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Pre-Paid Wireless Providers Must Pay e-911 Charges

09.22.2010

In Commonwealth of Kentucky On Behalf Of Commercial Mobile Radio Service Emergency Telecommunications Board v. Virgin Mobile U.S.A, L.P., No. 08-CI-10857 (Jefferson Cir. Ct., Div. II, May 8, 2010), appeal pending, Nos. 2010-CA-001266 & 2010-CA-1185 (Ky. App. May 21 & 30, 2010), the Jefferson County Circuit Court (“Court”) held that Virgin Mobile U.S.A., L.P. (“Virgin”), as a “CMRS provider,” was statutorily required to collect a “CMRS service charge” from its customers on behalf of the Commonwealth of Kentucky even though the statute was silent on whether it applied to pre-paid providers. 

In 1998, the Kentucky General Assembly enacted the initial version of KRS 65.7621 to create a “CMRS fund” used to support enhanced 911 (“E-911”) service.  CMRS providers (commonly known as wireless or cell phone providers) were to collect CMRS service charges on behalf of the Commonwealth from their customers that used a CMRS connection.  There were, and still are, two different methods for providing these CMRS connections.  The first is a “post-pay” method whereby customers are issued a monthly bill. The second method, which is utilized by Virgin, is referred to as the “pre-pay” method.  Under this method, service is sold by Virgin on the internet or through a vendor.  Virgin then collects limited information from its customers to complete a statutorily required quarterly report.  When a customer has exhausted his or her minutes, he or she refills their minutes by purchasing more from Virgin.

Virgin claimed that because the statute’s 1998 version referenced only “monthly billing” and not pre-paid providers, it was not required to collect and remit the CMRS service charges prior to 2006 when the statute was specifically amended to apply to pre-paid CMRS connections.  Virgin’s arguments were three-fold: (1) the statute was plain and unambiguous and therefore, required no interpretation by the Court; (2) in tax cases, an ambiguity in a statute is to be construed in favor of the taxpayer; and (3) the legislative history of the 2006 amendment shows that it was passed in order to “close a loophole” and bring in pre-pay carriers, thus the previous statute did not apply to these providers.

Based on these arguments, Virgin claimed it was entitled to claim a credit or refund for the CMRS service charges remitted under KRS 134.580(2) which provides a right to claim a tax refund, whether the payment was voluntary or involuntary, if filed within four years.  Virgin believed that because the CMRS service charge in question was, in fact, a tax, it was therefore entitled to a refund.  The Court, however, disagreed and instead held that because the CMRS service charge was properly levied according to Kentucky law, the fact that there was no statutory collection method in the statute’s original version did not relieve Virgin of what the Court characterized as Virgin’s obligation to do so.  

The Court began by analyzing the relevant statutory language.  According to KRS 65.7629(3), a CMRS service charge is due from “each CMRS connection within the Commonwealth.”  This CMRS service charge is not imposed upon a provider such as Virgin, but on all users equally because all benefit from the E-911 coverage.  Therefore, the Court stated that it did not matter whether the relationship between the provider and the customer was based upon pre-pay or post-pay methods because every user must pay the CMRS service charge.  Furthermore, because Virgin is a “CMRS provider,” it is required to collect the CMRS service charges from its customers “as part of its normal billing process” under KRS 65.7635.

Virgin contended that even if the CMRS service charge had been properly imposed on those connections under KRS 65.7629, it did not apply to them because the statute specified no method of collection for pre-paid providers until 2006.  Therefore, the sole issue before the Court was whether this demonstrated legislative intent to exempt pre-paid providers from the requirement of collecting CMRS service charges.  The Court held that it did not.

Although the Court recognized that it must resolve all doubts and ambiguities in favor of the taxpayer when the legislature fails to express its intention, it also noted that this rule does not apply when an exemption is at issue.  On the contrary, for exemptions, the presumption instead favors the taxing power in all cases of doubt as to legislative intent.  Therefore, because the Court characterized Virgin’s position as a request for an exemption to KRS 65.7629, it held that the Court cannot presume that an exemption was intended based on the statute being silent regarding pre-paid providers before 2006.  To hold otherwise, according to the Court, would not only discriminate between two types of providers, it would also go against the legislative purpose of funding the E-911 system.

In conclusion, because the Court held that the CMRS service charges were properly levied, the fact that there was no statutory collection method did not relieve Virgin of a collection obligation.  As such, the Court awarded summary judgment to the government.  Virgin has since appealed to the Kentucky Court of Appeals.

Subsequent to the Court’s decision, the government filed a motion to alter, amend or vacate the Court’s judgment arguing that it did not allow for the collection of attorney’s fees or pre-judgment interest.  After review of the motion, the Court entered an Order awarding the government reasonable attorney’s fees, but not pre-judgment interest.

KRS 65.7635(5) provides for an award of reasonable costs and attorney’s fees specifically in collection actions brought by the state.  Although the Court recognized that determining attorney’s fees can be difficult, it found that the attorney’s fees in the instant case were reasonable and therefore should have been awarded pursuant to KRS 65.7635(5).

However, in analyzing whether to award the government pre-judgment interest, the Court came to a different conclusion.  It recognized that the CMRS service charge imposed in Chapter 65 was actually a tax as its purpose was to support E-911 services by apportioning its costs among users.  Under Kentucky law, interest is not recoverable on taxes, absent a specific statutory provision and pre-judgment interest is only appropriate where it is provided by statute, by contract or where the damages represent a liquidated amount.

The Court found that although there was no statutory or contractual support for such an award, the damages involved were liquidated as they were made certain or fixed by KRS 65.7629(3).  But, an award of pre-judgment interest, which is based in equity, is still left to the Court’s sound discretion.  Because of this, the Court held that it would be inequitable to impose pre-judgment interest on the funds recovered by the government when Virgin had relied in good faith on the advice of its accountants and tax advisors.  Therefore, the government was entitled only to recover reasonable attorney’s fees from Virgin, not pre-judgment interest.

If you have questions about this topic or any other legal issue, please contact any member of the firm's State and Local Tax Team.

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