P. Lorillard Co. v. City of Seattle

• Decision Date: 12 March 1973
• Docket Number: No. 1273--I,1273--I
• Citation: 507 P.2d 1212,8 Wn.App. 510
• Parties: P. LORILLARD COMPANY, a corporation, Respondent, v. The CITY OF SEATTLE, a municipal corporation, Appellant.
• Court: Washington Court of Appeals

Page 510

8 Wn.App. 510

507 P.2d 1212

P. LORILLARD COMPANY, a corporation, Respondent, v. The CITY OF SEATTLE, a municipal corporation, Appellant.

No. 1273--I.

Court of Appeals of Washington, Division 1, Panel One.

March 12, 1973.

Rehearing Denied April 19, 1973.

Petition for Review Filed May 7, 1973.

Petition for Review Denied July 23, 1973.

A. L. Newbould, Corporation Counsel, Jorgen G. Bader, Asst. Corp. Counsel, Seattle, for appellant.

Williams, Lanza, Kastner & Gibbs, DeWitt Williams, Robert I. Betts, Seattle, for respondent.

CALLOW, Judge.

P. Lorillard Company, a distributor of cigarettes, brought an action for refund of business and occupation taxes paid under protest to the City of Seattle from July 22, 1965, through July 24, 1967, together with accrued interest.

The taxes paid were measured as a percentage of gross prceeds derived from engaging in business within the city, including the gross proceeds of cigarette sales.

RCW 82.02.020 read, during the period with which we are concerned:

The state preempts the field of imposing taxes upon retail sales of tangible personal property, the use of tangible personal property, conveyances, and cigarettes, and no county, town, or other municipal subdivision shall have the right to impose taxes of that nature.

Ordinance No. 72630, as amended, reads in pertinent part:

There is hereby levied upon and shall be collected from and paid as hereinafter provided by every person on account and for the privilege of engaging in business activities, a license fee or occupation tax, sometimes herein referred to as the 'tax,' in amounts to be determined by application or rates given against value of products, gross proceeds of sale, or gross income of business, as the case may be, for the three calendar months next preceding the beginning of each quarterly period, as follows: . . .

* * *

* * *

(c) Upon every person engaging within this City in the business of making sales at wholesale or retail, except persons taxable under Sub-section (d) of this section; 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 one-tenth of one per cent.

The city states this is not a tax upon cigarettes as such but rather a tax upon the privilege of doing business within the city, which includes warehousing, storage, sale and delivery of cigarettes. The tobacco company takes the position that the state has preempted the field of taxation of cigarettes, and the city may not levy its business and occupation tax upon that activity.

The trial court's findings of fact reveal the primary business of the plaintiff in Seattle is wholesaling cigarettes from the supply maintained at a public warehouse. Orders for the cigarettes are received and accepted or rejected at the plaintiff's North Carolina office and payment for the cigarettes delivered from the Seattle warehouse is received outside of Washington State.

The power of a municipality to support the performance of its functions through taxation is derived from the state. Article 11, section 12 of the Washington State Constitution provides:

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.

The reservation to the state of the complete power to tax is presumed. Tacoma v. State Tax Comm'n, 177 Wash. 604, 612, 33 P.2d 899 (1934); State ex rel. Tacoma School Dist. v. Kelly, 176 Wash. 689, 30 P.2d 638 (1934); Outlook Irrigation Dist. v. Fels, 176 Wash. 211, 28 P.2d 996 (1934). Municipal corporations possess only such taxing power as has been granted to them by the state constitution or the statutes; and if there is a doubt as to whether a power has been granted, it must be denied. Pacific First Federal Sav. & Loan Ass'n v. Pierce County, 27 Wash.2d 347, 178 P.2d 351 (1947). A city is a municipal corporation and as an agency of the state exercises only delegated taxing powers. State ex rel. Pacific Tel. & Tel. Co. v. Department of Public Serv., 19 Wash.2d 200, 272, 142 P.2d 498 (1943).

It was said in State ex rel. King County v. State Tax Comm'n, 174 Wash. 668, 671, 26 P.2d 80, 81 (1933):

The power of taxation is an attribute of sovereignty residing in the state alone. Municipal corporations, as such, have no inherent right to levy taxes. If the power to tax is not conferred directly upon them by the constitution, it must be granted by the legislature. Our Constitution makes no direct grant of the taxing power to municipal corporations, but provides that the Legislature may vest them with this power.

See also Flint v. Stone Tracy Co., 220 U.S. 107, 31 S.Ct. 342, 55 L.Ed. 389 (1911).

