Regardless of whether you have been following Dot Foods v. Washington Department of Revenue cases for the last several years, we need to pause and review.
According to the decision, Dot Foods 1 involved Dot Foods utilizing an exemption from the Washington Business & Occupation (B&O) tax for many years (note: the statute was originally enacted in 1983). Dot Foods facts changed from 1997 to 2000, but Dot Foods interpreted the exemption to still apply. In 1999, the state revised its interpretation of the statute to narrow the exemption, under which, Dot Foods would no longer qualify.
Washington later audited and assessed Dot Foods additional tax for the 2000 to 2004 tax years based on the state's revised interpretation. Dot Foods paid the tax, and filed a refund claim, eventually winning in the Washington Supreme Court in 2009. In simple terms, the court held the state's new interpretation was incorrect, and the state simply can't change it's long-standing interpretation of a statute without changing the legislation itself. The court said:
"The Department's argument for deference is a difficult one to accept, considering the Department's history interpreting the exemption. Initially, and shortly after the statutory enactment, the Department adopted an interpretation which is at odds with its current interpretation. One would think that the Department had some involvement or certainly awareness of the legislature's plans to enact this type of statute. As a general rule, where a statute has been left unchanged by the legislature for a significant period of time, the more appropriate method to change the interpretation or application of a statute is by amendment or revision of the statute, rather than a new agency interpretation."
While Dot Foods 1 was going on, (2005 to 2009), Dot Foods paid tax under the state's new interpretation of the statute to avoid penalties and interest. When Dot Foods 1 was decided in 2009, Dot Foods filed a refund claim for the 2005 to 2009 tax years.
Washington amended the statute in 2010 after Dot Foods 1 was decided in 2009, and applied the amendment retroactive to when the statute was originally enacted in 1983. According to the Washington State Budget and Policy Center's report in May 2010,
"the legislature enacted technical corrections and clarifications to state tax laws that will prevent steep revenue losses in the current year and in future years. This includes the legislature’s response to a recent State Supreme Court case that greatly expanded an exemption originally intended only for companies such as Avon and Mary Kay that sell products solely through door-to-door salespersons (Dot Foods decision). Without legislative action, the state would have lost about $151 million in the current biennium due to refunds and new firms claiming the exemption."
Under the authority of the retroactive amendment to the statute, Washington denied Dot Food's 2005-2009 refund claim (note, some of these tax years have been settled). Dot Food's challenged the ability of Washington to change the statute retroactively (Dot Foods 2). The Washington Supreme Court ruled in the state's favor in March 2016 holding that the legislature's amendment which retroactively narrowed the exemption and prospectively repealed the exemption, did not violate a taxpayer's rights under the Due Process Clause of the U.S. Constitution, collateral estoppel, or separation of powers principles. The court said:
"Retroactive application of the amendment did not violate due process protections because the amendment served a legitimate legislative purpose and was rationally related to the legitimate legislative purpose. The amendment prevented large revenue losses and removed preferential tax treatment for out-of-state businesses. In addition, the requirements of collateral estoppel were not met because collateral estoppel does not apply to subsequent taxing periods that were not previously adjudicated. Finally, since the taxpayer could not point to any evidence that the legislature intended to affect or curtail a prior judgment in the case, retroactive amendment did not violate the separation of powers doctrine."
Dot Foods requested the U.S. Supreme Court to review the case. We are waiting to learn if the Court will. Here are links to briefs filed by various organizations in support of Dot Foods:
Note: I am working on a more in-depth article for my column in Tax Analysts State Tax Notes.