 minus 16.99 is three dollars, correct?
Ms. Crisp: Yes.
Mr. Edwards: 19.99 is basically 20, right?
Ms. Crisp: Okay.
Mr. Edwards: Are you questioning whether that's right? If you could answer yes or no.
Ms. Crisp: Okay.
Mr. Edwards: I would prefer yes or no.
Ms. Crisp: Yes.
Mr. Edwards: Three dollars is basically 15% of 20.00. 10% of 20.00 would be two and half again, half of
two is one, two plus one is three.
Ms. Crisp: Say it again. Three dollars is how much? Let me write his down.
Mr. Edwards: Is roughly 15% of $20.00.
Ms. Crisp: So six dollars, that would be 30%. Six times three, yeah it's roughly.
Mr. Edwards: Got you. If on average, the margin or discount at which Tracfone made wholesale sells
was 10%-
Ms. Sand: Object to the form of the question [inaudible 00:19:06], characterizes Tracfone is making
wholesale sales. It's already been ruled on, Mr. Edwards and also assumes facts not in evidence. We don't
know the amount that Tracfone sold the air time card to Fred Meyer for.
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Mr. Edwards: I am not making any representation about what the percentage is, I'm trying to go to the
question of the computation of the Tracfone liability under the city's theory that Tracfone's indirect or
wholesales sales are subject to tax. I'm not disputing the ruling about those being included in the measure
of tax, I'm talking about the mechanics of how to apply the tax to that.
Mr. Olbrechts: Overruled. And understood that to your saying "assuming this and that" you're not
providing testimony, so go ahead.
Mr. Edwards: If we go back to the... And I'm going to stop sharing altogether right now, but if we go
back to the mechanics of how the schedule is done, you've started with retail sales numbers for Tracfone's
retail sales. Essentially when Tracfone sells a 60 minute card for 19.99, that 19.99 is included in the number
that you show as direct sales, correct?
Ms. Crisp: Yes, I would think so.
Mr. Edwards: And then to come up with your computation of non-direct sales, you are multiplying that
19.99 by a factor in which in 2007 was 4.55, correct?
Ms. Sand: Excuse me again, objection. Assumes facts not in evidence. Mr. Edwards, he keeps
[inaudible 00:21:21] that the retail price was used as the tax measure and there's been no actual
substantive evidence to show that the retail price was used as the tax measure as opposed to the amount
of revenues received from Tracfone for the unit price sales through the retailer.
Mr. Edwards: [Ms. Sand 00:21:44], I think you've mis-characterized where we are. The only sales data
that was provided by Tracfone to TRS was sales data for Tracfone's retail sales. The indirect sales number
is not a sales number of any type. It is the retail sales figure, the adjusted retail sales figure multiplied by
something. That's not assuming in a fact not in evidence, that is reflecting what Mrs. Crisp just testified to
when we looked at Exhibit 25 and the mathematical formula that she used to compute the number.
Mr. Olbrechts: All right, overruled. Go ahead. Mr. Edwards, I think you might have to restate your
question for Ms. Crisp?
Mr. Edwards: Yes, I think so, and I somehow have done something to screw up the cell in Exhibit 25,
which has thrown me a little bit off my game here. Let me try this a slightly different way and go back to
Mr. Hilton's declaration and the exhibit, his exhibit, the schedule for... Let me see if I can share this. And
then this presents what we had been talking about and maybe a little bit easier to follow the format. I'm
going to blow this up so everybody can see it. In January of 2007, you started with a sales figure of Tracfone
sales to identify zip codes of $5169.09 and you then multiplied that by three adjustments: a data
adjustment, an instate adjustment and a population adjustment and this 38% is the corrected population
adjustment, correct?
Ms. Crisp: Yes.
Mr. Edwards: And that yielded a figure of $1685.22, which you've identified as the amount of direct
sales subject to rent and utility tax, correct?
Ms. Crisp: Mm-hmm (affirmative), yeah.
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Mr. Edwards: And the next thing that you did, was to multiply that figure by the ratio of 82% divided by
18%, correct?
Ms. Crisp: Yes.
Mr. Edwards: And 82% divided by 18% is basically 4.55?
Ms. Crisp: 4.56.
Mr. Edwards: 4.56, yeah. And therefore the amount that you show on your scheduled as indirect sales
is mathematically the retail or direct sales times 4.55, correct?
Ms. Crisp: Yeah or 56, yes.
Mr. Edwards: 56, yes. And then to get the total tax base, you simply added the 1685 and the 7677
together and say the sum of the indirect or the direct and the indirect or non-direct is what is subject to
tax, correct?
Ms. Crisp: Mm-hmm (affirmative), yes.
Mr. Edwards: And so when multiplying a retail number by 4.5, that does not reflect the discount at
which the indirect sale was made?
Ms. Crisp: That's where I take issue of what you're saying, I don't agree with that statement.
Mr. Edwards: Would you agree that the $5169.09 that is the starting point for all of this math, involves
sales of air time at Tracfone's retail selling price?
Ms. Crisp: This reflects the gross income from those retail sales, what actually went into Tracfone's
pocket to run their business and their gross income, [crosstalk 00:27:03] sales.
Mr. Edwards: And these retail sales are sales to end users, not sales to wholesalers or distributors,
correct?
Ms. Crisp: In the retail sales-
Ms. Sand: Object to calling retail third parties "wholesalers."
Ms. Crisp: So what you call retail sales is the direct sales, correct?
Mr. Edwards: Yes.
Ms. Crisp: And this would represent the gross income that Tracfone received from those direct
sales?
Mr. Edwards: So only sales to end users.
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Ms. Crisp: Direct is straight to the end user.
Mr. Edwards: So no sales to Walmart or Fred Meyer or Safeway or anybody like that in this figure?
Ms. Crisp: Yes, that's how I understand it.
Mr. Edwards: So this is sales that Tracfone is making at the full retail selling price, correct?
Ms. Crisp: Yes, I would think so.
Mr. Edwards: None of the sales in this figure were sold at a discount to a third party?
Ms. Crisp: Correct. That's my understanding.
Mr. Edwards: And that full retail selling price figure was multiplied by 4.56 to estimate the tax base that
was a result of Tracfone sales to third party retailers such as Walmart and Safeway and Fred Meyer,
correct?
Ms. Crisp: Correct.
Mr. Edwards: And those are all people who paid Tracfone less than the retail selling price?
Ms. Crisp: So I'm telling you, I think you have a basic conception that would have to be proven here.
Very counterintuitive that the wholesale figures that we were given were not money that actually when
into Tracfone's pocket that were not part of gross income for Tracfone for company wide figures. I don't
believe that they would keep track of how much those cards were sold for. They would keep track of what
actually they earned for wholesale sales, what they call wholesale sells, what we call indirect. Therefore,
these calculations would be true and strong because they only counted what went into their pocket and
not what went into their retailers' pocket. What would the retailers care what the retailers made? They're
keeping track of what they make for the wholesale. The figure that we used, that 82%, was money that
was gross income. So we're comparing gross income to gross income when we do this calculation. If you
can show me differently, then I'll apologize, but why would anybody doing accounting for their company
keep track of how much their retailers made instead of how much they made on those sales to the
retailers. That's very counterintuitive.
Mr. Edwards: Are you finished?
Ms. Crisp: Sure.
Mr. Edwards: I want to go back now to Exhibit 24, which is your letter to Mr. Deginger and I regarding
the adjustments. As I mentioned, in addition to the zip code adjustment, you identified an adjustment
with respect to the interest rates. I'm showing now page two of the letter, the second paragraph-
Ms. Crisp: It's not showing.
Mr. Edwards: Oh I'm sorry, is it not?
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Mr. Olbrechts: No.
Mr. Edwards: Oh, I need to actually hit share here. I apologize.
Ms. Crisp: There you go.
Mr. Edwards: At the top it says, "The two corrections required are described in detail in this letter,"
right?
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: And one of those is the zip code error that we've talked about at length here. And the
error with respect to the interest rate is that beginning January 1 of 2016, the city adopted an ordinance
that changed the way that interest is computed on assessments, correct?
Ms. Crisp: That's correct.
Mr. Edwards: And the particular provision that was adopted is Renton Municipal Code 526-11 I believe.
Does that sound correct to you?
Ms. Crisp: Yes. That's the new code.
Mr. Edwards: And the-
Ms. Sand: Your screen is gray now, Mr. Edwards.
Mr. Edwards: It's frozen out because I was trying to move to the ordinance itself. Let me see if I can...
And this is the ordinance that we're talking about?
Ms. Crisp: Yes, that looks right.
Mr. Edwards: And so beginning in January of 2016, this provision that says "The rate of interest charge
for any late or underpayment of any assessment shall be in accordance with state statute RCW8232050
as it now exists or as it may be amended." Is that-
Ms. Crisp: Yes.
Mr. Edwards: And 8232050 provides for a variable interest rate on tax assessments, correct?
Ms. Crisp: Yes.
Mr. Edwards: And the adjustment that you made was to apply the state's rate under 8232050 to the
interest accrual time periods of January 1, 2016 through the date that the assessment was paid of
November 4, 2019, correct?
Ms. Crisp: Yes.
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Mr. Edwards: And for all of the tax years assessed and for all of the interest periods before January of
2016, you continued to assess interest at one percent per month or 12% per year, correct?
Ms. Crisp: Yes, I believe that was the proper method.
Mr. Edwards: Well that's exactly what we're going to deal with next is what is the proper method under
this statute, 8232.050 which controls more than just the interest rate, but how the interest rate gets
applied. So I'd like to now share my screen a copy of that statute. Can you see that or do I [crosstalk
00:35:50]-
Mr. Olbrechts: No, you're still on the ordinance.
Mr. Edwards: So I need to move from one to the other. So this is 8232.050 which is a state statute
regarding assessment of interest on tax assessments, correct?
Mr. Olbrechts: Yes.
Mr. Edwards: I've highlighted section 1B, which says "For tax liabilities arising after December 31, 1991
the rate of interest shall be variable and computed as provided in Section Two," and then Section Two
talks about the mechanics of how that variable rate is calculated, correct?
Ms. Crisp: Yes.
Mr. Edwards: If we go to Section Two, Section Two here, which I'm now showing, is actually describing
the methodology which is basically the federal short term fund rate plus two percentage averaged on four
quarters and rounded to the nearest full percentage. The next place I want to go is actually 1C which says,
"Interest imposed after December 31, 1998 shall be computed from the last day of the month following
each calendar year, included in a notice and the last day of the month following the final month included
in a notice if it's not the end of the calendar year. Did you apply this part of 8242.050 to the assessment?
Ms. Crisp: Well, we did. I called the state to make sure because it's very complicated to go through
to make sure I understood it correctly and they said basically they paid interest for the whole year and
previous years, but the last year where you're applying it, then you subtract January from that year. So
we took 31 days off of the interest rate and you calculate it for the days of the year. It was a leap year so
we divided by 366 and we took the days until you paid, until Tracfone paid, and subtracted that month.
So the interest that we had posed previous to that starting on January 2016, was we paid for a whole year
until the last year when we subtracted the month of January from your interest.
Mr. Edwards: Let me try to make this a little bit easier for everybody to follow. I'm going to go back, I
think I'm going to have to stop sharing this, go back to Mr. Hilton's declaration. There's two things I want
to show there. First is does everybody see this? This is a part of Mr. Hilton's declaration on Exhibit C and
it's a copy of a publication issued by the Washington Department of Revenue that shows what the interest
rate is for each tax year that's included in an assessment, do you see that?
Mr. Olbrechts: Yes.
Ms. Crisp: Mm-hmm (affirmative).
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Mr. Edwards: Have you seen this before, Mrs. Crisp?
Ms. Crisp: I saw it in his declaration, unfortunately. I calculated the years myself and then had to call
the state and then found out later this chart is absolutely available to anyone who asks for it.
Mr. Edwards: It's actually available on their website as well. You don't even have to ask for it, you can
just find it on the internet.
Ms. Crisp: Would have saved me a lot of time if I had known that.
Mr. Edwards: But you've never attempted before March of this year to compute interest in accordance
with RCW8232.050, correct?
Ms. Crisp: Actually, one of our cities uses that, but I've always done it the hard way. I calculate it
according to the directions on how to calculate it, looking up the short term rates, whatever. Now that I
know there's a chart, I'm going to save a lot of time.
Mr. Edwards: I've now moved to Schedule Two for Mr. Hilton's declaration and you've seen this before
as well, correct?
Ms. Crisp: Yes.
Mr. Edwards: And so Mr. Hilton here is depicting the computation of interest looking at the assessment
here, in this case 2007 and excluding January from, so it starts at the end of the month at the end of the
year, February of 2008 for a 2007 assessment and it shows a part year of interest in 08, the full rate
assessed for each of the following years and then for the year in which the assessment was paid, again
prorated through November 6th, the day that the assessment was made to get a total interest factor of
35.95, do you see that?
Ms. Crisp: Yes, and I'm interested. You're saying that they owed no interest at all for the months of
2007?
Mr. Edwards: The statute says that interest begins on the last day of the month following the calendar
year for which the notice is issued. The way that that works is you look for each calendar year in the
[inaudible 00:42:52]. You look at the tax due for that year, interest begins February 1 of the following year
and continues to the date of payment. So then for the tax due for the year 2008, interest begins February
1 of 2009 and similarly for taxes for the year 2009 begin accruing February 1 of 2010.
Ms. Crisp: I believe that first before we discuss that I would think that we need to clarify whether
we use the old tax prior to 2016 because that becomes a moot point if we are correct, but I still believe
we were in calculating the taxes by the method that was in effect during the years it was in effect. The
CPA went back and said that the new method applies through the whole of the audit. My understanding
that in years and years of auditing experience that my husband has had, that Mr. Crisp has had, in city of
Tacoma, everywhere, that the interest rate that's in effect during the year in question is the interest rate
that they use and according to the RMC, that interest rate didn't come into effect until 2016. So let's say
in 2007, you use the interest rate that was in effect during that time. You get to 2016, then you look to
the new RCW. I ask what interest rate is charged for that year?
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Mr. Edwards: Mrs. Crisp, again I appreciate that you want to make legal arguments and defend your
work product. That is not the way that this proceeding works. You're here as a fact witness to testify about
the facts of what you did and so that we can explore whether what you did led to the right result under
the applicable law. I'm correct that you're not an attorney, correct?
Ms. Crisp: Correct.
Mr. Edwards: And so it wouldn't be your place to opine as to what the legal way that interest should be
applied, correct?
Ms. Sand: Objection, argumentative.
Mr. Olbrechts: All right, let's move on.
Mr. Edwards: Factually you did not apply interest in the manner reflected in Mr. Hilton's schedule here,
did you?
Ms. Crisp: That's true.
Mr. Edwards: For taxes that you found to be due in 2007, you started accruing interest at one percent
a month immediately after the end of each month and you calculated that one percent interest all the
way through the end of 2015, correct?
Ms. Crisp: That's true except for, we did not accrue interest at one percent per month until the back
payment becomes late. So there's a month there for each payment when it wasn't overdue. So we didn't
charge interest for that month that it wasn't overdue, we started charging interest once the payment was
overdue.
Mr. Edwards: So for example, for the month of January of 2007, interest would start in March of 2007
in your computation?
Ms. Crisp: I forgot. I usually ask Mike about this, I meant Mr. Crisp about this. If it's due on the 1st,
it becomes late... 1st of January it becomes late in February. So I believe that we would start charging
interest in February because it becomes late at that point.
Mr. Edwards: So if you're charging, and I think the specific details are not critical here, but with respect
to the month of January of 2007, you started accruing interest at one percent a month either in February
or in March of 2007?
Ms. Crisp: Yes.
Mr. Edwards: And you did that at one percent a month for every month through December of 2016?
Ms. Crisp: Yes.
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Mr. Edwards: And then for 2016, am I understanding you to say then, beginning in 2016 you went to
the state rate, but for 2016 across the board here for each of the tax tiers, you only charged 11/12th of
two percent?
Ms. Crisp: The way the state did it, they said the do assessments, they do it per year. So we
calculated 2016 forward. We calculated how much they owed to the present or to the time of payment
and then we applied that at the end of the year to the amount of tax accrued. So you'll see on the
spreadsheet that we sent with our letter, you'll see that every year has that 10.28 I think it was, percent
interest charged for the rest of the audit starting January 2016 to the time of payment. That's the same
for every month because on the time period 2016 through the time of payment was the same for every
year, you'll see it every year.
Mr. Edwards: Let me switch screens here or switch what I'm sharing to try to get to what you are
describing and for some reason what I'm wanting to share isn't showing up for me as one of my options.
Maybe I have too many windows, oh let's show all windows, I bet, there we go, okay. I'm back now to
Exhibit 25, which is the schedule that you sent to Mr. Deginger and I in March of this year. And I'm moved
from the unreported revenue data tab that we've been focused on to the tax interest and penalty
provision. Here's interest, you've got a column in your spreadsheet for every month of the audit period
up through May of 2013, correct?
Ms. Crisp: Yes.
Mr. Edwards: So here you're showing, starting May of '13, there were 30 months at one percent. For
the prior month it's now 31 and every month, that's going up by one percent, correct?
Ms. Crisp: Uh-huh.
Mr. Edwards: I'm looking now at Column CA. It looks like to me like a sum of the tax liabilities for the
prior year. In this case it would be 2012, correct?
Ms. Crisp: Yes.
Mr. Edwards: And then you've got an interest rate here that is 10.8% and it looks like that's adding a
bunch of stuff, and I'm not sure where that's coming from, Column BG. What you're telling me is that for
each year of the audit period, this 30%, 31, 32% that we're looking, that's reflecting what we were just
talking about. Taxed at one percent a month from the month or the month after the liability through
December of 2015, correct?
Ms. Crisp: Yes.
Mr. Edwards: And this 10.8% is the interest from January of 2016 through November 6th of 2019,
correct?
Ms. Crisp: Yes.
Mr. Edwards: And this is computed based on the formula that you've identified here?
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Ms. Crisp: Yes, you see the sign.
Mr. Edwards: And so we would have to go to Row BG to see where that's done and you've got 2016 is
BG36 and 2019 is BG39.
Ms. Crisp: Mm-hmm (affirmative).
Mr. Edwards: So 36 and 39, if we go back to this formula it looks like you're taking the full amount of
the interest for those years and then you're go for 2016, '17 and '18. So you're applying the full two
percent for 2016 and it's only 2019 that you're prorating for the year?
Ms. Crisp: Right. It's a partial year, that's the one-
Mr. Edwards: Because it was paid before the end of the year?
Ms. Crisp: Yes.
Mr. Edwards: But if the method that should have been applied is the method reflected in Mr. Hilton's
schedule, this significantly overstates the amount of interest due, correct?
Ms. Crisp: Correct. (silence)
Mr. Edwards: I have no more questions for this witness.
Mr. Olbrechts: Okay, all right Ms. [Sand 00:55:34], are you ready for cross at this point? And like I said,
we'll go until 11:45 and a natural break around that point and then take our lunch break.
Ms. Sand: I need five minutes right now.
Mr. Olbrechts: Okay, that's fine. Take a five minute break right now.
Automatic Voice: Recording stopped.
Mr. Olbrechts:
Okay, looks like we're back on the record.
Automated:
Recording in progress.
Mr. Olbrechts:
We're ready to go again. This is the Tracfone utility tax appeal. Mr. Edwards just finished the direct
examination of Ms. Crisp. We're now into cross from Ms. [Sand 00:00:16]. So, all right, go ahead, Ms. Sand.
Mr. Edwards:
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I'm sorry, Mr. Olbrechts-
Mr. Olbrechts:
Yeah.
Mr. Edwards:
Just before we get started, one of the exhibits that we talked to that had, then, the subject matter of the
city's motion in limine was the... What's the number of the exhibit? 32, the receipts, where you overruled
the objection. So, I just want to move the admission of exhibit 32.
Mr. Olbrechts:
Oh, okay. Yeah. Actually, on that one, I said as far as the documents that were part of the pre-hearing
motions, those are considered part of the record, and are admitted for that purpose anyway. So, yeah,
they're in the record.
Mr. Edwards:
Okay. Thank you.
Mr. Olbrechts:
Okay, Ms. Sand. Go ahead.
Ms. Sand:
Thank you. So, Mrs. Crisp, you testified that before the Tracfone audit that you had completed
approximately 26 audits of telephone businesses. Is that correct?
Mrs. Crisp:
Before we submitted it. It was more like seven when we started, but by the time we submitted it, I think
I worked on 26 audits that were telephone-related and over 35 of not-telephone-related audits.
