IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
PUGET SOUND ENERGY, INC.,
CITY OF BELLINGHAM, FINANCE
FILED: August 29, 2011
Dwyer, C.J. — As the result of an audit conducted on its behalf, the city of
Bellingham assessed tax and penalties against Puget Sound Energy, Inc. (PSE),
which provides electric light and power to customers living within the city. PSE
thereafter filed a complaint seeking a judgment declaring the city’s tax
assessment illegal and ordering a refund of the taxes and penalties imposed.
Because PSE has not demonstrated that the tax assessment improperly
subjected certain of its revenue to city utility tax, the trial court did not err by
granting summary judgment in favor of the city.
In 2008, the city of Bellingham’s contract auditors conducted a business
and occupation (B&O) tax and utility tax audit of PSE for the period of time from
January 1, 2004 to September 30, 2008 (the audit period).
During the audit period, PSE had paid various city taxes on its business
activities within the city. PSE paid city utility tax on the revenue that it received
from both the “per kilowatt hour energy charges” and the “basic or customer
charges” paid by its Bellingham customers. Clerk’s Papers (CP) at 122.
However, PSE paid city B&O tax, rather than city utility tax, on other revenue
that it received from its Bellingham customers. For example, PSE paid city retail
B&O tax on the revenue that it received from business activities defined by PSE
as “sales and leases of tangible personal property to customers located in
Bellingham.” CP at 122. In addition, PSE paid city B&O tax under the “service
and other” classification on the revenue that it received from “setting up
accounts for prospective electricity customers (billing initiation charges);
connecting, reconnecting, and disconnecting prospective or former electricity
customers to or from the electricity grid (connection and reconnection charges
and disconnection visit charges); and receiving late payments (late payment
fees).” CP at 123.
Based upon the audit, the city issued an assessment against PSE in the
amount of $919,662.11—consisting of $680,316.76 in city utility tax and
$239,345.35 in penalties. The assessment was based upon the city’s
determination that certain revenue upon which PSE had paid city B&O tax was,
instead, properly subject to city utility tax. PSE paid the assessment in full.
PSE thereafter filed a “refund and declaratory judgment action
challenging the legality of the imposition of City of Bellingham utility tax,” in
which PSE alleged that the city had unlawfully imposed utility tax on “retail sales
of tangible personal property and other non-utility revenue.” CP at 380. PSE
also challenged the city’s inclusion of utility tax charges collected by PSE from
its Bellingham customers within the “gross income” amount subject to city utility
tax. CP at 380.
During discovery, the city issued an interrogatory requesting that PSE
“identify all types of revenues that PSE claims are not subject to” the city utility
tax. CP at 75. PSE answered:
PSE claims that only its gross income from selling electricity within
the City is subject to City utility tax, BMC 6.06.050.D. All other
revenue is “non-utility revenue” not subject to City utility tax,
including revenue from sales of steam, retail sales and leases of
tangible personal property other than steam, transformer rental
charges, late payment fees, billing initiation charges, connection
and reconnection charges, disconnection visit charges, and basic
CP at 75.
Subsequently, the parties filed cross motions for summary judgment,
agreeing that no issues of material fact were in dispute. The trial court granted
the city’s motion for summary judgment, dismissing PSE’s declaratory judgment
PSE first contends that, based upon the plain language of the city utility
taxation ordinance, those activities that PSE defines as “non-utility” activities are
not subject to the city utility tax. We disagree.
“[T]he proper construction of a city taxation ordinance is a legal question
that is reviewed de novo on appeal, but the ‘burden is on the taxpayer to prove
that a tax paid by him or her is incorrect.’” Avanade, Inc. v. City of Seattle, 151
Wn. App. 290, 297, 211 P.3d 476 (2009) (quoting Group Health Coop v. City of
Seattle, 146 Wn. App. 80, 88, 189 P.3d 216 (2008)). The same rules of
construction that apply to interpretations of statutes also apply to interpretations
of municipal ordinances. City of Puyallup v. Pac. Nw. Bell Tel. Co., 98 Wn.2d
443, 448, 656 P.2d 1035 (1982). “An unambiguous statute is not subject to
judicial construction and the court must derive its meaning from the plain
language.” Sprint Spectrum, LP/Sprint PCS v. City of Seattle, 131 Wn. App.
