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          IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

VONAGE AMERICA, INC., for itself            )       NO. 63234-5-I
and as a wholly-owned subsidiary of         )
Vonage Holding Corp. and as successor               )      DIVISION ONE
in interest to Vonage USA, Inc.             )
                                            )
       Appellant/Cross-Respondent,          )
                                            )
                      v.                    )
                                            )
CITY OF SEATTLE, DIRECTOR OF                )       ORDER GRANTING MOTION
DEPARTMENT OF EXECUTIVE                     )       TO PUBLISH OPINION
ADMINISTRATION, DIVISION OF                 )
REVENUE AND CONSUMER                        )
AFFAIRS, and CITY OF SEATTLE,               )
OFFICE OF THE HEARING                       )
EXAMINER,                                   )
                                            )
       Respondents/Cross-Appellants.        )
                                            )

       The respondent, City of Seattle, has filed a motion to publish opinion filed July 6, 

2009, and appellant Vonage America, Inc. has filed a response.  The court has 

determined that the motion should be granted; now, therefore, it is hereby

       ORDERED that the opinion filed July 6, 2009 in the above-entitled case be 

published. 

       DATED this _____ day of September 2009.   

63234-5-I/2

          IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

VONAGE AMERICA, INC., for itself            )       NO. 63234-5-I
and as a wholly-owned subsidiary of         )
Vonage Holding Corp. and as successor               )      DIVISION ONE
in interest to Vonage USA, Inc.             )
                                            )
       Appellant/Cross-Respondent,          )
                                            )
                      v.                    )
                                            )
CITY OF SEATTLE, DIRECTOR OF                )       Unpublished Opinion
DEPARTMENT OF EXECUTIVE                     )
ADMINISTRATION, DIVISION OF                 )       FILED: June 6, 2009
REVENUE AND CONSUMER AFFAIRS,)
and CITY OF SEATTLE, OFFICE OF              )
THE HEARING EXAMINER,                       )
                                            )
       Respondents/Cross-Appellants.        )
                                            )

       Lau, J.  --  In this appeal, Vonage America, Inc., disputes the City of Seattle's 

telephone utility tax assessment of $131,435.55. The City based the assessment on 

the estimate of Vonage's revenue from its provision of intrastate Voice over Internet 

Protocol (VoIP) service.  Vonage contends the assessment is erroneous because (1) it 

is not authorized under RCW 35.21.714 because VoIP service is "interstate" as a 

matter of law, (2) the State's "Internet Tax Moratorium" exemption applies, and (3)

Vonage lacks a substantial nexus with the City under the federal commerce clause.  

Vonage appealed the assessment to the superior court, which rejected these 

arguments, but nevertheless vacated the assessment and remanded for 

redetermination of the tax amount due.  Because Vonage established the assessment 

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was erroneous, the superior court required the City to produce substantial evidence to 

show the tax assessment was based on the intrastate component of Vonage's VoIP 

service.  Both parties appeal.  We affirm.

                                            FACTS

       Vonage provides VoIP service to its customers, including residents of Seattle.  

VoIP technology enables consumers to conduct voice communications (calls) via a high-

speed (broadband) Internet connection.  Vonage's service also includes voicemail, call 

waiting, call forwarding, and caller identification to allow its customers to control how 

their calls are sent, received, and stored.  Vonage's customers must purchase the 

broadband connection from a separate company, usually a telecommunications or 
cable television company.1 To use Vonage's VoIP service, customers must purchase 

special software through Vonage's website or they must acquire a "plug-and-play"

device (VoIP device), which they can purchase from third party retail stores or obtain 

from Vonage's website at no cost.  

       When a customer initiates a call, the software or VoIP device converts the 

customer's outgoing analog audio signal into digital data packets.  The customer's 

Internet service provider then carries the digital data to a "gateway" computer.  The 

gateway computers hold information regarding Vonage's customers and use the 

information to authenticate whether the data is from a valid Vonage customer.  

       If the call recipient is also a Vonage customer, the digital data is transmitted 

       1 Both parties agree that "Vonage does not function as an [Internet Service 
Provider], nor does it offer or provide its customers directly or indirectly with access to 
the Internet."  

                                              -3- 

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directly over the Internet through the recipient's broadband connection to the recipient's 

computer.  This is similar to the way in which e-mail communications are sent and 

received.  The recipient's VoIP device or software then converts the incoming digital 

data into an analog audio signal, enabling the recipient to hear the call.  

