Bravern Residential, II, LLC v. State, Dep't of Revenue

• Decision Date: 23 September 2014
• Docket Number: No. 44730–4–II.,44730–4–II.
• Citation: 334 P.3d 1182,183 Wash.App. 769
• Court: Washington Court of Appeals
• Parties: BRAVERN RESIDENTIAL, II, LLC, Appellant v. STATE of Washington, DEPARTMENT OF REVENUE, Respondent.

183 Wash.App. 769

334 P.3d 1182

BRAVERN RESIDENTIAL, II, LLC, Appellant

v.STATE of Washington, DEPARTMENT OF REVENUE, Respondent.

No. 44730–4–II.

Court of Appeals of Washington, Division 2.

Sept. 23, 2014.

Scott M. Edwards, Daniel A. Kittle, Lane Powell PC, Seattle, WA, for Appellant.

Rosann Fitzpatrick, Washington Attorney General, Charles E. Zalesky, Attorney General of Washington, Olympia, WA, for Respondent.

Opinion

MAXA, J.

¶ 1 Bravern Residential II, LLC (Bravern) appeals the trial court's summary judgment order dismissing its refund action against the Department of Revenue (Department) for retail sales and business and occupation (B & O) taxes payable on construction services performed by one of its members, PCL Construction Services, Inc., (PCL) on property Bravern owned. Under WAC 458–20–170(2), a “speculative builder”—a contractor that builds on property it owns—is not subject to retail sales and B & O taxes on its construction services. Bravern argues that because PCL was one of its members, Bravern should be considered the entity performing construction services and treated as a speculative builder. Bravern also argues that because PCL received only credits to its capital account in exchange for its construction services, the tax exemption in WAC 458–20–106 for the transfer of capital assets applies.

¶ 2 We hold that (1) Bravern was not a speculative builder under WAC 458–20–170(2)(b) because PCL acting as a separate entity, and not Bravern, performed the construction services; and (2) the exemption in WAC 458–20–106 for transfers of capital assets is inapplicable because the asset transferred to Bravern—PCL's construction services—was not a capital asset. Accordingly, we affirm the trial court's summary judgment dismissal of Bravern's tax refund action.

FACTS

¶ 3 Bravern is a limited liability company (LLC) formed in 2007 for the purpose of building a residential condominiumtower known as Signature Residences at The Bravern, Tower 4 on land Bravern owned in Bellevue. Bravern had two members: Bravern Residential Mezz II, LLC (BRM), a real estate development company, and PCL, a real estate construction company. BRM had a 99 percent ownership interest in Bravern, and PCL had a one percent ownership interest. BRM was the managing member and retained control over Bravern's management.

¶ 4 The Bravern LLC operating agreement obligated BRM to transfer title to land for the development to Bravern and obligated PCL to contribute construction services and materials pursuant to an attached “services addendum.” Clerk's Papers (CP) at 60. The services addendum provided that PCL would perform and manage all of the work related to the construction of Tower 4 in exchange for credits to its Bravern capital account. These capital account credits would equal PCL's cost of work and service overhead, not to exceed $116,226,428. In order to obtain the credits, the services addendum authorized PCL to submit periodic statements to Bravern setting forth the value of PCL's activities.

¶ 5 The operating agreement contemplated regular capital account distributions from Bravern to PCL. If PCL's capital account exceeded one percent of the total capital contributions to Bravern, then Bravern was allowed to make a distribution from PCL's capital account to PCL in an amount necessary to cause PCL's capital account to return to one percent. Although Bravern technically had discretion in making these distributions, the operating agreement penalized Bravern and BRM if Bravern did not make monthly capital account distributions to PCL. The operating agreement provided that if PCL's capital account balance exceeded one percent of Bravern's total unreturned capital for more than 20 days, the excess would accrue at a preferred return rate of “prime plus 2.5% per annum.” CP at 63. In addition, if PCL's capital account exceeded two percent for more than 15 days, PCL could require BRM to purchase PCL's entire interest in Bravern at a specified price unless PCL received a capital account distribution within 30 days. Bravern had the funds to make capital account distributions to PCL because the operating agreement required BRM to contribute cash to Bravern when necessary to enable Bravern to pay its expenses.

¶ 6 After construction began on Tower 4, PCL submitted to Bravern monthly statements showing the value of its construction services. That value then was credited to PCL's capital account. The value of these services totaled over $121 million by the end of the project. PCL then received monthly capital account distributions from Bravern for the construction activity associated with each billing statement. Bravern never allowed PCL's capital account to exceed one percent of Bravern's total capital contributions, so application of the preferred return clause was never triggered. A few months after completing construction, PCL assigned its interest in Bravern to BRM. PCL never received any distribution of profits from Bravern.

