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April 11, 2023 IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION II ANTIO, LLC; AZUREA I, LLC; BACK No. 57312-1-II BOWL I, LLC; CANDICA, LLC; CERASTES-WTB, LLC; GCG EXCALIBUR, LLC; LINDIA, LLC; OAK HARBOR CAPITAL, LLC; OAK HARBOR CAPITAL II, LLC; OAK HARBOR CAPITAL III, LLC; OAK HARBOR CAPITAL IV, LLC; OAK HARBOR CAPITALVI, LLC; OAK HARBOR CAPITALVII, LLC; OAK HARBOR CAPITAL X, LLC; OAK HARBOR CAPITAL XI, LLC; and VANDA, LLC,
Appellant,
v. PUBLISHED OPINION
WASHINGTON STATE DEPARTMENT OF REVENUE,
Respondent.
MAXA, J. – Antio LLC, Azurea I LLC, Back Bowl I LLC, Candica LLC, Cerastes-WTB
LLC, GCG Excalibur LLC, Lindia LLC, Oak Harbor Capital LLC, Oak Harbor Capital II LLC,
Oak Harbor Capital III LLC, Oak Harbor Capital IV LLC, Oak Harbor Capital VI LLC, Oak
Harbor Capital VII LLC, Oak Harbor Capital X LLC, Oak Harbor Capital XI LLC, and Vanda
LLC (collectively “the LLCs”) appeal the trial court’s grant of summary judgment in favor of the
Department of Revenue (DOR). The LLCs had challenged DOR’s determination that their
investment income did not qualify for a deduction from the measure of business and occupation
(B&O) taxes. For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 57312-1-II
The LLCs are investment funds, and all revenue that the LLCs receive is investment
income. The LLCs paid B&O taxes on that revenue, and subsequently applied to DOR for tax
refunds under RCW 82.04.4281(1)(a). That statute allows a deduction for “[a]mounts derived
from investments” from the measure of B&O taxes. RCW 82.04.4281(1)(a). DOR denied the
refund requests. The LLCs challenged this determination, and the trial court granted summary
judgment in favor of DOR.
The LLCs argue that (1) the trial court erred in concluding that no genuine issues of
material fact existed on summary judgment; and (2) under the plain language of RCW
82.04.4281(1)(a), they are entitled to deduct their investment income from B&O taxes. DOR
argues that the LLCs are not entitled to a refund under O’Leary v. Department of Revenue, 105
Wn.2d 679, 682, 717 P.2d 273 (1986), in which the court held that the term “investments” in
former RCW 82.04.4281 (1980) was limited to investments that were incidental to the main
purpose of the taxpayer’s business.
We hold that (1) no genuine issues of material fact existed on summary judgment because
whether the LLCs are entitled to a deduction depends on the interpretation of RCW 82.04.4281,
which is a question of law; and (2) the LLCs are not entitled to a deduction under RCW
82.04.4281(1)(a) based on the definition of “investment” in O’Leary. Accordingly, we affirm
the trial court’s order granting summary judgment in favor of DOR.
FACTS
Background
The LLCs are investment funds, and they acquire investors through private offerings
under a federal securities act exemption known as a private placement. Investors invest capital
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in the funds via private placements, and the LLCs then take that capital and invest it in debt
instruments like defaulted credit card debt. All revenue that the LLCs receive is investment
income from the debt instruments offered in private placements. The LLCs do not provide any
services.
In December 2019, the LLCs submitted applications to DOR for refunds of various
amounts paid in B&O taxes between January 2015 and December 2018. The LLCs sought a
refund for 100 percent of the B&O taxes they had paid, claiming that all their revenue was
investment income and therefore was subject to the deduction under RCW 82.04.4281(1)(a).
The claimed refunds for all the LLCs totaled $404,361.87.
