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125110.0002/8538048.1
DECLARATION OF CHESLEY DILLON -1
LANE POWELL PC
1420 FIFTH AVENUE, SUITE 4200
P.O. BOX 91302
SEATTLE, WA 98111-9402
206.223.7000 FAX: 206.223.7107
SUPERIOR COURT OF WASHINGTON FOR KING COUNTY
TracFone Wireless, Inc.,
Petitioner,
v.
City of Renton,Respondent.
Case No.
DECLARATION OF CHESLEY DILLON IN SUPPORT OF TRACFONE’S PETITION FOR WRIT OF REVIEW
Chesley Dillon, being of full age, declares under penalty of perjury of the laws of the
State of Washington and the United States:
1.I am the Vice President Corporate Taxation for TracFone Wireless, Inc.
(“TracFone”). This declaration is based on my personal knowledge and on the books and
records of TracFone.
2.TracFone is a non-facilities-based seller of prepaid wireless airtime.
TracFone purchases wireless airtime from facilities-based carriers and resells the airtime on a
prepaid basis at both retail (to end-users) and at wholesale (to businesses who purchase
prepaid wireless airtime from TracFone for the purpose of reselling it). TracFone does not
own, operate,or manage any telecommunications facilities in Renton or anywhere else.
3.Respondent City of Renton conducted an audit of TracFone through its
vendor, Tax Recovery Services, LLC (“TRS”), a contingent fee auditing company. The audit
covered the period January 1, 2007,through May 31, 2013.
DocuSign Envelope ID: 1CB4E434-2F47-4475-A8DC-1099D3FC6377
FILED
2021 JUN 29 02:05 PM
KING COUNTY
SUPERIOR COURT CLERK
E-FILED
CASE #: 21-2-08552-7 KNT
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125110.0002/8538048.1
DECLARATION OF CHESLEY DILLON -2
LANE POWELL PC
1420 FIFTH AVENUE, SUITE 4200
P.O. BOX 91302
SEATTLE, WA 98111-9402
206.223.7000 FAX: 206.223.7107
4.On February 14, 2018, TRS issued an assessment asserting (a) $30,325.00 of
utility tax on the portion of TracFone’s retail sales of wireless airtime estimated to be to
Renton residents and attributable to intrastate calling, (b) $116,783.72 of additional utility tax
on the estimated value of TracFone’s wholesale sales of wireless airtime to retailers and
distributers estimated to have been subsequently purchased by Renton residents from third-
party retailers and used to make intrastate phone calls, (c) penalties of $36,777.30, and (d)
interest of $142,259.04 for a total assessment of $326,145.06.A true and correct copy of that
assessment is attached as Exhibit A.
5.On October 17, 2019, following TracFone’s timely request for a conference to
review the assessment, the City issued its Final Determination, asserting that “that the City’s
February 14, 2019 assessment was correct,” and computing additional interest through a
revised payment due date of November 6, 2019, bringing the total assessment to $336,442.69
in taxes, interest, and penalties. A copy of the City’s Final Determination is attached as
Exhibit B.
6.TracFone timely paid the assessment in full as required by the Renton
Municipal Code and filed an appeal with the Renton Hearing Examiner.
7.In the course of the appeal, both TracFone and the City of Renton moved for
partial summary judgment. In accordance with a pre-hearing Order, TracFone also filed
several pre-hearing motions including a Motion to Compel, Motion to Preclude the
Testimony of Garth Ashpaugh (the City’s “expert witness”), and Motion to Preclude the
Introduction of Certain Exhibits at the Hearing.
8.On March 12, 2021, the Hearing Examiner issued its Findings of Fact,
Conclusions of Law and Ruling on TracFone and City Motions for Partial Summary
Judgment deciding the summary judgment and pre-hearing motions (the “SJ Ruling”). A true
and correct copy of the SJ Ruling is attached as Exhibit C.
DocuSign Envelope ID: 1CB4E434-2F47-4475-A8DC-1099D3FC6377
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125110.0002/8538048.1
DECLARATION OF CHESLEY DILLON -3
LANE POWELL PC
1420 FIFTH AVENUE, SUITE 4200
P.O. BOX 91302
SEATTLE, WA 98111-9402
206.223.7000 FAX: 206.223.7107
9.TracFone moved for reconsideration of the Hearing Examiner’s Ruling on
multiple grounds, including because the Hearing Examiner improperly decided disputed
questions of material fact on summary judgment and erroneously ruled that TracFone’s sales
of handsets were subject to utility tax.
10.On April 19, 2021, the Hearing Examiner issued its Partial Summary
Judgment Ruling upon Reconsideration (the “Reconsideration Ruling”).A true and correct
copy of the Reconsideration Ruling is attached as Exhibit D.
11.On May 12,2021, the Hearing Examiner issued its Third Revised Pre-hearing
Order, a true and correct copy of which is attached as Exhibit E.
12.A hearing limited to the computation of the assessment consistent with the SJ
Ruling and Ruling on Reconsideration was conducted on May 27, 2021.
13.On June 9, 2021,the Hearing Examiner issued its Findings of Fact,
Conclusions of Law, and Final Decision (the “Final Decision”). A true and correct copy of
the Final Decision is attached as Exhibit F.
14.TracFone seeks judicial review of the rulings and decisions of the Renton
Hearing Examiner.
EXECUTED at Miami,Florida, this 29th day June, 2021.
CHESLEY DILLON
DocuSign Envelope ID: 1CB4E434-2F47-4475-A8DC-1099D3FC6377
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125110.0002/8538048.1
DECLARATION OF CHESLEY DILLON -4
LANE POWELL PC
1420 FIFTH AVENUE, SUITE 4200
P.O. BOX 91302
SEATTLE, WA 98111-9402
206.223.7000 FAX: 206.223.7107
STATE OF FLORIDA )
) ss.
COUNTY OF DADE )
I certify that I know or have satisfactory evidence that Chesley Dillon is the person who
appeared before me, and said person acknowledged that she signed this instrument, on oath stated that
she was authorized to execute the instrument and acknowledged it as the Vice President Corporate
Tax of TracFone Wireless, Inc.to be the free and voluntary act of such party for the uses and
purposes mentioned in the instrument.
DATED:
Print Name:
NOTARY PUBLIC for the State of Washington,
residing at
My appointment expires: ___________________
DocuSign Envelope ID: 1CB4E434-2F47-4475-A8DC-1099D3FC6377
06-29-2021
MIAMI-DADE
SOLSIRE C FRANCES
Florida
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125110.0002/8538048.1
DECLARATION OF CHESLEY DILLON - 5
LANE POWELL PC
1420 FIFTH AVENUE, SUITE 4200
P.O. BOX 91302
SEATTLE, WA 98111-9402
206.223.7000 FAX: 206.223.7107
CERTIFICATE OF SERVICE
I hereby certify under penalty of perjury under the laws of the State of Washington and
the United States that, on June 29, 2021, I caused a true and correct copy of the foregoing to
be served on the following person(s) at the address and in the manner indicated below:
Cynthia Moya Renton City Clerk 1055 So. Grady Way Renton, WA 98057 cmoya@rentonwa.gov cityclerk@rentonwa.gov
☒ by Electronic Mail
by Facsimile Transmission
by First Class Mail
☒ by Hand Delivery
by Overnight Delivery
Kari L. Sand Ogden Murphy Wallace P.L.L.C. 901 Fifth Avenue, Suite 3500 Seattle, WA 98164 ksand@omwlaw.com
☒ by Electronic Mail
by Facsimile Transmission
by First Class Mail
by Hand Delivery
by Overnight Delivery Phil Olbrechts olbrechtslaw@gmail.com
☒ by Electronic Mail
by Facsimile Transmission
by First Class Mail
by Hand Delivery
by Overnight Delivery
DATED this 29th day of June, 2021, at Seattle, Washington.
