Washington State

Office of the Attorney General

Attorney General

Bob Ferguson

PO Box 40123
Olympia, WA 98504-0123


The Revenue Unit of the Revenue, Bankruptcy and Collections Division is comprised of nine attorneys and six professional staff.  The unit represents the Department of Revenue (DOR), the state agency responsible for the administration of the state's excise tax laws.  DOR also exercises overview responsibility over the administration of the state’s property tax laws.  Since various tax laws apply with respect to virtually all business activities in Washington, difficult and complex tax issues arise involving an endless variety of businesses, such as aerospace and computer software manufacturers, out-of-state manufacturers that sell products in Washington, telecommunication companies, tobacco manufacturers, and hospitals and other service providers.  The Revenue Unit also advises DOR on its administration of the state’s unclaimed property law.

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Legal Services Provided

The Revenue Unit’s principal legal activity involves defending DOR against excise tax refund actions.  The issues raised often involve complex statutory construction and constitutional claims.  The unit's attorneys appear regularly before the Board of Tax Appeals, Thurston County Superior Court, and state appellate courts.

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The Revenue Unit historically receives around 50-70 new cases each year.  Many of the claims handled by the unit are of industry-wide significance.  Over the past several years, the number of appeals handled by the unit has been higher than the historical norm.  In fiscal years 2014 and 2015, the Revenue Unit handled, respectively, seven and 11 cases in which appellate opinions were issued, and also has briefed petitions for discretionary review or answers opposing discretionary review in several more cases.  The unit currently has 20 cases pending in the appellate courts.

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Significant Cases

Tribal Cigarette Manufacturer:  The United States Supreme Court denied review of a decision of the Ninth Circuit Court of Appeals holding that a cigarette manufacturer owned by member of the Yakama Nation is subject to Washington’s escrow statute with respect to cigarettes it sold to non-Indians.  The escrow statute requires cigarette manufacturers that sell cigarettes in Washington that have not joined the historic master settlement agreement to pay an amount into escrow each year that is based on product sales during the preceding calendar year.  The Court held that the plain text of the Yakama Treaty did not create a federal exemption from the escrow statute.

Retroactive Estate Tax Legislation:  In October 2014, the Washington Supreme Court issued a unanimous opinion upholding the constitutionality of an amendment to the estate tax code against a claim that it applied retroactively and thus violated the federal due process clause and separation of powers doctrine.  The Legislature amended the estate tax code in 2013 in response to a Washington Supreme Court decision in late 2012 that held that the DOR could not include marital trust property within an estate’s Washington taxable estate although such trust property is taxed as part of the estate’s federal taxable estate.  The Estates challenging the 2013 legislation have filed a petition for a writ of certiorari in the United States Supreme Court.

First Mortgage Investment Deduction:  The Washington Supreme Court issued a 9-0 decision holding that a bank could not claim a B&O tax deduction for investments by banks that are primarily secured by first mortgages or trust deeds.  The Court held that the bank’s investments in collateralized mortgage obligations (CMOs) and real estate mortgage investment conduits (REMICs) were not primarily secured as required by the deduction statute.  The Court explained that a secured investment must be backed by collateral and the investor must have some recourse against that collateral.  The bank’s investments in CMOs and REMICs, however, were not backed by any encumbrance on property, nor did the bank have any legal recourse to the underlying trust assets in the event of default. 

Dropped-Ship Sales:  The Court of Appeals issued a published decision in DOR’s favor, concluding that an out-of-state wholesaler’s drop-shipped sales (shipments made to the wholesaler’s customers’ customers in Washington) are subject to Washington’s wholesaling B&O tax.  The Court also held that neither an administrative rule adopted by DOR nor the Commerce Clause permits an out-of-state wholesaler to “dissociate” a portion of its inbound sales based on the lack of a direct connection between those sales and the wholesaler’s in-state activities that create nexus with the State of Washington. 

Dealer Cash:  The Court of Appeals issued a published decision holding that “dealer cash” is subject to B&O tax under the service and other classification.  Dealer cash is an incentive payment that an automobile manufacturer pays an automobile dealer for selling a particular vehicle model during a specific time frame.

Medical Marijuana:  The Thurston County Superior Court issued a decision dismissing a lawsuit alleging that the state’s taxation of sales of medical marijuana is preempted by federal law and that requiring the taxpayer to report its sales of medical marijuana violated his Fifth Amendment guarantee against self-incrimination.  The court concluded that federal law does not preempt state taxation of medical marijuana sales and that having to comply with a generally-applicable tax scheme does not violate the Fifth Amendment.

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Major Issues

Implementation of Tobacco Settlement:  The Revenue Unit continues to play an important role in the implementation of the historic tobacco litigation settlement agreement.  The unit enforces the “escrow” statute adopted by the Legislature that applies to cigarette manufacturers selling tobacco products within the state which have not joined the master settlement agreement.  The amount that must be put into escrow is based on product sales each year and protects the fiscal soundness of the state and the public health.  Diligent enforcement of the escrow statute insulates the settlement payments received by the state under the master settlement agreement from being reduced based on the non-participating manufacturers’ (NPM) adjustment.  This adjustment applies if there is an increase in the NPM’s market share resulting from the implementation of the master settlement agreement.  The unit also helps maintain the Attorney General’s Office website required by a 2003 law, under which tobacco product manufacturers must certify to the AGO prior to selling their cigarettes in this state.  Tobacco manufacturers whose certifications have been approved can be found at www.atg.wa.gov/Tobacco.

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