Ford Motor Co. v. City of Seattle, 77167-7.

CourtUnited States State Supreme Court of Washington
Citation156 P.3d 185,160 Wn.2d 32
Decision Date12 April 2007
Docket NumberNo. 77516-8.,No. 77167-7.,77167-7.,77516-8.
PartiesFORD MOTOR COMPANY, Appellant, v. CITY OF SEATTLE, EXECUTIVE SERVICES DEPARTMENT, Respondent. Ford Motor Company, Appellant, v. City of Tacoma, Respondent.
156 P.3d 185
160 Wn.2d 32
Ford Motor Company, Appellant,
City of Tacoma, Respondent.
No. 77167-7.
No. 77516-8.
Supreme Court of Washington, En Banc.
Argued June 15, 2006.
Decided April 12, 2007.

[156 P.3d 187]

Scott M Edwards, Donald Michael Young, Perkins Coie LLP, Marie G. Aglion, Attorney at Law, Seattle, WA, for Appellant.

Kent Charles Meyer, City of Seattle Attorneys Office, Seattle, WA, Elizabeth Ann Pauli, Attorney at Law, Cheryl Fandel Carlson, Attorney at Law, Tacoma, WA, for Respondent.


¶ 1 We granted direct review of two separate trial court orders that upheld the imposition by the cities of Seattle and Tacoma (Cities) of a business and occupation (B & O) tax upon the Ford Motor Company (Ford) for its activities related to being in the business of making wholesale sales to dealers. Ford filed separate legal actions against both Cities in order to recover B & O taxes, interest, and penalties it paid. We now review whether the Cities used the proper tax classification and tax measure in calculating Ford's B & O taxes. We conclude that they did and consequently affirm the determinations of both trial courts.


¶ 2 Ford is a Delaware corporation, registered to do business in the state of Washington. Ford's principal place of business is in Dearborn, Michigan. Ford has manufacturing plants in several states, but none in Washington. Although Ford maintains an office in Bellevue, Washington, it does not directly sell vehicles to consumers in the cities of Seattle or Tacoma.

¶ 3 Ford does, however, sell automobiles, parts, and accessories to independent dealers located within the cities of Seattle and Tacoma. These dealers, in turn, sell the automobile parts and accessories to retail customers. Ford also conducts a variety of business activities within Seattle and Tacoma related to the sale of its cars, parts, and accessories to dealers. These activities include: advertising, sending representatives to meet with its dealers and their part managers, imparting information about new products, discussing problems and customer satisfaction concerns, and marketing and selling warranties on its automobiles. Ford has stipulated that all of these activities were for the business purposes of selling Ford products to dealers located in Tacoma and Seattle and helping those dealers sell Ford products to retail customers.

¶ 4 The City of Seattle audited Ford for the period of January 1998 through December 2002. It then assessed a B & O tax, on the ground that Ford was engaged within Seattle in the business of making sales at wholesale and assessed the tax on the entire gross proceeds from vehicles sold to Seattle dealers. Ford paid the assessed amount of $401,968. It then filed a lawsuit in King County Superior Court to obtain a refund and declaratory judgment as to the proper method of calculating its tax liability. The

156 P.3d 188

City of Seattle moved for a summary judgment dismissing Ford's claims. The trial court granted the City's motion, determining that there was no merit to Ford's claims that (1) it did not make sales within the City of Seattle as that term is used in the Seattle Municipal Code and (2) the gross income Ford received from its dealerships had to be apportioned in order to be constitutional.

¶ 5 The City of Tacoma also audited Ford, imposing a B & O tax, interest, and penalties for the period from January 1, 1990, through December 31, 2002 (audit period). Ford paid the amount assessed of $1,307,933.83 and filed suit in Pierce County Superior Court seeking a refund. After a bench trial, the trial court dismissed Ford's classification and apportionment challenges, which were the same as those made in the King County suit. That court also denied Ford's separate claims that (1) the City of Tacoma was barred from collecting taxes for the period from 1994 through 1999 by the statute of limitations and (2) Ford was not properly assessed.

¶ 6 Ford appealed both the King County summary judgment order and the Pierce County trial judgment, seeking direct review in this court. The two appeals were consolidated, and review was granted pursuant to RAP 4.2(a)(4), our court determining that both cases presented issues of substantial public importance.


¶ 7 A B & O tax is an excise tax imposed for "the privilege of doing business" in a particular jurisdiction. 1B KELLY KUNSCH ET AL., WASHINGTON PRACTICE: METHODS OF PRACTICE § 72.7, at 452 (1997). Washington imposes a B & O tax for the privilege of doing business in this state. RCW 82.04.220. Cities may also impose their own B & O tax for the exercise of the privilege within that city. The value of the "privilege is measured by the gross proceeds of the business; the rate of tax is determined by the type of business in which the taxpayer is engaged." 1B KUNSCH ET AL., supra, § 72.7, at 452.