       However, if the recipient is not a Vonage customer, the digital data is processed 

through one of several regional data centers. These centers convert the digital data 

into an analog audio signal, which is then directed to the Public Switched Telephone 

Network (PSTN).  Vonage contracts with its affiliate, Vonage Networks, Inc., which 

provides services that allow for VoIP-to-PSTN and PSTN-to-VoIP calls.  In turn, 

Vonage Networks purchases telephone communication services from traditional 

telephone companies that complete the communication to the recipient.  In Seattle, 

WilTel Communications and Global Crossing provided these services during the 

disputed period.  When a non-Vonage customer calls a Vonage customer, the process 

occurs in reverse order.

       Before it initiates service, Vonage also requires its customers to provide a valid 

credit card number and billing address.  It typically bills the customers monthly.  The 

bills identify "telephone" numbers assigned to the call initiator and recipient.  Although 

these numbers contain a three-digit area code like traditional telephone numbers, 

Vonage customers can choose any area code they wish, even if it is not geographically 

matched to their billing address or where they reside.  Vonage's VoIP service is 

nomadic because its customers can use the service anywhere in the world they have 

access to the Internet, without having to change their VoIP telephone numbers.  

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Nevertheless, Vonage requires its customers to register their street address for routing 

emergency communications.  And Federal Communications Commission ("FCC")

regulations require VoIP providers to obtain location information from their customers 

before initiating service and provide a mechanism for customers to update their location 
information if their location changes.2  

       Sometime in December 2002, Vonage began selling VoIP service to Seattle 

residents.  Acting through advertising agencies, Vonage purchased promotional 

materials that were broadcast or circulated in Seattle through television, radio, or 

newspapers. But Vonage did not own or lease any property or employ any employees 

in Seattle during this period.  When the City audited Vonage for the period between 

December 1, 2002, and December 31, 2005, it determined that Vonage was subject to 

the City's telephone utility tax.  Therefore, on May 18, 2006, the City issued a tax 

assessment of $131,435.55.  In computing the assessment, the City relied on Vonage 

customer billing addresses and emergency response registrations in Seattle to 

determine Vonage's gross revenue subject to tax.  The City deducted Vonage's 

revenue from interstate calls in order to limit the tax assessment to revenue from 

       2 In accordance with these requirements, Vonage's user agreement requires its 
customers to keep their location information updated.  "For each phone number that 
you use for the Service, you must register with Vonage the physical location where you 
will be using the Service with that phone number.  When you move the Device to 
another location, you must register your new location." However, Vonage asserts that it 
has no way to police this requirement or determine if the location information provided 
by the customer is accurate.  In its regulations, the FCC agreed "that it currently is not 
always technologically feasible for providers of interconnected VoIP services to 
automatically determine the location of their end users without end users' active 
cooperation." Vonage also contends that it is impossible to determine exactly what 
proportion of calls enabled through its service are intrastate versus interstate in nature.

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intrastate calls.3  

       The City estimated a revenue deduction of approximately three percent for the 

interstate calls based on usage charges obtained from an August 2005 invoice from 

WilTel to Vonage. However, this invoice reflected WilTel's charges to Vonage for 

traditional landline calls made by potential and new customers to Vonage's toll free

customer service number.  It is undisputed that this invoice did not reflect Vonage's 

interstate service revenues.  In response, Vonage produced a different August 2005 

invoice from WilTel that showed terminating VoIP-to-PSTN calls for Vonage customers 

to establish the correct proportion of interstate to intrastate calls.  But the City's auditor 

did not receive this invoice because it was too large to be delivered through the City's 

e-mail system.

       On June 16, 2006, Vonage appealed the assessment to the Seattle hearing 

examiner, contending that it was not subject to the City's telephone utility tax and,

alternatively, that the assessment amount was erroneous.  At the hearing, Vonage 

presented a "traffic study" based on five WilTel invoices, from which it estimated that 

81.73 percent of calls by Vonage customers carried over WilTel's communications 

network were interstate and only 18.27 percent were intrastate.  After the evidentiary 

hearing, the hearing examiner concluded that Vonage was subject to the tax.  The 

hearing examiner also found that neither the August 2005 invoice relied on by the 

auditor nor Vonage's traffic study accurately reflected the revenue derived from 

       3 The City made this deduction because RCW 35.21.714, which authorizes the 
imposition of the City's telephone utility tax, prohibits the City from imposing the tax "for 
access to, or charges for, interstate services."

