Opinion ID: 4542451
Heading Depth: 2
Heading Rank: 2

Heading: authority to impose local excise taxes

Text: “Municipal corporations have no inherent power to tax.” Watson, 189 Wn.2d at 166. Yet the constitution allows the legislature to delegate taxing authority to -8- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4 municipal corporations. Id. (citing WASH. CONST. art. VII, § 9 (“[A]ll municipal corporations may be vested with authority to assess and collect taxes.”)); see also WASH. CONST. art. XI, § 12. The Districts claim the legislature did not delegate the City “express” authority to impose the contested tax and one municipality may not tax another without an “express” statutory authorization. The City counters that RCW 35A.82.020 supplies the required taxing authority. That statute provides: A code city may exercise the authority authorized by general law for any class of city to license and revoke the same for cause, to regulate, make inspections and to impose excises for regulation or revenue in regard to all places and kinds of business, production, commerce, entertainment, exhibition, and upon all occupations, trades and professions and any other lawful activity. RCW 35A.82.020. RCW 35A.82.020’s plain language delegates code cities broad authority to impose business and occupation excise taxes. RCW 35A.82.020 provides code cities may impose such taxes on “all places and kinds of business.” (Emphasis added.) The legislature did not distinguish between public and private business entities. The plain language does not restrict the term “all” to only private corporations. The statute means what it says: all means all. -9- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4 Moreover, under this provision, if general law grants any other class of city4 the authority to impose business and occupation excise taxes, code cities may exercise that authority as well. See id. (“A code city may exercise the authority authorized by general law for any class of city.”). In Watson, we held the legislature delegated broad taxing authority to firstclass cities under RCW 35.22.280(32), including the authority to levy local business and occupation taxes. 189 Wn.2d at 165-68. There, the city of Seattle adopted an ordinance imposing a “Firearms and Ammunition Tax” on each firearm and round of ammunition sold within the city’s limits. Id. at 155. The relevant statute provided, “Any city of the first class shall have power: . . . [t]o grant licenses for any lawful purpose, and to fix by ordinance the amount to be paid therefor.” RCW 35.22.280(32). We noted the legislature granted cities authority to issue licenses for the dual purpose of regulation or revenue. Watson, 189 Wn.2d at 167-68. “Licensing authority [thus] includes the authority to raise revenues by taxing local businesses.” Id. at 167. But this type of taxation “must fall into one of three categories: property, income, or excise taxes.” Id. The most common type of excise tax is the business and occupation tax, which cities levy on the privilege of engaging in business and measure by gross income or receipts. Id. 4 See generally chs. 35.22 (first-class cities), 35.23 (second-class cities), 35.27 (towns), and 35.30 RCW (unclassified cities). -10- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4 Because first-class cities enjoy a broad legislative authorization under RCW 35.22.280(32) to impose business and occupation taxes, Watson, 189 Wn.2d at 16568, we hold code cities may also exercise that broad authority under RCW 35A.82.020. That said, cities imposing such taxes must generally comply with chapter 35.102 RCW, which governs municipal business and occupation taxes. 5 RCW 35.102.140. At the same time, the legislature drafted that chapter not to apply to taxes on any service that has historically or traditionally been taxed as a utility business for municipal tax purposes, including water or sewer services. 6 RCW 35.102.020(4). Quite simply, this related statute shows the legislature intended for cities to have the broad authority to levy local business and occupation excise taxes on water and sewer services, among other utilities. See id. In a Court of Appeals case directly on point, a code city brought a declaratory judgment action against a county public utility district, seeking a determination that the legislature authorized the city to impose a utility tax on domestic water sales. Chelan County Pub. Util. Dist., 181 Wn. App. at 330-31. The city argued that RCW 35A.82.020 included the authority to tax domestic water sales by another municipal 5 This chapter defines a “city” as “a city, town, or code city.” RCW 35.102.030(2). 