State Ex Rel. Namer Investment Corp. v. Williams

435 P.2d 975, 73 Wash. 2d 1, 1968 Wash. LEXIS 590

• Court: Washington Supreme Court
• Decided: January 5, 1968
• Docket: 38928
• Status: Published

Opinions

Hamilton, J.

In the context of a mandamus proceeding, appellant (plaintiff) seeks a judicial declaration that the 1 per cent excise tax on real-estate sales and transactions levied by King County, Washington, pursuant to RCW 28.45, does not apply to unexercised lease-options. The trial court granted respondents’ motion for summary judgment. This appeal on an agreed statement of facts, followed.

Briefly, the pertinent facts are these: Appellant is a Washington corporation which owns improved real property located at 15220 Aurora Avenue North in King County. The property has been used for the operation of a discount type department store under lease agreements with two successive tenants. The most recent of these agreements was entered into by appellant in 1965. This agreement is in the form of a lease-option, and gives rise to the present controversy.

The initial term of the lease-option is 7 years at a monthly rental of $5,500. The lessee, in addition to. occupancy, is given an option to purchase the property during this term for an established price of $528,000. In the event the lessee exercises the option, a formula provides that a portion of any rentals paid prior to the exercise date will be applied against principal and interest on the purchase price as though, for purposes of that calculation only, the option had been exercised at the commencement of the lease term. If the option to purchase is not exercised, the lessee is not entitled to any refund of rentals paid.

The initial lease-option term will expire in 1972. To date the lessee has not exercised the option to purchase, but has continued in possession of the property and in good standing by regularly paying the monthly rentals.

The King County Auditor has refused to record a memorandum of the agreement until it bears the stamp of the King County Treasurer indicating satisfaction of the 1 per cent excise tax on real-estate transactions. The King County Treasurer has refused to affix such a stamp to the memorandum until appellant pays the sum of $5,280, that is, 1 per cent of the option price. This action by the respective county officials is in accord with King County Resolution 29779.

In challenging its present liability for the tax, and in seeking a mandate to compel recordation of the memorandum of agreement, appellant attacks the validity of RCW 28.45 and King County Resolution 29779 as applied to the transaction in question. In this respect, appellant asserts (1) an unexercised lease-option is not a “sale” of real estate, and therefore it is not a taxable event subject to the 1 per cent excise tax; (2) if the transaction is held to be a sale within the purview of the pertinent legislation, then the legislation is unconstitutional as applied to appellant because (a) it amounts to a denial of due process and equal protection of the law, and (b) constitutes a standardless delegation of legislative power to the board of county commissioners; and (3) if the legislation is valid, then relief should be granted upon the basis of individual hardship and inequity. No other grounds of alleged invalidity are asserted by appellant in this court.

Appellant’s first contention is predicated upon the argument that the excise tax provided for by RCW 28.45 is one levied only upon “sales” of real property. From this premise, appellant proceeds to point out the technical distinctions between a real-estate sale and a lease-option, and ends the syllogism with the conclusion that a lease-option is not a taxable event under the statute.

We might agree with appellant were it not for the fact that the legislature, in enacting RCW 28.45, defined the taxable events covered by the statute in the following manner:

As used in this chapter, the term “sale” shall have its ordinary meaning and shall include any conveyance, grant, assignment, quitclaim, or transfer of the ownership of or title to real property, including standing timber, or any estate or interest therein for a valuable consideration, and any contract for such conveyance, grant, assignment, quitclaim, or transfer, and any lease with an option to purchase real property, including standing timber, or any estate or interest therein or other contract under which possession of the property is given to the purchaser, or any other person by his direction, which title is retained by the vendor as security for the payment of the purchase price. (Italics ours.) RCW 28.45.010.

Proceeding from the foregoing definition of taxable events, the legislature, in the second paragraph of RCW 28.45.010, spelled out the property transfers or transactions which it excluded or did not intend to cover. Among the types of transfers of estates or interests in property excluded are:

a transfer by gift, devise, or inheritance, a transfer of any leasehold interest other than of the type mentioned above [lease with an option to purchase real property], . . . a transfer in compliance with the terms of any lease or contract upon which the tax as imposed by this chapter has been paid or where the lease or contract was entered into prior to the date this tax was first imposed, .... (Italics ours.) RCW 28.45.010.

