HomeMy WebLinkAboutTracfone Final Decision
TracFone Appeal – Final Decision
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THE HEARING EXAMINER OF THE CITY OF RENTON
RE: TracFone Wireless, Inc.
Administrative Appeal
FINDINGS OF FACT, CONCLUSIONS
OF LAW AND FINAL DECISION
OVERVIEW
TracFone is entitled to a refund of $66,513.50 with per diem interest of $5.20 accruing
from 5/27/21. The TracFone utility tax assessment is modified as set forth in Ex. H2.
The TracFone appeal has raised multiple issues and lead to multiple revisions. The
parties were ultimately able to agree upon the resolution to most of the issues raised.
The only outstanding issue subject to reasonable disagreement is whether TracFone
sales to its retailers is exempt from the utility tax under a utility tax resale exemption
authorized by RCW 35A.82.060, i.e. “charges for network telephone service that is
purchased for the purpose of resale.” That issue was resolved in summary judgment.
The summary judgment ruling of this appeal concluded that TracFone was not selling
its airtime service to retailers for resale, because TracFone never actually sells airtime
service to its retail agents. Between TracFone, its retail agents and the consumer, only
TracFone has the right to provide airtime service (aka network telephone service) and
that service is only provided by TracFone to the consumer.
Beyond summary judgment issues, there was only one remaining issue upon which the
parties could not agree. Specifically, whether the City’s estimates of TracFone gross
TracFone Appeal – Final Decision
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income should have been reduced by a retail margin factor. TracFone did not give the
City any data on how much it made from sales to its retail agents and distributors.
Instead, TracFone only provided information on total company sales and the proportion
of revenues from TracFone direct sales to its consumers verses total company revenues.
From this information, the City determined that over the audit period, TracFone made
roughly $4 from sales to its distributors and retail agents for every dollar made from
direct sales to its consumers. The City was able to estimate TracFone direct sales to
consumers within the City of Renton from zip code sales data provide by TracFone.
The City then applied a direct consumer sales/sales to retail agents/distributers
multiplier (i.e. about 4) to convert direction consumer sales to sales to retail
agents/distributers.
TracFone asserted that the multiplier used to convert direct consumer sales to retail
agent/distributor sales was inaccurate because it failed to incorporate the mark up in
sales price that its retail agents added to the airtime cards that TracFone sold to them.
This Decision finds that position unavailing, since the markup was never included in the
multiplier to begin with. The revenue sales used to derive the multiplier were based
upon the revenues received by TracFone, not its retail agents. As previously noted, in
simplified terms, the multiplier assigns $4 of retail agent/distributor income to TracFone
for every $1 of direct consumer sales income. The retail markup added by TracFone’s
retail agents is entirely irrelevant to this conversion factor.
The only other significant issue raised at the appeal hearing was the late payment
interest rate. The City adopted a new interest rate after the end of the audit period but
before TracFone paid the amount under appeal. The new interest rate is substantially
less than the rate that applied before. The City only applied the new, lower rate
prospectively from the date of adoption. TracFone asserted that the rate should apply to
all of its accrued tax liability. Case law comports with the TracFone position.
According to that case law, late payment interest is a remedy that is applied at the time
of assessment and is therefore to be entirely based upon the rate in effect at the time of
assessment. The City ultimately agreed with this position and the newly adopted, lower
rate is what is applied by this Decision to the entirety of TracFone’s utility tax liability.
Testimony
A computer generated transcript has been prepared of the appeal hearing to provide an
overview of the hearing testimony. The transcript is provided for informational
purposes only as Appendix A. Since the transcript is computer generated, it is not 100%
accurate, but does provide a good indication of what testimony was presented during the
hearing.
TracFone Appeal – Final Decision
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Exhibits
Exhibit C -: All exhibits identified in the City’s Exhibit List dated May 20, 2021, using
the numbering of that list. All City exhibits are preceded with “C,”, e.g. “Exhibit C1.”
Exhibit T -: All exhibits identified in TracFone’s Exhibit list dated May 20, 2021,
except Exhibits 31and the terms and conditions1 of Ex. 37. All TracFone exhibits are
preceded with “T,” e.g. “Exhibit T1.”
Prehearing Exhibits: All prehearing briefs and motions along with associated exhibits.
No exhibit numbers are assigned. These exhibits will be identified by the title of the
document.
Exhibit H -: These are additional exhibits admitted after the appeal hearing, as follows:
Exhibit H1: June 3, 2021, email chain from Kari Sand to hearing parties.
Exhibit H2: June 7, 2021, email from Scott Edwards with attached 2021
“TracFone Calculation of Refund Due,” no retail margin included.