Ms. Sand:
And based on your understanding of telephone utility tax, is there any distinction between prepaid and
postpaid wireless providers, whether they are subject to telephone utility tax?
Mr. Edwards:
Objection. That's asking a legal question.
Mr. Olbrechts:
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Overruled. Again, that goes to the issue-
Ms. Sand:
[crosstalk 00:01:57] the audit.
Mr. Olbrechts:
Oh, sorry. Yeah. It goes to what Ms. Crisp's understanding was for her methodology, so we'll allow it.
Mrs. Crisp:
Yeah, my understanding of the law was that if it's gross income and it's funded by a telephone company,
per the RCW35A, it's taxable. It doesn't matter if you're prepaid only, whether you're a network carrier.
All that's taxed the same.
Ms. Sand:
Okay. And Mr. Edwards made quite a point to explain that you were asked to use this LibreOffice instead
of Microsoft Excel, and you agreed that, yes, you used LibreOffice, correct?
Mrs. Crisp:
Yes.
Ms. Sand:
And did Tracfone ever claim that it could not view a spreadsheet that you provided to Tracfone?
Mrs. Crisp:
Nothing direct from us, but when it would come through your office, it came back totally corrupted,
because your protection software found it very difficult-
Mr. Edwards:
Objection. She doesn't have personal knowledge to testify about what other people were seeing from
stuff that got sent from Ms. Sand to third parties.
Mrs. Crisp:
It was sent back to us, and we could see how corrupted it looked. And then we were obliged to send stuff
directly to your office so it wouldn't go through Ms. Sand's software. I didn't know until today that your
company's software had a hard time reading it. However, I did tell you how to download LibreOffice so
that you could read it yourself. Really, if we were having this problem all the time with clients, we would
have switched, but we found that LibreOffice does very well and it's so easy to use. We've been really
pleased with it. That's why we stuck with it.
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Ms. Sand:
So. Mrs. Crisp, I just want to clarify, did Tracfone ever communicate to you or TRS that they had difficulty
opening a spreadsheet that your company provided?
Mrs. Crisp:
I don't remember that ever happening. I remember hearing it from you.
Ms. Sand:
Okay. So, is your answer, no, Tracfone never communicated an issue with that?
Mrs. Crisp:
Not according to my memory. I don't remember that.
Ms. Sand:
So, Mr. Edwards brought up that Tracfone representatives wanted to meet with TRS representatives. Do
you recall that?
Mrs. Crisp:
Yes, they asked several times.
Ms. Sand:
And, what was your understanding of why they wanted to meet?
Mrs. Crisp:
Well, I understood that they wanted to make the argument that they basically made to this court that
they were not taxable at all because of the way their company was structured. The reason why we
understood that to be the case is we did have a telephone call with Mr. [Dillon 00:05:07] and Mr. Ford,
and that's exactly what they wanted to talk about, the way they structured their business was such that
they didn't owe any tax. And I think that's probably why the auditor-taxpayer relationship broke down,
because they didn't want to talk about the audit. They just want to talk about the legal aspects of how
they were not taxable. And we tried in emails, repeatedly, we tried in emails as best we could to show
them that their position was wrong. They certainly got it that we didn't agree with them.
Ms. Sand:
After that phone call with Mr. Dillon and Mr. Ford, did you think an in-person meeting would have been
unproductive?
Mrs. Crisp:
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Very much so.
Ms. Sand:
Okay. I'd like to attempt to share my screen and show you what's been marked as city's exhibit 17. Also,
do you have a hard copy of that to refer to as well in case my screen sharing attempt is not successful?
Mr. Olbrechts:
Okay.
Ms. Moya:
I just added you, Carrie, as a co-host.
Mr. Olbrechts:
Okay. It's showing.
Ms. Sand:
Thank you, Ms. Moya. So, Mrs. Crisp, I'm showing you what's been marked as city's exhibit C17. Do you
see at the top here, left hand box, 2009... Where did this data in this top box come from?
Mrs. Crisp:
All of it came from Tracfone, this whole-
Ms. Sand:
Okay. And explain how TRS used this to prepare its estimate related to revenues from third-party retailers
which TRS referred to as indirect sales revenues.
Mrs. Crisp:
The 82% was what they called wholesale sales, and the 18% is what they called retail sales. So, we just put
those numbers, calculated by Tracfone, and of course we checked them, into our spreadsheet, so that
they can see that we were using a percentage that came directly from them.
Ms. Sand:
And Mr. Edwards asked you a lot of questions that seemed to imply that TRS for estimation purposes was
using inflated revenue data, but you got your revenue data from Tracfone, correct?
Mrs. Crisp:
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Yes, and I'd like to point out that it even says here revenue, net airtime revenue. It would not be Tracfone
revenue if they were counting what the retail stores got from the sale of the cards. This is money that
came to Tracfone as part of their gross revenue. It was money that went to hit their pockets. Therefore,
the whole thing is taxable.
Ms. Sand:
So, I'm trying to highlight where in the second row it says net airtime revenue per financial statement. It
says company-wide. And then it looks like approximately $1.5 billion number. Is that right?
Mrs. Crisp:
Yep.
Ms. Sand:
Okay. And so, because it says company-wide, that's why you had to, for preparing the estimate, you had
to figure out how to determine what the [Renton 00:08:52] specific amount of revenues was, correct?
Mrs. Crisp:
Correct.
Ms. Sand:
I'm going to go ahead and stop sharing and ask you questions about how you calculated interest. Mr.
Edwards asked you questions to show that CPA Thomas Hilton calculated interest consistent with the
RCW, but I just want to clarify that your testimony is that the interest should be calculated using that RCW
method only after January 1st, 2016, correct?
Mrs. Crisp:
Correct.
Ms. Sand:
And is that because it's your understanding that the Renton ordinance that adopted the state method
only became effective prospectively starting January 1st, 2016, correct?
Mrs. Crisp:
Correct.
Ms. Sand:
And so, before January 1st, 2016, TRS calculated interest based on the Renton municipal code in effect
prior to January 1st, 2016.
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Mrs. Crisp:
When it was accrued, under the old law, the old code, we calculated it according to the old code, and
when the old code was no longer in effect, we calculated it under the code that was in effect.
Ms. Sand:
And that code was Renton municipal code 5-26-11, subsection A? If you recall.
Mrs. Crisp:
That sounds right. Yeah. We've got 5-26-11's the new code, and the old code is 5-11-2.
Ms. Sand:
Thank you. No further questions.
Mr. Olbrechts:
Okay. Mr. Edwards, any redirect, I guess I'll call it?
Mr. Edwards:
No redirect.
Mr. Olbrechts:
Okay. Ms. Crisp, thank you. I'm sure this is not the most pleasant part of your job. It's over.
Mrs. Crisp:
Thank you.
Mr. Olbrechts:
Yeah, thank you for your testimony. Really well done.
Ms. Sand:
I also want to note that the city will be calling Mrs. Crisp back during our case [crosstalk 00:11:05]-
Mr. Olbrechts:
Oh, I'm sorry, it's not over for you yet. Okay.
Mrs. Crisp:
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One last thing I wanted to say, when I'm under pressure, I don't think as well, and I realized that the
interest that we charged originally was calculated... Mr. Edwards was correct, starting March through
January, because the interest didn't start accruing until February, so by the time you got a month's
interest, then you start charging in March. So, he was absolutely correct on that one.
Mr. Olbrechts:
Okay. Thank you.
Mrs. Crisp:
So, thank you.
Mr. Olbrechts:
Thank you, Ms. Crisp.
Mrs. Crisp:
We'll see you later then.
Mr. Olbrechts:
All right. Great. Okay. All right. Mr. Edwards, next... I guess we can go on until noon, right? Since we did
take that additional little break. Does that sound like a good timeframe to get started with your next
witness?
Mr. Edwards:
I can certainly do that.
Mr. Olbrechts:
Okay.
Mr. Edwards:
My thought was we could either get started and go to noon, or take our lunch break early. Either one
works for me.
Mr. Olbrechts:
I think just because it sounds like we still have a few witnesses to go through, that go as far as we can
before we take our lunch break. So, yeah, why don't we go until noon right now.
Mr. Edwards:
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Okay. All right. Mr. Dillon, you're up. If you could unmute and turn on your video.
Mr. Olbrechts:
Yeah. Oh, there he is. Okay. Mr. Dillon, let me swear you in. Just raise your right hand. Do you swear affirm
to tell the truth, nothing but the truth in this proceeding?
Mr. Dillon:
Yes.
Mr. Olbrechts:
Okay, great. All right. Go ahead, Mr. Edwards.
Mr. Edwards:
Mr. Dillon, how long have you been employed by Tracfone?
Mr. Dillon:
A whole 16 years.
Mr. Edwards:
And what is your current title?
Mr. Dillon:
Vice President, Corporate Taxation.
Mr. Edwards:
Are you familiar with Tracfone's business activities and tax payments?
Mr. Dillon:
Yes, I am.
Mr. Edwards:
Okay. Does Tracfone sell telephone sets, handsets?
Mr. Dillon:
Mobile handsets, yes, if that's what you're referring to.
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Mr. Edwards:
Yeah. Does Tracfone also sell airtime?
Mr. Dillon:
Yes.
Mr. Edwards:
Does Tracfone sell handsets and airtime at both retail and wholesale?
Mr. Dillon:
Yes.
Mr. Edwards:
What is your understanding of a wholesale sale?
Mr. Dillon:
It's something that we-
Ms. Sand:
I object to the characterization of sales as wholesale when that's already been ruled on by the examiner
in the March 12th summary judgment ruling.
Mr. Olbrechts:
Okay. Yeah, I think just for clarity of speech, maybe Mr. Edwards, refer to it as indirect and direct sales, if
you could.
Mr. Edwards:
Yeah, the problem is that that's not the terminology that the company uses. It's not the-
Mr. Olbrechts:
Okay.
Mr. Edwards:
The term indirect or non-direct was something that was made up by Mrs. Crisp as she testified to it in her
deposition.
.
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Mr. Olbrechts:
Right. Okay.
Mr. Edwards:
So, yeah, having an ongoing battle about a choice of terminology, I think, is not productive.
Mr. Olbrechts:
Okay. No, I think I understood. I think we know what you mean in these particular circumstances, so okay.
Yeah, you can use your retail wholesale distinction, with the understanding, of course, that we're not
departing from the summary judgment ruling. Okay, go ahead, Mr. Edwards.
Mr. Edwards:
What is your understanding of a wholesale sale?
Mr. Dillon:
Wholesale is a purchase for resale personally [inaudible 00:14:56] going to resale.
Mr. Edwards:
And, does Tracfone make wholesale sales of handsets?
Mr. Dillon:
Yes.
Mr. Edwards:
And Tracfone also makes wholesale sales of airtime?
Ms. Sand:
Again, object. This goes to the very heart of the March 12th summary ruling.
Mr. Edwards:
This is a factual question. It is not a legal question. And, we're certainly allowed to present evidence. If
you're going to assert that we are precluded from presenting the evidence, I strenuously take offense at
that.
Mr. Olbrechts:
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No, okay. Like I said, I'll overrule, with the understanding of course, this is the terminology used in-
company by Tracfone.
Ms. Sand:
So, Mr. Examiner, I also just, for the record, want to reiterate that in your March 12th summary judgment
ruling, you ruled that the resale proviso in RCW35ANA2010 subsection one does not apply because
Tracfone is not reselling network telephone service. It remains the service provider for the end user
customer. I just want that stated for the record-
Mr. Olbrechts:
Okay.
Ms. Sand:
... to the extent that Tracfone, through Mr. Dillon's testimony, is seeking to try to somehow collaterally
attack that ruling.
Mr. Olbrechts:
All right, understood.
Mr. Edwards:
Yeah, to the extent that we're making speeches on the record here, the ruling was cross-motions for
summary judgment, which are only addressing questions of law and only in the circumstance where there
is no genuine issue of material fact. A summary judgment ruling cannot make factual determinations, and
if there is competing factual evidence, and decision on summary judgment cannot be made... So,
describing the ruling as affecting a determination of whether the sales or wholesale or resale, when that
is a disputed matter, is not an accurate description, to the extent that the ruling of the legal matter was
in computing Tracfone's liability, it's not permitted to exclude its wholesale sales. We are not revisiting
that issue here. We recognize that that is the ruling as to the law. But part of the issue becomes how
should the measure of the tax on those wholesale or indirect sales be computed.
Mr. Olbrechts:
Okay. Yeah. Mr. Edwards, understood, and of course, Ms. Sand, if the testimony of yours towards
collateral attack on the legal rulings of the summary judgment motion... I'll, of course, anticipate your
objections to that. But as long as we're narrowly tailored towards disputing the methodology of the
computation of gross income, and what's subject to the tax, that's valid questioning.
Ms. Sand:
I just wanted to note the standing objection for the record.
Mr. Olbrechts:
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Okay. Understood. All right. Mr. Edwards, go ahead.
Mr. Edwards:
See, I'm not sure I can keep track of where... We've talked about what a wholesale is. What is a retail sale?
Mr. Dillon:
Retail sales are what Tracfone is selling directly mostly to an end user or that's just not purchased for
resale.
Mr. Edwards:
Does Tracfone also sell SIM cards?
Mr. Dillon:
Yes.
Mr. Edwards:
What is a SIM card?
Mr. Dillon:
Without getting into the technical, it is a card that you use on a mobile device that allows that device... in
some cases, the technology of that device, to be able to connect to a network.
Mr. Edwards:
Does Tracfone also receive revenue from activities other than the ones that we've talked about so far?
Mr. Dillon:
Yes, other than phones and airtime?
Mr. Edwards:
Yeah, other than phones, airtime, and SIM cards.
Mr. Dillon:
Yes.
Mr. Edwards:
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Can you give an example of another type of revenue stream that Tracfone has?
Mr. Dillon:
We have a few different things that we sell. I have to think of what they are right now.
Mr. Edwards:
Do you have any advertising income?
Mr. Dillon:
There is some monies through some different, I guess, internet advertising and that stuff.
Mr. Edwards:
And in connection with this audit, the TRS and the city of Renton have never asserted that Tracfone is
subject to utility tax on its handset sales or its SIM card sales, correct?
Mr. Dillon:
Right, they've looked at our airtime.
Mr. Edwards:
And maybe I should've asked the question more directly. The only thing that they're asserting is subject
to Renton utility tax is sales of prepaid wireless airtime, correct?
Mr. Dillon:
Yes.
Mr. Edwards:
Is airtime the same product whether it's sold at wholesale or retail?
Mr. Dillon:
Yes.
Mr. Edwards:
And so, for example, Mr. Malone purchased a Tracfone brand 60-minute, 90-day basic airtime card. That's
a product that Tracfone sells at both at wholesale and retail, correct?
Mr. Dillon:
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Yes.
Mr. Edwards:
Okay. Does Tracfone collect sales tax on its retail sales of airtime in Washington?
Mr. Dillon:
Yes.
Mr. Edwards:
Does Tracfone collect sales tax on its wholesale sales on airtime in Washington?
Mr. Dillon:
No.
Mr. Edwards:
Why not?
Mr. Dillon:
We have a resale exemption that would allow us to not charge tax on that transaction.
Mr. Edwards:
That is, you said, for sales tax purposes, sales of airtime sold for the purpose of resale are not subject to
sales tax?
Mr. Dillon:
That's right.
Mr. Edwards:
What about E-911 tax? Does Tracfone collet E-911 tax on retail sales of airtime in Washington?
Ms. Sand:
Object. Beyond the scope of this hearing, which is about telephone utility tax.
Mr. Olbrechts:
Mr. Edwards?
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Mr. Edwards:
That's an interesting objection in light of the argument that the Tracfone E-911 case is controlling in this
matter.
Ms. Sand:
Again, the business model describing Tracfone's activities in that case is the same, but it's a different tax,
and that's why I made the objection.
Mr. Olbrechts:
Okay. Well, and also, that case was used for the summary judgment motion, which again, we're not
collaterally attacking that motion, so I'm not sure where you're going with this, Mr. Edwards. If we're just-
Mr. Edwards:
Well, if we're trying to identify the factual distinction between wholesale sales of telephone service and
retail sales of telephone service for tax purposes, which is part of Mr. Dillon's responsibilities as the Vice
President of Tax at Tracfone, is compliance with multiple types of taxes in multiple jurisdictions.
Mr. Olbrechts:
Well, it sounds like you're challenging the applicability of the resale proviso again.
Mr. Edwards:
This is purely a factual question of what they do. I'm not making any legal arguments in this hearing-
Mr. Olbrechts:
All right, but how does that-
Mr. Edwards:
... [crosstalk 00:24:03].
Mr. Olbrechts:
How does that factual determination relate to the methodology that was used by Ms. Crisp, I guess? That's
what I'm trying to figure out here.
Mr. Edwards:
Well, we're getting to that very shortly with respect to the questions that I'm about to ask.
Mr. Olbrechts:
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Okay. Well, I'll give you some latitude, yeah, if we're getting there soon. All right, go ahead.
Mr. Edwards:
How does a purchaser establish that it's making a purchase for resale?
Ms. Sand:
Objection. Vague as to whether the purchaser is referring to a third-party retailer or whether it's referring
to an end user subscriber. Can you clarify the question, Mr. Edwards?
Mr. Edwards:
How does any purchaser establish that it is purchasing for resale?
Mr. Dillon:
That would be communicated to us, and for tax purposes, we would be asking for the applicable resale
exemption certificate.
Mr. Edwards:
I'd like to share now on my screen exhibit 34... Oops. I've been disabled here.
Mr. Olbrechts:
Oh. Ms. Moya, can you make him a cohost again?
Ms. Moya:
Sorry, I will do that. I was-
Mr. Olbrechts:
All right.
Mr. Edwards:
No worries.
Ms. Sand:
Is it possible to have multiple people be able to screen share?
Ms. Moya:
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I think we can.
Mr. Olbrechts:
Yeah, I think you just did it.
Ms. Moya:
I just put you both on cohost.
Mr. Edwards:
I'm showing you a copy of what has been identified for purposes of this hearing as exhibit 34, and was
also an exhibit to your declaration in the summary judgment motion. Do you recognize what these
documents are? There's two of them here in this exhibit. Are these resale certificates?
Mr. Dillon:
Yes.
Mr. Edwards:
Do these resale certificates apply only to handsets, or do they also apply to the airtime cards that you sell
to these customers?
Mr. Dillon:
Usually they will say on there what they are purchasing, so it would be for whatever that certificate is
addressing.
Mr. Edwards:
Okay. I'm going to stop sharing this and... Do you have purchasers that only purchase airtime, that provide
you with resale certificates?
Mr. Dillon:
Yes.
Ms. Sand:
Object. Again, this line of questioning is not making a distinction between the purpose of the methodology
versus the resale proviso's applicability.
Mr. Olbrechts:
All right. Are you almost there, Mr. Edwards?
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Mr. Edwards:
I am almost there.
Mr. Olbrechts:
Okay. Like I said, I'll-
Mr. Edwards:
I've got, I think, two more questions that Ms. Sand will likely object to before I get to the key that this is
leading up to.
Mr. Olbrechts:
All right. Go ahead.
Mr. Edwards:
Okay. What would happen if a wholesale buyer did not provide Tracfone with a resale certificate?
Mr. Dillon:
We would be charging sales tax.
Mr. Edwards:
Does Tracfone... I guess maybe that's the last question before now I'm getting to the point. Does Tracfone
charge wholesale buyers and retail buyers the same price for the same product?
Mr. Dillon:
No. Usually, the wholesale purchasers are getting a discount because they are then going to... The object
of their business is to make money. They want to sell at a higher price.
Mr. Edwards:
And so, if we go back to the Mr. Malone example, he had purchased a Tracfone branded 60 -minute, 90-
day basic airtime. If he had purchased 60 minutes of 90-day basic airtime at retail from Tracfone, would
Tracfone have charged Mr. Malone $19.99?
Mr. Dillon:
Yeah, that should be what we call the suggested retail price, as what the retailer was charging. That would
be Tracfone's charge.
Mr. Edwards:
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So, when Tracfone makes retail sales, its sales are at the suggested retail price.
Mr. Dillon:
Yes.
Mr. Edwards:
Got it. When Tracfone makes wholesale sales, does Tracfone sell at the suggested retail price, or it's
something less than the suggested retail prices?
Mr. Dillon:
It would be less.
Mr. Edwards:
Do you know how much Tracfone charged Fred Meyer for the airtime card that Fred Meyer sold to Mr.
Malone?
