FILED SEPTEMBER 26, 2023 In the Office of the Clerk of Court WA State Court of Appeals, Division III
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION THREE
DISH NETWORK, LLC, a Colorado ) No. 39496-4-III limited liability company, ) ) Respondent / Cross Appellant, ) ) v. ) UNPUBLISHED OPINION ) STATE OF WASHINGTON, ) DEPARTMENT OF REVENUE, ) ) Appellant / Cross Respondent. )
PENNELL, J. — This case involves cross appeals of a tax refund decision. The trial
court decided DISH Network, LLC (DISH) was entitled to a refund of penalties and
a partial refund of interest after the Department of Revenue misstated DISH’s tax
obligation calculations through an inaccurate audit worksheet. Dissatisfied with this
result, DISH argues it should get a full refund. Also dissatisfied, the Department claims
DISH is not entitled to any refund. Both sides take their positions too far. While we do
not agree with all of the trial court’s analysis, we affirm the court’s ultimate disposition. No. 39496-4-III DISH Network, LLC v. Dep’t of Revenue
FACTUAL AND PROCEDURAL BACKGROUND
DISH 1 is a Colorado-based nationwide provider of direct-to-home satellite
television service. DISH incurs the majority of its operation costs in states other than
Washington. One of DISH’s largest expenses is the cost associated with buying television
programming from content providers (programming costs), which DISH then delivers to
viewers through satellite dishes.
Washington imposes a business and occupation (B&O) tax on “every person that
has a substantial nexus with this state . . . for the act or privilege of engaging in business
activities.” RCW 82.04.220(1). The tax is levied against the taxpayer’s gross sales. Id.
For a taxpayer like DISH, whose sales are taxable in multiple states, the tax applies only
to income that is apportioned to Washington. RCW 82.04.460(1). Apportionment of
income is based on the portion of income derived from services rendered within the state.
Id. During the time relevant to the parties’ suit, Washington’s B&O statute specified that
apportionment of income should be calculated using the “cost apportionment” method
if it could not accurately be calculated by what is known as the “separate accounting”
1 DISH was previously called Echostar Satellite, LLC (Echostar). The company is identified as DISH starting with its May 2008 Washington excise tax return. DISH and Echostar are the same entity, and the taxpayer identification number remained the same after the name change. For simplicity and readability, we refer to the company as DISH even though in the record on review it is also identified as Echostar.
2 No. 39496-4-III DISH Network, LLC v. Dep’t of Revenue
method. Former RCW 82.04.460(1) (2004). 2
In the late 1990s and early 2000s, the Department conducted audits of DISH that
addressed questions regarding whether DISH owed B&O taxes and, if so, what method
should be used for calculating income. The audits resulted in written administrative
rulings explaining that DISH was responsible for paying B&O taxes and that it must use
the cost apportionment method in calculating its taxable income.
Effective January 1, 2006, the Department made extensive amendments to
former WAC 458-20-194 (1983) (also known as Rule 194) to provide more detailed
and specific guidance on calculating tax by the cost apportionment method. See Wash. St.
Reg. 05-24-054. Rule 194 would now explain that cost apportionment was the ratio of the
cost of doing business in Washington divided by a company’s worldwide business costs.
WAC 458-20-194(4)(a)(ii).
In February 2007, the Department completed an audit of DISH’s excise tax returns
for the period running from January 1 through June 30, 2004. The audit resulted in an
assessment of additional tax. As explanation, the Department asserted DISH should have
2 “‘Separate accounting’ refers to a method of accounting that segregates and identifies sources or activities that account for the generation of income within the state of Washington. Separate accounting is distinct from cost apportionment, which assigns a formulary portion of total worldwide income to Washington.” WAC 458-20-194(3)(a).
3 No. 39496-4-III DISH Network, LLC v. Dep’t of Revenue
been calculating its B&O tax according to the separate accounting method, not the cost
apportionment formula.