6 This statute also does not apply to a light and power business, or a natural gas distribution business, a telephone business, cable television services, drainage services, solid waste services, or steam services. RCW 35.102.020. -11- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4 corporation that take place within the city’s limits. Id. at 331. The court determined “[t]here is no ambiguity in the statute’s grant to code cities of the authority to impose excises for revenue.” Id. at 337. It noted RCW 35A.01.010 requires “‘[a]ll grants of municipal power . . . shall be liberally construed in favor of the municipality.’” Id. (quoting RCW 35A.01.010). And it held, “RCW 35A.82.020’s grant of taxing authority is broad and, on its face, sufficient to support one municipality’s taxation of another government’s conduct of activity within its borders.” Id. at 336. We agree with Chelan County Pub. Util. Dist. and hold this statute, when read along with related statutes and provisions, provides the City sufficient authority to impose the business and occupation excise tax on the Districts. Despite the clear legislative intent outlined above, the Districts insist that RCW 35A.82.020 gives the City no actual taxing authority. They contend King County v. City of Algona, 101 Wn.2d 789, 681 P.2d 1281 (1984), requires the City to show an additional and specific “express” authorization giving one municipal corporation the authority to tax another. This argument seizes on our statement “that municipalities must have express authority, either constitutional or legislative, to levy taxes.” Algona, 101 Wn.2d at 791. At the heart of the parties’ controversy and the Districts’ reading of Algona are two competing theories of municipal law: home rule and “Dillon’s Rule.” Home -12- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4 rule grants municipalities the broadest powers of local self-government, while Dillon’s Rule would limit municipal powers to only those expressly granted by the constitution or the state legislature. See generally Hugh Spitzer, “Home Rule” vs. “Dillon’s Rule” for Washington Cities, 38 SEATTLE U. L. REV. 809 (2015). Even though Dillon’s Rule has been superseded by the optional municipal code for over 50 years, remnants of that antiquated theory have persisted in our case law and animate the Districts’ arguments on this issue.7 The City’s arguments, in contrast, properly reflect the home rule principles of the relevant statutes. The Districts’ proposition requiring a delegation in “express” terms does not have its roots in the constitution itself or current statutes. See generally WASH. CONST. art. VII, § 9; art. XI, § 12; Titles 35, 35A RCW. Instead, that proposition grew out of John F. Dillon’s influential, yet dated treatise, which gained popularity in the late-nineteenth century. Spitzer, “Home Rule,” supra, at 810, 813-16. Dillon’s theory of municipal government, which became known as Dillon’s Rule, encourages strict construction of laws relating to the powers of municipal corporations: 7 Our analysis here applies only to cities classified under the optional municipal code, Title 35A RCW. See Spitzer, “Home Rule,” supra, at 858 (“The lack of express antiDillon’s Rule language in their statutes arguably means that the rule still applies to second class cities, to towns, and to noncharter counties.”). Whether Dillon’s Rule survives in other contexts is not currently before us. -13- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4 “It is a general and undisputed proposition of law that a municipal corporation possesses, and can exercise, the following powers, and no others: First, those granted in express words; second, those necessarily or fairly implied in, or incident to, the powers expressly granted; third, those essential to the declared objects and purposes of the corporation—not simply convenient, but indispensable. Any fair, reasonable doubt concerning the existence of power is resolved by the courts against the corporation, and the power is denied.” Id. at 816 (quoting JOHN F. DILLON TREATISE ON THE LAW OF MUNICIPAL CORPORATIONS § 55, at 101-02 (1872)). Early in this state’s history, this court applied Dillon’s Rule for municipalities. 8 By the mid-twentieth century, however, Dillon’s Rule lost steam in light of the progressive era home rule movement. See generally Spitzer, “Home Rule,” supra, at 810, 816-24. The home rule principle stands for the “presumption of autonomy in local governance . . . [and] seeks to increase government accountability by limiting state-level interference in local affairs.” Watson, 189 Wn.2d at 166-67. “This is particularly important with respect to local taxation authority.” Id. at 167. In 1965, the legislature formed a temporary special municipal code committee tasked with either the complete revision of the laws governing municipal corporations or the development of an alternative optional municipal code. LAWS 8 See, e.g., Tacoma Gas & Elec. Light Co. v. City of Tacoma, 14 Wash. 288, 291, 44 P. 655 (1896) (“It is a well settled rule of construction that a delegation of powers will not be presumed in favor of a municipal corporation unless they be such as are necessary to its corporate existence, but that the same must be clearly conferred by express statutory enactment.” (emphasis added)). -14- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4 OF 1965, Ex. Sess., ch. 115 § 1, 2. The legislature directed