Mr. Dillon:
Yeah, looks like from what we were able to say, it was charged I think $16.99, or a similar... not to Fred
Meyer, but what that card that has sold, we see that price down at a lower amount, around $16.99 or
$17.
Ms. Sand:
Objection, to the extent that the witness refers to something they were able to see that has not been
submitted into the record, so it assumes facts not in evidence.
Mr. Olbrechts:
All right. Mr. Edwards, can you flesh that out?
Mr. Edwards:
[crosstalk 00:30:25] Mr. Dillon testifying from his personal knowledge.
Ms. Sand:
What has he based it on? You need to lay a foundation.
Mr. Olbrechts:
Yeah, lay a little foundation if you could, Mr. Edwards.
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Mr. Edwards:
Does Tracfone sell to Fred Meyer?
Mr. Dillon:
I'm not sure if Tracfone sells directly to a Fred Meyer.
Mr. Edwards:
Who does Fred Meyer obtain Tracfone branded airtime cards from?
Mr. Dillon:
That would be from a distributor.
Mr. Edwards:
So, with respect to products that are sold at Fred Meyer, Tracfone would make a sale to a distributor, who
would then make a second sale to Fred Meyer. Am I understanding that correctly?
Mr. Dillon:
Yes.
Mr. Edwards:
And you have looked at prices charged to that distributor for products that are 60-minute, 90-day airtime
cards?
Mr. Dillon:
I've looked at products that are sold at wholesale that were the same card, same description on the card.
Mr. Edwards:
And that description in this particular instance is 60 minutes, 90 days?
Mr. Dillon:
Yes, it's the same card.
Mr. Edwards:
Can you describe how Tracfone bills wholesale customers for airtime?
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Mr. Dillon:
Well, it can be done a couple of ways. [inaudible 00:32:42] it can be done through an actual invoicing, but
usually for the most part, the majority of the business is done by POSA cards, which are the point of sale
activation. And once those cards are activated, then that's when those cards get invoiced.
Mr. Edwards:
Do you also have cards that are non-POSA cards that are active at the time of shipment to the wholesale
purchaser?
Mr. Dillon:
Yes, there are.
Mr. Edwards:
And when are those invoiced?
Mr. Dillon:
Those are invoiced on shipment.
Mr. Edwards:
So, the non-POSA cards would be invoiced at the time of shipment, and sales of POSA cards are invoiced
at the time of activation by the retailer?
Ms. Sand:
Object. I don't understand the relevance of this with regard to the methodology.
Mr. Edwards:
Well, we're about to look at exhibits that you're going to object to with respect to the invoicing that we're
talking about.
Mr. Olbrechts:
Okay, I'll give you some latitude, just to see where it's going.
Mr. Edwards:
Do you need me to repeat the question?
Mr. Dillon:
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Yeah. For the active cards, those are invoiced when they are shipped, and for the POSA cards, those are
invoiced upon activation.
Mr. Edwards:
So, I'm going to share my screen here, and this is exhibit 35 from Tracfone's exhibit list. Are you able to
just see my screen-
Mr. Olbrechts:
Yeah.
Mr. Edwards:
Proceeding to the 35?
Mr. Dillon:
Yes.
Mr. Edwards:
Do you recognize exhibit 35 as an invoice to Circle K stores?
Mr. Dillon:
Yes, that's the standard format that we have. Yes.
Mr. Edwards:
And, there are we a number of different airtime products listed on this invoice?
Mr. Dillon:
Yes.
Mr. Edwards:
And, I notice that all of the products on this invoice have the phrase non-POSA in them. Does that indicate
that these are sales of non-POSA airtime cards?
Mr. Dillon:
Yes.
Mr. Edwards:
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Yeah. And, the sale of these cards would be invoiced, then, upon shipment to Circle K?
Mr. Dillon:
Yes.
Mr. Edwards:
And, if we look at line one, it identifies a product that is a Tracfone branded product with 60 units of
airtime, 90 access days. Do you see that?
Mr. Dillon:
Yes.
Mr. Edwards:
Is that a similar product to the product purchased by Mr. Malone?
Mr. Dillon:
Yes.
Mr. Edwards:
And then, I'll point out that the version of exhibit 35 that was shared with the city and the hearing
examiner's office last week did not have the column labeled unit price redacted, but the unit price data is
confidential financial... over and above the tax information. It's also business information about Tracfone's
pricing. And so, we have redacted that column for purposes of becoming the exhibit to be in the record,
but both the city and the hearing examiner have access to a non-redacted version that shows that unit
pricing. And my recollection is that for line one, that unit price shows as either $16.99 or $17.
Ms. Sand:
$17.
Mr. Edwards:
Yeah.
Ms. Sand:
It also has the watermark noting that it's confidential.
Mr. Edwards:
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Right. But yeah, the concern is on appeal, this will be transmitted to the court, and it will then become
part of a public court record unless it were filed under seal. And for those purposes, we felt it was easier
to simply redact that for when it's going to become a court record document.
Mr. Olbrechts:
Okay.
Ms. Sand:
Fun times ahead.
Mr. Edwards:
For all of us. So, now, I want to switch gears briefly, or actually, I guess, continue along this line, and share
with you the document that has been marked as exhibit 36. Do you recognize this as an invoice to
Walmart?
Mr. Dillon:
Yes.
Ms. Sand:
Mr. Edwards, I note that the [inaudible 00:38:58] prices are listed here after the speech you just made.
Mr. Edwards:
Yeah, and I'll provide some clarification around that, because this was the only one of the three in which
that's going to be the case. And the reason is that this particular document was entered as an exhibit in
the Springfield, Missouri, litigation, and is already a court record in that proceeding. And so-
Ms. Sand:
Objection. Object to referencing other proceedings that are not relevant for today's proceeding.
Mr. Olbrechts:
Okay, overruled, because he's just explaining why this doesn't have some redacted portions, correct?
Mr. Edwards:
That is correct.
Mr. Olbrechts:
Okay. Yeah.
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Mr. Edwards:
And I am on page six of the document, and line item 55, and with the invoice description, says Tracfone
POSA 60 units of airtime, 90 access days. Do you see that?
Mr. Dillon:
Yes.
Mr. Edwards:
And you see where the unit price reflected for that product is $16.99?
Mr. Dillon:
Yes.
Mr. Edwards:
And this was a product that would have a suggested retail price of $19.99?
Mr. Dillon:
Yeah, that would be $19.99 or possibly $20, depending on the...
Mr. Olbrechts:
Do you want to stop it here, Mr. Edwards, for the lunch break, or go a little further? How-
Mr. Edwards:
I have just one more invoice.
Mr. Olbrechts:
Okay.
Mr. Edwards:
Why don't we go through that invoice and then stop for the lunch break?
Mr. Olbrechts:
Okay. All right.
Mr. Edwards:
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And so, the next invoice that I'm going to show is exhibit 37. Does everybody see that?
Mr. Olbrechts:
Yes.
Mr. Edwards:
And, again, this is another representative invoice to a wholesale or indirect purchaser of Tracfone airtime.
Ms. Sand:
Object to the form of the question. Again, it's important to call these retailers or something to try to not
collaterally attack the March 12th summary judgment ruling.
Mr. Olbrechts:
Okay. Well, overruled for the reasons stated previously. This is just an issue of the terminology used by
the company, and again, waiting to see where this ultimately goes in terms of addressing the
methodology, but I'll allow it.
Mr. Dillon:
Yeah, this is to a distributor.
Mr. Edwards:
So, this is to somebody similar to the company that Fred Meyer would purchase airtime from.
Mr. Dillon:
Yes.
Mr. Edwards:
So, Interactive Communications is not itself a retailer. They sell to retailers.
Mr. Dillon:
Yes, that's their business.
Mr. Edwards:
Okay. And, as we look at page four, on line 29, again, we have a Tracfone airtime card, and this one
similarly is 60 minute, 90 access days, and in the version that was shared with the City of Seattle... or,
excuse me, the City of Renton and the hearing examiner's office, the unit price on this is not $19.99, but
is either $16.99 or $17, correct?
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Mr. Dillon:
Yes.
Mr. Edwards:
And then, I want to go to the very last page of exhibit 37, is the back of the invoice, has Tracfone's standard
terms and conditions for the sale of the airtime that we were looking at?
Mr. Dillon:
Yes.
Mr. Edwards:
And, this requires payment upon invoicing?
Mr. Dillon:
Yes.
Mr. Edwards:
And it provides that title and risk of loss passed to the buyer upon delivery?
Mr. Dillon:
Yes.
Mr. Edwards:
At this point, I think, Mr. Hearing Examiner, this is a good time for a break. I'd like to move the admission
of exhibits 35, 36, and 37, and then I'll be starting with a new line of questions after the lunch break.
Ms. Sand:
And I'd like to object to their admission. Again, Mr. Edwards has not established the relevancy of any of
these documents with regard to the methodology for estimating the amount of revenues attributable to
sales by third-party retailers.
Mr. Olbrechts:
Yeah.
Mr. Edwards:
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It is our position that the computation of the measure of tax on the indirect sales should include an
adjustment for the margin that is being reflected on these invoices, that is the difference between the
wholesale selling price and the retail selling price. So, these go very directly to the subject matter of this
hearing, which is the measure of the tax in light of the ruling that wholesale sales are subject to the tax.
It is not an attack on the legal ruling. It goes directly to how the measure of tax should be computed.
Mr. Olbrechts:
So, where's the relevancy of the terms and conditions, though?
Ms. Sand:
Mr. Examiner?
Mr. Olbrechts:
Yeah.
Ms. Sand:
If I understand correctly, Mr. Edwards is asserting that the city based its estimate of revenues from third-
party retailers on MSRP rather than on unit price paid to Tracfone. And there is no evidence that the MSRP
is the-
Mr. Edwards:
You are mis-characterizing what our position is. You can make your closing arguments at the end here. I
am presenting evidence from which I am going to make arguments about the mechanics of how that
computation was done and an adjustment that we believe should be made to that computation.
Mr. Olbrechts:
Yeah, no, I understand that. Yeah. Like I said, the issue about what the retail price is and the terminology
of Tracfone is relevant to the methodology, but back to the terms and conditions, though, Mr. Edwards,
that's where I was having trouble finding relevancy about assumption of risk upon the sale... What does
that have to do with your argument that we should be looking at these prices?
Mr. Edwards:
The terms and conditions go to the fact that this is a sale to the person that's being invoiced.
Mr. Olbrechts:
Okay. Yeah. I don't see that as pertinent to your attack on the ratio that TRS is using to apply to your...
what they call the direct sale. So, I'll admit the invoices except for the terms and conditions. Okay. So,
we'll take our break now until 1:05. We'll see you then.
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Ms. Sand:
Can we have a shorter lunch break, perhaps, in the interest of time? Just to make sure we finish today?
Mr. Olbrechts:
Okay. How does everyone feel, 12:35, then?
Mr. Edwards:
That's okay with me.
Mr. Olbrechts:
All right. Okay. I'll see you at 12:35.
Ms. Moya:
Mr. Edwards, could you stop sharing your screen?
Mr. Edwards:
Oh. Yes. I'm-
Mr. Olbrechts:
There we go.
Lunch Break
Mr. Scott Edwards:
Before the break you were also talking about the difference in the timing of invoicing between non-POSA
cards and POSA cards and my understanding is POSA stands for Point of Sale Activation. With respect to
POSA cards, who activates the card?
Mr. Dillon:
The card gets activated by the retailer when they make the sale.
Mr. Scott Edwards:
That happens at the retailer's cash register?
Mr. Dillon:
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Generally speaking, yes that's the process.
Mr. Scott Edwards:
Does Tracfone generally enter into agreements with the purchasers that we've been referring to today as
wholesale customers, retailers or distributors? Are yeah, retailers or distributors?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
Do those contracts address things such as the selling price of air time to those customers and the timing
of invoicing and payment?
Ms. Carrie Sand:
Object to the extent the question frames Tracfone as selling air time to third party retailers. They sell
through the retailers as ruled by the examiner in the March 12th summary judgment ruling.
Mr. Examiner:
Excuse me. Again we're just, this is the terminology used by Tracfone. I don't see it as a collateral attack
on the summary judgment motion, I'll overrule. Go ahead.
Mr. Dillon:
Yes, there are service agreements or purchase agreements that are signed between Tracfone and a
retailer or distributor.
Mr. Scott Edwards:
At this point I'd like to move the admission of Tracfone Exhibits 38 through 44, which are various such
agreements.
Ms. Carrie Sand:
Again, the city objects as stated in our motion in limiting. The reason we object is we don't see how this
is relevant for determining the amounts due of tax, interest and penalties. It's not relevant, Your Honor.
So again, we renew our objection as stated in our motion limiting.
Mr. Scott Edwards:
I have three components to the response is, it is relevant to our theory with respect to the adjustment,
which is the subject matter here in terms of the distinction between wholesale and retail selling prices.
Secondly, in the hearing examiner's ruling on summary judgment, the hearing examiner specifically
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provided or invited the opportunity to present additional forms of contract over and above those that
were submitted on the summary judgment motion to the extent that Tracfone thought that there was
more variety to represent what those contracts look like. So we think it is specifically within the scope of
the ruling and while I have no intent to make any legal arguments this hearing about matters that the
hearing examiner has ruled on, one of the issues raised in the summary judgment motion is that there are
genuine issues of material fact that were not appropriate for summary judgment and to the extent that
Ms. Sand is saying that she wants to make sure that the record is devoid of factual evidence or maybe of
additional factual evidence on a disputed factual point, I don't think that that argument is well taken.
Mr. Scott Edwards:
Again, I'm going to stop there because I think the first two points are the key focus for this purpose. I'm
simply asking to have these admitted to the record. I don't intend to ask questions about the specific
terms other than pricing terms, which goes to the wholesale retail adjustment piece.
Ms. Carrie Sand:
Mr. Examiner, if I may make a plea applied to that, Mr. Edwards said that he had three components to his
response. One of them was that he claims that March 12th summary judgment ruling invited more
evidence and yet he then ties that into his third point, which is there is genuine issues of material in fact
which mean in Tracfone's case summary judgment inappropriate and yet that was squarely addressed as
part of your April 19th ruling upon reconsideration and you ruled that those factual disputes Tracfone was
raising were not material. That was what your April 19th ruling held. And so again, without Tracfone
explaining how these contracts are needed to establish a judgment is necessary on TRS's methodology
that they use to estimate the amount of tax due. I don't think these are relevant, these contracts, and
then I'll just say the appropriate time to have brought these forward to your attention would have been
on reconsideration.
Mr. Examiner:
And Mr. Edwards, you referred to my summary judgment motion identifying that contracts could be
presented to show different business models then that essentially testified to by Mr. Ashpaugh because
he based his conclusions on your business model on a limited number of contracts and didn't actually
expressly say that he found that your business model worked that way for all of your contracts? So in
terms of business model, the contracts are pertinent if they show a different business model than what
Mr. Ashpile presented and by business model, I'm talking about his position on it, the two step activation
and the responsibilities of Tracfone once the telephone service is sold to the consumer. Are you going to
be making those arguments in regards to these contracts or are you really just presenting them to show
what the price is when it's sold to the retailers?
Mr. Scott Edwards:
My understanding is that for the purposes of today's hearing, I'm basically limited to talking to the pricing
components, that the business model elements that you just described are outside of the scope of this
hearing, but these contracts do go to that because they reflect a number of different things and each of
them is slightly different. One of the contracts is a drop ship contract, which is the only example in any of
the contracts in which there is a sale, a retail sale by Tracfone through somebody else, in this case QVC.
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There are provisions in several of these contracts that specifically indicate that the purchase of air time is
being purchased for the purpose of resale and there are provisions in some of these contracts to
distinguish between consignment sales and other types of sales and they reflect that Tracfone sales of air
time to these customers are not consignment sales.
Mr. Scott Edwards:
In that regard I think at least two of these contracts are contracts that were submitted to the trial court
in the Springfield case and were testified about by Mr. Dillon in that case and one of the other elements
of your ruling was a concern that you did not have familiarity with what the evidence was in the Springfield
case and this provides additional evidence from that case. All of those things go to the business model
question that is what you left open.
Ms. Carrie Sand:
And Mr. Examiner, I'd like to further object that the QVC drop ship agreement, marked Tracfone Exhibit
Number 39 is dated May 2016. That is outside the relevant audit period at issue. The audit period issue is
January 1st, 2007 through May 31st, 2013. This is dated May 2016. There are other contracts in this
collection, Tracfone Exhibit Number 38, the service level agreement with K-Mart, is dated 2001, well
before the start of this particular audit period. Tracfone Exhibit Number 40, the Family Dollar vendor
agreement, is dated 2005. Again, that predates the start of this audit period which began January 1st,
2007.
Mr. Examiner:
Okay, shoot. I think in terms of what's outside of the audit period, those contracts wouldn't be admissible.
I don't know how I have time to go through all that.
Mr. Scott Edwards:
Well, that's an interesting statement. I don't know that the contracts that have been admitted are dated
with dates within the audit period, so I don't know that that's a, and they're certainly not-
Mr. Examiner:
Yeah okay, as you were saying.
Mr. Scott Edwards:
... in and of itself, if those terms are terms on which Tracfone was engaging in business with those people
both before and after that particular version of it, the timing in and of itself is not dispositive of the
relevance.
Mr. Examiner:
All right. I'll make the contracts admissible. Again, in the reconsideration ruling it identifies what facts
were found pertinent to the business model that led to the conclusion that the resale proviso doesn't
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apply. So I leave it up to Tracfone to point out any contracts that are materially different from those, the
facts that establish that there's no resale of network telephone service to the retailers there. Overall, the
contracts are admitted, primarily for the issue of what the price is sold to those retailers. That's your major
point in attacking the multiplier to the direct sales that TRS uses.
Mr. Examiner:
So that's the primary reason that those contracts are admitted. In terms of showing a different business
model, if like I say, if any of those contracts show facts that are materially different from what was used
to come up with the conclusion that there's no resell of network telephone service, then I leave that up
to network or excuse me, to Tracfone to identify that for us. So with that, I'll admit those contracts as
examples of different pricing that goes from the, sold, what Tracfone calls wholesale as opposed to what
Tracfone calls resale. That's the primary purpose of admitting them. In terms of showing a different
business model, Tracfone has to point that out for that purpose. So, they're admitted.
Mr. Scott Edwards:
Thank you. Mr. Dillon, does Tracfone distinguish between sales to wholesale buyers of air time and retail
sales through third parties?
Mr. Dillon:
Sales through third parties? Well, we may have a, you keep mentioning QVC, something along that line
but other than that we have a platform that we're using. Other than that, we make retail sales. They're
our sales and the wholesale is going to sell to that party for resale.
Mr. Scott Edwards:
When somebody makes a purchase on QVC, is that a Tracfone retail sale?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
And so that works differently than when somebody makes a purchase from Fred Meyer or Walmart?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
Can you describe that difference?
Mr. Dillon:
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Well the difference is QVC is like a marketplace. We're able to sell our products using that. When we use
the term marketplace, that's a common term based on we will sell there directly to customers. If we're
selling to, you mentioned Fred Meyer, that might go to a distributor we sell that air time to or if it's another
retailer such as a K-Mart or Walmart, we sell to those stores directly or to that company.
Mr. Scott Edwards:
And I'm going to now share my screen with respect to Exhibit 39, which is the QVC contract that we've
been talking about here. I'm going to point your attention to Paragraph 3A here in the middle of the
second page of the document and can you read that first sentence of 3A.
Mr. Dillon:
I'm trying.
Mr. Scott Edwards:
Let me try to blow it up a little bit more for you. Is that a little bit easier?
Mr. Dillon:
[inaudible 00:16:56]. Is says "Orders of merchandise under agreement shall be initiated by QVC's issuance
of delivery instructions."
Mr. Scott Edwards:
And do those delivery instructions tell you what end user to ship the air time to?
Mr. Dillon:
Yes, that would be the purchaser.
Mr. Scott Edwards:
So you're not making sales to QVC, correct?
Mr. Dillon:
That's right.
Mr. Scott Edwards:
Let me stop sharing that exhibit and then I want to bring up Exhibit Number 43, which is a contract with
Safeway. Are you able to see that?
Mr. Dillon:
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Yes.
Mr. Scott Edwards:
And in the recitals I want to call your attention to Paragraph C. Can you read that provision for me?
Mr. Dillon:
"[inaudible 00:18:21] to appoint Safeway to sell Tracfones and air time cards collectively for to here as the
products and Safeway desires to purchase the products from Tracfone for resale in such Safeway store
and partner stores as they participate in the sale of the products as determined by Safeway from time to
time under collectively the participating stores."