DISH filed an administrative appeal, arguing that it remained entitled to use the
cost apportionment method. The Department’s Appeals Division agreed. See Clerk’s
Papers (CP) at 393-406 (Pl.’s Ex. 9) The Appeals Division determined DISH was entitled
to use the cost apportionment method as set forth in previous administrative decisions
and instructions. The May 2008 decision also stated DISH should utilize Rule 194, as
amended in 2006, to calculate future taxes. The decision included a statement that
DISH would receive further information from the Department’s Audit Division.
A few months later, in October 2008, the Department followed up on the Appeals
Division determination with an amended audit report for the tax period January 1 through
June 30, 2004. Attached to the amended audit report was Workpaper A, which showed
the Department’s line-by-line cost apportionment calculations. The audit report instructed
DISH to “[r]efer to apportionment Workpaper A for the cost apportionment detail.”
CP at 411 (Pl.’s Ex. 10 at 4). Workpaper A included an itemized list of “Total
Washington Expenses” to be included in the cost apportionment formula. Id. at 418
(Pl.’s Ex. 10 at 11). DISH’s programming costs were not included as expenses in the
4 No. 39496-4-III DISH Network, LLC v. Dep’t of Revenue
Workpaper A itemization. The amended audit report included a comment directing DISH
to contact the auditor or audit manager with any questions.
In July 2011, the Department conducted an audit of DISH’s excise tax returns
covering the four-year period of January 1, 2006 through December 31, 2009. The audit
concluded DISH failed to accurately report its B&O income by excluding its
programming costs from the apportionment formula. The audit claimed DISH owed
$9,325,106 in unpaid B&O taxes. The Department determined the total amount due,
which included penalties and interest, to be $11,959,168.
DISH again filed an administrative appeal. This time DISH lost. In its August
2012 written decision, the Appeals Division explained DISH should have been “using
the cost apportionment method required by the version of Rule 194 amended effective
2006.” Id. at 291 (Pl.’s Ex. 5 at 5). Under this method, programming costs should have
been included in the numerator of the cost ratio. The failure to include programming costs
in the calculation resulted in a smaller cost ratio and significant undercalculation of excise
tax liability. The Appeals Division upheld the Department’s assessment of outstanding
taxes, but modified a portion of the penalty. The revised total amount assessed to DISH
was $11,838,527.
5 No. 39496-4-III DISH Network, LLC v. Dep’t of Revenue
DISH paid the revised assessment under protest and then filed an action in
Thurston County Superior Court seeking a full refund. DISH claimed it was not liable
for unpaid taxes, and associated penalties and interest, under theories of collateral
estoppel and waiver.
The matter proceeded to a two-day bench trial. DISH’s sole witness was its senior
tax manager, Marin Noli. Mr. Noli testified that he was not involved in preparing the
2006 through 2009 tax returns, but he was aware of DISH’s general practices. According
to Mr. Noli, the calculations in the Department’s October 2008 amended audit report
and Workpaper A were consistent with DISH’s existing accounting practices in that it
excluded programming costs from the cost apportionment ratio. Mr. Noli explained that
he interpreted this consistency to mean that the Department had “accepted [DISH’s]
calculation.” Rep. of Proc. (RP) (May 17, 2021) at 61. Mr. Noli testified that if the
Department were to propose a tax calculation that differed from DISH’s approach, then
DISH would respond by either appealing the issue or amending its returns. Any amended
returns could be completed “within the month.” Id. at 37-38.
The trial court granted DISH relief on the “alternative and separate grounds” of
estoppel and statutory waiver. CP at 1054. The court’s findings were consistent with the
above summary and also included the following:
6 No. 39496-4-III DISH Network, LLC v. Dep’t of Revenue
• “[T]he Department and its Audit Division knew of DISH’s out-of-state
programming costs.” Id. at 1041.
• “The 2008 amended assessment letter told DISH how to calculate its B&O tax
liability. . . . The Audit Division’s cost apportionment calculation, however, did
not include any of DISH’s programming costs.” Id. at 1042.
• “DISH calculated its tax for the entire disputed audit period in the same way that
the auditor did—and just as the auditor told DISH to do—by referring to the
workpapers.” Id.