Maria G. Raines, Legal Assistant
at Seattle, Washington.
Maria G. Raines, Legal Assistant
EXHIBIT A
EXHIBIT B
EXHIBIT C
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Tracfone Appeal - 1
BEFORE THE HEARING EXAMINER FOR THE CITY OF RENTON
RE: TracFone Wireless, Inc.
Administrative Appeal
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FINDINGS OF FACT, CONCLUSIONS OF
LAW AND RULING ON TRACFONE AND
CITY MOTIONS FOR PARITAL SUMMARY
JUDGMENT
Tracfone Wireless, Inc. (Tracfone) and the City of Renton (City) have both filed motions for
summary judgment. The City’s motion is granted and Tracfone’s motion is denied. This Ruling
concludes that Tracfone has been engaging in the telephone business in the City of Renton and that its
gross income/receipts from that activity are subject to the City’s utility tax. The gross income subject
to tax includes that derived from sales to retail sellers of Tracfone’s handsets and airtime cards.
Evidence Relied Upon
1. Tracfone’s Motion for Summary Judgment dated January 29, 2021, along with City Response
and Tracfone Reply and all supporting exhibits and declarations.
2. Respondent City of Renton’s Motion for Partial Summary Judgment dated January 29, 2021,
along with Tracfone Response, City Reply and all supporting exhibits and declarations.
3. Oral argument held on February 23, 2021.
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Tracfone Appeal - 2
Findings of Fact
Procedural:
1. Appellant. Tracfone Wireless Inc., 9700 NW 112th Ave., Miami, FL 33178.
2. Hearing. A virtual hearing on the summary judgment motions was held via the Zoom
application on February 23, 2021, Meeting ID No. 878 2491 0213.
3. Motion Descriptions. Both Tracfone and the City filed motions for summary judgment on
January 29, 2021. Tracfone filed a motion for complete summary judgment and the City filed for
partial summary judgment. The issues raised in both motions are largely the same. Tracfone argues
that it’s business activity in Renton is not subject to the City’s utility tax because it is not engaged in
the telephone business under RCW 35A.82.060. Under RCW 35A.82.060, Tracfone’s gross receipts
is only subject to the utility tax if Tracfone’s business qualifies as a telephone business. Since Tracfone
does not believe any of its business qualifies as telephone business, Tracfone asserts that it owes no
utility tax. Tracfone also requested that if it was found to be engaged in the telephone business that
most of its gross income be exempt under RCW 35A.82.060 as sales to retailers for resale. The City
partial motion for summary judgment requested that Tracfone’s business operations within Renton be
considered a telephone business and that none of that business should be considered exempt even if
some of Tracfone’s business involved sales to retailers.
3. Tracfone Business Model. Tracfone provides wireless services by purchasing it at wholesale
from wireless network carriers and reselling it to consumers both directly via its website and toll free
number and indirectly via retailers such as Walmart and 7-Eleven.
TracFone has contracts for the purchase of wireless services with various wireless network carriers (
e.g., Verizon, T-Mobile, Sprint, AT&T, etc.). Tracfone sells the access it has purchased from these
network carriers to consumers via handsets and plastic airtime cards (collectively called “equipment”).
See Declaration of Garth Ashpaugh (“Ashpaugh Decl.”) at Par. 10. TracFone sells the equipment to
retailers such as Walgreens and 7-Eleven, who resell the equipment to the consumer. See Declaration
of Nate Malone (“Malone Decl.”) at Par. 8. Tracfone sometimes uses distributors to sell the equipment
to retailers. See Second Declaration of Chesley Dillon (“2nd Dillon Decl.”) Par. 5. Tracfone also sells
the equipment and wireless services directly to consumers via its website and its customer care toll free
number. Malone Decl. at Par. 11.
4. Tracfone Control over Wireless Services. Tracfone controls final consumer access to network
carrier facilities, imposes terms of usage for the wireless service, is responsible for customer service
and has the authority to terminate the wireless service. These rights are not transferred to retailers and
distributors who sell Tracfone’s equipment.
A significant point of disagreement between the City and Tracfone for transactions involving third-
party retailers is whether it is the retailer or Tracfone who “activates” consumer access to network
carrier service and thereby provides final network access to the consumer. Tracfone’s Vice-President
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Tracfone Appeal - 3
for Corporate Taxation, Chesley Dillon, asserts that some prepaid wireless airtime that Tracfone sells
to retailers is “active” at the time the cards are shipped to the retailers, while other sales wireless airtime
is activated at the register of the retailer immediately prior to the sale to the consumer. Dillon 2nd Dec.
Par. 12.
The City’s expert on utility taxation, Garth Ashpaugh, asserts that “activation” of network access is a
two step process. The first step involves the activities identified in the Chelsey declaration, supra. The
second step involves clearance through Tracfone. Ashpaugh Decl. Par. 12. The second step is the
consumer contacting Tracfone via Tracfone’s website or toll-free number. Id. With this second step,
Tracfone assigns a purchased Tracfone phone to a network carrier and sends a signal to the equipment
making it available to send and receive wireless calls. With the airtime cards, Tracfone’s signal
downloads the prepaid minutes to the assigned phone of the consumer.
On the issue of activation, the only recognizable disagreement between parties appears to be the
understanding of what “activation” means. Tracfone believes that activation occurs in the first step
described in the Ashpaugh declaration. The City believes that activation doesn’t occur until the second
step. Whatever definition the parties have in mind for “activation” is immaterial to the issue of whether
Tracfone controls consumer access to wireless network carriers. More significant is the City’s evidence
and assertion that consumers are not able to use their equipment until Tracfone grants network access
through its website or phone line. Tracfone does not dispute this fact, so it is taken as a verity.
Nate Malone, the City’s Tax and License Manager, notes that the “TracFone Wireless Terms and
Conditions of Service,” posted at Tracfone’s website provides that Tracfone retains the right “at any
time and without prior notice to [consumers], modify, cancel, and/or deactivate your Service and/or
take other corrective action, for any reason in our sole discretion, including, your violation of these
Terms and Conditions of Service.” Malone Decl. par. 10. This fact is uncontested by Tracfone and
taken as a verity.
Garth Ashpaugh, a City expert witness who is a CPA with expertise in utility tax issues, has examined
two of Tracfone’s network carrier contracts and found that Tracfone is contractually responsible, not
its retailers, for ensuring that the retailers abide by the terms of the agreement between network carriers
and Tracfone. Ashpaugh Decl. par. 7. The contracts also provide that Tracfone is responsible for all
risks, expenses and liabilities incurred in connection with its sale of cellular radio service including
consumer claims. Ashpaugh Decl. par. 8. The contracts further require Tracfone to provide all customer
service to its consumers. Id. In his declaration, Mr. Ashpaugh does not expressly state that he believes
the contracts to be representative of all the carrier contracts entered in to with Tracfone. If Tracfone
has some contractual arrangements that materially differ, it is free to bring those up during the final
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Tracfone Appeal - 4
appeal hearing to argue that some of its contractual arrangements should be excluded from the utility
tax due to the RCW 35A.82.060 resale exemption.
Conclusions of Law
1. Authority. RMC 5-26-18B authorizes the hearing examiner to hear appeals on the levy of
utility taxes.
