Lead Opinion
¶ 1 Article VII of the Washington Constitution imposes a set of requirements on taxes for the protection of the taxpayers; however, not all governmental charges are “taxes” that are subject to those requirements. At issue in this case is whether a certain governmental
FACTS
¶2 The Washington Constitution gives the legislature the authority to exempt property from taxation. Const, art. VII, § 1. In 2004, the Washington Legislature added tribal property to the list of tax-exempt property. Laws of 2004, ch. 236, § 1. Tribal property is exempt from state taxation if the property is owned by a recognized tribe and used for “ ‘essential government services,’ ” including operations like “tribal administration, public facilities, fire, police, public health, education, sewer, water, environmental and land use, transportation, and utility services.” Id. § 1(1), (2) (formatting omitted).
¶3 In 2014, the legislature passed Engrossed Substitute House Bill (ESHB) 1287, which expanded qualifying exempt property and created a payment in lieu of property tax for some of it. Id. ch. 207. To do so, it expanded the qualifying list of “‘[e]ssential government services’” to include “economic development,” thereby expanding the types of properties eligible for the tax exemption. Id. § 5(3)(b) (formatting omitted); RCW 84.36.010(3)(b). “Economic development” is defined as “commercial activities,
¶4 If a tribe takes advantage of the property tax exemption, it does not pay property taxes, but the statute still requires the tribe to make some payment. Where tribes lease the property to a third party, the private lessee must pay a leasehold excise tax essentially for the “privilege of occupying or using” the land. RCW 82.29A.030(l)(a). If the land is not leased, then the tribe must make a “payment in lieu of leasehold excise taxes.” RCW 82.29A.055(1). This PILT is owed to the county if (1) the property is used exclusively for economic development, (2) there is no taxable leasehold interest in the tax-exempt property, (3) the property is not on the tribe’s reservation, and (4) the property is not otherwise exempt from taxation under federal law. Id. The amount of the PILT is to be determined through good faith negotiation between the tribe and the county in which the property is located. RCW 82.29A-.055(2). If they cannot agree, the Department of Revenue will determine the PILT amount, which cannot exceed the leasehold excise tax amount that would be due if the land were leased to a third party. Id.
¶5 PILTs are nothing new. In 1976, the federal government established the payments in lieu of taxes (referred to as PILT or PILOT) program, whereby the government pays sums of money to state governments or localities where its property sits, in spite of its tax-exempt status. See 31 U.S.C. §§ 6901-6907. The purpose for PILT payments was to mitigate the burden on state governments created by the tax-exempt land that still requires public services from the state. As one report explained, “Federal lands cannot be taxed but may create a demand for services such as fire protection, police cooperation, or longer roads to skirt the federal property.” M. Lynne Corn, Cong. Research Serv., RL31392, PILT (Payments in Lieu of Taxes): Somewhat Simpli
¶6 Various Washington tribes took advantage of the 2014 amendment expanding the off-reservation tribal property exemption for around 190 properties. One of those properties is the Salish Lodge, an off-reservation hotel and spa in the city of Snoqualmie and King County, owned by the Muckleshoot Indian Tribe. Pursuant to the 2014 amendment, the tribe applied for and received a property tax exemption on the Salish Lodge as a property used for “economic development.” Clerk’s Papers at 416-34. The tribe negotiated a PILT payment with King County and agreed to pay 25 percent of the property taxes it paid in 2014.
¶7 The city challenged the constitutionality of ESHB 1287. Engrossed Substitute House Bill 1287, 63d Leg., Reg. Sess. (Wash. 2014). It contended that the Salish Lodge would generate about $93,500 in property tax revenue to the city, which would be roughly 1.6 percent of the city’s total property tax levy. The city stated in its complaint that the exemption of the lodge created a tax shift to its taxpayers (raising their individual tax liability due to the loss in overall revenue) and also raised the city’s property tax levy rate. Furthermore, the city points to the tribe’s planned development expansion of the Salish Lodge, which could generate an additional $600,000 of property tax revenue—however, due to the expanded property tax ex
¶8 Three amicus curiae briefs were filed in this case. The Muckleshoot Indian Tribe filed a brief in support of upholding the PILT. The Master Builders Association of King and Snohomish Counties and the Washington State Association of Municipal Attorneys both filed briefs in support of the city’s contention that the PILT is an unconstitutional tax.
