Sound Inpatient Physicians, Inc. v. City of Tacoma

507 P.3d 886

SOUND INPATIENT PHYSICIANS, INC., a Delaware Corporation, Appellant,

v.CITY OF TACOMA, a Washington Municipal Corporation, through its Finance Department, Tax & License Division, and City of Tacoma Office of the Hearing Examiner, Respondent.

No. 55391-1-II

Court of Appeals of Washington, Division 2.

Filed April 5, 2022

Debra Ellen Casparian, Tacoma City Attorney's Office, 747 Market St. Rm. 1120, Tacoma, WA, 98402-3701, for Appellant.

Gregg D. Barton, Perkins Coie LLP, David Thomas Martin, Attorney at Law, 1201 3rd Ave. Ste. 4900, Seattle, WA, 98101-3095, for Respondent.

PUBLISHED OPINION

Price, J.

¶1 The city of Tacoma (City) appeals the superior court's order reversing the city of Tacoma's hearing examiner's order that denied Sound Inpatient Physicians, Inc.’s (SIP) request for a refund for alleged overpaid business and occupation (B&O) taxes. As the party bearing the burden of proving that the tax assessment was improper, SIP argues that the City misinterpreted the applicable statutory language and erroneously apportioned the amount of SIP's service income to the City. And SIP argues that if the City's interpretation of the applicable statute is correct, then the statute violates the federal commerce clause.¹ We reverse the superior court's order in favor of SIP and affirm the hearing examiner.

FACTS

¶2 SIP is a company providing management and administrative services to medical professionals. These services are performed in Tacoma and other locations across the country. SIP has three major offices in Tacoma, Tennessee, and Texas. SIP has 14 other regional offices and many employees work from home.

¶3 In 2019, the City's finance department completed an audit of SIP's B&O taxes for 2013-2017. The audit was performed to determine whether SIP correctly apportioned the taxes on its gross receipts. Tax apportionment was determined based on a payroll factor and a service income factor. The City agreed with SIP's method for calculating the payroll factor.

¶4 However, the City rejected SIP's calculation of the service income factor. SIP calculated the service income factor based exclusively on customer contacts that occurred within the city—which were nearly zero. The City, on the other hand, determined that because the majority of SIP's business services (coding, billing, collections, claims, record-keeping, etc.) did not require any direct customer contact, apportionment based on customer contacts did not reflect a fair apportionment of service income. Therefore, the City determined that the service income factor should be determined using the costs of performance.

¶5 The City used four factors to calculate the costs of performance: "1) direct labor costs, 2) facility lease expense, 3) facility other expense, and 4) depreciation." Clerk's Papers (CP) at 61. Using these factors, the City determined that "the majority of expenses that are trackable by a location[ ] occur in Tacoma, and therefore all revenue is to be allocated to Tacoma because every expense item ... used for the [cost of performance] calculation has a higher expense percentage in Tacoma compared to any other single location of SIP." CP at 61 (emphasis omitted). The City also noted that only 5 of the 50 states have gross receipts taxes and, therefore, SIP's Texas and Tennessee offices have not paid any gross receipts taxes.

¶6 Based on the audit, the City assessed an additional $134,096 in B&O taxes against SIP. SIP appealed the City's decision to the hearing examiner arguing that the City's tax assessment incorrectly determined the service income factor. SIP sought a refund of $805,022 for taxes it believed it overpaid based on its calculation of the service income factor. The parties filed cross-motions for summary judgment. The hearing examiner granted the City's motion for summary judgment and denied SIP's request for a refund.

¶7 SIP filed a writ of review to appeal the matter to superior court. The superior court reversed the hearing examiner's order on the parties’ cross-motions for summary judgment and granted SIP's request for a refund.

¶8 The City appeals the superior court's order.

ANALYSIS

¶9 SIP successfully argued to the superior court that the hearing examiner erred by granting the City's motion for summary judgment and summary judgment should, instead, be entered in its favor. On appeal, SIP renews its argument that statutory construction does not support the City's calculation of its tax burden. Further, SIP renews its argument that the City's calculation of its tax burden is unconstitutional because it violates the federal commerce clause. We disagree with SIP.

I. LEGAL PRINCIPLES

¶10 Because this case was resolved on cross-motions for summary judgment, we review the superior court's decision reversing the hearing examiner de novo. City of Seattle v. KMS Fin. Services, Inc. , 12 Wash. App. 2d 491, 501, 459 P.3d 359 (2020). The taxpayer bears the burden of proving that a tax paid is incorrect. RCW 34.05.570(a) ; Ford Motor Co. v. City of Seattle , 160 Wash.2d 32, 41, 156 P.3d 185 (2007). " ‘[T]axes are presumed to be just and legal, and the burden rests upon one assailing the tax to show its invalidity.’ " Id. (quoting 72 AM. JUR. 2D State and Local Taxation § 1000 (2006)).