2. Tracfone Provides Network Telephone Service. In the business model described in Finding of
Fact No. 4, Tracfone provides “network telephone service” as referenced in RCW 35A.82.060 and
defined by RCW 82.16.010(7)(b)(ii). RCW 82.16.010(7)(b)(ii) defines “network telephone service”
as “providing by any person of access to a telephone network…” It is uncontested that
telecommunications companies such as Sprint and Verizon have the infrastructure that comprises a
telephone network and that these companies sell access to Tracfone. As identified in FOF No. 4,
Tracfone in turn maintains final control over consumer access to the network by granting access in the
second step of what the City terms the two step activation process. Under the business model described
in FOF No. 4, consumers do not gain access to telephone networks until they contact Tracfone via
Tracfone website or toll-free number. In this regard Tracfone is construed as providing access to a
telephone network as contemplated in RCW 82.16.010(7)(b)(iii).
3. Tracfone is a Telephone Business. In the business model described in Finding of Fact No. 4,
Tracfone engages in the “telephone business” as defined by RCW 82.16.010 (7)(b)(iii). RCW
82.16.010 (7)(b)(iii) defines telephone business as “the business of providing network telephone
service.” As concluded in COL No. 2, Tracfone provides “network telephone service” to consumers
by the sale of both airtime cards and handsets. In this regard, Tracfone is engaged in the “business”
of providing “network telephone service” and therefore this activity qualifies as “telephone business”
under RCW 82.16.010 (7)(b)(iii).
4. City Authorized to Impose Utility Tax on Tracfone. The City is authorized to impose a utility
tax on Tracfone. RCW 35A.82.060 authorizes the City to impose a utility tax on 100% of the gross
income upon the “business activity of engaging in the telephone business.” As concluded in COL No.
3, Tracfone is engaged in the telephone business.
5. Tracfone Not Exempt Because It Doesn’t Operate Network Facilities. Tracfone doesn’t need
to operate or manage any network telephone facilities to be subject to the RCW 35A.82.060 tax.
RCW 35A.82.060 prohibits imposition of the utility tax on “on that portion of network telephone
service which represents charges to another telecommunications company, as defined in RCW
80.04.010…” (emphasis added). RCW 80.04.010(28) defines telecommunications company as
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Tracfone Appeal - 5
including businesses that own, operate or manage “facilities used to provide telecommunications for
hire, sale, or resale to the general public within the state.”
Tracfone asserts that use of the term “another” in RCW 35A.82.060 implies that the utility tax can only
be levied upon telecommunications companies. Tracfone further asserts that it does not qualify as a
telecommunications company because it doesn’t own, operate or manage any network facilities.
Tracfone’s interpretation of the exemption does not prove very compelling. RCW 35A.82.060 broadly
authorizes the levying of the utility tax upon the “business activity of engaging in the telephone
business.” Tracfone reduces this broad based authority to activity engaged in by telecommunications
businesses by implication solely by inclusion of the term “another.” Had the legislature intended to
narrow application of the tax in this manner, it could have simply provided that the tax can be levied
upon the “business activity of telecommunications businesses engaging in the telephone business.”
Given that the opening line of RCW 35A.82.060 grants cities the authority to impose the utility tax on
any entity engaged in the telephone busines, it is unlikely that the legislature would then so drastically
reduce the qualifying businesses through highly ambiguous implication via inclusion of “another.”
Even if RCW 35A.82.060 limits the tax to telecommunications businesses, it still applies to Tracfone.
Tracfone qualifies as a telecommunications business. RCW 80.04.010(28) defines a
telecommunications company to include entities that own, operate or manage “facilities” used to
provide telecommunications for hire, sale or resale to the general public. RCW 80.04.010 (13) defines
facilities to include instrumentalities, all devices, real estate, apparatus and property to facilitate the
provision of telecommunications service. RCW 80.04.010 (27) defines telecommunications to include
the transmission of information by electromagnetic or similar means. Tracfone owns, manages and/or
operates websites, phone lines and the offices and property necessary to support them to control
consumer access to telephone networks in the second step of what the City characterizes as Tracfone
activation as identified in Finding of Fact No. 4. The handsets and airtime cards that Tracfone sells to
retailers and consumers also meets the broad definition of facility as devices, instrumentalities and/or
simply property. All of these facilities are used to facilitate access to the phone network supplied by
the network carriers identified in FOF No. 4, which in turn is part of the provision of
telecommunications service.
6. Tracfone Transaction Not Exempt as Resale. The sale of Tracfone’s handsets and airtime cards
to retailers is not exempt as a sale of telephone service for purposes of resale.
RCW 35A.92.060 exempts “charges for network telephone service that is purchased for the purpose
of resale.” Tracfone asserts that its sales of handsets and airtime cards to retailers such as Walmart and
Walgreens is exempt from the utility tax under this provision. The City asserts that the provision does
not apply because the retailer is only purchasing the equipment from Tracfone, not network telephone
service.
The applicability of the exemption is not as easily resolved as either party asserts. The sales transaction
between Tracfone and its retailers has the characteristics of both just an equipment sale as well as a
sale of telephone service. The most obvious factor supporting Tracfone is that the sales price between
Tracfone and its retailers and presumably distributors includes the price of network telephone service.
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Tracfone Appeal - 6
The money that Tracfone acquires from this transaction is how Tracfone is compensated for the service
it ultimately provides to the consumer. The retailer (and at times distributor) may never actually be
purchasing telephone service, but the price it’s paying is the right to that service from Tracfone, which
is ultimately resold to the consumer. In the terminology of RCW 35A.82.060, Tracfone sells the
entitlement to its telephone service to its retailers “for the purpose of resale.”
There are also strong factors in support of the City’s position. The most compelling factor is that
Tracfone’s retailers and distributors aren’t engaged in the “resale” of network telephone service
because they never at any point have purchased that service from Tracfone. As outlined in FOF No. 4,
as between Tracfone and its retailers/distributors, it is only Tracfone that has a contractual relationship
with the network carriers, only Tracfone that gives consumers final authorization to connect to the
carrier networks, only Tracfone that imposes terms of use, and only Tracfone that can terminate service
for violating those terms of use. In this regard, there is no “resale” of network telephone service when
a retailer sells Tracfone equipment to the consumer. Tracfone’s ability to provide network telephone
service is ultimately based upon the access and usage rights it contractually acquires from network
carriers. Tracfone never sells those access and usage rights to the distributors and retailers.
Consequently, there can be no “resale” of those rights as contemplated in RCW 35A.82.060.
The conclusion that Tracfone is not selling cell phone service is moderately supported by a case heavily
referenced by the City, Tracfone Wireless v. the Dept. of Revenue, 170 Wn. 2d 273 (2010). The
pertinent issue in Tracfone was whether Tracfone’s sale of equipment to its retailers qualified as a sale
to consumers under RCW 82.14B.042. The Tracfone court found that the retailers did not qualify as
consumers (called subscribers in the opinion) because the retailers do not use the telephone numbers
for the cell phones, “nor are they the recipients of the cell phone service provided by Tracfone.” Id. at
295. The Tracfone case is distinguishable because it dealt with RCW 82.14B.042 and not RCW
35A.82.060. The Tracfone case also was not applying the RCW 82.16.010 definition of network
telephone service, but instead was assessing whether Tracfone was supplying “cell phone service” to
its retailers. However, there is no discernable pertinent difference between what the Tracfone court
considered to qualify as “cell phone service” and the RCW 82.16.010 definition. Nor is there any
difference in the business model between that addressed in the Tracfone case and that identified in FOF
No. 4.
