Lakehaven Water & Sewer Dist., Highline Water Dist., & Midway Sewer Dist., Mun. Corporations v. City of Fed. Way, Corp.

195 Wash.2d 742

466 P.3d 213

LAKEHAVEN WATER AND SEWER DISTRICT, Highline Water District, and Midway Sewer District, municipal corporations, Appellants,

v.CITY OF FEDERAL WAY, a municipal corporation, Respondent.

NO. 96585-4

Supreme Court of Washington.

Argued January 16, 2020

Filed June 18, 2020

Steven Hugh Pritchett, Lakehaven Water and Sewer District, Po Box 4249, Federal Way, WA, 98063-4249, Mark S. Leen, Inslee Best Doezie & Ryder PS, 10900 Ne 4th St. Ste. 1500, Bellevue, WA, 98004-8345, Philip Albert Talmadge, Talmadge/Fitzpatrick, 2775 Harbor Ave. Sw, Third Floor Ste. C, Seattle, WA, 98126-2138, John William Milne, Attorney at Law, 1112 108th Ave. Se, Bellevue, WA, 98004-6839, for Appellants.

Jamie L. Lisagor, Jessica Anne Skelton, Shae Blood, Pacifica Law Group, 1191 2nd Ave. Ste. 2000, Seattle, WA, 98101-3404, J. Ryan Call, City of Federal Way, 33325 8th Ave. S., Federal Way, WA, 98003-6325, Mark David Orthmann, City of Covington, 16720 Se 271st St. Ste. 100, Covington, WA, 98042-7342, for Respondent.

Christopher Thomas Benis, Hecker, Wakefield & Feilberg, PS, 321 1st Ave. W., Seattle, WA, 98119-4103, for Amicus Curiae Rental Housing Association of Washington.

Erik J. Lamb, City of Spokane Valley, 10210 E. Sprague Ave., Spokane Valley, WA, 99206-3682, Sheila Marie Gall, Association of Washington Cities, 1076 Franklin St. Se, Olympia, WA, 98501-1346, for Amici Curiae Washington State Association of Municipal Attorneys, and Association of Washington Cities.

Michael Martin Hanis, Patrick Michael Hanis, Hanis Irvine Prothero PLLC, 6703 S. 234th St. Ste. 300, Kent, WA, 98032-2903, for Amicus Curiae Washington Association of Sewer and Water Districts.

Joseph Patrick Bennett, Hendricks-Bennett PLLC, 402 5th Ave. S., Edmonds, WA, 98020-3402, for Amicus Curiae Alderwood Water & Wastewater District.

STEPHENS, C.J.

¶ 1 This case is about the authority of one municipal corporation to impose an excise tax on another municipal corporation doing business within its borders. A code city adopted an ordinance that levies an excise tax on all businesses providing water or sewer services within the city's limits. Several water-sewer districts petitioned for declaratory judgment, arguing the city lacked express legislative authority to impose the tax on them. The districts also raised a governmental immunity defense. They further challenged the ordinance on constitutional grounds, arguing it violates both due process vagueness principles and privileges and immunities antifavoritism principles. The parties cross moved for summary judgment, and the superior court granted summary judgment in the city's favor. We granted direct review.

¶ 2 Courts play a limited role in reviewing challenges to local tax policy. Under Washington's constitutional framework, the legislature delegates authority to local governments to levy taxes, and we interpret that delegation of local taxing authority for compliance with the constitution and the general laws of the state. The legislature here granted code cities broad authority to levy excises on all places and kinds of business. That policy prescription contemplates code cities may choose to exercise their local taxing power by imposing excises for regulation or revenue on the business of providing water-sewer services to ratepayers. We hold the governmental immunity doctrine does not bar the city from taxing the districts because they perform a proprietary function when they engage in this business. As for the districts’ constitutional claims, they lack standing to bring such claims. For these reasons, we affirm.

FACTS

¶ 3 The city of Federal Way (City) is a noncharter code city incorporated under Title 35A RCW.¹ In the winter of 2018, the city council held a special meeting concerning the City's looming budget deficit. There, the City's finance director advised, under the 2017-18 budget, the City faced a shortfall of more than $850,000 because of various fiscal concerns. The City had identified and implemented cost-saving measures, but these spending cuts could not close the deficit. The City thus considered several potential sources of new revenue, including levying an excise tax on water and sewer utilities. The council found it necessary to expand the kinds of excises levied in order to pay for basic municipal services and to meet the budget deficit.