Glossary
Audit Period: The period of time subject to the City’s audit of TracFone, which was
January 1, 2007, through May 31, 2013.
City: City of Renton.
COL: Conclusion of Law.
Direct Sales: Network telephone sales from TracFone directly to the consumer.
Final Determination: The $336,442.72 tax assessment under appeal, issued on
October 17, 2019.
FOF: Finding of Fact.
Non-Direct Sales: Sales made by TracFone to its Retail Agents and distributors.
1 At hearing Mr. Edwards argued that the terms and conditions were presented in support of his retail
margin argument. The terms and conditions were excluded on the basis t hat they were not relevant to that
argument.
TracFone Appeal – Final Decision
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Primary Tax Amount: The base tax amount due from application of the City’s 6% tax
rate, exclusive of penalties and interest. The Final Determination Primary Tax Amount
was $147,108.72. Prior to the appeal hearing the City reduced the Primary Tax Amount
to $126,701.21 after it discovered errors in its computation of Direct Sales.
Retail Agents: Companies that purchase air cards from TracFone and sell them to
consumers. Examples include Walmart, Circle K and Fred Meyer.
SJ Ruling: The summary judgment ruling issued for this appeal, dated March 12,
2021.
Tr.: Transcript, followed by transcript page number.
TracFone: TracFone Wireless Inc., Appellant.
TRS: Tax Recovery Services, LLC. TRS conducted the audit under appeal. TRS
works as a contractor for the City.
TRS Multiplier: The conversion factor formulated by TRS to convert total Direct
Sales within the City to total Non-Direct Sales within the City.
Findings of Fact
Procedural:
1. Appellant. TracFone Wireless Inc., 9700 NW 112th Ave., Miami, FL 33178.
2. Hearing. A virtual hearing on the TracFone appeal was held via Zoom on May
27, 2021, at 8:30 am.
3. Appeal Description. TracFone challenges a $336,442.72 utility tax assessment
issued by the City for TracFone airtime sales within the City of Renton. The Audit
Period was for January 1, 2007, through May 31, 2013. Ex. C7. The assessment was
first issued by the City on February 14, 2019, for a Principal Tax Amount of
$147,108.72, $36,7777.30 in penalties and $142,108.72 in interest. Ex. C5. As
authorized by RMC 5-26-18A, TracFone requested a correction and conference on the
amount of the assessment. A conference was held and the City subsequently issued a
Final Determination on the assessment on October 17, 2019. The Final Determination
affirmed the February 14, 2019, assessment and added another $10,297.66 in penalties
and interest to arrive at the $336,442.72 Final Determination. Ex. C7. TracFone’s
appeal challenges the October 17, 2019, Final Determination. TracFone filed its appeal
on November 6, 2021. Ex. T23.
TracFone Appeal – Final Decision
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TracFone’s written appeal was focused upon two legal issues, specifically (1) that the
City does not have statutory authority to impose a utility tax on the type of telephone
business conducted by TracFone; and (2) even if TracFone is subject to the utility tax,
most of its revenues are exempt from the tax under a state statute resale exemption
clause.
4. Payment of Assessment. TracFone paid the $336,442.75 assessment under
protest on November 4, 2019. Tr. 29.
5. Final Determination Adjustments. On May 15, 2021, the City sent a $95,334.64
partial refund to TracFone for the $336,442.75 TracFone paid on November 4, 2019.
Ex. C23. The refund served as a correction of two errors. TRS acknowledged that it
had omitted the population from the 98178 zip code in its population estimates and also
that it had not applied a newly adopted late payment interest rate that went into effect on
January 1, 2016. Ex. C12. The refund total included “applicable interest of
$4,078.64.” Ex. C23.
TRS had initially miscalculated the refund amount due to miscommunication with
Renton on the outstanding interest paid. TRS advised TracFone it was recommending a
refund of $80,958. Ex. C12. The actual amount of the refund, as previously noted, was
$95,334.64. Ex. C23. Ms. Crisp testified that the reason for the increase in refund was
because her $80,958 refund estimate was based upon an interest schedule that Renton
ultimately didn’t use to issue its final TracFone assessment. Tr. 20. Ms. Crisp had
mistakenly believed that Renton’s Final Determination was based upon a corrected
interest schedule that she had sent after the one used by Renton to assess its Final
Determination. Id.
6. Summary Judgment. The two legal issues raised in the TracFone appeal were
resolved in the City’s favor by a summary judgment ruling issued on March 12, 2021.
