HomeMy WebLinkAboutTracFone Reply 9.19.2022
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The Honorable Matthew J. Segal Department 3
SUPERIOR COURT OF WASHINGTON
FOR KING COUNTY
TRACFONE WIRELESS, INC., Petitioner, v. CITY OF RENTON, Respondent.
No. 21-2-08552-7 PETITIONER TRACFONE WIRELESS, INC.’S REPLY BRIEF IN SUPPORT OF ITS PETITION FOR WRIT OF REVIEW
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TRACFONE’S REPLY
The parties agree that the City of Renton was only entitled to impose municipal telephone
utility tax on TracFone if TracFone was engaged in the “telephone business”—a statutorily defined
term that appears in RCW 35A.82.060. This, in turn, depends on another question of law: whether,
by selling prepaid wireless airtime, TracFone “provid[ed] … access to a telephone network” under
RCW 82.16.010(7)(b)(ii). If the answer is no, TracFone was not subject to Renton utility tax.1
As explained in TracFone’s Opening Brief, the plain language of the statutes at issue here
make clear that only network carriers are engaged in the “telephone business,” because they own,
operate, and provide access to their telephone networks. It is undisputed that TracFone does not
own or operate any telephone networks. Opening Brief at 3. Thus, as a matter of law, Renton was
not authorized to impose municipal telephone utility tax on TracFone.
The City’s Response attempts to recast these legal questions as factual issues. For example,
the City claims that TracFone “does not seriously dispute the basic fact” that it provides “access
to a telephone network” when it sells prepaid wireless airtime. Resp. at 17 (emphasis added). This
assertion is false but revealing. In reality, of course, TracFone devoted nearly a dozen pages of its
Opening Brief to this issue, under this heading: “TracFone does not provide ‘access to a telephone
network,’ within the meaning of the controlling statutes, because it is not a network carrier.”
Opening Brief at 14-26 (emphasis added). The City ignores this argument because it is grounded
in statutory interpretation. By contrast, the City’s argument assumes that these statutory terms are
self-explanatory: TracFone must provide “access to a telephone network,” because it sells prepaid
wireless airtime, which enables people to make phone calls. Case closed.2
Although the City purports to engage in a “plain meaning” analysis of the term “access to
1 If, by contrast, the answer is yes, TracFone is subject to Renton municipal utility tax on the
portion of its retail sales of prepaid wireless airtime to Renton residents that qualifies as intrastate
toll telephone service—and downstream buyers are likewise subject to Renton utility tax on the
same portion of their own retail sales.
2 Even if the City were correct that this case turns on factual rather than legal questions, it
would not have been appropriate for the Hearing Examiner to award the City summary judgment
because a number of material factual issues are disputed. See Opening Brief at 13, n. 7.
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a telephone network,” it gets plain meaning wrong. The plain meaning of a statutory term is not a
naïve or acontextual reading, as if the term appeared in isolation on an index card. Plain meaning
incorporates not only “the text of the … provision in question,” but also “the context of the statute
in which that provision is found, related provisions, and the statutory scheme as a whole.” State v.
Ervin, 169 Wn.2d 815, 820 (2010) (en banc) (quoting State v. Jacobs, 154 Wn.2d 596, 600 (2005));
In context, it is clear TracFone is not a “telephone business” under state law, and does not “provide
access to a telephone network” by selling prepaid wireless airtime. Opening Brief at 14-26.
Finally, the City’s Response doubles down on its incoherent argument regarding the resale
proviso, which prohibits cities from imposing utility tax on “charges for network telephone service
that is purchased for the purpose of resale.” RCW 35A.82.060. As TracFone has already explained
at length, the City’s argument that TracFone is not entitled to the resale proviso in connection with
its wholesale sales is inconsistent and incoherent. Opening Brief at 26-31. While the City claims
that TracFone’s wholesale sales of prepaid wireless airtime to retailers do not fall within the resale
proviso because they are really sales of “plastic cards,” this theory would place these sales wholly
beyond the reach of municipal utility tax, because “equipment” is not subject to utility tax.
A. “Plain meaning” incorporates statutory context, structure, and purpose.
In its Response, the City sometimes argues that the Court must apply the “plain meaning”
of the statutory terms “telephone business” and “provid[e] … access to a telephone network.” See
Resp. at 2, 14-18, 20-21.3 TracFone agrees. Opening Brief at 15-16 (citing Dep’t of Ecology v.
Campbell & Gwinn, LLC, 146 Wn.2d 1, 9-10 (2002)). But the City misconstrues “plain meaning,”
which does not refer to a “common sense” reading of statutory terms in isolation. Resp. at 15.
