Tracfone Wireless, Inc. v. Dir. of Revenue

• Decision Date: 14 February 2017
• Docket Number: Case No. SC 95785
• Citation: Tracfone Wireless, Inc. v. Dir. of Revenue, 514 S.W.3d 18 (Mo. 2017)
• Parties: TRACFONE WIRELESS, INC., Appellant, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

514 S.W.3d 18

TRACFONE WIRELESS, INC., Appellant,

v.DIRECTOR OF REVENUE, Respondent.

Case No. SC 95785

Supreme Court of Missouri, en banc .

Opinion issued February 14, 2017 Opinion Modified on Court's Own Motion April 4, 2017

John S. Kingston, Janette M. Lohman, Thompson Coburn LLP, St. Louis, MO, for Appellant.

Emily A. Dodge, Attorney General's Office, Jefferson City, MO, for Respondent.

Laura Denvir Stith, Judge

TracFone Wireless, Inc., a Delaware corporation with its headquarters in Miami, Florida, seeks review of the Administrative Hearing Commission's denial of its request for a refund of the difference between the sales tax paid on its sales to Missouri residents and the use tax it believes should have paid. TracFone argued it qualified for the "in commerce" sales tax exemption set out in section 144.030.1.¹

This Court affirms. The burden is on the taxpayer to prove it qualifies for an exemption. The record supports the Commission's determination that the true object of the transactions was the sale of access to telecommunications services to its Missouri customers, and the equipment and "Airtime" (TracFone's proprietary name for its package of minutes of access to cell towers and other equipment) were merely incidental to the sale of access to those services in Missouri. As TracFone failed to meet its burden of showing that the "in commerce" exemption applies, the decision of the Commission is affirmed.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. The Nature of TracFone's Transactions with Missouri Customers

TracFone operates a telecommunications business, but owns no telecommunication facilities, such as cell towers. Instead, TracFone contracts with several telecommunication carriers in Missouri, including Alltel, AT&T, US Cellular, T–Mobile, and Verizon, to buy access to their telecommunication facilities and services. It then sells prepaid access to what it calls its "virtual network"—actually the networks of the contracted carriers—in packages consisting of either a set number of minutes or "unlimited" minutes for a set time period, usually a month. TracFone refers to these packages as "Airtime."

TracFone has directly resold prepaid access to wireless telecommunications services to end users throughout Missouri continuously for more than 15 years. These services can be accessed only through use of TracFone handsets. These handsets are usable only when activated by TracFone and only to access telecommunications services sold by TracFone. They cannot be unlocked, modified, resold, or used to access another company's telecommunications services, and TracFone's end-user customers specifically agree not to use the handsets with another service provider.

The terms of services agreement also prohibits the end user from selling the handset. Once a customer has activated a handset, the customer can purchase additional Airtime without buying a new handset. All orders are taken in TracFone's Miami office, and all payments are made to the Miami office. TracFone has no warehouses or other facilities in Missouri, so handsets are shipped to Missouri customers from outside the state. The testimony before the Commission showed TracFone sold handsets and Airtime to its Missouri customers, who gave TracFone the ZIP code for the location where they would use their phones the most. The TracFone witness agreed that "TracFone is not making any argument that the customers aren't using the phone in Missouri." Customers in Missouri would access telecommunication services through Missouri cell towers and other facilities. TracFone resells telecommunication services in every ZIP code in Missouri, and these services include local services such as local phone service and 911 emergency services.

B. Procedural History

In May 2013, TracFone sought partial refunds of the sales tax paid on wireless telecommunications services from November 2009 through January 2010 and from February 2010 through February 2011. TracFone claimed that it sold handsets and Airtime from its Florida offices and did not make retail sales in Missouri and so did not owe Missouri sales tax on what it claimed were out-of-state sales of equipment and services. Rather, it argued, the purchases were subject to Missouri use tax. TracFone, therefore, sought the difference between the Missouri sale tax paid and the Missouri use tax on the purchases of handsets and Airtime. The Director of Revenue denied the requested refunds, and TracFone appealed to the Commission.