• “The Department’s 2012 decision was contrary to and inconsistent with its 2008
determination and the specific written instructions provided to DISH by the Audit
Division in the 2008 amended assessment letter. Specifically, The Department’s
conclusion in the instant audit that DISH should have included out-of-state
programming costs in its apportionment calculation was inconsistent with the
Department’s prior statement.” Id. at 1042-43.
• “DISH relied on the prior statement as confirmation of the correctness of DISH’s
apportionment calculation, foregoing the opportunity to amend its prior returns and
to adjust its returns going forward—opportunities that cost DISH millions in
7 No. 39496-4-III DISH Network, LLC v. Dep’t of Revenue
penalties, interest, and the difficulty of recovering the underpaid tax through its
business operations.” Id. at 1043.
• “[T]he 2008 amended assessment letter constituted erroneous written information
provided to the taxpayer, upon which the taxpayer relied in calculating its tax for
periods following October 2008 and in foregoing its ability to file amended returns
for prior tax periods. The issuance of such erroneous written information
constitutes a circumstance beyond the control of the taxpayer.” Id. at 1045.
The trial court initially did not specify a refund amount and instead instructed the
parties to meet and confer to propose a final judgment. The parties were unable to reach
agreement. DISH claimed it was entitled to a full refund of all taxes, penalties and
interest. The Department claimed the trial court’s findings warranted only a refund of
penalties.
The court’s ultimate ruling struck a middle ground, designed to “put the parties in
a position they would have been if the tax had been properly calculated in the first place.”
RP (Sep. 17, 2021) at 15. The court determined that its estoppel ruling did not bar the
Department from collecting approximately $9 million in B&O back taxes from DISH.
The court also ruled the Department could keep payments on interest accrued before
2009, since any nonpayment of interest during that period could not be attributed to
8 No. 39496-4-III DISH Network, LLC v. Dep’t of Revenue
misinformation supplied in Workpaper A. However, the court determined DISH was
entitled to a partial refund of interest, reasoning that had the Department not provided
inaccurate information in the October 2008 amended audit report Workpaper A, DISH
would have amended its tax returns by January 1, 2009. The court also ruled DISH was
entitled to a refund of the Department’s penalties. The final written judgment specified
DISH was entitled to a refund in the amount of $1,700,198. 3
The Department timely appealed the trial court’s order granting DISH’s demand
for relief and the subsequent judgment. DISH cross appealed the court’s failure to award
a full tax refund. A Division Three panel considered this appeal with oral argument after
receiving an administrative transfer of the case from Division Two.
ANALYSIS
The trial court’s refund decision rested on alternate theories of equitable estoppel
and statutory waiver. As explained below, we disagree with the trial court’s conclusion
that DISH established equitable estoppel. Nevertheless, we agree with the trial court’s
analysis of statutory waiver. The end result is that the trial court’s judgment is affirmed.
3 The court’s judgment includes a table detailing the penalties and interest that were subject to refund, broken down by tax year. See CP at 1087.
9 No. 39496-4-III DISH Network, LLC v. Dep’t of Revenue
Equitable estoppel
The parties both appeal from the trial court’s ruling on equitable estoppel.
The Department contends DISH did not prove all the elements of equitable estoppel.
Thus, the trial court should not have granted relief on this basis. DISH counters that not
only was equitable estoppel justified, it should have resulted in a full refund of all back
taxes, not just a refund of penalties and interest. We agree with the Department that DISH
did not establish all elements of equitable estoppel. As a result, DISH’s cross appeal must
fail.
Equitable estoppel prevents a party from taking a position inconsistent with a
previous one where inequitable consequences would result to a party who has justifiably
and in good faith relied on the earlier statement. Kramarevcky v. Dep’t of Soc. & Health
Servs., 122 Wn.2d 738, 743, 863 P.2d 535 (1993); Wilson v. Westinghouse Elec.
Corp., 85 Wn.2d 78, 81, 530 P.2d 298 (1975). When equitable estoppel is asserted against
the government, the party asserting estoppel must establish five elements by clear, cogent,
and convincing evidence: (1) a statement, admission, or act by the party to be estopped,
which is inconsistent with its later claims, (2) the asserting party acted in reliance upon
the statement or action, (3) injury would result to the asserting party if the other party
were allowed to repudiate its prior statement or action, (4) estoppel is “necessary to
10 No. 39496-4-III DISH Network, LLC v. Dep’t of Revenue
prevent a manifest injustice,” and (5) estoppel will not impair governmental functions.