Mr. Scott Edwards:
And this agreement operates materially different than the QVC agreement. Rather than providing a
marketplace for Tracfone to make retail sales to people who visit QVC's marketplace, under this
agreement Tracfone is making sales of headsets and air time to Safeway for the purpose of Safeway
reselling both of those items?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
Stop sharing that document.
Mr. Scott Edwards:
I'm going to now move to Exhibit 41, which is a contract with Circle K. Are you able to see that or I haven't
started sharing. Are you now able to see it?
Mr. Dillon:
I can see it now.
Mr. Scott Edwards:
And Circle K was also one of the purchasers that we looked at an invoice for previously, correct?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
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And this agreement covers Tracfone sales of both air time and hand sets to Circle K?
Mr. Dillon:
I believe so.
Mr. Scott Edwards:
And it has pricing provisions specifically for hand sets showing the difference between the wholesale
charge for handsets and the suggested retail price?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
And if does the same thing as well for air time, showing the difference between the wholesale price and
the suggested retail price?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
I'm going to stop sharing that exhibit. I'm going to share Exhibit 44. Are you able to see that? And let me
make that a little bit bigger. Is that almost legible?
Mr. Dillon:
It helps.
Mr. Scott Edwards:
I realize the text is quite small, so I'm going to blow that up to a 150%. Do you recognize this as an
agreement with Walmart?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
Is Walmart Tracfone's largest wholesale customer?
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Mr. Dillon:
Yes.
Mr. Scott Edwards:
And does Walmart purchase both hand sets and air time from Tracfone?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
I'm having difficulty, yeah.
Ms. Carrie Sand:
I will say Scott, you're probably screen sharing probably better than I will, so.
Mr. Scott Edwards:
I appreciate that. It doesn't feel like it right now. I'm not able to quickly find what I'm looking for and I'm
appreciative of everybody's time here, so let me move on. Are you familiar with the term consignment
sale?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
What is your understanding of-
Ms. Carrie Sand:
Objection, not relevant.
Mr. Examiner:
Overruled, go ahead Mr. Edwards.
Mr. Scott Edwards:
What is your understanding of what a consignment sale is?
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Mr. Dillon:
I understand that to be a sale where another party, usually a store or retailer, will hold that merchandise
that we're speaking and then sell that on behalf of the owner of that merchandise.
Mr. Scott Edwards:
Does Tracfone have consignment sale agreements with any of its wholesale customers?
Mr. Dillon:
I don't believe we do.
Mr. Scott Edwards:
I'm going to show you Exhibit 40, which if I go to the top, do you recognize this as a contract between
Tracfone and Family Dollar?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
And at the bottom or in Part Two here, there are a number of conditions of sale to be checked if they're
applicable, do you see that?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
And there are two different boxes for either finance consignment or merchandise consignment, do you
see that?
Mr. Dillon:
I do.
Mr. Scott Edwards:
Neither of those boxes are checked, correct?
Mr. Dillon:
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Correct.
Mr. Scott Edwards:
So this would indicate that Tracfone sales to Family Dollar are not consignment sales, am I reading this
correctly?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
Now when you make a retail sale of air time, whether it's over your own website or 800 number or on
QVC's marketplace, do you get billing information for the end user?
Mr. Dillon:
Well we don't bill the end users.
Mr. Scott Edwards:
When you make retail sales, you don't charge the end user?
Mr. Dillon:
We charge, but we don't consider them-
Mr. Scott Edwards:
Oh, okay. But you get information from them regarding their payment details?
Mr. Dillon:
We'll get information, yes. We'll get information related to their, it's called a payment instrument,
normally a credit card.
Mr. Scott Edwards:
When you make wholesale sales to retailers and distributors, do you get information about the payments
that they receive and the payment method when they make retail sales?
Mr. Dillon:
No.
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Mr. Scott Edwards:
Can Tracfone track the usage that an end user makes of air time that has been loaded onto a hand set?
Mr. Dillon:
When you say tracking?
Mr. Scott Edwards:
I mean tracking. Are you able to look at the usage as it's happening?
Mr. Dillon:
We don't have that capability.
Mr. Scott Edwards:
Are the network carriers able to track end users usage as it's happening?
Ms. Carrie Sand:
Objection, irrelevant.
Mr. Examiner:
Mr. Edwards? Any response to that?
Mr. Scott Edwards:
Ms. [Crisp 00:28:58] testified earlier that Tracfone didn't have certain types of data and this goes to
explaining why-
Mr. Examiner:
Okay.
Mr. Scott Edwards:
... they don't have that type of data.
Mr. Examiner:
Okay, overruled.
Ms. Carrie Sand:
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I don't know if she said they didn't have it. I think you're mis-characterizing her testimony. It wasn't
provided.
Mr. Examiner:
okay, I'll say I mean yeah, same thing. He's explaining why, so. All right, go ahead Mr. Dillon.
Mr. Scott Edwards:
Can network carriers track end users usage and air time as it's happening?
Mr. Dillon:
They can.
Mr. Scott Edwards:
Is that it's happening on their system, correct?
Mr. Dillon:
On their network, yes.
Mr. Scott Edwards:
Do network carriers sell prepaid wireless air time themselves?
Mr. Dillon:
Many do.
Mr. Scott Edwards:
What ever information that you, the data that you have about the usage of air time is provided to you by
the network carriers, is that correct?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
So when we were looking at the intrastate, interstate, international percentages of air time use that were
used to make an adjustment to your retail sales figures, those percentages were based on usage data that
was provided to Tracfone by the network carriers?
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Mr. Dillon:
Yes, it was.
Mr. Scott Edwards:
I'd like to share now, moving to Exhibit 12. This is an excerpt from an email string. It reflects an email from
Nick Ford to tax recovery services. Who is Nick Ford?
Mr. Dillon:
Nick Ford's an employee at Tracfone that's part of our tax team.
Mr. Scott Edwards:
And then the second page of this document reflects data that was transmitted by Mr. Ford to TRS, do you
recognize this form of report? Let me blow it up a bit for you.
Mr. Dillon:
I've seen similar reports.
Mr. Scott Edwards:
And the top it says "APPT." Do you know what that is referring to?
Mr. Dillon:
It's one of our retail sales systems that we use.
Mr. Scott Edwards:
So is this report reflecting retail sales on your APPT system for the zip codes that are identified here for a
month? I apologize. The specific month is identified in the body of the email. For some reason it's not
reflected on this document itself.
Mr. Dillon:
These would be sales for zip code, I'm not sure of the area, whatever it's stating as the audit area. Looks
like January.
Mr. Scott Edwards:
The audit period was January of '07 through May of 2013. Mr. Ford actually transmitted separate reports
for each of those months, so this doesn't cover that entire period, it covers one of those months. And like
I say, the body of it I think identifies this particular one is January of 2007.
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Mr. Dillon:
I think I see the heading of the report. It says "APPT Tax Report, January 2007."
Mr. Scott Edwards:
Oh, thank you. And then if we go to the second page, we've also got January 2007, that this is another
system that this data is being pulled from, is that correct?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
Still retail sales?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
And it's got a specific zip code again here, correct? Or series of zip codes?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
And you're aware that Mr. Ford provided these types of files to TRS for each of the months of the audit
period of January of 2007 through May of 2013?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
And none of these reports that were provided in November of 2015 includes sales to the zip code 98178-
Mr. Scott Edwards:
... [crosstalk 00:35:39], is that correct?
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Mr. Dillon:
I'd have to take a look, but [inaudible 00:35:44]. Is this the entire report or is it just that one?
Mr. Scott Edwards:
This is the entire report for that one month and this is the entire report for the other system for that one
month.
Mr. Dillon:
I do not see that zip code on here.
Mr. Scott Edwards:
I'm going to stop sharing. I'm going to move briefly to Exhibit 13. It'd help if I opened it all the way first.
Ms. Carrie Sand:
So Mr. Edwards?
Mr. Scott Edwards:
Yeah?
Ms. Carrie Sand:
Did Dillon not have a hard copy?
Mr. Scott Edwards:
No, he does not. In that regard, maybe you were more and hopefully everybody is seeing Exhibit 13 now?
Ms. Carrie Sand:
Yes.
Mr. Scott Edwards:
And do you recognize this as an updated version of the January 2007 APPT report that has included zip
code 98178?
Mr. Dillon:
It looks like it has that additional zip code.
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Mr. Scott Edwards:
And you see the total amount here being the 5169.09?
Mr. Dillon:
Yes.
Mr. Scott Edwards:
You were present during Ms. Crisp's testimony when we were looking at a number of versions of her
schedule that had sales data that included for the month of January of 2007, this figure 5169.09?
Mr. Dillon:
I'll take your word for it. I don't recall that specifically.
Mr. Scott Edwards:
If you give me 30 seconds here, I think I'm just about finished. I just want to look quickly through my
outline to make sure I haven't missed anything.
Mr. Scott Edwards:
I have no further questions at this time.
Mr. Examiner:
Okay, Ms. Sand, any cross?
Ms. Carrie Sand:
Yeah, thank you. Mr. Dillon, I want to ask you some questions about the resale certificate, marked
Tracfone Exhibit 34. Can you see that on my screen?
Mr. Dillon:
I can see it, yes.
Ms. Carrie Sand:
So do you see at the top where it says... Hold on, I want to make sure about the first page. Where it says
"Sales and Use Tax Certificate" at the top?
Mr. Dillon:
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"Uniform Sales and Use Tax Certificate?"
Ms. Carrie Sand:
Yes.
Mr. Dillon:
Is that what you're referring? Yes, for 2000.
Ms. Carrie Sand:
So that's a different tax than utility tax, correct?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
So I'm trying to scroll to you a subsequent page and it looks like this is only one page, I'm not sure what
that is. Because I thought it was a multi-page exhibit. We'll just hold for a minute, I'll try something else.
Ms. Carrie Sand:
So unfortunately I can't get the subsequent pages, it's a three page exhibit, Exhibit 34, correct Mr.
Edwards?
Mr. Scott Edwards:
That sounds correct to me.
Mr. Examiner:
Let's see if I can, maybe I can share my screen? Let me check. Yeah, let me try to share min e. Oh, Cindy
can you make me a host? No. Cindy, are you there?
Cindy:
I'm sorry.
Mr. Examiner:
Can you make me a host so I can share a screen?
Cindy:
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Oh, yes.
Mr. Examiner:
Okay.
Cindy:
Sorry, I'm working on my other side, so. Why didn't it go? Oh, I muted you, I'm sorry.
Mr. Examiner:
All right, let's try to-
Cindy:
You're co-host, you're host.
Mr. Examiner:
Okay, perfect. Let me get that up. Where is it?
Cindy:
And you're muted, I'm sorry. You have to unmute yourself.
Mr. Examiner:
Oh okay, there you go. All right, let me share that. Is that showing?
Ms. Carrie Sand:
It is. And I'm so sorry you have to [crosstalk 00:42:51].
Mr. Examiner:
That's fine.
Ms. Carrie Sand:
If we could advance to the next page and stop there, thank you. So Mr. Dillon, do you see where in Row
Six, types of items purchased for resale, can you read what it says there?
Mr. Dillon:
Yes, hang on. Try to, "Sold telephones, accessories and prepaid air time cards."
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Ms. Carrie Sand:
And then if you could scroll down Mr. Examiner to the bottom of that certificate and it says at the bottom
right before the border of the lower box, "Reference rule and statute" and it refers to RCW8208.130 and
then it refers to WAC458.20.102. Probably not too unexpected, that statute and that administrative code
refer to retail sales tax. Does that seem to comport with your understanding that this is a resale certificate
for retail sales tax?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
And then if you could scroll to the last page of this Exhibit 34 and stop at the top? Thank you, that's good.
In the certification, do you see where it says, "I certify that the K-Mart Corporation is engaged in the
business of selling tangible personal property at retail." Do you see where it says that?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
And then if I'm able, I'd like to try to screen share again for the next exhibit, Exhibit Number 35.
Mr. Examiner:
Okay.
Ms. Carrie Sand:
Let me see if I can make this work. If I can't, I'm so sorry if I have to keep relying on you to.
Mr. Examiner:
That's fine.
Ms. Carrie Sand:
So I've now got the exhibit pulled up on my screen and I'm going to attempt to screen share, one second.
Now I'm showing you what's been marked as Tracfone Exhibit Number 35 and this is a set of Circle K store
invoices issued by Tracfone. On this version, you'll see the unit prices are listed and those were redacted
in the version Mr. Edwards shared, do you recall that?
Mr. Dillon:
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That was the intent, that they would be redacted.
Ms. Carrie Sand:
Right. The redacted version will be made part of the record, not this version, but for purposes of my
questioning of you today, this un-redacted column that reflects unit prices, starting in Row One at $17
and going to down to Row Six at $34 per unit, these are the amounts paid by Circle K stores to Tracfone,
correct?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
So these are revenues to Tracfone, correct?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
And telephone utility tax of six percent would be due on these revenues, correct?
Mr. Scott Edwards:
Objection, that calls for a legal conclusion?
Ms. Carrie Sand:
Have you read the ruling dated March 12th, issued by the Examiner's case?
Mr. Dillon:
Have I?
Ms. Carrie Sand:
Yes, have you?
Mr. Dillon:
I have read through it.
Ms. Carrie Sand:
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And based on your reading of that ruling, the Examiner found that Tracfone is a telephone business based
on Washington state law, correct?
Mr. Dillon:
From the ruling, it that's what you're asking?
Ms. Carrie Sand:
Yes.
Mr. Dillon:
The ruling has that finding or determination.
Ms. Carrie Sand:
And based on that ruling, which is the one that governs this proceeding, six percent utility tax would be
assessed against these revenues, correct?
Mr. Scott Edwards:
Well, you're referring to is a unit price as revenue. This is a sale of a lot-
Ms. Carrie Sand:
Based on the witness's prior answer, he-
Mr. Scott Edwards:
Hold on, Ms. Sand? Carrie?
Mr. Examiner:
Let Mr. Edwards speak.
Mr. Scott Edwards:
As we talked about extensively with Ms. Crisp, the starting point was a subset of revenue and that was
revenue to a specific set of zip codes and then there were multiple adjustments to that amount. So the
notion that under any theory that $17 is a measure of utility tax simply misstates the mechanics of how
the utility tax gets computed.
Mr. Examiner:
I'm sorry Mr. Edwards, I thought you were going to make an objection. Are you just arguing or? Okay.
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Mr. Scott Edwards:
My objection is-
Mr. Examiner:
Okay.
Mr. Scott Edwards:
... that the assertion that $17 is a measure of tax does not follow from the statement that it is a measure
of revenue because there are a number of different adjustments to revenue before you get to a measure
of tax.
Ms. Carrie Sand:
So Mr. Dillon, looking at these unit prices, these are the amounts paid by Circle K to Tracfone, correct?
Mr. Dillon:
They were.
Mr. Examiner:
Yeah, oh sorry. Okay, I thought you were speaking to Mr. Edwards. Okay, go ahead Ms. Sand.
Ms. Carrie Sand:
I'm now advancing to the last page of this exhibit, and let me try to reorient this so it's easier to read.
Sorry, for some reason I thought there was an invoice to a different retailer in this collection, but these
are all Circle K, so for all of these the unit price reflected is the price paid by Circle K, correct?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
So now I'd like to move on what's been marked as Tracfone Exhibit Number 36. Do you see that on the
screen now?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
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So as with the Circle K invoices on Tracfone Exhibit 35, again the unit prices are reflected here and these
are the amounts paid by Walmart to Tracfone, correct?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
And up here under bill to where I'm trying to, oops, that didn't work. I'm trying to highlight with my cursor
where it says "WM Air Time." Is that referring to Walmart?
Mr. Dillon:
Yes. Walmart air time, yes.
Ms. Carrie Sand:
Now moving on to, it's been marked as Exhibit 37. So Exhibit 37 shows another Tracfone wireless
[inaudible 00:51:01] invoice. This one's dated May 21st, 2015, which I'll note is outside the audit period.
This says "Bill to Interactive Communications International," in Atlanta, Georgia?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
And you testified previously that Interactive Communications is a distributor, right?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
So for example, they would sell to a retailer like Fred Meyer, who would then sell to Tracfone end users,
correct?
Mr. Dillon:
Yes, that could happen.
Ms. Carrie Sand:
So again, this column showing unit prices, can you see my cursor going up and down?
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Mr. Dillon:
I can see it, yeah.
Ms. Carrie Sand:
So these again are prices that Interactive Communications would pay to Tracfone, correct?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
We're now going to try and share Exhibit Number 39, this is the QVC drop ship agreement. Can you see
that, Mr. Dillon?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
As I already noted, you'll see at the top, it refers to the 11th day of May, 2016 and that is outside the audit
period which was through May of 2013, correct?
Mr. Dillon:
I believe that's the audit period.
Ms. Carrie Sand:
Now I'm going to scroll to the last page of this document, the last page before the exhibits. And I want to
look with you at this Paragraph 18. Can you see that all right?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
Can you go ahead and read that Paragraph 18?
Mr. Dillon:
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"Service subscription under represents that it would administer any and all of the services associated to
use the merchandise will have full responsibility for fulfilling any of all obligations to purchasers of the
[inaudible 00:53:58]. Such services including all prepaid minutes that arrived with the merchandise and
are subsequently redeemed by the purchaser minutes and QVC will not be a party there to or an obligation
there ever. Following the [inaudible 00:54:14] expiration or termination of this agreement, vendor will
continue to administer and will honor all of its obligations with regard to any business."
Ms. Carrie Sand:
So when Mr. Edwards asked you about the sales that Tracfone makes through QVC, you described QVC as
a marketplace, right?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
And based on this paragraph that you just read, Paragraph 18, Tracfone remains responsible and obligated
to fulfill minutes with regard to end user subscribers who purchase Tracfone phones-
Mr. Scott Edwards:
Objection, you're-
Ms. Carrie Sand:
... through QVC, right?
Mr. Scott Edwards:
You're making a legal argument, you're not asking a question.
Mr. Examiner:
Overruled, I'll allow it.
Mr. Dillon:
What's the question again?
Ms. Carrie Sand:
Did you need me to repeat the question Mr. Dillon?
Mr. Dillon:
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What's the question again?
Ms. Carrie Sand:
Happy to restate it.
Mr. Dillon:
Please.
Ms. Carrie Sand:
So my question to you is, based on your understanding of this paragraph and your understanding of how
Tracfone sells to the QVC marketplace, Tracfone remains ultimately liable to provide minutes to the end
user purchasers, correct?
Mr. Dillon:
Well Tracfone does because it's their sale. I think this is just reiterating that, that it's not QVC's
responsibility.
Ms. Carrie Sand:
Right. Next I'd like to refer you to what's been marked Tracfone Exhibit Number 40. This is the Family
Dollar vendor agreement. Must've grabbed the wrong thing. Do you see where my cursor is pointing, up
in this upper right hand corner? Again, Tracfone Exhibit Number 40, Family Dollar vendor agreement, do
you see it's dated 2005?
Mr. Dillon:
I do.
Ms. Carrie Sand:
And that is before the start of the audit period which began January 1st, 2007, right?
Mr. Dillon:
That's probably when it was signed, but those agreements continue on for many years. This is when it was
initiated, doesn't mean that it wasn't in effect there [inaudible 00:56:55].
Ms. Carrie Sand:
Do you have any personal knowledge if it was extended into the audit period?
Mr. Scott Edwards:
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Objection, you're asserting, assuming the length of time in order for it to be extended, you have to identify
that it terminated in the absence of an extension.
Mr. Examiner:
Do you want to rephrase that, Ms. Sand?
Ms. Carrie Sand:
I'll get back to that. With regard to Family Dollar, do you know if there are any Family Dollar stores in
Renton, Washington?
Mr. Dillon:
I do not know that.
Ms. Carrie Sand:
Do you see this state abbreviation right here that I'm circling and what state is that?
Mr. Dillon:
I'm sorry, you were circling where?
Ms. Carrie Sand:
Right here after city of Long Beach, M-S?
Mr. Dillon:
I believe that's Mississippi.
Ms. Carrie Sand:
And on the next page, there are several locations noted. Looking at the various locations noted here and
I'll try to zoom out, maybe you can still see and see all of them better, do you see any in Washington?
Mr. Dillon:
From what I can see, I don't see Washington on there. Not sure if there's something lower than [inaudible
00:58:38] showing right now.
Ms. Carrie Sand:
I'll scroll down.
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Mr. Dillon:
Okay.
