Lakeside Industries, Inc., V. Department Of Revenue

• Court: Court of Appeals of Washington
• Decided: September 13, 2021
• Docket: 81502-4
• Status: Published

Opinion

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

LAKESIDE INDUSTRIES, INC., ) No. 81502-4-I ) Appellant, ) DIVISION ONE ) v. ) ) WASHINGTON STATE DEPARTMENT ) PUBLISHED OPINION OF REVENUE, ) ) Respondent. )

BOWMAN, J. — Lakeside Industries Inc. is an asphalt manufacturer and

retailer that uses much of its product for its own public road construction

activities. Lakeside appealed the Department of Revenue’s (DOR’s) specific

written instructions that Lakeside must utilize comparable sales instead of a “cost

basis” method to calculate the amount of asphalt use-tax owed. DOR upheld the

written instructions, and Lakeside petitioned for judicial review under the

Administrative Procedure Act (APA), chapter 34.05 RCW, in King County

Superior Court. The court dismissed the petition for lack of subject matter

jurisdiction and failure to state a claim upon which the court can grant relief

because Lakeside sought relief under the APA instead of Title 82 RCW, and did

not follow the statutory requirements to appeal a tax matter. We conclude the

trial court erred by dismissing Lakeside’s petition for lack of subject matter

jurisdiction, but affirm the dismissal for failure to state a claim.

Citations and pin cites are based on the Westlaw online version of the cited material. No. 81502-4-I/2

FACTS

Lakeside is an asphalt manufacturer, retailer, and paver. It uses much of

its asphalt on its own public road construction projects. Lakeside must pay a

“use tax” on the value of the self-manufactured asphalt utilized in their projects.

RCW 82.12.010(7)(b); WAC 458-20-171. To calculate the use tax, the value of

the asphalt is based on “sales at comparable locations in [Washington] [S]tate of

similar products of like quality and character, in similar quantities, under

comparable conditions of sale, to comparable purchasers.” WAC 458-20-112(3).

If no comparable sales exist, Lakeside may use the cost of manufacturing the

asphalt to determine its value. WAC 458-20-112(3).

According to Lakeside, very few comparable sales exist because of the

hundreds of different types of asphalt they manufacture, and because sales are

influenced by job specification, location, conditions, and market forces. As a

result, Lakeside has historically relied on the “cost basis” method to calculate its

use tax, and DOR has accepted its valuation.

In June 2018, DOR performed a partial audit of Lakeside’s vehicle sales

for January 1, 2014 to March 31, 2018. The partial audit led to no tax adjustment

or assessment of additional taxes for vehicle sales. But along with the audit

results, DOR issued “specific written instructions,”1 directing Lakeside to use

comparable sales to calculate the value of its self-manufactured asphalt used in

future public construction projects. The instructions informed Lakeside it could

no longer calculate value on a cost basis.

If a taxpayer disregards “specific written instructions as to reporting or tax liabilities,” 1

DOR “must” assess a penalty of 10 percent of the amount of tax owed. RCW 82.32.090(5).

2 No. 81502-4-I/3

Lakeside petitioned DOR for “an adjudication and the withdrawal” of the

instructions, seeking both formal review under the APA and informal

administrative review under WAC 458-20-100. Lakeside argued that DOR could

not issue specific written instructions as part of an unrelated audit and that the

instructions were arbitrary and capricious because they were not based on

Lakeside’s “actual records,” which showed no comparable sales for asphalt.

DOR conducted an informal administrative review, the only type available

for rulings on future tax liability. See WAC 458-20-100(1)(a). A tax review officer

from DOR’s Administrative Review and Hearings Division held a hearing on

Lakeside’s petition and issued Determination No. 19-0219 (Wash. Dep’t of

Revenue, Admin. Review & Hr’gs Div., Aug. 28, 2019) (unpublished). The

determination upheld the written instruction with modifications. It also authorized

Lakeside to seek a “Letter Ruling” from DOR approving a return to the cost-basis

method if Lakeside “ceases to have comparable sales.” But Lakeside would

have to “include copies of one year of invoices to substantiate its Letter Ruling

request.”

Lakeside petitioned for reconsideration. A tax review officer issued

Determination No. 19-0219R (Wash. Dep’t of Revenue, Admin. Review & Hr’gs

Div., Dec. 20. 2019) (unpublished), denying Lakeside’s petition but revising the

effective date of the written instructions. The decision became DOR’s final action

and remains “binding”

until the facts change, the applicable statute or rule changes, or is ruled invalid by a published appellate court decision not subject to review, [DOR] publicly announces a change in the policy upon

3 No. 81502-4-I/4

which these instructions are based, or [DOR] notifies the taxpayer in writing that these instructions are no longer valid.

