Dot Foods, Inc. v. State

185 Wash.2d 239

372 P.3d 747

DOT FOODS, INC., Respondent/Cross Appellant

v.STATE of Washington, DEPARTMENT OF REVENUE, Appellant/Cross Respondent.

No. 92398–1.

Supreme Court of Washington, En Banc.

Argued Jan. 28, 2016.

Decided March 17, 2016.

As Amended on Denial of Reconsideration April 28, 2016.

Kelly Owings, Atty. Generals Office/Revenue Div., Charles E. Zalesky, Attorney General of Washington, Olympia, WA, for Appellant/Cross–Respondent.

Michele G. Radosevich, Dirk Jay Giseburt, Davis Wright Tremaine LLP, Seattle, WA, for Respondent/Cross–Appellant.

YU, J.

¶ 1 We are asked to decide whether retroactive application of the legislature's amendment to a business and occupation (B & O) tax exemption violates a taxpayer's rights under the due process clause of the Fourteenth Amendment, U.S. Const. amend. XIV, § 1, collateral estoppel, or separation of powers principles. Taxpayer Dot Foods contends that it should remain eligible for a B & O tax exemption pursuant to our decision in Dot Foods, Inc. v. Department of Revenue, 166 Wash.2d 912, 215 P.3d 185 (2009) Dot Foods I ), despite an intervening, contrary amendment to the applicable law. Because Dot Foods I does not encompass the tax periods before us now, we hold that retroactive application of the legislative amendment to Dot Foods does not violate due process, collateral estoppel, or separation of powers principles. We affirm in part and reverse in part.

Factual & Procedural History

¶ 2 The B & O tax is imposed for “the act or privilege of engaging in business activities” within the state. RCW 82.04.220(1). The tax applies unless a specific exemption exists. See RCW 82.04.310 –.427; see also TracFone Wireless, Inc. v. Dep't of Revenue, 170 Wash.2d 273, 296–97, 242 P.3d 810 (2010). Former RCW 82.04.423(1)(d) (1983) exempted certain out-of-state sellers from the B & O tax if they made “sales in this state exclusively to or through a direct seller's representative,” as defined in former RCW 82.04.423(2).

¶ 3 Dot Foods is an Illinois-based food reseller that sells products to service companies in Washington through its wholly owned subsidiary DTI. Dot Foods qualified for the direct seller's exemption under former RCW 82.04.423 from 1997 until 2000, when the Department of Revenue (Department) narrowed its interpretation of the statute. This new interpretation gave rise to Dot Foods I , the previous tax appeal implicated in the current dispute.

¶ 4 In 2009, we decided Dot Foods I , which held that the Department's revised interpretation of RCW 82.04.423 was contrary to the statute's plain and unambiguous language. Dot Foods I, 166 Wash.2d at 920–21, 215 P.3d 185. We concluded that “Dot [Foods] remains qualified for the B & O tax exemption to the extent its sales continue to qualify for the exemption.” Id. at 926, 215 P.3d 185.

¶ 5 Dot Foods continued to pay the full B & O tax during the pendency of its prior tax appeal to avoid penalties and interest. Clerk's Papers (CP) at 360. In December 2009, pursuant to the judgment in Dot Foods I , Dot Foods requested a refund for B & O taxes paid from January 2005 through August 2009, id. at 83–84, a time period that extends beyond the tax periods directly at issue in Dot Foods I .

¶ 6 In April 2010, the legislature amended former RCW 82.04.423 in direct response to our decision in Dot Foods I . Laws of 2010, 1st Spec. Sess., ch. 23, §§ 401, 402. The amendment retroactively narrowed the scope of RCW 82.04.423(2) and prospectively repealed the direct seller's exemption. Id. at § 401(4). It is undisputed that Dot Foods qualified for the exemption under former RCW 82.04.423 but is ineligible for the exemption under the 2010 amendment.

¶ 7 In July 2010, based on the retroactive application of the 2010 amendment, the Department denied Dot Foods' refund request for the periods outside the litigation in Dot Foods I , “[s]pecifically, the refund request for Wholesaling B & O tax for the periods from May 2006 through August 2009.” CP at 309. However, the Department explained that “retroactive application of the bill does not affect the periods included in the Dot Foods Supreme Court decision. Specifically, it will not apply to the periods from January 2000 through April 2006.” Id. at 308. Later that year, Dot Foods negotiated a settlement with the Department for over 97 percent of the B & O taxes paid from January 2000 through April 2006, the refund period directly at issue in Dot Foods I . Dot Foods' Resp. Br. & Br. on Cross–Appeal (Dot Foods' Resp. Br.) at 7.

¶ 8 Dot Foods now seeks a refund for the B & O taxes it paid from May 2006 through December 2007, the interim period beginning immediately after the tax periods at issue in Dot Foods I and ending when Dot Foods' business practices changed in 2008. After the Department denied its refund request, Dot Foods brought a refund action against the Department in Thurston County Superior Court, challenging retroactive application of the amendment under theories of collateral estoppel, separation of powers, and due process.