the committee to prepare “a code of laws for the government of cities and towns which shall include a form of statutory home rule.” Id. § 2. The committee’s work led to the optional municipal code now codified under Title 35A RCW. LAWS OF 1967, Ex. Sess., ch. 119. The committee report preceding Title 35A RCW’s enactment noted that one of the drafters’ basic objectives was “[t]he broad grant of home rule authority to municipalities without a specified enumeration of powers, thus avoiding continuously burdening the state legislature with a multiplicity of municipal housekeeping bills at each session.” MUN. CODE COMM., WASH. STATE LEGISLATURE, A REVIEW OF THE OBJECTIVES OF THE MUNICIPAL CODE COMMITTEE 2 (1966) (emphasis added). The legislative committee further noted its clear intent to abrogate Dillon’s Rule: Chapter 35A.11 . . . directs that the laws be liberally construed in favor of the city as a clear mandate to abandon the so-called “Dillon’s Rule” of construction. In addition to the general grant of broad powers, the chapter makes clear that existing laws relating to . . . taxation . . . shall be available to the code cities. MUN. CODE COMM., supra, at 4 (emphasis added); see also Spitzer, “Home Rule,” supra, at 840. The optional municipal code thus superseded Dillon’s Rule in 1967, as plainly expressed in RCW 35A.01.010. 9 9 “The purpose and policy of this title is to confer upon two optional classes of cities created hereby the broadest powers of local self-government consistent with the -15- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4 Despite this history, the Districts rely on Algona to argue the City must have “express” authorization to impose the excise tax on them. We disagree and decline to extend Algona to perpetuate this mistaken reading. In Algona, the city adopted an ordinance levying a seven percent business and occupation tax on the gross revenues collected at a solid waste transfer station located within the city’s limits. 101 Wn.2d at 790. The county petitioned for declaratory judgment, arguing the city had no express authorization to levy such a tax. Id. at 791. The court stated, “We have consistently held that municipalities must have express authority, either constitutional or legislative, to levy taxes.” Id. The court determined “[t]he general grant of taxation power on which Algona relies in RCW 35A.11.020 contains no express authority to levy a tax on the State or another municipality.” Id. at 793. The court also concluded “[t]o allow the City to impose the tax in this case would violate the established rule that municipalities must have specific legislative authority to levy a particular tax.” Id. Constitution of this state. Any specific enumeration of municipal powers contained in this title or in any other general law shall not be construed in any way to limit the general description of power contained in this title, and any such specifically enumerated powers shall be construed as in addition and supplementary to the powers conferred in general terms by this title. All grants of municipal power to municipalities electing to be governed under the provisions of this title, whether the grant is in specific terms or in general terms, shall be liberally construed in favor of the municipality.” -16- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4 Algona actually supports the City in this case; RCW 35A.82.020 grants municipalities express authority to impose the business and occupation excise tax on all businesses—including the Districts. Even so, Algona’s cursory analysis presents some interpretative difficulties, and we note at least three concerns. First, Algona fails to analyze RCW 35A.82.020’s broad grant of taxing authority in any detail. Second, it echoes language from Dillon’s Rule of construction, applying that outmoded principle to a statute that clearly embraces home rule principles. Third, Algona suggests it might be helpful for a statute to contain “express” language directly addressing municipal taxation authority over other governmental entities, yet this has never been a requirement to exercise an otherwise plain delegation of taxing authority. Turning to the first concern, the Algona court based its decision on the general grant of taxing power provided to code cities under RCW 35A.11.020: “Within constitutional limitations, legislative bodies of code cities shall have within their territorial limits all powers of taxation for local purposes except those which are expressly preempted by the state as provided in RCW 66.08.120, RCW 82.36.440, RCW 48.14.020, and RCW 48.14.080.” 