On February 2, 2010, District Judge Orlinda Naranjo ruled in favor of taxpayers, TracFone and Virgin Mobile, in their challenge to the state’s attempt to apply the e-911 fee to prepaid wireless carriers. In TracFone Wireless, Inc., and Virgin Mobile USA, LP v. Commission on State Emergency Communications and Texas 9-1-1 Alliance, Cause No. D-1-GN-08-003039, Judge Naranjo ruled that prepaid wireless services were not governed by Chapter 771 of the Texas Health and Safety Code from 2001-2005, the period in issue. Judge Naranjo also ruled that as prepaid wireless service providers, TracFone and Virgin Mobile were not required to collect and remit e-911 fees to the Comptroller. In issuing her ruling Judge Naranjo construed the provisions of § 771.0711 and § 771.073, Texas Health and Safety Code. The former statute states that a wireless service provider shall collect the fee in an amount equal to 50 cents a month for each wireless telecommunications connection from its subscribers. The latter statute provides that a customer on which a fee is imposed is liable for the fee in the same manner as the customer is liable for the charges for services provided by the service provider. Section 771.073 also states that the service provider shall collect the fees in the same manner it collects those charges for service, and that the fee must be stated separately on the customer’s bill.

In giving effect to the legislative intent in these statutes and applying the plain meaning of Chapter 771 as a whole, Judge Naranjo noted that statutes imposing a tax must be strictly construed against the taxing authority and liberally construed in favor of the taxpayer. In analyzing the statutory provisions based on the facts of the case, Judge Naranjo observed that prepaid wireless service providers do not charge monthly fees, do not have monthly subscribers and have limited contact, if any, with the consumers. In the vast majority of cases, prepaid wireless customers do not subscribe to wireless service with prepaid wireless carriers; instead, they purchase their prepaid wireless service directly from third party retailers who sell the wireless phones and prepaid phone cards. Accordingly, Judge Naranjoa further noted that on its face, the statute is ambiguous as applied to prepaid wireless service providers. In other words, the provisions of Chapter 771 do not clearly apply to prepaid wireless carriers and the prepaid customers.

Of particular importance to Judge Naranjo in support of her decision was the Legislature’s enactment in 2009 of § 771.0712 of the Texas Health and Safety Code. The court observed that this new statute specifically applies to prepaid wireless telecommunication services and changes the method of collection (at the time of each transaction, i.e., retail sale); changes who should collect the fee (the seller and not the wireless service provider); and changes the fee (to 2% of the purchase price) for the prepaid wireless service communications business model. In the court’s words, “This statute creates, in essence, a whole new method of collection and calculation of the fee specifically tailored for prepaid wireless telecommunications services.” Accordingly, Judge Naranjo concluded that (1) § 771.0712 is a change to existing law and not merely a clarification of existing law, and (2) that “Chapter 771 … does not apply to prepaid wireless telecommunications service providers and Plaintiffs are precluded from being subjected to the requirements of Chapter 771 for 2001-2005.”

While Judge Naranjo specified that her ruling applied to the years before her, 2001-2005, since Chapter 771 and in particular §§ 771.0711 and 771.073 have read the same way since 2005 as during the period in issue, these statutes should have no current application to prepaid wireless services. As Judge Naranjo notes, there is no e-911 fee statute that applies to prepaid wireless carriers until the new statute in § 771.0712 takes effect on June 1, 2010. The new statute also directs the Comptroller to promulgate rules implementing the new fee by June 1, 2010.

Gilbert Bernal of Stahl, Bernal & Davies represents TracFone in this case as co-counsel with Scott Spears and Yetter, Warden & Coleman. Mr. Bernal is prosecuting TracFone’s pending refund claim with the Comptroller to obtain a refund of the e-911 fees that TracFone erroneously paid to the Comptroller under Chapter 771.