Lakeside then petitioned the King County Superior Court for judicial review

under the APA. Lakeside asked the court to set aside Determination No. 19-

0219R and DOR’s written instructions. DOR moved to dismiss Lakeside’s

petition under CR 12(b)(1), (3), and (6), claiming the case “was filed at the wrong

time, in the wrong county, and under the wrong statute.”

The court granted the motion to dismiss under CR 12(b)(1) and (6) for lack

of subject matter jurisdiction and failure to state a claim upon which relief can be

granted. The court noted that case law establishes “there’s no mechanism for

direct judicial review of [DOR]’s denial of a ruling request,” and access to court

review requires taxes be “paid . . . in full.” The court dismissed the case “for

failure to follow the [Title 82 RCW] statutory requirements for a challenge such as

the one that’s before the court.”

Lakeside appeals.

ANALYSIS

Lakeside argues the trial court erred in dismissing its petition under CR

12(b)(1) and (6) for lack of subject matter jurisdiction and failure to state a claim

upon which the court can grant relief. Whether a court has subject matter

jurisdiction is a question of law reviewed de novo. Young v. Clark, 149 Wn.2d

130, 132, 65 P.3d 1192 (2003). We also review de novo a trial court’s ruling to

dismiss for failure to state a claim. Kinney v. Cook, 159 Wn.2d 837, 842, 154

P.3d 206 (2007).

4 No. 81502-4-I/5

Subject Matter Jurisdiction

Lakeside claims the trial court erred by dismissing its petition under CR

12(b)(1) because the legislature “authorized superior courts to review excise tax

controversies under Title 82 RCW.” We agree.

“Generally speaking, jurisdiction is the power of a court to hear and

determine a case.” In re Marriage of Buecking, 179 Wn.2d 438, 447, 316 P.3d

999 (2013). “Subject matter jurisdiction” refers to “the court’s ability to entertain a

type of case.” Buecking, 179 Wn.2d at 448. Under the Washington Constitution,

the superior court has original jurisdiction in all cases that involve “the legality of

any tax,” and appellate jurisdiction in cases “as may be prescribed by law.” Art.

IV, § 6. Title 82 RCW confers appellate jurisdiction over tax related matters to

the superior court. See RCW 82.32.180; RCW 82.03.180.

The legislature cannot restrict the court's jurisdiction where the constitution

has specifically conferred dominion to the court. Buecking, 179 Wn.2d at 448.

But the legislature may direct “in what manner, and in what courts, suits may be

brought against the state.” W ASH. CONST. art. II, § 26. And it can “establish

certain conditions precedent before suit can be brought against the [s]tate.”

McDevitt v. Harborview Med. Ctr., 179 Wn.2d 59, 66, 316 P.3d 469 (2013). This

is particularly true when a party seeks the court’s appellate jurisdiction rather

than original jurisdiction. See ZDI Gaming Inc. v. State ex rel. Wash. Gambling

Comm’n, 173 Wn.2d 608, 619, 268 P.3d 929 (2012) (“[T]he legislature has

greater power to sculpt the appellate jurisdiction of the individual superior

courts.”).

5 No. 81502-4-I/6

The legislature has established two paths under Title 82 RCW by which a

party may access the superior court’s appellate jurisdiction for tax related

matters. First, a party, “having paid any tax as required and feeling aggrieved by

the amount of the tax,” may appeal directly to Thurston County Superior Court.

RCW 82.32.180. Alternatively, a party can first seek administrative review by the

Washington State Board of Tax Appeals, and then appeal to the superior court.

RCW 82.03.180. If the party is appealing from a formal administrative hearing,

the APA governs judicial review. RCW 82.03.180; RCW 34.05.510. When, as

here, a party appeals an informal administrative decision, judicial review occurs

under RCW 82.03.180. No matter the path a tax payer follows to judicial review,

“the taxpayer shall have first paid in full the contested tax, together with all

penalties and interest.” RCW 82.03.180; RCW 82.32.150, .180.2

DOR argues the superior court lacked subject matter jurisdiction to hear

Lakeside’s appeal of DOR’s decision because Lakeside failed to pay its taxes

before seeking judicial review. But statutory limitations on the exercise of a

court’s jurisdiction do not have the effect of depriving the court of its jurisdiction

altogether. Buecking, 179 Wn.2d at 449. Either a court has subject matter

jurisdiction or it does not. Williams v. Leone & Keeble, Inc., 171 Wn.2d 726, 730,

254 P.3d 818 (2011). Instead, statutory procedural requirements limit when the

superior court will invoke its jurisdiction. Stewart v. Dep’t of Emp’t Sec., 191

Wn.2d 42, 52, 419 P.3d 838 (2018).