¶11 Statutory construction is an issue of law that we review de novo.² Id. Our goal is to give effect to the legislature's purpose and intent. Jametsky v. Olsen , 179 Wash.2d 756, 762, 317 P.3d 1003 (2014). "Where a statute is clear on its face, its plain meaning should ‘be derived from the language of the statute alone.’ " Ford Motor Co. , 160 Wash.2d at 41, 156 P.3d 185 (quoting Kilian v. Atkinson , 147 Wash.2d 16, 20, 50 P.3d 638 (2002) ). If the plain language of the statute is unambiguous, we do not resort to canons of judicial constructions. Jametsky , 179 Wash.2d at 762, 317 P.3d 1003. A statute is only ambiguous if it is subject to more than one reasonable interpretation. Id.

¶12 In construing a statute, we avoid interpretations that render portions of a statute meaningless or superfluous. Ford Motor Co. , 160 Wash.2d at 41, 156 P.3d 185. We must also avoid constructions that yield unlikely, absurd, or strained consequences. Thurston County ex rel. Snaza v. City of Olympia , 193 Wash.2d 102, 108, 440 P.3d 988 (2019). "However, when construing an ordinance, a ‘reviewing court gives considerable deference to the construction of’ the challenged ordinance ‘by those officials charged with its enforcement.’ " Ford Motor Co. , 160 Wash.2d at 42, 156 P.3d 185 (quoting Gen. Motors Corp. v. City of Seattle , 107 Wash. App. 42, 57, 25 P.3d 1022 (2001) ).

¶13 We also review constitutional issues de novo. Amunrud v. Bd. of Appeals , 158 Wash.2d 208, 215, 143 P.3d 571 (2006), abrogated on other grounds by Yim v. City of Seattle , 194 Wash.2d 682, 689-90, 451 P.3d 694 (2019). "[T]he burden to show unconstitutionality is on the challenger." Id.

II. STATUTORY CONSTRUCTION

¶14 SIP argues that the City has improperly interpreted how to calculate its tax liability under former RCW 35.102.130(3)(b) (2017).³ Specifically, SIP argues that Division One's opinion in Wedbush⁴ requires the statute be interpreted as "cascading hierarchy" and, because SIP had negligible customer locations within the city, essentially no tax liability for service income can be apportioned to SIP under the statute. Br. of Resp't at 14 (boldface omitted). Alternatively, SIP argues that even if the statute's alternatives are not "cascading," the City still improperly applied the statute to SIP because it is taxable at the customer locations. We disagree with SIP's arguments and hold that the City properly interpreted the statutory language.

¶15 B&O taxes are assessed for the privilege of conducting business in a taxing jurisdiction. Ford Motor Co., 160 Wash.2d at 44, 156 P.3d 185. Apportionment of B&O taxes is determined under former RCW 35.102.130. When business is conducted in various locations, income must be apportioned to reflect the location in which it is earned. KMS , 12 Wash. App. 2d at 502, 459 P.3d 359. "The tax must actually reflect a reasonable sense of how income is generated." Id. at 502-03, 459 P.3d 359.

¶16 Gross income from services is taxed by the City based on "multiplying apportionable income by a fraction, the numerator of which is the payroll factor plus the service-income factor and the denominator of which is two." Former RCW 35.102.130(3). The parties dispute only the calculation of the service income factor.

¶17 The service income factor reflects the proportion of service income earned in the city as compared with other locations. Former RCW 35.102.130(3)(b). The statute defines the service income factor as follows:

The service income factor is a fraction, the numerator of which is the total service income of the taxpayer in the city during the tax period, and the denominator of which is the total service income of the taxpayer everywhere during the tax period.

Former RCW 35.102.130(3)(b).

¶18 Subsection (3)(b)(i) provides that service income is in the city if "[t]he customer location is in the city[.]" Under subsection (b)(ii) service income is in the city if "[t]he income-producing activity is performed in more than one location and a greater proportion of the service-income-producing activity is performed in the city than in any other location, based on costs of performance, and the taxpayer is not taxable at the customer location[.]" And subsection (b)(iii) provides service income is in the city if "[t]he service-income-producing activity is performed within the city, and the taxpayer is not taxable in the customer location." The subsections of former RCW 35.102.130(3)(b) are separated by the disjunctive "or."

¶19 "Customer location" means "the city or unincorporated area of a county where the majority of the contacts between the taxpayer and the customer take place." Former RCW 35.102.130(4)(d). "Taxable in the customer location" means "either that a taxpayer is subject to a...