Both parties moved for summary judgment on January 29, 2021, and oral argument was
heard on February 23, 2021. The summary judgment ruling determined that (1)
TracFone’s gross revenues from sale of airtime was subject to the utility tax authorized
by RCW 35A.82.060 and (2) that TracFone’s gross revenues from sales to its Retail
Agents and distributors were not exempt under a proviso of RCW 35A.82.060
exempting purchases of network telephone service for resale. Upon TracFone’s motion
for reconsideration, the summary judgment ruling was revised in a reconsideration
decision dated April 19, 2021. The reconsideration decision acknowledged that sales of
TracFone handsets was not subject to the scope of the summary judgment motions or
the relief requested by the parties. TracFone’s request for reconsideration on other
issues addressed in the summary judgment ruling were denied.
TracFone Appeal – Final Decision
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7. Appeal Hearing Issues. At the appeal hearing, TracFone challenged how the
City computed TracFone’s gross income and how it computed late payment interest.
On the gross income issue, TracFone contended that the gross revenue assigned to it by
the City should be reduced by the retail markup added to it by its Retail Agents. The
City took the position that the gross revenue figures given to it by TracFone didn’t
include the retail markup so no reduction was warranted. The merits of the markup
issue are addressed in FOF No. 8 below.
On the late payment interest issue, TracFone asserted that all past due interest should
have been computed pursuant to the rates imposed by a City ordinance that went into
effect after much of the late interest had accrued. The City took the position that the
newly adopted rates only applied prospectively to accrued late interest after adoption of
the ordinance. After the close of the hearing, the City agreed with TracFone’s position
that the newly adopted rates should apply to all late payment interest. TracFone and the
City further agreed that under the gross income amounts assigned by the City, the late
payment interest under the newly adopted rate would total $12,085.01 (down from
$156,556.67 in the Final Determination) and late penalties would total $43,078.41 (up
from $35,777.30 in the Final Determination). Ex. H2.
The two appeal hearing issues raised by TracFone were not identified in its written
appeal, Ex. T23. The City did not object to the two issues being beyond the scope of
the appeal.
8. TracFone Gross Income Methodology. TRS reasonably and rationally estimated
TracFone’s gross income for the Audit Period. Schedule 4 of Exhibit C19 provides the
most useful mathematical depiction of the TRS methodology for calculating gross
income for each month of the Audit Period. The narrative below explains the basis for
the computations.
The TRS methodology is somewhat complex because TRS had to estimate gross sales
from incomplete information. TracFone was unable to provide the City with direct data
on how much it made in gross sales of network telephone service within the City of
Renton. According to TracFone testimony, it does not keep records of sales made
within Renton city limits as opposed to sales without. Tr. 73-742. Instead, TracFone
provided revenue data on its Direct Sales per zip code partially or entirely within the
2 More specifically, Mr. Dillon testified that TracFone doesn’t have records of when Retail Agents sell its
products or when consumers use it. In contrast, Ex. C6, which was apparently written by TRS, provides
that for prepaid utility taxes, companies typically provide state-wide gross income amounts and those
figures are then proportionately assigned to the city imposing the tax. According to Ex. C6, TracFone
“declined” to provide that type of information. TracFone did not specifically identify why it does not
keep statewide sales figures and/or why it didn’t want to provide those figures to TRS.
TracFone Appeal – Final Decision
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City. See Ex. C5, Data Sheet; Ex. C14. TracFone was also able to provide TRS with
data on its yearly total gross income verses its total Direct Sales income. See Ex. C17.
From this data, TRS was tasked with formulating two major conversions. First, it had
to convert the Direct Sales per zip code to Direct Sales within the City. Second, it then
had to convert the Direct Sales within the City to Indirect Sales within the City. Adding
the Direct and Indirect Sales resulted in the taxable gross income subject to the City’s
6% utility tax. The conversions are more specifically addressed below.
A. Direct Sales Conversion. To convert the Direct Sales per zip code into
Direct Sales for the City, TRS divided the total City population by the total
population of all zip codes partially or entirely within the City of Renton . It
then multiplied this factor against the total TracFone direct network
telephone sales of all zip codes partially or entirely within the City of Renton
to determine how much of those Direct Sales were made within the City of
Renton. See Ex. C19, Schedule 2; Schedule 4, Column D. As a simplified
example, TRS determined that if half of the City’s population was located
within the zip codes located partially or completely within the City, then
approximately half of the TracFone sales within those zip codes were made
within the City. TRS was able to derive population data for the zip codes
and city population for each of the seven years of the Audit Period and
applied a different multiplier for each of those seven years based upon the
differences in population ratios for each of those years. Id; Ex. C22.
