Community Telecable of Seattle v. City

• Decision Date: 26 June 2008
• Docket Number: No. 79702-1.,79702-1.
• Court: Washington Supreme Court
• Parties: COMMUNITY TELECABLE OF SEATTLE, INC.; Comcast of Washington I, Inc.; and Comcast of Washington IV, Inc., Petitioners, v. CITY OF SEATTLE, DEPARTMENT OF EXECUTIVE ADMINISTRATION, Respondent.

186 P.3d 1032

164 Wn.2d 35

COMMUNITY TELECABLE OF SEATTLE, INC.; Comcast of Washington I, Inc.; and Comcast of Washington IV, Inc., Petitioners, v. CITY OF SEATTLE, DEPARTMENT OF EXECUTIVE ADMINISTRATION, Respondent.

No. 79702-1.

Supreme Court of Washington, En Banc.

Argued January 22, 2008.

Decided June 26, 2008.

Randal Lee Gainer, Dirk Jay Giseburt, Davis Wright Tremaine LLP, Seattle, WA, for Petitioners.

Kent Charles Meyer, Seattle City Attorney's Office, Seattle, WA, for Respondent.

Robert Lee Mahon III, Perkins Coie LLP, Seattle, WA, Amicus Curiae on behalf of Qwest Corporation.

Jon Brian Davis, Morgan Lewis & Bockius LLP, Washington, DC, Amicus Curiae on behalf of Microsoft, Time Warner Cable, Verizon, National Cable & Telecommunications Association, AOL, LLC.

STEPHENS, J.

¶ 1 Petitioners Community Telecable of Seattle, Inc.; Comcast of Washington I, Inc.; and Comcast of Washington IV, Inc. (collectively referred to as Comcast) provide high-speed cable Internet service in Seattle. Following an audit, the city of Seattle (City) assessed a telephone utility tax against Comcast for 2001 and 2002. Comcast challenged the tax as violating both state and federal law. The superior court granted summary judgment in Comcast's favor, but Division One of the Court of Appeals reversed and ordered summary judgment in favor of the City. This case requires us to consider whether Comcast may be taxed as a telephone business when providing Internet service. We hold it may not and reverse the Court of Appeals. During the audit period, the City's taxation of Comcast as a telephone business was barred by state law.

I Background Facts and Procedural History

¶ 2 Around 1998, Comcast began providing high-speed cable Internet service in Seattle. The service allows subscribers to connect to the Internet at a faster rate than traditional dial-up service, which uses a telephone connection instead of a cable connection. Through its cable Internet service, Comcast provides its subscribers with "access to e-mail over the Internet, access to chat rooms, access to the World Wide Web, [and] access to sites on the Web where Comcast customers can download music and other content." Br. of Resp'ts at 3.

¶ 3 During the audit period, Comcast's high-speed cable Internet service operated in the following manner:

• A cable inside the subscriber's home connects the subscriber's computer to a cable modem, which is owned or leased by the subscriber. The cable modem converts the digital signal from the subscriber's computer to an electronic signal, which is then transmitted out of the subscriber's home through Comcast's coaxial cable.

• The electronic signal travels through coaxial cable to a fiber node hub located in the subscriber's neighborhood. A fiber node in the hub converts the signal to a fiber optic signal. Comcast owns the hubs.

• The fiber optic signal is forwarded over Comcast's fiber optic cable to Comcast's "head end" in Burien.

• Equipment at the head end performs three important functions: it assigns an Internet Protocol (IP) address to each subscriber's computer, converts the signal back into a digital signal, and converts the data into IP packets that can be sent across the Internet. Comcast owns the head end.

• The IP packets are sent from the head end over fiber optic cables to an Internet Point of Presence (POP) in downtown Seattle. The connection from Comcast's head end to the POP was owned by the At Home Corporation¹ until November 23, 2001, when it was acquired by Comcast's predecessor.

• At the POP, data is routed through a server that sends data onto the Internet across fiber optic cables; the data is routed through various servers located outside Washington, sometimes across the globe, as it travels the Internet. The POP server and the various routers, servers and cables beyond the POP server were owned by At Home Corporation until November 23, 2001, when they were purchased by AT & T Corporation.

• Data returns to the subscriber's computer in a reverse order.

A subscriber cannot receive cable Internet service without each of the network components described above.

