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September 28, 2015
You should be concerned about Avnet v. Department of Revenue because “there is a certain unseemliness about the Department of Revenue disavowing its own regulation when it appears to favor the taxpayers”
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It’s not fair.  There is nothing that is more aggravating than when the government instructs a citizen to do one thing, changes its mind and then retroactively applies a different and costly instruction to that citizen.  Should this happen?  No.  Does it happen?  More often than one would imagine.

In 2006, the Washington State Supreme Court struck down this questionable behavior.  The state Supreme Court considered a situation involving the Department of Labor Industries (L&I) 1992 policy announcement.  It dealt with when prevailing wages must be paid to dump truck drivers.  Based upon that policy memorandum, the contractors bid their prices.  By 1998, the contract had been accepted and performed.  After the work had been completed and the contractor and drivers had been paid, the drivers contended that the contractor should have paid the prevailing wage.  The drivers complained to L&I.  L&I agreed with the drivers, based on its interpretation of its administrative rule and ignoring its 1992 memorandum.  The Supreme Court, in a decision penned by Chief Justice Alexander,[1]  eventually agreed with L&I’s interpretation, but the decision refused to apply the interpretation retroactively, holding instead:

"Although we uphold the Department Director's broad reading of WAC 296–127–018 and the finding that the drivers participated in incorporation of the fill materials, the interests of justice prevent us from upholding the Department's order applying these determinations retroactively *887 to Suppliers. We hold that all elements of equitable estoppel are met and that, therefore, the Department is estopped in this case from claims contrary to its policy memorandum position." [2]

This seems like a right, just and fair result based upon the mixed signals from the agency that has the requisite experience and background to administer the law.

One year later, in 2008, the Court had the chance to review Tesoro Refining and Marketing v. Washington, 164 Wash.2d 310, 190 P.3d 28 (2008).  Like Silverstreak, the case involved a policy that the government --- Department of Revenue (DOR) --- sought to impeach.  The dispute was whether DOR’s rule permitted an exemption.  The court concluded that the statute did not support the exemption.  Although there was also a department policy memorandum that interpreted the rule to permit the exemption (adopted in 1988) and that DOR followed since 1988, the court found the statute superseded the memorandum.  The court resisted the characterization that the Department was repudiating its own rule, stating:

"Tesoro advocates for an outdated interpretation of Rule 252(7)(b) that is inconsistent with the HST by creating a tax exemption not found in statute. Such a reading of Rule 252(7)(b) *325 would render the regulation ultra vires and void. By disputing Tesoro's argument, DOR is not attempting to repudiate its own regulation."[3]

Again, it was a split decision with four in the majority, one concurrence and four dissenting.  The concurrence,[4] ironically written by Chief Justice Alexander who had written Silverstreak, said:

"I, nevertheless, join in the result the majority reaches because I agree with the Court of Appeals that to the extent WAC 458–20–252(7)(b) is inconsistent with the statute imposing the HST, it is void and of no force or effect. Although there is a certain unseemliness about the Department of Revenue disavowing its own regulation when it appears to favor the taxpayers, the 'bottom line' is that a statute trumps a regulation that conflicts with that statute."  (Underlining added.)

The issue has come up again in 2015.  In this case, Avnet distributes electronic component parts at wholesale, shipping from Arizona or Texas.  Avnet is present in Washington and it pays the wholesaling B&O tax on all sales shipped into Washington if the sales were generated by its Washington activities.  

The national sales are not reported because national sales are sales that involve no Washington activities.  As an example, when a national manufacturer sells towels to Target and Walmart, then it would not go to each Target and Walmart retail outlet store in Washington to sell towels.  Indeed, buyers do not likely exist in those retail stores.  Instead, it will go to Minnesota or Arkansas where the Target and Walmart buyers are located.  They do their selling activities in those states, not in Washington.  The local retail outlets are not free to negotiate or order towels from the towel supplier.  Instead, they must go through their own internal purchase order process that is centrally located in Minnesota and Arkansas.  So, the towel supplier does nothing to maintain or market towels to the local retail outlets.

Washington adopted an administrative rule, WAC 458-20-193 (“Rule 193”) several decades ago based on a U.S. Supreme Court opinion.[5]  That rule said that the state does not tax sales that are “dissociated” from the existing nexus for the other Washington sales.  In Avnet, the trial court forced the DOR to follow its rule.  On appeal by DOR, the Court of Appeals reversed the trial court, summarily dismissing the rule as irrelevant.[6]  Even though it was an administrative rule, it was “interpretive only”, allowing DOR to disregard retroactively the instructions that it had been giving taxpayers for decades under Rule 193.  Avnet has petitioned the Washington State Supreme Court for review of this decision.

The Supreme Court, as explained above, has had plurality decisions going both ways.  In Silverstreak, seven justices agreed with estoppel and two did not.  In Tesoro, five justices allowed DOR to disregard its rule and four dissented.  The four dissenters actually found that the rule was correct and did not address estoppel.  Out of the seven Silverstreak justices that agreed that estoppel applied, only two remain on the court.  Out of the five justices that refused to enforce the DOR’s publicly announced position, four remain.  Of the two from Silverstreak and four from Tesoro, only one justice agreed with the citizen both times.  That justice remains on the Court.  There are four new justices that did not participate in either Silverstreak or Tesoro.  It looks like these four new justices will swing the policy one way or the other if the court accepts review.

As citizens, you should be concerned about Avnet, because if the Court decides that government can change its mind after telling citizens to do it one way for decades and then impose additional monetary burdens upon that citizen when it changes its mind, then government can say or do whatever it feels is correct today but retroactively and lawfully change its mind in the future.  If this case is accepted for review, then you should consider providing “friend of the court” briefing to explain how such a policy negatively affects your business.

[1] The majority consisted of four justices and a concurrence as well as four concurring in part and dissenting in part.

[2] Silverstreak, Inc. v. Washington State Dep't of Labor & Indus., 159 Wash. 2d 868, 886-87, 154 P.3d 891, 901 (2007). 

[3] Tesoro Ref. & Mktg. Co. v. State, Dep't of Revenue, 164 Wash. 2d 310, 324-25, 190 P.3d 28, 36 (2008).  

[4] Id. at 325

[5] Norton v. Illinois, 340 U.S. 534 (1951)

[6] Avnet, Inc. v. State, Dep't of Revenue, 187 Wash. App. 427, 348 P.3d 1273 (2015), as amended (May 19, 2015)



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