Homestreet, Inc. v. State, Dept. of Revenue

• Decision Date: 18 June 2009
• Docket Number: No. 80544-0.,80544-0.
• Citation: 210 P.3d 297,166 Wn.2d 444
• Court: Washington Supreme Court
• Parties: HOMESTREET, INC., Homestreet Capital Corporation, and Homestreet Bank, Petitioners, v. STATE of Washington, DEPARTMENT OF REVENUE, Respondent.

210 P.3d 297

166 Wn.2d 444

HOMESTREET, INC., Homestreet Capital Corporation, and Homestreet Bank, Petitioners, v. STATE of Washington, DEPARTMENT OF REVENUE, Respondent.

No. 80544-0.

Supreme Court of Washington, En Banc.

Argued September 16, 2008.

Decided June 18, 2009.

Robert Lee Mahon, III, Scott M. Edwards, Gregg D. Barton, Perkins Coie LLP, Seattle, WA, for Petitioners.

Donald F. Cofer, Attorney General's Office, Olympia, WA, for Respondent.

SANDERS, J.

¶ 1 HomeStreet, Inc., is a residential mortgage lender that services loans it sells or securitizes¹ to secondary lenders. It received tax deductions for the interest retained from these loans under RCW 82.04.4292 until the Department of Revenue (DOR) issued an order requiring HomeStreet, Inc., to pay business and occupation (B & O) taxes. HomeStreet, Inc., paid the taxes but then sued DOR for a refund. The trial court granted DOR's motion for summary judgment of dismissal, which was affirmed by the Court of Appeals. We now reverse the Court of Appeals and order DOR to refund the taxes to HomeStreet, Inc., plus statutory interest and costs.

FACTS AND PROCEDURAL HISTORY

¶ 2 HomeStreet Capital Corporation,² HomeStreet Bank,³ and HomeStreet, Inc.⁴ (collectively HomeStreet) are corporations organized and existing under the laws of the State of Washington, each with corporate headquarters in Seattle. HomeStreet Capital Corporation and HomeStreet Bank are wholly owned subsidiaries of HomeStreet, Inc.

¶ 3 HomeStreet originates mortgage loans by lending money to borrowers to purchase residential property. HomeStreet sells or securitizes about 90 percent of these loans on the secondary market to lenders such as the Federal National Mortgage Association (Fannie Mae), the Government National Mortgage Association (Ginnie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), the Oregon Housing Authority, and the Federal Home Loan Bank. HomeStreet sells the loans or securitized interests two ways: (1) it sells the whole loan or security in its entirety (servicing released) or (2) it sells a portion of the loan while retaining the right to service the loan or security and receive a portion of the interest (servicing retained). HomeStreet also sells securities backed by mortgages or deeds of trust (mortgage-backed securities) guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae.

¶ 4 For mortgage-backed securities and loans sold on a service-retained basis, borrowers continue to make principal and interest payments to HomeStreet because HomeStreet still owns a portion of the loan and services the loans for the secondary market lenders. Borrowers usually do not know a secondary market transaction has occurred. HomeStreet collects the payments from the borrowers, pays the investors the principal and a portion of the interest, and retains a portion of the interest as a servicing fee. HomeStreet retains a portion of the interest only if the borrowers make interest payments. The money HomeStreet receives is not a flat fee but varies according to the size and length of the loan, interest rate fluctuations, and whether the borrower prepays or defaults on the loan.

¶ 5 When a loan is sold in its entirety the borrower makes principal and interest payments to the purchaser of the loan, and HomeStreet no longer receives any compensation for these loans from the borrower or the purchaser. This case does not involve service-released loans, and this is where the confusion arises for the dissent. The dissent conflates loans sold on a service-retained basis with loans sold on a service-released basis. HomeStreet does not maintain any connection with loans sold on a service-released basis. Unfortunately the dissent fails to distinguish between these two very different ways in which HomeStreet sells loans on the secondary market. The dissent, in fact, fails to even mention this important difference. The dissent simply says HomeStreet "assigns" and sells the loans to third parties. Dissent at 305. In essence the dissent simplifies and misstates the facts.

¶ 6 The State imposes B & O tax on the privilege to do business in Washington. RCW 82.04.220. One statutory deduction is found in RCW 82.04.4292; however HomeStreet and DOR dispute the meaning of "amounts derived from interest." RCW 82.04.4292 provides,

In computing tax there may be deducted from the measure of tax by those engaged in banking, loan, security or other financial businesses, amounts derived from interest received on investments or loans primarily secured by first mortgages or trust deeds on nontransient residential properties

(Emphasis added.) RCW 82.04.4292 contains five elements:

1. The person is engaged in banking, loan, security, or other financial business;

2. The amount deducted was derived from interest received;

3. The amount deducted was received because of a loan or investment;

4. The loan or investment is primarily secured by a first mortgage or deed of trust; and

5. The first mortgage or deed of trust is on nontransient residential real property.

Clerk's Papers (CP) at 99. All five elements of the statute must be met for the taxpayer to receive a deduction. The second element is the only element in dispute herein.