Ms. Carrie Sand:
Washington state is not listed as a location, is it?
Mr. Dillon:
No, it's not.
Ms. Carrie Sand:
Now I'm going to turn your attention to Tracfone Exhibit 41. This is a retail distribution agreement
between Tracfone Wireless, Inc and Circle K Stores, Inc. So in this first [inaudible 00:59:24], it states that
Tracfone is in the business of distributing prepaid phones able to store rates and decrement a prepaid
account under the registered Tracfone and Net10 trademarks. What does decrement mean?
Mr. Dillon:
I'm sorry, where was that at?
Ms. Carrie Sand:
In this first, we're asked-
Mr. Dillon:
Oh right there, I'm sorry. I didn't see that, yeah. All right, I'm able to. That is for our, referring to our PayGo
phones that have software on the hand set where it's a certain number of minutes that are loaded to that
phone or the hand set and as they're used they decrement or they decrease.
Ms. Carrie Sand:
So Tracfone is able to track the usage of the air time minutes going down from a set prepaid amount to
begin with?
Mr. Scott Edwards:
Objection, that's not what he testified to.
Mr. Examiner:
Well, I think she's asking, so no. Overruled, go ahead Mr. Dillon.
Mr. Dillon:
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You talk about usage as being when a and actually being able to track that, that's something we've looked
in to and we have some ability to see when. As far as not live how minutes are used. There is some
information available, but it doesn't give any information about the location as far as where a call went to
or came from.
Ms. Carrie Sand:
So I'd like to turn your attention to now to some language at the bottom of this page. Do you see right
here where my cursor is starting with the words "In the event?"
Mr. Dillon:
Yes, I see that.
Ms. Carrie Sand:
So it says, "In the event that Tracfone terminates the agreement for non-payment, Tracfone shall also
have the right to immediately and without further notice render all air time codes in Tracfones then in
retailers inventory or in retailer's possession and control inoperable and retailer agrees to immediately
return all such Tracfones and air time codes at its sole expense to Tracfone." So Tracfone in this particular
agreement with Circle K can render the air time codes and hand sets inoperable, correct?
Mr. Dillon:
Well, these would be codes that have not been purchased, I believe is what this is referencing. That this
retail would have access to, so they'd want to stop that from happening if there's a dispute over it, most
likely over payment.
Ms. Carrie Sand:
And so speaking of payment, I'm going to now go to page, what's been marked as Page 726. In this
Paragraph C, Air Time Codes, do you see where my cursor is marking right here, "Retailers shall pay for air
time?"
Mr. Dillon:
Yes.
Ms. Carrie Sand:
It says, "Retailers shall pay for air time codes, which are redeemed by Tracfone and users." Do you see
where it describes the end users as being Tracfone end users?
Mr. Scott Edwards:
Objection to the characterization.
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Mr. Examiner:
Overruled, that's what the contract says, so.
Mr. Dillon:
I see that, but.
Ms. Carrie Sand:
So they are not Circle K end users, correct?
Mr. Dillon:
Well that could mean a, well. That's the brand they're buying then that's the brand they're going to be
using.
Ms. Carrie Sand:
That's the service that they're going to be using, the service Tracfone provides, correct?
Mr. Dillon:
Well, is that... I don't know. I'm not sure what that's referring to. Is that the brand or is that the, help me
there?
Ms. Carrie Sand:
You are the Vice President of Corporate Taxation for Tracfone and I would think that you would know that
Tracfone is providing the wireless service, correct?
Mr. Scott Edwards:
Objection, you're testifying and trying to put words in his mouth. What he's saying is that the word
Tracfone doesn't refer to the company Tracfone. It refers to the brand name as distinguished between
Net10 and other types of brand names and you're trying to infuse meaning into words there that he's not
testifying to.
Ms. Carrie Sand:
Well Mr. Dillon, isn't Net10 also a wholly subsidiary of Tracfone?
Mr. Dillon:
No.
Ms. Carrie Sand:
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Is Net10 a separate company from Tracfone?
Mr. Dillon:
No.
Ms. Carrie Sand:
How are they related?
Mr. Dillon:
It's a brand.
Ms. Carrie Sand:
So Net10 is a brand owned by Tracfone?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
So in this part of the agreement where you've got a lot of information redacted, it's blacked out here,
looking at the invoice price column, that's the amount that Circle K would pay to Tracfone, correct?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
And the MSRP is the amount Circle K would charge to end use purchasers, right?
Mr. Dillon:
Most likely.
Ms. Carrie Sand:
And the difference between these two is what you refer to as the retail margin, correct?
Mr. Dillon:
Yes.
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Ms. Carrie Sand:
And Tracfone does not collect the retail margin, Circle K does, right?
Mr. Dillon:
Well Circle K collects whatever they charge their customers, which is likely that MRSP.
Ms. Carrie Sand:
Right, and then they keep the difference between the invoice price paid to Tracfone and the MRSP price
paid by the purchaser, right?
Mr. Dillon:
That's what they would be doing.
Ms. Carrie Sand:
Now going to Page 728 of this exhibit, looking at Subsidy Protection in Paragraph H. It says, "Reta iler
understands and acknowledges that Tracfone subsidizes its Tracfone hand set prices as part of its retail
distribution model. Accordingly, retail acknowledges and agrees that the Tracfone hand sets to be
produced by retailer here under shall be sold to retailer to end user customers as part of Tracfone's
nationwide prepaid wireless program and that such hand sets may not be knowingly sold, directly or
indirectly, to any other party, including but not limited to other distributors, both purchasers, wireless
carriers or liquidators." Is this to your understanding, Tracfone's attempt to control its Tracfone branded
hand set inventory?
Mr. Dillon:
[crosstalk 01:07:06]-
Mr. Scott Edwards:
Objection.
Ms. Carrie Sand:
Well explain then what's the purpose of this subsidy protection paragraph as you understand it?
Mr. Dillon:
Well, what I understand is that would mean we're selling to this retailer. We have an agreement with this
retailer and that's how we want those to be, that's the place we want those to be sold. And so we sell
them at a discount, so we don't want, obviously they could turn around and sell it for more money to
anybody they wanted. That's this business model is selling something, our phones are sold below cost in
many cases.
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Ms. Carrie Sand:
I don't know if you hear Ms. Crisp testify earlier, but can you confirm that the city of Renton did not include
within the tax base any sales revenues from hand set or equipment sales, is that correct?
Mr. Dillon:
I think that's correct.
Ms. Carrie Sand:
Now going to Exhibit 43, this is the Safeway retail distribution agreement.
Ms. Carrie Sand:
I'm not going to ask you to look at Paragraph 1.6, Tracfone Customer Service. Here it states, "Tracfone
shall be responsible for all customer service in connection with all products sold to customers in
connection [inaudible 01:09:19]." Do you see where it says that?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
And Tracfone does have the 1-800 toll free customer care number to allow customers to receive service
from Tracfone directly, correct?
Mr. Dillon:
Yes, so that we contract it out to other parties to assist with that, but yes.
Ms. Carrie Sand:
Now going to Page 778, Paragraph 6.4 Effective Termination. "The expiration or termination of the term
shall not effect customers usage of the product." What does that mean, Mr. Dillon?
Mr. Scott Edwards:
Objection, Mr. Dillon is not a lawyer. Asking him to interpret a contract is improper and I find there to be
some significant irony in your objection to the relevance of these contracts and then wanting to focus on
elements of them that have nothing to do with the subject matter of today's hearing.
Mr. Examiner:
Well, she objected to their entry. They've been entered, so now she needs to deal with the fact that
they're there and so overruled to the extent that Mr. Dillon, if Ms. Sand you can establish that he's familiar
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with these contracts and how they're implemented you can ask him the question about how the
termination clause works.
Ms. Carrie Sand:
So Mr. Dillon, do you need me to repeat the question?
Mr. Dillon:
How about rephrase the question?
Ms. Carrie Sand:
So if Tracfone were to terminate this agreement with Safeway, it would not affect customer's use of the
products, correct?
Mr. Dillon:
If I can understand, I'm not sure what they mean, there's a capital T for Terms, I'm not sure what that
means, but I believe that would be the case. If somebody has already purchased something, then
termination of this agreement with Safeway wouldn't affect something they've already purchased.
Ms. Carrie Sand:
Now I'm going to move to Exhibit B to this retail distribution agreement with Safeway. Again, this is
Tracfone Exhibit Number 43. So again, there are a lot of black marks blocking out costs and initial retail
price and other information on this page. Again, this column in the middle here labeled "Costs to
Safeway," the unit prices for air time cards that is costs to Safeway, those are amounts Safeway pays to
Tracfone, correct?
Mr. Dillon:
Well that column, Costs to Safeway, would be what Safeway's paying Tracfone.
Ms. Carrie Sand:
So your answer is yes.
Mr. Dillon:
I'm not sure. If you restate that question again if you like, it's rather lengthy. You mentioned unit prices, I
didn't see anything on here referencing that. So I'm just saying that column says, "Costs to Safeway." That
appears to be what Safeway would pay to Tracfone.
Ms. Carrie Sand:
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Well we can look at the language that's not blacked out. It says in the parenthetical, it says "Including
certain units an amount determined by Tracfone." So this presumably has cost listed here in this column
and these are the amounts Safeway would pay to Tracfone, correct?
Mr. Scott Edwards:
Objection, when you say including certain units, you're making an assumption about what units is referring
to it. Is it referring to units of air time or units of cards or units of air times in terms of minutes versus
number of cards.
Ms. Carrie Sand:
Well it says on the left, "Air time card." The upper row is, this first row is labeled, "Card/denomination."
So cost to Safeway presumable lists various costs that Safeway pays to Tracfone, correct?
Mr. Dillon:
Are you asking me again?
Ms. Carrie Sand:
Yes, you are the witness.
Mr. Dillon:
I did say that earlier, I did say that that column was costs to Safeway would be what Safeway is going to
pay Tracfone, I said that, I'll say it again. In that column, yes.
Ms. Carrie Sand:
And using an example that's been brought up several times, if they cost to Safeway hypothetically was
$17 and the retail price that Safeway sold it for was $20, the retail margin for Safeway would be three
dollars, correct?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
And the amount Tracfone would receive from Safeway would be $17, correct?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
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This Paragraph Three at the bottom refers to taxes, do you see that?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
Do you see here where it says, "Tracfone shall be responsible for the collection of payment there of to the
appropriate governmental taxing authorities." Do you see where it says that?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
Now I'd like to refer to Roman numeral IV, Products Data Transmission and Activation, and within this
section, Roman numeral IV, look at Paragraph Two, Tracfone's Data Transmission. Do you see where it
says down here, "There after the customer may contact Tracfone directly to supply such additional
customer data as Tracfone may require and to request that the Tracfone be activated. And upon such
customer contact, Tracfone shall be responsible for causing the Tracfone to be properly activated." My
question to you Mr. Dillon is, what is the customer data that Tracfone may require in order to activate a
Tracfone branded hand set?
Mr. Dillon:
I'm not sure. The piece of information that we request is usually a zip code. We ask where the phone is
used the most and we ask for a zip code. Other than that, I'm not sure what other customer data might
be requested.
Ms. Carrie Sand:
And then the next, Paragraph Three, Activation of Air Time Cards, here it says "Upon purchase of any air
time cards by customers, Safeway shall electronically scan the computer readable barcode affixed by
Tracfone to the air time card being purchased, thereby transmitting directly to Tracfone the related data
embedded within and deemed necessary by Tracfone to permit the air time card to be activated by
Tracfone and upon such transmission, Tracfone shall be responsible for causing each such air time card to
be properly activated." Do you see where it says that?
Mr. Dillon:
Yes.
Ms. Carrie Sand:
And my question to you about that is, is this a POSA type of arrangement? Point of sale activation?
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Mr. Dillon:
It appears that it would be a point of sale activation. Or some variant of that.
Ms. Carrie Sand:
Now I'm going to Roman numeral IX, Customer Service and Customer Products Return Policy. Go ahead
and take a minute to review that. I don't want to read the whole thing, it's rather long. Oh oh, our clerk
has a question.
Cindy:
I'm so sorry. So Jason, the City Clerk is trying to do a bid opening and since he can't do two zoom meetings
at the same time, he set this one up and he has another one. He was wondering if we could hold off for
15, 30 minutes?
Mr. Examiner:
This is about the time to take a break. We'll take a break til 2:15. If Jason's not there yet, we'll just wait
until he gets back.
Cindy:
Okay, thank you.
Mr. Examiner:
All right.
Cindy:
Sorry guys.
Mr. Examiner:
Okay, we'll see y'all at 2:15.
Cindy:
Okay.
Ms. Carrie Sand:
I'll stop screen sharing, sorry.
Cindy:
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Oh, you're fine. Thank you.
Ms. Sand:
Mr. [Dillon 00:00:00], when Mr. Edwards was asking you questions, you referred to the average retail
margin for the years of the audit period. Do you recall that?
Mr. Dillon:
Yes.
Ms. Sand:
And in 2007 you testified that the average retail margin was 12.5%, and then it was reducing over time,
and by 2013 you said it was 7.7%. Do you recall that?
Mr. Dillon:
Yes.
Ms. Sand:
For 2013, is that 7.7% a prorated amount? Because you recall, the audit only goes through May.
Mr. Dillon:
That number was for the entire year.
Ms. Sand:
Wouldn't it be more accurate to prorate it since the audit ended at the end of May?
Mr. Dillon:
Well, to be consistent, we were taking our financial statements as of year end, so that's what we were
using. I guess we could take a look at a prorated number.
Ms. Sand:
I'm going to now refer to what's been marked as City's Exhibit 17.
Mr. Olbrechts:
Are you going to try to share a screen, Ms. [Sand 00:01:16]?
Ms. Sand:
Yes I am going to.
Mr. Olbrechts:
Oh, okay. Mr. [Seth 00:01:20], can you make Ms. Sand a cohost?
Mr. Seth:
She should be able to share now.
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Mr. Olbrechts:
Okay, great.
Ms. Sand:
Well phrased as should be. Okay, I don't see the right exhibit. Let me try that one more time. Okay, so I
can see C17 on my screen; I'm having trouble sharing it for some reason.
Mr. Olbrechts:
Hm. See if I can do it. Is that an email?
Ms. Sand:
It is an email, yes.
Mr. Olbrechts:
Okay. Mr. Seth, can you make me a cohost too? Oh, okay, she got it. All right. There is it.
Ms. Sand:
Finally it worked. I apologize for the delay. Okay, so, where I'm looking at on C17 is this row two, where
it shows net airtime revenue per financial statements [inaudible 00:03:23] approximately $1.523 billion
dollars. Do you see that, Mr. Dillon?
Mr. Dillon:
Yes, I do.
Ms. Sand:
So, is it your testimony that this, that airtime revenue includes retail margins from third-party retailers?
Mr. Dillon:
No.
Ms. Sand:
And you do understand that this is Tracfone data that TRS relied upon to prepare the estimate?
Mr. Dillon:
I do.
Ms. Sand:
Okay. I have no further questions. Thank you, Mr. Dillon.
Mr. Olbrechts:
Okay, Mr. Edwards, any redirect?
Mr. Edwards:
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Yeah, just a couple of quick questions. I want to go back briefly to, it looks like Exhibit 36. I guess I
probably need to be made a ...
Mr. Olbrechts:
Yeah, a cohost?
Mr. Edwards:
Cohost as well.
Mr. Olbrechts:
Did you get that, Mr. Seth?
Mr. Seth:
Yes, one second.
Mr. Olbrechts:
Okay, great.
Mr. Edwards:
Yep. Yeah, it looks like that's ... Do you see Exhibit 36 in front of you, Mr. Dillon?
Mr. Dillon:
Yes, I do.
Mr. Edwards:
Interesting, this ... There was a discussion during your cross-examination about the figures in the column
titled Unit Price [inaudible 00:05:30] Revenue Figures. Is the unit price a revenue figure or the amount
that is going to be charged for one unit of that item?
Mr. Dillon:
It's what will be charged.
Mr. Edwards:
And when you send the invoice, do you recognize the invoiced amount as revenue, or do you reflect it as
an account receivable until it's been paid?
Mr. Dillon:
That would be receivable.
Mr. Edwards:
This invoice was sent to Bentonville, Arkansas, is that correct?
Mr. Dillon:
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Yes.
Mr. Edwards:
Is this invoice for airtime cards that were shipped to stores in particular locations?
Mr. Dillon:
[crosstalk 00:06:33]
Mr. Edwards:
Go ahead.
Mr. Dillon:
I'd say, for the most part, for Walmart we ship to the distribution centers.
Mr. Edwards:
Does Walmart have any distribution centers in the state of Washington?
Mr. Dillon:
Not that I know of.
Mr. Edwards:
When a person goes into a Walmart store to purchase an airtime card, does the location of that store
necessarily reflect, is it necessarily in the city where they are going to make the most use of the airtime
card that they purchase?
Mr. Dillon:
No, not necessarily.
Mr. Edwards:
So if we go back to the example of Mr. [Malone 00:07:25] having purchased an airtime card from a Fred
Meyer in the city of Renton, he could've just as easily purchased that airtime card from a store in
another city, is that correct?
Mr. Dillon:
Yes.
Mr. Edwards:
I'm going to stop sharing that. I have no further questions.
Mr. Olbrechts:
Okay. Thank you, Mr. Dillon, appreciate your testimony today. Thanks very much.
Mr. Dillon:
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All right, well thank you, everyone.
Mr. Olbrechts:
Okay, Mr. Edwards, next witness?
Mr. Edwards:
I have no other witnesses.
Mr. Olbrechts:
Okay. All right, great then. All right, Ms. Sand, are you ready to go? Do you have any witnesses you want
to present at this time? And you can also do an opening if you want.
Ms. Sand:
Before I begin, I'd actually like to bring a motion for a directive verdict. In Mr. Edwards's opening
statement he mentioned that Tracfone was entitled to a $92,000 adjustment. That's a very specific
number, and yet I heard and saw no evidence to support that amount of an adjustment. Tracfone has
not proven that a $92,000 adjustment is needed. They just rested their case in chief, and it was their
burden as the taxpayer to prove that as part of their case in chief.
Ms. Sand:
They have not also established that Tracfone received retail margins. In other words, the profit earned
by third-party retailers on sales of Tracfone airtime cards. They haven't established that those retail
margins were improperly included in the tax base. It's been implied, but there's been no evidence
submitted to support that.
Ms. Sand:
In addition to a motion for a directive verdict, I want to again move to exclude the deposition transcript
marked as Exhibits 28, 30, and 33. Those were offered but not used, and I don't think they will need to
be used given that, again, they have not met their burden of proof here. So we could save a lot of time,
and in the interest of time, not have the city present its case in chief when Tracfone the taxpayer has
not even met their burden.
Mr. Olbrechts:
Okay. Mr. Edwards?
Mr. Edwards:
[crosstalk 00:10:13] respect to the population of the specific amount, respectively, all of the evidence in
support of that has been presented today. The argument showing how that evidence leads to that
amount will be my closing argument, and I will walk through those computations based on the evidence
that we've heard today. So, I think it's premature to say that you don't understand where those came
from because you have not yet heard the informal argument based on the evidence that was elicited so
far.
Ms. Sand:
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And I submit that argument is not enough. Evidence is what is needed to establish the point.
Mr. Olbrechts:
Yeah. Yeah. Understood. Yeah, these are informal proceedings. I mean, I've held a couple thousand of
them; not a lot of tax cases. This is the first time I've ever had a motion for a directed verdict though. I
don't feel comfortable making a decision on the overall case just yet. I like to go back and review all the
evidence to make sure I didn't miss something, and I want to give Mr. Edwards a chance to go over the
evidence he's presented to point out if I've missed anything, so I'll deny that.
Mr. Olbrechts:
As to the depositions, they're not in the record yet. They might come in the record, of course, during
rebuttal from Tracfone, so I'll still give them the chance to a rebuttal if the need comes up to put that
into the record, but if they don't move to admit them, it's not going to be in the record.
Mr. Olbrechts:
With that, let's move on to the city's presentation at this point.
Ms. Sand:
Thank you.
Mr. Olbrechts:
Sure.
Ms. Sand:
With that, I would like to make a brief opening statement [crosstalk 00:12:04] time.
Mr. Olbrechts:
Okay.
Ms. Sand:
Based on the two prior rulings in this case, the sole focus today is the current amounts due; tax, interest,
and penalties from Tracfone to the City of Renton. Again, taxpayers have the burden of proof on appeal.