As the Washington Supreme Court has explained, “plain meaning” incorporates not only
“the text of the … provision in question,” but also “the context of the statute in which that provision
is found, related provisions, and the statutory scheme as a whole.” Ervin, 169 Wn.2d at 820; see
3 As explained in Section C.3, below, the City’s reliance on “plain meaning” is selective. At
several points in its Response, the City relies on legislative history, which is only relevant where
a term remains ambiguous after a plain-meaning analysis. See, e.g., Resp. at 13, 20, 22-23.
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also State v. J.P., 149 Wn.2d 444, 450 (2003) (plain meaning “may be discerned ‘from all that the
Legislature has said in the statute and related statutes which disclose legislative intent about the
provision in question”). This guidance is consistent with that of United States Supreme Court. See,
e.g., Food & Drug Admin. v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 132-33 (2000);
Abramski v. United States, 573 U.S. 169, 180 (2014) (plain meaning includes “statutory context,
structure, history, and purpose”).
The reason a court should not “confine itself to examining a particular statutory provision
in isolation” is that “the meaning—or ambiguity—of certain words or phrases may only become
evident when placed in context.” Brown & Williamson, 529 U.S. at 132-33. For the same reason,
courts must also consider how “the meaning of one statute may be affected by other [legislative]
acts,” and should, whenever possible, read statutory terms to “create a symmetrical and coherent
regulatory scheme.” Id. (citing United States v. Estate of Romani, 523 U.S. 517, 530-31 (1998);
Gustafson v. Alloyd Co., 513 U.S. 561, 569 (1995)).
B. TracFone was not subject to Renton municipal telephone utility tax because it is not a “telephone business” under RCW 35A.82.060.
As explained in TracFone’s Opening Brief, the Legislature has only authorized Renton to
impose telephone utility taxes on persons engaged within the City in the “telephone business.” See
RCW 35A.82.060(1). The law defines “telephone business” as “the business of providing network
telephone services,” RCW 82.16.010(7)(iii)—or, in other words, providing “access to a telephone
network,” RCW 82.16.010(7)(ii). The precise meaning of these italicized terms is illuminated by
the authorizing statute, RCW 35A.82.060(1), which explains that cities like Renton cannot tax the
“portion of the network telephone service which represents charges to another telecommunications
company as defined in RCW 80.04.010.” This language demonstrates the Legislature’s intent that
only telecommunications companies could be subject to municipal utility tax—and even then, only
on a specified portion of their income. Opening Brief at 14-16.
In its Response, the City argues (1) TracFone must be engaged in the “telephone business,”
because it sells prepaid wireless airtime (Resp. at 15-17); (2) it is “absurd” to believe that the term
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“another telecommunications company” in RCW 35A.82.060(1) relates to and clarifies the term
“telephone business” within the same section of the same statute (id. at 19); and (3) in any event,
TracFone should be considered a “telecommunications company” because it has purportedly been
“recognized” as such by the FCC, and because it owns “facilities,” such as “airtime cards and SIM
codes” (id.). Each of these arguments is meritless.
The City’s Response also contains a subtle but significant distortion of the law, which is
repeated throughout the brief. The City claims TracFone “engages in telephone business because
it provides its customers access to network telephone service.” Resp. at 34 (emphasis added); see
also id. at 1-2, 5-8, 14-17, 22, 26. Indeed, the City has made “network telephone service” a defined
term, which it abbreviates as “NTS.” Id. at 1; see also id. at 2-5, 9, 11, 15, 17, 26-27. What the law
actually says, however, is that (1) “‘telephone business’ means the business of providing network
telephone service”; and (2) “‘network telephone service’ means the providing … of access to a
telephone network.” RCW 82.16.010(iii), (ii) (emphasis added). In other words, the law says that
to be a “telephone business,” a company must provide access to a “telephone network”; indeed,
providing access to a telephone network is what it means to provide “network telephone service.”
The City conflates “service” and “network,” and uses the misleading abbreviation “NTS,” because
the record shows that TracFone has no network facilities and cannot provide network access. See
Opening Brief at 3 (citing HEX 1049-50 (First Decl. of Chesley Dillon), ¶¶ 2-3, 12; HEX 3372
(Decl. of C. Dillon ISO Petition for Writ of Rev.), ¶ 2)).
1. “Telephone business” is synonymous with “telecommunications company” in
RCW 35A.82.060(1).
As noted above, the City claims TracFone “does not seriously dispute the basic fact” that
it provides “access to a telephone network” when it sells prepaid wireless airtime, which makes it
a “telephone business” for purposes of RCW 35A.82.060(1). Resp. at 17. But whether TracFone
provides “access to a telephone network” and qualifies as a “telephone business” is not a question
of fact. Rather, as TracFone has already explained at length, these are legal questions that must be
analyzed using accepted methods of statutory interpretation. Opening Brief at 16-19.