2 Constitutional challenges to a tax assessment are the only exceptions to the rule that taxes must be paid in full before obtaining judicial review. RCW 82.32.150.

6 No. 81502-4-I/7

Here, the legislature conferred appellate subject matter jurisdiction over

tax related matters to the superior court under Title 82 RCW. As a result, the

superior court has the authority to hear Lakeside’s appeal from DOR’s informal

ruling upholding the written instructions that direct Lakeside’s future method of

calculating its use tax. But the legislature limited when the court will invoke that

jurisdiction by proscribing a procedural barrier—full payment of the disputed tax.

Failure to satisfy the procedural barrier does not deprive the court of its subject

matter jurisdiction.3 Rather, it bars Lakeside from accessing the court’s

jurisdiction. The court erred by dismissing Lakeside’s petition for judicial review

under CR 12(b)(1).

Failure To State a Claim

Lakeside claims the trial court erred in granting DOR’s motion to dismiss

its petition for failure to state a claim upon which the court can grant relief under

CR 12(b)(6). DOR asserts that Lakeside’s petition for review was properly

dismissed because Lakeside petitioned under the APA instead of RCW

82.03.180. We agree with DOR.

A CR 12(b)(6) motion questions the legal sufficiency of the allegations in a

pleading, asking “whether there is an insuperable bar to relief.” Markoff v. Puget

Sound Energy, Inc., 9 Wn. App. 2d 833, 839, 447 P.3d 577 (2019), review

denied, 195 Wn.2d 1013, 460 P.3d 183 (2020). A court may dismiss an action

3 We recognize that Division Three of our court arrived at a different conclusion in Booker Auction Co. v. Washington Department of Revenue, 158 Wn. App. 84, 89, 241 P.3d 439 (2010), where it determined that failure to pay a tax before petitioning for review deprived the court of subject matter jurisdiction. But subsequent case law has “narrowed the types of errors that implicate a court’s subject matter jurisdiction.” Buecking, 179 Wn.2d at 448. We disagree with Booker’s characterization that failure to meet a procedural requirement deprives the superior court of subject matter jurisdiction.

7 No. 81502-4-I/8

for failure to state a claim only if it appears beyond a reasonable doubt that no

facts justifying recovery exist. Durland v. San Juan County, 175 Wn. App. 316,

320, 305 P.3d 246 (2013), aff’d, 182 Wn.2d 55, 340 P.3d 191 (2014).

The APA is the exclusive means of judicial review of an agency action

unless de novo review is expressly authorized elsewhere by statute. RCW

34.05.510(3). As discussed above, the legislature expressly authorized two

separate paths for de novo review of tax challenges in Title 82 RCW. See RCW

82.32.180; RCW 82.03.180. Where general and specific statutes address the

same matter, the specific statute prevails. Booker, 158 Wn. App. at 90. “Thus,

the APA’s general provisions cannot overcome [Title 82 RCW] specific ones.

The APA does not circumvent the legislature’s precisely governed system for

obtaining superior court review of an excise tax challenge.” Booker, 158 Wn.

App. at 90.

Lakeside tries to sidestep the application of Title 82 RCW by arguing it is

“not challenging the assessment of any excise taxes or seeking to obtain a tax

refund.” According to Lakeside, DOR’s written instructions are not an

assessment of a tax, and “the procedural requirements set forth in those statutes

simply do not apply.”

