HomeMy WebLinkAbout04-14-2021 - Ogden Murphy email RE: In re TracFone Wireless, Inc. CAUTION: This email originated from outside the City of Renton. Do not click links, reply or open attachments unless you know the content is safe.
Good afternoon, Examiner Olbrechts:
The City also prefers to wait until after issuance of your reconsideration ruling before scheduling a prehearing conference.
Thank you,
Kari L. Sand | Attorney
Ogden Murphy Wallace P.L.L.C.
901 Fifth Avenue, Suite 3500 Seattle, WA 98164
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From: Phil Olbrechts <olbrechtslaw@gmail.com>
Sent: Wednesday, April 14, 2021 8:38 AM
To: Edwards, Scott M. <EdwardsS@lanepowell.com>
Cc: CityClerk <CityClerk@rentonwa.gov>; Cynthia Moya <CMoya@rentonwa.gov>; Kari L. Sand <ksand@omwlaw.com>; Kenya C. Owens <kowens@omwlaw.com>; Degginger, Grant <DeggingerG@lanepowell.com>;
Docketing <Docketing@lanepowell.com>; Tsuboi, Norma <TsuboiN@lanepowell.com>; Craig, Angela <CraigA@lanepowell.com>
Subject: Re: In re TracFone Wireless, Inc.
Thank you to both parties for your comments on the handset issue. As I mentioned in my prior email, I have no problem in limiting the sj ruling to gross income from airtime and excluding
proceeds from handset sales. My preference was to base that decision upon the record as opposed to having to resort to stipulation by the parties. From my preliminary review it appears
that Paragraph 24 of Mr. Dillon’s declaration takes care of that very well. Based on that paragraph alone, I should have no problem limiting the sj ruling to airtime sales. I should
have a complete ruling on all the reconsideration issues by early next week. I leave it up to the parties whether they want to schedule a prehearing conference now for later next week
or to wait until the sj ruling is issued.
On Tue, Apr 13, 2021 at 4:57 PM Edwards, Scott M. <EdwardsS@lanepowell.com <mailto:EdwardsS@lanepowell.com> > wrote:
Mr. Olbrechts,
We write in response to your email of Wednesday, April 7, 2021, asking the parties to identify where in the administrative record it is established that handsets are sold separately
from airtime.
As explained below, the administrative record establishes that handsets are sold separately from airtime in (1) the Second Declaration of Chesley Dillon of TracFone; (2) the Circle
K and Safeway retail distribution agreements; and (3) the two Fred Meyer receipts reflecting that Nate Malone bought a handset and airtime separately in two different transactions on
September 15, 2020, and that Fred Meyer charged him E-911 tax for the latter but not the former.
Unfortunately, this issue was confused by the declaration of Garth Ashpaugh, which misleadingly defines handsets and “plastic airtime cards” “collectively” as “equipment.”
1. The record shows that handsets are sold separately from airtime.
A. In his declaration dated February 12, 2021, Chesley Dillon attested:
Separate from TracFone’s sales of prepaid wireless airtime, TracFone makes wholesale and retail sales of handsets and accessories. The Renton utility tax assessment issued by TRS did
not impose Renton utility tax on any of TracFone’s sales of handsets or accessories.
Second Dillon Decl., ¶ 24.
B. The Retail Distribution Agreement between TracFone and Circle K lists in two separate sub-paragraphs the wholesale prices and MSRP for handsets (¶ 2(b)), on the one hand,
and airtime (¶ 2(c)), on the other. See Ashpaugh Decl., Ex. 3 at TF_000725-26. The same is true of TracFone’s agreement with Safeway. Id. at TF_000785.
C. The fact that handsets are sold separately from airtime is also demonstrated by the two separate receipts reflecting Nate Malone’s purchases from Fred Meyer on September 15,
2020. These receipts reflect two distinct transactions:
* In the first transaction, completed at 12:25 pm, Mr. Malone purchased a handset for $19.99, and was charged $2.00 in sales tax, for a total charge of $21.99.