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At no point in this litigation—including in its Response—has the City ever made any legal
argument as to the meaning of these terms. Before the Hearing Examiner, the City asserted, without
elaboration, that TracFone “clearly engages in telephone business when it provides its end users
‘access to a telephone network,’ thereby enabling telephonic communication.” Id. at 16-17. In its
Response, the City asserts that TracFone’s interpretation of the relevant statutes “strains credulity,”
because the Legislature could have distinguished TracFone’s “business model” from that of the
network carriers but purportedly declined to do so. Resp. at 15-16.4
The City is wrong. In fact, the authorizing statute does distinguish between TracFone and
network carriers like AT&T and T-Mobile. In RCW 35A.82.060(1), the Legislature specified that
cities cannot tax the “portion of the network telephone service which represents charges to another
telecommunications company as defined in RCW 80.04.010.” In keeping with the true definition
of plain meaning, this language must be read within its statutory context. By referencing “another
telecommunications company” in RCW 35A.82.060(1), the authorizing statute makes clear that
this term is synonymous with the term “telephone business” as used in the same subsection of the
same statute. Contrary to the City’s Response, there is nothing “absurd” about interpreting these
two terms in context and in concert; indeed, this is the only way to read statutory text. Ervin, 169
Wn.2d at 820 (plain meaning includes “the context of the statute in which that provision is found,
related provisions, and the statutory scheme as a whole”).
2. TracFone is not a “telecommunications company.”
After arguing that the term “telecommunications company” in RCW 35A.82.060(1) should
be read out of the statute, the City then asserts that TracFone is a “telecommunications company”
under RCW 80.04.010(28) because (1) it is supposedly “recognized” as such by the FCC; and (2)
it owns “facilities,” such as “handsets and airtime cards and SIM codes.” Resp. at 18-19. Wrong.
First, as TracFone has already explained, it does not hold an FCC operating license, which
4 The City’s repeated references to TracFone’s “business model” are a strange non sequitur.
See, e.g., Resp. at 9, 11-12, 15-16, 23-25, 27, 31. Municipal utility taxes are imposed on income
(within statutory limits), not on “business models.” RCW 35A.82.060.
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is necessary for a company to be considered a facilities-based network carrier. Opening Brief at
25 (citing 18 U.S.C. § 1029(e)(10) and HEX 1332 (Second Dillon Decl.), ¶ 25)). This distinguishes
TracFone from network carriers, which are licensed by the FCC. Before the Hearing Examiner,
and again in its Response, the City has cited Garth Ashpaugh’s declaration as evidence that the
FCC “recognizes” TracFone as a telecommunications company. Resp. at 18. It is not clear what
Ashpaugh may have meant by this, but it remains undisputed that TracFone does not hold an FCC
operating license, and is not a facilities-based network carrier. Opening Brief at 25.5
Second, the term “facilities” in RCW 80.04.010 clearly refers to transmission facilities, as
opposed to the City’s preferred definition, which could include literally anything. In its Response,
the City lists the following as examples of “facilities”: (1) “handsets” (i.e., telephones); (2) airtime
cards; and (3) SIM codes. Resp. at 19. The Hearing Examiner offered his own similarly expansive
definition of “facilities,” in which he included “websites, phone lines, and the offices and property
necessary to support them.” Opening Brief at 17-18 (citing HEX 1397).
These definitions of “facilities” are so broad as to render the term meaningless. If “facilities
used to provide telecommunications” could include telephones, websites, codes, offices, and other
unspecified “property,” there would have been no need for the Legislature to reference “facilities”
in RCW 80.04.010(28), since every active company owns some physical or intellectual property.
See Opening Brief at 18 (a statute should be construed so that no part will be rendered superfluous).
A better approach is to read RCW 80.04.010(28) in conjunction with the preceding section, RCW
80.04.010(27), which defines “telecommunications” to mean “transmission of information.” With
this context, the statutory term “facilities used to provide telecommunications” obviously refers to
network facilities. TracFone does not own, operate, or maintain any such facilities (Opening Brief
5 Along with Garth Ashpaugh’s declaration, the City also cites to Exhibit 5 to his declaration
as showing that TracFone is “recognized” as a telecommunications company by the FCC. But this
exhibit is just a set of public comments that TracFone submitted in response to an FCC Notice of
Proposed Rulemaking—which affirm that TracFone is a non-facilities-based reseller of airtime.