Kramarevcky, 122 Wn.2d at 743.
DISH’s theory of equitable estoppel was that the Department’s 2008 amended
audit report and workpaper amounted to a statement that out-of-state programming costs
need not be included in calculating its B&O tax under the cost apportionment method.
DISH argues it effectively relied on the 2008 report and workpaper when it continued its
practice of excluding out-of-state programming costs from its tax calculations. Given
this reliance, DISH argued the Department should be estopped from claiming DISH
miscalculated its taxes during the 2006 through 2009 audit period. Because allowing the
Department to change positions would result in DISH being obliged to pay significant
back taxes and penalties, DISH contends the Department should be estopped from taking
the position that DISH failed to pay its taxes during the 2006 through 2009 period.
The parties disagree as to the standard of review governing the sufficiency
analysis. DISH claims the traditional substantial evidence test applies. Nordstrom Credit,
Inc. v. Dep’t of Revenue, 120 Wn.2d 935, 939-40, 845 P.2d 1331 (1993). According to
the Department, a heightened standard applies, which considers DISH’s burden of
proving estoppel by clear, cogent, and convincing evidence. See In re Marriage of
11 No. 39496-4-III DISH Network, LLC v. Dep’t of Revenue
Tupper, 15 Wn. App. 2d 796, 812-13, 478 P.3d 1132 (2020). We need not resolve this
dispute. Regardless of which standard applies, DISH is not entitled to collateral estoppel.
The fatal flaw in DISH’s collateral estoppel claim is the lack of evidence in
support of the second element. This element requires more than passive reliance. Instead,
the party asserting estoppel must show that it “changed [its] position in reliance upon the
representations or conduct of the [Department].” Sorenson v. Pyeatt, 158 Wn.2d 523, 540,
146 P.3d 1172 (2006) (emphasis added) (citing 31 C.J.S. Estoppel and Waiver §§ 59, 78
(1996) and Elmonte Inv. Co. v. Schafer Bros. Logging Co., 192 Wash. 1, 72 P.2d 311
(1937)).
The undisputed evidence shows DISH did not change its conduct in response to
the 2008 amended audit report and Workpaper A. The cost apportionment calculations
itemized in Workpaper A were consistent with DISH’s past practices. In fact, Mr. Noli
testified he interpreted Workpaper A to mean that the Department had accepted DISH’s
method of calculation. Given the consistency, DISH did not change its tax calculations.
While Mr. Noli testified that DISH would have taken some sort of corrective action had
Workpaper A disclosed some flaw in DISH’s existing practices, this is not what
happened. Estoppel does not apply in this circumstance.
12 No. 39496-4-III DISH Network, LLC v. Dep’t of Revenue
Waiver of penalties and interest
The fact that DISH has not established collateral estoppel does not settle all of its
arguments against the Department. DISH also claims that, regardless of estoppel, the
Department was prohibited from imposing penalties and interest on DISH’s tax
deficiency pursuant to former RCW 82.32.105(1) and (3)(a) (1998). The trial court agreed
with DISH as to these statutory provisions, and provided relief from penalties and interest
as an alternate statutory remedy. We affirm this ruling.
We review a trial court’s interpretation of a statute de novo. Ruvalcaba v. Kwang
Ho Baek, 175 Wn.2d 1, 6, 282 P.3d 1083 (2012). If we agree with the trial court’s
interpretation, we give broad deference to the court’s factual findings pursuant to the
terms of the statute. See In re Pennington, 142 Wn.2d 592, 602-603, 14 P.3d 764 (2000).
Under former RCW 82.32.105(1), the Department was required to waive or
cancel penalties if it found a business had not paid a tax by the due date because of
“circumstances beyond the control of the taxpayer.” Circumstances beyond the control
of the taxpayer include “[e]rroneous written information given to the taxpayer by a
[D]epartment officer or employee.” Former WAC 458-20-228(9)(a)(ii)(B) (2010).
