Keller v. Department of Revenue

Decision for defendant rendered February 23, 1993.

Appeal pending. These cases have been consolidated and submitted on stipulated facts because they involve a common legal issue. Plaintiffs are individuals who were residents of Oregon during one or more of the years 1986, 1987 or 1988. Through their business enterprises, they became subject to the Business and Occupation (B O) Tax imposed by the state of Washington. Plaintiffs initially claimed a deduction on their Oregon returns for the taxes paid to Washington. Later, they filed claims for refunds on the ground that ORS 316.082 entitled them to a credit rather than a deduction.

ORS 316.082(1) provides:

"A resident individual shall be allowed a credit against the tax otherwise due under this chapter for the amount of any income tax imposed on the individual, or on an Oregon S corporation of which the individual is a member (to the extent of the pro rata share of the individual of the S corporation), for the taxable year by another state of the United States or the District of Columbia on income derived from sources therein and that is also subject to tax under this chapter."¹ (Emphasis added.)

ISSUE

The issue is whether B O taxes are income taxes within the meaning of ORS 316.082.

WASHINGTON TAX SCHEME

1. Washington imposes no personal income tax or corporate income tax. It does impose a wide variety of excise taxes. The B O tax is an excise tax imposed on the privilege of engaging in business. Wash Rev Code § 82.04.220.² Different measures of the tax are used for different types of businesses. For example, "gross income of the business" is used for service businesses, Wash Rev Code § 82.04.290, "gross proceeds of sales" for retailers, Wash Rev Code § 82.04.250, and "value of the products" for manufacturing businesses, Wash Rev Code § 82.04.240.

Washington also imposes a retail sales tax based on the gross proceeds of sale. Wash Rev Code § 82.08.020. Although the tax must be collected by the seller, it is imposed on the buyer. Wash Rev Code § 82.08.050. The sales tax is reinforced by a use tax imposed on the privilege of using property. The measure of the use tax is the value of the property. Wash Rev Code § 82.12.020.

BACKGROUND OF TAX CREDIT

The predecessor to ORS 316.082, OCLA § 110-1605a, allowed a tax credit for "net income taxes imposed by and paid to another state or country." In 1951, the legislature amended the statute by deleting the word "net." Or. Laws 1951, ch 203, § 1. Plaintiffs contend that, by this change, the legislature intended "income" to be used in its broadest sense. In support of their position, plaintiffs cite the State Tax Commission regulation. Prior to the 1951 amendment, the regulation denied a credit for taxes paid on gross receipts, gross income and dividends, etc. See State of Oregon, Personal Income Tax Law and Regulations, Art 605a-1-a(1) (1947). However, in response to the 1951 amendment, the regulation was amended to provide:

"Credit is limited to taxes imposed upon income, but may be claimed with respect to gross income taxes as well as net income taxes. No credit is allowed with respect to property, transaction, sales or consumption taxes, nor with respect to occupational licenses unless they are imposed upon income." State of Oregon, Personal Income Tax Law and Regulations, Art 605a-1-a(3) (1951).

The interpretation of the statute by the State Tax Commission is given significant weight.

"Although such rules promulgated by the Tax Commission or other state administrative agency are not controlling, their contemporaneous construction of an act is, nevertheless, highly persuasive, especially where such rules have been in effect for a long term of time as a basis for determining technical and involved matters such as here presented." Keyes v. Chambers et al, 209 Or. 640, 661, 307 P.2d 498 (1957).

Plaintiffs view the B O taxes as an occupational license tax imposed on income. They assert that defendant allowed a credit for such taxes until the years in question. Defendant denies this. It does appear that defendant allowed some of the plaintiffs a credit for one of the years in question, but defendant claims this was done in error.

CONSTRUCTION OF STATUTE

2. In close cases, as this one is, the court must pay particular heed to the rules governing construction of tax credit statutes. Applying the pre-1951 law, the court in Keyes held that a Canadian gross income tax on dividends did not qualify as a "net income tax." 209 Or. at 662. That case sets forth appropriate guidance for application of the statute in this case.

"A provision allowing a credit against a state tax is, in effect, an exemption from liability for a tax already determined and admittedly valid. It is, therefore, in order to note before proceeding further that such credits, deductions or exemptions as the legislature may allow in the computation of an income tax are privileges accorded as a matter of legislative grace and not as a matter of taxpayer right. By reason of their character as legislative grants, statutes relating to deductions allowable in computing income must be strictly construed against the taxpayer and in favor of the taxing authority. The rule of strict construction to which we refer is equally applicable to tax credits. A 'credit' to a tax has a far greater impact on the ultimate liability of the taxpayer than an allowable deduction and, therefore, is an item of greater importance as a subject for strict construction in favor of the government." Id. at 645-46. (Citations omitted.)

The taxpayers have the burden of showing they come within the ambit of the statute. Any doubts are resolved against them.