101 Wn.2d at 792-93. The court cited RCW 35A.82.020 in passing and noted the statute “grants code cities specific authority to levy B & O taxes,” id. at 792 (emphasis added), but it devoted no attention to analysis of whether that statute delegated the required taxing authority. Instead, the court pivoted to the -17- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4 governmental immunity doctrine. Id. at 793-94. Contrary to the Districts’ contention, whether the governmental immunity defense shields one municipal corporation from the taxing of another is a different question than whether the legislature “expressly” delegated code cities the authority to levy local excise taxes. Algona is thus unhelpful here because it does not purport to address whether RCW 35A.82.020 provides an independent delegation of authority authorizing the imposition of local business and occupation excise taxes. Second, while the Algona court inserted the “express” term to modify municipal taxation authority, article VII, section 9 of the Washington State Constitution does not require as much: “For all corporate purposes, all municipal corporations may be vested with authority to assess and collect taxes.” Nowhere in the text of the constitution is there a requirement that the legislature delegate taxing authority to municipalities in “express” terms. See generally WASH. CONST. art. VII, § 9; art. XI, § 12. Instead, the “express” limiting language, as shown above, is a vestige of Dillon’s Rule. The inherent doctrinal problem with the Districts’ reading of Algona is that the Districts (and ostensibly the Algona court) mistakenly apply Dillon’s Rule precepts to a statutory scheme in which the legislature plainly stated that home rule applies. If we trace the “express” term in Algona through the case law, we find that -18- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4 this court likely did follow Dillon’s rule in developing the common law governing a municipal corporation’s authority to levy local taxes. Still, that common-law precept was superseded by statute when the legislature adopted Title 35A RCW. And our goal when interpreting statutes is to “ascertain and carry out the Legislature’s intent.” Campbell & Gwinn, 146 Wn.2d at 9. The Algona court relied on three cases to support its statement that the legislature must delegate taxing authority in “express” terms: Citizens for Financially Responsible Gov’t v. City of Spokane, 99 Wn.2d 339, 343, 662 P.2d 845 (1983); Hillis Homes, Inc. v. Snohomish County, 97 Wn.2d 804, 809, 650 P.2d 193 (1982); and Carkonen v. Williams, 76 Wn.2d 617, 627-28, 458 P.2d 280 (1969). Citizens for Financially Responsible Government in turn relied on McQuillin’s Municipal Corporations to provide, “The general rule is municipalities possess, with respect to taxation, only such power as has been granted to them by the constitution or the general laws of the state.” 99 Wn.2d at 343 (citing 16 EUGENE MCQUILLIN MUNICIPAL CORPORATIONS § 44.05 (3d ed. 1981)). Note this language omits the “express” limiting term and requires a delegation only under “the constitution or the general laws of the state.” See id. The “express” language does appear in Hillis Homes, however. There, the court asserted, “This court has clearly stated that ‘county authorities must have -19- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4 express authority, either under the constitution or an act of the legislature, to levy taxes.’” 97 Wn.2d at 809 (emphasis added) (quoting State ex rel. Sch. Dist. 37 v. Clark County, 177 Wash. 314, 322, 31 P.2d 897 (1934)). The case cited, School District 37, provides no authority for this proposition; it also predates the enactment of Title 35A RCW by over 30 years. See id. Even so, we may fairly infer that the court there also based its reasoning on Dillon’s Rule precepts. Carkonen likewise provides “political subdivisions [such as counties and other municipal authorities] must have an express grant of such power either by legislative act or other constitutional provision.” 76 Wn.2d at 627 (emphasis added). Although Carkonen similarly cites the unsupported proposition in School District 37, it also points to Great Northern Railway Co. v. Stevens County, 108 Wash. 238, 183 P. 65 (1919). Great Northern Railway—unlike School District 37—cites Cooley’s treatise on taxation to outline the rule governing municipalities’ authority to levy taxes: “The fact that the state creates municipal governments does not by implication clothe them with the power to levy taxes. That power must be conferred in terms, or must result by necessary implication from the language made use of in the law. But it is not requisite that any particular technical or legal terms shall be made use of in giving the power; it is enough that the purpose is apparent, and that on a fair construction of the language employed the legislature must be deemed to have intended that the power should exist.” -20- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4 108 Wash. at 241-42 (emphasis added) (quoting 1 THOMAS M. COOLEY, A TREATISE ON THE LAW OF TAXATION 465 (3d ed. 1903)). Rather than foreshadow Dillon’s Rule, Cooley’s treatise negates the premise that the legislature must delegate authority in “express” terms. Cooley was concerned with legislative intent, regardless of the terms used. See id. Indeed, “Cooley argued for a local right to selfgovernment and for a less restrictive view of local government powers than did Dillon.” Spitzer, “Home