                                              -6- 

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intrastate as opposed to interstate Seattle calls.  Nevertheless, the hearing examiner 

affirmed the assessment, concluding that under the Seattle Municipal Code, it was 

Vonage's burden to establish the correct tax amount.

       Vonage sought appeal by writ of review to the superior court.  The superior court 

concluded Vonage was subject to the City's telephone utility tax, but that the tax 

assessment impermissibly included charges for interstate activity.  It vacated the 

assessment and held that on remand, "the City must show by substantial evidence that 

the taxes being assessed are for intrastate services only."  Vonage and the City 
appeal.4

                                          ANALYSIS

       Vonage is Subject to the City's Telephone Utility Tax

       Vonage appealed the hearing examiner's decision under a writ of review as 

authorized by RCW 7.16.120.  On review from such an appeal, this court reviews 

issues of law de novo and issues of fact for substantial evidence.  Gen. Motors Corp. v. 

City of Seattle, 107 Wn. App. 42, 47, 25 P.3d 1022 (2001).  Neither Vonage nor the 

City assign error to the hearing examiner's factual findings, so they are verities on 

appeal.  Gen, Motors, 107 Wn. App. at 47.

       The City's telephone utility tax is a tax on the privilege of engaging in telephone 

business in Seattle.  SMC 5.48.050A.  The City defines "telephone business" broadly to 

include more than traditional telephone service.

       "Telephone business" means the providing; by any person of access to a local 
       telephone network, local telephone network switching service, toll service, 

       4 Vonage sought direct review by the Washington Supreme Court, and the City 
cross-appealed.  The supreme court denied review.

                                              -7- 

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       cellular or mobile telephone service, coin telephone services, pager service or 
       the providing of telephonic, video, data, or similar communication or 
       transmission for hire, via a local telephone network, toll line or channel, cable, 
       microwave, or similar communication or transmission system. The term includes 
       cooperative or farmer line telephone companies or associations operating 
       exchanges. The term also includes the provision of transmission to and from the 
       site of an internet provider via a local telephone network, toll line or channel, 
       cable, microwave, or similar communication or transmission system. . . . 

SMC 5.30.060(C) (emphasis added).  Before the hearing examiner, Vonage argued 

that it did not qualify as a telephone business under this provision, contending instead 

that it should be treated as a provider of additional Internet services.  On appeal, 

Vonage does not dispute that its service falls under the City's definition of telephone 

business.  Rather, it argues that the City's tax is not authorized under state law.  

       "A municipal corporation's authority to tax must be delegated by the state 

legislature."  Cmty. Telecable of Seattle, Inc. v. City of Seattle, 164 Wn.2d 35, 41, 186 

P.3d 1032 (2008).  RCW 35.21.714(1) grants cities the authority to impose telephone 

utility taxes.

       Any city which imposes a license fee or tax upon the business activity of 
       engaging in the telephone business which is measured by gross receipts or 
       gross income may impose the fee or tax, if it desires, on one hundred percent of 
       the total gross revenue derived from intrastate toll telephone services subject to 
       the fee or tax: PROVIDED, That the city shall not impose the fee or tax on that 
       portion of network telephone service which represents charges to another 
       telecommunications company, as defined in RCW 80.04.010, for connecting 
       fees, switching charges, or carrier access charges relating to intrastate toll 
       telephone services, or for access to, or charges for, interstate services, or 
       charges for network telephone service that is purchased for the purpose of 
       resale, or charges for mobile telecommunications services provided to
       customers whose place of primary use is not within the city.

(Emphasis added.)

       Vonage contends that this statute prohibits Seattle from imposing any telephone 

                                              -8- 

63234-5-I/9

utility tax against it because its service is interstate and cities cannot impose the tax on 

"access to, or charges for, interstate service." RCW 35.21.714(1). The City counters 

that it only seeks to tax the revenue Vonage derives from the intrastate component of 

its service, i.e., calls originating and terminating within Washington state.  But Vonage 

argues that its entire service is interstate as a matter of law, regardless of any 

intrastate usage of its service as a matter of fact.  It relies on Qwest Corp. v. City of 

Bellevue, 161 Wn.2d 353, 166 P.3d 667 (2007) to assert that "a telephone service is 

characterized as 'interstate' if such service is subject to federal (FCC) regulatory 

jurisdiction rather than state . . . jurisdiction, and [] the courts should not parse the 

intrastate versus interstate usage of a service once the service is determined to be 
'interstate.'"5 Appellant's Opening Br. at 15.  

