Lakeside Indus. v. Wash. State Dep't of Revenue, 091321 WACA, 81502-4-I

CourtCourt of Appeals of Washington
Writing for the CourtBOWMAN, J.
Docket Number81502-4-I




No. 81502-4-I

Court of Appeals of Washington, Division 1

September 13, 2021


Lakeside Industries Inc. is an asphalt manufacturer and retailer that uses much of its product for its own public road construction activities. Lakeside appealed the Department of Revenue's (DOR's) specific written instructions that Lakeside must utilize comparable sales instead of a "cost basis" method to calculate the amount of asphalt use-tax owed. DOR upheld the written instructions, and Lakeside petitioned for judicial review under the Administrative Procedure Act (APA), chapter 34.05 RCW, in King County Superior Court. The court dismissed the petition for lack of subject matter jurisdiction and failure to state a claim upon which the court can grant relief because Lakeside sought relief under the APA instead of Title 82 RCW, and did not follow the statutory requirements to appeal a tax matter. We conclude the trial court erred by dismissing Lakeside's petition for lack of subject matter jurisdiction, but affirm the dismissal for failure to state a claim.


Lakeside is an asphalt manufacturer, retailer, and paver. It uses much of its asphalt on its own public road construction projects. Lakeside must pay a "use tax" on the value of the self-manufactured asphalt utilized in their projects. RCW 82.12.010(7)(b); WAC 458-20-171. To calculate the use tax, the value of the asphalt is based on "sales at comparable locations in [Washington] [S]tate of similar products of like quality and character, in similar quantities, under comparable conditions of sale, to comparable purchasers." WAC 458-20-112(3). If no comparable sales exist, Lakeside may use the cost of manufacturing the asphalt to determine its value. WAC 458-20-112(3).

According to Lakeside, very few comparable sales exist because of the hundreds of different types of asphalt they manufacture, and because sales are influenced by job specification, location, conditions, and market forces. As a result, Lakeside has historically relied on the "cost basis" method to calculate its use tax, and DOR has accepted its valuation.

In June 2018, DOR performed a partial audit of Lakeside's vehicle sales for January 1, 2014 to March 31, 2018. The partial audit led to no tax adjustment or assessment of additional taxes for vehicle sales. But along with the audit results, DOR issued "specific written instructions, "1 directing Lakeside to use comparable sales to calculate the value of its self-manufactured asphalt used in future public construction projects. The instructions informed Lakeside it could no longer calculate value on a cost basis.

Lakeside petitioned DOR for "an adjudication and the withdrawal" of the instructions, seeking both formal review under the APA and informal administrative review under WAC 458-20-100. Lakeside argued that DOR could not issue specific written instructions as part of an unrelated audit and that the instructions were arbitrary and capricious because they were not based on Lakeside's "actual records," which showed no comparable sales for asphalt.

DOR conducted an informal administrative review, the only type available for rulings on future tax liability. See WAC 458-20-100(1)(a). A tax review officer from DOR's Administrative Review and Hearings Division held a hearing on Lakeside's petition and issued Determination No. 19-0219 (Wash. Dep't of Revenue, Admin. Review & Hr'gs Div., Aug. 28, 2019) (unpublished). The determination upheld the written instruction with modifications. It also authorized Lakeside to seek a "Letter Ruling" from DOR approving a return to the cost-basis method if Lakeside "ceases to have comparable sales." But Lakeside would have to "include copies of one year of invoices to substantiate its Letter Ruling request."

Lakeside petitioned for reconsideration. A tax review officer issued Determination No. 19-0219R (Wash. Dep't of Revenue, Admin. Review & Hr'gs Div., Dec. 20. 2019) (unpublished), denying Lakeside's petition but revising the effective date of the written instructions. The decision became DOR's final action and remains "binding" until the facts change, the applicable statute or rule changes, or is ruled invalid by a published appellate court decision not subject to review, [DOR] publicly announces a change in the policy upon which these instructions are based, or [DOR] notifies the taxpayer in writing that these instructions are no longer valid.

Lakeside then petitioned the King County Superior Court for judicial review under the APA. Lakeside asked the court to set aside Determination No. 19-0219R and DOR's written instructions. DOR moved to dismiss Lakeside's petition under CR 12(b)(1), (3), and (6), claiming the case "was filed at the wrong time, in the wrong county, and under the wrong statute."

The court granted the motion to dismiss under CR 12(b)(1) and (6) for lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted. The court noted that case law establishes "there's no mechanism for direct judicial review of [DOR]'s denial of a ruling request," and access to court review requires taxes be "paid . . . in full." The court dismissed the case "for failure to follow the [Title 82 RCW] statutory requirements for a challenge such as the one that's before the court."

Lakeside appeals.


Lakeside argues the trial court erred in dismissing its petition under CR 12(b)(1) and (6) for lack of subject matter jurisdiction and failure to state a claim upon which the court can grant relief. Whether a court has subject matter jurisdiction is a question of law reviewed de novo. Young v. Clark, 149 Wn.2d 130, 132, 65 P.3d 1192 (2003). We also review de novo a trial court's ruling to dismiss for failure to state a claim. Kinney v. Cook, 159 Wn.2d 837, 842, 154 P.3d 206 (2007).

Subject Matter Jurisdiction

Lakeside claims the trial court erred by dismissing its petition under CR 12(b)(1) because the legislature "authorized superior courts to review excise tax controversies under Title 82 RCW." We agree.

"Generally speaking, jurisdiction is the power of a court to hear and determine a case." In re Marriage of Buecking, 179 Wn.2d 438, 447, 316 P.3d 999 (2013). "Subject matter jurisdiction" refers to "the court's ability to entertain a type of case." Buecking, 179 Wn.2d at 448. Under the Washington Constitution, the superior court has original jurisdiction in all cases that involve "the legality of any tax," and appellate jurisdiction in cases "as may be prescribed by law." Art. IV, § 6. Title 82 RCW confers appellate jurisdiction over tax related matters to the superior court. See RCW 82.32.180; RCW 82.03.180.

The legislature cannot restrict the court's jurisdiction where the constitution has specifically conferred dominion to the court. Buecking, 179 Wn.2d at 448. But the legislature may direct "in what manner, and in what courts, suits may be brought against the state." Wash. Const. art. II, § 26. And it can "establish certain conditions precedent before suit can be brought against the [s]tate." McDevitt v. Harborview Med. Ctr., 179 Wn.2d 59, 66, 316 P.3d 469 (2013). This is particularly true when a party seeks the court's appellate jurisdiction rather than original jurisdiction. See ZDI Gaming Inc. v. State ex rel. Wash. Gambling Comm'n, 173 Wn.2d 608, 619, 268 P.3d 929 (2012) ("[T]he legislature has greater power to sculpt the appellate jurisdiction of the individual superior courts.").

The legislature has established two paths under Title 82 RCW by which a party may access the superior court's appellate jurisdiction for tax related matters. First, a party, "having paid any tax as required and feeling aggrieved by the amount of the tax," may appeal directly to...

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