HEX 409-503; see also Opening Brief at 25, n. 17.
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at 3), and is not “telecommunications company” under Washington law.6
3. The City’s cases, including the 2010 TracFone E-911 tax case, are irrelevant.
Although the City’s Response cites several cases, none supports its arguments here. Most
notably, the City quotes at length from TracFone Wireless v. Dep’t of Revenue, 170 Wn.2d 273
(2010). See Resp. at 3, 17, 19, 23-28. As TracFone has already explained, however, that case had
nothing to do with either municipal telephone utility tax or the proper interpretation of RCW
82.16.010. Opening Brief, 17-18. Rather, the issue in the prior case was whether, under the specific
statutes authorizing the State of Washington to collect E-911 excise tax, that tax applied to prepaid
wireless airtime. 170 Wn.2d at 277. The court analyzed statutory terms like “all radio access lines”
and “radio communications service company” that have no application here. Id. at 280-297.7
While the City concedes that the 2010 TracFone Wireless opinion involved a different tax
and different statutes, it asserts that “the arguments made by TracFone [in the earlier] case mirror
those in the present case,” and that the earlier case is therefore “instructive” (Resp. at 24), or even
“controlling” (id. at 26). This is nonsense. Here, TracFone has consistently argued that (1) its sales
of prepaid wireless airtime were not subject to municipal utility tax; and (2) in any event, Renton
could not impose this tax on wholesale sales of prepaid wireless airtime because these sales were
made for purposes of resale. These arguments and concepts were not even referenced—let alone
6 The City also cites the definition of “facilities” in RCW 80.04.010(13), but misconstrues
this definition, partly through selective quotation. Resp. at 19. Read in full, this provision defines
“facilities” to mean “lines, conduits, ducts, poles, wires, cables, cross-arms, receivers, transmitters,
instruments, machines, appliances, instrumentalities and all devices, real estate, easements,
apparatus, property and routes used, operated, owned or controlled by any telecommunications
company to facilitate the provision of telecommunications service” (emphasis added).
This definition does not support the City’s position. First, the specific examples listed in this
provision (poles, transmitters, etc.) indicate the Legislature was referring to transmission facilities.
Second, this definition limits “facilities” to items that are used by a “telecommunications company
to facilitate the provision of telecommunications service.” Thus, this definition of “facilities” is
constrained by the definitions of “telecommunications” and “telecommunications company”—the
latter of which excludes TracFone for the reasons explained in this section.
7 The E-911 tax at issue in the 2010 TracFone case is a state excise tax that is assessed to
provide emergency services relating to 911 calls, as authorized by RCW 82.14B.030.
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analyzed or adjudicated—in the 2010 case,8 and to the extent that the 2010 TracFone opinion has
any relevance here, it supports TracFone’s position. See Opening Brief at 17-18 (the 2010 opinion
recognizes that TracFone “does not own or operate any network wireless facilities”).
The other cases cited by the City are no more persuasive. The only legal authority the City
has ever cited to support its interpretation of RWC 35A.82.060 is a vague, uncodified legislative
statement reproduced in a footnote in Western Telepage v. City of Tacoma, 140 Wn.2d 599 (2000),
which alludes generally to the Legislature’s intent “to place telephone companies and nonregulated
competitors … on an equal excise tax basis.” Id. at 603 n.2. As TracFone explained in its Opening
Brief, this forty-year-old statement predates seismic regulatory changes that followed the breakup
of the Bell System in 1984. Opening Brief at 19-20. Moreover, even if this language were removed
from its historical context, it would not support the City’s sweeping claim that the Legislature “has
granted cities broad, express authority to tax telephone businesses for intrastate services.” Resp. at
11 (citing Western Telepage, 140 Wn.2d at 603 n.2). The Legislature has said no such thing.9
4. The text of the Renton Municipal Code is irrelevant because the City’s taxing
power is limited by the Legislature’s authorizing statute.
The City’s Response includes dozens of citations to and quotations from RMC 5-11-1, the
Renton Municipal Code provision that supposedly entitled the City to impose municipal utility tax
on TracFone. See Resp. at 1, 5, 9, 12-16, 18, 23, 26. But the Legislature has only authorized Renton
to impose municipal utility taxes within parameters set by RCW 35A.82.060. See Opening Brief
at 14, and Section C.2 below (cities can only tax as authorized by the Legislature). Thus, to the
extent the Municipal Code can be read as awarding the City greater taxing power than is permitted
8 None of the following terms appear in the 2010 TracFone opinion: “telephone business,”
“telephone network,” “network telephone services,” “telecommunications company,” “network
carriers,” “utility,” “municipal.” 170 Wash.2d 273-302.
