Dot Foods v. Department of Revenue, State

• Citation: 141 Wn. App. 874,173 P.3d 309
• Decision Date: 27 November 2007
• Docket Number: No. 35733-0-II.,35733-0-II.
• Parties: DOT FOODS, INC., Appellant, v. DEPARTMENT OF REVENUE, State of Washington, Respondent.
• Court: Washington Court of Appeals

173 P.3d 309

141 Wn. App. 874

DOT FOODS, INC., Appellant, v. DEPARTMENT OF REVENUE, State of Washington, Respondent.

No. 35733-0-II.

Court of Appeals of Washington, Division 2.

November 27, 2007.

Jacquelyn A. Beatty, Attorney at Law, Howard Mark Goodfriend, Edwards Sieh Smith & Goodfriend PS, Seattle, WA, for Appellant.

Cameron Gordon Comfort, Atty. Gen. Office, Olympia, WA, for Respondent.

PENOYAR, J.

¶ 1 Dot Foods sought a refund of business and occupation (B & O) taxes paid between 2000 and 2006, claiming that the Department of Revenue (Department) improperly denied them an exemption. During this time period, Dot Foods produced food products out-of-state that it sold (through a wholly-owned subsidiary) to dairies, meat packers, and other food processors located in Washington, who then used the products as ingredients in other products that were sold to various retail outlets in Washington. Dot Foods appealed to the trial court for a refund of the taxes, claiming that it qualified for a statutory exemption for out-of-state persons selling consumer goods only to or through a "direct seller's representative." RCW 82.04.423. The trial court disagreed, and Dot Foods appeals. Despite Dot Foods' arguments to the contrary, the plain language of the exemption illustrates that it should only apply where direct seller's representatives exclusively sell consumer products. Because Dot Foods admits that a portion of its sales in Washington consist of non-consumer products the exemption does not apply to them. We affirm.

FACTS

¶ 2 Washington law imposes a B & O tax "for the act or privilege of engaging in business activities" in the state. RCW 82.04.220. This tax is subject to several exemptions, including an exemption for sales by certain out-of-state persons to or through a direct seller's representative. RCW 82.04.423(1)(d). Specifically, RCW 82.04.423(1) states that the B & O tax does not apply to gross income derived from wholesale or retail sales in the state if the person:

(a) Does not own or lease real property within this state; and

(b) Does not regularly maintain a stock of tangible personal property in this state for sale in the ordinary course of business; and

(c) Is not a corporation incorporated under the laws of this state; and

(d) Makes sales in this state exclusively to or through a direct seller's representative.

Additionally, RCW 82.04.423(2) defines "direct seller's representative" in relevant part as:

[A] person who buys consumer products on a buy-sell basis or a deposit-commission basis for resale, by the buyer or any other person, in the home or otherwise than in a permanent retail establishment, or who sells, or solicits the sale of, consumer products in the home or otherwise than in a permanent retail establishment.

¶ 3 Dot Foods is an Illinois corporation that sells food and other products to food processors and food service distributors in Washington. The Department concedes that Dot Foods meets the first three requirements for the exemption (contained in RCW 82.04.423(1)(a)-(c)). The only requirement at issue here is whether Dot Foods "[m]akes sales in this state exclusively to or through a direct seller's representative." Clerk's Papers (CP) at 65; RCW 82.04.423(1)(d).

¶ 4 The Department issued a private letter ruling to Dot Foods in October 1997, stating that Dot Foods qualified for the direct seller's representative exemption under RCW 82.04.423. The letter ruling specified that it was binding on both Dot Foods and the Department but that it would only remain binding until: "the facts change; the law (either by statute or court decision) changes; the applicable rule(s) change; the Department of Revenue publicly announces a change in the policy upon which this ruling is based; or Dot Foods, Inc. is notified in writing that this ruling is not valid." CP at 69.

¶ 5 Since receiving the private letter ruling, Dot Foods' Washington sales have been exclusively through its wholly-owned subsidiary, Dot Transportation, Inc. (DTI). While neither Dot Foods nor DTI have sold any products in Washington from a permanent retail establishment, food processors purchase Dot Foods' products and use the products as ingredients in products that are then sold in permanent retail establishments in Washington. Additionally, DTI employed salesmen who solicited sales of Dot Foods' products in Washington. The salesmen personally called on businesses in Washington to solicit sales of Dot Foods' products, but they did not take orders for such products—all orders were transmitted either electronically to Dot Foods' headquarters in Illinois or telephonically to sales representatives located in Illinois.

¶ 6 The Department issued a "Special Notice for Direct Sellers" in February 2000, which informed taxpayers that the Department had updated its interpretation of the B & O tax. CP at 73. The notice directed taxpayers to WAC 458-20-246,¹ and it specifically stated that "[i]f a consumer product is sold by anyone in a permanent retail establishment, the direct sellers' exemption is not available to the direct seller." CP at 73. The Department sent a copy of the notice to Dot Foods, which Dot Foods received.