A fair reading of the definition and the exclusions therefrom, as set forth in RCW 28.45.010, render it manifest that the legislature intended a broader excise tax coverage on transfers of property interests than one which would be limited to the technical and legalistic meaning of the word “sale.” And certainly it is unmistakably clear that the legislature intended that the term “sale” would not only have its ordinary meaning but would include “any lease with an option to purchase real property.” Particularly would this seem so when the latter phrase is read in pari materia with the exclusions set forth in the next paragraph, embracing as such exclusions do, the italicized references to leaseholds and leases. In the face of this rather specific and embracive legislative language, it remains only to determine whether the legislature was invested with the power to so broaden the technical meaning of the term “sale” for the purpose of imposing the excise tax in question.

In speaking of the power of the legislature with respect to defining or classifying taxable events amenable to an excise tax, we had occasion to summarize our former holdings in Gruen v. State Tax Comm’n, 35 Wn.2d 1, 32, 211 P.2d 651 (1949), as follows:

It can be stated that there is no constitutional limitation upon the selection by the legislature of the subjects for excise tax, so long as there is any reasonable basis for the classification whatsoever. The two quotations which follow contain previous holdings of this court in accordance with the statement just made:

“It is well settled law that the legislature may constitutionally classify persons with reference to their business, occupation or inheritance, with a view of exacting from them excise or privilege taxes differing in amount, or differing in that one class shall be taxed and another class shall be exempted, so long as there may be some reasonable basis for such classification, and so long as all in each class shall be taxed or exempted alike. [Citing cases.]” State v. Hart, 125 Wash. 520, 217 Pac. 45.

“This being an excise tax, the legislature, under the 14th amendment to our state constitution, has very broad power, and we cannot interfere with that power except for arbitrary action, clear abuse, or constructive fraud appearing on the face of the act or from facts of which we may take judicial knowledge.

“ ‘A very wide discretion must be conceded to the legislative power of the state in the classification of trades, callings, businesses or occupations which may be subjected to special forms of regulation or taxation through an excise or license tax. If the selection or classification is neither capricious nor arbitrary, and rests upon some reasonable consideration of difference or policy, there is no denial of the equal protection of the law.’ Brown-For-man Co. v. Kentucky, 217 U. S. 563.” State ex rel. Stiner v. Yelle, 174 Wash. 402, 25 P. (2d) 91.

And see also Smith v. State, 64 Wn.2d 323, 391 P.2d 718 (1964), wherein we reiterated, at 330:

And the power of a state to tax within its boundaries embraces all persons, property and pursuits except as the power may be limited by the constitution of the state or the United States. Moran v. New Orleans, 112 U.S. 69, 28 L. Ed. 653, 5 S. Ct. 38 (1884); Greenough v. Tax Assessors, 331 U.S. 486, 91 L. Ed. 1621, 67 S. Ct. 1400, 172 A.L.R. 329 (1947). Exercised within constitutional limits, the power of a state to tax has been called plenary, and all subjects over which this sovereign power extends are objects of taxation. (Citing cases.)

In keeping with these principles, we have heretofore upheld the extension of the retail sales tax to leases of tangible personal property. Gandy v. State, 57 Wn.2d 690, 359 P.2d 302 (1961); Lakewood Lanes, Inc. v. State, 61 Wn.2d 751, 380 P.2d 466 (1963); Black v. State, 67 Wn.2d 97, 406 P.2d 761 (1965).

In the instant case we find no constitutional inhibition to the legislative classification or definition of a “lease with an option to purchase” as a property interest transfer or transaction subject to the tax imposed by RCW 28.45.

This, then, brings us to appellant’s second attack upon the tax, i.e., whether imposition of the tax on the type of transaction here involved amounts to a denial of due process and equal protection of the law.

We think not.

Due process, equal protection and the privileges and immunities clauses of the federal and state constitutions impose general requirements of reasonableness in the classification of persons and property to which a tax is applicable. As we have heretofore pointed out, the power of the legislature to select and define the activity upon which an excise tax will be levied, within these restrictions and limitations, is plenary, and is an exercise of legislative discretion which is rarely upset by the courts.

It is not the function of this court in cases like this to consider the propriety of the tax, or to seek for the motives or to criticize the public policy which may have prompted adoption of the legislation. State Board of Tax Comm’rs of Indiana v. Jackson, 283 U. S. 527, 75 L. Ed. 1248, 51 Sup. Ct. 540, 73 A.L.R. 1464 (1931). Our obligation is to sustain the classification adopted by the legislature if it is neither capricious nor arbitrary, and is reasonably related to some valid public and legislative purpose. Robison v. Dwyer, 58 Wn.2d 576, 364 P.2d 521 (1961); Hemphill v. Tax Comm’n, 65 Wn.2d 889, 400 P.2d 297 (1965); Black v. State, supra.

