Sprint Intern. v. Department of Revenue

• Decision Date: 09 March 2010
• Docket Number: No. 38347-1-II.,38347-1-II.
• Citation: 226 P.3d 253,154 Wn. App. 926
• Parties: SPRINT INTERNATIONAL COMMUNICATIONS CORPORATION, Appellant, v. DEPARTMENT OF REVENUE, State of Washington, Respondent.
• Court: Washington Court of Appeals

226 P.3d 253

154 Wn. App. 926

SPRINT INTERNATIONAL COMMUNICATIONS CORPORATION, Appellant, v. DEPARTMENT OF REVENUE, State of Washington, Respondent.

No. 38347-1-II.

Court of Appeals of Washington, Division 2.

March 9, 2010.

Michele G. Radosevich, Davis Wright Tremaine LLP, Seattle, WA, for Appellant.

Brett S. Durbin, Cameron Gordon Comfort, Atty General's Office, Olympia, WA, for Respondent.

Michael S. Kelley, Stephanie Anderson, K & L Gates LLP, Seattle, WA, Amicus Curiae on behalf of Microsoft Corporation.

ARMSTRONG, J.

¶ 1 In 1995, the Department of Revenue conducted an audit of Sprint International Communications, Inc., for the sale of transmission services via its SprintNet X.25 network and Frame Relay network from 1989 to 1993. The Department determined the services were subject to retail sales tax as "network telephone services" under the statutes in effect during the audit period. See Former RCW 82.04.250 (1994); Former RCW 82.04.050(5) (1994); Former RCW 82.04.065(2) (1994). Sprint paid the $1,248,344 assessment and filed a refund claim. The superior court granted the Department's motion for summary judgment. On appeal, Sprint assigns error to the trial court's ruling that the X.25 and Frame Relay networks are network telephone services.¹ We affirm.

FACTS

¶ 2 Telecommunications companies began offering data communication services over packet-switched networks in the mid-1970s.² X.25 protocol, a worldwide accepted standard defining the interface between a packet-switched network and end-user equipment, was first introduced in 1976. Companies generally stopped building X.25 networks around 1990 and switched to newer technologies, such as frame relay. The frame relay standard was approved in 1991.

¶ 3 Throughout the audit period, 1989 to 1993, Sprint sold data transmission services via the SprintNet X.25 packet-switched network. Sprint began selling transmission services via its Frame Relay packet-switched network in 1992. Both networks consisted of circuits purchased from other telecommunications companies, packet switches Sprint owned and operated, and terminal processing equipment Sprint owned and operated.

I. The X.25 Network

¶ 4 Customers accessed the X.25 network via dial access over the public telephone system or via dedicated access over a private line. The X.25 network transmitted information in a synchronous protocol. Personal computers and data terminals typically transmit information in an asynchronous protocol. The X.25 network was therefore equipped with packet assembler/disassembler devices that converted asynchronous signals into synchronous X.25 packets for transmission over the network. The X.25 network was not part of the internet during the audit period.

¶ 5 Sprint's X.25 customers were predominantly banking and financial institutions, followed by information service providers, government agencies, manufacturing companies, and computer companies. Customers used the X.25 network to transmit data between their data centers, databases, and remote office locations. Information service providers such as Westlaw, Dow Jones, and America Online used the X.25 network to provide their customers with access to their information databases and servers. The X.25 network itself did not provide users with access to information.

II. The Frame Relay Network

¶ 6 Sprint's Frame Relay network provided customers with a dedicated connection between destination pairs of host computers, similar to a private line. Customers used the Frame Relay network to transmit data between offices through host-to-host data transmission. The Frame Relay network did not perform asynchronous/synchronous protocol conversion, and it was not part of the internet during the audit period.

ANALYSIS

¶ 7 We review an order of summary judgment de novo. W. Telepage, Inc. v. City of Tacoma Dep't of Fin., 140 Wash.2d 599, 607, 998 P.2d 884 (2000). Summary judgment is appropriate only if there is no genuine issue of material fact in the pleadings, affidavits, depositions, and admissions on file, and the moving party is entitled to judgment as a matter of law. CR 56(c).

¶ 8 The Department argues that the X.25 and Frame Relay networks are "network telephone services" under the plain language of former RCW 82.04.065 (Laws of 1983, 2d Ex.Sess., ch. 3, § 24), the statute in effect throughout the audit period. Sprint does not argue that former RCW 82.04.065 is ambiguous. Rather, Sprint argues that we should interpret former RCW 82.04.065 in accordance with contemporaneous federal regulations and subsequent amendments to the statute. We therefore begin with an overview of the statute's history and subsequent amendments.

