Sprint Spectrum, LP v. State

• Decision Date: 30 April 2013
• Docket Number: No. 42304–9–II.,42304–9–II.
• Citation: 174 Wash.App. 645,302 P.3d 1280
• Parties: SPRINT SPECTRUM, LP, Respondent/Cross Appellant, v. STATE of Washington, DEPARTMENT OF REVENUE, Appellant/Cross Respondent.
• Court: Washington Court of Appeals

174 Wash.App. 645

302 P.3d 1280

SPRINT SPECTRUM, LP, Respondent/Cross Appellant,

v.STATE of Washington, DEPARTMENT OF REVENUE, Appellant/Cross Respondent.

No. 42304–9–II.

Court of Appeals of Washington, Division 2.

April 30, 2013.

Limitation Recognized

WAC 458–20–17803(4)

Heidi A. Irvin, Brett S. Durbin, Attorney Generals Office/Revenue Div., Olympia, WA, for Appellant/Cross–Respondent.

Michele G. Radosevich, Davis Wright Tremaine LLP, Seattle, WA, for Respondent/Cross–Appellant.

QUINN–BRINTNALL, J.

[174 Wash.App. 648]¶ 1 The Department of Revenue (DOR) assessed use tax on wireless phones Sprint Spectrum, LP (Sprint) had folly discounted and “sold” to customers—for $0.00—who signed extended term wireless service agreements. Sprint successfully appealed the use tax assessment to the Board of Tax Appeals (the Board), arguing that it recovers the cost of the free phones through sales of wireless phone service (on which it collects retail sales tax every month). Sprint also successfully argued that it was not a consumer of the free phones it provided to customers but, instead, was a retailer who resold the phones in conjunction with wireless service plans.

¶ 2 DOR appeals the Board's decision, asserting that Sprint is liable for use tax because it does not “resell” fully-discounted phones but, instead, acts as a consumer distributing the fully-discounted wireless phones primarily for the purpose of promoting the sale of its wireless telephone services. ¹ Because the Board's decision contains factual findings contrary to the evidence in the record, the Board erroneously interpreted and applied the law, and we settled this issue on almost identical facts in Activate, Inc. v. Department of Revenue, 150 Wash.App. 807, 209 P.3d 524 (2009), we reverse the Board's decision. RCW 34.05.570(3)(d)–(e).

FACTS

¶ 3 In 2007, DOR assessed Sprint with various state taxes for the audit period July 1, 1999, through December 2002, including $85,946 of unreported use tax on fully-discounted wireless phones Sprint “sold” to customers for $0.00. DOR assessed the tax, pursuant to former RCW 82.12.020(1) (2002),² on the grounds that Sprint “provided free cell phones to customers for the primary purpose of promoting the sale of its wireless services.” Administrative Record (AR) at 155. Sprint paid DOR's use tax assessment but appealed the assessment decision to DOR's Appeals Division, arguing that as a retailer of wireless phones, it was not subject to consumer use tax on phones it sold to customers—including phones “sold” for $0.00. The Appeals Division disagreed; after losing that appeal, Sprint appealed to the Board.

¶ 4 The parties stipulated to a number of facts for the Board appeal, including

(1) “[d]uring the audit period, Sprint sold wireless telephone services, wireless telephones, and accessories.” AR at 836. “All cell phones transferred from Sprint to a customer were configured to be used with Sprint's wireless services.” AR at 841.

(2) “Sprint arranged for cell phone manufacturers to send the cell phones it purchased to a warehouse in Kentucky, from which the cell phones were shipped to Sprint retail outlets for sale in various states, including Washington. Sprint purchased these cell phones from manufacturers without paying retail sales tax on the purchases.” AR at 840–41.

(3) “During the audit period, Sprint sold some cell phones to customers at what was termed their ‘regular price’. Sprint collected retail sales tax from customers on the regular price. These were typically sales in which the customer was not purchasing any wireless service or was purchasing wireless service on a month-to-month basis.” AR at 841.

(4) “During the audit period, Sprint sold most cell phones to customers at partial discounts off the regular price, including discounts that were conditioned upon the customers signing a service agreement legally binding them to purchase wireless service from Sprint for a term, typically 1 or 2 years, either as a new customer or as a returning customer.” AR at 841. Typically, Sprint offered its customers discounts on the purchase price of wireless phones in accordance with the length of the service contract a customer was willing to sign.³ For example, at the time of the audit, customers signing a one-year contract for wireless telephone services would receive a $75 discount off the purchase price of a phone while customers signing a two-year contract would get a $150 discount. DOR did not assess use tax on phones sold at discounted rates so long as the discount did not result in a customer receiving a free phone. These “partial cost sales” were not at issue in the Board appeal.