Taken as a whole, RCW 28.45 reflects a legislative intent to tax those allied and related transfers of interests in real property which are listed and not specifically excluded. The lease-option agreement or contract might well have been considered by the legislature as a device through which the tax could be evaded, or a device to unduly postpone attachment of the tax liability. Thus, specifically including the “lease-option” arrangement within the classification of taxable events, appears to be a rational means to accomplish a legislative purpose — closing potential loopholes in a scheme of excise taxation. A similar legislative purpose may well have prompted the inclusion of “renting and leasing” in the definition of “sale” as used in an excise tax on personal property transactions. RCW 82.04.040, 82.08.020. This was upheld, as heretofore pointed out, in Black v. State, supra.

Appellant under this contention further assails the legislation upon the grounds that it fails to provide equal treatment for all persons falling within the classification. This inequality, appellant contends, springs from the legislative authorization to tax a lessor-optionor before, and regardless of whether the option to purchase is exercised. We are convinced, however, that RCW 28.45.035 adequately protects against and fully meets this contention, for it provides:

The board of county commissioners shall provide by ordinance for the determination of the selling price in the case of leases with option to purchase, and shall further provide that the tax shall not be payable, where inequity will otherwise result, until and unless the option is exercised and accepted. (Italics ours.)

Although the italicized portion of the statute may be somewhat ineptly worded, it would appear, upon a careful reading, that the legislature intended that the tax should not be imposed until the option is exercised and accepted, unless it would be equitable to impose the tax at an earlier stage in the course of the transaction. Determination of the equities that can arise under various circumstances was then left to the administrative action of the county officials of those counties electing to impose the tax.

This conclusion brings us to appellant’s next contention —that the legislation contains no proper standards or legislative guidelines by which the respective county officials can determine (a) the selling price, and (b) the equities or inequities of imposing the tax upon unexercised lease-options.

Again, we are unable to agree.

The constitutional prohibition against delegation of legislative power (Const, art. 2, § 1 (amendment 7)) does not preclude delegation of authority to administrative officials or commissions to determine some fact or state of things upon which the application and operation of a law is made to depend. Senior Citizens League, Inc. v. Department of Social Security, 38 Wn.2d 142, 228 P.2d 478 (1951); Shoreline School Dist. No. 412 v. Taxpayers of Shoreline School Dist. No. 412, 52 Wn.2d 849, 329 P.2d 829 (1958); P. Trautman, Administrative Law Problems of Delegation and Implementation in Washington, 33 Wash. L. Rev. 33 (1958). In this respect, we said in Keeting v. Public Util. Dist. No. 1 of Clallam Cy., 49 Wn.2d 761, 306 P.2d 762 (1957), at 767:

It is unconstitutional for the legislature to abdicate or transfer to others its legislative function. It is not unconstitutional for the legislature to delegate administrative power. In so doing, the legislature must define (a) what is to be done, (b) the instrumentality which is to accomplish it, and (c) the scope of the instrumentality’s authority in so doing, by prescribing reasonable administrative standards.

RCW 28.45.035 vests in the counties the function of prescribing an administrative method for determining the selling price to be taxed in lease-option transactions. This is to be distinguished from the legislative function of defining “selling price,” which is accomplished by the legislature in RCW 28.45.030, whereby it is provided:

As used in this chapter, the term “selling price” means the consideration, including money or anything of value, paid or delivered or contracted to be paid or delivered in return for the transfer of the real property or estate or interest in real property, and shall include the amount of any lien, mortgage, contract indebtedness, or other in-cumbrance, either given to secure the purchase price, or any part thereof, or remaining unpaid on such property at the time of sale.

The term shall not include the amount of any outstanding lien or incumbrance in favor of the United States, the state, or a municipal corporation for the taxes, special benefits, or improvements.

In our view, the legislative definition of the “selling price” provides the constitutionally required framework within which the counties must exercise their ministerial determination of the “selling price” in the lease-option transactions. The basis for any excise tax to be levied, then, must be the actual consideration paid or delivered or contracted to be paid or delivered in exchange for the ultimate transfer of the designated interest in real property. It is against the background of this definition of “selling price” that a number of our previous cases arising out of RCW 28.45 have been decided. See, Deer Park Pine Indus., Inc. v. Stevens Cy., 46 Wn.2d 852, 286 P.2d 98 (1955); Doric Co. v. King Cy., 57 Wn.2d 640, 358 P.2d 972 (1961); Christensen v. Skagit Cy., 66 Wn.2d 95, 401 P.2d 335 (1965); Estep v. King Cy., 66 Wn.2d 76, 401 P.2d 332 (1965); Senfour Inv. Co. v. King Cy., 66 Wn.2d 67, 401 P.2d 319 (1965); Ban-Mac, Inc. v. King Cy., 69 Wn.2d 49, 416 P.2d 694 (1966).

