The Washington Court of Appeals held that the sales of pre-paid telephone airtime purchased from third-party cellular networks by a business (Taxpayer) and resold to individual customers and retailers were subject to the City of Renton’s municipal utility tax.
The utility tax was imposed on the privilege of conducting a “telephone business” within city limits, which was defined as “providing by any person of access to the local telephone network.” Renton Municipal Code 5-11-3(O) (2019). Under the city municipal utility tax, charges to “another telecommunications company” were not taxable. RCW 35A.82.060(1). A “telecommunications company” was an entity “owning, operating, or managing any facilities used to provide telecommunications for hire, sale or resale.” RCW 80.04.010(28). The Taxpayer was not a telecommunications company because it had no physical network facilities of its own.
The Taxpayer made a few arguments as to why its sales were not taxable. First, it argued that the municipal utility tax applied only to “telecommunications companies” because the statutory exception required charges to be imposed upon “another telecommunications company.” The Taxpayer argued that this exception “presume[s] the first taxed entity was also a telecommunications company.” The court rejected this argument because “if the legislature intended for the statute to apply exclusively to ‘telecommunications companies,’ it would have used only that term.” Further, the court held that the legislature’s use of the broader term “telephone business” “evince[d] an intent to grant taxing authority broader in scope than” telecommunications companies.
The court also disagreed with the Taxpayer’s argument that – even if its direct consumer sales were taxable – its wholesale business sales to retailers were exempt from tax as resales. The resale exemption provided that cities “shall not impose the fee or tax on … charges for network telephone service that is purchased for the purpose of resale.” RCW 83A.82.060(1). Reviewing the statutory terms, the court explained that for the exemption to apply, “it is the ‘access’ to a network that must be ‘purchased’ for ‘resale.’” The court explained that no resale occurred in these transactions because the Taxpayer—not the retailers—retained control over the end user’s access to a telephone network. The retailers were thus not selling access to the cellular networks to their customers.
TracFone, Inc. v. City of Renton, 547 P.3d 902 (Wash. Ct. App. 2024).