City of Spokane v. WASH. STATE DEPT. OF REV.

• Citation: 145 Wn.2d 445,38 P.3d 1010,145 Wash.2d 445
• Decision Date: 24 January 2002
• Docket Number: No. 70765-1.,70765-1.
• Court: United States State Supreme Court of Washington
• Parties: CITY OF SPOKANE, by and through its WASTEWATER MANAGEMENT DEPARTMENT, as Taxpayer, Petitioner, v. WASHINGTON STATE DEPARTMENT OF REVENUE, Respondent.

38 P.3d 1010

145 Wn.2d 445

145 Wash.2d 445

CITY OF SPOKANE, by and through its WASTEWATER MANAGEMENT DEPARTMENT, as Taxpayer, Petitioner, v. WASHINGTON STATE DEPARTMENT OF REVENUE, Respondent.

No. 70765-1.

Supreme Court of Washington, En Banc.

January 24, 2002.

Short, Cressman & Burgess, Brian L. Comstock, Andrew William Maron, Seattle, Amicus Curiae.

Robert Gerard Beaumier, Jr., Assistant Spokane City Attorney, Spokane, Counsel for Petitioner.

Christine Gregoire, Attorney General, Anne Elizabeth Egeler, Asst., Olympia, Counsel for Respondent.

CHAMBERS, J.

This case concerns the apportionment of sewerage¹ between collection sewerage subject to the 3.6 percent public utility tax and sewerage concerned with the transportation and treatment of sewage, which is subject to the business and occupation (B & O) services tax rate. The B & O tax rate varies, but is always lower than the public utility tax rate, and at the time of the complaint was 2.0 percent. At an administrative hearing, the Board of Tax Appeals (BTA) concluded that collection (subject to the higher tax rate) continues up to the point where no new sewage is introduced into the system. The superior court reversed, concluding that collection occurs only in the small lateral pipes, but the Court of Appeals reversed again and found for the Department of Revenue (DOR). The City of Spokane sought review of the decision of the Court of Appeals, which we granted. Spokane argues here that its large interceptor pipes should be taxed at the lower rate applicable to transfer. We reverse the Court of Appeals and affirm the superior court.

FACTS

Two different tax rates apply to sewerage. At the time under appeal, the gross income attributable to the portion involved in collection of sewage was taxed at 3.6 percent under the public utility tax, RCW 82.16.020(1)(a), while the portion involved in transport of sewage was taxed at 2.0 percent under the generic B & O statute, former RCW 82.04.290(4) (1996).² Washington State is the only state to identify a separate tax applicable to sewage collection. See 3 St. Tax Guide (CCH) 9401-606 (2001).

Prior to 1985, the entire sewer system was taxed at the lower rate, the generic B & O tax. However, in 1985, the Legislature imposed a new 3.6 percent public utility tax on the gross income of businesses involved in "sewerage collection:"

Public utility tax imposed—Additional tax imposed—Deposit of moneys. (1) There is levied and there shall be collected from every person a tax for the act or privilege of engaging within this state in any one or more of the businesses herein mentioned. The tax shall be equal to the gross income of the business, multiplied by the rate set out after the business, as follows:

(a) Express, sewerage collection, and telegraph businesses: Three and six-tenths percent;

RCW 82.16.020. The goal was to increase revenue in order to help fund the newly created public works assistance account.

Pursuant to this statute, the DOR promulgated a regulation imposing the public utility tax on all income derived from sewage collection and transport. WAC 458-20-179. At that point, no confusion existed because all sewerage was taxed at the same rate. However, the following year DOR reinterpreted the law and promulgated WAC 458-20-251 (Rule 251) restricting the tax to the portion derived from collection and leaving the remainder to be taxed at the lower rate applicable to the generic B & O statute:

The department has determined that, within the intent of the law, only the portion of gross receipts from customer billings attributable to the "collection" portion of services rendered should be taxed under the public utility tax classification.

WAC 458-20-251(2). Although neither the rule nor the statute from which it was derived defines the term "collection," Rule 251 specifies that collection does not include transfer, treatment, or disposal of sewage. WAC 458-20-251(3)(a). However, a difference of opinion arose about where sewage collection ends and sewage transfer begins.