339, 346, 127 P.3d 755 (2006). “A statute is ambiguous if it is susceptible to
more than one reasonable interpretation.” Sprint Spectrum, 131 Wn. App. at
The city’s utility taxation ordinance levies a six percent tax against “every
person engaged in or carrying on the business of selling or furnishing electric
light and power.” Bellingham Municipal Code (BMC) § 6.06.050(D). The electric
utility tax is imposed upon “the total gross income from such business in the
city.” BMC § 6.06.050(D).
PSE seeks a narrow interpretation of the city utility taxation ordinance in
which only the revenue that it receives from “per kilowatt hour energy charges”
and “basic or customer charges” is subject to the six percent utility tax rate. In
so doing, PSE asserts that it is subject to the city utility tax only for its specific
activities of “selling or furnishing electric light and power.” Br. of Appellant at 7.
This is incorrect.
In fact, the language of the city’s taxation ordinance is not so restrictive.
Rather, the ordinance provides that the electric utility tax be levied against
persons engaged in “the business of selling or furnishing electric light and
power.” BMC § 6.06.050(D) (emphasis added). Contrary to PSE’s assertion,
“the business” of selling or furnishing light and power is not limited to the actual
provision of electricity. Rather, it encompasses the entire commercial enterprise
of selling or furnishing electric light and power. See Webster’s Third New
International Dictionary 302 (3rd ed. 2002) (defining “business” as “a commercial
or industrial enterprise”). Similarly, the tax is imposed upon “the total gross
income from such business,” BMC § 6.06.050(D) (emphasis added), not upon
the total gross income obtained solely from the provision of the electricity itself.
Thus, the ordinance unambiguously states that the utility tax applies to more
than simply the revenue that PSE receives through per kilowatt hour and basic
Moreover, PSE has the burden of proving that the city’s tax assessment is
improper. See Avanade, 151 Wn. App. at 297. However, PSE fails to explain
why those activities that it defines as “non-utility” activities are not part of its
“business of selling or furnishing electric light and power,” BMC § 6.06.050(D),
and, thus, not subject to city utility tax. PSE characterizes those activities upon
which it paid city retail B&O tax as “sales and leases of tangible personal
property,” which it contends “consisted of leases of . . . hardware, software, and
equipment to Quanta Services, Inc.” CP at 122-23. However, PSE does not
assert that these activities are unrelated to its business of selling electric light
and power, and the lease agreement indicates that Quanta’s use of the leased
property was restricted to activities connected to the performance of certain
obligations to PSE.1 In addition, PSE fails to explain why those activities upon
which it paid city B&O tax under the “service and other” classification—including
billing initiation charges, connection and reconnection charges, disconnection
visit charges, and late payment fees—are not part of its business of selling or
furnishing electric light and power.2 Because PSE bears the burden of proving
that the city’s tax assessment is incorrect, the tax assessment must stand unless
PSE demonstrates that these activities are not part of its electric utility business.
The city asserts that Quanta’s obligations to PSE, as referenced in the lease
agreement, involve utility construction, operation, and maintenance services for PSE, see Br. of
Resp’t at 6 n.3, thus indicating that the revenue that PSE obtained by virtue of its lease with
Quanta may, indeed, be a part of its electric utility business. In any event, PSE has not
demonstrated otherwise and has the burden of so doing.