(5) Because of discounts—especially the discount customers received by signing long-term wireless service agreements—Sprint ended up “transferr[ing] some cell phones to customers at discounts equal to the regular price” during the audit period. AR at 842. Sprint collected no retail sales tax on these “fully-discounted” phones and, at the point of sale, customers received a receipt reflecting a purchase price of the phone as $0.00. DOR's use tax assessment solely involved these “free” wireless phones.

(6) Sprint's monthly wireless service rates did not vary depending upon whether a customer bought an undiscounted, partially-discounted, or fully-discounted phone.

¶ 5 The parties argued the case before the Board on August 19, 2010. Sprint called Sprint Senior State Tax Counsel Anthony Whalen to testify. Whalen explained that Sprint loses almost $100 on every phone it sells and that Sprint's business model is designed to recoup the almost “two billion dollars a year” that Sprint loses in phone sales through sales of wireless service plans. Administrative Report of Proceedings (ARP) at 15. Whalen further stated that Sprint sold most wireless phones at prices below their fair market value because “consumers in the U.S. aren't willing to pay a big upfront fee for [wireless phones], but they're more than willing to pay it over the life of a contract. So it's just more of a forced financing arrangement.” ARP at 54. Whalen testified that despite losing money on nearly every phone Sprint sells, he does not “consider a cell phone to be a. promotional item. The cell phone is integral to the business.” ARP at 55.

¶ 6 DOR argued that contrary to Sprint's position, Sprint “distributed these cell phones without charge for a price of zero dollars and zero cents in order to promote the sale of its wireless service” and, in result, Sprint owed use taxes on the fully-discounted phones. ARP at 95. DOR also explained that because of the way Washington's tax statutes are written, it has a bright line rule: “[i]f you charge over zero dollars and zero cents, even if it's one dollar or one cent, then there's been a retail sale, and it's not use by the retailer. If you charge zero dollars and zero cents, it's use if it falls within this promotional purpose statute.” ARP at 113–14.

¶ 7 On September 24, 2010, the Board delivered its written decision, concluding that Sprint did not owe use tax on the fully-discounted phones. DOR now appeals this decision.⁴

DISCUSSION

Factual Findings

¶ 8 As a preliminary matter, DOR argues that a number of the Board's factual findings are not supported by evidence that is substantial when viewed in light of the whole record but “reviewing the Board's factual findings concerning Sprint's practice of providing free cell phones in certain transactions is complicated by the way the Board set forth those findings.” Br. of Appellant at 23. While DOR is correct in arguing that the Board's findings fall short of the standard envisioned in RCW 34.05.461(3), ⁵ WHEN “FINDINGS OF FACT ARE NOT EXPLICITLY DELINEATED, OR WHERE THOse findings are buried or hidden within conclusions of law, it is within the prerogative of an appellate court to exercise its own authority in determining what facts have actually been found below.” Tapper v. Emp't Sec. Dep't, 122 Wash.2d 397, 406, 858 P.2d 494 (1993).

¶ 9 We exercise this authority to conclude that, contrary to the Board's assertions, (1) Sprint did not receive money directly from retail consumers for fully-discounted phones via customers' monthly service contract payments and, accordingly, Sprint did not sell fully-discounted phones in installment sales with a “zero down” payment; and (2) Sprint customers do not purchase wireless phones and wireless services as a single purchase.⁶

A. Standard of Review

¶ 10 We may grant DOR relief by vacating some of the Board's findings if the Board's order is not supported by evidence that is substantial when viewed in the light of the whole record before the court. SeeRCW 34.05.570(3)(e). Substantial evidence is evidence that is sufficient to persuade a fair-minded person of the truth of the declared premise. Heinmiller v. Dep't of Health, 127 Wash.2d 595, 607, 903 P.2d 433, 909 P.2d 1294 (1995) (quoting Nghiem v. State, 73 Wash.App. 405, 412, 869 P.2d 1086 (1994)), cert. denied,518 U.S. 1006, 116 S.Ct. 2526, 135 L.Ed.2d 1051 (1996). But we will overturn an agency's factual findings only if they are clearly erroneous and we are definitely and firmly convinced that a mistake has been made. Port of Seattle v. Pollution Control Hearings Bd., 151 Wash.2d 568, 588, 90 P.3d 659 (2004). We review the evidence in the light most favorable to the party who prevailed in the highest administrative forum to exercise fact-finding authority, here Sprint. City of University Place v. McGuire, 144 Wash.2d 640, 652, 30 P.3d 453 (2001).

B. Installment Sale

¶ 11 In its sixth factual finding, the Board concluded that “Sprint receives money directly from the retail consumer for the ‘free phones' via its monthly service contract payments and pays retail sales tax on that money.” AR at 97. In addition, at the outset of its final decision, the Board states that the fully-discounted phones “were resold by Sprint in installments with a zero down payment, upon which sales tax was...