This is established in the Renton Municipal Code in Section 5-26-18, Subsection B5. So, the burden rests
on Tracfone to prove that the city's final assessment as corrected is erroneous, and the evidence will
show that it is not erroneous. The evidence will show that Tracfone did not provide any Renton-specific
revenue data, and thus tax recovery services of the contracted auditor for the city had to prepare an
estimate, and that they did so in a reasonable manner based on the information that Tracfone did
provide.
Ms. Sand:
The evidence will show that they had to remove from the tax base all of the categories that are not
appropriately or authorized to be taxed under the authorizing statute RCW 35A 81 060 Sub 1, and those
categories are revenues from outside the City of Renton. Only revenues within the city can be subject to
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tax. Any interstate revenues or international, any internet-related revenues, and then any data.
Equipment revenue should also be excluded.
Ms. Sand:
And so, based on that, TRS again had to determine the amount attributable to the City of Renton based
on the only data that Tracfone provided, which was ZIP code data, because that's the only data they
collect from their end user subscribers. And because the ZIP codes are only partially within the city's
jurisdictional limits, again a ratio needed to be determined and applied to figure out how much that
revenue from each particular ZIP code should be properly attributed to within City of Renton.
Ms. Sand:
That's how they arrived at the taxable portion of Tracfone's direct sales. With regard to sales revenues
from third-party retailers like Walmart, Target, et cetera, the way that TRS estimated that, again
because specific revenue data was not provided by Tracfone, they basically obtained nationwide data
from Tracfone and applied a multiplier. To use very simple math, if 20% of the revenues were
attributable to direct sales and 80% were attributable to indirect sales, they took the direct sales figure
and applied a multiplier of four. I explain it simply because I want it to be simply understood.
Ms. Sand:
That's my understanding of the methodology that they used, and while Tracfone certainly takes issue
with the amount attributed to the indirect sales, again, they apply that that was an inflated number and
it was higher than it should've been because it inappropriately included retail margins from third-party
retailers. But again, there's been no evidence to support that claim.
Ms. Sand:
They also take issue, they being Tracfone, with the city's computation or calculation of interest.
Mr. Edwards:
[crosstalk 00:15:56] a closing argument, or our opening? I mean, opening is describing what the facts are
going to be and what you're going to present, not making argument about my position.
Ms. Sand:
Well, the evidence will show that interest was properly calculated.
Mr. Olbrechts:
Okay.
Ms. Sand:
And that it was calculated one way before the ordinance changing the method went into effect, so it
was calculated one way before January 1st, 2016, and consistent with the RCW, after January 1st, 2016.
Ms. Sand:
So that's what the evidence will show, and this is all laid out in the city's pre-hearing brief. We've got
two supporting tables, City's Table One showing the amount of the refunds issued based on corrections
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made, the ZIP code calculation error, as well as the interest calculation error. And then City's Table Two
shows how the interest was calculated, again, two different ways, whether it's pre-2016 or post, or 2016
and later.
Ms. Sand:
With that, I'd like to call my first witness, Mr. Nate Malone.
Mr. Olbrechts:
Okay. Mr. Malone? All right, let's swear you in. Do you swear or affirm to tell the truth and nothing but
the truth in this proceeding?
Mr. Malone:
Yes.
Mr. Olbrechts:
Okay, great. All right, go ahead.
Ms. Sand:
Good afternoon, Mr. Malone. Can everyone hear him?
Mr. Olbrechts:
Yes.
Ms. Sand:
Okay, good. If you could, Mr. Malone, just briefly describe your education after high school.
Mr. Malone:
I have a bachelor's in science [inaudible 00:17:36] from Central Washington University.
Ms. Sand:
And briefly describe for us your work history after you graduated from Central Washington University.
Mr. Malone:
Graduating, I was a field auditor for the Department of Labor and Industries up from 2011 until 2014. I
held various titles there, field auditor 3 and field auditor 4, which was the fraud auditor and lead
auditor. From there I went to City of Tacoma and was a tax and license field auditor there from 2014 to
2017, at which time I joined the City of Renton in March of 2017 as the tax auditor and began as the tax
and license manager in 2019.
Ms. Sand:
When you first joined the City of Renton in March of 2017, how did you become involved in the TRS
audit of Tracfone?
Mr. Malone:
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Initially I was beginning to be included around July of 2017 by them sending the monthly updates to me
and to Jan [Hahn 00:18:58], who was the administrative services director at the time. Then from that
point forward I began to get more and more involved as I grew and learned into that role.
Ms. Sand:
To your knowledge, why did Renton choose to audit Tracfone?
Mr. Malone:
To my knowledge, I believe that Tracfone was suggested by TRS as a potential audit candidate to
determine if they were appropriately paying city utility tax under [inaudible 00:19:30].
Ms. Sand:
And without revealing the identity of other taxpayers, are you aware of any other prepaid wireless
providers, competitors of Tracfone, who pay telephone utility tax to Renton?
Mr. Malone:
Yes.
Ms. Sand:
Are you aware of any other post-paid wireless providers, also competitors of Tracfone, who pay
telephone utility tax to Renton?
Mr. Malone:
Yes.
Ms. Sand:
And just to confirm, this has been established before, but the audit period [inaudible 00:20:00] issue is
January 1, 2007 through May 31, 2013, correct?
Mr. Malone:
That's correct.
Ms. Sand:
Among your many duties as the tax and license manager for City of Renton, is it your responsibility to
administer the city's tax code?
Mr. Malone:
Yes, that would be one of the things.
Ms. Sand:
Does that responsibility include insuring the tax code is properly applied to the activities of taxpayers
engaging in business in Renton?
Mr. Malone:
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Yes.
Ms. Sand:
So, are you familiar with what's been marked as Exhibit C1?
Mr. Malone:
I am, yes.
Ms. Sand:
Okay. Without trying to screen share, because that sometimes takes me a lot more time than I need to,
that is Chapter 5-11 of the Renton Municipal Code, but that is a chapter that is no longer in effect or has
been amended subsequent, correct?
Mr. Malone:
It has been amended since this time. This is the code that was in effect at the beginning of the audit.
Ms. Sand:
And this is no longer, this version of the code marked C1 is no longer available online, is it?
Mr. Malone:
I believe it would be by searching full code in our [inaudible 00:21:25] portal, but it would be more
difficult to obtain than simply going to our [inaudible 00:21:31].
Ms. Sand:
I'm sorry to interrupt you. For ease of reference, we marked it as an exhibit, correct?
Mr. Malone:
Yes.
Ms. Sand:
Okay. Has the city's telephone utility tax code remained the same over the course of Tracfone's audit?
Mr. Malone:
The utility tax code has changed a couple of times. There's been several code changes, including RMC 5 -
26, which has been discussed at length in this proceeding, which changed the applicability of the
existent penalty rating starting in 2016. Also there was considerable changes done in the beginning of
2019 to several Renton Municipal Code chapters, including gambling tax, utility tax, [ANO 00:22:26] tax;
5-26, 5-25, 5-11. There were several that were included in that change as part of a code cleanup
process.
Ms. Sand:
And are you aware that the document marked City's Exhibit C5, which is labeled the February 14, 2019
telephone utility tax assessment issued by TRS on behalf of Renton, did you review that prior to its
issuance?
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Mr. Malone:
Yes.
Ms. Sand:
And then subsequently the city issued what's been marked as Exhibit C7, and that is Renton's final
determination of telephone utility tax assessment. That was dated October 17, 2019. Did you review
that before it was issued?
Mr. Malone:
Yes.
Ms. Sand:
What, if anything, changed with regard to the assessment between February 14 and October 17, 2019?
Mr. Malone:
The only thing that would have changed during that time in the assessment amount would've been
additional interest that was accrued due to the original assessment not being paid.
Ms. Sand:
And have you been actively involved in Tracfone's appeal since it was first filed in November of 2019?
Mr. Malone:
Yes.
Ms. Sand:
Have you reviewed the hearing examiner's March 12, 2021 summary judgment ruling?
Mr. Malone:
Yes I have.
Ms. Sand:
As well as the examiner's April 19, 2021 ruling upon reconsideration?
Mr. Malone:
Yes.
Ms. Sand:
So you're aware that tax liability issues have been decided and we're here to talk about amounts due,
correct?
Mr. Malone:
Yes.
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Ms. Sand:
Is it your understanding that RMC 5-26-18B5 places the burden on Tracfone as the taxpayer to prove the
city's final assessment as corrected is erroneous?
Mr. Malone:
Yes.
Ms. Sand:
And are you aware that Tracfone did not provide TRS with any Renton-specific revenue data?
Mr. Malone:
Not Renton-specific besides the codes which were partially in, partially out of the city limits.
Ms. Sand:
Okay. And based on your experience as an auditor, is it typical for an audit to be an area of process?
Mr. Malone:
Yes, very much so. New information usually continues to come in throughout the audit, and we
reviewed and adjusted to determine the appropriate amount of tax liability for the taxpayer.
Ms. Sand:
And is that usually an interactive process between the [inaudible 00:25:12] and the taxpayer?
Mr. Malone:
Yes, very much so.
Ms. Sand:
But the interactions can vary. They can be by telephone, by email, in person, just whatever—
Mr. Edwards:
Objection. This is getting very argumentative.
Mr. Olbrechts:
Overruled. This is outlining how the city views this audit, so I'll ... It's someone from their auditing
department, so I'll allow it. Go ahead.
Mr. Malone:
Can you repeat the question? Sorry.
Ms. Sand:
Certainly, Mr. Malone. Is it also typical for the taxing authority to engage with the taxpayer during the
audit process?
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Mr. Malone:
Yes it is.
Ms. Sand:
And are you familiar with RMC 5-26-6 Sub H, which provides that the city's assessment shall be deemed
prima facie correct?
Mr. Malone:
Yes.
Ms. Sand:
So, based on the lack of Renton-specific data, what is your understanding, Mr. Malone, of how TRS
prepared its estimate of Tracfone's tax base?
Mr. Malone:
I think this has been gone over pretty in depth during Mrs. [Crisp's 00:26:29], during her testimony, but
basically there was two separate methodologies to get to the total tax amount. First was, there's direct
and indirect sales. The direct sales, which were provided by Tracfone as ZIP codes, were reduced by a
number of factors. The population percentages in the city versus out of city, the data percentages
provided by Tracfone [inaudible 00:27:01] access portion as well as the interstate or international
portion, which [inaudible 00:27:07] direct sales that would be subject to tax.
Mr. Malone:
At that point, to arrive at the indirect sales, TRS prepared an estimate based on Tracfone-provided
company-wide ratios of indirect formal sale versus direct or retail, as they refer to them, sales on the
company level, and applied a multiplying factor which varied throughout the audit period anywhere
from, I believe 270% to 455%. Somewhere in that range.
Ms. Sand:
Okay, so I appreciate you explaining the methodology for the two different types of revenue, but the
authorizing statute doesn't make any distinction between different revenue streams, does it?
Mr. Malone:
No it does not.
Ms. Sand:
So the measure of tax is gross revenues based on the authorizing statute?
Mr. Malone:
Correct.
Ms. Sand:
And the applicable rate for telephone utility tax is 6%, correct?
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Mr. Malone:
Correct.
Ms. Sand:
So, I now want to refer you to Exhibits C10 through C12, and it's my understanding you have a hard copy
to look at. Is that right?
Mr. Malone:
I do.
Ms. Sand:
Thank goodness. That will hopefully save a little time. Okay. So, if everyone can look at City Exhibits 10
through 12, I believe these are the same as Tracfone Exhibit 24.
Mr. Edwards:
Are you going to put that on the screen, Kari?
Ms. Sand:
No I was not, just to save time, because Mr. Malone has them. And it's my understanding that you have
them electronically.
Mr. Edwards:
Yeah. Can you give us all a minute, then, to get to the same place you are before you ask your
questions?
Ms. Sand:
Sure.
Mr. Olbrechts:
Okay.
Mr. Edwards:
Which one are you starting with, Kari?
Ms. Sand:
Well, my question is going to be kind of broadly based on all three of them, C10 through C12. My
question to Mr. Malone is, what is your understanding of the two corrections that are addressed to
these exhibits, C10 through C12?
Mr. Malone:
In the initial assessment, TRS inadvertently excluded one of the ZIP codes, 98178, which artificially
inflated the amount of tax liability, so that was [inaudible 00:29:57] number one, is adding that to the
population percentage.
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Mr. Malone:
The second correction was in regard to the applicable [inaudible 00:30:06] rate, and that was due to TRS
not being aware of the RMC 5-26 ordinance going into place in 2016, so that was the other adjustment
made.
Ms. Sand:
And with that RMC amendment going into effect, it was prospective only, correct?
Mr. Edwards:
Objection; calls for a legal conclusion.
Ms. Sand:
Well, I believe Mr. Malone can read the ordinance and see what it says.
Mr. Edwards:
Well, what the ordinance says doesn't say prospective, and how the ordinance applies is a legal question
that is very much the subject matter of one of our disputes.
Mr. Olbrechts:
Well, as—
Ms. Sand:
Mr. Malone [crosstalk 00:30:53] he's the tax and license manager [crosstalk 00:30:55].
Mr. Olbrechts:
Yeah. Yeah. Yeah, I'll allow it. No, I'll overrule. It's to the extent that he understands how the ordinance
is to be implemented, since one of his jobs and responsibilities is implementing the ordinance. I find it
pertinent.
Mr. Malone:
My understanding is that RMC 5-26 had an effective date of January 1, 2016.
Ms. Sand:
[inaudible 00:31:19] effective date, you knew that it's correct to apply it prospectively from that date
forward?
Mr. Malone:
Correct.
Ms. Sand:
So, if you could, and I know Mrs. Crisp already testified to this, and I know that we're trying to avoid
cumulative testimony, but did you agree with her testimony regarding how the city calculated the
interest due as corrected?
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Mr. Malone:
I believe so. If I recall the entirety of her testimony, I believe that's correct.
Ms. Sand:
Explain your understanding of the correction of interest as set forth in her March 18, 2021 correction
letter.
Mr. Malone:
The interest correction was due to [inaudible 00:32:03] 12%, which was [inaudible 00:32:07] previous
RMC 5-11 was applied throughout the entire audit period. That was adjusted to reflect the effective
date of RMC 5-26 from 2016 forward, and applying the appropriate RCW from 2016 going forward.
Ms. Sand:
Can you explain your understanding of the basis of the penalty amount?
Mr. Malone:
The penalty amount was calculated under, again, the previous 5-11 during the periods that were under
audit. The penalty rate was 5% per monthly, up to 25%. This was at the maximum; a 25% penalty.
Ms. Sand:
Because it was more than five months delinquent? Is that right?
Mr. Malone:
Correct.
Ms. Sand:
I'd like to now refer you to Exhibit C23. I'll try to screen share. Mr. Malone, do you see what's been
marked as Exhibit C23?
Mr. Malone:
Yes I do.
Ms. Sand:
Do you recognize this document?
Mr. Malone:
I do. That is the letter that accompanied the refund submitted to Tracfone [inaudible 00:34:00].
Ms. Sand:
Did you initiate the issuance of a refund to Tracfone Wireless?
Mr. Malone:
Yes.
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Ms. Sand:
What prompted your refund request?
Mr. Malone:
The March 18, 2021 letter and email from TRS to Tracfone representatives.
Ms. Sand:
And explain how the refund amount, plus interest, was calculated.
Mr. Malone:
The refund amount was taking the original [inaudible 00:34:36] plus the corrected amount due, which
again has been covered previously in [Tamara's 00:34:42] testimony that the letter that was provided to
Tracfone representatives did not account for the total interest paid, so that correction resulted in a total
refund of $91,256 plus the applicable interest refund credit from the appropriate RCW of $4,000, just
over $4,000.
Ms. Sand:
That's the $4,078.64?
Mr. Malone:
Correct.
Ms. Sand:
So the total refund was $95,334.64?
Mr. Malone:
Correct.
Ms. Sand:
And then, continuing to scroll down in this Exhibit 23, C23, and now the last page. I believe it's the last
page. Based on the UPS tracking number, is it your understanding that Renton's refund check has now
been delivered to Tracfone's corporate headquarters in Miami, Florida?
Mr. Malone:
Yes.
Ms. Sand:
Thank you, Mr. Malone. I have no further questions.
Mr. Olbrechts:
Okay. Mr. Edwards, any cross?
Mr. Edwards:
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Yeah. Can we take a five-minute break first?
Mr. Olbrechts:
Okay. Until 3:00? Sure.
Mr. Edwards:
Thank you.
Mr. Olbrechts:
We'll do that.
Speaker 7:
Recording stopped.
Speaker 7:
(silence)
Mr. Olbrechts:
All right, let's get back on the record. We are—
Speaker 7:
Recording in progress.
Mr. Olbrechts:
Okay. Always gets me. May 27, 2021, 3:00 p.m. We are now in the Tracfone and utility tax PO. We are
now at the cross-examination of Mr. Malone by Mr. Edwards.
Mr. Edwards:
Mr. Malone, you testified just a little while ago that you had reviewed both the February 2019
assessment, City Exhibit C5, and the subsequent October 2019 assessment, Exhibit C7, before they were
issued. Is that correct?
Mr. Malone:
Correct, in some degree.
Mr. Edwards:
And both of those assessments contained both of the two errors that you talked about as well, the ZIP
code error and the interest rate error, correct?
Mr. Malone:
That is correct. We did not catch those errors, unfortunately.
Mr. Edwards:
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Okay. Did you also review the versions of the assessment that are Tracfone Exhibit 8 and Tracfone
Exhibit 11; those are the draft assessments that were submitted by TRS to the City of Renton in June of
2017 and August of 2017?
Mr. Malone:
I believe the June would've been prior to my involvement with the audit. The August one, I do not recall.
I probably had reviewed it in some degree, or at least looked at it, but probably not the same level of
review.
Mr. Edwards:
So, you didn't review it until 18 months later, after the Springfield decision had come out?
Mr. Malone:
Not in the same level of detail.
Mr. Edwards:
Okay. But again, you didn't identify either of the two errors that you now have testified existed in all
four versions of that assessment?
Mr. Malone:
Correct.
Mr. Edwards:
And as we go now to, I believe it is Tracfone Exhibit 4, which I will share, which was also I believe City
Exhibit either 10 or 11, this letter from Mrs. Crisp to me and Mr. [Deckinger 00:44:02] dated March of
2021 describing both of those errors—
Ms. Sand:
This is Exhibit 34, right? I think you said [crosstalk 00:44:14].
Mr. Edwards:
24. 24. 24, yes. Is everybody seeing that exhibit on the—
Mr. Olbrechts:
Yes.
Mr. Edwards:
On the screen? Okay. And Mrs. Crisp indicates in December of 2020 that there was a realization of both
the ZIP code error and the interest rate error, correct?
Mr. Malone:
Yes, I can see that.
Mr. Edwards:
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Is that when you became aware of both of those errors?
Mr. Malone:
I believe so, around that time.
Mr. Edwards:
Did you prepare a declaration in this case in January of 2021?
Mr. Malone:
I believe so, yes.
Mr. Edwards:
And did you testify under oath in that declaration that you had reviewed the assessment and that the
amount stated in the assessment, the full $336,000 assessed, was correct?
Mr. Malone:
I believe so, if I recall correctly.
Mr. Edwards:
But at the time that you signed that declaration, you knew that that assessment had both of the errors
that you've talked about?
Mr. Malone:
I may have not known the level of the errors or the materiality. It was just kind of right near around the
same time.
Mr. Edwards:
And you joined the city in 2017?
Mr. Malone:
Correct.
Mr. Edwards:
And Renton Municipal Code 5-26-11 regarding the interest rate on tax assessment had been enacted in
2016?
Mr. Malone:
Correct.
Mr. Edwards:
And so it was in effect at the time that you joined the city?
Mr. Malone:
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That's correct.
Mr. Edwards:
So you were aware of the application of that interest rate provision to city assessments when you were
reviewing the assessments in 2017?
Mr. Malone:
Yes, I believe that would've been in place.
Mr. Edwards:
But you didn't recognize that interest rate had not been calculated in accordance with that provision?
Mr. Malone:
I did not notice it on the schedules.
Mr. Edwards:
Did you review how interest was computed?
Mr. Malone:
I did not review it in as much detail as I have more recently, as TRS was our contractor and I really relied
a lot on them to do the computations.
Mr. Edwards:
Did you review the computations at all?
Mr. Malone:
We did review more so the methodology, and to that regard [inaudible 00:47:33].
Mr. Edwards:
If you had looked at the interest rate schedule on the assessment you would have seen that it was
computed at 1% per month.
