CITIES AND TOWNS ‑- MUNICIPAL CORPORATIONS ‑- TAXATION ‑- PUBLIC UTILITY

AGO 1990 No. 3 - Apr 26 1990

Attorney General Ken Eikenberry

CITIES AND TOWNS ‑- MUNICIPAL CORPORATIONS ‑- TAXATION ‑- PUBLIC UTILITY

1. A municipality that imposes a tax on its electric utility department pursuant to RCW 35.21.860 and [35.21].865 may measure the tax by the utility department's gross revenues, derived from the utility's customers located both inside and outside the city, so long as the tax is within constitutional limits.2. A municipality may not levy a tax on another municipality without express authority. RCW 35.21.860 and [35.21].865 do not authorize one municipality to levy a tax on the electric utility department of another municipality.

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April 26, 1990

Honorable Sally W. Walker
State Representative
Twenty-eighth District
House Office Building
Olympia, WA 98504

Cite as: AGO 1990 No. 3

Dear Representative Walker:

By letter previously acknowledged, you requested our opinion on three questions concerning the authority of municipal corporations to tax municipal utility operations. In that your questions presuppose certain circumstances, we note them at the outset.
[[Orig. Op. Page 2]]

A city or town in Washington (for purposes of this opinion, "City A") owns and operates an electric energy utility with generation, transmission and distribution facilities serving customers residing within and outside the corporate limits of City A. Some of the customers of City A's electric utility reside in another Washington city (for purposes of this opinion, "City B"). City B provides typical services and protections (e.g., fire, police) to persons and property within its jurisdiction. City A's electric utility derives three‑quarters of its revenue (e.g., $750,000) from customers residing within the corporate limits of City A. The utility derives one‑quarter of its revenue (e.g., $250,000) from customers residing within the corporate limits of City B.

City A is imposing on its own electric utility department a tax for the privilege of engaging in an electric utility business. At present, this tax is measured by the gross receipts of the electric utility department, derived only from the provision of electric energy within the corporate limits of City A (i.e., $750,000). It is imposed at a rate of 6 percent. Based on the foregoing background, you pose three questions which we have paraphrased as follows:

1. Does City A have authority under RCW 35.21.860 and [35.21].865 to impose a tax on its electric utility department for the privilege of engaging in an electrical energy business, the measure of which tax includes gross revenues derived from providing electrical energy to customers within the corporate limits of both City A and City B?

2. Does City B have authority under RCW 35.21.860 and [35.21].865 to impose a tax on City A for the privilege of engaging in an electrical energy business within the corporate limits of City B?

3. If both cities may impose such a tax and assuming that the voters have not authorized a tax greater than 6 percent, may each city do so at a rate of 6 percent of gross receipts or does RCW 35.21.870 require proration or reduction of the rate?

For the reasons stated in the following analysis, we answer your first question in the affirmative and your second question in the negative. Our negative answer to your second question renders unnecessary a response to your third question.
[[Orig. Op. Page 3]]

ANALYSIS

For ease of reference, we begin our analysis by setting forth, in full, the statutory provisions relevant to your inquiry. They are RCW 35.21.860, [35.21].865 and [35.21].870.

RCW 35.21.860 provides:

(1) No city or town may impose a franchise fee or any other fee or charge of whatever nature or description upon the light and power, or gas distribution businesses, as defined in RCW 82.16.010, or telephone business, as defined in RCW 82.04.065, except that (a) a tax authorized by RCW 35.21.865 may be imposed and (b) a fee may be charged to such businesses that recovers actual administrative expenses incurred by a city or town that are directly related to receiving and approving a permit, license, and franchise, to inspecting plans and construction, or to the preparation of a detailed statement pursuant to chapter 43.21C RCW.

(2) Subsection (1) of this section does not prohibit franchise fees imposed on an electrical energy, natural gas, or telephone business, by contract existing on April 20, 1982, with a city or town, for the duration of the contract, but the franchise fees shall be considered taxes for the purposes of the limitations established in RCW 35.21.865 and 35.21.870 to the extent the fees exceed the costs allowable under subsection (1) of this section.

RCW 35.21.865 states:

No city or town may change the rate of tax it imposes on the privilege of conducting an electrical energy, natural gas, or telephone business which change applies to business activities occurring before the effective date of the change, and no rate change may take effect before the expiration of sixty days following the enactment of the ordinance establishing the change except as provided in RCW 35.21.870.