Similarly, former RCW 82.32.105(3)(a) required waiver or cancellation of interest if a
taxpayer’s failure to make timely payment “was the direct result of written instructions
13 No. 39496-4-III DISH Network, LLC v. Dep’t of Revenue
given the taxpayer by the [D]epartment.”
The trial court found the 2008 amended audit and Worksheet A constituted
erroneous written information that caused DISH to persist in its practice of excluding
out-of-state programming costs in calculating its taxes “for periods following October
2008.” CP at 1045. As a result, the trial court concluded the Department was required to
waive penalties and interest pursuant to former RCW 82.32.105. 4 Substantial evidence
supports the trial court’s findings and we agree with the court’s legal conclusions.
The Department challenges the trial court’s findings and conclusions, pointing out
that even if the instructions in the October 2008 amended audit report and Workpaper A
were erroneous, that did not apply to the 2006 through 2009 audit period. As pointed out
in the Appeals Division’s May 2008 Determination, DISH should have followed Rule
194’s guidance on calculating cost apportionment for the tax periods starting in 2006.
We disagree with the Department that Rule 194 contains sufficient guidance to
discount the 2008 amended report and Workpaper A. Rule 194 did not purport to change
4 The trial court’s order does not differentiate between penalties under former RCW 82.32.105(1) and interest under former RCW 82.32.105(3)(a). Instead, the trial court generally referred to RCW 82.32.105. The trial court’s failure to distinguish subsections (1) and (3)(a) of the statute was not error given that the “circumstances beyond the control” of DISH was the “[e]rroneous written information” issued by the Department in 2008. Former WAC 458-20-228(9)(a)(ii)(B).
14 No. 39496-4-III DISH Network, LLC v. Dep’t of Revenue
existing law, it just provided guidance on how to calculate cost apportionment. The
guidance set forth in Rule 194 was not specific to DISH’s unique business model. It also
allowed that certain kinds of costs could be excluded from the apportionment formula,
so long as there was Department approval. See WAC 458-20-194(4)(i). Given the 2008
report and worksheet postdated the extensive changes to Rule 194, it was reasonable
for DISH to assume that the calculations set forth in the worksheet constituted the
Department’s understanding of cost apportionment, consistent with the January 1, 2006,
amendments to Rule 194.
The Department also challenges the trial court’s decision to waive penalties and a
portion of the interest given DISH did not receive any erroneous information from the
Department until October 2008, which was midway through the 2006 through 2009 audit
period. Again, we disagree with this criticism. Mr. Noli’s undisputed trial testimony was
that had the amended report and workpaper included instructions to include programming
costs in the tax calculation, DISH could have amended its 2006 through 2008 tax returns
to pay the adjusted tax, thus leaving no tax unpaid and avoiding the underpayment penalty
and interest. It is beside the point whether under this counter-factual scenario DISH
actually would have submitted timely amendments instead of challenging the
Department’s calculations. Because the Department provided in 2008 what was only
15 No. 39496-4-III DISH Network, LLC v. Dep’t of Revenue
later discovered to be erroneous information, DISH lost the opportunity to timely amend
the prior tax returns. This was a “circumstance[] beyond the control” of DISH, mandating
a waiver of penalties under RCW 82.32.105(1) and interest under RCW 82.32.105(3)(a).
Former WAC 458-20-228(9)(a)(ii)(B).
CONCLUSION
While we disagree with some of the reasoning, we affirm the trial court’s bottom
line. DISH is not entitled to a full tax refund or a refund of pre-2009 interest. However,
because the Department supplied DISH with erroneous written information that deprived
DISH of an opportunity to timely amend its tax returns, DISH is entitled to a refund of
penalties and interest that could have been averted had the Department’s information been
accurate. The trial court’s judgment is affirmed.
A majority of the panel has determined this opinion will not be printed in
the Washington Appellate Reports, but it will be filed for public record pursuant to
RCW 2.06.040.
_________________________________ Pennell, J.
WE CONCUR:
______________________________ _________________________________ Fearing, C.J. Lawrence-Berrey, J.