Mr. Malone:
If I had reviewed it at the time before the correction?
Mr. Edwards:
Yes.
Mr. Malone:
Yeah, I would've probably likely been able to see that.
Mr. Edwards:
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So is it your testimony that when you reviewed the assessment, it did not include a review of the
interest that was asserted, even though that interest was more than the total amount of tax being
asserted?
Mr. Malone:
I didn't review line by line. Again, we reviewed more the methodology of the audit before its issuance.
Mr. Edwards:
Oh, I see. It would help if I ... So, I'm going to share now Exhibit 11, which is the assessment as of August
of 2017. We go to the tax interest and penalty calculation. You see the interest rate here as being
changing by 1% a month across each of these months?
Mr. Malone:
Yes, I can see that.
Mr. Edwards:
Did you review this at all when you were reviewing the assessment?
Mr. Malone:
Again, like I said, previously not in a line-by-line detailed review; more the methodology of the
assessment prior to its issuance.
Mr. Edwards:
The Renton Municipal Code indicates, you testified, that there's a presumption that the assessment is
correct and the taxpayer has the burden of establishing that it's incorrect? Was that your prior
testimony?
Mr. Malone:
Yes.
Mr. Edwards:
What was the specific provision of the RMC that you were citing to there?
Mr. Malone:
I would have to re-review it, but it was in 5-26.
Mr. Edwards:
Does that presumption continue to apply after errors have been identified that the city admits are
errors?
Mr. Malone:
We have corrected the errors.
Mr. Edwards:
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So, whatever the city does is presumed to be correct until after it's identified the errors in its corrected
version is now presumed to be correct?
Mr. Malone:
I believe so, based on that RMC provision.
Mr. Edwards:
I'm now going to share RMC 5-26-11. Do you recognize this ordinance provision?
Mr. Malone:
Yes.
Mr. Edwards:
And this is the ordinance provision that addresses interest on tax assessments?
Mr. Malone:
Correct.
Mr. Edwards:
And this interest provision was in effect in 2019 at the time that the assessment was issued, is that
correct?
Mr. Malone:
Correct. This was effective 2016.
Mr. Edwards:
Okay. And I've highlighted here in Subsection A, it says, "The interest to be charged for any late payment
or underpayment shall be in accordance with RCW 82-32-05 as it now exists or as it may be amended."
Do you see that?
Mr. Malone:
Yes I do.
Mr. Edwards:
Do you understand the phrase in accordance with to mean that you would follow 82-32-050 with
respect to the computation of interest?
Mr. Malone:
Yes, we would follow that RCM.
Mr. Edwards:
Okay. I'm going to now switch screen sharing and go to that RCW. Do you see that on your screen now?
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Mr. Malone:
I do.
Mr. Edwards:
In Subsection B it talks about, "For tax liabilities arising after December 31 of 1991," do you see that?
Mr. Malone:
I do, yes.
Mr. Edwards:
Are all of the tax liabilities at issue here liabilities that arose after December 31, 1991?
Mr. Malone:
They would be, yes.
Mr. Edwards:
And then it says that the rate of interest shall be variable and computed as provided in Subsection 2, do
you see that?
Mr. Malone:
Yes.
Mr. Edwards:
And if we go down to Subsection 2 it describes a methodology for establishing a interest rate each year
based on a fed funds rate plus 2%. Do you understand that that's how the interest rate works under
RCW 82-32-050?
Mr. Malone:
Yes.
Mr. Edwards:
And you're aware that the Washington Department of Revenue has a schedule showing what that
computed interest rate under the statute for every calendar year from 1999 forward?
Mr. Malone:
Yes sir. I've seen that PDF document.
Mr. Edwards:
And then if we look at Subsection 1CI, I've highlighted here it says, "Interest imposed after December 31,
1998 shall be computed from the last day of the month following each calendar year included in a
notice"? Do you see that?
Mr. Malone:
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Yes I do.
Mr. Edwards:
And again, the interest here was imposed after December 31 of 1998?
Mr. Malone:
Yes.
Mr. Edwards:
Did the assessment apply the rates under this statute to all of the tax liabilities in this assessment and
apply them following the method described in Subsection 1C?
Mr. Malone:
No, only for the periods after 2016, or starting in 2016.
Mr. Edwards:
Was doing it only for those periods in accordance with this statute?
Mr. Malone:
It was in accordance with the effective date of the Renton Municipal Code 5-26.
Mr. Edwards:
But effective in 2016, the requirement was to follow this statute, correct?
Mr. Malone:
Correct, for tax liabilities when arising. These tax liabilities were arisen prior to 2016.
Mr. Edwards:
Can you show me here, do you now see 5-26-11?
Mr. Malone:
I still am seeing the RCW.
Mr. Edwards:
Okay, let me try again. Do you now see 5-26-11?
Mr. Malone:
I do.
Mr. Edwards:
Can you show me where in 5-26-11 there's any reference to, "When the tax liabilities arise"?
Mr. Malone:
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It doesn't appear to state that.
Mr. Edwards:
So, beginning January 1 of 2016 the requirement of the ordinance was to compute interest in
accordance with RCW 82-32-050, correct?
Mr. Malone:
Starting in 2016, yes.
Mr. Edwards:
And the assessment that was issued in 2019 was issued after January 1 of 2016, correct?
Mr. Malone:
Yes.
Mr. Edwards:
And the assessment methodology used in calculating the assessment was not in accordance with 82-32-
050 but instead, for most of the interest assessed, was in accordance with a prior ordinance that was no
longer in effect at the time that the assessment was issued, correct?
Mr. Malone:
Correct.
Mr. Edwards:
I have no further questions.
Mr. Olbrechts:
Okay. Ms. Sand, any redirect?
Ms. Sand:
Yes, briefly. Mr. Malone, with regard to the Ordinance 57-56 that is the ordinance referenced on RMC 5-
26-11 that Mr. Edwards just stopped screen sharing, are you aware that that ordinance, like all state
ordinances, has a section of it that establishes its effective date?
Mr. Malone:
Yes.
Ms. Sand:
And are you aware that that ordinance was effective January 1, 2016?
Mr. Malone:
Yes.
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Ms. Sand:
And is that why the city calculated interest differently before the effective date of that ordinance, which
was different from the RCW, and then starting January 1, 2016 calculated it consistent with the RCW?
Mr. Malone:
That's correct.
Ms. Sand:
No further questions.
Mr. Olbrechts:
Okay. Thank you, Mr. Malone, appreciate your testimony. All right, Ms. Sand, other witnesses?
Ms. Sand:
No, the city has no other witnesses [crosstalk 00:59:29].
Mr. Olbrechts:
Oh. Okay. We'll move on then to rebuttal. Mr. Edwards, any rebuttal evidence?
Mr. Edwards:
No.
Mr. Olbrechts:
Oh, fantastic! All right, I guess we're into the closing argument phase. Do the parties want to jump into it
or take a break to collect their thoughts? How would you like to proceed?
Mr. Edwards:
I'm embarrassed to say I may have spoke too quickly about being finished with Mr. Malone.
Mr. Olbrechts:
Oh.
Mr. Edwards:
Because I realized that an exhibit that I want to talk to, or a visual aid may be more accurate, that I want
to talk to in my closing and it's probably best set up by asking him some questions about it.
Mr. Olbrechts:
Okay. Mr. Malone, are you still there? If you were smart you would say you already left, but okay, there
you are, so ...
Mr. Malone:
Yeah. I'm gone.
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Mr. Olbrechts:
Okay. All right. You're still under oath. Okay, go, Mr. Edwards.
Mr. Edwards:
Okay. Mr. Malone, I'm now sharing on my screen a Excel file that has been created that summarizes a
variety of things that have been talked about today. I'm going to start over here in column K [inaudible
01:00:49]. This is a summary of the assessment prepared by TRS that resulted in the payment made by
Tracfone in November of 2009, and here I have simply broken down the tax amount between the tax
that was assessed on the retail or direct sales and the tax that was assessed on the wholesale or non-
direct sales, which sums up to the $147,108 of tax.
Ms. Sand:
For the record, I'd like to launch an objection to this exhibit. It was not provided last Thursday, May
20th, with Tracfone's exhibits.
Mr. Edwards:
This is not evidence, this is a visual aid.
Ms. Sand:
Thank you for clarifying that for the record.
Mr. Olbrechts:
Yeah. Okay.
Mr. Edwards:
Yeah. All right, this is to help people to understand where we are and what's at issue.
Mr. Olbrechts:
Yeah. Presented just for—
Mr. Edwards:
[crosstalk 01:02:05] how and why those amounts are in data sheet. So, do you recognize the $147,108
as being the tax that was initially assessed pre-correction?
Mr. Malone:
Yes.
Mr. Edwards:
And then there was, in August of 2017, the schedule that is Tracfone Exhibit 11, showed interest at that
point from $114,311. Over time, interest continued to accrue, correct?
Mr. Malone:
Correct.
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Mr. Edwards:
And so, at the time that the initial assessment was issued in February of 2019, the total interest was
$142,259, which is $27,000 more than the $114,000 previously. You see how that's flowing here?
Mr. Malone:
Okay.
Mr. Edwards:
And then between then and when the payment was due, there was another $10,000 of interest accrued
so that the total amount of interest paid in the original assessment was $152,000, and then there was
$36,000 penalty, which is simply 25% of the $147,000. So the sum of the three kind of pinkish cells add
up to the $336,442 that Tracfone paid on November 4, 2019. Does that accord with your understanding
of the assessment?
Mr. Malone:
Yes.
Mr. Edwards:
And then when we were talking about the corrections, the correction that was made was here with
respect to the measure of tax on retail sales by adding the 98178 ZIP code to the computation of the ZIP
code population [inaudible 01:04:27]. Do you recall that?
Mr. Malone:
Yes.
Mr. Edwards:
In that regard, both Mrs. Crisp and Tracfone's expert witness, Tom Hilton, computed a corrected amount
of the tax on retail or direct sales of $26,112. The fact that there's agreement on those amounts is
reflected here by being highlighted in yellow. Are you following that so far?
Mr. Malone:
Yes.
Mr. Edwards:
And you had testified earlier that in computing the tax on wholesale or non-direct sales, that TRS had
grossed up the sales by a factor that ranged between 270% and roughly 450%?
Ms. Sand:
Object. I don't think the witnessed used the word grossed up. That's your term, Mr. Edwards.
Mr. Olbrechts:
Okay. Let's just say increased or ...
Ms. Sand:
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It is a multiplier.
Mr. Olbrechts:
Multiplier. All right.
Mr. Malone:
Yes. Yeah.
Mr. Edwards:
Okay. So, the cells here in this row reflect the retail sales multiplied by the multiplier that was used by
TRS, and then make another adjustment you'll see here, and this here is one minus 12.5%. Do you recall
hearing Mr. Dillon testifying today that the 2007 retail margin was 12.5%?
Mr. Malone:
Yes, I recall that.
Mr. Edwards:
So, would you agree that this formula basically reduces the computation that TRS used for non-direct or
wholesale sales by a retail margin adjustment?
Mr. Malone:
It appears that would be the result, yeah. [crosstalk 01:06:50].
Mr. Edwards:
Okay. And I'm not asking you to agree with the correctness of the answer; only agree that that's
mechanically what's happening here.
Mr. Malone:
Yes, that's accurate.
Mr. Edwards:
And if we look through each of these cells that have been highlighted in gray, the retail sales piece is
multiplied by the TRS multiplier and then reflects a retail margin adjustment using the average retail
margin for the year as testified to by Mr. Dillon. So if you look at 2008, you'll see it at 12.7%, and as we
go down to 2013 it's the 7.7% you testified to. Are you following those computations?
Mr. Malone:
Yes. Yes.
Mr. Edwards:
And so if we look at cell I4, that is a computation of rented utility tax on a wholesale or non-direct sales
that include a retail margin adjustment to it. Would you agree that that's a fair characterization of that
computation?
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Mr. Malone:
Say that again?
Mr. Edwards:
This cell that is $91,497 reflects the sum of the tax on a wholesale or indirect sale measure that starts
with the tax on retail, makes the same multiplier that TRS used, and then makes an adjustment for retail
margin?
Mr. Malone:
Yes, that would be the total of each of those years with that margin adjustment.
Mr. Edwards:
And if we were to compare that to the column here called TRS Corrected, this is the TRS-revised non-
direct or wholesale sales that have gone down because of the ... and the multiplier is applied to a
smaller retail number. Do you understand that?
Mr. Malone:
Yes.
Mr. Edwards:
So, the reason why the corrected one has $100,000 of tax on wholesale sales rather than $116,000 is
driven entirely by applying the same multiplier to a lower starting point, is that ...
Mr. Malone:
So, the correction that TRS made to the $100,000 was due to the population percentage? Is that what
you're ...
Mr. Edwards:
Well, the correction that TRS made to the $30,000 to bring it down to $26,000 automatically also
brought the $116,000 down to $100,000, correct?
Mr. Malone:
Correct, yes.
Mr. Edwards:
And so here, if there were a retail margin adjustment added to the wholesale or non-direct sales
computation it wouldn't change the retail measure, but it would reduce the wholesale measure from
$100,000 of tax to $91,000 in tax. Are you following that?
Mr. Malone:
Yes, I can see that.
Mr. Edwards:
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Okay. And so the difference between those two numbers is $9,091.10 in tax?
Mr. Malone:
Okay.
Mr. Edwards:
Okay. And if the total tax goes down, the penalty is going to go down because the penalty is simply 25%
of whatever the tax is. Wasn't that your testimony earlier?
Mr. Malone:
Yes.
Mr. Edwards:
So, the $2000 reduction of penalty here is driven by the fact that that's 25% of the $9,000 tax
adjustment. Are you following still?
Mr. Malone:
Yes.
Mr. Edwards:
Then the big item that is driving the adjustments that Tracfone is arguing for at this hearing today is the
computation of interest. When we were talking just a little while ago, we observed that in RCW 82-32-
050 it says that for interest for tax periods after 1998, that the tax rate is applied beginning at the end of
the month after the year included in the notice. Do you recall that?
Mr. Malone:
Yes.
Mr. Edwards:
And do you remember the exhibit to Mr. Hilton's declaration that presented a schedule of how interest
is assessed, is computed under RCW 82-32-050?
Mr. Malone:
I believe I saw the schedule. It looked kind of similar to this mock-up here.
Mr. Edwards:
And I'll represent to you that it is exactly the same as this mock-up. This is the information from that
schedule that is in evidence here. And so the interest then, it begins to run under 82-32-050 from
February of the year after each assessment year up until the date of payment at the variable rate under
the statute. Do you understand the mechanics of how that works?
Mr. Malone:
Yes.
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Mr. Edwards:
And if we were to apply interest in that fashion to this tax base, or maybe ... The total interest for each
year, regardless of what the tax amount is, is reflected in row 19 here.
Mr. Malone:
Okay.
Mr. Edwards:
So that whatever the tax liability is times row 19 will equal the interest amount. In this case, this is
computing interest under 82-32-050 based on the corrected TRS assessment with a retail margin
adjustment only on the wholesale component. Are you following me so far mathematically?
Mr. Malone:
Yes.
Mr. Edwards:
If one were to do that, the result would be that the amount of interest that was due at the time the
assessment was paid, November 4, 2019, would've been $10,800 instead of $152,000?
Mr. Malone:
Okay.
Mr. Edwards:
And so again we go to the same result. Taking the corrected tax amount with the retail margin
adjustment of $117,610, a corrected interest calculation of $10,000, and then a penalty at a rate of 25%
on the tax assessed of $29,000, the sum of all of these things in green adds up to $157,825.
Mr. Malone:
Okay.
Mr. Edwards:
And again, showing the amount that was paid on November of 2019, in red I've got each place that that
shows up. It's the same $336,442. Are you following me so far?
Mr. Malone:
Yes.
Mr. Edwards:
So, under Tracfone's position here today, if only $157,825 was due but they paid $336,000, the
difference between those two figures is $178,000. Are you following that?
Mr. Malone:
Yes.
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Mr. Edwards:
And you had testified earlier that under the corrected assessment reflected in column L there was a
refund computed of $91,256 as the difference between the $245,000 and the $336,000.
Mr. Malone:
Correct, yes.
Mr. Edwards:
Okay. So, if we credited that $91,000 that has been paid against the $178,000 that Tracfone asserts to
have been due, there would remain an additional $87,361.38. Do you see that?
Mr. Malone:
Yes.
Mr. Edwards:
And you're following the math on that?
Mr. Malone:
Mm-hmm (affirmative).
Mr. Edwards:
Okay. And then, isn't it true that interest is due on any refund from the time that the amount to be
refunded was initially paid until the refund is actually paid?
Mr. Malone:
That's correct.
Mr. Edwards:
And so when the $91,256 was issued, the check there was actually for $95,000 because there was some
refund interest on that $91,000, correct?
Mr. Malone:
Correct, yes.
Mr. Edwards:
So since the refund interest has already been paid on that $91,000, it's only the $87,000 that would be
subject to additional refund interest?
Mr. Malone:
Correct.
Mr. Edwards:
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And then the figure down here is computing refund interest from November 5 of 2019 to the date of
this hearing, which would be $4,822.35. Are you following that?
Mr. Malone:
Yes.
Mr. Edwards:
If you added those two things together, you would get an additional refund due over and above the
refund that has already been paid, of another $92,183.73 if the refund were paid today, the date
through which interest is calculated?
Mr. Malone:
[inaudible 01:18:21].
Mr. Edwards:
And then, if it was not paid today and this was the correct amount, there would be additional interest
that would continue to accrue on the refund until it's actually paid?
Mr. Malone:
Correct, yes.
Mr. Edwards:
And the current statutory rate under 82-32-010 is 3% for this year?
Mr. Malone:
I would have to [inaudible 01:18:54] but that sounds correct.
Mr. Edwards:
Okay. And so, to figure out the per diem rate, you would divide whatever the annual rate is by 365 days?
Mr. Malone:
Correct.
Mr. Edwards:
If you did that here, 3% divided by 365 times 87,361 would yield $7.18 of additional refund interest per
day. Are you following the amount there? From a mechanical standpoint, if Tracfone prevailed on its
position that the computation of Renton utility tax on wholesale or non-direct sales should include a
margin adjustment, and also prevailed on its assertion that RCW 82-32-050 applies to the entire
assessment, do you have any objections to the computations as to how the result of those two
combined rulings would mathematically compute?
Mr. Malone:
So, making the assumption if those two rulings went in that direction, in your favor?
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Mr. Edwards:
Correct.
Mr. Malone:
I mean, obviously I would like us to review the computation, but on its face it does seem sound.
Mr. Edwards:
Okay. Now I have no further questions.
Mr. Olbrechts:
Okay. Ms. Sand, did you have any questions then?
Ms. Sand:
I do. Mr. Malone, have you ever seen this spreadsheet before Mr. Edwards showed it to you today?
Mr. Malone:
I have not.
Ms. Sand:
And in your opinion, should RCW 82-32-050 be applied to the entire audit period?
Mr. Edwards:
Objection. Whether it should be applied to the entire audit is a legal question, not a factual question. It
calls for a legal opinion.
Mr. Olbrechts:
Yeah, it's a long ways there, but I'll still overrule again because Mr. Malone works for the Renton
auditing department, and the city's construction of its ordinance, including by its staff, is due some
deference in some cases, so I'd like to hear his opinion.
Mr. Malone:
My opinion would be that the interest under RMC 5-26 would apply from 2016 forward. Prior to that,
the interest would be [computated 01:22:07] under 5-11 as it was in place.
Ms. Sand:
And Mr. Edwards, I want to ... You stopped screen sharing. Thank you. I'm going to screen share
[crosstalk 01:22:27].
Mr. Edwards:
Oh, I'm sorry, did you want me to put that back up, or did you want to [crosstalk 01:22:31].
Ms. Sand:
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No, no, I was going to ask you to stop screen sharing, and I was also at the same time searching for my
exhibit. Mr. Malone, to your knowledge, did Tracfone ever take TRS up on TRS's request to review the
schedules that TRS prepared pursuant to the audit process?
Mr. Malone:
To my knowledge, I do not believe so; or if they did, they did not offer any substantive feedback to the
schedules.
Ms. Sand:
I'm going to share what's been marked as Exhibit C13. This is a series of seven emails by TRS to Tracfone.
Mr. Malone, have you had an opportunity before now to review what's been marked at C13?
Mr. Malone:
Briefly, yes.
Ms. Sand:
And based on your review of this exhibit—
Mr. Edwards:
I'm going to object. This goes beyond the cross-examination here. This is not appropriate redirect.
