TracFone provides cellular or wireless telecommunication
services -- bundled with wireless handsets -- to customers in California at market-based rates, and has apparently done so since 1999.1 TracFone resells minutes and network connectivity which it purchases on a wholesale basis from facilities-based carriers.
Customers prepay for their wireless service through TracFone. TracFone has its proprietary and copyrighted "software included in [the] telephone handsets" it sells to customers in California,2 software that is used to manage and control the handsets and the purchase and sale of minutes of wireless service through the handset.3 TracFone's agreement with Verizon Wireless, for instance, requires TracFone "to own, operate and maintain at all times during this Agreement the technology platform (`Platform') that supports and monitors the TracFone Handset."4 Its agreement with AT&T provides, similarly, that TracFone "must provide and maintain all Mobile Radio Unit equipment and ensure that it is technically and operationally compatible with the CMRS systems [of AT&T],"5 and its agreement with T-Mobile refers to the "equipment, software, technology, handsets, accessories or other materials or equipment used by [TracFone] in its business operation or by [TracFone's] End Users."6
On August 20, 2008, TracFone filed an Advice Letter with this Commission, to which it attached a petition asking the Commission designate it as eligible for Federal universal service support ("Lifeline and Link Up Services to Qualified Households") (Petition). Several parties filed comments or protests related to the Petition. In the course of investigating the issues raised by the comments and protests, staff of the Commission's Communications Division (CD) discovered that TracFone had apparently never collected or remitted State universal service surcharges,7 and had not paid required user fees since at least 2004.8 On May 1, 2009, Staff requested that TracFone pay the amounts due;9 TracFone refused,10 and for that reason and others the Commission has denied TracFone's Petition through Resolution (Res.) T-17235. Resolution T-17235, and a Staff Report published concurrently with this OII/OSC, set out further facts relating to TracFone's failure to collect and remit the required surcharges and fees.
In response to a Communications Division data request, TracFone reported that it had California intrastate revenues in the following amounts for the following years:
2006 - $ 57,176,752.00
2007 - $ 63,503,404.00
2008 - $ 62,022,339.0011
Based on this reporting, and imputed numbers for 2004 and 2005, Staff reports that TracFone owes the State an aggregate total of over $13,170,727 in surcharges, fees, interest and penalties (see Appendix A, attached hereto).12
1 See accompanying Staff Report at 6 (TracFone payment of user fees from 1999-2004). As described in more detail in the accompanying Staff Report , the Wireless Registration Identification number used by TracFone was originally granted to a company named Topp Telecomm, Inc., in 1997. Id. at 2.
2 TracFone's October 13, 2009 Opening Comments on Proposed Resolution T-17235, at 8, fn. 7.
3 TracFone Wireless, Inc. v. Carson, Civil Action No. 3:07-CV-1761-G, August 28, 2008 Memorandum Opinion and Order, 2008 U.S.Dist. LEXIS 68673 (N.D. Tex), at *2 (TracFone's assertion of "copyrighted and proprietary software computer code installed in the Phones"). The Court there described the importance of TracFone's software:
Customers prepay for wireless service from Tracfone by purchasing "airtime cards." Id. PIN numbers located on the cards are entered into the specially manufactured phones to load airtime minutes. Id. The airtime cards are carried by national retailers such as
Wal-Mart, Target, and Sam's Club. Id. Software installed onto the phones prevents their use without the loading of airtime minutes from a TracFone or NET10 airtime card. Id.
P 25. TracFone's business model turns on its phones being used solely on the TracFone prepaid wireless network. Id. P 24. TracFone sells its phones for less than cost and "recoups this subsidy through profits earned on the sale of the Tracfone prepaid airtime cards that are required [*3] to make and receive calls on the TracFone/NET10 Prepaid Phones."
Id. at 2-3 (emphasis added).
4 [Verizon's] Agreement for TracFone Wireless Inc., at 5. ¶ 2.3(ii). TracFone submitted this and the AT&T Mobility and T-Mobile agreements cited below under P.U. Code section 583, but has waived the protections of 583 to the extent set forth here.
5 TracFone's Reseller Agreement with AT&T Mobility, at 10.
6 [T-Mobile] Wireless Service Purchase Agreement, at Section 1.14 (emphasis added).
7 P.U. Code §§ 270 et seq., 701, and 739.3, inter alia, require the collection and remittance of such surcharges, as shown in the chart below.
8 P.U. Code §§ 401-410 and 431-35 require the collection and remittance of such fees, as shown further in the chart below.
9 May 1, 2009 email from CD staff to TracFone counsel, Attachment F to Staff Report; see also discussion in Staff Report at 6-8.
10 May 15, 2009 letter from TracFone counsel to staff, Attachment H to Staff Report; see also discussion in Staff Report at 6-8.
11 Staff Report, Attachment J.
12 Id. at Appendix A. A portion of Appendix A, addressed to the surcharge issue (which alone accounts for $12.5 million of the monies owed), is attached hereto, likewise as Appendix A.