Greater Seattle Chamber Commerce v. City of Seattle

Decision Date21 June 2022
Docket Number82830-4-I
Citation512 P.3d 594
Parties GREATER SEATTLE CHAMBER OF COMMERCE, d.b.a. Seattle Metropolitan Chamber of Commerce, Appellant, v. CITY OF SEATTLE, Respondent.
CourtWashington Court of Appeals

PUBLISHED OPINION

Mann, J.

¶ 1 In response to a homelessness emergency, and loss of revenue due to the COVID-19 pandemic, in July 2020 the City of Seattle (City) adopted a payroll expense tax on certain entities engaged in doing business in Seattle. The Greater Seattle Chamber of Commerce (Chamber) sued, seeking declaratory judgment to invalidate the payroll expense tax. The King County Superior Court dismissed the Chamber's case on summary judgment. The Chamber appeals arguing that the payroll expense tax is an unconstitutional tax of employee wages under Cary v. Bellingham, 41 Wash.2d 468, 250 P.2d 114 (1952). We disagree and affirm.

FACTS

¶ 2 On July 6, 2020, the City adopted Ordinance 126108 imposing a payroll expense tax on certain entities engaging in business in Seattle. The ordinance was adopted in response to a November 2015 proclamation of civil emergency related to homelessness, and a projected severe revenue impact related to the 2020 COVID-19 pandemic. The City also adopted Ordinance 126109 establishing a spending plan for the proceeds generated by the payroll expense tax. The City's Department of Finance and Administrative Services adopted Rule 5-980 detailing the structure of the payroll expense tax. Seattle Business Tax Rule (SBTR) 5-980 (June 1, 2021). The payroll expense tax became effective January 1, 2021. The City delayed the date of the first payment of the payroll expense tax until January 31, 2022.

¶ 3 The payroll expense tax applies to entities "engaging in business within Seattle." SMC 5.38.030(A).1 The tax is measured using a business's "payroll expense," which is defined as "compensation paid in Seattle to employees." SMC 5.38.030. Compensation includes wages, commissions, salaries, stock, grants, gifts, bonuses, and stipends. SMC 5.38.020; SBTR 5-980. The tax applies to businesses with a payroll expense of more than $7 million in the prior calendar year. SMC 5.38.040(A). Compensation is considered "paid in Seattle" if the employee works more than 50 percent of the time in Seattle. SMC 5.38.025(C). If the employee does not work in any city more than 50 percent of the time, the employee's compensation is treated as though it was "paid in Seattle" "if the employee resides in Seattle." SMC 5.38.025(C)(3).

¶ 4 The payroll expense tax imposes a tiered rate structure with three levels that increase as a business's payroll expense in Seattle increases. SMC 5.38.030(B). The tax applies to the payroll expense of employees with annual compensation of $150,000 or more. The tax is levied on the business entity and employers "may not make any deductions from employees’ compensation to pay" for this tax. SMC 5.38.030.

¶ 5 The Chamber, on behalf of its members, sued the City in King County Superior Court seeking a declaration that the tax is illegal, invalid, and unconstitutional under Cary. After considering cross motions for summary judgment, the trial court granted the City's motion and dismissed.

¶ 6 The Chamber appeals.

ANALYSIS

¶ 7 This court reviews a grant of summary judgment de novo, engaging in the same inquiry as the trial court. Ruvalcaba v. Kwang Ho Baek, 175 Wash.2d 1, 6, 282 P.3d 1083 (2012). Summary judgment is appropriate only where "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." CR 56(c) ; Ruvalcaba, 175 Wash.2d at 6, 282 P.3d 1083 (quoting Michak v. Transnation Title Ins. Co., 148 Wash.2d 788, 794-95, 64 P.3d 22 (2003) ).

A. Cary v. City of Bellingham

¶ 8 The Chamber's primary argument is that Cary controls, and the City's payroll expense tax is an illegal tax on the right to work for wages. We disagree.

¶ 9 In Cary, the City of Bellingham adopted an ordinance requiring all employees within the city to secure a yearly license. The City levied a tax based on one-tenth of one percent of gross income, revenues, receipts, and commissions on all persons receiving compensation for services performed within the city. Cary, 41 Wash.2d at 468-69, 250 P.2d 114. The tax was "based upon the assumed power of the municipality to control the right to work for wages." Cary, 41 Wash.2d at 472, 250 P.2d 114.

¶ 10 Our Supreme Court held, "the municipality ha[d] no such power and hence no right to levy an excise tax upon such right." The court found that "the right to earn a living by working for wages is not a ‘substantive privilege granted or permitted by the state.’ " Cary, 41 Wash.2d at 472, 250 P.2d 114 (quoting Power, Inc. v. Huntley, 39 Wash.2d 191, 197, 235 P.2d 173 (1951) ). Thus, because working for wages is a right, not a substantive privilege, the municipality lacked the authority levy the tax and the ordinance was unconstitutional.

