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TracFone Wireless, Inc. v. Director of Revenue

Supreme Court of Missouri, En Banc

February 14, 2017


         Petition for Review of a Decision of the Administrative Hearing Commission Sreenivasa Rao Dandamudi, Commissioner

          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 it paid on its sales to Missouri residents and the use tax it believes it 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 in Missouri, 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.


         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, U.S. 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 Commission found access to telecommunications services occurs largely in Missouri, and when Missouri customers use the handsets to access telecommunication services they do so principally 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 it 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 it 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 ...

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