Tracfone presents its own case supporting its position on the resale exemption, specifically Tracfone
Wireless, Inc. v. City of Springfield, 557 S.W.3d 439 (Mo. Ct. App. 2018). Unfortunately, the published
court opinion doesn’t provide sufficient information to assess its applicability to the resale exemption
relied upon by Tracfone. In his second declaration, Chelsey Dillon noted that at the trial level the
Springfield court found that Tracfone’s wholesale sales of prepaid wireless sales were “legitimate
wholesale sales” of prepaid wireless airtime and that the court rejected the City of Springfield’s factual
contention that Tracfone’s sales to retailers are consignment sales rather than wholesale sales. 2nd
Dillon Dec. Par. 13 and 14. These factual determinations do serve to undermine the City position that
Tracfone retailers are not re-selling network telephone service. However, nothing more can be taken
from this ruling because Tracfone (Appellant of this case) and the published court opinion do not
identify how the trial or appellate court applied any resale exemption or even what how the exemption
is worded. Footnote 2 of the appellate court decision identifies the City of Springfield provision that
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Tracfone Appeal - 7
imposes the utility tax, but that language doesn’t contain any exemption for network telephone service
sold for resale.
The conflicting interpretations and case law above confirm that the resale exemption is ambiguous.
There are compelling reasons supporting the positions taken by both Tracfone and the City. In this
regard, legislative history and statutory construction proves to be a necessary and determinative tool in
resolving the ambiguity.
Fortunately, there is case law that has proven highly useful in applying legislative intent to telephone
utility tax provisions. In construing the “network telephone service” definition incorporated into RCW
35A.82.060, one court noted that as follows:
Until 1981, the Legislature imposed a public utility tax on traditional telephone services.
Former RCW 82.16.010 (1965), amended by Laws of 1981, ch. 144, § 2. Recognizing the
impending revolution in telecommunications services and wishing to `level the pl aying
field' between regulated telephone businesses and emerging, nonregulated
telecommunications companies, the Legislature broadened the definition of companies
susceptible to the state public utilities tax by amending former RCW 82.16.010 [the
predecessor to the RCW 82.04.065 “network telephone service” definition].
Western Telepage v. City of Tacoma, 140 Wn. 2d 599, 602-03 (2000).
In its briefing Tracfone asserts that the legislative intent analysis of Western Telegraph is outdated
because of changes in the regulatory framework applicable to telephone taxation that occurred after the
adoption of the “network telephone service” definition in 1981. Tracfone cites to the breakup of AT&T
and amendments that resulted from that in 1983. Those regulatory changes are irrelevant as they
occurred well before the Western Telepage decision was issued and its construction of the legislative
intent of RCW 82.04.065.
In point of fact, as quoted above, the Western Telepage decision found that the legislature broadened
the definition because of the “impending revolution in telecommunications services.” The court cited
the AT&T break-up and other significant changes in the telecommunications industry as the type of
“unprecedented change” that the 1981 definition was designed to address. See 140 Wn.2d at 603-604.
Far from outdating the legislative intent cited in Western Telegraph, the industry upheaval cited by
Tracfone only serves to validate it. The legislative intent cited by Western Telegraph is further
supported by the broad based language in the definition of network telephone service and those
associated with it, as the language is written as broadly as possible to encompass advances in
telecommunications and its associated regulatory framework.
An equally useful aid to construction is the judicial rule that if ambiguity exists in an exception or
deduction provision, courts strictly construe the provision against the taxpayer. Lowe’s Home Centers,
LLC v. Dep’t of Revenue, 195 Wn.2d 27, 33 (2020). The resale exemption of RCW 35A.82.060 serves
as an exception to the utility tax applicable to telephone businesses. Consequently, the ambiguities of
the resale exemption must be construed against Tracfone.
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Applying the concepts of level playing field and strict construction to the ambiguities of the resale
exemption, it must be concluded that Tracfone’s sale of equipment to its retailers does not qualify as a
sale of network telephone service. The handsets and air cards sold by Tracfone are the modern day
equivalents of the poles and telephone lines several decades ago. They are the infrastructure used to
provide network telephone service, but they do not qualify as the service itself. Exempting Tracfone
from the utility tax because it chooses to subcontract out the sale of its equipment to retailers disrupts
the level playing field objective of the network telephone definition. It puts Tracfone at a competitive
advantage against network service providers who sell directly to consumers when there is no policy or
equitable reason to do so.
7. Incident Properly Identified. At hearing, Tracfone’s counsel argued that if the sale to retailers
isn’t considered the sale of network telephone service, then it can’t be taxed because “that’s the starting
point of the measure of the tax.” This argument relates to Tracfone’s summary judgment reply brief
argument that the City has not identified the incident that triggers the utility tax liability. The measure
of the tax and the incident of the tax are both identified in RCW 35A.82.060, which simply provides
in the first sentence that that the incident is “the business activity of engaging in the telephone business”
and the measure is “gross receipts or gross income.” Renton Municipal Code Section 5-11-4A sets the
tax rate at six percent. For equipment sales to retailers the gross income may be paid by the retailers,
but this doesn’t detract from the fact that Tracfone is getting compensated for engaging in the telephone
business in the City of Renton. Tracfone is taxed for engaging in the business of supplying network
telephone service to consumers in Renton. It gives the access for that service, provides some of the
facilities necessary for the service and regulates usage. Tracfone has not provided any reasonable
explanation or legal authority as to why the incident outlined in RCW 35A.82.060 and the City’s utility
tax regulations are legally insufficient to impose tax liability.
DECISION
The City’s motion for partial summary judgment is granted and Tracfone’s motion for summary
judgment is denied. This Ruling concludes that Tracfone has been engaging in the telephone business
in the City of Renton and that its gross income/receipts from that activity is subject to the City’s utility
tax. The gross income subject to tax includes that derived from sales to retail sellers of Tracfone’s
handsets and airtime cards.
DATED this 12th day of March 2021.
City of Renton Hearing Examiner
EXHIBIT D
SJ UPON RECONSIDERATION - 1
BEFORE THE HEARING EXAMINER FOR THE CITY OF RENTON
RE: TracFone Wireless, Inc.
Administrative Appeal
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PARTIAL SUMMARY JUDGMENT
RULING UPON RECONSIDERATION
Tracfone’s Motion for Reconsideration is granted in part. The March 12, 2021 Partial Summary
Judgment Ruling (SJ Ruling) erroneously addressed whether the City’s utility telephone tax applied to
Tracfone handset sales. That issue was beyond the scope of the City and Tracfone requests for
summary judgment. The SJ Ruling is overruled to the extent that it finds that City of Renton telephone
utility tax applies to the proceeds of handset sales. That issue instead should be considered unresolved
for purposes of this appeal. The rest of Tracfone’s motion for reconsideration is denied. Tracfone’s
assertions of error are each addressed separately below.
Evidence Relied Upon
Tracfone undated Motion for Reconsideration of SJ Ruling.
April 2, 2021 City Response to Tracfone Motion for Reconsideration
February 19, 2021 Tracfone Reply to Motion for Reconsideration
April 2, 2021 email from Kari Sand
April 14, 2021 Emails from Scott Edwards and Kari Sand
SJ UPON RECONSIDERATION - 2
Legal Analysis
The assertions of legal and factual error in Tracfone’s reconsideration are each addressed separately
below.
The SJ Ruling Erroneously Applies to the Sale of Handsets.