9 The City also cites Sprint Int’l Communications Corp. v. Dep’t of Revenue, 154 Wn. App.
926, 936 (2010) as illustrating “the Legislature’s intent for a broad reach.” Resp. at 13. Sprint was
a case about state sales tax. It says nothing about the taxing power of cities—and, in any event, the
passage quoted by the City does not support its “broad authority” argument. See Resp. at 13.
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by state law, the Code is invalid. See, e.g., Community Telecable of Seattle, Inc. v. City of Seattle,
164 Wn.2d 35 (2008) (en banc) (city lacked authority to define and tax Internet service as “network
telephone service” where statutory definition in RCW 82.04.065(27) excluded Internet service).
Most notably, the City quotes from and relies upon RMC 5-11-1(A)(2)’s lengthy definition
of “telephone business.” Resp. at 12-13. This differs from the concise definition in the authorizing
statute, RCW 82.16.010(7)(b)(iii) (“‘telephone business’ means the business of providing network
telephone service”). The Renton Municipal Code’s definition of “telephone business” is irrelevant
here, because the City cannot unilaterally expand its own taxing authority beyond the Legislature’s
authorization. Of course, the definition in RMC 5-11-1 could be relevant here if it were narrower
than that in the Legislature’s authorizing statutes, but this is not the City’s position.
5. The Hearing Examiner erred in relying on the Garth Ashpaugh and Nate Malone
declarations—regardless of whether they were admissible.
The City argues that the Hearing Examiner did not err in relying on the declarations of the
City’s witnesses, Garth Ashpaugh and Nate Malone, because the hearing process is governed by
looser evidentiary rules than apply in court. Resp. at 31. In the process, however, the City misstates
the law. Although the City quotes from RCW 34.05.452(1), which says that the presiding officer
in an administrative hearing may admit evidence of the kind “on which reasonably prudent persons
are accustomed to rely in the conduct of their affairs,” it does not quote RCW 34.05.452(2), which
clarifies that “if not inconsistent with subsection (1) of this section, the presiding officer shall refer
to the Washington Rules of Evidence as guidelines for evidentiary rulings” (emphasis added).
In any event, the evidentiary questions are less important than the weight that the Hearing
Examiner accorded to the Ashpaugh and Malone declarations, which was wholly unjustified given
the declarants’ lack of relevant knowledge and/or expertise. As explained in TracFone’s Opening
Brief, this Court reviews the Hearing Examiner’s factual determinations to determine if they were
supported by “substantial evidence.” Opening Brief at 12 (quoting RCW 7.16.120(5)). Neither of
the City’s declarations provides substantial factual evidence to support the Ruling.
Garth Ashpaugh was not primarily a fact witness, but a purported “expert” on TracFone’s
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“business model,” which he supposedly understood based on his experience with other companies,
as well as his interpretation of TracFone contracts. Opening Brief at 24. While Ashpaugh admitted
he is not an expert on Washington tax law—or even a lawyer—he nonetheless attested that in his
“expert opinion,” TracFone “is properly taxable as a telephone business” under RCW 82.16.010,
which is obviously a question of law and outside the scope of proper expert testimony (even for a
qualified expert, which Ashpaugh was not). Id. To the extent Ashpaugh’s declaration did address
factual questions, it was often misleading or flat-out wrong. Id. at 23-30. Yet the Hearing Examiner
cited Ashpaugh’s declaration extensively, and adopted much of its flawed reasoning—including
Ashpaugh’s confusing, baseless theory that TracFone sells “plastic cards” at wholesale. Id.
After TracFone challenged the Hearing Examiner’s reliance on Ashpaugh’s interpretation
of various TracFone contracts, the Hearing Examiner claimed that he had not relied on Ashpaugh’s
legal analysis, and had interpreted the relevant contract provisions himself. HEX 1500 (Partial S.J.
Ruling Upon Reconsideration). But the Hearing Examiner’s Ruling contradicts this assertion. The
Ruling explicitly adopted what Ashpaugh found in reviewing the contracts, and does not analyze,
quote from, or cite the contracts themselves. Opening Brief at 25-26 (citing id.). Nonetheless, the
City still insists that the Hearing Examiner “relied on the specific language of [the] contracts—not
Mr. Ashpaugh’s interpretation.” Resp. at 32. This finds no support in the Ruling.
