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Important New Court Decision on a City's Utility Tax Authority

May 20, 2014 by Bob Meinig
Category: Revenues

In a decision issued today (5/20/2014), Division III of the state court of appeals decided that a code city has the legal authority to impose its utility tax on the revenues of a public utility district's provision of water service to customers within the city limits, except to the extent that the district's revenues "were derived from governmental activities." The court's decision in City of Wenatchee v. Chelan County Pub. Util. Dist. No. 1 will have significance for all classes of cities and for other municipal entities, such as water-sewer districts, that provide utility service within cities. {C}

In reaching its decision, the court first had to determine the scope of a prior state supreme court decision, King County v. Algona, 101 Wn.2d 789 (1984), which held that the City of Algona did not have the authority to impose its business and occupation tax on revenues generated by a King County solid waste plant located in the city. The court in City of Wenatchee v. Chelan County Pub. Util. Dist. No. 1 determined that the supreme court's decision in King County v. Algona meant that a governmental entity's immunity from taxation applied only to the sovereign, or governmental, activities of that entity, and not to its proprietary activities. When a municipal entity, such as a public utility district or a water-sewer district, provides utility services, it is, for the most part, acting in its proprietary capacity.

When is a governmental entity acting in its "proprietary capacity"? Quoting the state supreme court, the court of appeals noted that a municipal corporation acting in that capacity "acts as the proprietor of a business," as it does when it operates a utility. Putting it another way, the court of appeals stated that, "If it operates to serve customers, a utility is serving a proprietary function."

However, some aspects of a municipal utility's operation may be governmental, and, as such, its revenues from those aspects of its operation may not be taxed. For example, in providing fire hydrants for fire protection purposes, a municipal corporation is acting in its sovereign or governmental capacity. So, if a municipal utility's revenues include recovering the costs of fire suppression water facilities and services, those revenues may not be taxed.

Although the court's decision concerned the taxing authority of code cities, other classes of cities have similar authority to tax all kinds of businesses within their boundaries, including municipal utilities. See RCW 35.22.195 (first class cities); RCW 35.23.440(8) (second class cities); and RCW 35.27.370(9) (towns).

Also, although the court's decision addressed the city's taxing of the water utility revenues of a public utility district, the decision will affect other municipal corporations, such as water-sewer districts, that provide utility services - and not just water - within cities.

The court's decision here may, of course, be appealed. But its reasoning appears solid to me. Stay tuned!




About Bob Meinig

Bob has written extensively on the state Open Public Meetings Act and on municipal incorporation and annexation. At MRSC, he has also advised local governments for over 25 years on diverse legal issues.



"Interesting and valuable perspective. Unlimited municipal utility taxes appear to conflict with a long standing Washington State Supreme Court decision: "Utilities operate solely for the benefit of their ratepayers and not the general public, and that the objective of a municipal utility is to provide the best service possible at the lowest possible costs.""

Robert Dashiell on Jun 9, 2014 8:51 AM

"I would like to add this comment: The ability to set higher utility tax for some communities is a means to balance a tax inequity that may exist in a particular community. In our community 50% of the real estate in the city is exempt from property tax. The Port, Hospital District, State of WA, County, Schools, Churches are the largest property owners and they generate the highest service demands. Yet they pay no property tax, but are the highest utility consumers. Levying a higher utility tax helps balance this inequity. If a study of this topic is considered, I suggest the study also look to see if utility taxes are simply a way to grab general fund income, or reflect a policy to level the playing field like our situation."

David Timmons on Jun 9, 2014 8:18 AM

"Most Washington State cities and/or counties do not own electrical, telephone, natural gas, and steam energy utilities. The legislative 6% upper limit applies to these common utilities that are externally owned. Most commonly owned municipal owned utilities are a Water Utility, a Sewer Utility and a Stormwater Utility. The state legislature has set no upper tax limit on these most commonly owned municipal utilities. That sets up the common conflict where City or County Councils control both the utility tax rates AND the utility rates. If the governing bodies want more general fund money, they can do it by simply raising utility rates, and if that isn't sufficient, they can change the utility taxes at will. MRSC could perform a study of local government owned utility tax revenue increases in Washington State after property tax limitations were put in place in 2001. The believe increases will be far greater than explained by utility consumption factors and inflation."

Robert Dashiell on Jun 9, 2014 7:47 AM

"Robert - The legislature has placed a 6% upper limit, without voter approval, on taxes on electricity, telephone, natural gas, and steam energy utilities. See RCW 35.21.870. Yes, utility tax revenues are general fund revenues."

Bob Meinig on Jun 9, 2014 7:17 AM

"This decision brings forth the bigger picture of the basic reasoning and possible extent of a local utility tax. The state legislature has placed no upper limits on local utility taxes I believe. So a local government can apply any tax rate they decide upon ... whereas interstate utilities are limited by law? Is that correct? It's not legal to transfer utility funds (fee based, and not a tax) directly to a current operating (general) fund. So to get around that legal prohibition, the transfer of funds is legislatively labeled a tax and it accomplishes the same thing ... a transfer of a portion of fee based payments to the current operating fund. Is there any relationship with a utility tax and paying utility overhead? Most municipalities have utility cost allocation programs to cover overhead, so aren't utility taxes just another form of collecting general revenue?"

Robert Dashiell on Jun 6, 2014 11:32 AM

"Your utility tax is basically a B&O tax, but on utilities. The statutory source of authority is the same for both (RCW 35A.82.020). So, no, you wouldn't charge both."

Bob Meinig on May 30, 2014 3:57 PM

"Good Article, I am wondering if this will change the Utility Tax that Cities can charge. I was always told that companies like the PUD, pay the 6% Utility tax, and therefore are not required to pay the B&O tax. Does this mean that we can now charge them both? Or would one have to give? Thank you for all the good information you pass along."

Bobbi G. on May 30, 2014 3:50 PM

"Rob - It's not that the city didn't, prior to this court decision, have that authority; it just wasn't clear whether the city did. Now, unless this decision is overruled, it is clear that the city has that authority. Also, as to a PUD's provision of electricity, RCW 54.28.070 has long provided cities with the express authority to tax those revenues."

Bob Meinig on May 22, 2014 11:42 AM

"Nice article on utility taxes and curious, too because I am sure the City of Port Angeles was able to levy the tax on Clallam PUD facilities (power and water) during the time I worked for the City. This was miniscule, however. MSRC continues to be such a wonderful resource for us!"

Rob Orton on May 22, 2014 9:35 AM

9 comments on Important New Court Decision on a City's Utility Tax Authority


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