¶ 8 A tax statute has three basic elements: "First, there must be an incident that triggers the tax." Id. § 72.3, at 449. The "taxable incident" is the "activity that the legislature has designated as taxable." Id. Second, there must be a base that represents the value of the taxable incident. This is known as the "tax measure." Id. Third, there must be a "tax rate," which, when multiplied by the tax measure, determines "the amount of tax due." Id. At issue in this case are the taxable incident and tax measure of Seattle and Tacoma's B & O tax.

A. The Taxable Incident

¶ 9 It is well established that the tax "incident" for a B & O tax is generally the "`act or privilege of engaging in business activities'" in the taxing jurisdiction. Id. § 72.6, at 451 (quoting RCW 82.04.220). Unlike a sales tax, which taxes a specific sale of a good or service, the B & O tax is imposed on the general privilege of engaging in business. As noted above, Seattle and Tacoma both impose B & O taxes on the "privilege of engaging in business activities within" their respective cities. Seattle Municipal Code (SMC) 5.45.050; former Tacoma Municipal Code (TMC) 6.68.220 (1998).1

¶ 10 A major determinant of B & O tax liability is how the taxed activity is classified. Under the relevant codes, the tax rate is based upon the type of business activity performed by the taxed entity within the applicable city. The various types of activity include (1) "engaging . . . in the business of making sales . . . at wholesale" within the city, under SMC 5.45.050(C), and (2) the general classification for engaging within the city in "any business activity other than or in addition to those enumerated in the above

156 P.3d 189

subsections," under SMC 5.45.050(G). See former TMC 6.68.220(B)(F)(2).2

¶ 11 The Cities imposed their B & O tax on Ford under the "engaging in the business of making sales at wholesale" provision. In relevant part, Seattle's provision is as follows:

Upon every person engaging within the City in the business of making sales . . . at wholesale or retail . . .; as to such persons, the amount of tax with respect to such business shall be equal to the gross proceeds of such sales of the business without regard to the place of delivery of articles, commodities or merchandise sold, multiplied by the rate of two hundred fifteen one-thousandths of one percent (.00215).

SMC 5.45.050(C). The City of Tacoma has a similarly worded provision in its tax code, former TMC 6.68.220(B), with the exception that its tax rate is one hundred two one-thousandths of one percent (.00102).

¶ 12 Ford contends that its activities were improperly classified because it did not make sales at wholesale within the Cities. Ford would have us construe SMC 5.45.050(C) and former TMC 6.68.220(B) narrowly, holding the taxable incident to be the actual sale of products within the respective taxing jurisdictions to dealers. Ford contends that proper application of the B & O tax ordinances would classify its business activities in the Cities under the "other business activities" provisions.

¶ 13 In analyzing the positions of the parties, we start with the principle that the burden is on the taxpayer to prove that a tax paid by him or her is incorrect. In other words, "[t]axes are presumed to be just and legal, and the burden rests upon one assailing the tax to show its invalidity." 72 AM. JUR.2D State and Local Taxation § 1000 (2001).

¶ 14 Municipal ordinances, such as the ordinances at issue here, are local statutes that are to be construed according to the rules of statutory construction. McTavish v. City of Bellevue, 89 Wash.App. 561, 565, 949 P.2d 837 (1998). Where a statute is clear on its face, its plain meaning should "be derived from the language of the statute alone." Kilian v. Atkinson, 147 Wash.2d 16, 20, 50 P.3d 638 (2002) (citing State v. Keller, 143 Wash.2d 267, 276, 19 P.3d 1030 (2001)). Constructions that would render a portion of a statute "meaningless or superfluous" should be avoided. Keller, 143 Wash.2d at 277, 19 P.3d 1030. Construction of a statute is a question of law that is reviewed de novo. W. Telepage, Inc. v. City of Tacoma, 140 Wash.2d 599, 607, 998 P.2d 884 (2000). However, when construing an ordinance, a "reviewing court gives considerable deference to the construction of" the challenged ordinance "by those officials charged with its enforcement." Gen. Motors Corp. v. City of Seattle, 107 Wash.App. 42, 57, 25 P.3d 1022 (2001).

¶ 15 Here, the Cities, who enforce their own municipal codes, reach the same conclusion as the trial courts: A B & O tax on engaging in the business of wholesaling is levied upon the privilege of doing business as a wholesaler, not upon the actual sales at wholesale. We agree. A tax imposed on the actual sale of products is, by definition, a sales tax. B & O taxes, on the other hand, are not sales taxes. The Cities' municipal codes plainly tell us that their B & O taxes are imposed on "the act or privilege of engaging in business...

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