The state legislature has granted to cities of the first, second, third and fourth class the power to impose a business and occupation tax. RCW 35.22.570, 35.23.440(9), 35.24.290(7) and 35.27.370(9).

The power of the City of Seattle to levy the business and occupation tax was upheld in Pacific Tel. & Tel. Co. v. Seattle, 172 Wash. 649, 21 P.2d 721 (1933), aff'd 291 U.S. 300, 78 L.Ed. 810, 54 S.Ct. 383 (1934). The decision held that while a city, under granted powers, could impose license taxes either for the purpose of regulation or revenue, it could not enact regulatory ordinances upon subjects covered by state legislation. There a license tax imposed for the purpose of raising revenue was permitted since the power to impose such a tax was exercised within the limitations of the statutory authority. Where the state grants to a municipal corporation a power to tax, the grant is to be strictly construed. It is said in 16 E. McQuillin, Municipal Corporations § 44.13 (3d ed. 1972):

The grant of any power to tax, made by the state to municipal corporations, will be, according to the rule accepted by virtually all the authorities, construed with strictness. A citizen cannot be subjected to the burden of taxation without clear warrant of law. Therefore, statutes authorizing the levy of taxes are to be strictly construed; they are not to be extended by implication, nor is their operation to be enlarged so as to embrace matters not specifically pointed out, though standing upon a close analogy. Stated briefly, in case of doubt a tax statute should be construed strictly in favor of the taxpayer and against the municipality.

The power of taxation can be exercised only in the manner prescribed by law. If the authority of the municipality to tax is doubtful, the doubt must always be resolved against the tax. The presumption is that the state has granted in clear and unmistakable terms all that it has intended to grant, and municipal officers must be able to show a warrant in words of the grant for whatever authority they assume to exercise.

(Footnotes omitted.)

When a state preempts a particular field of taxation, it may be inferred reasonably that it intends to exclude municipalities from such a field. 16 E. McQuillin, Municipal Corporations § 44.14 (3d ed. 1972). The term 'preemption' is broader than the term 'exemption'. Preemption indicates a complete take-over of a field of taxation to the exclusion of all interference while an exemption is a special freedom from taxation imposed upon others. A preemption precludes an invasion, while an exemption grants a dispensation. The terms are used loosely and interchangeably at times so that the total context of a holding must be examined to discover its true purport. In this light, read Columbia & Puget Sound R. R. v. Chilberg, 6 Wash. 612, 34 P. 163 (1893), which held it within the power of the legislature to entirely exempt certain property from taxation and, if and when it did, such an exemption would deprive a municipality of power to impose any tax upon such property.

The 'incidence' of a tax is its impact, affect or imposition upon the person, property or transaction that bears the ultimate money burden. Merriam-Webster Third Int'l Dictionary (1969). Where a state statute has preempted a field of taxation, the preemption makes no distinction as to where the legal incidence of a tax invading the field may be placed. If it invades the preempted area, it is null and void. Columbus v. Atlanta Cigar Co., 111 Ga.App. 774, 143 S.E.2d 416 (1965). See also Haefner v. Youngstown, 147 Ohio St. 58, 68 N.E.2d 64 (1946); East Ohio Gas Co. v. Akron, 2 Ohio App.2d 267, 207 N.E.2d 780 (1965).

The Seattle business and occupation tax is a tax on gross proceeds. The ordinance itself defines gross proceeds as follows:

The term 'gross proceeds of sales' means the value proceeding or accruing from the sale of tangible personal property and for services rendered without any deduction on account of the cost of property sold, the cost of materials used, labor costs, interest, discount paid, delivery costs, taxes, or any other expense whatsoever paid or accrued and without any deduction on account of losses.

RCW 82.04.070 similarly defines gross proceeds of sales as the value accruing from the sale of tangible personal property. The incidence or burden of a business and occupation tax is on the business itself. Greyhound Lines, Inc. v. Tacoma, 81 Wash.2d 525, 503 P.2d 117 (1972); Commonwealth Title Ins. Co. v. Tacoma, 81 Wash.2d 391, 502 P.2d 1024 (1972). Whether the tax is measured by value proceeding from sales or is upon gross income from sales, the tax is upon the cigarettes as such. The trial court noted that the city tax would be imposed upon the gross proceeds of sales of cigarettes in any calendar quarter and that if there were no sales of cigarettes there would be no tax other than the initial license fee of $1. It follows that the tax which the...