ISSUES
¶9 1. Does the city of Snoqualmie have standing to challenge the constitutionality of the PILT?
¶10 2. Is the PILT an unconstitutional tax?
ANALYSIS
1. The City of Snoqualmie Has Standing To Pursue Its Constitutional Claims
¶ 11 The city of Snoqualmie has standing to challenge the PILT, both on its own behalf and in the form of representative standing on behalf of its residents. As explained below, we find that the city has direct standing
a. The City Has Direct Standing To Challenge the Statute under Our More Liberal Standing Requirements for Cases of Public Importance
¶12 Typically, a party has direct standing when it seeks to protect interests that are within the “ ‘zone of interests’ ” regulated by the challenged statute and where the party suffered an injury in fact.
¶13 Here, the department even concedes the substantial importance of this case, stating, “The Department recognizes that this case raises important constitutional questions, the resolution of which will have a broad impact on the administration of property taxes.” Br. of Appellant at
¶14 The issue of whether this PILT is constitutional will impact Indian tribes throughout the state. As the Muckle-shoot Indian Tribe stated in its amicus brief, several other tribes will be directly affected by an invalidation of the exemption and accompanying PILT. See Amicus Curiae Br. of Muckleshoot Indian Tribe at 1. We also recognize that the tax implications surrounding this case might broadly impact the legislature’s actions concerning the imposition of future PILTs. Therefore, since this issue concerns a matter of great public importance as it pertains to Washington’s tribes and our tax system, we find that the city has standing to challenge the constitutionality of the PILT. Alternatively, the city has representative standing on behalf of its residents, which is discussed below.
b. The City Has Representative Standing
¶15 In addition, municipalities may have standing to raise constitutional issues on behalf of their citizens in a representative capacity. Grant County, 150 Wn.2d at 803. Any property tax exemption will slightly increase the property tax rate of other taxable property because an exemption reduces the overall taxable property base. See Wash. Senate Ways & Means Comm., A Legislative Guide to Washington State Property Taxes 4 (2016), http://leg.wa.gov /Senate/Committees/WM/Documents/Publications/2016 /2016%20Property%20Tax%20Guide%20v9Jan8_website.pdf [https://perma.cc/BJ9J-ZRJB]. This is called “tax shift,” and
2. The Statute Does Not Violate the Washington Constitution’s Tax Requirements Because the PILT Is Not a Tax
¶16 It is within the legislature’s power to declare property exempt from taxation. Const, art. VII, § 1. Thus, the legislature’s amendment expanding the types of tribal property that qualify for a property tax exemption is not at issue. The issue we must decide is whether the PILT that accompanies the expanded exemption is constitutional under article VII. Article VII requires that taxes conform to certain standards. The city challenges the constitutionality of the PILT on three separate grounds under article VII. First, the city argues that it violates the uniformity clause, which requires classes of property to be taxed uniformly. Id. Second, the city argues that the statute is an improper delegation of the legislature’s taxing authority. Const, art. VII, § 9. Third, the city argues that the statute violates the antisurrender clause, which prohibits the legislature from surrendering its taxing power. Const, art. VII, § 1.
¶17 In order for these three constitutional requirements to apply to the PILT, the PILT must be a “tax.” “It is beyond dispute that article VII, section 1 applies only to taxes. Anything other than a tax is beyond the provision’s scope.” Dean v. Lehman, 143 Wn.2d 12, 26, 18 P.3d 523 (2001). Thus, if the PILT is a tax, it must conform to the requirements of article VII. If it is not a tax, then the tax requirements do not apply to it. We explain below that the PILT is not a tax.
¶18 As explained above, the threshold question in this case is whether the PILT is a tax. However, both parties frame the question as whether the PILT is a tax or a regulatory fee. This is understandable since much of our prior case law in this area dealt with whether certain fees were actually hidden taxes, and thus our analysis was designed to distinguish between those two categories of payments. However, some payments to the government are neither taxes nor regulatory fees. As we explain below, that is the case here.
