Opinion ID: 1309243
Heading Depth: 1
Heading Rank: 5

Heading: inequity imposed by retroactive application

Text: Taxpayers argue that denying refunds to litigants would discourage challenges to existing precedent. The taxpayers argue Tyler should be applied to them because they bore the burden of litigating the issue. They are essentially arguing for what is termed quasi-prospective application wherein the new rule applies retroactively to the parties to the overruling decision. Note, Confusion in Federal Courts: Application of the Chevron Test in Retroactive-Prospective Decisions, 1985 U. Ill. L. Rev. 117. If courts give successful litigants the benefit of the new rule, they have greater incentive to challenge existing rules. However, this singles out the successful litigant for special treatment while applying the old law to other people similarly situated. It also punishes other parties who relied on prior law and then lose in the overruling decision. 1985 U. Ill. L. Rev. at 128. In addition, in tax cases taxpayers always have the incentive to challenge potentially unconstitutional tax statutes to avoid future tax liability. [6] Taxpayer Tyler Pipe argues that, because the State argued against an injunction for the collection of taxes pending resolution of the constitutionality of the B & O tax, it now has an absolute right to a refund under the Washington refund statutes. This court denied the requested injunction not only because a remedy at law existed but also because Tyler Pipe failed to make the requisite showing of a likelihood of success on the merits. Tyler Pipe Indus., Inc. v. Department of Rev., 96 Wn.2d 785, 794, 638 P.2d 1213 (1982). The fact that the State argued that taxpayers had an adequate remedy at law in the form of a possible refund should not mean the State is foreclosed from arguing that such a refund is not (under applicable preexisting law) now owed to the taxpayers. Because under Washington law a refund suit constitutes an adequate legal remedy foreclosing a preliminary injunction, it does not mean a successful taxpayer necessarily is entitled to retroactive application of his case. Taxpayers here were on notice that Washington and many other states afford prospective application to decisions finding tax statutes unconstitutional. Ashland Oil, Inc. v. Rose, ___ W. Va. ___, 350 S.E.2d 531 (1986), appeal dismissed, 95 L.Ed.2d 522 (1987); Metropolitan Life Ins. Co. v. Commissioner of Dep't of Ins., 373 N.W.2d 399 (N.D. 1985); Bond v. Burrows, 103 Wn.2d 153, 690 P.2d 1168 (1984); Salorio v. Glaser, 93 N.J. 447, 461 A.2d 1100, cert. denied, 464 U.S. 993 (1983); Jacobs v. Lexington-Fayette Urban Cy. Gov't, 560 S.W.2d 10 (Ky. 1977); Pellnat v. Buffalo, 59 A.D.2d 1038, 399 N.Y.S.2d 788 (1977); Gulesian v. Dade Cy. Sch. Bd., 281 So.2d 325 (Fla. 1973); Hurd v. Buffalo, 41 A.D.2d 402, 343 N.Y.S.2d 950 (1973); Southern Pac. Co. v. Cochise Cy., 92 Ariz. 395, 377 P.2d 770 (1963). But see Perkins v. County of Albemarle, 214 Va. 416, 200 S.E.2d 566 (1973). Whether the taxes had been collected or still remained to be collected is not relevant to the issue of retroactive application. The Ashland court explained that it was irrelevant whether the disputed taxes had been paid or were simply assessed. Ashland Oil, Inc. v. Rose, supra . Both taxes collected and those assessed and unpaid fall within the prospective application of Armco and could be retained or collected by the State. As the previous list of citations illustrates, many states including Washington have found it equitable to afford only prospective application to decisions invalidating taxing statutes. In Bond v. Burrows, supra , this court invalidated the statutory scheme establishing a sales tax differential for border counties. After determining the tax statute violated the constitutional rule of proportionality, this court unanimously agreed to give the ruling only prospective application. Implicit in Bond is the fact that the court did not apply its decision so as to afford any refunds of past taxes to the counties which had paid higher taxes than the border counties. Last year in Ashland Oil, Inc. v. Rose, supra , the West Virginia Supreme Court ruled that Armco would be applied prospectively. The West Virginia court determined that the reliance of the state on a presumptively valid tax outweighs injuries sustained on account of a holding of prospectivity. The State's reliance on the constitutionality of the B & O tax was justifiable in light of decisions such as Tyler Pipe Indus., Inc. v. Department of Rev., supra ; National Can Corp. v. Department of Rev., 105 Wn.2d 327, 715 P.2d 128 (1986); Chicago Bridge & Iron Co. v. Department of Rev., 98 Wn.2d 814, 659 P.2d 463, appeal dismissed, 464 U.S. 1013 (1983); Department of Rev. v. Association of Wash. Stevedoring Cos., 435 U.S. 734, 55 L.Ed.2d 682, 98 S.Ct. 1388 (1978); and General Motors Corp. v. Washington, 377 U.S. 436, 12 L.Ed.2d 430, 84 S.Ct. 1564 (1964). We do not believe the Armco decision so clearly foreshadowed the outcome in Tyler that the State's reliance on the validity of the tax was unjustified or that prospective application would be inequitable. As the court in Salorio noted, the expenditures made from this revenue during the many years for which refunds are sought cannot be undone, and reimbursement at this point would pose a significant hardship upon the State's existing financial requirements. Salorio, 93 N.J. at 465. Refunds sought in these cases alone exceed $56 million and the State estimates refunds from 1980 through 1984 could be in excess of $423 million. Given that the reliance was justified by the presumptive validity of the tax statute and case law upholding that statute, retroactive application would be inequitable. [7] We turn now to taxpayers' argument that prospective application would violate due process and equal