As for Nate Malone, the City’s own tax and license manager, his declaration provides no
foundation for his assertions about TracFone’s “business model”—including his groundless legal
conclusions that (1) retailers that buy wireless airtime from TracFone are actually “retail agents”
of TracFone; and (2) TracFone is a “telephone business” under RMC 5-11-1. Opening Brief at 22-
23. The City barely defends Malone’s declaration on its merits, but instead objects that it was not,
technically, inadmissible. See, e.g., Resp. at 33 (“TracFone … posits that Mr. Malone’s declaration
contained [1] information outside his personal knowledge and [2] conclusions of law,” but “these
arguments fundamentally misunderstand the … rules governing administrative hearings”).10
10 In particular, the City criticizes TracFone’s citation of In re Baroni, 2015 WL 6956664, at
*10 (9th Cir. Nov. 10, 2015) on the ground that this is “an unpublished federal bankruptcy case.”
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But admissibility is not the real issue. What matters is whether the Hearing Examiner was
justified in relying on a pair of declarations that are replete with groundless legal conclusions and
unsupported factual claims. This question answers itself. The relaxed rules of evidence that govern
administrative hearings do not give the presiding officer a license to uncritically adopt the amateur
legal reasoning and foundationless factual allegations of one party’s witnesses.11
6. The City continues to misstate the taxable incident.
In its Opening Brief, TracFone noted in a footnote that “the City has erroneously claimed
that ‘Renton has taxing authority to impose a 6% utility tax on telephone businesses, and the proper
tax measure is 100% of gross income from all sources.’” Opening Brief at 30 n.21 (quoting HEX
116-120)). TracFone explained that City’s claim is contradicted by RCW 35A.82.060, which limits
the measure of tax to “gross revenue derived from intrastate toll telephone service.” Id. (emphasis
added). The City’s Response ignores this point entirely, but reiterates that “the proper tax measure
is 100% of gross income from all sources.” Resp. at 12 (emphasis added). This is manifestly false.
C. TracFone’s wholesale sales fall within the resale proviso.
The Legislature has barred cities from imposing municipal utility tax on “charges for
network telephone service that is purchased for the purpose of resale.” RCW 35A.82.060 (emph.
added); Opening Brief at 26-31. The City argues TracFone’s wholesale sales of prepaid wireless
airtime to retailers do not fall within this resale proviso because “retailers do not purchase ‘network
telephone service’ [from TracFone] for the purpose of reselling it.” Resp. at 21. Instead, retailers
supposedly buy plastic airtime cards, which the City characterizes as “equipment.” Resp. at 4. Not
Resp. at 33. TracFone cited In re Baroni for the uncontroversial proposition that a witness should
offer a foundation for personal knowledge. Opening Brief at 22-23. Apparently, the City disagrees.
11 To show that administrative hearings are governed by a looser set of evidentiary rules, the
City relies upon Nisqually Delta Ass’n v. City of DuPont, 103 Wn.2d 720, 733 (1985). Importantly,
however, the Nisqually court emphasized that the hearsay evidence at issue had “circumstances of
reliability” and was “the best evidence reasonably obtainable,” and noted that the presiding officer
in an administrative hearing “shall” consider the Rules of Evidence. Id. at 733-34. Nisqually does
not hold or imply that anything goes in an administrative hearing.
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only is the City’s “plastic cards” theory nonsensical on its face, but it would—if valid—exclude
TracFone’s wholesale sales from the scope of utility tax.
1. The City’s argument is hopelessly inconsistent.
In the first 19 pages of the Response, the City argues it was authorized to impose municipal
utility tax on TracFone because TracFone provides customers with “access to a telephone network”
by selling prepaid wireless service. Resp., 1-19. The City seeks to impose utility tax on TracFone’s
revenues “from all sources,” including its wholesale sales of prepaid wireless service to retailers.
See, e.g., Resp. at 12. Then, abruptly, the City reverses itself, claiming retailers “did not purchase
‘network telephone service’” from TracFone, but instead purchased “prepaid airtime cards” (Resp.
at 21 (emphasis added)), which the City characterizes as “equipment” (id. at 4).
The City cannot have it both ways. Sales of telecommunications equipment are not subject
to municipal utility tax. Opening Brief at 30-31. The City effectively concedes this point. See, e.g.,
Resp. at 20-23. If, when TracFone sells prepaid wireless airtime to retailers, it is actually selling
“equipment,” these sales are not subject to the tax assessed by the City. The City and the Hearing
Examiner were both led astray by Garth Ashpaugh, who invented the idea that TracFone is selling
“equipment” to retailers at wholesale, and thereby inadvertently excluded all such sales from the
scope of the authorizing statute, RCW 35A.82.060(1). Opening Brief at 29-31.
In reality, TracFone sells prepaid wireless airtime to retailers at wholesale for the purpose
of resale. This is reflected by the resale certificates TracFone collects from wholesale buyers, and
by the receipt that the City’s witness Nate Malone collected when he bought airtime at Fred Meyer.