RCW 28.45.035 also vests in the counties the administrative function of determining when a lease-option should be taxed so as to avoid “inequity.” The basic standards to guide the counties in the exercise of this function can be gleaned from other sections of RCW 28.45. Section .010 clearly provides that such transactions are amenable to the tax. Section .030 specifies that the basis for the tax is the “selling price” as defined. Section .035 provides for the creation of a mode of administrative determination of the selling price in lease-option cases, and further provides that the tax shall not be payable until the selling price is ascertained and the option is exercised, unless it would otherwise be equitable to enforce or collaterally secure payment before the option is actually exercised.

The legislature is not required to explicitly legislate in great detail for the guidance of administrative bodies. It is sufficient if basic and reasonably ascertainable guidelines are prescribed from which the purpose of the enactment can be accomplished. Miller v. Tacoma, 61 Wn.2d 374, 378 P.2d 464 (1963). Under the circumstances surrounding imposition of the excise tax in the present case, we find that the standards to be gleaned from the general provisions of the statute are sufficient to guide the counties in performing their administrative function in regard to the treatment of unexercised lease-options. The particular function of administratively determining when a tax imposed upon an unexercised lease-option is “equitable” or “inequitable” is not unlike a similar delegation of power upheld in Wheeler School Dist. No. 152 v. Hawley, 18 Wn.2d 37, 137 P.2d 1010 (1943), where a state committee was established to approve or disapprove the formation of new school districts and alteration of district boundaries upon the basis of whether the planned changes were “fair and equitable.” Cf., also, State ex rel. Oregon R.R. & Navigation v. Railroad Comm’n of Washington, 52 Wash. 17, 100 Pac. 179 (1909); State Bd. of Medical Examiners v. Macy, 92 Wash. 614, 159 Pac. 801 (1916); Continental Ins. Co. v. Fishback, 154 Wash. 269, 282 (1929); State ex rel. Washington Toll Bridge Authority v. Yelle, 195 Wash. 636, 82 P.2d 120 (1938); Gericke v. Philadelphia, 353 Pa. 60, 44 A.2d 233 (1945); Gladney v. Review Comm., 230 F. Supp. 35 (W.D. La. 1964).

Against the foregoing background we come to appellant’s final contention, that is, that the tax imposed upon the unexercised option in the present case is inequitable and should be deferred until the option is, in fact, exercised.

In resolving this contention, we are, at the outset, met with the proposition that under the terms and the administrative application of King County Resolution 29779, the tax is imposed upon all unexercised lease-options as a prerequisite of recording the instrument, the only pertinent exception being in those instances where the lease payments do not apply on the ultimate sales price. In our view, the net effect of this application of the resolution is at odds with the legislative intent expressed in RCW 28.45.035, which we construe to be that the tax shall be imposed in all cases when the option portion of the lease is exercised, unless it is otherwise equitable, under the surrounding circumstances pertaining to a particular lease-option, to impose the tax or require suitable security for the tax at an earlier stage in the transaction. This latter determination cannot be made by a mechanical application of a county resolution which forbids the filing or recording of the lease-option instrument until the tax is paid. It is, rather, an administrative determination and a decision which must be made in the light of the circumstances pertaining to the particular lease-option agreement under consideration, otherwise the instrument is entitled to recordation and the tax is not collectible until the option is exercised. The county resolution as presently administered is accordingly inconsistent with RCW 28.45.035.

In the instant case, the selling price under the lease-option agreement is $528,000. The aggregate of rentals applicable to the selling price over the 7-year lease term is in the neighborhood of $229,072.55, and the balance to be paid upon exercise of the option in the neighborhood of $298,927.45. Whether it would be equitable or inequitable to collect all or part of the tax as measured by the “selling price” has not been properly determined. Accordingly, appellant is entitled to recordation of the lease-option memorandum and the deferment of the tax until the option is actually exercised, unless an appropriate administrative determination is otherwise made.¹

The order of dismissal is therefore vacated and the cause is remanded to the superior court for issuance of a writ of mandate in compliance herewith.

Finley, C. J., Hunter, Hale, and Neill, JJ., concur.

1 The legislature by Laws of 1967, Ex. Ses., ch. 149, § 1, amended ECW 28.45.035 to provide that the state department of revenue shall “provide by rule for the determination of the selling price in the case of leases with option to purchase, and shall further provide that the tax shall not be payable, where inequity will otherwise result, until and unless the option is exercised and accepted.” The county’s determination in the instant case should be guided by such rules as may be promulgated by the state department of revenue in accordance with the views expressed in this opinion.