During the audit period, PSE also engaged in sales of steam, for which it paid city B&O
tax under the “service and other” classification. CP at 122. However, the proper taxation of
such sales is not an issue in this appeal, as the parties have resolved that issue through
PSE may not simply reclassify its activities in order to avoid the city’s utility
The city’s utility taxation ordinance unambiguously levies an electric utility
tax against any person engaged in “the business of selling or furnishing electric
light and power.” The broad language of the ordinance indicates that its scope
is not restricted only to revenue obtained through the actual provision of
electricity. PSE has not demonstrated that those activities that it defines as “nonutility” activities are not a part of its “business of selling or furnishing electric light
and power.” BMC § 6.06.050(D). Absent such a showing, and based upon the
plain language of the city’s taxation ordinance, the tax assessment against PSE
PSE further contends that the city’s tax assessment violates the statutory
rate limitation and uniformity requirement set forth in RCW 35.21.710 and
constitutional limitations imposed by the equal protection clause of the United
States Constitution and our state’s privileges and immunities clause. We
RCW 35.21.710 provides that “[a]ny 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.” That rate must not exceed 0.2 percent. RCW 35.21.710.
Contrary to PSE’s assertion, RCW 35.21.710 is not applicable here. As
explained above, PSE has not demonstrated that the city improperly assessed
city utility tax on the revenue defined by PSE as “non-utility revenue.” As such,
PSE has not demonstrated that such revenue was obtained through retail sales
and, therefore, properly subject to city B&O retail tax, BMC § 6.04.050(D), rather
than city utility tax, BMC § 6.06.050(D). Thus, the taxes were not imposed upon
“business activities consisting of the making of retail sales,” as required in order
for RCW 35.21.710 to apply, notwithstanding that PSE categorized various of its
activities as such.
Moreover, “a city . . . may define its taxation categories as it sees fit
unless it is restrained by a constitutional provision or legislative enactment.”
Commonwealth Title Ins. Co. v. City of Tacoma, 81 Wn.2d 391, 394, 502 P.2d
1024 (1972). Thus, PSE’s contention that many of its so-called “non-utility”
activities are subject to state B&O tax, rather than state utility tax, has no bearing
on whether such activities are properly subject to city utility tax. See
Commonwealth Title, 81 Wn.2d at 393-94; see also Enterprise Leasing, Inc. v.
City of Tacoma, 139 Wn.2d 546, 988 P.2d 961 (1999); cf. City of Tacoma v.
Seattle-First Nat’l Bank, 105 Wn.2d 663, 717 P.2d 760 (1986) (holding that the
city was bound by the state’s B&O tax classifications for financial institutions
because the statute authorizing municipalities to impose such taxes provided
that the definitions set forth in the statute “shall be applied” to any such tax
imposed by a municipality). Because the city is not required to classify for
taxation purposes the activities of PSE in the same manner as does the state,
the city is free to subject PSE’s so-called “non-utility” revenue to the city utility
tax. As such, RCW 35.21.710, which sets forth the rate limitation and uniformity
requirement for retail taxation, is not applicable here.
For the same reason, PSE’s contention that the city’s tax assessment
violates the federal and state constitutions also fails. Because PSE has not
shown that the city improperly assessed city utility tax upon that revenue defined
by PSE as “non-utility revenue,” PSE cannot demonstrate that the city has
improperly treated it unlike others in the same class, as required in order to
establish a violation of either the equal protection clause of the United States
Constitution, U.S. Const. amend. XIV, § 1,3 or our state constitution’s privileges
and immunities clause, Wash. Const. art. I, § 12.4 PSE—an electric utility
business—is not within the same class as retailers and services providers, which
are subject to city B&O tax. So long as the city’s taxation of PSE is consistent
with its taxation of other utilities—and PSE has provided no evidence to the
contrary—no equal protection clause or privileges and immunities clause
violation has been shown to exist. See, e.g., KMS Fin. Servs., Inc. v. City of
Seattle, 135 Wn. App. 489, 498, 146 P.3d 1195 (2006) (noting that legislative
classifications violate the Fourteenth Amendment and article I, § 12 only where
the legislation applies differently to persons within the same class) (quoting City
of Seattle v. Rogers Clothing for Men, Inc., 114 Wn.2d 213, 234-35, 787 P.2d 39
The city need not classify PSE’s activities for taxation purposes in the
same manner as does the state, and, here, the city properly determined that the
revenue obtained from those activities defined by PSE as “non-utility” activities
is subject to city utility tax. Consequently, the city’s tax assessment violates
neither RCW 35.21.710 nor the federal or state constitutions.