¶ 7 The Department audited Dot Foods' B & O tax returns for 2000 through 2003 and, as a result, it issued a tax assessment due by October 2004. Dot Foods petitioned for administrative review of the tax assessment, but it also began to pay the tax, resulting in payments to the Department as follows: $50,973.27 for the 4th quarter of 2004; $302,973.48 for January through April 2006; and $747,123.26 in payment of the tax assessment. The parties then agreed to dismiss Dot Foods' petition for administrative review and proceed with the refund action in Thurston County Superior Court.

¶ 8 Both parties filed for summary judgment, which the trial court granted to the Department. The trial court relied heavily on this court's decision in Stroh Brewery Co. v. Dep't of Revenue, 104 Wash.App. 235, 15 P.3d 692, review denied, 144 Wash.2d 1002, 29 P.3d 718 (2001), narrowly construing the exemption in favor of the tax and against the taxpayer. The court concluded that Dot Foods did not qualify for the exemption, and it dismissed its claim with prejudice. Dot Foods now appeals.

ANALYSIS

I. Consumer Products

¶ 9 Dot Foods argues that the trial court erred in ruling that it did not qualify for the direct seller's exemption because it did not exclusively sell consumer products through a direct seller's representative. It contends that, contrary to the trial court's ruling, neither RCW 82.04.423(2) (defining "direct seller's representative") nor the Department's revision of WAC 458-20-246(4)(b)(ii) contain an exclusivity requirement regarding the types of products the representative is buying or selling. Therefore, "[t]he fact that Dot Foods may occasionally sell a non-consumer product does not disqualify it from the direct seller's exemption for consumer products." Appellant's Br. at 28. The Department correctly responds that Dot Foods' interpretation does not read the statute as a whole and does not give effect to all the statutory language.

¶ 10 We review rulings on summary judgment and issues of statutory interpretation de novo. Berrocal v. Fernandez, 155 Wash.2d 585, 590, 121 P.3d 82 (2005). When interpreting a statute, a reviewing court's fundamental duty is to give effect to the legislature's intent, which is primarily derived from the statutory language. McLane Co., Inc. v. Dep't of Revenue, 105 Wash.App. 409, 413, 19 P.3d 1119 (2001) (citing U.S. Tobacco Sales & Mktg. v. Dep't of Revenue, 96 Wash.App. 932, 938, 982 P.2d 652 (1999)). Where the statutory language is plain and unambiguous, we derive the meaning of the statute solely from that language. McLane Co., 105 Wash.App. at 413, 19 P.3d 1119.

¶ 11 A tax exemption presupposes a taxable status, and the burden is on the taxpayer to establish eligibility for the benefit. In re Sehome Park Care Ctr., Inc., 127 Wash.2d 774, 778, 903 P.2d 443 (1995) (citing Group Health Coop. v. Wash. State Tax Comm'n, 72 Wash.2d 422, 429, 433 P.2d 201 (1967)). In interpreting the scope of a tax exemption, we resolve ambiguities in favor of taxation and against exemption. Sehome Park, 127 Wash.2d at 778, 903 P.2d 443. Specifically, we construe ambiguous tax exemptions strictly, though fairly, and in keeping with the statutory language. Stroh, 104 Wash.App. at 240, 15 P.3d 692 (citing Safeway, Inc. v. Dep't of Revenue, 96 Wash.App. 156, 160, 978 P.2d 559 (1999)).

¶ 12 RCW 82.04.423(1)(d) states that the exemption applies only to sellers who make sales "exclusively to or through a direct seller's representative." Subsequently, RCW 82.04.423(2) specifically limits the definition of "direct seller's representative" to one who buys or sells consumer products. Therefore, construing the statute as a whole properly imputes the exclusivity requirement to the consumer products requirement. Dot Foods has not met its burden of proving that the exemption should be read otherwise.

¶ 13 Additionally, Dot Foods' reliance on Agrilink Foods, Inc. v. Dep't of Revenue, 153 Wash.2d 392, 397-98, 103 P.3d 1226 (2005), is misplaced. In that case, the court refused to impute a "perishable finished product requirement" to subsection (4) of RCW 82.04.260 where several other subsections included the "finished product" language, but subsection (4) did not. Conversely here, subsection (2) merely defines a term in subsection (1)—it is not delineating an entirely different category.

¶ 14 Under our interpretation of RCW 82.04.423, a direct seller must exclusively sell consumer products in Washington in order to qualify for the exemption. Therefore, Dot Foods does not qualify for the exemption, and we affirm.

II. Statutory Interpretation

¶ 15 The Department and Dot Foods also offer two different interpretations of the remaining language of the direct seller's exemption. The Department argues that RCW...