* In the second transaction, completed at 12:29 pm, Mr. Malone purchased an airtime card for $19.99, and white grapes for $3.19. The receipt for this second purchase
reflects that Mr. Malone was charged $2.00 in sales tax and $0.95 in E-911 tax, for a total charge of $22.94 excluding the grapes. (Food is exempt from sales tax and is not subject
to E-911 tax, so the taxes were on the airtime only.)
Second Degginger Decl., Ex. 10.
The reason for the different tax treatment is that the “seller” of “prepaid wireless telecommunications service” in a “retail transaction” (in this case, Fred Meyer) must charge both
sales tax and E-911 tax, whereas the retail sale of “competitive telephone service”—which includes handsets—is subject to sales tax only. These two receipts show that the airtime and
handsets were sold separately by Fred Meyer and taxed differently.
Mr. Malone’s Declaration also describes his separate purchases of a handset and an airtime card, and attaches a copy of the airtime card as an exhibit, demonstrating that he purchased
the airtime separate from the handset. See Malone Decl., ¶9 and Ex. 3.
D. There is no contrary evidence in the record. In other words, the record contains no evidence that TracFone-branded handsets are sold with airtime included.
2. This issue was confused by Mr. Ashpaugh’s declaration.
We recognize that Mr. Ashpaugh’s declaration is confusing. In paragraph 10, which you reference, Mr. Ashpaugh claimed that he had “reviewed TracFone’s business model, including agreements
between TracFone and retailers,” and asserted that:
[u]nder these retail distribution agreements, the retailers purchase handsets and plastic airtime cards (collectively, “equipment”) from TracFone to sell to the public.
Ashpaugh Decl., ¶ 10.
Mr. Ashpaugh’s use of the term “equipment” to “collectively” define both handsets and “plastic airtime cards” is inaccurate and misleading, and has no basis in law or the agreements
that he supposedly reviewed. While Mr. Ashpaugh claimed that he based the conclusions in paragraph 10 of his declaration on his review of “agreements between TracFone and retailers,”
none of the agreements attached to his declaration define “equipment” at all, let alone to “collectively” include “plastic airtime cards.” See Ashpaugh Decl., Ex. 3.
To the contrary, as noted above, several of the agreements that Mr. Ashpaugh claims to have reviewed make explicit that handsets and airtime were priced and sold separately as different
“products.” For example, the Retail Distribution Agreement between TracFone and Circle K lists in two separate sub-paragraphs the wholesale prices and MSRP for handsets (¶ 2(b)), on
the one hand, and airtime (¶ 2(c)), on the other. See Ashpaugh Decl., Ex. 3 at TF_000725-26. The same is true of TracFone’s agreement with Safeway. Id. at TF_000785.
Other agreements are simply general form agreements, are not specific to the type of product purchased or the vendor. This includes, for example, the Sears K Mart Universal Terms and
Conditions (id. at TF_000740) and the Walmart Supplier Agreement (id. at TF_000794)neither of which makes any reference to handsets or airtime (let alone the defined term “equipment”
to “collectively” include both handsets and airtime cards).
The fact that Mr. Ashpaugh confused this issue should not be terribly surprising. As TracFone has previously emphasized, Mr. Ashpaugh admits he is not an expert in Washington tax law,
and he likely did not understand the legal significance of his lumping airtime cards in with handsets and defining them both as “equipment.” Nor, for that matter, does Mr. Ashpaugh’s
declaration state that he has any personal knowledge of TracFone’s business. However, the record does contain Mr. Asphaugh’s admissions that he has never has audited TracFone. Second
Degginger Decl., Exhibit 7 (P. 62 of Ashpaugh Decl.). The absence of an evidentiary foundation for Mr. Ashpaugh’s opinions resulted in the current confusion and speculation.
3. Gross income from sales of handsets and airtime.
As you have correctly noted, Renton’s summary judgment briefing did not distinguish between gross income from handset sales versus that from airtime cards. Confusion on this point
may have been compounded by the City’s assertion that, if TracFone met the definition of a “telephone business,” the Renton Municipal Code imposed tax “on six percent (6%) of its total
gross income,” which blurs the distinction between handset income and airtime income. City SJ Mot. at 5. Moreover, the City’s motion fails to describe how the assessment was computed.