DOR ultimately denied the refund requests in full because all the revenue that the LLCs
received was investment income. DOR stated that the LLCs did not qualify for the deduction
because 100 percent of their income was derived from investments, and under RCW
82.04.4281(1)(c)1 only investment income that is less than five percent of their gross income
qualified for the deduction.2
Trial Court Ruling
The LLCs filed a tax refund action in superior court under RCW 82.32.180. DOR filed a
summary judgment motion, arguing that the LLCs did not meet the definition of “investments”
1 RCW 82.04.4281(1)(c) states, “Amounts derived from interest on loans between subsidiary entities and a parent entity or between subsidiaries of a common parent entity, but only if the total investment and loan income is less than five percent of gross receipts of the business annually.” 2 DOR also noted that some of the LLCs had taken small business credits during the refund request period that either reduced their tax liability to zero or to an amount that was less than the requested refund. As a result, some of the LLCs either did not actually make any payments or requested refunds for an amount that was more than what they paid.
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as defined in O’Leary. DOR also stated the same reasoning it used in the refund denials – that
the five percent limiting language in RCW 82.04.4281(1)(c) also applied to section (a).
However, DOR specified that the trial court was not required to determine whether the five
percent limitation applied because the LLCs’ claims failed as a matter of law under O’Leary.
In response, the LLCs submitted internal DOR emails regarding the LLCs’ B&O tax
liability. In one email, an auditor referenced RCW 82.04.4281 and stated that amounts derived
from investments are deductible for “issuers,” and that the LLCs were issuers. The auditor
further noted that the “[s]tatute does not require anything else” and that based on the current
information she had it seemed “that the [LLCs] would be eligible for refunds.” Clerk’s Papers
(CP) at 260. In a later email, a senior excise tax examiner noted that they were “confused about
the taxability” and that the four requests being reviewed “appear[ed] to qualify for the deduction
they quoted.” CP at 237. The LLCs argued that DOR’s argument regarding the five percent
limitation was inconsistent with this internal position, which did not mention any limits.
In their opposition brief, the LLCs also quoted an interpretation of investment funds from
DOR’s website:
A trader not meeting the characteristics of a broker, dealer, or broker-dealer is not a security business and would be eligible for the B&O tax deduction for amounts derived from investments. Additionally, most mutual funds, private investment funds, family trusts, and other collective investment vehicles are not a securities business, and are allowed the B&O tax deduction for amounts derived from investments.
CP at 160. The LLCs argued that because they are private investment funds, they fall within the
language of DOR’s published position, and any contradicting contention would create a genuine
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issue of material fact. In addition, the LLCs stated that DOR’s published interpretation
contained no reference to a five percent limitation or to O’Leary.
The trial court granted DOR’s summary judgment motion, declining to look at DOR’s
website and finding that no genuine issue of material fact existed. The LLCs filed a motion for
reconsideration of the summary judgment ruling, which the court denied.
The LLCs appeal the trial court’s grant of summary judgment in favor of DOR.
ANALYSIS
A. LEGAL PRINCIPLES
1. Summary Judgment Standard
For a summary judgment motion, we view the evidence and apply all reasonable
inferences in the light most favorable to the nonmoving party. Lavington v. Hillier, 22 Wn. App.
2d 134, 143, 510 P.3d 373, review denied, 200 Wn.2d 1010 (2022). Summary judgment is
appropriate if there are no genuine issues of material fact and the moving party is entitled to
judgment as a matter of law. Id.; CR 56(c). There is a genuine issue of material fact only if
reasonable minds could disagree on the conclusion of a factual issue. Lavington, 22 Wn. App.
2d at 143. However, if the material facts are not in dispute, summary judgment can be
determined as a matter of law. Protective Admin. Servs., Inc. v. Dep’t of Revenue, 24 Wn. App.
2d 319, 325, 519 P.3d 953 (2022).
2. B&O Tax and Deductions
RCW 82.04.220(1)3 states that entities must pay a B&O tax for the privilege of doing
business in Washington. The tax is measured by the application of rates against certain types of
3 RCW 82.04.220 has been amended since the events of this case transpired. Because these amendments do not impact the statutory language relied on by this court, we refer to the current statute.