¶ 7 In August 2007, Bravern requested confirmation from the Department that Bravern would be treated as a “speculative builder” under WAC 458–20–170(2)(a), which would allow it to avoid paying retail sales or B & O taxes on PCL's construction services. In February 2008, the Department issued a letter ruling denying Bravern's request, determining that Bravern was not a speculative builder. Bravern appealed the Department's denial of its ruling request to the Department's Appeals Division. The Appeals Division denied the appeal and upheld the Department's reasoning in its ruling denying speculative builder status to Bravern.

¶ 8 Because there is no mechanism for direct judicial review of the Department's denial of a ruling request,¹ Bravern paid $107,842.10 in taxes on $1,135,180 in services PCL provided for the month of June 2009.² Bravern then filed an action in superior court for a refund of those taxes.³ Bravern moved for summary judgment, arguing that because PCL was a member of Bravern, Bravern had constructed Tower 4 on its own land and therefore was a speculative builder in accordance with the Department's published construction guidelines for joint ventures. The Department also moved for summary judgment, arguing that Bravern was required to pay taxes on the services PCL performed because PCL had constructed Tower 4 on Bravern's property, and therefore was engaged in making a retail sale. The Department further argued that Bravern was not a speculative builder because PCL received compensation for its services independent of any right to Bravern's profits. Alternatively, the Department argued that Bravern was not entitled to a refund because RCW 82.32.655 specifically prohibited the type of tax avoidance transactions in which Bravern was engaged.

¶ 9 The trial court granted the Department's summary judgment motion and denied Bravern's motion. Bravern appeals.

ANALYSIS

A. Standard of Review

¶ 10 We review a trial court's order granting summary judgment de novo. In re the Estate of Bracken, 175 Wash.2d 549, 562, 290 P.3d 99 (2012). Summary judgment is appropriate where, viewing the evidence in the light most favorable to the nonmoving party, there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Loeffelholz v. Univ. of Wash., 175 Wash.2d 264, 271, 285 P.3d 854 (2012). Here, the parties do not dispute the material facts. Accordingly, the issue before us is whether the trial court correctly determined that Bravern was not entitled to a tax refund, a question of law we review de novo. Bracken, 175 Wash.2d at 562, 290 P.3d 99.

¶ 11 To establish that a taxpayer is entitled to a refund, the taxpayer must prove that the tax paid was incorrect and prove the correct amount of tax. RCW 82.32.180. In order to determine whether the tax paid here was correct, we must interpret the applicable statutes and Department regulations regarding speculative builders, which are questions of law we review de novo. Skinner v. Civil Serv. Comm'n, 168 Wash.2d 845, 849, 232 P.3d 558 (2010).

B. Requirements for “Speculative Builder” Status

1. Statutory Framework

¶ 12 The State of Washington imposes a tax on the selling price of retail sales in the state, payable by the purchaser. Former RCW 82.08.020(1) (2010); RCW 82.08.050(1). Washington also imposes a B & O tax on the gross proceeds of retail sales in the state, payable by the business owner. Former RCW 82.04.250(1) (2010). For both taxes, a “retail sale” includes tangible personal property consumed and services rendered in constructing buildings on real property for consumers. Former RCW 82.04.050(2)(b) (2010); former RCW 82.08.010(1)(a) (2010), recodified as RCW 82.08.010(1)(a)(i) ; Dep't of Revenue v. Nord Nw. Corp., 164 Wash.App. 215, 224, 264 P.3d 259 (2011), review denied, 173 Wash.2d 1019, 272 P.3d 247 (2012).

¶ 13 A contractor constructing a building on real property owned by a consumer is a “prime contractor” under WAC 458–20–170(1)(a). A “consumer” includes a “person who is an owner, lessee or has the right of possession to or an easement in real property which is being constructed, repaired, decorated, improved, or otherwise altered by a person engaged in business.” Former RCW 82.04.190(4) (2010). The prime contractor is a seller of services, and under former RCW 82.08.020(1)(c) the consumer property owner must pay retail sales tax on the amount charged for those services. Under former RCW 82.04.250(1) the prime contractor also must pay B & O taxes measured by the gross proceeds of the sale of its services.

¶ 14 In contrast, a contractor constructing a building on real property it owns is not required to pay retail sales or B & O taxes. WAC 458–20–170(2)(b). WAC 458–20–170(2)(a) calls such a person a “speculative builder.” A speculative builder is not required to pay these taxes on the value of its construction services because it is not engaged in a retail sale. See Nord, 164 Wash.App. at 225, 264 P.3d 259. Although speculative builders are not...