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August 14, 1972
Municipal Research Council
4719 N.E. Brooklyn Avenue, N.E.
Seattle, Washington 98105
Cite as: AGLO 1972 No. 62 (not official)
Attention: Dr. Ernest H. Campbell
By letter previously acknowledged you have requested an opinion of this office on two questions relating to the imposition of business license taxes by cities and towns. We paraphrase these questions as follows:
(1) May a city or town for purposes of revenue impose a license tax upon business activities which are classified according to the amount of gross income so that each class encompasses all businesses whose gross incomes range between a certain minimum and maximum amount, with each class paying a different flat rate of tax?
(2) In view of §§ 6 and 7, chapter 134, Laws of 1972, 2nd Ex. Sess., may a city or town for purposes of revenue impose a single rate business license tax measured by gross income upon the activity of making retail sales of tangible personal property, but specify a dollar ceiling of gross income above which the tax would not apply?
We answer question (1) in the affirmative subject to certain qualifications explained in our analysis; and question (2) in the negative.
It is well established in this state that cities and towns possess the authority to license businesses for the purpose of revenue and to measure the amount of such a license tax on the basis of the gross revenues of the licensed businesses. See Pacific Tel. and Tel. Co. v. Seattle, 172 Wash. 649, 21 P.2d 721 (1933), affirmed 291 U.S. 300, 78 L.Ed. 810, 54 S.Ct. 833; and Wells & Wade Hdwe. v. Wenatchee, 64 Wn.2d 103, 390 P.2d 701 (1964). As stated in the first of these two cases:
[[Orig. Op. Page 2]]
"This court has held in numerous cases that cities and towns, under the powers granted, have the right to impose license taxes either for the purpose of regulation or revenue. Fleetwood v. Read, 21 Wash. 547, 58 Pac. 665, 47 L.R.A. 205; Walla Walla v. Ferdon, 21 Wash. 308, 57 Pac. 796; Stull v. DeMattos, 23 Wash. 71, 62 Pac. 451, 51 L.R.A. 892; In re Garfinkle, 37 Wash. 650, 80 Pac. 188; Sumner v. Ward, 126 Wash. 75, 217 Pac. 502; Bucoda v. Swaney, 163 Wash. 43, 299 Pac. 652.
"Speaking of the grant of power contained in subdivision 33, § 8966, supra, in the Fleetwood case, Judge Dunbar said:
"'This provision is in relation to cities of the first class. . . . The language is comprehensive. The authority is to grant licenses for any lawful purpose, and, in the absence of restriction, the purpose of raising revenue is as lawful as the purpose of exercising the police power. This interpretation is borne out, we think, by the authorization of the legislature to cities of other classes. . . . And so the power to license for purposes of revenue is especially granted to all the other classes of cities.'"
Moreover, it has been held to be constitutionally permissible to establish several classes of business activities on the basis of gross income (each class including all businesses whose gross receipts range between designated minimum and maximum amounts) and to impose such a municipal license tax at a different flat rate on each such class. See Clark v. Titusville, 184 U.S. 329, 46 L.Ed. 569, 22 S.Ct. 382 (1902), in which this type of classification was held to be reasonable and, therefore, not to violate the equal protection clause of Amendment 14 to the United States Constitution. We would expect that a similar result would be reached by our own state supreme court under the equal privileges and immunities clause of Article I, § 12 of our state Constitution, since the Washington court has long regarded this state constitutional provision to mean essentially the same thing as does the federal equal protection clause. See Texas Company v. Cohn, 8 Wn.2d 360, 112 P.2d 522 (1941).
Therefore, in general terms, we may answer your first question in the affirmative. However, because of the recent enactment of §§ 6 and 7, chapter 134, Laws of 1972, 2nd Ex. Sess., this answer must be qualified in one respect. These two sections apply, respectively, to cities and towns which have not come under the optional municipal code and those which have; otherwise, both sections are identical and may be exemplified by quoting the text of § 6 only, as follows:
[[Orig. Op. Page 3]]
"Any city which imposes a license fee or tax upon business activities consisting of the making of retail sales of tangible personal property which are measured by gross receipts or gross income from such sales, shall impose such tax at a single uniform rate upon all such business activities. This section shall not apply to any business activities subject to the tax imposed by chapter 82.16 RCW."