Finally, RCW 35.21.870, which places certain limitations on the rate of tax that may be imposed pursuant to the above‑quoted statutes, provides:

(1) No city or town may impose a tax on the privilege of conducting an electrical energy, natural gas, steam energy, or telephone business at a rate which exceeds six percent unless the rate is first approved by a [[Orig. Op. Page 4]] majority of the voters of the city or town voting on such a proposition.

(2) If a city or town is imposing a rate of tax under subsection (1) of this section in excess of six percent on April 20, 1982, the city or town shall decrease the rate to a rate of six percent or less by reducing the rate each year on or before November 1st by ordinances to be effective on January 1st of the succeeding year, by an amount equal to one‑tenth the difference between the tax rate on April 20, 1982, and six percent.

Nothing in this subsection prohibits a city or town from reducing its rates by amounts greater than the amounts required in this subsection.

Voter approved rate increases under subsection (1) of this section shall not be included in the computations under this subsection.

With these statutes in mind, we consider your first question. It asks:

This question concerns the permissible measure of the tax authorized by RCW 35.21.860 and [35.21].865. Specifically, it asks whether the tax measure may include not only gross receipts derived from providing electrical energy to customers within the corporate limits of City A (i.e., $750,000) but also whether that measure may include gross receipts derived from providing electrical energy to customers outside of the corporate limits of City A and within the corporate limits of City B (i.e. $250,000).

Although RCW 35.21.860 and [35.21].865 provide that cities and towns may impose a tax on the privilege of conducting an electrical energy business, neither statute specifically addresses the measure of the authorized tax. That is not unusual. The Legislature often leaves establishing the measure of an authorized tax to the discretion of the municipality. See, e.g., RCW 35A.11.020, 35.23.440(8), 35.22.280(32).

We know of no reason why the measure of the tax authorized by RCW 35.21.860 and [35.21].865 could not include gross receipts derived from customers residing outside the corporate limits of [[Orig. Op. Page 5]] the city imposing the tax and within the corporate limits of another Washington city, so long as the tax measure remains within constitutional constraints. There is no constitutional objection simply because a city resorts to extraterritorial elements in determining the measure of a tax. Dravo Corp. v. Tacoma, 80 Wn.2d 590, 599, 496 P.2d 504 (1972).

For example, in the recent case of Burba v. Vancouver, 113 Wn.2d 800, 783 P.2d 1056 (1989), the court upheld an excise tax imposed by a city on its municipal water and sewer utility. The measure of the tax was gross revenues derived by the utility from providing service to resident and non-resident customers. The court sustained the tax against constitutional challenge, concluding that a sufficient nexus existed between the city and the taxable event and that there was a rational relationship between the measure of the tax and the activity of the municipal utility. Burba, 113 Wn.2d at 807-10. See also Greyhound Lines, v. Tacoma, 81 Wn.2d 525, 527, 503 P.2d 117 (1972) (recognizing that sufficient nexus between a taxing authority and the activity taxed permits imposition of a tax on the entire value of a transaction);Seattle v. Pashen Contractors, Inc., 111 Wn.2d 54, 62, 758 P.2d 975 (1988) (cities "are not precluded from imposing a tax on the entire contract price simply because some of the business activity under the contract occurred outside those jurisdictions").

Nexus is the connection between the taxing jurisdiction (i.e., City A), the taxpayer (i.e., City A's electric utility department) and the taxable event (i.e., engaging in the electrical energy business). This is largely a factual question that lies outside the scope of an Attorney General's Opinion.

In this case if we assume that there is sufficient nexus, such as that found by the court inBurba, there would be no constitutional objection to the tax imposed by City A on its electric utility department, measured by its gross revenue from customers in both City A and City B. Based on this assumption, we would conclude that City A has the authority under RCW 35.21.860 and [35.21].865 to impose such a tax.

Your second question asks:

2. Does City B have authority under RCW 35.21.860 and [35.21].865 to impose a tax on City A for the privilege of engaging in an electrical energy business within the corporate limits of City B?

Your second question concerns the authority of one municipality to tax the activities of another municipality. Our analysis of your second question begins with the premise that municipalities must have specific legislative authority to levy a [[Orig. Op. Page 6]] particular tax. If there is any doubt about a legislative grant of taxing authority to a municipal corporation, it must be denied. Pacific First Fed. Sav. & Loan v. Pierce Cy., 27 Wn.2d 347, 353, 178 P.2d 351 (1947);Ivy Club Investors Ltd. Partnership v. Kennewick, 40 Wn. App. 524, 528, 699 P.2d 782 (1985).