The SJ Ruling erroneously addressed an issue that was not raised by the parties. It concluded that
Tracfone gross income from its sale of handsets are subject to the utility tax. Neither party intended to
take the position that Tracfone handset sales are subject to the utility tax. The SJ Ruling should not be
construed as finding that the City’s utility tax applies to the to the sale of Tracfone handsets.
The SJ Ruling was based upon the erroneous but reasonable premise that Tracfone handsets were sold
with preloaded1 airtime. As outlined in the email appended as Exhibit A to this reconsideration ruling,
there were gaps in the manner in which the Tracfone business model was presented by the City. These
gaps left open the possibility that Tracfone sells its handsets with airtime already loaded into the
handsets and handset/airtime combined into one sales price. In essence, the handsets would themselves
serve as an elaborate airtime card. At the same time one of the two Questions Presented by the City
in its summary judgment motion was “Is Tracfone’s gross income from its retail agents properly
included within the City’s tax base and not exempt under the so-called ‘resale proviso’ in RCW
35A.82.060(1).” The City’s brief answered “yes” to this Question, without distinguishing between
sales of airtime to its retail agents from sales of handsets to its retail agents. Consequently, in its
Question Presented the City was asking for a ruling that the gross proceeds of handset sales be included
in the proceeds subject to the utility tax. Neither the City nor Tracfone in its summary judgment briefing
argued that the sale of handsets should be treated differently from the sale of airtime. Based on this
background, the SJ Ruling was worded to apply to sales of both airtime and handsets without
distinguishing between the two.
In its motion for reconsideration, Tracfone pointed out that neither the City nor Tracfone were taking
the position that handset sales were subject to the utility tax. In its response briefing, the City agreed.
As part of “oral argument” (done by email) on Tracfone’s reconsideration motion, the parties were
asked to identify if the record identifies that Tracfone sells its handsets separately from airtime. The
City provided several citations to the record, but none clarified that handsets were sold separately from
airtime. The citations revealed that the phones do not work until “activated,” but the same principle
applies to Tracfone’s airtime cards.
Tracfone’s response was more successful in addressing the issue. It identified that Chesley Dillon’s
declaration provided that “[s]eparate from Tracfone’s sales of prepared airtime, TracFone makes
1 For purposes of this ruling, a “preloaded” handset is one that serves the same function as an airtime card, where upon
activation a pre-established amount of airtime is available to the consumer.
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wholesale and retail sales of handsets and accessories.” This uncontested statement alone2 fills in the
informational gaps in the City’s presentation of evidence and is sufficient to establish that the SJ Ruling
was based upon the erroneous premise that handsets themselves served as elaborate airtime cards with
preloaded airtime.
Since the handsets are in fact not sold as elaborate airtime cards, there is no basis under applicable
statutory definitions for the SJ Ruling conclusion that the utility tax applies to the gross proceeds from
the sale of handsets. RCW 35A.82.060 only applies the telephone utility tax to the activity of engaging
in telephone business. RCW 82.16.010 (7)(b)(iii) defines telephone business as including network
telephone service. RCW 82.16.010 (7)(b) (ii) provides that network telephone service does not include
the providing of competitive telephone service. RCW 82.04.065(5) defines competitive telephone
service as the providing of telecommunications equipment or apparatus, “if the equipment or apparatus
is of a type which can be provided by persons that are not subject to regulation as telephone companies
under Title 80 RCW and for which a separate charge is made.” (emphasis added). Since Tracfone
charges for its handsets separately as identified in the Dillon declaration, the handsets sales do not
qualify as competitive telephone service and thus do not qualify as network telephone service that is
subject to the telephone utility tax.
For the reasons stated above, the SJ Ruling is found to have erroneously included proceeds from the
sale of handsets in the scope of its assessment and rulings. The SJ Ruling is overturned to the extent
that it applies to handset sales. Whether the proceeds of handset sales are subject to the telephone
utility tax were beyond the scope of the summary judgment motions and should not be considered
addressed by the SJ Ruling.
SJ Ruling Doesn’t Make Contradictory Conclusions on Applicability of Resell Proviso3.
Setting aside the misunderstanding on handset sales, Tracfone’s most significant reconsideration
argument is that the partial summary judgment ruling makes contradictory conclusions on the
applicability of the resell proviso. Tracfone points out that the utility tax can only be assessed upon
the proceeds of network telephone sales. Therefore, Tracfone asserts that the SJ ruling cannot both
conclude that Tracfone is not selling network telephone service to its retailers while at the same time
imposing the utility tax on the proceeds of those sales. These conclusions are not found to be
contradictory. The gross income that Tracfone acquires from its sales to retailers is ultimately derived
from the sale of Tracfone network telephone service to the consumer. The fact that Tracfone has
2 Tracfone also identified several other portions of the record that it felt clarified that handsets were not preloaded
with airtime. However, that fact was actually not very clear from the referenced evidence. The retail distribution
agreements distinguishes between handset and airtime, but this doesn’t preclude the possibility that the handsets are
preloaded with airtime. Mr. Malone’s purchase of both a handset and an airtime card doesn’t preclude the possibility
that he purchased the airtime card separately to add airtime to his preloaded handset. The fact he didn’t pay 911 tax
on the handset does support the premise that the handset was not preloaded, although that’s a very indirect way of
establishing that fact.
3 The “resell proviso” is the RCW 35A.82.060 telephone utility tax exemption “for charges for network telephone
service that is purchased for the purpose of resale.”
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structured its business plan to generate gross income prior to the final consumer sale does not give
Tracfone license to thereby avoid the utility tax.
Tracfone’s contradiction argument goes to the heart of Tracfone’s position in this appeal. It implicates
the question of whether Tracfone can avoid paying the utility tax by structuring the way it sets up its
business and marketing plan. Given the strong legislative intent to avoid this type of maneuvering and
related case law, it is found that the conclusions reached in the SJ Ruling should not be construed as
contradictory. As noted in the SJ Ruling, the state legislature has adopted broad definitions for
companies subject to the telephone utility tax in order to create a level playing field that prevents
“emerging, nonregulated telecommunications companies” from avoiding the tax. Evaluating the same
business model presented in this appeal, the state supreme court had to determine if Tracfone could
avoid the cellular 911 tax, applicable to sales to consumers, by asserting that it was selling cellular
service to its retail agents instead of the consumer. The court disagreed, as follows:.
We agree that the statutes contemplate collection of the tax from the subscriber. RCW
82.14B.040 says that the state E-911 excise tax on radio access lines "shall be collected
from the subscriber by the radio communications service company providing the radio
access line to the subscriber." See also RCW 82.14B.042. We do not agree, however,
that the manner in which a clearly taxable event (an assigned cell phone number) is
marketed can negate a tax that is otherwise clearly payable. Any difficulty in collecting
the tax from the subscriber is due to TracFone's choice of business model.
Tracfone Wireless v. the Dept. of Revenue, 170 Wn. 2d 273, 289 (2010).
The same principles apply to application of the resell provision. Tracfone should not be given license
to disrupt the level playing field sought by the broad language of the utility tax provisions simply
because of its choice of business model. There is no rational policy basis to distinguish between
Tracfone selling directly to consumers or doing it via its retail agents. Yet that is precisely what
Tracfone is requesting. If Tracfone doesn’t pay the utility tax, then no one will. Its retail agents would
not, because they would legitimately claim that they are not selling network telephone service for the
same reasons that Tracfone should be construed as providing that service itself, i.e. Tracfone retains
the access rights to telephone networks and Tracfone grants final approval for those access rights via
its online and telephone number activation process.