Although the assessment was prepared and issued by TRS following a six-year audit conducted by TRS, the City did not present testimony from either of TRS’s principals on summary judgment
to explain how the assessment was computed.
However, the First Declaration of Chesley Dillon describes the sales data that TRS requested from TracFone:
TRS requested and received data from TracFone regarding TracFone’s income from retail sales of prepaid wireless airtime to buyers in specified zip codes. Initially TRS requested retail
sales data for the zip codes 98055, 98056, 98057, and 98059. After receiving that data, TRS asked for retail sales to zip code 98078, which TracFone also provided.
First Declaration of Chesley Dillon, ¶ 9 (emphasis added). Likewise, the Declaration of Thomas Hilton reflects that the City’s assessment asserted tax on a portion of the estimated
retail sales price of third party retailers sales of airtime to residents of Renton, which did not include sales of handsets or accessories. Hilton Decl., Ex. B. And as noted above,
paragraph 24 of the Second Dillon declaration expressly states that the “Renton utility tax assessment issued by TRS did not impose Renton utility tax on any of TracFone’s sales of handsets
or accessories.”
4. Clarification of the Activate ruling.
You have described Activate as holding that “sales of handsets do not qualify as competitive telephone service if they are not charged separately from network telephone service.” This
is not an accurate summary of the court’s opinion.
Activate had nothing to do with “network telephone service,” which is not referenced in the opinion. Nor, for that matter, was it a case about “sales” of handsets. Activate did not
buy, own, or sell airtime—and although Activate did sell some handsets, these sales were not at issue in the case, as there was no dispute about their tax treatment. See Activate, Inc.
v. Washington Dep’t of Revenue, 150 Wash.App. 807, 811 (2009) (noting that Activate charged and collected sales tax when it sold phones, “but it did not charge tax on the phones it gave
away free of charge”).
Rather, the question in Activate was whether use tax could be assessed on handsets that Activate gave away (rather than sold) as part of a promotion to induce customers to buy service
plans from AT&T (not Activate itself). The court ruled in favor of DOR on the basis that (1) Activate received no consideration from customers for these phones; and (2) Activate’s give-away
promotion was an “intervening use.”
Activate thus has little relevance here. Unlike Activate, TracFone did not give away handsets. Also unlike Activate, TracFone actually buys and sells airtime, rather than serving as
a representative for a network carrier. Nothing in Activate suggests that local utility tax—as opposed to state use tax—may be imposed in connection with the sale of handsets under any
circumstances.
Conclusion
For the reasons set forth above and in TracFone’s motion for reconsideration, TracFone respectfully requests that the Hearing Examiner reconsider the Ruling, and either (a) amend the
Decision to confirm that TracFone’s income from sales of airtime to retailers and distributors is not subject to Renton utility tax, scheduling a hearing to address only the computation
of utility tax on TracFone’s retail/direct sales of airtime; or (b) deny both parties’ summary judgment motions regarding the application of utility tax on TracFone’s income from sales
of airtime to retailers and distributors, and schedule a full hearing to address both evidence regarding TracFone’s sales of airtime and the computation of tax.
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From: Phil Olbrechts <olbrechtslaw@gmail.com <mailto:olbrechtslaw@gmail.com> >
Sent: Wednesday, April 7, 2021 8:18 PM
To: Craig, Angela <CraigA@LanePowell.com <mailto:CraigA@LanePowell.com> >
Cc: CityClerk <CityClerk@rentonwa.gov <mailto:CityClerk@rentonwa.gov> >; Cynthia Moya <CMoya@rentonwa.gov <mailto:CMoya@rentonwa.gov> >; ksand@omwlaw.com <mailto:ksand@omwlaw.com> ;
Kenya C. Owens <kowens@omwlaw.com <mailto:kowens@omwlaw.com> >; Edwards, Scott M. <EdwardsS@LanePowell.com <mailto:EdwardsS@LanePowell.com> >; Degginger, Grant <DeggingerG@LanePowell.com
<mailto:DeggingerG@LanePowell.com> >; Docketing <Docketing@LanePowell.com <mailto:Docketing@LanePowell.com> >; Tsuboi, Norma <TsuboiN@LanePowell.com <mailto:TsuboiN@LanePowell.com> >
Subject: Re: In re TracFone Wireless, Inc.
