Armstrong v. State

• Decision Date: 27 December 1962
• Docket Number: No. 36209,36209
• Citation: 377 P.2d 409,61 Wn.2d 116
• Court: Washington Supreme Court
• Parties: Arthur O. ARMSTRONG, d/b/a the Armstrong General Agency, Appellant, v. The STATE of Washington, Respondent.

Page 116

61 Wn.2d 116

377 P.2d 409

Arthur O. ARMSTRONG, d/b/a the Armstrong General Agency, Appellant, v. The STATE of Washington, Respondent.

No. 36209.

Supreme Court of Washington, Department 2.

Dec. 27, 1962.

McMicken, Rupp & Schweppe, Seattle, for appellant.

John J. O'Connell, Atty. Gen., Henry W. Wager, Asst. Atty. Gen., Olympia, for respondent.

FINLEY, Chief Justice.

This is a lawsuit for a declaratory judgment, pursuant to RCW 7.24, coupled with a demand, in accordance with RCW 82.32.180, for the return of business and occupation taxes previously paid to the state under RCW 82.04.

The appellant, Arthur O. Armstrong, is licensed under RCW 48.05.310 as a general agent engaged in the business of selling insurance in Seattle, Washington, under the name of Armstrong General Agency. Appellant (emphasizing that as a general agent he performs essentially the same functions as insurance company branch offices), contends that the B and O tax levied upon him is unconstitutional; i. e., it violates the equal protection clauses, ¹ because RCW 82.04.320 ² exempts branch offices of insurance companies from the tax. The trial court entered judgment upholding the tax and dismissing the appellant's complaint with prejudice.

The trial court made findings essentially as follows: The plaintiff is an independent, general insurance agent, in business for himself, selling insurance which is offered to the public by several different companies. He hires his own employees, agents or salesmen who sell insurance directly to the public. ³ The plaintiff receives compensation in the form of commissions from the insurance companies. These are measured or determined by the amount of insurance sold. Some insurance companies have branch offices which are staffed by salaried employees of the companies and perform the same functions as a general agent. While a general agent pays B and O taxes under RCW 82.04.290, measured by the gross income of his business, no such tax is paid by the branch offices which are part of the organization of insurance companies. However, regardless of how insurance is sold, whether by general agents or through branch offices, a tax is paid by all insurance companies on all gross premiums derived from business in the state of Washington.

In Allied Stores of Ohio v. Bowers (1958), 358 U.S. 522, 526-528, 79 S.Ct. 437, 440-441, 3 L.Ed.2d 480, the United States Supreme Court stated:

'* * * Of course, the States, in the exercise of their taxing power, are subject to the requirements of the Equal Protection Clause of the Fourteenth Amendment. But that clause imposes no iron rule of equality, prohibiting the flexibility and variety that are appropriate to reasonable schemes of state taxation. The State may impose different specific taxes upon different trades and professions and may vary the rate of excise upon various products. It is not required to resort to close distinctions or to maintain a precise, scientific uniformity with reference to composition, use or value. [Citing cases.] 'To hold otherwise would be to subject the essential taxing power of the State to an intolerable supervision, hostile to the basic principles of our government and wholly beyond the protection which the general clause of the Fourteenth Amendment was intended to assure.' [Citing cases.]

'But there is a point beyond which the State cannot go without violating the Equal Protection Clause. The State must proceed upon a rational basis and may not resort to a classification that is palpably arbitrary. * * * 'If the selection or classification is neither capricious nor arbitrary, and rests upon some reasonable consideration of difference or policy, there is no denial of the equal protection of the law.' [Citing cases.] That a statute may discriminate in favor of a certain class does not render it arbitrary if the discrimination is founded upon a reasonable distinction, or difference in state policy. [Citing cases.]'

In State ex rel. Stiner v. Yelle (1933), 174 Wash. 402, 25 P.2d 91, the issue was whether the exemption of (1) agriculture and (2) the performance of various services rendered the B and O tax unconstitutional. Therein, at page 407, 25 P.2d at page 93, the court said:

'This being an excise tax, the Legislature, under the Fourteenth Amendment to our State Constitution, has very broad power, and we cannot interfere with that power except for arbitrary action, clear abuse, or constructive fraud appearing on the face of the act or from facts of which we may take judicial knowledge.

"A very wide discretion must be conceded to the legislative power of the state in the classification of trades, callings, businesses, or occupations which may be subjected to special forms of regulation or taxation through an excise or license tax. If the selection or classification is neither capricious nor arbitrary, and rests upon some reasonable consideration of difference or policy, there is no denial of the equal protection of the law.' Brown-Forman Co. v. Kentucky, 217 U.S. 563, 30 S.Ct. 578, 580, 54 L.Ed. 883.'

In Supply Laundry Co. v. Jenner (1934), 178 Wash. 72, 34 P.2d 363, the court reiterated the quotation from Brown-Forman Co. v. Kentucky, and quoted from State Board, etc. v. Jackson (1931), 283 U.S. 527, 537-538, 51 S.Ct. 540, 543, 75 L.Ed. 1248, as follows "It is not the function of this Court * * * to consider the propriety or justness of the tax. * * * Our duty is to sustain the classification adopted by the Legislature if there are substantial differences between the occupations separately classified. Such differences need not be great." (Emphasis supplied.)

In Texas Company v. Cohn (1941), 8 Wash.2d 360, 386-87, 112 P.2d 522, 534, the court, reviewing previous decisions relating to the matter of equal protection in the filed of tax law, stated:

'A state legislature has very broad discretion in making classifications in the exercise of its taxing powers. A classification of commodities, businesses, or occupations, for excise tax purposes, under which the classes are taxed at unequal rates, or one class is taxed and another is exempted, will be upheld as constitutional if it is not arbitrary nor capricious and rests upon some reasonable basis of difference or policy. The difference between the classes need not be great. * * * If any such reasonable basis for the classification exists, or conceivably may exist, then the circumstance that there is competition between a commodity or business which is taxed and some commodity or business which is not taxed, does not materially affect the validity of the classification.'

As indicated heretofore, a tax is imposed on all insurance companies, measured by the gross premiums received from business in Washington; RCW 48.14.020. This gross premium tax has been labeled an 'in lieu of' tax by RCW 48.14.080. RCW 82.04.320 (previously quoted in Footnote 1), specifically provides that RCW 82.04 (B and O tax) does not apply to any person in respect to insurance business upon which the gross premium tax has been imposed. But the exemption does not apply to those who engage in the business of representing insurance companies.

Although the appellant performs the same functions for insurance...