Arizona Court of Appeals Holds Prepaid Wireless Provider Liable for State's 911 Tax

Aug 22nd, 2012

The Arizona Court of Appeals recently affirmed an Arizona Tax Court decision that ruled that Virgin Mobile USA, LP (Virgin Mobile), as a prepaid wireless service provider, was liable for the state's 911 tax imposed by Ariz. Rev. Stat. sec. 42-5252(A). Virgin Mobile USA, LP v. Dept. of Revenue, No. 1 CA-TX 11-0005 (Ariz. App. Div. 1 Aug. 2, 2012).

Between October 2002 and July 2006, Virgin Mobile remitted state 911 taxes to Arizona for prepaid wireless services it sold in Arizona. Asserting that the 911 tax was not applicable to providers of prepaid wireless services, Virgin Mobile filed a refund claim with the Arizona Department of Revenue (DOR). The DOR subsequently denied the refund claim, and Virgin Mobile protested that denial. The parties went on to litigate the applicability of the 911 tax to prepaid wireless services before an administrative law judge, who again rejected Virgin Mobile's claim. Virgin Mobile then appealed to the Arizona Tax Court, which held that Virgin Mobile was liable for the 911 tax. Virgin Mobile next appealed the Tax Court's decision to the Court of Appeals, where the issue was whether the 911 tax applies to the prepaid wireless services. Virgin Mobile argued that it does not and presented the court with three related arguments to that effect.

The first argument relied on the differences in the statutory definitions of "provider" and "wireless provider." For purposes of imposing the 911 tax, Arizona defines both "wireless provider" and "provider." Under Ariz. Rev. Stat. sec. 42-5252(A), the 911 tax "is levied on every provider." Virgin Mobile argued that the use of the term "every provider" without also including the term "wireless provider" in Ariz. Rev. Stat. sec. 42-5252(A) means that "wireless providers" are not subject to the 911 tax. The court examined the use of the term within the specific context of Ariz. Rev. Stat. sec. 42-5252 and reasoned that when the statute imposes the 911 tax on "every provider," the term "every provider" is the generic term for both "provider" and "wireless provider." Thus, the court concluded that Virgin read the term "provider" in the imposition statute too narrowly, so the court rejected the argument. Id. at paras. 10-11.

Second, Virgin Mobile argued that the 911 tax is imposed on services that are billed monthly, so the tax does not apply to the Virgin Mobile's prepaid wireless services because Virgin Mobile does not bill for its prepaid services each month. The court explained that, even if Virgin Mobile does not have customers whom it bills monthly, it is required, as a wireless provider, to calculate and remit the 911 tax monthly. So, while it is true that the statute computes the 911 tax on a monthly basis and that the tax should be remitted monthly, it is not true that the tax only applies to services that are billed monthly. Thus, the court concluded that Virgin Mobile's system for billing its prepaid wireless customers did not affect the requirement that Virgin Mobile pay the 911 tax. Id. at paras. 14-15.

Virgin Mobile relied on the fact that Arizona incorporates the Federal Mobile Telecommunications Sourcing Act (MTSA) to make its third argument. The MTSA provides sourcing rules for mobile telecommunications. Virgin Mobile asserted that the 911 tax can only be levied and collected if Arizona is a taxing situs as defined by the MTSA. But the MTSA's sourcing rules "do not apply to the determination of the taxing situs of prepaid telephone calling services." 4 U.S.C. sec. 116(c)(1). Thus, Virgin Mobile argued that its prepaid wireless services are not subject to the 911 tax because the MTSA's rules for determining the taxing situs of wireless services specifically exclude any wireless services that are prepaid. Once again, the court rejected Virgin Mobile's argument by holding that Arizona's adoption of the MTSA and its exception for prepaid services does not, by implication, lead to a conclusion that Arizona cannot be a tax situs for prepaid wireless services. Id. at paras. 19-20.

The holding of this case--that providers of prepaid wireless services are required to pay the Arizona 911 telecommunication services excise tax--is interesting in light of the fact that Arizona enacted legislation that creates a new prepaid wireless 911 excise tax earlier this year. Ariz. Sess. Laws ch. 198 (2012), (We reported on the legislation in April, and you can read our article here.)

In an article discussing this legislation before it was enacted, Rep. Bob Robson (R-Chandler), the co-sponsor of the legislation, was quoted as saying, "What I'm trying to do is recognize that there has been a revenue stream that has not been collected from." Cale Ottens, Lawmaker Proposes 911 System Tax on Prepaid Cellphone Plans, Cronkite News Service (Feb. 14, 2012). The implication of Robson's statement was that Arizona did not subject prepaid wireless plans to the 911 tax.

The new legislation tweaks the very language in Ariz. Rev. Stat. sec. 42-5252 upon which Virgin Mobile based its arguments. See Ariz. Rev. Stat. sec. 42-5252 (effective Jan. 1, 2014). But, more significantly, the new legislation creates the Prepaid Wireless Telecommunications E911 Excise Tax, an entirely new tax that clearly applies to prepaid wireless services and will take effect January 1, 2014. See Ariz. Rev. Stat. secs. 42-5401, 42-5402, 42-5403, 42-5404 (all effective Jan. 1, 2014); Ariz. Sess. Laws ch. 198 (2012).

Nevertheless, as evidenced by the DOR's denial of Virgin Mobile's claim for a refund of 911 taxes collected between 2002 and 2006 (which, in turn, precipitated Virgin Mobile's subsequent appeals to the Tax Court and the Court of Appeals), the DOR has long taken the position that prepaid wireless services are subject to the 911 tax. Thus, the DOR apparently views the new legislation as simply providing a clear statutory basis and mechanism for collecting the tax.