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income, including “gross income of the business.” RCW 82.04.220(1). “Gross income of the
business” means “value proceeding or accruing by reason of the transaction of the business
engaged in.” RCW 82.04.080(1). The term specifically includes interest. RCW 82.04.080(1).
However, chapter 82.04 RCW contains a number of exemptions and deductions
regarding B&O taxes. RCW 82.04.4281 provides,
(1) In computing tax there may be deducted from the measure of tax: (a) Amounts derived from investments; (b) Amounts derived as dividends or distributions from the capital account by a parent from its subsidiary entities; and (c) Amounts derived from interest on loans between subsidiary entities and a parent entity or between subsidiaries of a common parent entity, but only if the total investment and loan income is less than five percent of gross receipts of the business annually.
(Emphasis added.)
Whether a trial court correctly determined that a taxpayer was not entitled to a tax refund
is a question of law that we review de novo. Protective, 24 Wn.2d at 325. A taxpayer must
prove the incorrect amount of tax paid along with the correct amount of tax in order to establish
that they are entitled to a refund. RCW 82.32.180.
3. Statutory Interpretation
A determination of whether the LLCs’ investment income was deductible from their
B&O taxes requires interpretation of RCW 82.04.4281(1). Interpretation of a statute is a
question of law that we review de novo. Protective, 24 Wn.2d at 325. When interpreting a
statute, our goal is to determine and give effect to the legislature’s intent. Id. at 330. The
language and context of the statute, related statutes, and the statutory scheme as a whole are
considered. Id.
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Tax exemptions are narrowly construed. Green Collar Club v. Dept. of Revenue, 3 Wn.
App. 2d 82, 94, 413 P.3d 1083 (2018). Although an ambiguous tax exemption is construed fairly
and in the ordinary meaning of its language, it is strictly construed against the taxpayer. Id.
In addition, we are bound by the Supreme Court’s interpretation of a statute. Yuchasz v.
Dep’t of Labor & Indus., 183 Wn. App. 879, 888, 335 P.3d 998 (2014).
B. GENUINE ISSUES OF MATERIAL FACT
The LLCs argue that the trial court erred in concluding that there were no genuine issues
of material fact and that the trial court failed to consider the facts in a light most favorable to
them as the nonmoving parties. We disagree.
The question here is whether the investment deduction stated in RCW 82.04.4281(1)(a)
applies to the LLCs. The key material fact regarding that question is undisputed: 100 percent of
the LLCs’ income was investment income. We must decide as a matter of law whether DOR’s
position is correct that RCW 82.04.4281(1)(a) does not apply when investment is not incidental
to the main purpose of the taxpayer’s business or when investment income is more than five
percent of the taxpayer’s gross income.
The LLCs argue that a genuine issue of material fact exists because DOR’s interpretation
of investment funds and the application of the investment deduction on its website and in its
internal email communications discussing the LLCs’ eligibility for refunds contradict DOR’s
position that the LLCs are not entitled to a refund. But statutory interpretation is a question of
law, not a question of fact. See Protective, 24 Wn.2d at 325. We give effect to the legislature’s
intent, not the interpretation of a few DOR employees or on DOR’s website.
Therefore, we hold that no genuine issues of material fact existed on summary judgment.
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C. APPLICATION OF RCW 82.04.4281(1)(a)
The LLCs argue that the trial court erred in determining that they were not entitled to
deduct their investment income under RCW 82.04.4281(1)(a). We disagree.
1. O’Leary Interpretation of “Investments”
RCW 82.04.4281(1)(a) provides a B&O tax deduction for “[a]mounts derived from
investments.” But the statute does not define “investments.” The question here is how that term
should be interpreted.
The plain language of RCW 82.04.4281(1)(a) seems to support the LLCs’ position. All
of the LLCs’ income is derived from investments. This subsection does not state or even suggest
that the deduction is unavailable if the main purpose of taxpayer’s business is investments.
There are no limitations at all to application of the deduction in the statutory language.