The Fourteenth Amendment to the United States Constitution provides that “[n]o state
shall . . . deny to any person within its jurisdiction the equal protection of the laws.” U.S. Const.
amend. XIV, § 1.
Article I, § 12 of the Washington State Constitution provides that “[n]o law shall be
passed granting to any citizen, class of citizens, or corporation other than municipal, privileges or
immunities which upon the same terms shall not equally belong to all citizens, or corporations.”
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PSE finally contends that the city’s tax assessment improperly included in
PSE’s gross income the revenue from “utility tax charges” that PSE collects from
its Bellingham customers in order to pay the city utility tax. We disagree.
“Gross income,” for purposes of the city utility tax,
means the value proceeding or accruing from the sale of tangible
property or service, and receipts, including all sums earned or
charged, whether received or not, by reason of the investment of
capital in the business engaged in, including rentals, royalties, fees
or other emoluments, however designated, excluding receipts or
proceeds from the use or sale of real property or any interest
therein, and proceeds from the sale of notes, bonds, mortgages, or
other evidences of indebtedness, or stocks and the like, and
without any deductions on account of the cost of the property sold,
the cost of materials used, labor costs, interest or discount paid, or
any expense whatsoever, and without any deduction on account of
BMC § 6.06.020(A) (emphasis added).
We have recently held that the definition of “gross income” in the
city of Seattle’s utility taxation ordinance, which is identical to the
definition herein in all relevant respects, unambiguously included the
utility tax charges collected by a company in order to pass the cost of the
utility tax on to its customers. Sprint Spectrum, 131 Wn. App. at 346-47.
There, we determined that, although Sprint passed on to its customers the
tax that it owed to the city, the utility tax was Sprint’s obligation, not that of
its customers. Sprint Spectrum, 131 Wn. App. at 346-47. We noted that
“[t]he utility tax is a part of the consideration that Sprint’s customers pay
for cellular service” and deemed important the fact that Sprint’s customers
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received no benefit for the utility tax payment apart from obtaining cellular
service from Sprint. Sprint Spectrum, 131 Wn. App. at 347. Indeed, the
utility tax charge simply increased the price that the consumers paid to
Sprint in exchange for cellular service. Sprint Spectrum, 131 Wn. App. at
347. Thus, we determined that “those charges are properly included in
the calculation of Sprint’s utility tax liability.” Sprint Spectrum, 131 Wn.
App. at 347.
Similarly, here, the fact that PSE passes on to its customers the
utility tax imposed upon PSE by the city does not make that tax the
obligation of PSE’s customers. Moreover, PSE’s customers receive no
additional consideration in exchange for paying this charge; rather, they
receive only electric light and power service. As in Sprint Spectrum, the
utility tax imposed here is simply one of PSE’s operating expenses. As
such, the revenue that PSE receives by virtue of charging its customers
for the utility tax is a part of the “value proceeding or accruing” to PSE,
see BMC § 6.06.020(A), and, thus, is properly included in PSE’s gross
income subject to city utility tax.5
PSE contends that the facts of this case are distinguishable from those of Sprint
Spectrum, in that PSE is a regulated utility that is required to pass utility taxes on to its
customers. However, even if this is so, the revenue that PSE collects from its customers as
utility tax charges is “value proceeding or accruing” to PSE, see BMC § 6.06.020(A), regardless
of whether PSE chooses to or is required to pass on the tax.
PSE additionally contends that, at least during that part of the audit period occurring
prior to our decision in Sprint Spectrum, it was required to adhere to our earlier decision in Puget
Sound Energy, Inc. v. City of Redmond, noted at 97 Wn. App. 1075 (1999). However, our
decision in that case was specific to the city of Redmond’s taxation ordinance. The city of
Bellingham, which was not a party to that action, was not precluded by our decision in that case
from taxing PSE in the manner that it did here.
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Because the revenue that PSE receives by virtue of passing the city utility
tax on to its customers is “value proceeding or accruing” to PSE, such revenue is
properly subject to the city utility tax. Thus, the city’s tax assessment did not
improperly include that revenue in calculating PSE’s utility tax liability.
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