"In fact, if there is even a doubt whether the legislature granted a deduction or exemption, the presumption is that the legislature did not so provide and we have so held. 'No exemptions should be allowed, therefore, unless they are plainly warranted, and the intent of the legislature to exempt must be clear beyond a reasonable doubt. * * * An intention to exempt will not be implied from language which is susceptible of any other reasonable interpretation.' " Unander v. Pasquill et al, 212 Or. 213, 223, 319 P.2d 579 (1957) (quoting Allen v. Multnomah County, 179 Or. 548, 552-53, 173 P.2d 475 (1946)).

ANALYSIS

Plaintiffs argue that the history of the statute shows they are clearly within its intended grace. However, the history only indicates an intent to remove the requirement that it be a "net" income tax. There is no indication of an intent to expand the concept of an income tax.

3. Although there are conflicting authorities, generally an income tax is considered a direct tax and an excise tax an indirect tax.

"[E]xcises are defined as 'taxes laid upon the manufacture, sale or consumption of commodities within the country, upon licenses to pursue certain occupations, and upon corporate privileges.' As thus defined, excise taxes come to have a more or less precise meaning. They are an indirect tax and have no reference to earnings or income except that the sum of such earnings or income may be made the measure of the tax." 1 Cooley, The Law of Taxation, 127 § 42 (4th ed 1924) (footnotes omitted).

In contrast, the same author observes:

"An income tax is one levied on the income from property or an occupation. It is a direct tax upon the thing called income. It is a special rather than a general tax. An excise upon those engaged in a particular occupation, although graded in accordance with income, is an occupation tax and not an income tax." Id. 138-39, § 49 (footnotes omitted).

4. There is a different orientation between an income tax and an excise tax. An income tax is not conditioned on engaging in any particular activity or the exercise of a privilege. The B O tax is. The difference between an income tax and an excise tax has been thoroughly considered by the courts in Washington.³ Based on Washington's particular constitution, income taxes are deemed a type of property tax. Culliton v. Chase, 174 Wn. 363,25 P.2d 81, 83 (1933). On the same day, the court also found the B O tax to be an excise tax. State ex rel. Stiner v. Yelle,174 Wn. 402, 25 P.2d 91 (1933). In so doing, the court stated:

"This act does not concern itself with income which has been acquired, but only with the privilege of acquiring, and that the amount of the tax is measured by the amount of the income in no way affects the purpose of the act or the principle involved." Id. at 407.

The difficult question of classification has also been dealt with on the national level. When Congress attempted to impose an income tax, the Supreme Court held the income tax was a "direct" tax that must be apportioned. The court made it clear that the same did not hold true for an excise or indirect tax.Pollock v. Farmers' Loan Trust Co., 158 U.S. 601, 628,15 S Ct 912, 39 L Ed 1108, modifying 157 U.S. 429, 15 SC 673, 39 L Ed 759 (1895). This view required adoption of the 16th Amendment to the United States Constitution before an income tax could be levied. Despite the passage of time, the distinctions have remained. See, for example, Steward Machine Co. v. Davis,301 U.S. 548, 57 S Ct 883, 81 L Ed 1279 (1937) (social security tax held an excise tax) and MillerCharitable Fund v. Commissioner, 89 TC 1112, 1121 (1987) (tax on private foundations an excise tax).

The focus of the B O tax is on business activity, not income. In Fisher Flouring Mills Co. v. State, 35 Wn.2d 482,213 P.2d 938, 940 (1950), the Washington Supreme Court held that government subsidies were not included in "value of the products manufactured," the measure of the B O tax on manufacturing businesses. The court stated:

"The subsidy payments were income and they tended to increase the value of the enterprise and the profits of the business. But they did not increase the value of the products — that value was established by the market price at which they sold." (Emphasis in original.)

In that case, the respondent contended the B O tax was a gross income tax. The court found that, at least as to manufacturers, the B O tax was not a tax on gross income.

As indicated above, this is a close case. It is possible that B O taxes using the measure "gross income of the business" are just as comprehensive, if not more so, than a personal income tax. However, it is doubtful the Oregon legislature intended the credit to apply to an excise tax merely because the measure of the tax referred to income. Oregon has long recognized a difference between an income tax and an excise tax.

"An occupation tax is a form of excise tax. It is a tax imposed upon a person for the privilege of carrying on a business, trade or occupation." Eugene Theatre et al v. Eugene et al, 194 Or. 603, 627-28, 243 P.2d 1060 (1952). (Citations omitted.)

CONCLUSION

5. In conclusion, plaintiffs have not clearly shown they are within ORS 316.082. In using the term "income tax," the statute requires the tax to be imposed on income. While the measure of the income tax may be irrelevant, whether "gross," "adjusted gross," "net," "flat" or "basic," the subject of the tax must be "income." The Washington B O tax is not a tax on income. It is a tax on business activities. The court finds the Washington B O taxes are not "income taxes" within the meaning of ORS 316.082. Judgment will be entered sustaining defendant's opinion and orders in the above cases.

Costs to defendant.

¹ The language providing for S corporations was added by the 1987 legislature and, therefore, does not apply to 1986. See Or Laws 1987, ch 647, §§ 11, 14.

² All references to the Washington Revised Code are to the law as of 1988.

³ See Comment, A Study of State Taxation in Washington, 33 Wn. L Rev 398 (1958).