But the Supreme Court in O’Leary provided a definition of “investments” as used in
former RCW 82.04.4281.4 The court stated, “Whether an investment is ‘incidental’ to the main
purpose of a business is an appropriate means of distinguishing those investments whose income
should be exempted from the B&O tax [in] RCW 82.04.4281.” O’Leary, 105 Wn.2d at 682.
In O’Leary, the taxpayer received interest payments pursuant to real estate contracts
involving the sale of apartment complexes. Id. at 680. The taxpayer argued that the real estate
contracts constituted “investments” and therefore the interest was deductible under former RCW
82.04.4281. Id. After stating its interpretation of “investments,” the court noted that the real
estate contracts “were neither incidental investments nor were they made from surplus income of
4 When O’Leary was decided, former RCW 82.04.4281 stated as follows in part: “In computing tax there may be deducted from the measure of tax amounts derived by persons, other than those engaging in banking, loan, security, or other financial businesses, from investments or the use of money as such.” (Emphasis added.)
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the partnership.” Id. at 682. The court concluded that the sale of the apartments was not an
investment and therefore that the taxpayer was not entitled to a deduction under former RCW
82.04.4281. Id. at 682-83.
This court followed O’Leary in Browning v. Department of Revenue, 47 Wn. App. 55,
733 P.2d 594 (1987). In that case, the taxpayer claimed a deduction under former RCW
82.04.4281 for interest received on real estate contracts for the sale of rental houses. Id. at 56.
The court quoted the passage from O’Leary stating that an investment must be incidental to the
main purpose of the taxpayer’s business to qualify for the investment income deduction. Id. at
58. The court affirmed the trial court’s denial of the deduction, stating that “the evidence here
does not establish that the real estate contracts were entered into with surplus monies or that they
were incidental investments.” Id.
Here, the LLCs’ investment in debt instruments is not incidental to the main purpose of
their businesses. Instead, investment is the only purpose of their businesses – 100 percent of the
LLCs’ income was investment income. Therefore, based on the definition of “investments” in
O’Leary, the LLCs are not entitled to a deduction under RCW 82.04.4281(1)(a).
2. Continued Vitality of O’Leary
The LLCs argue that O’Leary has no application to this case because it was nullified by
amendments to RCW 82.04.4281 that occurred after O’Leary was decided. The LLCs claim that
these amendments affected a change in the meaning of the term “investments” as stated in
O’Leary. We disagree.
When O’Leary was decided in 1986, former RCW 82.04.4281 stated that “there may be
deducted from the measure of tax amounts derived by persons, other than those engaging in
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banking, loan, security, or other financial businesses, from investments or the use of money as
such, and also amounts derived as dividends by a parent from its subsidiary corporations.”
In 2000, the Supreme Court held in Simpson Investment Company v. Department of
Revenue that a holding corporation for multiple subsidiaries was a “financial business” for
purposes of former RCW 82.04.4281. 141 Wn.2d 139, 164, 3 P.3d 741 (2000). A year later, the
legislature adopted a finding regarding RCW 82.04.4281:
The legislature finds that the application of the business and occupation tax deduction provided in RCW 82.04.4281 for investment income of persons other than those engaging in banking, loan, security, or other financial businesses has been the subject of disagreement between taxpayers and the state. Decisions of the supreme court have provided some broad guidelines and principles for interpretation of the deduction provided in RCW 82.04.4281, but these decisions have not provided the certainty and clarity that is desired by taxpayers and the state. Therefore, it is the intent of the legislature to delay change in the manner or extent of taxation of the investment income until definitions or standards can be developed and enacted by the legislature.
LAWS OF 2001, ch. 320, §18. The legislature adopted a new section that limited DOR’s ability to
classify an entity as a “financial business,” LAWS OF 2001, ch. 320, §19, but that section was
vetoed. LAWS Of 2001, ch. 320, veto statement at 1625-26.