       Vonage's argument depends entirely on its reading of Qwest.  At issue was the 

City of Bellevue's attempt to tax revenue that Qwest obtained from certain charges paid 

by its customers.  Qwest, 161 Wn.2d at 359.  Specifically, the charges consisted of 

"customer access line charges," and "private line," "frame relay," and "ATM or 

asynchronous transfer mode" charges.  Qwest, 161 Wn.2d at 356.  These charges 

were federally tariffed charges imposed pursuant to FCC regulations to compensate 

       5 It is undisputed that Vonage's VoIP service is subject to FCC regulatory 
jurisdiction.  See In re Vonage Holdings Corp. Petition, 19 F.C.C.R. 22404 ¶1 (2004).  
But, as Vonage concedes, this fact alone does not preclude state or municipal taxation 
of its service as a matter of federal law.  Indeed, the FCC has specifically declined to 
preempt local taxation of Vonage's VoIP service.  Id. Thus, Vonage's argument rests 
entirely on its contention that under Qwest, telephone services subject to FCC 
jurisdiction must be deemed completely "interstate" as a matter of state law.

                                              -9- 

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Qwest for providing its customers access to the national interstate telephone system.6  

Qwest, 161 Wn.2d at 360 n.11.  While Qwest's customers could use its service to place 

both intrastate and interstate telephone calls, under FCC rules, Qwest could only levy 

the access charges when its customers indicated that they planned to use the service 

for at least 10 percent interstate calls.  Qwest, 161 Wn.2d at 361.  

       The City of Bellevue ("Bellevue") argued that it should be able to tax some of 

Qwest's revenue from the charges because in some cases, customers were not using 

the service for interstate calls at all.  It pointed to its own invoices from Qwest, which 

showed frame relay charges for certain dedicated lines the city government used only 

to connect various offices with each other, entirely within Washington state.  Qwest, 

161 Wn.2d at 360.  In essence, Bellevue argued that because its actual usage of the 

lines was entirely intrastate, the revenue Qwest derived from the frame relay charges 

was not for providing interstate service.  Therefore, the revenue should be subject to 

Bellevue's uncontested authority to tax Qwest for its provision of intrastate telephone 

service.  Qwest, 161 Wn.2d at 359 -- 60.

       The Washington Supreme Court rejected this argument, holding that the 

revenue Bellevue sought to tax derived from Qwest's interstate service as a matter of 

law. It emphasized that under FCC rules, the charges were based on "the customer's 

initial indication of how they plan to use the service and not how the service is 

subsequently used."  Qwest, 161 Wn.2d at 361.  Because the charges at issue were 

       6 A "tariff" in this context is defined as "Schedules of rates and regulations filed 
by common carriers." 47 C.F.R. § 61.3(rr) (2008). Under 47 U.S.C. § 203, common 
carriers like Qwest are required to file their rates, or tariffs, with the FCC.  Qwest, 161 
Wn.2d at 362.  

                                              -10- 

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defined by federal tariff as being for interstate service, imposed in exchange for 

providing access to the national interstate telephone system, the court concluded they 

were "interstate" as a matter of law regardless of the actual use of the service.  Qwest, 

161 Wn.2d at 361 -- 62.  The court did not hold, as Vonage contends, that by being 

subject to FCC regulatory jurisdiction, a service that is used for both intrastate and 

interstate calls is entirely "interstate" as a matter of law for municipal taxation
purposes.7  The court's limited holding applied only to the federally tariffed charges at 

issue in that case.  

       But Vonage argues that its service is covered by Qwest's holding even though it 

is not subject to federal tariff filing requirements.  It points to the court's statement that 

"all interstate services are exempt from taxation, not simply those for which rates are 

contained in tariffs filed with the FCC."  Qwest, 161 Wn.2d at 362.  This statement, 

however, did not relate to whether a service with both interstate and intrastate 

components is "interstate" as a matter of law.  Rather, in context, this statement 

represents a different holding made in response to a different argument.