Spokane manages hundreds of miles of sewer pipes, which take sewage from the customers to a sewage treatment and disposal plant. The pipes range in diameter from 4 inches to 135 inches, with 358 miles at 8 inches or less, and 397.42 miles at more than 8 inches, totaling 755.52 miles.³ Sewage from each property empties into a lateral pipe, and these laterals run along the street. Each lateral pipe is up to 8 inches in diameter and collects sewage from up to 72 homes. The largest building in Spokane uses 8 inch laterals, and of the 80,000 sewer connections maintained by the City of Spokane, only 1-2 percent have lateral lines exceeding 8 inches in diameter. A lateral has no other common tributary to it. For accounting convenience, Spokane classifies all pipes of 8 inches or less as laterals and those over 8 inches as interceptors or trunks.⁴ Until the 1950s, the laterals emptied directly into the nearest convenient river or lowland area. When treatment plants became prevalent, however, large interceptor pipes were installed to transport sewage from the point where the sewage was formerly discharged from laterals to exit the system. These interceptors carried the sewage to the treatment facility. Interceptors are at least 8 inches in diameter and are often up to 12 feet in diameter.

Bill Peacock, Senior Engineer for Spokane's Wastewater Department, testified at the BTA hearing that from the point where the lateral feeds into the interceptor, the primary function of the sewerage is transfer of the sewage to the plant:

[O]nce that sewage hits here, it's on its freeway to the plant, and it doesn't care how many cars or how many people flush their toilet; it's moving that direction and moving there only.

Tr. of Hr'g Before BTA at 70.

About 1,600 (1 or 2 percent) of Spokane's customers are located along an interceptor line, and their sewage empties directly into the interceptor. Installation of laterals from these buildings would be an unnecessary duplication.

At certain points in the system, where gravity is inadequate to propel the sewage, lift stations propel the sewage uphill through pressurized pipes called force mains. After the hill is overcome, force mains reconnect to the gravity flow system. This process may be repeated several times until the sewage reaches the treatment facility. A pressurized pipe is unable to collect sewage, but can only transfer it. No such pumps are found in the laterals.

When Rule 251 was adopted, Spokane defined 23.99 percent of its assets as collection sewerage, with the remaining 76.01 percent engaged in transfer and treatment. A DOR audit that year concluded that Spokane owed $70,000 in taxes, assuming that collection continues until the point where no further collection lines enter the system prior to entry into the treatment plant. If one home emptied into an interceptor pipe, DOR considered the pipe to be a collection line rather than a transfer line. This definition labeled 99.39 percent of Spokane's pipes as collection sewerage, leaving less than 1 percent as transfer sewerage. The remainder of the noncollection income was from the treatment plant, which is the most expensive component of sewerage.

After paying, Spokane petitioned DOR for a refund, arguing that neither interceptor lines nor pressurized lines should be counted as collection lines, and that they should therefore be taxed at the lower B & O rate. The BTA upheld DOR's ruling, and the superior court reversed. The Court of Appeals upheld the original ruling, holding that a sewerage system collects sewage until the last point at which new sewage is introduced, and only after that point is the sewerage devoted to transfer. Spokane seeks review.

ANALYSIS

The Administrative Procedure Act, chapter 34.05 RCW, governs appeals from BTA. Spokane does not challenge any of BTA's findings of fact, so they are verities on appeal. Tapper v. Employment Sec. Dep't, 122 Wash.2d 397, 407, 858 P.2d 494 (1993). When reviewing a question of law, the appellate court grants relief if the agency "erroneously interpreted or applied the law." RCW 34.05.570(3)(d). Review is de novo. Enter. Leasing, Inc. v. City of Tacoma, 139 Wash.2d 546, 551, 988 P.2d 961 (1999). Spokane has the burden of showing that BTA's decision was erroneous. RCW 34.05.570(3)(e).

RCW 82.16.020, the statute imposing the public utility tax, does not define the term "collection" for the purpose of determining where "sewerage collection" ends. Spokane urges a substantial use test, arguing that collection ends at the point where the sewerage is used primarily for the purpose of sewage transfer. DOR, on the other hand, urges a sole use test, arguing that collection continues until the point at which the sewerage is used exclusively for sewage transfer. When attempting to determine where collection ends and where transfer begins, DOR incorporated a definition of "collection" into Rule 251:

"Sewerage collection business" means the activity of receiving sewage deposited into and carried off by a system of sewers, drains, and pipes to a common point, or points, for disposal or for transfer to treatment for disposal, but does not include such transfer, treatment, or disposal of sewage.

WAC 458-20-251(3)(a).

The State argues that if collection includes "carry[ing] off" as well as receiving sewage, then collection must have a transportation component. Thus, deferring to the agency, BTA accepted DOR's proposition that the pipes are involved in collection up to the point where the last customer hook-up enters the system. The Court of Appeals, in affirming the BTA, concluded that although RCW 82.16.020 does not define the term "collection," Rule 251 unambiguously defines the term. We agree that Rule 251 and RCW 82.16.020 are unambiguous, but conclude that the Court of Appeals erred in holding that collection necessarily occurs until the last common point.⁵

DOR argues that because the word...