It is recognized that the resell proviso expressly applies to what would qualify as an element of a
business plan, i.e. whether network telephone services are sold directly or subject to resale. Taken to
extremes, the applicability of all taxing regulations are dependent upon what type of business plan is
employed. A tax on legal services can be avoided by changing the business plan from legal services
to accounting services. Under the “level playing field” rationale, as well as the “choice of business”
model rationale of the Dept. of Revenue case, the determinative and logical focus in assessing its
business plan is whether Tracfone is still the ultimate provider of network telephone service. In the
Dept. of Revenue case what mattered to the court was whether or not Tracfone was providing cell phone
service to its consumers as opposed to its retail agents. Similarly, what matters in a level playing field
objective is that Tracfone be treated the same as other network telephone service providers – again, as
in Dept. of Revenue, the pertinent issue is who is providing the service. The focus on who is providing
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the service similarly explains whey the resell proviso does apply in the transactions between Tracfone
and its network carriers – those transactions are exempt because the network carriers have sold their
network telephone service rights to Tracfone, i.e. rights to use its network facilities.
SJ Ruling Did Not Rely Upon Expert Opinion on Issue of Law
The SJ Ruling did not rely upon Mr. Ashpaugh’s legal opinion on the interpretation of Tracfone
contracts. The Ruling relied upon Mr. Ashpaugh’s opinion on the business model employed by
Tracfone. As noted in Mr. Ashpaugh’s declaration, he has extensive experience in auditing utilities
and is familiar with the business model of prepaid wireless companies who purchase or lease excess
wireless service from network carriers at wholesale and then resell the service to end users. See January
29, 2021 Ashpaugh Declaration, par. 3. Mr. Ashpaugh is not referenced in the SJ Ruling for his
expertise in contractual interpretation, but rather what those contracts inform him about the business
model used by Tracfone. To the extent Mr. Ashpaugh’s opinions are based upon the legal accuracy of
his contractual interpretations, that was independently verified by the examiner and found to be legally
accurate. None of Mr. Ashpaugh’s opinions on how Tracfone conducts business are inconsistent with
the contracts he references in his declaration.
Resell Proviso is an Exemption
In its reconsideration motion, Tracfone asserts that the resell proviso is not an exemption, but rather “is
a part of the Legislature’s grant of utility tax authority to cities…” The SJ Ruling did not erroneously
characterize the resell proviso as an exemption.
The difference between an exemption and a grant of authority can become somewhat muddled, since
any exemption by definition can be viewed as defining the limits of the grant of taxing authority. There
has apparently been no Washington appellate court decision that has provided any detailed guidance
on how to distinguish between a grant of taxing authority and its exemptions. The closest case law on
the subject may be Western Petroleum v. Friedt, 127 Wn. 2d 420 (1995). In Western Petroleum, the
court was tasked with determining whether the elimination of an exemption qualified as a tax increase
that was prohibited by a citizen’s initiative. In its analysis, the court concluded that a tax exemption
relieves certain taxpayers from payment, in whole or in part, from taxes due. Id. at 426. As noted in
the City’s response brief, taxation is the “‘rule’” and “‘exemption is the exception.” Quoting TracFone
Wireless, Inc. v. Dep't of Revenue, 170 Wn.2d 273, 296-97, 242 P.3d 810 (2010).
The Western Petroleum definition serves as a useful starting point in analyzing how to characterize the
resell proviso in RCW 35A.82.060. The origin of a city’s taxing authority is RCW 35.21.870, which
authorizes a utility tax of up to 6% without voter approval upon the privilege of conducting a telephone
business. RCW 35A.82.060 provides more detail on this grant of authority and its exemptions. The
language prior to the “PROVIDED” term in RCW 35A.82.060 serves as part of the grant of taxing
authority originating from RCW 35.21.870, specifically that cities may impose a tax upon the business
activity of engaging in the telephone business as measured by gross receipts derived from toll telephone
service. After defining this grant of authority, immediately after “PROVIDED,” the statute states that
“…the city shall not impose the fee or tax…” (emphasis added) followed by numerous activities not
subject to “the fee or tax,” including the resell proviso. From this structure, it is clear that the language
SJ UPON RECONSIDERATION - 6
prior to “PROVIDED” along with RCW 35A.21.870 creates the “the fee or tax” and the language after
it identifies the activities that relieve the taxpayer from having to pay the fee or tax, i.e. the activities
for which “..the city shall not impose the fee or tax.”
As legal authority for its position, Tracfone cites to Qwest Corp. v. City of Bellevue, 161 Wn. 2d 353
(2007). The Qwest case presents a muddled and implied assessment of what constitutes direct taxing
authority as opposed to an exemption in RCW 35A.92.060. The case is somewhat confusing because
it frames the issue before it as an issue of direct taxing authority, but evaluates that issue by focusing
on the construction of an RCW 35A.92.060 exemption, i.e. one of the business activities listed after
the PROVIDED term. Ultimately, the court’s analysis can be construed as consistent with other case
law applicable to exemptions if the court’s focus on the RCW 35A.92.060 exemption is understood to
be a means of clarifying ambiguities in the direct taxing authority granted by RCW 35A.92.060, i.e.
the language preceding the PROVIDED term.
The primary issue in Qwest was whether RCW 35A.82.060 authorizes cities and towns to tax interstate
in addition to intrastate network telephone service. The Qwest court had to determine if Bellevue could
tax interstate internet service. Tracfone correctly identifies that the Qwest court treated this question
as an issue of direct taxing authority as opposed to an exemption, because in addressing the interstate
issue the court concluded that “[a]mbiguities in taxing statutes are construed most strongly against the
government and in favor of the taxpayer.” Id. at 364. This stance is the opposite of the treatment given
to tax exemptions, where exemptions must be construed “‘strictly, though fairly and in keeping with
the ordinary meaning of their language, against the taxpayer.’” Seattle FilmWorks, Inc. v. Dep't of
Revenue, 106 Wn. App. 448, 453, 24 P.3d 460 (2001).
As previously noted, RCW 35A.82.060 authorizes cities to tax the business activity of engaging in the
telephone business as measured by gross revenue derived from intrastate toll telephone service.
Despite the explicit limitation to intrastate telephone service in this grant of authority, Division I of the
Court of Appeals interpreted RCW 35A.82.060 as also granting the authority to tax interstate telephone
service so long as it wasn’t charged to another telecommunications company. See Cmty. Telecable v.
Seattle, 136 Wn. App. 169 (2006). Division I came to this conclusion by an analysis of the RCW
35A.92.060 exemptions, finding that an exemption for interstate telephone charges in RCW
35A.82.060 only applied to sales to other telecommunications companies. On this basis, Division I
concluded that the interstate internet service it was reviewing wasn’t exempt because the proceeds
subject to utility tax weren’t derived from sales/charges to another telecommunications company. Id.
at 182.
In its analysis the interstate issue, Division I did not address the grant of authority language in RCW
35A.82.060 that provided that the measure of the tax was to be gross revenues derived from intrastate
service. At first blush, the limitation to intrastate taxation in the RCW 35A.82.060 grant of authority
would appear to limit the grant of authority to intrastate telephone service. As best as can be inferred,
Division I must have considered the intrastate reference not to be a limitation on taxing authority but
rather just one way the amount of the tax is to be measured.