¶ 7 In 1992 Continental, Inc., HomeStreet's predecessor, brought a petition seeking correction of a tax assessment and a refund of the taxes it paid to DOR. DOR issued Determination No. 92-403,⁵ stating the five requirements of RCW 82.04.4292 were met and Continental should have received a deduction for the interest. DOR issued other determinations, including Determination No. 92-392,⁶ which held that other financial institutions qualified for deductions on their retained interest. However in 1999 DOR issued Determination No. 98-218, which overruled Determination No. 92-392 "to the extent it states the portion of the interest income stream retained by the seller of a qualifying mortgage continues to be deductible under RCW 82.04.4292 despite the seller's lack of risk of interest rate fluctuation," changing its position on the deductions allowed under RCW 82.04.4292. CP at 112. HomeStreet was then audited by DOR and ordered to pay $20,224.72 in B & O tax on interest retained from 1997 through 2001 on mortgages it sold on a service-retained basis and mortgage-backed securities. HomeStreet paid DOR, and both parties entered into an agreement allowing HomeStreet to dispute the retained interest at a later date.

¶ 8 HomeStreet sued DOR for a refund of the B & O tax it paid. In January 2006 the trial court granted DOR summary judgment of dismissal, opining DOR's interpretation of the statute was more consistent with the legislature's intent because the statutory deduction was intended to be limited.

¶ 9 The Court of Appeals affirmed the trial court, holding the income was "derived from interest" in its broadest sense but due only to the "contractual relationship with the purchaser of the loan for servicing the loans and that it is merely allowed to pay itself by `retaining' part of the contract purchaser's interest payment in return." HomeStreet, Inc. v. Dep't of Revenue, 139 Wash.App. 827, 843, 162 P.3d 458, 460 (2007). It also held HomeStreet's interpretation of the statute was "overbroad, unreasonable, and ignores the requirement that we construe tax deduction statutes narrowly." Id. at 844, 162 P.3d 458. We granted review. 163 Wash.2d 1022, 185 P.3d 1194 (2008).

STANDARD OF REVIEW

¶ 10 Statutory interpretation is a question of law reviewed de novo. City of Seattle v. Burlington N. R.R., 145 Wash.2d 661, 665, 41 P.3d 1169 (2002). The primary objective of any statutory construction inquiry is "to ascertain and carry out the intent of the Legislature." Rozner v. City of Bellevue, 116 Wash.2d 342, 347, 804 P.2d 24 (1991).

ANALYSIS

¶ 11 We are asked to determine what "amounts derived from interest" means in RCW 82.04.4292 and whether HomeStreet qualifies for a deduction under the statute. We hold that HomeStreet is entitled to a tax deduction under RCW 82.04.4292 because the amounts it receives are derived from interest.

¶ 12 When interpreting a statute, we first look to its plain language. State v. Armendariz, 160 Wash.2d 106, 110, 156 P.3d 201 (2007). If the plain language is subject to only one interpretation, our inquiry ends because plain language does not require construction. Id.; State v. Thornton, 119 Wash.2d 578, 580, 835 P.2d 216 (1992). "Where statutory language is plain and unambiguous, a statute's meaning must be derived from the wording of the statute itself." Wash. State Human Rights Comm'n v. Cheney Sch. Dist. No. 30, 97 Wash.2d 118, 121, 641 P.2d 163 (1982). Absent ambiguity or a statutory definition, we give the words in a statute their common and ordinary meaning. Garrison v. Wash. State Nursing Bd., 87 Wash.2d 195, 196, 550 P.2d 7 (1976). To determine the plain meaning of an undefined term, we may look to the dictionary. Id. "Where statutory language is plain and unambiguous courts will not construe the statute but will glean the legislative intent from the words of the statute itself, regardless of contrary interpretation by an administrative agency." Agrilink Foods, Inc. v. Dep't of Revenue, 153 Wash.2d 392, 396, 103 P.3d 1226 (2005). "A statute that is clear on its face is not subject to judicial construction." State v. J.M., 144 Wash.2d 472, 480, 28 P.3d 720 (2001).

¶ 13 If the statute remains subject to multiple interpretations after analyzing the plain language, it is ambiguous. Burton v. Lehman, 153 Wash.2d 416, 423, 103 P.3d 1230 (2005). A statute is ambiguous if "susceptible to two or more reasonable interpretations," but "a statute is not ambiguous merely because different interpretations are conceivable." State v. Hahn, 83 Wash.App. 825, 831, 924 P.2d 392 (1996).

¶ 14 "[E]ach word of a statute is to be accorded meaning." State ex rel. Schillberg v. Barnett, 79 Wash.2d 578, 584, 488 P.2d 255 (1971). Whenever possible, statutes are to be...