In 2002, the legislature amended RCW 82.04.4281, changing the language to the current
version. LAWS OF 2002, ch. 150, § 2. The legislature adopted the following finding:
The legislature finds that the application of the business and occupation tax deductions provided in RCW 82.04.4281 for investment income of persons deemed to be “other financial businesses” has been the subject of uncertainty, and therefore, disagreement and litigation between taxpayers and the state. The legislature further finds that the decision of the state supreme court in Simpson Investment Co. v. Department of Revenue could lead to a restrictive, narrow interpretation of the deductibility of investment income for business and occupation tax purposes. As a result, the legislature directed the department of revenue to work with affected businesses to develop a revision of the statute that would provide certainty and stability for taxpayers and the state. The legislature intends, by adopting this recommended revision of the statute, to provide a positive environment for capital investment in this state, while continuing to treat similarly situated taxpayers fairly.
LAWS OF 2002, ch. 150, § 1.
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Viewed in context, the findings in both 2001 and 2002 primarily related to the meaning
of “other financial businesses” in former RCW 82.04.4281. The legislature was reacting to the
Supreme Court’s holding in Simpson. And in fact the provision in former RCW 82.04.4281
precluding “other financial businesses” from claiming the deduction was removed in the 2002
amendments. LAWS OF 2002, ch. 150, § 2.
Conversely, the legislature did not react at all when O’Leary was decided in 1986, 15
years earlier. The 2001 and 2002 findings did not mention O’Leary and did not address the
meaning of the term “investments.” And in fact the language of former RCW 82.04.4281
regarding the investment deduction remained the same after other language was deleted:
(1) In computing tax there may be deducted from the measure of tax: (a) Amounts derived by persons, other than those engaging in banking, loan, security, or other financial businesses, from investments or the use of money as such, and also.
LAWS OF 2002, ch. 150, § 2.
Finally, the 2002 amendments to RCW 82.04.4281 added definitions of several terms.
LAWS OF 2002, ch. 150, § 2. But the legislature did not add a definition of “investment.” This
suggests that the legislature did not disagree with the O’Leary definition.
There is no basis for the LLCs’ argument that the legislature’s 2001 and 2002 findings
and the 2002 amendment of RCW 82.04.4281 somehow superseded the definition of
“investment” in O’Leary. Therefore, we conclude that O’Leary remains good law and
establishes that the LLCs are not entitled to a deduction under RCW 82.04.4281(1)(a).
3. Effect of DOR Website Interpretation
The LLCs imply that an excerpt from DOR’s website should control over the
interpretation of “investments” in O’Leary. We disagree.
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The LLCs suggest that we adopt DOR’s interpretation of investment funds and the
application of the investment deduction on its website. DOR asserts that the website excerpt on
which the LLCs rely is addressing a completely different issue than the meaning of
“investments” under RCW 82.04.4281(1)(a).
However, the LLCs provide no authority for the proposition that DOR guidance on its
website somehow controls over the statutory language and a Supreme Court decision interpreting
that language. In fact, the cases state the opposite.
In Bravern Residential, II, LLC v. Department of Revenue, this court rejected an
argument that DOR’s construction guidelines could be used to avoid taxes for construction
activities. 183 Wn. App. 769, 780, 334 P.3d 1182 (2014). The court emphasized that documents
like construction guidelines could not contradict the plain language of any applicable regulation.
Id.
In Dynamic Resources, Inc. v. Department of Revenue, the taxpayer relied on a guide that
DOR had published regarding taxes in a certain industry. 21 Wn. App. 2d 814, 823, 508 P.3d
680 (2022). The court stated,
The Guide, however, is simply that—a guide. . . . Despite inconsistencies between the Guide and RCW 82.04.050(2)(b), the statute controls. [The taxpayer] cannot avoid its tax obligations based on informal tax guidance, and its information does not replace or substitute Washington rules or laws.
We conclude that the information on DOR’s website is immaterial to the resolution of
this case.
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CONCLUSION
We affirm the trial court’s order granting summary judgment in favor of DOR.
MAXA, J.
We concur:
CRUSER, A.C.J.
VELJACIC, J.