This receipt, which includes line items for sales tax and E-911 tax, shows that it is the retailers—
not TracFone—that collect revenue and taxes on retail sales. Opening Brief at 4 (citing HEX 2260).
2. The resale proviso is neither a “loophole” nor an “exemption.”
A major theme of the City’s Response is that it would be unfair to apply the resale proviso
to TracFone’s wholesale sales. The City argues that TracFone is trying to exploit a “loophole” in
the law. Resp. at 3; see also id. at 22-23. The City describes the resale proviso as an “exemption”
that must be narrowly construed. Id. at 22-23.
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But the resale proviso is not a “loophole,” and there is nothing unfair about its application
to wholesale sales of prepaid wireless airtime. Although “loophole” implies that there is something
abnormal about the exclusion of certain economic activity from municipal taxation, this gets things
backwards. In fact, cities in Washington must have legislative authorization to tax. “It is a legal
tenet, universally accepted, that the power of a … municipal corporation to tax is not an inherent,
but a delegated, power.” Love v. King County, 181 Wash. 462, 468 (1935). Cities have “no inherent
power to levy taxes”; rather, their powers are “derived through legislative grant, and are strictly
construed.” State ex rel. Tacoma School Dist. No. 10 v. Kelly, 176 Wash. 689, 690 (1934).
Nor is the resale proviso an “exemption.” Whereas an exemption allows certain categories
of taxpayers to avoid a particular tax (e.g., the exemption of charitable organizations from property
and income taxes), a proviso is a clause that clarifies the taxable incident. For example, in City of
Seattle v. T-Mobile West Corp., 199 Wn. App. 79 (2017), the court explained that the limitation of
municipal utility taxes to revenue from intrastate communications is a proviso, not an exemption,
because it “explains how [an earlier] clause applies in particular circumstances.” Id. at 83-84. The
clause at issue here is similar: the resale proviso does not exempt any taxpayers from municipal
utility taxes; instead, it clarifies the taxable incident by explaining that municipal utility taxes do
not apply to revenues from sales of network service made for purposes of resale.12
3. Legislative history is irrelevant because the resale proviso is unambiguous.
As noted above, the City sometimes argues that the Court must apply the “plain meaning”
of contested statutory terms. When it comes to the resale proviso, however, the City adopts a new
approach, turning to “legislative history” to support its argument that the proviso should not apply
to TracFone’s wholesale sales. Resp. at 22-23. According to the City, the legislative history of the
proviso demonstrates that its purpose was “to avoid double taxation, not create a loophole.” Id.
12 While the City cites several cases, including Columbia Irrig. Dist v. Benton County, 149
Wash. 234 (1928), as holding that “taxation is the rule and exemption is the exception,” none of
these were decided in the present context, in which a city seeks to demonstrate that it is not bound
by a clear proviso limiting its taxing authority. Resp. at 16, 25. In the municipal context, taxation
is not the rule, because cities do not have plenary taxing power.
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As explained above, the resale proviso is not a “loophole”; rather, the text makes clear that
the Legislature intended to limit the taxing power of municipalities. In addition, the City’s reliance
on legislative history here is improper because the statutory text is unambiguous. In attempting to
determine legislative intent, courts may only resort to legislative history if a statute is “susceptible
to more than one reasonable interpretation.” Ervin, 169 Wn.2d at 821. The resale proviso, which
prohibits cities from imposing municipal utility tax on “charges for network telephone service that
is purchased for the purpose of resale,” is not ambiguous. RCW 35A.82.060. Indeed, the City does
not even argue that it is ambiguous. See, e.g., Resp. at 22-23.
Although the parties disagree about the application of the resale proviso to this case, their
disagreement is not based on any ambiguity in the statute. Rather, the parties disagree as to whether
TracFone’s wholesale sales are sales of prepaid wireless airtime (TracFone’s position), or sales of
worthless “plastic cards” (the City’s position, adopted by the Hearing Examiner). Thus, even if the
legislative history cited by the City appeared relevant on its face, the Court would have no reason
to consider that history in interpreting the clear language of the resale proviso.
4. The “shrinkwrap” cases do not support the City’s position.
The City also argues that TracFone’s invocation of the resale proviso here is inconsistent
with arguments it has made in other litigation regarding so-called “shrinkwrap” agreements, which
become effective when a buyer opens a product’s packaging. Resp. at 21-22. In those cases, courts
have accepted TracFone’s position that terms of service in such shrinkwrap agreements are binding
on companies that purchase trademarked TracFone handsets in bulk from retailers, “unlock” these
phones by altering TracFone’s copyrighted software, then ship and sell them abroad. See TracFone
Wireless, Inc. v. Anadisk LLC, 685 F.Supp.2d 1304 (S.D. Fla. 2010); TracFone Wireless, Inc. v.
