Association of Wash. Business v. State, Dor

• Decision Date: 22 September 2005
• Docket Number: No. 75623-6.,75623-6.
• Citation: 120 P.3d 46,155 Wn.2d 430
• Court: Washington Supreme Court
• Parties: ASSOCIATION OF WASHINGTON BUSINESS, Petitioner, v. STATE OF WASHINGTON, DEPARTMENT OF REVENUE, Respondent.

Page 46

120 P.3d 46

155 Wn.2d 430

ASSOCIATION OF WASHINGTON BUSINESS, Petitioner, v. STATE OF WASHINGTON, DEPARTMENT OF REVENUE, Respondent.

No. 75623-6.

Supreme Court of Washington, En Banc.

Argued May 17, 2005.

Decided September 22, 2005.

Franklin G. Dinces, Gig Harbor, Geoffrey P. Knudsen, Seattle, for Petitioner.

Donald F. Cofer, Attorney General's Ofc./Revenue Div., Maureen Hart, Jeffrey David Goltz, Olympia, for Respondent.

SANDERS, J.

¶ 1 The Association of Washington Business (AWB) seeks reversal of a published Court of Appeals opinion holding the Department of Revenue (DOR) has the inherent authority to issue nonbinding interpretive rules. We hold DOR has that authority, and we define the purpose and scope of interpretive rules.

FACTS AND PROCEDURAL HISTORY

¶ 2 In April 2001 AWB filed a lawsuit in Thurston County Superior Court challenging three DOR regulations published in the Washington Administrative Code (WAC). AWB alleged the regulations¹ were invalid because DOR did not have the statutory authority to adopt them. Specifically, AWB alleged the regulatory reform act of 1995 revoked DOR's rule making authority under RCW 82.01.060 and that RCW 82.32.300 did not authorize interpretive rules. RCW 82.32.300 is the cited statutory authority for the WACs at issue. AWB prayed for a declaratory judgment that RCW 82.32.300 does not grant DOR the authority to issue the three WACs, that the WACs are invalid, and it sought an injunction to prevent DOR from adopting any other interpretive rules under that statute.

¶ 3 DOR admitted the three rules are interpretive as defined by RCW 34.05.328(5)(c)(ii).² It admitted adopting or amending the three rules after the effective date of the regulatory reform act of 1995 (July 23, 1995) and that RCW 82.32.300 is the only statutory authority cited for the rules, but denied it is the only statutory authority. The other primary statutes DOR claims support its authority are RCW 82.01.060 and RCW 82.32A.010.

¶ 4 The superior court held a hearing in 2002 at which AWB presented testimony that the public was misled by DOR into believing the rules were binding rather than merely interpretive. Two officers of AWB, Thomas Dooley and Michael Bernard, testified of their belief, induced by DOR, the three WACs had the force and effect of law. Bernard in particular said he would have challenged the rules in department appeals processes and claimed larger exemptions had he known the rules were nonbinding.

¶ 5 The court issued an oral ruling. The court clarified that it was not ruling on the question of whether the rules accurately reflected the underlying statutes. The court ruled that DOR had the authority to issue rules under RCW 82.32.300, but not nonbinding interpretive rules. The court determined the rules impaired the rights of AWB since the rules were nonbinding but were still called "rules" and found the rules misleading because other avenues existed to inform the public of the department's interpretation of statutes.

¶ 6 The court made the following findings of fact:

1. The Association of Washington Business contested the Department of Revenue's authority to adopt three rules, WAC 458-20-136, WAC 458-20-13601 and WAC 458-20-238, "the Rules".

2. The Department of Revenue argues to the Court that the Rules do not and are not intended to have the force of law because the Department believed the rules are interpretive rules.

3. The Rules are for nonbinding informational purposes only. The Rules do not have the force of law.

4. The public has been misled by prelitigation, Department of Revenue actions to believe that the Rules have the force of law.

5. The Plaintiff, and its members, have been substantially prejudiced by the adoption of the Rules and the Department of Revenue's prelitigation actions.

6. The Rules and their applications improperly interfere with and/or impair the legal rights of Plaintiff and its members.

7. Plaintiff has proved that it and its members have standing to challenge the Department of Revenue's authority to adopt the Rules.

Clerk's Papers (CP) at 80. The court also entered the following conclusions of law:

1. This Court has jurisdiction over the Parties and the claims decided herein under RCW 34.05.514 and RCW 34.05.570(2). In the alternative, this Court would have jurisdiction to decide this matter under RCW 34.05.514 and RCW 34.05.570(4) or The Declaratory Judgment Act, RCW 7.24.

2. Paragraph two of RCW 82.32.300 provides certain authority to the Department of Revenue to adopt rules having the force of statutory law.

3. RCW 82.32.300 does not provide authority to adopt rules that are for nonbinding informational purposes that lack the force of law.