The Qwest court overruled Division I and determined that the utility tax could not be imposed on any
charges for interstate telephone service. Like Division I, the Qwest court arrived at its conclusions by
SJ UPON RECONSIDERATION - 7
construing the exemption language of RCW 35A.82.060. As stated by the court, “[b]ecause it is
undisputed the City may impose a UOT [utility occupation tax] on Qwest’s revenue derived from
charges for intrastate service, only the language following the word “PROVIDED” is necessary for
resolution of this case.” Id. at 364. The Qwest court also did not identify the intrastate language as
limiting a city’s taxing authority. However, from an analysis of the legislative history it concluded that
the exemption for interstate service didn’t just apply to charges to telecommunications companies. It
found that the interstate exemption was not linked to other language referencing telecommunications
companies and instead was a stand-alone exemption that applied to all interstate telephone charges.
The Qwest decision is puzzling because it applies a standard of construction that applies only for grants
of taxing authority even though it was construing exemptions. To compound the ambiguity, the court
itself identified that it was construing exemptions. It characterized the language exempting interstate
telephone service as an “exemption,” the language exempting charges to other telecommunications
companies as an “exemption” and another clause exempting interstate services subject to federal tariffs
as an “exemption.” See Id. at 362, 366 and 367. The issue of whether or not the court was addressing
an exemption as opposed to a grant of taxing authority was not explicitly addressed by the court.
Reconciling what the court did with the voluminous case law that requires exemptions to be construed
against the taxpayer, it appears that the court considered itself to be using the exemption language to
reconcile an ambiguity in the grant of authority. As noted previously, the court stated that it had to
review language after the “PROVIDED” term because the language before it made it indisputable that
cities could tax intrastate service. Since the grant of authority was clear as to its applicability to
intrastate service but silent as to interstate service, the silence on interstate service in the granting clause
can be construed as an ambiguity of that clause and the exemption language subsequent to the
“PROVIDED” term serving as a means to resolve that ambiguity.
SJ Ruling Correctly Found Resell proviso to be Ambiguous
Tracfone asserts that the SJ Ruling improperly characterized the resell proviso as ambiguous. The SJ
Ruling provided two highly detailed reasonable and conflicting interpretations of the resell proviso.
On this basis, the resell proviso clearly qualifies as ambiguous. The SJ Ruling did not err in treating
the resell proviso as ambiguous.
In support of its argument that the resell proviso is not ambiguous, Tracfone correctly notes that for a
statutory provision to be considered ambiguous, it must be susceptible to competing reasonable
interpretations. Agrilink Foods, Inc. v. Dep’t of Revenue, 153 Wn.2d 392, 396 (2005). In its reconsideration motion, Tracfone asserts that the SJ Ruling doesn’t “does not identify competing
reasonable interpretations of” the resell proviso. In point of fact, the SJ Ruling devoted two single-spaced pages to detailing reasonable competing interpretations of the resell proviso. See SJ Ruling, pages 5-8. The resell proviso exempts “charges for network telephone service that is purchased for
the purpose of resale.” The ambiguity of this provision is whether Tracfone retailers have in fact
purchased network telephone service when they bought Tracfone’s airtime cards for the purpose of
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reselling them to the consumer. Using the terminology adopted by Tracfone, are the retailers merely
buying plastic as argued by the City, or are they actually purchasing network telephone service?
SJ Ruling Correctly Found No Material Question of Fact Pertinent to Applicability of Resell Proviso.
Tracfone has not demonstrated any material question of fact on whether airtime is resold to retailers.
The facts that form the basis for that legal conclusion are not in dispute.
The qualification of the resell proviso as a tax exemption plays a significant role as to whether there
are any material questions of fact that bar resolution through summary judgment. This is because tax
exemptions are construed narrowly, and the taxpayer has the burden of showing that he qualifies for a
particular exemption. Adult Student Housing, Inc. v. Department of Revenue, 41 Wn. App. 583 (1985).
When the nonmoving party bears the burden of proof at trial, the party moving for summary judgment
can meet its initial burden by pointing out that the nonmoving party lacks sufficient evidence to meet
its burden at trial. Guile v. Ballard Community Hosp., 70 Wn. App. 18, 21, 851 P.2d 689 (Div. 1 1993)
(citing Young v. Key Pharmaceuticals, Inc., 112 Wn.2d 216, 225 n.1, 770 P.2d 182 (1989)). The burden
then shifts to the nonmoving party to produce evidence. Young, 112 Wn.2d at 225. The nonmoving
party cannot rely on its pleadings or on speculation or argumentative assertions that unresolved factual
issues remain; rather it must set forth specific facts which sufficiently rebut the moving party's
contentions and disclose the existence of a genuine issue as to a material fact. Meyer v. University of
Washington, 105 Wn.2d 847, 852, 719 P.2d 98 (1986).
Under the summary judgment guidelines listed above, Tracfone has the burden of proof in establishing
exemption status under the resell proviso. As such, if the City as the moving summary judgment party
demonstrates that Tracfone has insufficient evidence to establish that it qualifies for the resell
exemption, then Tracfone bears the burden to set forth specific facts which sufficiently rebuts the City’s
claim that the exemption is inapplicable. As shall be discussed, Tracfone’s conflicting “facts” are
largely opposing legal conclusions and argumentative assertions that unresolved factual issues remain.
The one true fact that Tracfone does present is not pertinent or compelling enough to sufficiently rebut
the City’s contentions and reveal that Tracfone does not sell network telephone service to its retail
agents for the purpose of resale.
In its reconsideration motion, Tracfone asserts that there is a material question of fact as to whether
Tracfone or third-party retailers sell airtime to consumers. This position lacks the precision necessary
to accurately assess whether the resell proviso applies. The RCW 35A.82.060 resell proviso applies to
charges for “network telephone service” that are purchased for the purpose of resale. The airtime
referenced by Tracfone is that “network telephone service.” RCW 82.16.010 (7)(b) (ii) defines
“network telephone service” as either (1) providing access to a telephone network or (2) providing
telephonic, video, data, or similar communication or transmission for hire, via a telephone network or
similar transmission system. Ultimately, the SJ Ruling made the legal conclusion that if Tracfone
directly provides network telephone service to the consumer, there is no sale of that service to its retail
agents. The pertinent facts, therefore, are either (1) whether Tracfone provides access to a telephone
network to its retail agents for resale or (2) whether it provides telephonic, video, data, or similar
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communication or transmission for hire via a telephone or similar communications network to its retail
agents for resale.
Applying the “network telephone service” definition outlined above, the SJ Ruling determined that
based upon uncontested and material facts, Tracfone provides network telephone service directly to its
consumers without resale from its retail agents. The facts upon which this legal conclusion was based
were as follows:
1. As between Tracfone and its retailers/distributers:
a. Only Tracfone has a contractual relationship with the network carriers.
b. Only Tracfone gives consumers final authorization to connect to the carrier networks.
c. Only Tracfone imposes terms of use.
d. Only Tracfone can terminate service for violating the terms of use.
2. The money that Tracfone acquires from its sales to retail agents and/or distributors is how
Tracfone is compensated for the service it ultimately provides to the consumer for sales that
involve retail agents/distributors.
The facts listed above are the basis of the legal conclusion that for purposes of the RCW 35A.82.060
resell proviso, Tracfone’s retail agents/distributors are not purchasing network telephone service.
Tracfone disputes none of those facts.
In its request for reconsideration, Tracfone’s sole reference to an alleged disputed fact is a Declaration
statement from its President for Taxation, Chelsey Dillon:
TracFone’s wholesale sales of prepaid wireless airtime are made to retailers…who
purchase the prepaid wireless airtime for the purpose reselling it at retail to end
users…TracFone does not control the price at which retailers and distributors resell
prepaid wireless airtime. The amounts charged by retailers who make retail sales of
prepaid wireless airtime that they purchased for resale (at wholesale) is not TracFone’s
income, it is the income of the retailer who makes the retail sale.