Before the Commission, TracFone argued the sales qualified for the "in commerce" exemption in section 144.030.1 for sales that occur "in commerce" between Missouri and another state. The Commission disagreed and found in favor of the Director. First, it held that TracFone was selling access to telecommunications services in Missouri and, therefore, was engaged in retail sales in Missouri, stating:

While TracFone asks us to focus on its sales of Airtime and handsets to its customers, emphasizing that those sales occurred between its headquarters in Miami and its customers in Missouri, what it was really selling was access to telecommunications networks it leased from cell phone carriers. The handsets it sold could only be used to access those networks; they could not be unlocked, otherwise modified, or resold. Accordingly, those sales fit the language of § 144.020.1(4), which imposes:

A tax equivalent to four percent on the basic rate paid or charged on all sales of local and long distance telecommunications service to telecommunications subscribers and to others through equipment of telecommunications subscribers for the transmission of messages and conversations and upon the sale, rental or leasing of all equipment or services pertaining or incidental thereto ....

The Commission, accordingly, found that TracFone's sales were subject to sales tax under section 144.020.1(4).

The Commission then found that TracFone was not entitled to claim the "in commerce" exemption from sales tax set out in section 144.030.1 for "such retail sales as may be made in commerce between this state and any other state of the United States" because TracFone was selling local access to telecommunications services in Missouri:

[T]he Airtime TracFone sold to its customers was nothing more (or less) than access to telecommunications services. That access was more than an "integral part" of the transaction; it was the transaction's true object, what the customer wanted and what TracFone was selling. Furthermore, the handsets were tangible personal property in only an abstract sense. The modifications and limitations built into the handsets—special software to track customer use, use limited to networks TracFone provided, inability to unlock, modify, or resell them—made them "equipment ... pertaining or incidental to [telecommunications service]." Therefore, the true object of TracFone's sales consisted of selling telecommunications service to its Missouri customers. Accordingly, TracFone is not entitled to the exemption it seeks.

TracFone filed a petition for review arguing that, while the sales at issue may be retail sales under section 144.020.1, they qualify for the "in commerce" exemption set out in section 144.030.1. Because this appeal involves construction of Missouri's revenue laws, this Court has exclusive jurisdiction of the appeal. Mo. Const. art. V, § 3 .

II. STANDARD OF REVIEW

The Commission's decisions "shall be upheld when authorized by law and supported by competent and substantial evidence upon the whole record," provided "a mandatory procedural safeguard is not violated" and the decision is not contrary to what this Court concludes were the "the reasonable expectations of the general assembly at the time such authority was delegated to the agency." § 621.193 . This Court reviews the Commission's interpretation of revenue statutes de novo . IBM Corp. v. Dir. of Revenue, 491 S.W.3d 535, 538 (Mo. banc 2016). "Tax exemptions are strictly construed against the taxpayer." Id . The burden is on the taxpayer to prove an exemption applies by "clear and unequivocal proof," and "all doubts are resolved against the taxpayer." Id.

III. TRACFONE'S SALES DO NOT QUALIFY FOR THE "IN COMMERCE" EXEMPTION

Six Flags Theme Parks, Inc. v. Dir. of Revenue, 102 S.W.3d 526, 527–28 (Mo. banc 2003), held that to determine whether a particular retail sale qualifies for the "in commerce" exemption, one must look for the "true object" of the transaction. In Six Flags, the transactions were the sales of admission tickets and season passes to out-of-state customers. Phone orders for tickets were taken from customers calling from outside Missouri; a portion of the fees were collected outside Missouri; credit card payments were processed outside Missouri; and the tickets were shipped to addresses outside Missouri. Id. at 528. Despite these "incidental or nonessential interstate elements" of the transactions, Six Flags held that the sales qualified as taxable sales in Missouri because, at heart, each sale was "essentially [a] ... local transaction," the essence or "true object" of which was admission to the Missouri amusement park:

The true object of the transactions in this case is the service of amusement, not the sale of tangible personal property. There is no evidence that the tickets themselves have any value independent of the customer's permission to enter the amusement park. These transactions do not depend on the transfer of title or ownership in any tangible property; instead, they are the sale of permission to enter a place of amusement and become the recipient of a service. Given that the thing of value purchased by the customer is not the ticket, but the entry into the amusement park, the transaction does not take place in commerce between the states....

The object of the transaction and the taxable event is the admission to a place of amusement in Missouri, which is taxable pursuant to section 144.020.1(2). The "in commerce" exemption of section 144.030.1 does

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