¶ 4 In passing the ordinance, the council relied on RCW 35A.82.020, which it concluded gave the City broad authority to impose excises for regulation or revenue regarding all places and kinds of businesses. It also observed that more than 150 cities and towns in Washington impose an excise tax on the gross incomes of utilities providing water and sewer services.² The council determined that it was in the public's best interest to impose the tax.

¶ 5 So, the City adopted an ordinance amending the Federal Way Revised Code (FWRC), ch. 3.10, governing utility taxes.³ At issue is FWRC 3.10.040, which provides:

There are levied upon and shall be collected from everyone, including the city, on account of certain business activities engaged in or carried on in the city, occupation taxes in the amounts to be determined by the application of rates given against gross income as follows:

...

(9) Upon everyone engaged in or carrying on the business of selling or furnishing water services for commercial, industrial, or domestic use or purpose, a tax equal to 7.75 percent of the total gross income from such business within the city during the period for which the tax is due; and

(10) Upon everyone engaged in or carrying on the business of furnishing sewer services for commercial, industrial, or domestic use or purpose, a tax equal to 7.75 percent of the total gross income from such business within the city during the period for which the tax is due.

Federal Way Ordinance 18-847, § 1 (Mar. 20, 2018).

¶ 6 Lakehaven Water and Sewer District, Highline Water District, and Midway Sewer District (collectively Districts) are municipal corporations formed under Title 57 RCW.

Each provides water or sewer services (or both) to ratepayers within and without the City's limits. The Districts petitioned for declaratory judgment, arguing the City lacked express legislative authority to impose the tax. The Districts also raised a governmental immunity defense. Under this theory, the Districts argued the provision of water and sewer services is mostly public or governmental in nature, thus precluding imposition of the tax. The Districts also sought relief on constitutional grounds. They claimed (1) the ordinance violates due process as void for vagueness under both the Fourteenth Amendment of the United States Constitution and article I, section 3 of the Washington State Constitution, and (2) the City's exemption of another municipal corporation (the city of Tacoma) under a preexisting franchise agreement violates article I, section 12 antifavoritism principles.

¶ 7 In answering the petition, the City relied on RCW 35A.82.020. The City maintained its delegated taxing authority encompasses an authorization to tax a municipal corporation's proprietary business activities, including providing water-sewer services. The City also challenged the Districts’ standing to bring the suit and contested the merits of the Districts’ constitutional claims.

¶ 8 The parties cross moved for summary judgment, essentially debating five issues, including whether (1) RCW 35A.82.020 grants the City express legislative authority to impose an excise on the Districts, (2) the governmental immunity doctrine prevents the City from imposing the tax on the Districts, (3) the Districts have standing to bring their constitutional challenges under the due process and the privileges and immunities clauses, (4) the ordinance is void for vagueness, and (5) the City's exemption of another municipal corporation under an preexisting franchise agreement violates article I, section 12 antifavoritism principles.

¶ 9 The superior court granted the City's motion for summary judgment and denied the Districts’ motion. Relying on City of Wenatchee v. Chelan County Public Utility District No. 1 , 181 Wash. App. 326, 325 P.3d 419 (2014), the court ruled RCW 35A.82.020 authorizes the City to impose excise taxes on other municipal corporations if the income derives from proprietary functions. Still, the court noted the Districts operate in both proprietary and governmental capacities. In the court's view, the "[p]roprietary function is seen in the provision of water and sewer services to benefit directly billed customers who requested the services and governmental function is seen in the provision of services that protect the health, safety and welfare of the general public." Clerk's Papers (CP) at 1527.

¶ 10 It also ruled that the Districts had standing to bring their constitutional claims but rejected their arguments on the merits. The superior court concluded the ordinance's definition of "gross income" was not vague and thus did not violate due process. Even though the ordinance did not state the tax was on only income derived from proprietary business activities or distinguish what conduct was proprietary or governmental to calculate total gross income, it ruled the ordinance was constitutional. The superior court noted, however, that "[s]pecific determination of what is proprietary or governmental generated income for purposes of taxation may be the subject of future litigation." CP at 1529.

¶ 11 Finally, the superior court ruled that the ordinance did not favor the city of Tacoma over other municipal corporations but merely adhered to a preexisting franchise agreement. It reasoned that, under the bargained-for exchange, the City would receive public fire protection and payment of associated costs for public fire protection in exchange for not imposing the utility tax at issue.

¶ 12 We granted the Districts’ motion for direct review. The Washington State Association of Municipal Attorneys and Association of Washington Cities filed a...