       Bellevue argued that RCW 35A.82.060's bar on taxes "'"for access to, or 

charges for, interstate services"'" was not triggered because an FCC tariff defined the 

       7 Vonage relies primarily on this passage of the court's opinion:  "To summarize, 
whether the FCC or the WUTC [Washington Utilities and Transportation Commission] 
has jurisdiction over certain charges (i.e., whether the charges are for access to 
interstate or intrastate service) is not determined by looking to the customer's use of 
the connections.  Instead, whether charges are charges for access to interstate (as 
opposed to intrastate) service is a question of law, and the City's contention that a court 
must conduct factual analysis to determine the interstate or intrastate nature of the 
charges is erroneous."  Qwest, 161 Wn.2d at 361.  But the charges being discussed in 
this passage are federally tariffed charges, a point critical to the court's holding.

                                              -11- 

63234-5-I/12

service as interstate.8  Qwest, 161 Wn.2d at 362.  It noted that a prior version of RCW 

35A.82.060 had prohibited cities from imposing the tax on "'access to, or charges for, 

interstate services for which rates are contained in tariffs filed with the federal 

communications commission.'"  Qwest, 161 Wn.2d at 362 (quoting Laws of 1983, 2d 

Ex. Sess., ch. 3, § 38).  Bellevue argued that by omitting the italicized language, the 

legislature intended to prohibit taxes only on services that were in fact interstate,

without regard to the existence of FCC tariffs.  Qwest, 161 Wn.2d at 362.  The court 

rejected this argument and read the omission as an expansion of the tax prohibition 

rather than a limitation on it.  "[U]nder the amended version of the statute, all interstate 

services are exempt from taxation, not simply those for which rates are contained in 

tariffs filed with the FCC."  Qwest, 161 Wn.2d at 362.  Thus, the statement Vonage 

relies on does not mean that services subject to federal regulation but not tariff filing 

requirements are interstate as a matter of law.  Rather, it was a statement that the 

State's prohibition on municipal taxation of services that are interstate is not limited to 

those that are subject to federal tariffs.  Here, for example, RCW 35.21.714 bars the 

City from taxing the interstate component of Vonage's VoIP service even though it is 

not required to file tariffs with the FCC.  This is consistent with the superior court's 

ruling that the City can tax Vonage only for intrastate activity.  

       In sum, Qwest did not hold that services like Vonage's are interstate as a matter 

of law regardless of the actual service usage.  Under RCW 35.21.714, cities have the 

       8 The only difference between RCW 35A.82.060 and 35.21.714 is that the former 
is applicable to code cities, whereas the latter applies to noncode cities like Seattle.  
Qwest, 161 Wn.2d at 363 n.12.

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option of taxing the intrastate component of such services.  See Qwest, 161 Wn.2d at 

359 ("It is undisputed that under state law, the City may tax Qwest's charges for and its 

provision of access to intrastate services.").  However, the City may not tax the 
interstate component of Vonage's VoIP service.9  See Qwest, 161 Wn.2d at 362 ("all

interstate services are exempt from taxation.")  We hold the superior court properly 

concluded that Vonage is subject to the City's telephone utility tax but the assessment 

must be based on the intrastate component of Vonage's service.

       Internet Tax Moratorium

       Vonage also argues that the City's tax assessment is barred by another state 

statute, RCW 35.21.717, the "Internet Tax Moratorium." This statute provides,

       Until July 1, 2006, a city or town may not impose any new taxes or fees specific 
       to internet service providers.  A city or town may tax internet service providers 
       under generally applicable business taxes or fees, at a rate not to exceed the 
       rate applied to a general service classification.  For the purposes of this section, 
       "internet service" has the same meaning as in RCW 82.04.297.