B. Non-Direct Sales Conversion. To convert Direct Sales to Non-Direct Sales,
TRS aligned the proportion of Non-Direct to Direct Sales within Renton to
the proportion that applied to the company as a whole. TracFone provided
TRS with the company-wide proportion of Non-Direct Sales verses Direct
Sales for each of the seven years of the Audit Period. See Ex. C6, C17 and
C18. The proportion overall very roughly averaged out to about 4:1 of
Non-Direct verses Direct Sales for the duration of the Audit Period.
Applying this ratio, TRS would multiply the Direct Sales for a particular
year by about 4 to arrive at its estimate for Non-Direct Sales.
In practice, TRS applied a ratio specific to each audit year (the TRS
Multiplier) to come up with an Non-Direct Sales estimate for each of the
Audit Period years. The TRS Multiplier varied from 2.70 to 4.88. Ex. C19,
Schedule 4. TRS then added the Direct Sales figures to the estimated Non-
Direct Sales to arrive at a total gross income amount for each of the audit
years3. See Ex. C19, Schedule 4.
3 Direct Sales were actually converted to Non-Direct Sales on a monthly basis, but the TRS Multiplier
was kept the same for the entire year.
TracFone Appeal – Final Decision
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C. Exclusions from Direct Sales. Before multiplying the Direct Sales figures to
arrive at the yearly Non-Direct Sales, the Non-Direct Sales were reduced to
exclude sales revenues that were not subject to the utility tax, specifically
data usage, interstate network service and sales of handsets and accessories.
See Ex. C19, Schedule 4, Columns B and C and Schedules 7 and 8.
TracFone provided the data necessary for this determination. See Ex. C15
and C16. Interstate calls are exempt from the utility tax by operation of
RCW 35A.82.060. According to the testimony of Ms. Crisp, uncontested by
TracFone, data usage is exempt by operation of the Internet Tax Freedom
Act. Tr. 12. The parties were in agreement that TracFone revenue from sale
of handsets and accessories (other than air cards) was not subject to the
utility tax. See Ex. C6, p. 3. TRS asserts that the sales of handsets and
accessories were not included in the gross income it computed for the utility
tax. Id. TracFone has not disputed this position.
D. Retail Margin Deduction. One of the two most contested factual issues
raised by TracFone during the appeal hearing was whether Non-Direct Sales
should be reduced by a retail margin4 factor. It is determined that Non-
Direct Sales need not be adjusted for retail margin, since the margin was
never included in the revenue sales reported by TracFone to begin with.
At the hearing, TracFone spent considerable time demonstrating the fairly
self-evident principle that retailers who sell TracFone airtime and TracFone
handsets sell them at a higher price than they paid to TracFone to purchase
them. Mr. Edwards summed up his position at hearing as “[a] retail
number, multiplied by something by a factor, gets you a retail end result.”
There are two ways to interpret Mr. Edwards’ argument, neither of which is
compelling.
The first way to assess his position is to translate his summation into the
City’s terminology, i.e. “a Direct Sales number, subject to the TRS
Multiplier, gets you a Direct Sales end result.” Cast in this light, Mr.
Edwards is pointing out that TracFone airtime sold directly to consumers is
sold at different prices than that sold by TracFone’s Retail Agents such as
Walmart and Circle K. Presumably, TracFone sells its airtime at higher
prices directly to consumers than what it sells to Retail Agents so it won’t
undercut the sales of its Retail Agents. While this may be true, there is no
need to add an adjustment for the mark up made for TracFone Direct Sales
because that markup is already built into the TRS Multiplier. With the
4 “Retail margin” and “retail markup” have been used interchangeably in this Decision.
TracFone Appeal – Final Decision
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rough approximation that the TRS Multiplier overall is 4:1, it is to be
understood to provide that for every dollar TracFone makes for the prices it
sells directly to the consumer, it makes four dollars for the lower prices at
which it sells to its Retail Agents and distributers. The fact that TracFone
may sell its units at a higher price in its Direct Sales than Non-Direct Sales
is already empirically factored into the TRS Multiplier. It should further be
noted that there is no inconsistency used in the units of measurement in the
TRS Multiplier. TRS was not comparing inches to miles, it was comparing
taxable revenues to taxable revenues5.