¶ 9 In a letter opinion, the trial court granted summary judgment to the Department on the collateral estoppel and separation of powers issues but found in favor of Dot Foods on the due process claim. CP at 468–74. The Department appealed, and Dot Foods cross appealed on the separation of powers and collateral estoppel issues. The Court of Appeals certified the case to this court pursuant to RAP 4.4.

Analysis

¶ 10 The history of litigation around Washington's B & O tax and its subsequent amendments has been a long and winding road.¹ While the constitutional validity of the ability to impose a B & O tax is not at issue, this case requires us to examine whether due process and collateral estoppel should disallow retroactive application of an amended statute to a particular period of time. The dispute before us is resolved by our own precedent, traditional legal principles, and cases from the United States Supreme Court and federal district courts.

A. Due Process Claim

¶ 11 The Supreme Court set forth the due process standard for retroactive tax legislation in United States v. Carlton, 512 U.S. 26, 114 S.Ct. 2018, 129 L.Ed.2d 22 (1994). Carlton established that “[t]he due process standard to be applied to tax statutes with retroactive effect ... is the same as that generally applicable to retroactive economic legislation,” id. at 30, 114 S.Ct. 2018 ; that is, the statute must be “ ‘supported by a legitimate legislative purpose furthered by rational means.’ ” Id. at 30–31, 114 S.Ct. 2018 (quoting Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 729, 104 S.Ct. 2709, 81 L.Ed.2d 601 (1984) ). Retroactive legislation must meet an additional burden not faced by statutes with only prospective effect, but “ ‘that burden is met simply by showing that the retroactive application of the legislation is itself justified by a rational legislative purpose.’ ” Id. at 31, 114 S.Ct. 2018 (quoting Pension Benefit, 467 U.S. at 730, 104 S.Ct. 2709 ).

¶ 12 We affirmed a retroactive tax amendment under the Carlton rational basis standard most recently in In re Estate of Hambleton, 181 Wash.2d 802, 335 P.3d 398 (2014), cert. denied, ––– U.S. ––––, 136 S.Ct. 318, 193 L.Ed.2d 227 (2015). The legislature retroactively amended the Estate and Transfer Tax Act, chapter 83.100 RCW, in direct response to our decision in In re Estate of Bracken, 175 Wash.2d 549, 290 P.3d 99 (2012). In Hambleton, we upheld the retroactive application of the amendment against a due process challenge under the Carlton rational basis standard.

¶ 13 Although the present case involves a different tax scheme, the underlying facts are analogous to those in Hambleton, which is controlling precedent here.² Under the rational basis standard set forth in Carlton, as applied in Hambleton, retroactive application of the 2010 amendment at issue here does not violate due process protections.

i. The 2010 amendment serves a legitimate legislative purpose

¶ 14 As with other economic legislation, a tax statute must serve a legitimate legislative purpose. Carlton, 512 U.S. at 30, 114 S.Ct. 2018. The legislature identified the prevention of “large and devastating revenue losses” as the primary purpose for narrowing the scope of RCW 82.04.423. Laws of 2010, 1st Spec. Sess., ch. 23, § 401(3). This is the same legislative intent that the Supreme Court recognized as a legitimate purpose in Carlton, 512 U.S. at 32, 114 S.Ct. 2018, and that we upheld in Hambleton, 181 Wash.2d at 827, 335 P.3d 398. Additionally, the legislature concluded that former RCW 82.04.423 provided “preferential tax treatment for out-of-state businesses over their in-state competitors and now creates a strong incentive for in-state businesses to move their operations outside Washington.” Laws of 2010, 1st Spec. Sess., ch. 23, § 401(3). This is analogous to the legislature's goal of restoring parity between different classes of taxpayers, which we also accepted as a legitimate legislative purpose in Hambleton, 181 Wash.2d at 826, 335 P.3d 398. See also Am. Nat'l Can Corp. v. Dep't of Revenue, 114 Wash.2d 236, 247–48, 787 P.2d 545 (1990). It is clear that the amendment to RCW 82.04.423 serves a legitimate legislative purpose under our case law.

¶ 15 Dot Foods alleges that the 2010 amendment is not supported by a legitimate legislative purpose because the legislature was attempting to reinstate the “ ‘original intent’ ” of the direct seller's exemption. Dot Foods' Resp. Br. at 19. Dot Foods contends, and the trial court agreed, that because “the [l]egislature cannot know the intentions of a prior, distant legislature,” the asserted purpose of the amendment is both arbitrary and unreasonable. Id.; see also CP at 473.

¶ 16 However, our duty is to review the statute for its rational basis, not to analyze the strength of its epistemological underpinnings. The rational basis test is the “most relaxed form of judicial scrutiny.” Amunrud v. Bd. of Appeals, 158 Wash.2d 208, 223, 143...