In turn, RCW 82.04.297(3) defines "internet service."

       a service that includes computer processing applications, provides the user with 
       additional or restructured information, or permits the user to interact with stored 
       information through the internet or a proprietary subscriber network. "Internet 
       service" includes provision of internet electronic mail, access to the internet for 
       information retrieval, and hosting of information for retrieval over the internet or 

       9 Vonage also argues that it is impossible to determine the exact ratio of 
interstate to intrastate calls and that the Seattle billing addresses and emergency 
contact information could be inaccurate in some cases.  Consequently, Vonage argues, 
it should not have to pay the City's telephone utility tax at all.  We reject this argument.  
Assuming that Vonage is correct that there is inevitably some degree of imprecision in 
determining the revenue from its Seattle intrastate VoIP service, that imprecision does
exempt it from the obligation to pay the City's tax.  We note that this is not the only 
situation where there is an absence of complete mathematical certainty, yet taxation is 
still required.  See, e.g., Washington Beef, Inc. v. County of Yakima, 143 Wn. App. 165, 
168, 177 P.3d 162 (2008) (noting that "[s]etting the value of assets for the purpose of 
assessing property taxes is more of an art than a science.").

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       the graphical subnetwork called the world wide web.

       Vonage contends its VoIP service is an Internet service because it has 

technological similarities to the transmission of e-mail communications.  It relies on

Community Telecable of Seattle v. City of Seattle, 164 Wn.2d 35, 186 P.3d 1032 

(2008), which held that Comcast's broadband cable modem business qualified as an 

Internet service, exempt from tax under the moratorium.  But unlike Comcast, Vonage 

does not provide its customers with access to the Internet.  It is undisputed that 

Vonage's customers must purchase a broadband Internet connection from a separate 

company.  Thus, while Vonage's VoIP service is delivered through the Internet and has 

some similarities to e-mail, it is not an Internet service provider, exempt from tax under 

RCW 35.21.717.

       Nexus

       Vonage also argues that the federal commerce clause bars the City's tax 

because its contacts with Seattle were insufficient to establish a "substantial nexus"

with the City.  The commerce clause authorizes Congress to "regulate commerce . . . 

among the several states."  U.S. Const. art I, § 8, cl. 3.  The United States Supreme 

Court has interpreted this provision to prohibit certain state actions that interfere with 

interstate commerce, even in the absence of direct action by Congress.  Quill Corp. v. 

North Dakota, 504 U.S. 298, 309, 112 S. Ct. 1904, 119 L. Ed. 2d 91 (1992).  In 

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S. Ct. 1076 (1977), the 

Court held that a state tax would withstand a commerce clause challenge when the tax 

"is applied to an activity with a substantial nexus with the taxing State, is fairly 

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63234-5-I/15

apportioned, does not discriminate against interstate commerce, and is fairly related to 

the services provided by the State."  In Tyler Pipe Industries, Inc. v. Washington State 

Department of Revenue, 483 U.S. 232, 250, 107 S. Ct. 2810 (1987), the Court 

addressed whether the actions of Tyler Pipe's independent contractors in the state 

could satisfy the substantial nexus requirement and justify imposition of Washington's 

business and occupation tax on the company.  The Court approved the following nexus 

test:  "'[T]he crucial factor governing nexus is whether the activities performed in this

state on behalf of the taxpayer are significantly associated with the taxpayer's ability to 

establish and maintain a market in this state for the sales.'"  Tyler Pipe, 483 U.S. at 250

(quoting Tyler Pipe Indus., Inc. v. Dep't of Revenue, 105 Wn.2d 318, 323, 715 P.2d 

123 (1986)).

       Vonage argues that under Quill, a case that postdates Tyler Pipe, it lacks a 

substantial nexus with Seattle because it has no physical presence in the City.  In Quill, 

the Court considered whether North Dakota's use tax on an out-of-state mail-order 

business unduly burdened interstate commerce.  Quill, 504 U.S. at 301.  The Court 

concluded that the business lacked a substantial nexus with the State because it 

maintained no physical presence in the state, only contacting its North Dakota 

customers via mail or common carrier.  Quill, 504 U.S. at 304, 311, 315.  Consequently, 

the commerce clause barred the State from collecting the use tax.  Quill, 504 U.S. at 

311.  