The second interpretation of Mr. Edwards’ position was articulated by the
City, which focused on the TRS Multiplier as opposed to TracFone’s
monthly Direct Sales. As previously noted, the multiplier was derived by
dividing TracFone’s company-wide Non-Direct Sales revenues by its
company-wide Direct Sales revenues. The City understood TracFone to be
asserting that its company-wide Non-Direct Sales revenues leads to an
artificially high TRS Multiplier because those revenue figures include the
retail markup. Tr. 62. It that is indeed the TracFone position, the City
effectively derailed it from this one question to Mr. Dillon:
Ms. Sand:
So, is it your testimony that this, that airtime revenue [used for the TRS
Multiplier] includes retail margins from third-party retailers?
Mr. Dillon:
No.
Tr. 102.
5 At hearing, Mr. Dillon testified that the company-wide revenues of TracFone included proceeds from
other than phones, airtime and SIM cards. He noted that TracFone’s revenues arose from “some”
different revenue streams, such as internet advertising. Tr. 4 7. If these other revenue streams comprised
a significant part of company-wide sales that TRS used for the TRS Multiplier, then those sales would
render the multiplier inaccurate if those other revenue streams were not reflected in the Direct Sales data.
Given that TRS has the burden of proof, see COL No. 3, i n the absence of objection from TracFone, it is
presumed that if the other revenue streams were included in the company-wide revenues used for the TRS
Multiplier, the amount of those other revenue sources was not materially significant.
TracFone Appeal – Final Decision
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As testified by Ms. Crisp, see Tr. 28, TracFone would have no reason to
maintain records of revenue that its retailers make from their retail markup
of TracFone airtime cards. There is no basis for offsetting a retail margin in
the TRS Multiplier because the margin was never included in the multiplier
to begin with. The TracFone position, as understood by the City, is devoid
of merit.
9. TracFone Business Model. At hearing, TracFone did not present any contract
that established a materially different business model for some of its revenue than that
established by the City in its summary judgment motion.
The SJ Ruling determined that TracFone operated under a business model that subjected
the full amount of its airtime sales to the utility tax authorized by RCW 35A.82.060.
The parameters of the business model, in turn, were largely based upon a declaration
submitted by Garth Ashpaugh. Mr. Ashpaugh based his assessment of TracFone’s
business model upon a handful of contracts between TracFone and its Retail Agents.
The SJ Ruling recognized that it was possible that TracFone may derive some of its
revenues from contracts that set a different business model than that found by Mr.
Ashpaugh, as follows:
In his declaration, Mr. Ashpaugh does not expressly state that he believes
the contracts to be representative of all the carrier contracts entered into
with TracFone. If TracFone has some contractual arrangements that
materially differ, it is free to bring those up during the final appeal hearing
to argue that some of its contractual arrangements should be excluded from
the utility tax due to the RCW 35A.82.060 resale exemption.
SJ ruling, p. 3-4.
In short, TracFone was still free to present contracts at hearing establishing that some of
its revenues were acquired under a different business model than that found by Mr.
Ashpaugh and thus may not be subject to the RCW 35A.82.060 utility tax. The material
facts of why the revenues of the Ashpaugh derived business model were subject to
RCW 35A.82.060 were laid out at Page 9 of the April 19, 2021, reconsideration
decision to the SJ Ruling. Those material facts established that under the contracts
reviewed by Mr. Ashpaugh, TracFone and not its Retail Agents served as the telephone
network service provider to the consumer. None of the contracts presented by TracFone
at the hearing changed TracFone’s role as the ultimate service provider to the
consumer6. Per the reasoning of the SJ Ruling and associated ruling upon
6 This includes the QVC contract referenced by Mr. Dillon in his testimony. Tr. 67. Under the QVC
contract, TracFone sells directly to the consumer instead of to its Retail Agents or distributors. This is a
TracFone Appeal – Final Decision
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reconsideration, all the revenue derived from the contracts presented by TracFone
(excluding handset sales etc.) are subject to the RCW 35A.82.060 utility tax.
10. Late Payment Interest. As confirmed at hearing by Ms. Crisp, with the FOF No.
5 Final Determination adjustments, TRS imposed a late interest charge of 12 percent
pursuant to former RMC 5-11-2 for late payments accruing prior to January 1, 2016,
and the late interest rates required by RCW 82.32.050 for late payments accruing after
that date. Tr. 29. Mr. Malone, the City’s tax and license manager, testified that it was
his understanding that the RCW 82.32.050 late payment interest rate only applied to
past due amounts accruing after the rate was adopted and went into effect, which was
January 1, 2016, under Renton Ordinance No. 5756. Tr. 115. Subsequent to the close
of the appeal hearing, the City acknowledged that the late payment interest adopted by
Ordinance No. 5756 (imposed by RCW 82.32.050) should apply to all of the tax
liability accrued by TracFone during the Audit Period and that the City was in error for
imposing 12% interest on any of that liability. See Ex. H1. On June 7, 2021, the parties
then submitted an agreed upon late payment schedule that would apply if the City’s
position on the primary tax amount ($147,108.72) prevailed. Ex. H2. The agreed upon
interest totaled $12,085.01. Id.