¶19 “Not all demands for payment made by a governmental body are taxes.” Hillis Homes, Inc. v. Snohomish County, 97 Wn.2d 804, 809, 650 P.2d 193 (1982). This court has defined “tax” as
an enforced contribution of money, assessed or charged by authority of sovereign government for the benefit of the state or the legal taxing authorities. It is not a debt or contract in the ordinary sense, but it is an exaction in the strictest sense of the word.
State ex rel. City of Seattle v. Dep’t of Pub. Utils., 33 Wn.2d 896, 902, 207 P.2d 712 (1949). In Hillis Homes, we were asked to decide whether certain “development fees” should actually be characterized as taxes. 97 Wn.2d at 809. To make that determination, we questioned whether the fees were regulatory instead of purely fiscal. Id. To answer such questions, we designed a three-factor test to distinguish between taxes and regulatory fees in Covell v. City of Seattle, 127 Wn.2d 874, 879, 905 P.2d 324 (1995). We have applied the three-factor Covell test to several government charges. See, e.g., Cedar River Water & Sewer Dist. v. King County, 178 Wn.2d 763, 808, 315 P.3d 1065 (2013) (credit enhancement charge); Arborwood Idaho, LLC v. City of Kennewick, 151 Wn.2d 359, 371, 89 P.3d 217 (2004) (ambulance charge); Okeson v. City of Seattle, 150 Wn.2d 540, 553, 78 P.3d 1279 (2003) (streetlight charge).
¶21 As we have previously pointed out, “municipalities may charge fees that are not purely regulatory in nature.” Branson v. Port of Seattle, 152 Wn.2d 862, 874 n.5, 101 P.3d 67 (2004) (citing Spitzer, supra, at 343-49). Regulatory fees are only one subset of “user charge,” which is a broad term that describes other types of charges such as commodity charges, burden offset charges, and special assessments. Spitzer, supra, at 343-51. These various types of fees illustrate why a test that determines only whether a charge is a tax or a regulatory fee is too limited. Just because a charge is not a tax does not always mean that it is a regulatory fee. Thus, we take this opportunity to clarify that the two-category dichotomy of governmental charges from the Coveil test is not always practical. At times, the critical inquiry will not be labeling the charge, but merely determining whether a charge is a tax. That is the case here, where the key issue is not whether the PILT is some kind of fee, but whether the PILT is a tax (and therefore subject to the constitution’s taxation requirements). Thus, we analyze below not whether the PILT is a fee or a tax, but only whether the PILT is a tax.
¶22 Given that we are not determining whether this charge is a tax or a fee, the original Coveil factors are not entirely helpful. Nonetheless, the principles underlying the Coveil factors help us answer the question presented. As we have done previously, we can apply a broader version of the
¶23 First, we look at the purpose of the charge, id., which supports finding that the PILT is not a tax. We have found that where a charge’s purpose is to “alleviatfe] a burden to which they contribute,” then the charge is more likely not a tax. Arborwood Idaho, 151 Wn.2d at 371. Here, the PILT’s purpose is to allow the tribe to alleviate a burden to which it contributes. The PILT is meant to offset the burden created by the tax exemption, in order to compensate the municipality for the services the tribal exempt land requires. Although we have said that where the purpose of a charge is to raise revenue, it is a tax, see Coveil, 127 Wn.2d at 879, we must also acknowledge that all governmental charges are generally imposed to raise revenue. Thus, that aspect is not dispositive. Since the purpose of the PILT is to alleviate a burden, this factor weighs against finding that the PILT is a tax.