¶ 4 In 1995, in anticipation of the arrival of high-speed Internet, the City and Comcast initially agreed that Comcast's Internet service would be taxed at the City's rate for telecommunications services, 6 percent. Nevertheless, when Comcast began providing high-speed Internet services, it paid the City a 10 percent cable television tax on its Internet services. On December 26, 2000, the City instructed Comcast to pay the 6 percent telephone utility tax for its Internet services, rather than the 10 percent cable television tax. For reasons that are not clear from the record, Comcast continued to pay the 10 percent cable television tax until approximately March 2002. On March 15, 2002, the Federal Communication Commission (FCC) issued a declaratory ruling in an unrelated case, explaining that cable Internet service is neither a telecommunications service nor a cable service. At that time, Comcast began paying the City a 0.415 percent service business and occupation (B & O) tax pursuant to former Seattle Municipal Code (SMC) 5.45.050F (2001) (now SMC 5.45.050G).

¶ 5 The City audited Comcast's records for the period of January 1, 2001, through December 31, 2002 (the audit period). During the audit, the City requested documents detailing agreements and revenue-sharing between Comcast and At Home Corporation, the company Comcast contracted with to provide some components of Comcast's Internet services. Comcast did not provide all of the requested documentation until after the audit was over. Sometime prior to the end of the audit, however, Comcast verbally advised the City that At Home Corporation received approximately 35 percent of the total cable modem revenues. This was apparently the key piece of information the City sought.

¶ 6 As a result of the audit, the City concluded that Comcast was not subject to the 10 percent cable television tax for its Internet activities but was subject to the 6 percent telephone utility tax, rather than the 0.415 percent service B & O tax. Accordingly, the City credited Comcast with the 10 percent cable television tax paid during portions of the audit period and imposed the 6 percent telephone utility tax on Comcast's Internet activities during the audit period. Comcast paid the tax and filed a complaint in King County Superior Court, seeking recovery of the assessment above the 0.415 percent tax rate and additional compensation.

¶ 7 Both parties filed summary judgment motions before the superior court. The court granted Comcast's motion, but the Court of Appeals reversed and granted summary judgment in favor of the City. Cmty. Telecable of Seattle, Inc. v. City of Seattle, 136 Wash.App. 169, 149 P.3d 380 (2006). Comcast filed a petition for review, which we granted at 161 Wash.2d 1025, 169 P.3d 830 (2007).

II Analysis

¶ 8 As a preliminary matter, the City argued below that Comcast is barred from challenging the results of the audit under SMC 5.55.060D, which prohibits a taxpayer from questioning an assessment in court when the taxpayer refused or failed to make information available to the City. Clerk's Papers (CP) at 9; Appellant's Corrected Opening Br. at 13-15. The City claimed that because Comcast failed to provide requested documentation concerning its relationship with At Home Corporation, Comcast is now forever barred from challenging the audit. In response, Comcast challenged the constitutionality of SMC 5.55.060D. Br. of Resp'ts at 24-31. We need not rule on the constitutionality of the provision. SMC 5.55.060D does not appear to specify a time frame in which a taxpayer must provide requested information. The record shows that Comcast did at some point provide the City with the information. Supra p. 4. The City does not claim to have been prejudiced by the delay. Appellant's Corrected Opening Br. at 14; CP at 831-32. We will avoid deciding constitutional questions where a case may be fairly resolved on other grounds. Holmes Harbor Sewer Dist. v. Holmes Harbor Home Bldg., LLC, 155 Wash.2d 858, 862, 123 P.3d 823 (2005). Because we need not consider Comcast's constitutional argument, we also decline to address the City's related defense concerning notice to the attorney general. See Appellant's Corrected Opening Br. at 14-15.

¶ 9 The dispositive issue in this appeal is whether the City may tax Comcast as a telephone business with regard to its cable Internet service. This issue was resolved below on cross-motions for summary judgment, and thus our review is de novo. See Qwest Corp. v. City of Bellevue, 161 Wash.2d 353, 358, 166 P.3d 667 (2007).

¶ 10 A municipal corporation's authority to tax must be delegated by the state legislature. Arborwood Idaho, LLC v. City of Kennewick, 151 Wash.2d 359, 374, 89 P.3d 217 (2004); see Matthew Senechal, Revisiting Granite Falls: Why the Seattle Monorail Project Requires Re-examination of Washington's Prohibition on Taxation without Representation, 29 Seattle U.L.Rev. 63, 72-73 (2005). Accordingly, we engage in an analysis of the applicable state statutes to determine whether the City's tax during the audit period was permissible.

¶ 11 In 1997, as high-speed Internet technology was becoming more common, the legislature passed an act entitled "Prohibiting Taxation of Internet Service Providers as Telephone Service Providers," Laws of 1997, ch. 304, codified in part as RCW 35.21.717:

Until July 1, 2006, a city or town may not impose any new taxes or fees specific to internet service providers. A city or town may tax internet service providers under generally applicable business taxes or fees, at a rate not to exceed the rate applied to a general service classification. For the purposes of this section, "internet service" has the same meaning as in RCW 82.04.297.

Comcast provides Internet service under RCW 82.04.297(3):

"Internet service" ... includes...