Rule,” supra, at 815. The Great Northern Railway opinion adopts Cooley’s less restrictive view concerning legislative delegations of municipal taxing authority, though School District 37 likely gleaned the “express” requirement from Dillon’s treatise directly or from other cases relying on Dillon. But there is no way to know for certain, because School District 37 failed to cite its source of authority. So, to the extent that Algona requires “express” authority for one municipality to tax another, it mainly relies on a case that lacks authority to support its legal proposition. We decline to read Algona to perpetuate an unsupported common-law proposition that does not have its roots in the constitution or general laws of the state. See Spitzer, “Home Rule,” supra, at 856-59. As a final point, other analysis in Algona undermines the Districts’ view. The Algona court recognized that municipal taxation authority extends to proprietary -21- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4 functions of municipal corporations but held that the county’s operation of a solid waste transfer station was a governmental function. 101 Wn.2d at 794. The governmental aspect was critical to the court’s analysis of earlier cases that had found sufficient taxing authority. Algona distinguished City of Seattle v. State, 59 Wn.2d 150, 153-54, 367 P.2d 123 (1961) (interpreting ch. 82.04 RCW), and partially overruled City of Bellevue v. Patterson, 16 Wn. App. 386, 556 P.2d 944 (1976), which it held erroneously relied on City of Seattle. 101 Wn.2d at 792-95. Unlike the statute at issue in City of Seattle, which defined a “person” subject to business and occupation tax to include a municipal corporation and encompassed both proprietary and governmental functions, RCW 35A.82.020 did not define its terms. See Algona, 101 Wn.2d at 792-93. Algona thus refused to read RCW 35A.82.020— authorizing only the imposition of excises on businesses—to extend to governmental functions, including the operation of a solid waste transfer station. Id. at 795. The City correctly observes that had the Algona court meant to say more, it would have overruled Patterson entirely. In sum, we recognize Dillon’s Rule as a vestige of 19th century jurisprudence that no longer applies to code cities given current statutes. We decline to extend Algona to perpetuate this rule. Instead, we adhere to “[t]he general rule [that] municipalities possess, with respect to taxation, only such power as has been granted -22- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4 to them by the constitution or the general laws of the state.” Citizens for Financially Responsible Gov’t, 99 Wn.2d at 343. No “express” language calling out municipal corporations is needed; general articulations of municipal taxing authority are sufficient as long as the legislature’s intent is plain. In the context of code cities, “[a]ll grants of municipal power . . . whether the grant is in specific terms or in general terms, shall be liberally construed in favor of the municipality.” RCW 35A.01.010. For these reasons, we hold RCW 35A.82.020 delegates the City sufficient authority to impose the business and occupation excise tax on the Districts. 10 We now turn to whether the governmental immunity doctrine shields the Districts from the tax. 10 The dissent vastly overestimates the extent of our holding today. Consistent with the constitution and general laws of the state, we hold only, “[f]or all corporate purposes, all municipal corporations may be vested with authority to assess and collect taxes,” WASH. CONST. art. VII, § 9, and “municipalities possess, with respect to taxation, only such power as has been granted to them by the constitution or the general laws of the state.” Citizens for Financially Responsible Gov’t, 99 Wn.2d at 343. Despite the cases regurgitating that the legislature must vest municipal corporations with taxing authority in “express” terms— see, e.g., Algona, 101 Wn.2d at 791-92; Hillis Homes, 97 Wn.2d at 809; Carkonen, 76 Wn.2d at 627-28; State ex rel. Sch. Dist. 37, 177 Wash. at 322—nowhere in the text of the constitution or general laws of the state does such a requirement exist with respect to code cities. See generally WASH. CONST. art. VII, § 9; art. XI, § 12; Title 35A RCW. In any event, none of the cases relied on by the dissent address the question presented today: whether a code city, which adopts its charter under Title 35A RCW, must have “express” authority to impose a business and occupation excise tax on another municipal corporation doing business within its borders. For that reason, we need not engage in a stare decisis analysis of whether these prior statements of law are incorrect and harmful. Contra Johnson, J. (dissenting) at 1, 3. “‘Where the literal words of a court opinion appear to control an issue, but where the court did not in fact address or consider the issue, the ruling is not dispositive and may be reexamined without violating stare -23- Lakehaven Water & Sewer Dist. et al. v. City of Federal Way, 96585-4