¶24 The second factor considers where the money raised is spent. Lane, 164 Wn.2d at 882. Overall, this factor supports finding that the PILT is not a tax because although the money is deposited into a general fund like taxes are, its value is accounted for by the particular services required. Previously, we have found that a charge is less likely to be a tax if it is deposited into a special fund for a particular purpose. See id. at 883. However, we have held that the funds need not be directly allocated to a particular service in order to not be a tax. Dean, 143 Wn.2d at 27-28. Although the PILT is not directly allocated to a particular special fund or service, it is essentially a reimbursement, or at least a prospective payment, for municipal
¶25 Finally, the third factor considers whether there is a relationship between the charge and the service. Lane, 164 Wn.2d at 882. This factor also supports finding that the PILT is not a tax. While Coveil required a “direct” relationship to find the charge was not a tax, 127 Wn.2d at 879, our cases that have applied the factors more broadly have simply looked at “whether people pay the cost because they use the service.” Lane, 164 Wn.2d at 882. Here, the PILT is paid because of the municipal services the land receives. This is evidenced by the negotiation process between the tribe and the county, which allows for flexibility and accounts for the unique service requirements of each piece of tribal land. Although the PILT is not a direct reimbursement to the municipality for services received— such as receiving a bill for a service like a forest fire on the land—it is preemptive and is intended to cover costs that are likely to arise. Under the broad interpretation, we find that the PILT is related to the services received on the land. Thus, the third factor supports finding that the PILT is not a tax. Consequently, the three factors support a finding that the PILT is not a tax. Instead, the purpose of the PILT is to compensate the local government for services provided to the land, as evidenced by the negotiation process between the tribe and the county to determine the amount of the PILT.
¶26 We also note that practically speaking, the PILT is simply not a tax because of the legislature’s own language and construction of the PILT. If it were a tax, then the legislature would not provide a tax exemption. A PILT by its very nature is a payment in lieu of a tax. Its very reason for being is an understanding that while certain property is tax exempt, it still creates a burden that justifies the property owner’s payment of some funds to cover that burden.
It is the legislature’s specific public policy objective to create jobs and improve the economic health of tribal communities. It is the legislature’s intent to exempt property used by federally recognized Indian tribes for economic development purposes, in order to achieve these policy objectives.
Laws of 2014, ch. 207, § 1(2). The legislature intended to bolster tribal communities by allowing more tribal property to receive the benefit of exemption. The PILT, as explained above, is used to provide some compensation for the burden the increase in tax exempt land might place on cities. The PILT was simply not intended to be a tax. If it were, then the legislature would not have provided for an exemption and a PILT simultaneously. Consequently, we hold that the PILT is not a tax. Since it is not a tax, it is not subject to article VII’s tax requirements and our inquiry ends. Accordingly, we reverse the trial court’s decision to strike down ESHB 1287 as unconstitutional.
CONCLUSION
¶28 We hold that the PILT is not a tax because payment is tied to compensating the municipality for public services the land might require, in lieu of paying a property tax or leasehold excise tax. Since the PILT is not a tax, the tax requirements of article VII do not apply to it. Accordingly, we reverse.
The city made other claims relating to the Public Records Act (ch. 42.56 RCW), which are still pending before the King County Superior Court. This court’s commissioner stayed the superior court’s decision pending the resolution of this appeal.
Although the department references justiciability in its briefing to this court, it does not appear to raise it as a separate issue and instead focuses on standing only. Thus, we focus on the standing challenge.
Concurrence Opinion
(concurring in result)
¶29 I agree with the majority that the city of Snoqualmie (City) has standing to
¶30 I take issue with the majority’s analysis of the third Covell
¶31 Both the PILT and the property tax compensate the government for governmental services. See, e.g., RCW 82-.29A.010(1)(a) (recognizing that certain properties “receive substantial benefits from governmental services provided by units of government” and requiring a leasehold excise tax as a result); Wash. State Dep’t of Revenue, Homeowner’s Guide to Property Tax 1 (2016) (“[The property tax] continues to be the most important revenue source for public schools, fire protection, libraries, and parks and recreation.”),
¶32 It is true that we do not require that “the charge be individualized as to the actual benefit received or burden imposed by the payer” to characterize the charge as a fee versus a tax. Dean v. Lehman, 143 Wn.2d 12, 28, 18 P.3d 523 (2001). However, there still must be a direct relationship between the fee charged, and the services received and the burden produced by the fee payer. Id. In the present case, even if a tribe fails to pay the PILT, the tribal property will still receive governmental services. This is likewise the case for individuals who fail to pay their property taxes; such individuals still receive the benefit of government services. Therefore, there is precisely the same relationship between the PILT and the governmental services received as there is between property taxes paid and the services those taxes go to provide.