11. Penalties. The parties are in agreement that the late payment penalties are
governed by RMC 5-26-14 and that the penalties total $43,078.41.
The penalty imposed in the Final Determination was based upon the version of RMC 5-
11-2 that was in effect immediately prior to the January 1, 2016, effective date of
Chapter 5-26 RMC. Tr. 116. That penalty was assessed at the maximum total amount
allowed, 25% of the primary tax amount assessed in the Final Determination, equaling
$36,7777.30. As noted in FOF No. 5, $5,101.84 of this penalty amount was refunded to
TracFone as a result of the population error identified in that FOF, reducing the total
penalty amount to $31,675.46.
As identified in FOF No. 10, the City ultimately agreed that the version of RMC 5-11-2
in effect immediately prior to the January 1, 2016, effective date of Chapter 5-26 RMC
did not apply to any assessment of late payment interest. In turn, TracFone agreed that
the penalties of former RMC 5-11-2 also did not apply and that RMC 5-26-14 governed
penalties. See Ex. H2. This agreement resulted in an increase in penalty amount from
the FOF No. 5 $31,675.46 amount to the final agreed upon amount of $43,078.41. Ex.
H2.
different business model than that reviewed by Mr. Ashpaugh, but it does not change the material facts,
i.e. TracFone maintains its role as the provider of network telephone service to the consumer.
TracFone Appeal – Final Decision
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12. Final Agreed Upon Tax Liability. The City and TracFone have agreed upon a
tax refund due of $66,513.50 plus $5.20 per diem overpayment interest accruing from
May 27, 2021, if this Decision concludes that no retail margin adjustment is warranted
as described in FOF No. 8.
As identified in FOF No. 10, after the close of the appeal hearing the City agreed that it
had assessed an incorrect amount of late payment interest. The City stated it agreed
with TracFone’s late payment methodology. As a result, the Examiner asked the parties
to submit an agreed upon tax liability schedule based upon an Examiner determination
that no retail margin adjustment was warranted7. The agree upon tax liability schedule
was submitted by TracFone on June 7, 2021. Ex. H2. The schedule includes the agreed
upon penalty and late payment interest identified in FOF No. 10 and 11.
13. TRS Credibility. TracFone has devoted a significant part of its challenge
attacking the credibility and expertise of TRS. The information provided by TracFone
has not proven to make a material difference in any conclusions drawn regarding the tax
liability ultimately imposed by this Decision. TracFone has had ample opportunity to
identify any shortcomings in the work done by TRS. Ultimately, as noted in the
Conclusions of Law, TracFone has the burden of proof in establishing any errors in the
methodology or computations of TRS. TracFone has not identified any grey areas in
methodology or computation where the credibility or expertise of TRS would have
made a substantial difference in assessing accuracy or reasonableness. It is clear that
TRS was saddled with the responsibility of extrapolating and interpolating a significant
amount of data provided by TracFone. TracFone has not identified any methodology
that would have provided more accurate results than that presented by TRS.
Even if TRS expertise and competence were a material factor, TracFone has not
established that TRS was lacking in either. As testified by Mr. Malone, who has years
of experience conducting tax audits, an audit is an interactive process that involves
numerous adjustments as the City and taxpayer work together in reaching a Final
Determination. Tr. 112. Throughout the appeal proceeding, TracFone constantly
referred to the errors identified in FOF No. 5, presumably to cast doubt as to the
accuracy of its assessment. However, there is nothing to suggest that errors of this
nature were unreasonable for an assessment of this complexity. Notably, TracFone
produced no witnesses of its own to claim that these errors were unusual or below the
standard of care expected of a tax audit. Most important, TracFone ultimately has not
identified any other potential errors in the TRS assessment.
7 TracFone had already submitted a tax liability schedule based upon an Examiner determination that a
retail margin adjustment was warranted, although the schedule didn’t include an agreed upon penalty
amount.
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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.
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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
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the tax.” With this statutory background, the State Supreme Court upheld the 50%
apportionment as follows:
Passing now to the question of apportionment at 50 per cent where appellants'
books and the vagaries of navigation on the Columbia make a precise
mathematical formula impossible, we consider that the state acted fairly and
reasonably. The burden of segregating taxable income from exempt income rests
upon the taxpayer.