I. Former RCW 82.04.065: History and Amendments

¶ 9 Until 1981, the legislature imposed a public utility tax on traditional telephone services. See W. Telepage, 140 Wash.2d at 602, 998 P.2d 884. The legislature recognized "the impending revolution in telecommunications services" and equalized the state's tax treatment of telephone companies and their unregulated competitors by broadening the definition of companies susceptible to the public utility tax. W. Telepage, 140 Wash.2d at 602, 998 P.2d 884; Laws of 1981, ch. 144, § 1. The legislature broadly defined "telephone business" under former RCW 82.16.010 (Laws of 1981, ch. 144, § 2(6)), which was the predecessor to the definition of "network telephone service" under former RCW 82.04.065 (Laws of 1983, 2d Ex.Sess., ch. 3, § 24).³

¶ 10 As predicted, the telecommunications industry underwent unprecedented change in the 1980s, with the breakup of the AT & T telephone system monopoly and the emergence of new telecommunications services, such as cable television and cellular telephones. See W. Telepage, 140 Wash.2d at 603-04, 998 P.2d 884. Several of these new industries sought and obtained exemptions from the public utility tax, which are reflected in the legislature's 1983 amendments:

"Network telephone service" means the providing by any person of access to a local telephone network, local telephone network switching service, toll service, or coin telephone services, or the providing of telephonic video, data, or similar communication or transmission for hire, via a local telephone network, toll line or channel, cable, microwave, or similar communication or transmission system....

"Network telephone service" does not include the providing of competitive telephone service, the providing of cable television service, [nor] the providing of broadcast services by radio or television stations.

Laws of 1983, 2d Ex.Sess., ch. 3, § 24, codified as RCW 82.04.065; see also W. Telepage, 140 Wash.2d at 604, 998 P.2d 884. This 1983 statute was in effect throughout the audit period.

¶ 11 The telecommunications industry continued to rapidly evolve with the emergence of internet services. Although the origins of the internet date back to the 1950s with the development of ARPANET, a packet-switched network used for military and university research, internet usage was not widespread until the mid-1990s. Before 1991, the federal government paid for the "backbone" service that allowed the internet to operate and restricted internet use to the higher educational system; commercial users were not allowed access. In the early 1990s, three major events contributed to a surge in internet usage: the "world wide web" program was released in 1991, the first web browser was released in 1993, and the government transitioned responsibility for the internet's backbone service to commercial internet service providers in 1995.

¶ 12 In 1997, the legislature amended Washington's tax statutes to define "internet service"⁴ and exclude such services from "network telephone service." Laws of 1997, ch. 304, § 4, codified as RCW 82.04.297; Laws of 1997, ch. 304, § 5, codified as RCW 82.04.065. The legislature stated:

The legislature finds that the newly emerging business of providing internet service is providing widespread benefits to all levels of society .... and that, as this industry emerges, it should not be burdened by new taxes that might not be appropriate for the type of service being provided. The legislature further finds that there is no clear statutory guidance as to how internet services should be classified for tax purposes and intends to ratify the state's current treatment of such services.

Laws of 1997, ch. 304, § 1.⁵ To prevent this "newly emerging business" from being improperly taxed, the legislature imposed a two-year moratorium on municipal taxation of internet services. Laws of 1997, ch. 304, § 2, codified as RCW 35.21.717.

¶ 13 In 2007, the legislature adopted the Streamlined Sales and Use Tax Agreement. Laws of 2007, ch. 6, § 901. Adopting the Agreement's telecommunications definitions, the legislature amended former RCW 82.04.065 to replace "network telephone service" with "telecommunications service."⁶ Laws of 2007, ch. 6, § 1002(8), codified as RCW 82.04.065. The legislature stated: "These are changes to terminology in current law, but do not change current law regarding taxability and exemptions." Final B. Rep. on Substitute S.B. 5089, 60th Leg., Reg. Sess. (Wash.2007).

II. The X.25 Network

¶ 14 When interpreting a statute, our fundamental objective is to ascertain the legislature's intent. Dep't of Ecology v. Campbell & Gwinn, L.L.C., 146 Wash.2d 1, 9, 43 P.3d 4 (2002). If a statute's language is clear, we derive its meaning from that plain language. State v. Watson, 146 Wash.2d 947, 954, 51 P.3d 66 (2002). We will not add or subtract from a statute's clear language "even if we believe the Legislature intended something else but did not adequately express it[,] unless the addition or subtraction of language is imperatively required to make the statute rational." Watson, 146 Wash.2d at 955, 51 P.3d 66.

¶ 15 The plain language of "network telephone service" in effect during the audit period includes "data ... communication or transmission for hire." Former RCW...