4. The Department of Revenue lacks authority to adopt rules that are for nonbinding informational purposes if the rules do not expressly inform the public of their nonbinding nature and purpose.

5. The Court expresses no opinion whether the Department of Revenue has the authority to adopt rules that are for nonbinding informational purposes if the rules do expressly inform the public of their nature and purpose.

6. The Department of Revenue lacks the authority to lead the public to believe that a nonbinding informational rule has the force of law.

7. Any finding of fact that is more properly characterized as a conclusion of law shall be considered to be included herein.

8. The Court hereby incorporates its oral ruling of October 3, 2002.

CP at 80-81. The court entered judgment in favor of AWB and declared the three rules invalid. DOR appealed.

¶ 7 The Court of Appeals reversed in a published opinion. Ass'n of Wash. Bus. v. Dep't of Revenue, 121 Wash.App. 766, 90 P.3d 1128 (2004). The court held DOR has the inherent authority to adopt interpretive rules and that interpretive rules do not need to state they are interpretive. Id. at 772, 775, 90 P.3d 1128. The court refused to opine on DOR's misrepresentations of the rules as binding, saying that interpretive rules are binding on the public. Id. at 774-75, 90 P.3d 1128. Further, even if the rules were misrepresented as law, that is not a sufficient reason to invalidate the rules under the statute. Id. at 775-76, 90 P.3d 1128.

¶ 8 AWB petitioned this court for review, which we granted.

STANDARD OF REVIEW

¶ 9 The party challenging a rule has the burden to prove it is invalid. RCW 34.05.570(1)(a); Wash. Pub. Ports Ass'n v. Dep't of Revenue, 148 Wash.2d 637, 645, 62 P.3d 462 (2003). "This court may declare an agency rule invalid if it: (1) violates constitutional provisions, (2) exceeds statutory authority of the agency, (3) was adopted without compliance to statutory rule-making procedures, or (4) is arbitrary and capricious." Id. at 645, 62 P.3d 462 (citing RCW 34.05.570(2)(c)). "Determining the extent of DOR's rule-making authority is a question of law" which is reviewed de novo. Id. AWB only alleges the rules exceed DOR's statutory authority.

ANALYSIS

I. DOR Has the Authority to Adopt Interpretive Regulations

¶ 10 "Administrative agencies have those powers expressly granted to them and those necessarily implied from their statutory delegation of authority." Tuerk v. Dep't of Licensing, 123 Wash.2d 120, 124-25, 864 P.2d 1382 (1994) (citing Municipality of Metro. Seattle v. Pub. Empl. Relations Comm'n, 118 Wash.2d 621, 633, 826 P.2d 158 (1992)).³ DOR argues it has both express and implied authority to adopt interpretive rules, citing various statutes to support its position.

A. RCW 82.32.300 and Its Proper Interpretation

¶ 11 The first statute is RCW 82.32.300, which reads in relevant part:

The administration of this and chapters 82.04 through 82.27 RCW of this title is vested in the department of revenue which shall prescribe forms and rules of procedure for the determination of the taxable status of any person, for the making of returns and for the ascertainment, assessment and collection of taxes and penalties imposed thereunder.

The department of revenue shall make and publish rules and regulations, not inconsistent therewith, necessary to enforce provisions of this chapter and chapters 82.02 through 82.23B and 82.27 RCW, . . . which shall have the same force and effect as if specifically included therein, unless declared invalid by the judgment of a court of record not appealed from.

(Emphasis added.) The first paragraph clearly grants DOR the authority to adopt rules of procedure, which are not at issue here. The second paragraph refers to legislative rules.⁴ Legislative rules must be consistent with the statutes DOR is charged with administering and have the "same force and effect" as the statutes themselves. Such rules clearly cannot be merely interpretive, which by definition means nonbinding in the sense that violating the rule does not result in sanctions. See RCW 34.05.328(5)(c)(ii). Thus, RCW 82.32.300 expressly authorizes rules of procedure and legislative rules.⁵

¶ 12 DOR argues interpretive rule making authority is implied from the vesting of the tax code's administration and enforcement in DOR. As the enforcer of the revenue statutes, DOR of necessity makes interpretive decisions about those statutes. See United States v. Mead Corp., 533 U.S. 218, 227, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001) ("[W]hether or not they enjoy any express delegation of authority on a particular question, agencies charged with applying a statute necessarily make all sorts of interpretive choices. . . ."). It was our holding that "[a]n agency charged with the administration and enforcement of a statute may interpret ambiguities within the statutory language through the rule making process." Edelman v. State ex rel. Pub. Disclosure Comm'n, 152 Wash.2d 584, 590, 99 P.3d 386 (2004).

¶ 13 DOR is charged with enforcing the tax code⁶ and hence has the authority to interpret it. Interpreting statutes is consistent with administering and enforcing the statutes. As one treatise says, "Legislative authorization for an agency to interpret...