¶ 11 In reaching its holding, the court noted the "inherent, fundamental difference between one engaged in business ... and one who is simply employed by others." Cary, 41 Wash.2d at 471, 250 P.2d 114. The court stated, "[t]he wage-earner is properly excluded and ... upon no theory can he be classed with those engaged in business." Cary, 41 Wash.2d at 471, 250 P.2d 114 (citing State ex rel. Stiner v. Yelle, 174 Wash. 402, 411, 25 P.2d 91 (1933) ). The court continued to articulate the contours of a true excise tax levied on business:

When a tax is, in truth, levied for the exercise of a substantive privilege granted or permitted by the state, the tax may be considered as an excise tax and sustained as such.
We recognize the right to levy an excise tax on the privilege of doing business or exercising corporate franchises and to base that tax on income; but the tax must be, in truth, levied for the exercise of a substantive privilege granted or permitted by the state.
The right to earn a living by working for wages is not a substantive privilege granted or permitted by the state.

Cary, 41 Wash.2d at 472, 250 P.2d 114 (citations omitted).

¶ 12 The City's payroll expense tax is readily distinguishable from the tax imposed in Cary. In Cary, the income based tax was levied on the employee, while the payroll tax here is levied on the business itself. The payroll expense tax applies to the privilege of engaging in business, not an employee's right to earn a living by working for wages. The taxation of a business's payroll expense and the taxation of an individual employee's earnings are not the same taxable incident. Again, there is a fundamental difference between one engaged in business and one who is simply employed by others. Cary, 41 Wash.2d at 471, 250 P.2d 114. A prohibition against taxing one party in a relationship does not prohibit a tax on the other party. See Klickitat County v. Jenner, 15 Wash.2d 373, 382, 130 P.2d 880 (1942).

¶ 13 In Cary, the tax was unconstitutional because the right to work for wages was not a "substantive privilege granted or permitted by the state." Instead, the right to work for wages was an "inalienable right" that could not be taxed. Cary, 41 Wash.2d at 472, 250 P.2d 114 (quoting State v. City of Sheridan, 25 Wyo. 347, 357, 170 Pac. 1 (1918) ). But engaging in business is a privilege granted or permitted by the City and therefore open to taxation. Lakehaven Water & Sewer Dist. v. City of Fed. Way, 195 Wash.2d 742, 753-54, 466 P.3d 213 (2020). Because the payroll tax is levied on the business, it is a valid exercise of the City's taxing authority. Cary does not support the Chamber's position.

B. True Incident of the Payroll Expense Tax

¶ 14 The Chamber next argues that simply calling the tax a tax on "engaging in business," does not change the true incident of the tax: paying employees’ compensation. Again, we disagree.

¶ 15 This court reviews questions of constitutional and statutory interpretation de novo. Sheehan v. Cent. Puget Sound Reg'l Transit Auth., 155 Wash.2d 790, 796-97, 123 P.3d 88 (2005). The court's objective is to "ascertain and carry out the legislature's intent by giving effect to the ordinance's plain meaning." Watson v. City of Seattle, 189 Wash.2d 149, 158, 401 P.3d 1 (2017). The City's ordinance is presumed to be valid and constitutional, and the challenging party has the burden of showing unconstitutionality. Watson, 189 Wash.2d at 158, 401 P.3d 1.

¶ 16 Regardless of the label a legislative body assigns a tax, courts must determine the nature and effect—the "incident"—of the tax. Power, Inc., 39 Wash.2d at 196, 235 P.2d 173. "The nature of a tax is revealed by examining the subject matter of the tax and the incidents of the tax, ‘i.e., the manner in which it is assessed and the measure of the tax.’ " Harbour Vill. Apartments v. City of Mukilteo, 139 Wash.2d 604, 607 n.1, 989 P.2d 542 (1999) (quoting Weaver v. Prince George's County, 281 Md. 349, 356, 379 A.2d 399 (1977) ). "Engaging in business" and "doing business" are recognized privileges that may be taxed. However, Washington courts also hold that merely labeling a tax as a tax on the privilege of engaging in business does not make it one. Power, Inc., 39 Wash.2d at 196, 235 P.2d 173. The "character of a tax [must be] determined by its incidents, not by its name." Power, Inc., 39 Wash.2d at 196-97, 235 P.2d 173.

¶ 17 All taxes fall into one of three categories: property, income, or excise. Watson, 189 Wash.2d at 167-68, 401 P.3d 1 ; Lakehaven, 195 Wash.2d at 754, 466...

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