       But it is not clear that a physical presence requirement for nexus applies beyond 

sales and use taxes.  See Quill, 504 at 314 ("we have not, in our review of other types 

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of taxes, articulated the same physical-presence requirement that [National] Bellas 

Hess[, Inc. v. Department of Revenue of Ill., 386 U.S. 753, 87 S. Ct. 1389, 18 L. Ed. 2d 

505 (1967)] established for sales and use taxes").  Some decisions since Quill have 

extended the physical presence requirement to other kinds of taxes whereas others 

have declined to do so.  See, e.g., J.C. Penney Nat'l Bank v. Johnson, 19 S.W.3d 831, 

839 (Tenn. Ct. App. 1999) (applying physical presence test to franchise and excise 

taxes), Geoffrey, Inc. v. S. Carolina Tax Comm'n, 313 S.C. 15, 437 S.E.2d 13 (1993) 

(declining to extend physical presence test in context of income and business license 

taxes).  In General Motors Corp. v. City of Seattle, 107 Wn. App. 42, 55, 25 P.3d 1022 

(2001), this court "declin[ed] to extend Quill's physical presence requirement" in the 
context of the City's business and occupation tax.10 In Ford Motor Co. v. City of 

Seattle, 160 Wn.2d 32, 43, 156 P.3d 185 (2007), the court noted that it denied review 

of General Motors and that the Ford holding was consistent with its other decisions.  

       While there is no evidence that Vonage owned or leased property in Seattle or 

that it had employees in Seattle during the audit, it obtained a sufficient physical 

presence in the city by purchasing the right to use telephone lines in Seattle through its 

affiliate, Vonage Networks, Inc.  And Vonage advertised its VoIP service in Seattle to 

       10 Vonage contends that this statement is dicta because physical presence was 
established by the company's sales representatives, who visited the city on a monthly 
basis.  But the court's substantial nexus discussion did not rely on these visits alone or 
discuss the physical presence requirement in connection with the sales 
representatives.  Instead, its conclusion that General Motors had a substantial nexus 
with the City was based on the "market" test described in Tyler Pipe.  "We are satisfied 
that in this case, the collective activities of each automaker are strategically designed 
to maximize their sales within the City and that the absence of these activities would 
significantly affect their ability to maintain a share of the Seattle market."  Gen. Motors, 
107 Wn. App. at 53.

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"establish and maintain a market" in the city.  Vonage sold its service to Seattle 

customers with Seattle billing addresses.  This is sufficient to establish the requisite 

nexus.  See Mayor & City Counsel v. Vonage Am., Inc., 569 F. Supp. 2d 535, 538

(2008) ("in the context of Vonage's nomadic VoIP, the presence of a billing address in 

the taxing locality is sufficient to constitute a 'substantial nexus.'").

       Cross-Appeal

       The City argues that Vonage failed to prove the correct tax amount due and that 

the superior court erroneously shifted the burden of establishing this amount to the 

City.  The City relies on SMC 5.55.140B:  "The Director's assessment or refund denial 

shall be regarded as prima facie correct, and the person shall have the burden to prove 

that the tax assessed or paid by him is incorrect, either in whole or in part, and to 

establish the correct amount of tax."  The City concedes that Vonage satisfied its 

burden of proving that the City's tax assessment was incorrect.  Nevertheless, the City 

contends that Vonage is required to pay this incorrect assessment in full because it 

failed to satisfy its burden of proving the correct tax amount.  The City's argument 

mirrors the hearing examiner's analysis.

              The Director also attempted to include only intrastate service revenues in 
       calculating the tax owed.  The evidence presented by Vonage shows that the 
       August 2005 WilTel invoice used by the Department to estimate interstate 
       service revenues was not related to the use of service by Vonage's customers.  
       Thus, the assessment may be inaccurate, since this invoice did not reflect 
       interstate service revenues.  However, Vonage's "traffic study" of minutes does 
       not establish how much of the contested revenues were related to interstate 
       services; the five-month traffic study does not identify the calls that are 
       "interstate," e.g., which originated in Seattle and terminated outside the state.  
       Because of the bundled nature of Vonage's records, it is clearly difficult for the 
       company to provide this information after the service has occurred, but the Code
       places the burden on the taxpayer to establish the correct amount of tax, if the 

                                              -17- 

63234-5-I/18

       Director's assessment is to be modified.  Vonage has not met its burden to
       establish the correct amount of tax, as required under SMC 5.55.140. Thus, the 
       Department's assessment and calculation of tax must be affirmed.

       But as the superior court correctly observed, applying the City's burden-shifting 

procedure under these facts would result in Vonage paying tax on revenues that are 

indisputably from the interstate component of its service.  Yet the state statute 

authorizing imposition of the tax specifically prohibits the imposition of such tax.  See

RCW 35.21.714(1) ("[T]he city shall not impose the fee or tax . . . for access to, or 

charges for, interstate services.").  The City cannot use SMC 5.55.140B to obtain 

greater taxing ability than the legislature has delegated it.  See Cmty. Telecable of 

Seattle, Inc. v. City of Seattle, 164 Wn.2d 35, 41, 186 P.3d 1032 (2008) (municipal 

corporation's taxing authority derives from State).