protection. Prospective application, designed to protect justifiable reliance on prior law and to respect the desire for stability in past transactions, was upheld by the Supreme Court against a due process challenge in 1932 in Great Northern Ry. v. Sunburst Oil & Ref. Co., 287 U.S. 358, 77 L.Ed. 360, 53 S.Ct. 145, 85 A.L.R. 254 (1932). United States v. Johnson, 457 U.S. 537, 73 L.Ed.2d 202, 102 S.Ct. 2579 (1982) reiterated the Sunburst rule that the federal constitution has no voice upon the subject of retroactivity and that the constitution neither prohibits nor requires retrospective effect be given to any new constitutional rule. ( Griffith v. Kentucky, ___ U.S. ___, 93 L.Ed.2d 649, 107 S.Ct. 708 (1987), made some changes in the Johnson rationale in criminal settings, but reaffirmed that Chevron Oil Co. v. Huson, 404 U.S. 97, 30 L.Ed.2d 296, 92 S.Ct. 349 (1971) is to be used in civil cases.) Implicit in Bond v. Burrows, supra , is this court's opinion that retroactive application of a decision invalidating a tax is not constitutionally mandated. In Salorio v. Glaser, supra , the New Jersey Supreme Court gave pure prospective effect to a decision declaring a tax statute unconstitutional and ruled that the plaintiffs were not entitled to reimbursement of taxes paid. That court held that [t]he modern view is that invalidation of a statute does not automatically invalidate all prior transactions made in justifiable reliance upon the statute. Salorio, 93 N.J. at 463. Both the Salorio court and the Ashland court rely on Lemon v. Kurtzman, 411 U.S. 192, 36 L.Ed.2d 151, 93 S.Ct. 1463 (1973) ( Lemon II) wherein the Court refused to give retroactive application to its decision declaring a Pennsylvania statute unconstitutional. In Lemon v. Kurtzman, 403 U.S. 602, 29 L.Ed.2d 745, 91 S.Ct. 2105 (1971) ( Lemon I) the Court held unconstitutional a statute under which the state had reimbursed private sectarian schools for certain educational services. However, in Lemon II the Court permitted the state to pay the schools for services provided before its decision. The Lemon Court explained, `in the last few decades, we have recognized the doctrine of nonretroactivity outside the criminal area many times, in both constitutional and nonconstitutional cases.' Lemon II, at 197 (quoting Chevron Oil Co. v. Huson, supra at 106). The Court explained that its holdings in recent years have emphasized that the effect of a given constitutional ruling on prior conduct `is subject to no set principle of absolute retroactive invalidity ...'. Lemon II, at 198-99 (quoting Linkletter v. Walker, 381 U.S. 618, 627, 14 L.Ed.2d 601, 85 S.Ct. 1731 (1965)). Lemon II also recognized that statutory or even judgemade rules of law are hard facts on which people must rely in making decisions and in shaping their conduct. This fact of legal life underpins our modern decisions recognizing a doctrine of nonretroactivity. Lemon II, at 199. The Ashland court recognized that [a]lthough Lemon II is not a tax refund case and does not therefore provide direct and conclusive authority in this case, it provides the basis for applying the retroactivity analysis in the context of protecting state fiscal interests. See also Cipriano v. Houma, 395 U.S. 701, 89 S.Ct. 1897, 23 L.Ed.2d 647 (1969) (decision holding unconstitutional Louisiana's property-taxpayer limitation on franchise applied prospectively because retroactivity would impose significant hardship on cities, bondholders, etc.) Ashland Oil, Inc., 350 S.E.2d at 536. In Arizona Governing Comm. v. Norris, 463 U.S. 1073, 77 L.Ed.2d 1236, 103 S.Ct. 3492 (1983), the majority of the Supreme Court agreed that retroactive relief was not appropriate upon its finding that a state's pension plan violated U.S.C. Title VII. This court has also recognized that courts possess the power to give their decisions prospective effect, i.e., not to apply the decision to the parties in the overruling case. Cascade Sec. Bank v. Butler, 88 Wn.2d 777, 785, 567 P.2d 631 (1977). Taxpayers argue that denial of refunds violates equal protection in creating two classes of taxpayers  those whose refund claim is based on the discrimination of the B & O tax against interstate commerce and all others. However, they cite no relevant authority. The body of state and federal law previously cited in the tax area indicates this argument to be without merit. This court held that equal protection forbids all invidious discrimination but does not require identical treatment for all without recognition of difference in relevant circumstances. Aetna Life Ins. Co. v. Washington Life & Disab. Ins. Guar. Ass'n, 83 Wn.2d 523, 520 P.2d 162 (1974). In a recent tax case the Supreme Court stated: In the equal protection context ... if the State's purpose is found to be legitimate, the state law stands as long as the burden it imposes is found to be rationally related to that purpose, a relationship that is not difficult to establish. Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 881, 84 L.Ed.2d 751, 105 S.Ct. 1676 (1985). Earlier this year this court held that equal protection challenges to state tax laws are (absent fundamental rights or suspect classifications) reviewed with a minimum level of scrutiny. Cosro, Inc. v. Liquor Control Bd., 107 Wn.2d 754, 733 P.2d 539 (1987). A holding of pure prospectivity would divide taxpayers into two classes in regard to the time of the Tyler decision. Given the State's reliance on prior law, this is not a classification without a rational basis. Having weighed the equities in this case, we conclude that pure prospective application from the date of the United States Supreme Court Tyler decision is appropriate, and appellants' claims for refunds before June 23, 1987, are denied. PEARSON, C.J., and BRACHTENBACH, DOLLIVER, DORE, ANDERSEN, CALLOW, GOODLOE, and DURHAM, JJ., concur.