By: David J. Herzig
Earlier this year, the Washington Supreme Court held that the retroactive application of the legislature’s amendment to a Business & Occupation (B&O) tax exemption revising the definition of “direct seller’s representative” to conform to the Washington Department of Revenue’s interpretation of the exemption did not violate a taxpayer’s rights under due process, collateral estoppel, or separation of powers principle.
Like most states, Washington had a B&O tax for “the act or privilege of engaging in business activities.” Under the original law, out-of-state sellers were exempt if they acted through a representative. DOT Foods shows up in Washington and sells through a wholly owned subsidiary to avoid the B&O tax.
In 1999, the Washington Department of Revenue changed its interpretation of the statute to subject DOT and others to the B&O tax. Dot challenged that change (215 P.3d 185 (Wash. 2009) “DOT I”)) and won. DOT I applied for the tax periods 2000-2006.
DOT then sought a refund for the period Jan. 2005 – Aug. 2009 (not the time period of DOT I). In the meantime, in 2010 the Washington State Legislature changed Wash. Rev. Code Sec. 82.04.423(2) in response to the DOT I ruling. The statute both retroactively and prospectively changed the statute. Based on the statutory change, the Washington Department of Revenue rejected the refund claim.
For the period covered by DOT I, DOT and Washington agreed on a settlement for a 97% refund for B&O taxes paid. For the May 2006 to December 2007 period (after DOT I), the refund request was denied. DOT challenged the retroactive application under the theories of collateral estoppel, separation of powers, and due process. DOT lost in the Washington Supreme Court and now has appealed to the US Supreme Court.
The test for whether or not retroactive tax legislation satisfies Due Process is United States v. Carlton, 512 U.S. 26 (1994). Carlton applied a rational basis test. The Court stated retroactive tax legislation would not violate due process if, “legitimate legislative purpose furthered by rational means.” According to the ACTC brief, “The Washington Supreme Court ignored the unique circumstances of the Carlton case, which involved the correction of an obvious legislative error that was identified very soon after the statute was enacted and which the taxpayer was admittedly exploiting for its own benefit.”