While a multiple rate license tax such as we are here considering is not "measured by gross receipts or gross income * * * sales" in the same manner as is the state business and occupation tax (chapter 82.04 RCW) or many other municipal business taxes modeled thereon, it is nevertheless likely that such a tax would be judicially construed to fall within this language, since the particular flat rate which would be applicable in a given case would be dependent upon the amount of gross receipts or gross income from sales of the particular business license. Accordingly, it is apparent that such a municipal tax may no longer be applied to those business activities which consist of making retail sales of tangible personal property because the tax would not be "at a single uniform rate upon all such business activities." However, this does not necessarily mean that such a tax may not be applied to types of business activities other than retailing.
There is no constitutional prohibition against a separate classification of different trades, businesses or occupations for excise tax purposes. Texas Company v. Cohn, supra; Drury the Tailor v. Jenner, 12 Wn.2d 508, 122 P.2d 493 (1942). Consistent therewith, the placement of retailers in a different class from wholesalers for tax purposes has been held to be reasonable and proper. Southwestern Oil Co. v. Texas, 217 U.S. 144, 54 L.Ed. 688, 30 S.Ct. 469 (1910); Liggett Co. v. Lee, 288 U.S. 517, 77 L.Ed. 929, 53 S.Ct. 481 (1933). Therefore, it would appear to us to be permissible for a city desiring to do so to classify the various trades, businesses and occupations to be taxed either separately, or according to the general type of business of each (such as wholesaling, manufacturing and the rendition of services) ‑-excluding the business of retailing tangible personal property and taxing this business separately at a single flat rate. Each of the basic types of included businesses could then be subclassified according to the amount of business done as evidenced by gross income and the varying rates of tax contemplated by your question could then be applied. See Clark v. Titusville, supra.
Also to be noted in connection with this matter is another part of chapter 134, Laws of 1972, 2nd Ex. Sess., supra; namely, § 2, [[Orig. Op. Page 4]] which provides that:
"The governing body of any city or town which imposes a license fee or tax, by ordinance or resolution, may pursuant to sections 2 through 5 of this 1972 amendatory act only, fix and impose a license fee or tax on national banks, state banks, trust companies, mutual savings banks, building and loan associations, savings and loan associations, and other financial institutions for the act or privilege of engaging in business: PROVIDED, That the definitions, deductions and exemptions set forth in RCW 82.04 [[chapter 82.04 RCW]], insofar as they shall be applicable shall be applied to a license fee or tax imposed by any city or town, if such fee or tax is measured by the gross income of the business: PROVIDED FURTHER, That the rate of such license fee or tax shall not exceed the rate imposed upon other service type business activity: AND PROVIDED FURTHER, That nothing in sections 2 through 5 of this 1972 amendatory act shall extend the regulatory power of any city or town."
Since a municipal license tax such as we are here considering would probably be judicially construed to be one measured by the gross income of those businesses which are made subject to the tax, it follows from this last quoted statute that if such a tax is to be imposed upon financial institutions the applicable exemptions and deductions contained in chapter 82.04 RCW must be allowed. There is, however, no similar requirement in the case of other service businesses which might be made subject to the tax. We would, therefore, suggest that in order to avoid any possibility of unconstitutional discrimination, all financial institutions of the types listed in § 2, supra, be placed in a separate class from other service businesses. Accord, Clifford v. State, 78 Wn.2d 4, 469 P.2d 459 (1970). Of course, because of § 2, supra, the rate of tax imposed upon these financial institutions could not exceed that imposed upon other service businesses.
By this question you have asked whether, in view of §§ 6 and 7, chapter 134, supra, a business license tax imposed by a city or town for purposes of revenue and measured by gross income could be imposed upon the business of making retail sales for tangible personal property under an ordinance specifying a dollar ceiling of gross income beyond which the tax would not apply.
[[Orig. Op. Page 5]]
Under the terms of this recent legislation, we have seen that when a municipal license tax is imposed upon the business of making retail sales of tangible personal property, such tax must be imposed "* * * at a single rate upon all such business activities * * *". The effect of this provision is to place all such businesses into a single class to which one uniform tax rate is to be applied.
However, an exclusion of gross income over a certain amount from the measure of the tax would obviously mean that some retailers of tangible personal property would not be paying the tax on a portion of their business incomes in contravention of the statutory requirement that any such tax be imposed "upon all such activities * * *".
Accordingly, any such exclusion as is contemplated by your second question would, in our opinion, be prohibited by these recently enacted statutory provisions.
We trust the foregoing will be of assistance to you.
Very truly yours,
FOR THE ATTORNEY GENERAL
Henry W. Wager
Assistant Attorney General