Thus, where an apportionment cannot, because of one reason or another, be
made with reasonable mathematical certainty from the books and records of the
taxpayer , and the tax commission, acting with reasonable prudence and
circumspection with regard to all of the circumstances of the taxpayer's
business, declares an apportionment which it deems to be reasonable, the
burden then rests upon the taxpayer to show that the apportionment fixed by the
tax commission is unreasonable, excessive, or has been arbitrarily and
capriciously achieved. Nothing in the record shows us that the 50 per cent
apportionment where employed by the tax commission was either unreasonable,
excessive, arbitrary or capricious.
64 Wn.2d at 339-40 (citations omitted).
The TRS methodology was much more precise and data based than assigning a 50%
apportionment where data was unavailable, as was done in Smith. For the reasons
identified in the FOF, the TRS/City methodology and final adjusted and agreed upon
computations were not unreasonable, excessive, arbitrary or capricious.
4. Primary Tax Amount is $126,701.21. The Final Determination properly
calculated the Primary Tax Amount as revised in FOF No. 5. The revised primary tax
amount was properly calculated as $126,701.21.
As identified in Finding of Fact No. 7, TracFone’s challenge to the Primary Tax
Amount was focused upon how TRS estimated revenues from Non-Direct Sales.
Specifically, as outlined in Finding of Fact No. 8, TracFone asserted that the TRS
Multiplier for gross income was inaccurate because it failed to address the retail markup
added by TracFone’s Retail Agents. As outlined in Finding of Fact No. 8, the TRS
Multiplier did not need to include the markup because the TracFone revenues used to
compute the multiplier didn’t include markup revenues. In short, the multiplier was not
found to be inaccurate due to failing to include a retail markup factor. TracFone did not
identify any other potential or actual material inaccuracy in the TRS estimates of
TracFone gross income or any other part of TRS computations for the Primary Tax
Amount.
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The record clearly establishes that TRS methodology used the best and most accurate
information available to it to compute primary tax income. TracFone has not identified
any compelling alternative methodology to arrive at a more accurate assessment.
TracFone has not made any showing that the TRS computation was unreasonable,
excessive, arbitrary or capricious. For these reasons, the TRS estimate for the primary
tax amount is found to be sufficiently accurate and appropriate for setting the utility tax
liability of TracFone for the Audit Period at issue.
5. Late Payment Interest Totals $12,085.01. Late payment interest for the Audit
Period totals $12,085.01. This a substantial reduction from the $152,556.67 late
payment interest assessed in the Final Determination and the $86,810.02 late payment
interest imposed in the revised assessment identified in FOF No. 5.
As noted in FOF No. 7, one of the two appeal hearing issues raised by TracFone was
whether 12% late payment interest from former RMC 5-11-2 applied to any of the
utility tax debt that accrued from the Audit Period. It is concluded that none of that
accrued debt is subject to the 12% interest rate. All of the accrued debt is subject to the
interest rates imposed by RCW 82.32.050(2), which the parties agree to be $12,085.01.
The 12% interest rate of RMC 5-11-2 was repealed by Renton Ordinance No. 5944 in
November 2019. Ordinance No. 5944 went into effect after TracFone paid off the
assessment under review in October 2019. However, effective January 1, 2016, Renton
adopted Ordinance 5756. Ordinance 5576 imposed a much lower interest rate that was
generally applicable to most if not all Renton taxes, expressly including utility taxes. In
short, the 12% interest rate of RMC 5-11-2, which only applied to the City’s utility tax,
conflicted with the much lower interest rate adopted by Ordinance 5756. For the
reasons outlined below, it is concluded that: (1) the lower interest rate of Ordinance No.
5756 supersedes the 12% interest imposed by RMC 5-11-2; and (2) the lower interest
rate adopted by Ordinance 5756 applies to all of TracFone’s accrued tax liability from
the Audit Period, including debt accruing prior to the January 1, 2016, effective date of
Ordinance No. 5756.
A. RMC 5-11-2 Interest Superseded by Ordinance 5756. As previously noted,
the Ordinance No. 5756 interest rate is substantially less than the RMC 5-
11-2 interest rate. The Ordinance No. 5756 interest rate prevails as a matter
of legislative intent.
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The 12% interest rate adopted into RMC 5-11-2 was adopted by Renton
Ordinance No. 5367 in 2008. Ordinance 5367 adopted RMC 5-11-2B,
which provided that “…any late payment of utility tax shall bear interest at
the rate of 12% per annum until paid.” This provision was repealed by
Renton Ordinance No. 5944 in November 2019.