Ms. Sand:
So, the reason I wanted to pursue this line of questioning with Mr. Malone is because the whole concept
of whether a retail margin adjustment should be made is new to the city and we're hearing it for the
very first time in today's proceedings, and I'm just pointing out that during the audit, before the
assessment was scheduled, Tracfone never raised this point.
Mr. Olbrechts:
Okay. Overruled. Go ahead.
Ms. Sand:
So, Mr. Malone, if you need to take a minute to refresh your memory about this exhibit marked C13,
and do you also have a hard copy of it to look at as well?
Mr. Malone:
I do, yes.
Ms. Sand:
Based on this, isn't it true that seven different times TRS asked Tracfone if they would like to review the
tax schedules with TRS?
Mr. Malone:
Yes, it does appear that's what these emails are requesting.
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Ms. Sand:
And before today, to your knowledge, had Tracfone ever brought up the point being made today that a
retail margin adjustment should be made?
Mr. Malone:
No.
Ms. Sand:
No further questions. Thank you, Mr. Malone.
Mr. Olbrechts:
Okay. Thank you, Mr. Malone.
Mr. Edwards:
I have a couple of followup questions as a result of the inquiries.
Mr. Olbrechts:
Sure. Yeah, yeah. Understood.
Mr. Edwards:
Mr. Malone, isn't it true that on at least 138. different occasions Tracfone requested to meet with TRS
to discuss the draft assessments, and that in each instance TRS refused to do so?
Mr. Malone:
My understanding is there was a request for a meeting. I don't know the exact number.
Mr. Edwards:
Were each of those requests for meetings rejected?
Mr. Malone:
I believe so.
Mr. Edwards:
I'm going to stop there. No further questions.
Mr. Olbrechts:
Okay. All right. Ms. Sand, I take it no more questions?
Ms. Sand:
No further questions.
Mr. Olbrechts:
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Okay. Thank you again, Mr. Malone. Just run. Get out of there. Okay. All right, so now I think we're to
the closing, so do the parties want to spend a few minutes getting ready, or just jump into it?
Mr. Edwards:
Yes please. Could we have about 15 minutes?
Mr. Olbrechts:
Sure. Okay, get back on at 4:00? Okay, we'll see you then.
Ms. Sand:
Thank you.
Mr. Edwards:
Bye.
Speaker 7:
Recording stopped.
Mr. Olbrechts:
Okay. Oh, it looks like we're just about ready to go.
Speaker 2:
Recording in progress.
Mr. Olbrechts:
Okay. Just got to, oh, there he is. Okay. Back on the record, 4:00 PM, May 27, 2021 utility tax appeal
from TracFone. We are now at the closing argument stage. I believe the format is Ms. Sand would go
first and then Mr. Edwards. Ms. Sand, go ahead.
Mr. Edwards:
Okay.
Ms. Sand:
Thank you. So as the city noted at the very beginning of this hearing, the proper focus of today's hearing
is the sole remaining issue of the amounts due. The amount of tax, interest and penalty. And so that's
where I'm going to focus for closing argument. You've heard testimony today, Mr. Examiner, about
various corrections having been made by TRS and the city having refunded money to TracFone based on
the March, I believe it's March 18th, letter 2021. It's TracFone's, exhibit number 24, and I've referred to
city's exhibits 10 through 12 which regard to the refund. And in addition, I'd referee to Mr. Malone's
refund letter and that's C23. So the city issued that refund and with regard to now, the spreadsheet that
Mr. Edwards was just sharing in his examination of Mr. Malone, obviously one of the fundamental
underpinnings of the adjustments that TracFone is now asserting to be made to the city's assessment.
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Ms. Sand:
One of those is pertaining to whether or not there should be a so-called retail margin adjustment made.
And the evidence that you heard today shows in fact, that TracFone never provided Renton specific
data. And so TRS had to prepare estimates based on the company-wide zip code data, that TracFone did
provide. And so the methodology for calculating the estimate has been explained. It was explained by
Ms. Crisp, it was also explained by Mr. Malone. And it just does not stand to reason based on the
evidence that you saw today, that there should be a retail margin adjustment made. To review, recall
that the contracts we looked at between TracFone and various retailers and distributors shows, for
example, looking at the Circle K contract, and that's TracFone on exhibit 41, there were reductions
made, but comparing that to the Fred Meyer example of Mr. Malone's purchase of a basic airtime card
for $20, 1999.
Ms. Sand:
What the Circle K exhibit 41 and other TracFone on exhibits demonstrates is that in the case of Circle K,
they paid $17 to TracFone. And turned around and set the MSRP at $20. So Circle K's incentive for selling
TracFone airtime cards is it gets a $3 profit off of each of those card sales. And it doesn't make any sense
that TracFone would inflate its revenue data to include retail margins earned by third party retailers.
There instead including the invoice amounts, basically that they charge the retailers. And so no
adjustment is warranted. In fact, there was nothing in the record to support that TracFone's revenue
data actually includes retail margin revenues, on top of the amounts that TracFone is paid by its various
retail distributors. So I want to make that point because it's just clearly an implied argument been made
by TracFone that is belied by looking at the actual contracts. And it's also belied by the testimony that
you heard from the vice president of corporate taxation, Chesley Dillon.
Ms. Sand:
He was very clear that the columns that were often blacked out, not always, but for the record that will
be blacked out, that those unit prices where the revenues that TracFone received. And it just doesn't
stand to reason that TRS would think to even discount the multiplier, to somehow subtract out and
make an adjustment for retail margins. I.e retailer profit. As you heard Tamara Crisp testify, the mark-
up, the difference between the $17 that TracFone charges Circle K and the $20 that Circle K charges the
end-user, that $3 difference goes into Circle K's pocket, not TracFone's pocket. [Inaudible 00:05:53]
whose pocket the money goes into. And so I just think that there is no basis in the substantive evidence
before you today that there should even be a retail margin adjustment made.
Ms. Sand:
Turning now to the other large dollar figure that would impact any additional adjustment that TracFone
is arguing to receive in this case. And that pertains to the computation of interest. As Mr. Malone, the
city's tax manager testified, and again, he is the employee of the city of Renton who's charged with
administering the Renton and tax code. He testified that the interest should be computed differently
before January 1st, 2016, and it should be computed in accordance with the code in effect before
January 1st, 2016. And then once the code was amended, it did not go into effect pursuant to section
three of that particular ordinance number 5756 until January 1, 2016. And TracFone has put on no
evidence that a city can compute interest differently than the RCW's computation of interest.
Ms. Sand:
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In fact, cities can charge 12% like Renton was doing before it demanded it's code effective 1.1.16. So the
city properly applied and computed a Pirate's Code and computed interest consistent with it's code a
different way before 1.1.16 and then persistent with the RCW starting 1.1.16. So I think the evidence
when you review it, will show that, it will demonstrate that. And so again, there is no basis to make the
adjustment for any kind of retail margin. The city did properly compute the tax. And based on that, we
believe that the fund was properly issued and that the remainder of the penalty was calculated
correctly. Thank you.
Mr. Olbrechts:
Okay. One quick question was, Ms. Sand, prior to 2016, was the city properly, I mean, was the ordinance
consistent with state law in terms of the 1% a month? I mean, I wasn't quite sure you said that the city
was allowed to do that at the time and still could if it wanted to, or-
Ms. Sand:
Yeah. The city did compute interest differently from the state before January 1st, 2016. It was 12% per
year, is my understanding. And I would submit to you that it could still be that way but for the fact that
the council passed an ordinance amending the code and instead competing interest consistent with how
it's computed under the RCW effective 1.1.16.
Mr. Olbrechts:
Oh, okay. So the city voluntarily reduced its interest rate and not to conform to any state mandate then
is what you're saying if I understand you correctly?
Ms. Sand:
Yes.
Mr. Olbrechts:
Okay.
Ms. Sand:
That's what the city's position is.
Mr. Olbrechts:
Okay, great. Okay. Thank you, Ms. Sand, appreciate your closing argument. Mr. Edwards, anything to
say?
Mr. Edwards:
Yeah. So a few things, I'll try to be fairly brief. First, there's been a lot of talk about TracFone's burden of
proof and TracFone has met its burden of proof of proving that the final assessment issued in October
2017 in the amount of $335,442.69 was incorrect. That assessment is the subject matter of this appeal.
And under [inaudible 00:09:52] municipal code 526-18B5, we had the burden of proving the
determination of the department is erroneous. That determination was the October 27, 2019
assessment that is the subject matter of the appeal. Even under the hearing examiners ruling on
summary judgment and reconsideration, which TracFone respectively disagrees with, the city's
assessment was substantially overstated. And that you have heard here today of the city's tax manager
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and the city's third party contingent fee auditor tax recovery services admit that the assessment that is
the subject matter of this appeal was erroneous and that it contained multiple errors. Both an error, in
the calculation of the tax amount, and another error in the calculation of interest.
Mr. Edwards:
Both of those errors were identified by TracFone in the course of discovery. They weren't identified by
either Mr. Crisp, despite whatever training and supervision he provided to Ms. Crisp. They weren't
identified by the city's tax manager. They weren't identified by her predecessor, but everybody admits
that they were nevertheless material errors, which resulted in the city sending TracFone and Chuck for
$95,000, a very substantial portion of the $335,000 that we had the burden of proving was incorrect.
Mr. Edwards:
So today the focus is on two additional errors that have not been yet corrected. And like before, one is
an error with respect to the computation of tax and the other is an error with respect to the
computation of interest. And with respect to the computation of tax, and the evidence today has made
it very clear. The only sales data, the only revenue number on which the assessment is computed, is a
retail sales number. That the assessment was computed by starting with a retail sales number, making
three adjustments to that retail sales number to bring it down to an adjusted taxable retail revenue
figure. And then multiplying that retail sales number by a multiplier effect. Mr. Malone testified to that
multiplier as ranging between 270% of the retail sales number and 450% of the retail sales number. Both
Mr. Malone and Ms. Crisp testified under oath and acknowledge that the number that shows up on the
assessment as a measure of non-direct sales is simply the retail taxable number multiplied by
something.
Mr. Edwards:
And so, as a matter of basic math, a retail number multiplied by something is a retail number. The
suggestion that the way that the retail multiplier was computed somehow changes that fact, is
inconsistent with the same as well with the mechanism by which that multiplier was computed, because
it didn't just look at wholesale and retail sales of airtime. It also included within it handset sales data
that the city admits and acknowledged repeatedly today is not subject to utility tax and was never part
of the assessment. And you can't say because we used wholesale sales numbers in computing the
multiplier, it makes the results a wholesale number. You'd have to then say using handset sales in the
multiplier makes some of that number a revenue from sales of handsets. It's just nonsensical. A retail
number, multiplied by something by a factor, gets you a retail end result.
Mr. Edwards:
And as a consequence, an adjustment for the fact that sales at retail are higher than sales at wholesale is
necessary. We got testimony today from Mr. Dillon about what that average margin is and the
difference between a wholesale sale and a retail sale. And it is our position that the retail number
multiplied by a multiplier needs to then be adjusted for a retail margin adjustment. The schedule that I
walked through with Mr. Malone makes that mathematical computation of adding that retail
adjustment, as we saw on the schedule, making that adjustment as part of the multiplier, so that we're
taking a retail number adjusted down to the wholesale value instead of the retail value of something
that was purchased will get us to a more accurate estimate of wholesale or non-direct sales.
Mr. Edwards:
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Before I move on to the interest component, we heard repeatedly today that Tracfone never provided
Renton specific data for its non-direct or wholesale sales. But we looked at a number of invoices with
respect to those wholesale sales. There's no such thing as a Renton wholesale sale. TracFone makes
sales of airtime in massive volume that gets sent out to the wholesalers and distributors. Those cards
get shipped all over the country. They can be purchased anywhere in the country, and where they are
resold by the retailer has nothing whatsoever to do with whether the person who purchases from the
retailer ends up being a Renton resident or not. There simply is no such thing as Renton specific data to
be provided with respect to wholesale sales. When TracFone makes a sale of an airtime card to Safeway
or Fred Meyer, or they don't sell to Fred Meyer, they sell to a distributor, or Walmart, those sales are
not Renton sales, they are sales wherever the card is shipped to where the subsequent retail sale
occurs, turns on where the retailer puts those cards.
Mr. Edwards:
In Walmart's instance, they get first shipped to a Walmart distribution center and Walmart itself may
then subsequently ship those cards to a Walmart store in Renton. But again, I could go to a Walmart
store in Renton and purchase one of those cards. I'm not a Renton resident, that wouldn't make my
purchase at a Renton Walmart, Renton taxable. The focus again was where is the end consumer has
nothing to do with where the wholesale or the retail sale by the retailer occurs. So the notion that these
numbers, that the indirect sales number somehow is illustrative of some type of Renton wholesale sale
number at Renton simply isn't true.
Mr. Edwards:
It is a retail sale number that has been multiplied. And as a result that grossed up multiplied retail
number requires a margin adjustment to reflect a wholesale value rather than a retail value. Let me talk
last to the interest rate computation. This is a pure question of law and it's a question that has been
conclusively answered by the court of appeals in a case called Group Health v. City of Seattle. The cite is
146 Wn. App. 80. The case came out in 2008 and the relevant citation or pages to look at are at 101 to
103. But here, the situation is that at the time that the assessment was issued in 2019, the Renton
municipal code said interest shall be assessed in accordance with RCW-82-32-050.
Mr. Edwards:
RCW-82-32-050 says, "For any assessment that is issued for tax periods that occur after December 31,
1998, have to follow two different requirements. One requirement is the interest rate has to be a
variable rate that is recalculated on an annual basis. And the other requirement is that for each year of
tax liability, each calendar year of tax liability after 1998, the interest at that variable rate begins to run
in February of the following year and continues up through the date of payment." The method reflected
in Tom Hilton's declaration and utilized in the schedule that I walked through. The case that I cited
addresses both this issue and the question that you asked Mr. Olbrechts about whether or not applying
82-32-050 to city utility taxes is mandated. The context is, in 2004, the state legislature enacted a
statute that required cities that have B&O taxes to conform their B&O taxes to certain requirements.
One of those requirements is that an assessment of B&O tax had to compute interest in accordance with
RCW-82-32-050.
Mr. Edwards:
That same magic phrase, as in the city of Renton's ordinance, that was in effect in 2019 when the
assessment was issued. So the effective date of when taxes had to be computed in accordance with the
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statute, was January 1, 2000, either 4 or 5, I forget which. Group health involved a B&O tax dispute. The
city of Seattle did not use the, and it involved tax periods that predated the effective date of that
statutory requirement to compute interest in accordance with 82-32-050. One of multiple disputes in
that case was whether the interest had to be computed for those tax periods that predated the effective
date of the statute. And the court held, yes, they do because as a matter of law, in accordance with
means, following the process described in the statute. The City of Seattle argued that that was a
retroactive application of a provision that did not have effect, was not effective until January 1 of either
'04 or '05 after the tax period at issue.
Mr. Edwards:
And the Supreme court said, "No, that's not correct. It is an application of the law that is in effect at the
time that the assessment is issued and the law at the time required in accordance with the statute and
the statute required the application of those rates and that methodology to those periods. You looked
at what was in effect at the time the assessment was issued to determine the interest rate applicable to
everything. The court also noted that that's how the state of Washington interprets the statute here 82-
32-050 and that was what the relevant interpretation, but not the city, because the requirement was to
be in accordance with the statute.
Mr. Edwards:
And then finally, the court of appeals made citation to a case is site I don't have in front of me, that was
decades old and said, "It is the long standing law of the state of Washington that with respect to the
computation of interest on an assessment, you apply interest to the entire assessment based on what
the law is at the time that the assessment is issued, not based on what the law was for tax periods that
were included in the assessment." So as a matter of law, when the city recognized that the TRS had not
applied the interest rate provision of the ordinance that went into effect January 1, 2016, nearly three
years before the assessment was issued, that in computing tax in accordance with RCW-82-32-050, the
tax rate and the method of applying it had to be done for the entire audit assessment in accordance
with 82-32-050 leading to more than $75,000 of excess interest that was assessed against TracFone.
Mr. Edwards:
And while Ms. Sand is right, that the city was not required to have adopted that ordinance. Because in
this instance, the only requirement to follow 82-32-050 is for B&O taxes. But once the city did pass an
ordinance that said interest will be assessed in accordance with 82-32-050, the legal effect of that
ordinance was that every assessment issued after the effective date of the ordinance had to be
computed in accordance with 82-32-050 and group health [inaudible 00:27:43] Seattle tells us that in
accordance with means applying it to the entire tax period at issue, even though part of that [inaudible
00:27:53] and all of that tax period predates the effective date of the interest rate provision. So we
respectfully request that the hearing examiner issue a decision on this hearing, ordering the city of
Renton to issue an additional assessment or an additional refund to TracFone in the amount of
$92,183.73, plus an additional $7.18 cents per day from today through the date that the refund is paid.
Mr. Edwards:
And based on the evidence presented that that refund is the additional amount due as a result of two
further adjustments required to be made. One, the retail margin adjustment which reduces the tax by
$9,000 and as a result reduces the penalty by $2,200. And the reduced interest of only $10,000.
Obviously to the extent that the hearing examiner were to rule that only the interest rate calculation is
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to change and that there is no retail margin adjustment available, the amount would vary, but that can
be computed mathematically quite easily. I'm more than happy to circulate the schedule that I have, for
the city and the hearing examiner to review, but quite simply deleting the retail adjustment from row
four would automatically recalculate the amount of refund on the schedule, much the way that adding
the zip code to the TRS schedules resulted in automatically recalculating both the tax on retail and
wholesale sales, as well as the interest in penalty.
Mr. Edwards:
And with that, I want to thank you for your time and attention today. And we request a ruling in
TracFone's favor in those amounts for those two reasons.
Mr. Olbrechts:
Okay. Thank you Mr. Edwards. I'll be very brief. I'm very much looking forward to passing out as soon as
this is over. And I am looking forward to reading the court of appeals and Supreme court decisions on
this case, too. I have a feeling this is going to go on probably for a while. It's a lot of money into the
parties, both for Renton, and also probably setting a precedent throughout the state. So I would imagine
this is an important case, and there's a lot at stake here. And for that very reason though, I regretted
having to spend so much time on the summary judgment because I knew that my opinion of the state
law in this matter is not going to matter much by the time it starts processing through the court system.
However, I think on the factual findings though, unless those are reviewed de novo on appeal, that
deference is going to be given to where what I find on the facts. So that I have to be very, very careful
about.
Mr. Olbrechts:
And, I will, I'm going to have, as a matter of course now, I have computer generated transcripts made of
all the hearings I do. And especially on this one, it'll be helpful to go back and review it and make sure
that I properly address each material, factual issue that's raised. I think that the interest one is mainly a
legal one. I think that we have again, as a hearing examiner, I don't have the authority to overrule
invalidate city ordinances, I have to follow them regardless of whether they're consistent with state law
or not, but at the same time, I'm also supposed to, of course, follow legislative intent and it's reasonable
to presume that the city council in intends for their ordinances to be consistent with state law.
Mr. Olbrechts:
And so on the issue of whether that applies interests retroactively or not, it's going to boil down to
whether or not a state law compels that kind of interpretation, whether Mr. Edwards's state legal
argument prevails or whether the city's does. And so of course, I'll be taking a close look at that group
health case and so forth. On that, the multiplier issue, that's the other big issue of the case clearly.
Preliminary impressions, it does seem to me that you are comparing apples to apples if the revenues
you're looking at are network telephone service revenues, whether they're from indirect sales or direct
sales, and therefore it's appropriate to do the multiplier, but again, that would not include the handset
sales and that kind of thing. And so that's something I have to figure out as well, because I know they
were excluded from the indirect sale computation, whether that translated over into the whole
multiplier that was applied to, I don't, I just have to look at the math and see how that pans out.
Mr. Olbrechts:
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And again, I'll be looking at the transcript very closely to see how the other arguments from TracFone
track on, on the multiplier impact as well. So I really appreciate all the arguments that were made, and
this took a lot of work and a lot of time to get here. And I should have my decision out in a couple of
weeks and again, appreciate the civility and I know this has been a pretty contentious one, and well we
made through it. So thank you again for your great professionalism, and I guess we're done for today. So
have a great weekend.
Ms. Sand:
Thank you.
Mr. Olbrechts:
Bye.
Mr. Edwards:
Thank you.
Ms. Sand:
Hope you feel better soon.
Speaker 2:
Recording stopped.
Mr. Olbrechts:
Thanks, yeah. Me too.