With one exception, there is nothing in the statement quoted above that creates a material question of
fact as to whether Tracfone is providing network telephone service to consumers. Mr. Dillon’s
statement that “wholesale sale of prepared wireless airtime are made to retailers” is not a fact, it is the
legal conclusion that is at the heart of whether the resell proviso applies. Mr. Dillon’s statement that
TracFone has no control over the prices set by its retail agents is uncontested by the City and has no
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material bearing on whether Tracfone is selling network telephone service directly to consumers when
its retail agents are involved.
The one fact in Mr. Dillon’s statement that supports the Tracfone position that it’s selling network
telephone service to its retail agents is the comment that the retail income from the retail agent’s sale
of airtime should not be considered income of Tracfone. This fact was recognized in a slightly different
form in the SJ Ruling that the retail agent is the source of income for Tracfone’s network telephone
service.4 Another fact in support of Tracfone’s position, also uncontested, is that retail agents in some
circumstances must give electronic notice to Tracfone at the sales register when a consumer purchases
an air card. See January 29, 20201 Ashpaugh Dec., par. 12. Both of these facts marginally support the
position that network telephone service is sold to retail agents. However, the facts are not significant
enough to “sufficiently rebut” as required by the Meyer case the City’s assertion that Tracfone has final
and ongoing control over consumer access to network telephone facilities and the associated provision
of the services available from those facilities as laid out in the network telephone service definition.
The nominal facts presented by Tracfone do nothing to establish or, more importantly suggest, that a
hearing on the nature of Tracfone’s services will result in any additional material evidence that would
be relevant to establishing whether the resell proviso applies to Tracfone.
In its reconsideration motion, Tracfone also tries to create a material question of fact over whether
Tracfone as opposed to its retail agents activates airtime cards. The SJ ruling recognized that Tracfone
and the City strongly disagree over who does the activation. However, the SJ ruling also noted that
this disagreement is based upon differing opinions about what activation means. There is no
disagreement between the parties as to how access to the network is controlled, which is the only part
of the activation issue that is pertinent to resolving the factual issue of whether Tracfone is selling
network telephone service to its retail agents. As outlined in the SJ ruling, there is no material
disagreement between the parties as to how the final steps to consumer network access are carried out.
When airtime cards are sold by a retail agent to a consumer, TracFone is notified electronically when
the purchase is scanned if this hasn’t been already done prior to purchase. After purchase, for what
Mr. Ashpaugh describes as the second step, the airtime cannot be used unless and until the consumer
contacts the Tracfone website by phone or website, at which point Tracfone assigns the phone to a
network carrier and sends a signa to the equipment making it available to send and receive wireless
calls. January 29, 2021 Asphpaugh Decl., par. 12. Tracfone at no point disputes the necessity of the
second step. Its sole dispute is that the second step qualifies as part of the “activation” of the consumer’s
cell phone. Whether or not that second step qualifies as “activation,” whatever that means to Tracfone,
4 More precisely, the SJ Ruling noted at p. 5-6 that the “sales price between Tracfone and its retailers and presumably
distributors includes the price of network telephone service.” This was written under the erroneous understanding that
airtime charges were sometimes combined with handset charges as discussed in the first section of this reconsideration
decision. With the proper understanding that airtime charges are always separate from handset charges, it must be
recognized that the sales price between Tracfone and its retailers doesn’t m erely “include” the price of network
telephone service that Tracfone receives, it is likely the entire source of income that Tracfone receives for the ultimate
sale of Tracfone’s service to the consumer.
SJ UPON RECONSIDERATION - 11
is irrelevant to whether Tracfone controls final and ongoing access to a telephone network to the
consumer, the dispositive factual issue for the resell proviso.
Ruling
Tracfone’s motion for reconsideration is granted in part. The SJ Ruling is overturned to the extent that
it finds gross proceeds from the sale of handsets subject to the RCW 35A.82.060 telephone utility tax.
That issue should be considered beyond the scope of the SJ Ruling and has the status of an unresolved
issue. The rest of Tracfone’s motion for summary judgment is denied.
DATED this 19th day of April 2021.
City of Renton Hearing Examiner
EXHIBIT E
PRE-HEARING ORDER
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THE HEARING EXAMINER OF THE CITY OF RENTON
RE:
TracFone Wireless, Inc.
Administrative Appeal
THIRD REVISED PRE-HEARING
ORDER
The schedule and procedural rules outlined below apply to the above-captioned appeal.
This prehearing order is based upon the prehearing conference conducted on April 26,
2021 at 9:00 am.
A. Document Distribution. All documents required by this Order shall be
emailed, mailed or delivered to the parties at the addresses below. All documents must
be received by the due dates set by this order. For mailed documents, documents shall
be deemed received three business days after mailing.
Hearing Examiner’s Office
Cynthia Moya
Renton City Clerk
1055 Grady Way
Renton, WA 98057
CMoya@rentonwa.gov
PRE-HEARING ORDER
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Appellant
Scott Edwards
Grant Degginger
Scott Edwards
Lane Powell, PC
1420 5th Ave., Suite 4200
Seattle, Washington 98101
EdwardsS@LanePowell.com
DeggingerG@lanepowell.com
TsuboiN@lanepowell.com
CraigA@LanePowell.com
City of Renton
Kari Sand
Kari Sand
Ogden Murphy Wallace
901 Fifth Ave., Suite 3500
Seattle, WA 98164-2008
ksand@omwlaw.com
kowens@omwlaw.com
B. Hearing Date. The appeal hearing will be held on May 27, 2021 at 8:30
am.
C. Exhibit Lists. The parties are required to exchange exhibit lists per the
schedule below. The exhibit lists shall list any documents, recordings, videos or
photographs that the parties intend on presenting at the appeal hearing. No exhibits
beyond those identified in the witness and exhibit lists will be admitted unless necessary
for reasonably unanticipated rebuttal or for other good cause. Exhibits not already
distributed must be exchanged contemporaneously with the final exhibit lists and
may be distributed by email.
D. Hearing Format. As identified in RMC 5-26-18B5, Tracfone has the
burden of proof in an administrative tax appeal. Consequently, the taxpayer shall have
first and last rights of presentation as identified in the following hearing format:
1. Tracfone’s opening and presentation of evidence.
2. City’s opening and presentation of evidence.
3. Tracfone’s rebuttal evidence.
4 City’s closing arguments.
PRE-HEARING ORDER
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5. Tracfone’s closing arguments.
E. Cross-Examination. All witnesses who present live testimony will be
subject to cross-examination. Declarations and other documents that would qualify as
testimony are admissible without a right of cross-examination unless a right to cross-
examine is asserted by email to all hearing parties within three calendar days of when
the document is disclosed in the exhibit lists. Documents qualify as live testimony if the
substantive content was prepared specifically for the appeal.
F. Witnesses. As confirmed by the City, Michael Crisp and Tamara Crisp
will be available for questioning by Tracfone at the appeal hearing. All other witnesses
allowed to testify are limited to those identified in the witness lists previously
exchanged by the parties.
G. Schedule. The following schedule applies:
5/20/20 Exhibit Lists and Prehearing Briefs (if any) due
5/27/20 Appeal Hearing, 8:30 am.
ORDERED this 12th day of May 2020.
City of Renton Hearing Examiner
EXHIBIT F
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.
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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.
TracFone Appeal – Final Decision
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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.
TracFone Appeal – Final Decision
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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
TracFone Appeal – Final Decision
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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.
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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.
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