Ordinance No. 5756, with an effective date of January 1, 2016, adopted
Chapter 5-26 RMC, the “Tax Administrative Code.” RMC 5-26-2 provided
that “…the provisions of this chapter shall apply with respect to the taxes
and fees imposed by Chapter 5-5 (Business Licenses), 5-6 (Admission Tax),
5-8 (Gambling Tax), 5-11 (Utility Tax), and 5-25 (Business and Occupation
Tax Code).” (emphasis added). RMC 5-26-11A provided that late payment
interest was to be governed by RCW 82.32.050. RCW 82.32.050(2)
imposes late interest at “an average of the federal short-term rate as defined
in 26 U.S.C. Sec. 1274(d) plus two percentage points.” In 2007 the RCW
82.32.050(2) interest rate was 7% and this amount steadily declined to over
subsequent years down to 2% for the years 2012 through 2016. See Ex.
C20.
In short, as outlined in the two preceding paragraphs, the late payment
interest rate imposed by RMC 5-26-11A conflicted with the late payment
interest imposed by RMC 5-11-2 from January 1, 2016 (the effective date of
RMC 5-26-11A) through November 2019 (the date the 12% interest rate
was repealed). RMC 5-26-11A was the more general of the two conflicting
provisions, since it applies to several City types of taxes whereas RMC 5-
11-2 only applies to utility taxes. The RMC 5-26-11A tax was also the
most recently adopted late payment interest for utility taxes, since it went
into effect in 2016 and the 12% rate went into effect in 2008.
Fortunately, there is case law that directly addresses conflicting statutory
provisions in circumstances where the most recently adopted statute was
also the more general of the two. As summarized in one court opinion:
Under the general-specific rule, a specific statute will prevail over a
general statute. Wark v. Wash. Nat'l Guard, 87 Wn.2d 864, 867, 557
P.2d 844 (1976) ("It is the law in this jurisdiction, as elsewhere, that
where concurrent general and special acts are in pari materia and
cannot be harmonized, the latter will prevail, unless it appears that
the legislature intended to make the general act controlling."). As
this court recognized in Wark, "It is a fundamental rule that where
the general statute, if standing alone, would include the same matter
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as the special act and thus conflict with it, the special act will be
considered as an exception to, or qualification of, the general
statute, whether it was passed before or after such general
enactment." Id.; see State v. Conte, 159 Wn.2d 797, 803, 154 P.3d
194, cert. denied, 552 U.S. 992 (2007). Furthermore, if the general
statute was enacted after the specific statute, this court will construe
the original specific statute as an exception to the general statute,
unless expressly repealed. Wark, 87 Wn.2d at 867 ("If it was passed
before the general statute, the special statute will be construed as
remaining an exception to its terms, unless it is repealed by express
words or by necessary implication."); State ex rel. Dep't. of Pub.
Serv. v. N. Pac. Ry., 200 Wash. 663, 668, 94 P.2d 502 (1939) ("`It is
elementary that a general statute or rule, though subsequently
enacted or promulgated, does not affect a special statute or rule.'"
(internal quotation marks omitted) (quoting In re W. Barton St.
Sewer, 163 Wash. 645, 647, 1 P.2d 858 (1931))).
Residents v. Site Evaluation Council, 165 Wn. 2d 275, 309 (2008)(emphasis
added).
As discussed in the Residents case, specific code provisions prevail over the
general even if the general is the later adoption, unless contrary to
legislative intent. For late interest payments, it must be concluded that the
legislative intent in adopting Chapter RMC 5-26 was to have a uniform
code of taxation apply to City taxes. The last whereas clause to Ordinance
No. 5756, which adopted Chapter 5-26, provides that “the Council wishes
the City to administer all tax codes of the City including Chapter 5-5, 5-6,
5-7, 5-8, 5-11 as well as 5-25 consistently.” The Council followed through
on this intent by expressly subjecting all of its tax codes to Chapter 5-26 in
RMC 5-26-2. It would be contrary to this intent to construe RMC 5-11-2 as
still applying a yearly 12% tax after the adoption of Chapter 5-26 RMC.
Indeed, there is no apparent reason why the Council would want to subject
late utility payments to a higher interest rate than any of its other taxes. The
retention of the 12% interest rate after the adoption of Chapter 5 -26 RMC
appears to have been an oversight, as evidenced by the fact that the City
Council ultimately repealed the 12% tax by Ordinance No. 5944 in
November 2019. For these reasons, it is concluded that the City Council
did not intend the 12% interest rate to remain in place upon the effective
date of Chapter 5-26 RMC. The 12% interest rate is found to be implicitly
repealed upon the effective date of Chapter 5-26 RMC.
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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
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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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