City of Wenatchee, Corp. v. Chelan Cnty. Pub. Util. Dist. No. 1, Corp.

• Decision Date: 20 May 2014
• Docket Number: No. 31195–3–III.,31195–3–III.
• Citation: 325 P.3d 419,181 Wash.App. 326
• Court: Washington Court of Appeals
• Parties: CITY OF WENATCHEE, a municipal corporation, Appellant, v. CHELAN COUNTY PUBLIC UTILITY DISTRICT NO. 1, a municipal corporation, Respondent.

181 Wash.App. 326

325 P.3d 419

CITY OF WENATCHEE, a municipal corporation, Appellant,

v.CHELAN COUNTY PUBLIC UTILITY DISTRICT NO. 1, a municipal corporation, Respondent.

No. 31195–3–III.

Court of Appeals of Washington, Division 3.

May 20, 2014.

Steve Douglas Smith, Attorney at Law, Aaron J. Harris, Johnson, Gaukroger, Drewelow & Woolett, Wenatchee, WA, for Appellant.

Carol A. Wardell, Wenatchee, WA, for Respondent.

Andrew William Maron, Short Cressman & Burgess PLLC, Seattle, WA, Amicus Curiae on behalf of Washington Association of Sewer and Water Districts.

Andrew William Maron, Short Cressman & Burgess PLLC, Seattle, WA, Amicus Curiae on behalf of Shoreline Water District.

Michael Martin Hanis, Hanis Irvine Prothero PLLC, Kent, WA, Amicus Curiae on behalf of Soos Creek Water and Sewer District.

SIDDOWAY, C.J.

¶ 1 This case calls upon us to decide whether one municipality may tax the revenue of another municipality based on a general rather than specific legislative grant of taxing authority, where the revenue is from activity that is proprietary in character rather than governmental. To decide that question, we must discern the principles on which this issue was decided by our Supreme Court in King County v. City of Algona, 101 Wash.2d 789, 681 P.2d 1281 (1984). In Algona, the city of Algona assessed a business and occupation tax on revenues generated by a King County solid waste plant located in the city—a tax that the Supreme Court held was invalid.

¶ 2 Considering the decision in Algona in its entirety and bearing in mind the language of the Washington Constitution and earlier and later decisions by our Supreme Court, we hold that Algona was decided on the basis of the governmental character of the activity that the city of Algona sought to tax. Because the utility tax that the city of Wenatchee levied in this case was on activities that were proprietary (in whole or in large part) we hold that the city enjoys the authority to levy and collect the tax from Chelan County Public Utility District No. 1, except to the extent that the district can demonstrate that its revenues were derived from governmental activities. We therefore reverse the trial court's declaratory judgment in favor of the district and remand for further proceedings.

FACTS AND PROCEDURAL BACKGROUND

¶ 3 In April 1964, the city of Wenatchee adopted a utility tax on domestic water sales. Chelan County Public Utility District No. 1(PUD), which provides water to 2,000 customers located within the city's limits, paid the utility tax on domestic water service for many decades. In May 2012, however, it notified the city of its intent to stop paying the tax on its water system revenues, having concluded that absent express statutory authorization to the city to impose the tax the PUD enjoyed immunity from taxation under the governmental immunity doctrine. By express authorization, the PUD means legislation that not only authorizes a municipality to tax, but explicitly authorizes it to tax other municipalities. The PUD is itself a municipal corporation authorized to own and operate domestic water systems and to sell electric power. See chapter 54.04 RCW.

¶ 4 The city and the PUD presented their disagreement over the city's authority to tax to the Chelan County Superior Court through a declaratory judgment action by the city, in which the PUD joined. No facts are in dispute.

¶ 5 The city's position is that RCW 35A.82.020, which grants code cities like Wenatchee broad general authority to impose excise taxes for regulation or revenue, includes the authority to tax domestic water sales by another municipality that take place within the city limits. Its position is that the governmental immunity doctrine only applies when the municipality being taxed is operating in a sovereign capacity; in that case (and only that case) it agrees that the legislative authorization to tax that governmental function must be express in the sense urged by the PUD. Where a municipality is operating in a proprietary capacity—as the PUD is, in selling domestic water—the city contends that the governmental immunity doctrine does not apply and the legislature's general grant of authority to impose an excise tax is sufficient.

¶ 6 The PUD's position is that the governmental immunity doctrine applies any time one municipality seeks to tax another, so that express legislative authorization to tax anothermunicipality is always required. It views governmental immunity as grounded in article VII, section 9 and article XI, section 12 of the Washington Constitution.