InKing County v. Algona, 101 Wn.2d 789, 681 P.2d 1281 (1984), our State Supreme Court held that absent express statutory authority to do so, a municipality may not levy a tax on the state or another municipality. Because we believe theAlgona case is largely dispositive of the questions you have posed, we examine it in some detail.

In theAlgona case, the City of Algona enacted a business and occupation tax of 7 percent of the gross revenues derived from all fees collected by a solid waste transfer station located within its city limits. The transfer station was owned and operated by King County and collected solid waste from a large area of South King County.

The City of Algona relied on three statutes as providing authority to impose such a tax, RCW 35A.11.020, 35A.11.050 and 35A.82.020. RCW 35A.11.020 provided the following general grant of taxing authority to code cities, including the City of Algona:

Within constitutional limitations, legislative bodies of code cities shall have within their territorial limits all powers of taxation for local purposes except those which are expressly preempted by the state as provided in RCW 66.08.120, 82.36.440, 48.14.020, and 48.14.080.1/

The second statutory provision cited by the City of Algona, RCW 35A.82.020, authorizes the levy of business and occupation taxes as follows:

A code city may exercise the authority authorized by general law for any class of city to license and revoke the same for cause, to regulate, make inspections and to impose excises for regulation or revenue in regard to all places and kinds of business, production, commerce, entertainment, exhibition, and upon all occupations, trades and professions and any other lawful activity . . . .
[[Orig. Op. Page 7]]

The final statute relied upon by the City of Algona as authorizing its tax on the operation of King County's transfer station, RCW 35A.11.050, stated:

The general grant of municipal power conferred by this chapter and this title on legislative bodies of noncharter code cities and charter code cities is intended to confer the greatest power of local self-government consistent with the Constitution of this state and shall be construed liberally in favor of such cities. Specific mention of a particular municipal power or authority contained in this title or in the general law shall be construed as in addition and supplementary to, or explanatory of the powers conferred in general terms by this chapter.

The court inAlgona began its decision with the above‑noted rule that municipalities must haveexpress authority to levy taxes. Although the court inAlgona recognized that RCW 35A.82.020 grants to code cities specific authority to levy business and occupation taxes, it nevertheless held that the city lacked requisite express authority to levy a tax on the state or another municipality. Algona, 101 Wn.2d at 792-93.

In doing so, theAlgona court overruled Bellevue v. Patterson, 16 Wn. App. 386, 556 P.2d 944 (1976), review denied, 89 Wn.2d 1004 (1977), insofar as that case upheld the imposition of a business and occupation tax by the City of Bellevue on municipal corporations (a King County water district and the Eastgate Sewer District) serving customers inside Bellevue city limits.2/

Here, as in the Algona case, the statutes in question, RCW 35.21.860 and [35.21].865, contain no express authority to levy privilege taxes on municipalities.3/

In light of theAlgona [[Orig. Op. Page 8]] case, we conclude that your second question properly is answered in the negative‑-neither RCW 35.21.860 nor [35.21].865 provide requisite statutory authority for cities or towns to impose a tax on a municipality for the privilege of operating an electrical energy business.4/

As noted above, our negative response to your second question makes it unnecessary to consider your final question which assumes an authority to tax that in our opinion, does not currently exist.

We trust the foregoing will be of assistance to you.

Very truly yours,

KENNETH O. EIKENBERRY
Attorney General

MAUREEN HART
Senior Assistant Attorney General

*** FOOTNOTES ***

1/The excepted statutes concern liquor, motor fuel and insurance premiums, neither relevant in Algona nor here.

2/The court in Algona distinguished the case of Seattle v. State, 59 Wn.2d 150, 367 P.2d 123 (1961) which affirmed application of the State's public utility tax to a city water department. There, the Legislature expressly authorized such a tax by including municipal corporations within the statutory definition of persons subject to the tax. Algona, 101 Wn.2d at 793.

3/We note that the Legislature has provided such express authority in other statutes. For example, RCW 54.28.070 authorizes cities and towns in which public utility districts operate facilities for the distribution and sale of electricity to levy and collect from such districts a tax measured by gross receipts derived from sales of electricity within the city or town.

4/Because we conclude that neither RCW 35.21.860 nor [35.21].865 provide express authority to tax municipal utilities, we do not consider it necessary to discuss or rely on the governmental immunity doctrine, also embraced by the court in Algona to invalidate the city's tax on King County.