Bequator Corp., Ltd., 2011 WL 1427635 (S.D. Fla. April 13, 2011) (cited in Resp. at 21-22);13 see
13 The City also quotes a third case, In re TracFone Unlimited Serv. Plan Litig., 112 F. Supp.
3d 993 (N.D. Cal. 2015), in which the court made no ruling as to the enforceability of TracFone’s
shrinkwrap contracts, but merely noted, in the process of approving a class action settlement, that
an arbitration provision in these agreements might threaten or limit plaintiffs’ recovery if the case
were fully litigated and the arbitration clause were enforced. Id. at 999.
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also TracFone Wireless, Inc. v. Pak China Group, Ltd., 843 F.Supp.2d 1284 (2012). The City
argues that TracFone’s position in these shrinkwrap cases “directly” contradicts its arguments here,
because these cases purportedly show TracFone “enforces its terms of service … on its customers”
in one context, but “rejects the relationship with its end users” in another. Resp. at 22.
In reality, there is no inconsistency, because the shrinkwrap cases were argued and decided
in an entirely different legal and factual context. As noted above, the defendants in these cases did
not buy handsets from TracFone itself, but from retailers. In seeking to enforce its terms of service
against defendants, TracFone did not claim defendants were the phones’ first true buyers; rather,
it argued the terms of service are binding even on downstream purchasers. The courts considered
but rejected the theory that the defendants were protected by the “first-sale” doctrine, which shields
certain downstream purchasers from IP liability—not because the courts concluded that defendants
were the phones’ “first” buyers, but because defendants altered the phones after purchasing them
from retailers, which renders the first-sale doctrine inapplicable.14
The City’s reliance on the shrinkwrap opinions is representative of its interpretive approach
generally. Taken out of context, snippets from these cases may appear to be superficially relevant
(at least insofar as they reference TracFone and retailers). As soon as one reads the cases, however,
it becomes clear that they are inapposite or even undermine the City’s position, since they establish
that TracFone sells handsets to retailers for purposes of resale to consumers. This type of slapdash
reasoning—relying on cases decided in a completely different legal context, while misstating their
significance—is no substitute for careful analysis of controlling statutes.
14 In both Anadisk and Bequator, the court noted that “the first sale doctrine does not apply
when an alleged infringer sells trademarked goods that are materially different than those sold by
the trademark owner.” 685 F.Supp.2d at 1313-14; 2011 WL 1427635, at *7; see also Pak China
Group, 843 F.Supp.2d at 1296-97 (first-sale doctrine does not apply to altered goods).
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CONCLUSION
For all the reasons set forth above and in TracFone’s Opening Brief, the Court must reverse
the Ruling of the Renton Hearing Examiner and award summary judgment to TracFone.
DATED: September 19, 2022
Counsel for Petitioner TracFone Wireless, Inc. certify that the body and footnotes of this
Reply Brief do not exceed 6,000 words. See Rule of Appellate Procedure 18.17(c).
LANE POWELL PC
By:
Grant S. Degginger, WSBA No. 15261
Scott M. Edwards, WSBA No. 26455
Taylor Washburn, WSBA No. 51524
1420 Fifth Avenue, Suite 4200
P.O. Box 91302
Seattle, Washington 98111-9402
Telephone: 206.223.7000
deggingerg@lanepowell.com
edwardss@lanepowell.com
washburnt@lanepowell.com
Attorneys for Petitioner TracFone Wireless, Inc.
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CERTIFICATE OF SERVICE
I hereby certify under penalty of perjury of the laws of the State of Washington that on the
date listed below, I caused to be served a copy of the foregoing document to the following persons
via in the manner indicated:
Cynthia Moya Renton City Clerk 1055 So. Grady Way Renton, WA 98057 cmoya@rentonwa.gov cityclerk@rentonwa.gov
by CM/ECF
by Electronic Mail
by Facsimile Transmission
by First Class Mail
by Hand Delivery
by Overnight Delivery
Kari L. Sand Julia Norwood Ogden Murphy Wallace P.L.L.C. 901 Fifth Avenue, Suite 3500 Seattle, WA 98164 ksand@omwlaw.com jnorwood@omwlaw.com
by CM/ECF
by Electronic Mail
by Facsimile Transmission
by First Class Mail
by Hand Delivery
by Overnight Delivery
DATED this 19th day of September, 2022.
Angela Craig