¶ 7 The trial court was persuaded by the arguments of the PUD, declared the utility tax imposed by the city on the PUD's water system to be unlawful, and ordered the city to cease charging the PUD for the tax. The city appeals.

ANALYSIS

¶ 8 Central to the parties' disagreement and to our task on appeal is determining the principle of law expressed in Algona that constituted the holding of that case. The disposition reached by the Washington Supreme Court in Algona was that the city of Algona lacked authority to assess a business and occupation (B & O) tax against King County on revenues from a solid waste plant owned by the county that was located in the city. The parties point to different statements of legal principle in Algona as accounting for that disposition.

¶ 9 The PUD argues that the Algona court expressed the principle of law necessary to its disposition when it said:

The general grant of taxation power on which Algona relies in RCW 35A.11.020 contains no express authority to levy a tax on the State or another municipality. To allow [Algona] to impose the tax in this case would violate the established rule that municipalities must have specific legislative authority to levy a particular tax.

The governmental immunity doctrine provides that one municipality may not impose a tax on another without express statutory authorization.

101 Wash.2d at 793, 681 P.2d 1281 (citations omitted).

¶ 10 The city argues that the foregoing discussion in Algona cannot be read in isolation and that it was implicitly based on the fact that Algona was seeking to tax revenue derived from a governmental function. It argues that the court more clearly expressed the principle of law necessary to its disposition when it said:

[Algona] argues that governmental immunity should not apply because the [King] County operation of a solid waste transfer station is proprietary. This court has explicitly recognized that the disposal of solid waste is a governmental function. Where the primary purpose in operating the transfer station is public or governmental in nature, the county cannot be subject to the city B & O tax, absent express statutory authority.

Id. at 794, 681 P.2d 1281 (citation omitted).

¶ 11 The city also points to Burba v. City of Vancouver, 113 Wash.2d 800, 783 P.2d 1056 (1989), in which the Supreme Court held that a city could constitutionally impose a utility tax on a city-owned water and sewer utility—although without addressing Algona or the doctrine of governmental immunity. It also points to Burns v. City of Seattle, 161 Wash.2d 129, 164 P.3d 475 (2007) in which the Supreme Court noted an asserted inconsistency between Algona and Burba. Without deciding what, precisely, Algona held, the Burns court observed that a city's ability to impose an excise tax on revenue of a utility “is not ... a settled issue of law” and that “it is by no means certain ... that the doctrine of governmental immunity from taxation would prevent the [cities of Shoreline, Burien, Lake Forest Park, SeaTac, and Tukwila] from imposing a utility tax on [Seattle City Light].” Id. at 159–60, 164 P.3d 475.

¶ 12 For reasons explained below, we conclude, first, that the provisions of the Washington Constitution relied upon by the PUD are not a source of limitation on local taxing authority granted by the legislature; second, that RCW 35A.82.020's grant of taxing authority is broad and, on its face, sufficient to support a municipality's taxation of another municipality's conduct of activity within its borders; and third, that the legislature's use of more explicit language in statutes dealing with a city's taxation of a public utility district's sale of electricity does not support the conclusion that we should ignore the plain language of RCW 35A.82.020 in favor of a more narrow authorization.

¶ 13 Turning to the governmental immunity doctrine, we recognize that it is a common law doctrine implied where a government acts in its sovereign capacity. We conclude that Algona's holding is consistent, and limits immunity from taxation to sovereign, not proprietary, activities. Finally, we acknowledge the PUD's and amici's argument that recent case law and legislation may support a water purveyor's claim that it has allocated and recovered the cost of providing fire suppression services and that its revenue from those fees is from a government function. Since the record is insufficient to determine what, if any, revenues of the PUD might be immune from taxation on that basis, that issue must be resolved upon remand to the trial court.

I. Article XI, section 12 and article VII, section 9 of the Washington Constitution are not a source of limitation on local taxing authority granted by the legislature

¶ 14 Article XI of the Washington Constitution, dealing with “County, City and Township Organization,” provides at its section 12 (entitled “Assessment and Collection of Taxes in Municipalities”):

The legislature shall have no power to impose taxes upon counties, cities, towns or other municipal corporations, or upon the inhabitants or property thereof, for county, city, town, or other municipal purposes, but may, by general laws, vest in the corporate authorities thereof, the power to assess and collect taxes for such purposes.

¶ 15 The general import of this section of the Washington Constitution is well settled. In Larson v. Seattle Popular Monorail...