       Additionally, the City argues that it should not be required to bear the burden of 

proving the correct amount of the tax on remand.  Instead, the taxpayer should bear the 

burden because it "holds the information and is in the best position to divide its revenue 
between taxable and nontaxable activities."11 Cross-Appellant's Reply Br. at 4. But the 

       11 The accuracy of this general proposition is very much in doubt in this case.  
The FCC has determined that VoIP is difficult if not impossible to accurately segregate 
into interstate and intrastate use.  See In re Vonage Holdings Corp. Petition 19 
F.C.C.R. 22404 ¶29 (2004).  Courts have reached the same conclusion.  See, e.g., 
Vonage Holdings Corp. v. Nebraska Pub. Serv. Comm'n, 2009 WL 1161584 *4 (8th Cir. 
May 1, 2009) (concluding that impossibility exception, which applies when a service 
otherwise subject to dual regulation is impossible or impractical to separate into 
interstate and intrastate components, justified FCC's preemption of state regulation of 
Vonage).  And the hearing examiner here acknowledged, "[I]t is clearly difficult for 
[Vonage] to provide this information."  

                                              -18- 

63234-5-I/19

City misreads the superior court's holding.  The superior court determined that there 

was insufficient evidence to support the City's tax assessment.  "The invoice that the 

City used to determine the ratio of interstate to intrastate calls had nothing to do with 

use of the VoIP service; rather it was related to calls made to Vonage's customer 

service number." The superior court remanded with instructions for the City to produce

substantial evidence that its taxes were based on intrastate usage of Vonage's VoIP 

service.  And afterwards, the burden would fall on Vonage to establish the correct tax 

amount.  The superior court did not impose on the City the burden to establish the 

correct tax amount.  But it did require the City to base its assessment on a genuine 

estimate of Vonage's intrastate activity rather than on a mistakenly submitted invoice 
that had nothing to do with the ratio of interstate to intrastate calls.12  

       On remand, the City must produce substantial evidence that its tax assessment 

is based on the intrastate component of Vonage's VoIP service, i.e., an estimate of 

calls initiated and terminated within Washington state.  Once this burden is met, it falls 

on Vonage to demonstrate that the estimate is inaccurate and to establish a more 
accurate estimate.13

       12 In its memorandum opinion, the court expressed its confidence that the City 
could meet this minimal requirement.  "[T]his court is persuaded by the following 
statement made by the auditor during cross-examination that an authorized tax can be 
established:  'And if it was necessary to allow them an interstate deduction even though 
they are bundling it together, I do see how we could use something like that [traffic] 
study.'"  We note that the invoice Vonage submitted to the auditor, which was too large 
to be delivered through the City's e-mail system, might also provide a sufficient basis to 
show that its assessment is for the intrastate component of Vonage's service.

       13 Vonage presented evidence to the hearing examiner suggesting that 81.73 
percent of calls by Vonage customers carried over WilTel's communications network 
were interstate and only 18.27 percent were intrastate.  The hearing examiner 

                                              -19- 

63234-5-I/20

       We affirm.

WE CONCUR:

concluded that this evidence failed to accurately establish Vonage's revenues from the 
interstate component of its service because the evidence did not identify the calls 
originating from Seattle and terminating outside the state.  But the mere fact that 
Vonage's efforts to establish the correct amount of tax rely on estimates does not 
render them ineffective.  The City essentially argues that Vonage should have to pay 
an obviously inflated amount because it did not prove exactly how much less it owes.  
We reject this argument.  While it may be difficult to prove the interstate to intrastate 
ratio with precision, the City's tax should be based on a reasonable estimate of 
Vonage's revenue from the intrastate component of its service.  We note that the FCC 
has dealt with the difficulty of determining the actual proportion by conducting "traffic 
studies" and establishing a "safe harbor" of 64.9 percent, which approximates the 
percentage of VoIP revenues from interstate calls and that this approach was upheld in 
Vonage Holdings Corp. v. Federal Communications Commission, 489 F.3d 1232 (D.C. 
Cir. 2007).

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