¶33 This scenario is different from a true fee scheme. For example, in a hypothetical water district, a price is calculated, similar to the PILT, according to the estimated burden an individual may create by drawing water from the district. See, e.g., RCW 57.08.005(11). Yet, we do not label the water district charge a “fee” merely because the charge is based on a practical estimate of what burden on the district an individual may cause. Instead, we call the water district charge a fee because there is a direct relationship between the charges an individual pays and the service received from the water district: water. If an individual stops paying water district fees, the water district no longer provides the service; the district shuts off access to the
¶34 In the present case, there is no direct relationship between the “actual benefit received or burden imposed” for the PILT to be classified as not a tax. Since the tribal property receives governmental services regardless of the PILT, as is the case with property tax, and since the only discernable difference between the PILT and the property tax is the name and amount charged, I would classify it as a tax rather than a fee.
¶35 Furthermore, I do not find persuasive the majority’s reasoning that “the PILT is simply not a tax because of the legislature’s own language and construction of the PILT.” Majority at 302. Courts have never been persuaded on a constitutional question regarding the propriety of taxation merely by the legislature’s labeling. See, e.g., Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 564, 132 S. Ct. 2566, 183 L. Ed. 2d 450 (2012) (noting that a governmental charge’s constitutionality “was not controlled by Congress’s choice of label”); United States v. Sotelo, 436 U.S. 268, 275, 98 S. Ct. 1795, 56 L. Ed. 2d 275 (1978) (“That the funds due are referred to as a ‘penalty’ . . . does not alter their essential character as taxes.” (quoting 26 U.S.C. § 6672(a))); Nelson v. Sears, Roebuck & Co., 312 U.S. 359, 363, 61 S. Ct. 586, 85 L. Ed. 888 (1941) (“In passing on the constitutionality of a tax law ‘we are concerned only with its practical operation, not its definition or the precise form of descriptive words which may be applied to it.’ ” (quoting Lawrence v. State Tax Comm’n, 286 U.S. 276, 280, 52 S. Ct. 556, 76 L. Ed. 1102 (1932))); Covell, 127 Wn.2d at 886 (“[T]he characterization of charges by the governmental entity imposing them is not dispositive. Rather, the characterization of the fees turns on a determination of the primary purpose of the fees as derived from the language of the authorizing and implementing legislation.”).
[A]n assessment is a valid excise tax if (1) the obligation to pay an excise tax is based upon the voluntary action of the person taxed in performing the act, enjoying the privilege, or engaging in the occupation which is the subject of the excise tax, and (2) the element of absolute and unavoidable demand is lacking.
Arborwood, 151 Wn.2d at 367. We stated the difference between a property tax and excise tax alternatively as follows:
If a tax is imposed on the value of the property, it may be a property tax. If levied upon the privilege of doing business, it is an excise tax. A tax for the beneficial use of property as distinguished from a tax on property itself has long been established law.
High Tide Seafoods v. State, 106 Wn.2d 695, 699-700, 725 P.2d 411 (1986) (citations omitted). In the present case, RCW 82.29A.055(l)(a) imposes a PILT when “[t]he tax exempt property is used exclusively for economic development.” The same property would not be subject to the PILT if not used for commercial purposes. As such, the PILT lacks the element of “absolute and unavoidable demand” of property taxes .Arborwood, 151 Wn.2d at 367. Consequently, the PILT is an excise rather than a property tax. Therefore, the PILT, while certainly a tax, is not subject to the uniformity requirements of article VII, section 1 of the Washington Constitution. See High Tide Seafoods, 106 Wn.2d at 700.
¶37 I concur in the majority’s result only.
Reconsideration denied March 8, 2017.
Covell v. City of Seattle, 127 Wn.2d 874, 905 P.2d 324 (1995).