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Supplementing my prior email, I neglected to mention that I didn't find Mr. Malone's Fred Meyer purchase very illuminating on the issue, since I understood him to be just adding airtime
to a handset that already had its own minutes. I don't believe there was anything from the description of that event that would preclude that understanding.
On Wed, Apr 7, 2021 at 8:06 PM Phil Olbrechts <olbrechtslaw@gmail.com <mailto:olbrechtslaw@gmail.com> > wrote:
Thank you for the reconsideration briefing. I will likely need at least a week to carefully go through the arguments presented by the parties. In the meantime, in lieu of oral argument,
I’m hoping we can resolve the ambiguities of the handset issue by email.
In clarifying the handset issue in my reconsideration decision, I would like to give the parties an opportunity to identify where in the administrative record it is established that
the handsets are sold and charged separately from airtime.
My understanding of the handsets sales was that Tracfone handsets include Tracfone airtime rights to the same extent as airtime cards, in a sense being “preloaded” with airtime in
the same fashion as airtime cards. In this scenario the phones simply serve as a more expensive and functional version of plastic airtime cards. It was also my understanding that the
handsets were sold to the consumer via one charge. This is why I found the Activate case pertinent. In its reconsideration request, Tracfone argued that the handset sales are not subject
to the utility tax because handset sales qualify as competitive telephone service. The Activate court held that sales of handsets do not qualify as competitive telephone service if
they are not charged separately from network telephone service.
The evidence presented by the City left a very strong impression that the handsets were “loaded” with airtime in the same fashion as the airtime cards. The most detailed rendition
of how handsets are sold and activated was in the 1/29/21 Ashpaugh declaration. Paragraph 10 of his declaration states that both airtime cards and handsets will be referenced as “equipment.”
Paragraph 12 states that when “equipment” (which includes handsets) is scanned for purchase by a consumer, Tracfone is notified electronically. Mr. Ashpaugh goes on to declare that
once the “equipment” (which includes handsets) is purchased, it (the handset, without an airtime card) doesn’t become activated until the consumer contacts TracFone via website or phone
number.
So from the Ashpaugh declaration, it was reasonable to conclude that a handset could be purchased without an airtime card and then activated for use. Under such a scenario there would
be no basis for concluding that any airtime “loaded” into the handset would be charged separately from the phone itself. Indeed, my one time experience with prepaid airtime was the
purchase of a disposable phone when I forgot to pack my cell phone on a business trip. As best as I can recall, there was only one charge for that phone.
The City’s request for summary judgment relief also made no distinction between airtime card sales and handset sales. In its Statement of Facts, the City identified that Tracfone
sells wireless services and handsets directly and to retail agents. The City then framed its second question presented as “Is TracFone’s gross income from its retail agents properly
included within the City’s tax base…” Nowhere in its summary judgment argument did the City distinguish between gross income generated from handset sales and that generated from airtime
cards.
After being presented with the record and arguments described above, I’m now told that the City’s sj motion was only advocating for application of the utility tax to airtime card sales
and also that handsets are not “activated” in the fashion described in the Ashpaugh declaration. I am happy to accommodate the parties’ request on this issue since both parties are
in agreement. However, it would be helpful to be able to identify something in the record and/or briefing that clearly identifies that all handsets are sold separately from airtime
and also that the City had limited is sj request to gross sales of airtime. On the latter issue, simply stating that the City was only asking for utility tax on network telephone service
doesn’t resolve the situation, since handsets that serve as glorified airtime cards arguably qualify as network telephone service if the airtime is not separately charged.
If the parties have any references they’d like to make to the record to clarify the handset issue, please do so by email by next Tuesday. I’ll try to get my ruling out shortly thereafter.
On Wed, Apr 7, 2021 at 2:51 PM Craig, Angela <CraigA@lanepowell.com <mailto:CraigA@lanepowell.com> > wrote:
Good afternoon. Attached for filing in the above matter, please find the following:
* Reply in Support of TracFone’s Motion for Reconsideration
Please confirm receipt. Thank you.
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ANGELA CRAIG
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