Lakeside cites a recent United States Supreme Court case, CIC Services,

LLC v. Internal Revenue Service, ___ U.S. ___, 141 S. Ct. 1582, 209 L. Ed. 2d

615 (2021), in support of its argument.4 In that case, the Court considered

whether the anti-injunction statute, 26 U.S.C. § 7421(a), barring suits to restrain

4 Lakeside submitted this case in a notice of supplemental authority, filed May 24, 2021.

8 No. 81502-4-I/9

the assessment or collection of any tax, prohibits a challenge to an IRS5

information reporting requirement. CIC, 141 S. Ct. at 1586-87. The reporting

requirement compels tax payers and advisors in certain insurance agreements to

provide a detailed description of the transaction so that the IRS can understand

the tax structure and determine whether the insurance contract “is a sham”

designed to escape tax liability. CIC, 141 S. Ct. at 1587. Failure to submit the

detailed reports is punishable by civil tax penalties and criminal penalties. CIC,

141 S. Ct. at 1587.

In assessing whether the reporting requirement was a tax assessment

barred by the anti-injunction statute, the Court looked to the lawsuit’s “purpose,”

and inquired “not into a taxpayer’s subjective motive, but into the action’s

objective aim—essentially, the relief the suit requests.” CIC, 141 S. Ct. at 1589.

The Court determined that the petitioner sought relief from a reporting

requirement, which does not levy a tax, but “compels taxpayers and their material

advisors to collect and submit detailed information” to discern whether the

transaction is taxable. CIC, 141 S. Ct. at 1591. The Court noted the “reporting

rule and the statutory tax penalty are several steps removed from each other,”

requiring a “threefold contingency” before tax liability attached. CIC, 141 S. Ct. at

1591. It stated the petitioner “stands nowhere near the cusp of tax liability:

Between the upstream Notice [to report information] and the downstream tax, the

river runs long.” CIC, 141 S. Ct. at 1591. Because of the long path between the

reporting requirement and the tax, the Court concluded, “The suit contests, and

5 United States Internal Revenue Service.

9 No. 81502-4-I/10

seeks relief from, a separate legal mandate” rather than a tax, and is not barred.

CIC, 141 S. Ct. at 1593-94.6

Unlike the IRS reporting requirements in CIC that may or may not lead to

tax liability, DOR’s written instructions direct Lakeside to start using the

comparable sales method for calculating its future use tax. Payment of the use

tax is imminent. And the objective of Lakeside’s lawsuit is to challenge the

amount of taxes it owes. Lakeside’s petition is a challenge to tax liability that

must be brought under Title 82 RCW.

Division Three of our court reached the same conclusion in Booker.

There, DOR issued prospective written instructions for excise tax on farm

equipment Booker Auction Co. sold at auctions. Booker, 158 Wn. App. at 86-87.

Booker petitioned the superior court for review under the APA, seeking to vacate

DOR’s instructions. Booker, 158 Wn. App. at 87. The court determined the APA

did not apply because Title 82 RCW provides de novo review for tax challenges.

Booker, 158 Wn. App. at 89. And “[a]pplying the APA to afford review of

prospective reporting instructions, without payment of a tax, would directly

conflict with RCW 82.32.150 by allowing review of an excise tax dispute in

superior court without payment of the tax in full.” Booker, 158 Wn. App. at 89.

6 Lakeside also cites AOL, LLC. V. Washington Department of Revenue, 149 Wn. App. 533, 205 P.3d 159 (2009), and Wells Fargo Bank, N.A. v. Washington Department of Revenue, 166 Wn. App. 342, 271 P.3d 268 (2012), in support of its argument. Neither case is persuasive. AOL acknowledges that the term “ ‘assessment’ ” and the phrase “ ‘such tax, penalties, and interest’ ” are used interchangeably in Title 82 RCW. AOL, 149 Wn. App. at 549 n.20 (quoting RCW 82.32.100(2)). Even so, the provisions in Title 82 RCW clearly require payment of all taxes, penalties, and interest (or assessments) before initiating an appeal. In Wells Fargo, the court determined the APA governed a dispute over a settlement agreement between DOR and a taxpayer because the provision authorizing DOR to execute settlement agreements does not provide for de novo review. Wells Fargo, 166 Wn. App. at 353-54. As discussed above, Title 82 RCW provides for de novo review of Lakeside’s appeal.

10 No. 81502-4-I/11

Because Lakeside petitioned under the APA rather than RCW 82.03.180

and had not yet paid the use tax, it fails to state a claim upon which relief can be

granted. See Blue Spirits Distilling, LLC v. Wash. Liquor & Cannabis Bd., 15 Wn.

App. 2d 779, 794, 478 P.3d 153 (2020); Gorman v. Garlock, Inc., 155 Wn.2d

198, 218-19, 118 P.3d 311 (2005); Asche v. Bloomquist, 132 Wn. App. 784, 788,

133 P.3d 475 (2006). Lakeside’s claim is legally insuperable and properly

dismissed under CR 12(b)(6).

Affirmed.

WE CONCUR: