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AGO 1962 No. 137 - May 21, 1962
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John J. O'Connell | 1957-1968 | Attorney General of Washington


CITIES AND TOWNS ‑- THIRD CLASS ‑- COMMISSION FORM OF GOVERNMENT ‑- EXERCISE OF TAXING POWER FOR REVENUE ‑- BUSINESS AND OCCUPATION TAX ORDINANCE ‑- CLASSIFICATION FOR FUEL OIL DEALERS ONLY ‑- RETAIL OF FUELS USED FOR ANY PURPOSE OTHER THAN TRANSPORTATION ‑- EXEMPTING PUBLIC UTILITIES.

(1) A city of the third class operating under a commission form of government may, in the exercise of its taxing power for revenue, establish a classification for fuel oil dealers only in its business and occupation tax ordinance.

(2) A city of the third class may establish for business tax purposes a classification for every person except public utilities engaging within the city of the business of distributing at retail fuels used for purposes other than transportation.

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                                                                   May 21, 1962

Honorable Donald H. Webster
Director, Bureau of Governmental
Research and Services
266 J. Allen Smith Hall
University of Washington
Seattle 5, Washington

                                                                                                              Cite as:  AGO 61-62 No. 137

Dear Sir:

            You have requested our opinion on the following two questions:

            1. "[May] a city of the third class operating under the commission form of government . . ., in the exercise of the taxing power, for revenue, as distinguished from exercising the police power for regulation, establish a classification 'for fuel oil dealers only' in its business and occupation tax ordinance and impose a business and occupation tax of 2% or 3% on the gross income of fuel oil dealers derived from fuel oil business conducted within the corporate limits of such a city, when such a city now imposes a 5% tax on the gross income of electric power, natural gas, telephone and telegraph, water, and sanitation and sewer systems derived from business conducted within the corporate limits of such a city?"

            2. "May such a city, in the exercise of its taxing power, establish a classification for every person (excluding public utilities) engaging within the city in the business of distribution at retail of fuels used for any purpose other than transportation and impose a business and occupation tax upon such persons within such classification?"

             [[Orig. Op. Page 2]]

            We answer both questions in the affirmative as explained in our analysis.

                                                                     ANALYSIS

            Question 1.

            Any city organized under the commission form of government is governed by the statutes applying to cities of the second class to the extent they are applicable and not in conflict with provisions specifically applying to cities using the commission form.  RCW 35.17.030.

            Cities of the second class are given the power and authority by RCW 35.23.440 (9) to:

            "License generally: To fix and collect a license tax for the purposes of revenue and regulation, upon all occupations and trades, and all and every kind of business authorized by law not heretofore specified:  Provided, That on any business, trade, or calling not provided by law to be licensed for state and county purposes, the amount of license shall be fixed at the discretion of the city council, as they may deem the interests and good order of the city may require."

            That RCW 35.23.440 (9) confers authority on a second class city to impose an occupation tax is clear fromState ex rel. Pac. T. & T. Co. v. D.P.S., 19 Wn. (2d) 200, 142 P. (2d) 498 (1943), at p. 272.  And as stated inPacific Tel. & Tel. Co. v. Seattle, 172 Wash. 649, 21 P. (2d) 721 (1933), affirmed 291 U.S. 300, 78 L.Ed. 810, 54 S.Ct. 383:

            "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. . . ."  (Citations omitted.)  (p. 653)

            Your question therefore resolves itself into whether the separate classification of fuel oil dealers would violate Amendment Fourteen of the Federal Constitution, or Article I, § 12, of the State Constitution, which relate to equal protection and equal privileges and immunities respectively.  These constitutional provisions are substantially identical so it is not necessary to discuss them separately.  Texas Company v. Cohn, 8 Wn. (2d) 360, 112 P. (2d) 522 (1941).

            In passing upon the constitutionality of a classification in a city ordinance whereby an occupation tax was imposed upon privately owned,  [[Orig. Op. Page 3]] but not upon publicly owned, electrical utilities, the court in Puget Sound Power & Light Co. v. Seattle, 172 Wash. 668, 21 P. (2d) 727 (1934), affirmed 291 U.S. 619, 78 L.Ed. 1025, 54 S.Ct. 542, quoted with approval from State Board of Tax Commissioners of Indiana v. Jackson, 283 U.S. 527, 75 L.Ed. 1248, 51 S.Ct. 540, 73 A.L.R. 1464, as follows:

            "'The principles which govern the decision of this cause are well settled.  The power of taxation is fundamental to the very existence of the government of the States.  The restriction that it shall not be so exercised as to deny to any the equal protection of the laws does not compel the adoption of an iron rule of equal taxation, nor prevent variety or differences in taxation, or discretion in the selection of subjects, or the classification for taxation of properties, businesses, trades, callings, or occupations.  Bell's Gap. R. Co. v. Pennsylvania, 134 U.S. 232; Southwestern Oil Co. v. Texas, 217 U.S. 114;Brown-Forman Co. v. Kentucky, 217 U.S. 563.  The fact that a statute discriminates in favor of a certain class does not make it arbitrary, if the discrimination is founded upon a reasonable distinction,American Sugar Rfg. Co. v. Louisiana, 179 U.S. 89, or if any state of facts reasonably can be conceived to sustain it.  Rast v. Van Deman & Lewis Co., 240 U.S. 342; Quong Wing v. Kirkendall, 223 U.S. 59.  As was said inBrown-Forman Co. v. Kentucky, supra, at p. 573:

            "'"A very wide discretion must be conceded to the legislative power of the State in the classification of trades, callings, businesses or occupations which may be subjected to special forms of regulation or taxation through an excise or license tax.  If the selection or classification is neither capricious nor arbitrary, and rests upon some reasonable consideration of difference or policy, there is no denial of the equal protection of the law."

            "'It is not the function of this Court in cases like the present to consider the propriety or justness of the tax, to seek for the motives or to criticize the public policy which prompted the adoption of the legislation.  Our duty is to sustain the classification adopted by the  [[Orig. Op. Page 4]] legislature if there are substantial differences between the occupations separately classified.  Such differences need not be great.  The past decisions of the Court make this abundantly clear.'"  (172 Wash. at p. 672.)

            As was said inTexas Company v. Cohn, 8 Wn. (2d) 360, 112 P. (2d) 522 (1941):

            "A state legislature has very broad discretion in making classifications in the exercise of its taxing powers.  A classification of commodities, businesses, or occupations, for excise tax purposes, under which the classes are taxed at unequal rates, or one class is taxed and another is exempted, will be upheld as constitutional if it is not arbitrary nor capricious and rests upon some reasonable basis of difference or policy.  The difference between the classes need not be great.  It may consist of physical and chemical dissimilarity of commodities or difference in the character or manner of their uses.  Classification may also be permissible if it is reasonably related to some lawful taxing policy of the state, such as greater ease or economy in the administration or collection of a tax, the selection of a fruitful source of revenue with the exemption of sources less promising, or the equalization of the burdens of taxation.  If any such reasonable basis for the classification exists, or conceivably may exist, then the circumstance that there is competition between a commodity or business which is taxed and some commodity or business which is not taxed, does not materially affect the validity of the classification."  (Emphasis supplied.)  (8 Wn. (2d) at p. 386.)

            It was held, among other things, in State v. Inland Empire Refineries, Inc., 3 Wn. (2d) 651, 101 P. (2d) 975 (1940), that an excise tax upon distributors of fuel oil was invalid as unreasonable and discriminatory because no reasonable ground existed for making a distinction in classification between distributors of fuel oil and distributors of other types of fuel.

            The identical question was reconsidered in the case of Texas Company v. Cohn, supra, and while not expressly overruled on the point, the  [[Orig. Op. Page 5]] Inland case was re‑examined [[reexamined]]and the court held that to make a separate classification of fuel oil distributors for excise tax purposes was entirely proper.  The court's opinion thoroughly discusses a great many cases on the question and sets forth several reasons for differentiating fuel oil from solid fuel.  (8 Wn. (2d) at p. 387.)

            InPearson v. Seattle, 199 Wash. 217, 90 P. (2d) 1020 (1939), a city ordinance was held to be discriminatory in classifying solid fuel dealers separately from liquid fuel dealers.  The ordinance was enacted solely and expressly for regulation.  This case is distinguished in Texas Company v. Cohn, supra, which points up the difference bet regulatory and revenue measures when classification is the issue.

            It is therefore clear that there is no unconstitutional discrimination involved in classifying solid fuel dealers separately from liquid fuel dealers for tax purposes.  In view of this and in view of the wide discretion allowed to taxing authorities by the language quoted above from Puget Sound Power and Light Co. v. Seattle, supra, and Texas Company v. Cohn, supra, it seems clear that there would be no unconstitutional discrimination involved in classifying fuel oil dealers separately from other types of businesses.  We therefore conclude that a city of the third class operating under the commission form of government may, in the exercise of the taxing power, for revenue, as distinguished from exercising the police power for regulation, establish a classification for fuel oil dealers only in its business and occupation tax ordinance and impose a business and occupation tax of 2% or 3% on the gross income of fuel oil dealers derived from fuel oil business conducted within the corporate limits of such a city, when such a city now imposes a 5% tax on the gross income of electric power, natural gas, telephone and telegraph, water, and sanitation and sewer systems derived from business conducted within the corporate limits of such a city.

            Question 2.

            The same principles of law as apply to the first question apply to this question also.

            As we learned fromTexas Company v. Cohn, supra, the difference between classes need not be great.  It may consist of physical and chemical dissimilarity, or differences in the character, method, or manner of use.  Classification may also be permitted if it is related to some lawful taxing power such as the equalization of the burdens of taxation.

            In the proposed ordinance the tax would not be imposed upon those retailing fuel to be used in transportation.  This is a valid distinction based upon use and perhaps even upon physical or chemical differences.  It is also well known that liquid fuels, at least, capable of use in transportation are subjected to their own special taxes, (chapters 82.36  [[Orig. Op. Page 6]] and 82.40 RCW) and the state has preempted the field for this type of tax, RCW 82.36.440.

            An exemption of public utilities, be they publicly or privately owned, would be valid.  Both privately and publicly owned utilities are subject to special state taxes (cf. chapter 82.16 RCW) and to special municipal taxes, as indicated in your first question.  Accordingly, the exemption of public utilities may be justified as an attempt to equalize tax burdens among competing businesses.  See,Texas Company v. Cohn, supra.

            The proposed tax will apply to retailers only.  However, the classification of retailers and wholesalers separately has been held to be reasonable and proper.  Southwestern Oil Co. v. Texas, 217 U.S. 114, 30 S.Ct. 496, 54 L.Ed. 688 (1910);Liggett Co. v. Lee, 288 U.S. 517, 53 S.Ct. 481, 77 L.Ed. 929 (1933).

            We therefore conclude that the city in question may establish for business tax purposes, a classification for every person, except public utilities, engaging within the city in the business of distributing at retail, fuels used for purposes other than transportation.

Very truly yours,

JOHN J. O'CONNELL
Attorney General

HENRY W. WAGER
Assistant Attorney General

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