Do the limits in RCW 54.28 on city utility taxes (including the carve-out from 'gross revenue') restrict a First Class city's authority under RCW 35.22.280(32) to tax investor-owned utilities?
Plain-English summary
Senator Ann Rivers asked about a city in her district (Vancouver) that imposes a utility tax on every electricity seller, including the local public utility district. The city assesses the tax on "gross revenue derived from the sale of electricity within the city limits" and then the utility passes the tax through to its customers. The question was whether RCW 54.28 (the chapter that governs state and city taxes on PUDs) limits a city's general business-licensing taxing authority under RCW 35.22.280(32). In particular, does the RCW 54.28.011 definition of "gross revenue" (which excludes "any tax levied by a municipal corporation") apply when the city is taxing investor-owned utilities like Puget Sound Energy?
The AG drew a line based on what kind of utility was being taxed:
- Investor-owned utilities. A First Class city's authority under RCW 35.22.280(32) is broad business-licensing power. Watson v. City of Seattle and Puget Sound Energy v. City of Bellingham hold that this authority supports a utility tax independent of the state PUD tax in RCW 54.28. The "gross revenue" definition in RCW 54.28.011 does not apply, so the tax can be assessed on amounts the utility collects from its customers to pay the tax. That allows what is sometimes called tax pyramiding (tax on top of tax), but the Puget Sound Energy decision specifically permits it for taxes imposed under the city's licensing power.
- Public utility districts. A city's only authority to tax a PUD is RCW 54.28.070, which expressly limits the measurement to "gross revenues derived by such district from the sale of electricity within the city or town." That term incorporates the RCW 54.28.011 definition, which excludes "any tax levied by a municipal corporation upon the district pursuant to RCW 54.28.070." So when the taxpayer is a PUD, the city cannot pyramid; the city's own tax has to come out of the measurement base.
The opinion harmonized the two statutes by reading RCW 35.22.280(32) and RCW 54.28.070 as covering different taxpayers. Otherwise, one or the other would be superfluous, an outcome the canons of construction try to avoid (In re Det. of Strand; Am. Legion Post 149).
Currency note
This opinion was issued in 2018. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.
Common questions
Q: Why does it matter what statute the city's tax authority comes from?
A: Because the two statutes have different limits. RCW 35.22.280(32) is general business-licensing authority with broad scope. RCW 54.28.070 is a narrower grant specifically for taxing PUDs and incorporates the gross-revenue definition that excludes the city's own tax.
Q: What is "tax pyramiding"?
A: When the same revenue is taxed twice (first as the base for the tax, then again because the tax was passed through to customers and is now part of the utility's revenue). For investor-owned utilities under city business-licensing authority, Puget Sound Energy v. City of Bellingham allows the city to assess on the post-pass-through total. For PUDs under RCW 54.28.070, the gross-revenue definition prevents this by excluding the city's own tax from the measurement base.
Q: Why are PUDs treated differently?
A: They are quasi-municipal corporations, not investor-owned businesses, and the legislature regulated city taxation of PUDs through a specific statute (RCW 54.28.070) with its own measurement rule. Cities cannot use general business-licensing authority to reach a PUD because the more specific statute controls.
Q: Does this opinion apply to non-First-Class cities?
A: The opinion addresses only First Class cities (those operating under RCW 35.22). Other classes of cities have parallel but not identical authority statutes. The opinion expressly notes its analysis is "limited to the law applicable to cities of the First Class."
Q: Did this change anything for Vancouver's existing tax?
A: The opinion did not opine on any specific city's ordinance. It addressed the general allocation of authority. Vancouver's ordinance taxes both investor-owned utilities and PUDs under the city's general license authority. Under this opinion, the IOU portion was on solid ground; the PUD portion would need to use RCW 54.28.070 with the corresponding gross-revenue definition.
Q: What about the constitutional prohibition on local taxation without legislative authority?
A: Cities have no inherent taxing power. Wash. Const. art. VII, § 9 and art. XI, § 12 require legislative grants. RCW 35.22.280(32) and RCW 54.28.070 are two such grants, with different scopes. Cmty. Telecable of Seattle confirms that cities depend on these legislative grants.
Background and statutory framework
Washington has a two-track system for taxing utility revenue. The state taxes PUDs through RCW 54.28.020, with "gross revenue" defined in RCW 54.28.011 to exclude any city-imposed tax under RCW 54.28.070. Cities can tax PUDs under RCW 54.28.070, which uses the same gross-revenue definition. That symmetry prevents recursive double-counting.
For investor-owned utilities, no equivalent state utility tax exists; instead, the city's authority comes from its general business-license power under RCW 35.22.280(32) for First Class cities (Tacoma, Spokane, Seattle, etc.). Watson v. City of Seattle described that authority as "broad statutory taxing authority" used to tax businesses for the privilege of doing business within city limits, "unless otherwise restricted by statute." The Court of Appeals' decision in Puget Sound Energy v. City of Bellingham expressly held that "cities have broad authority to impose utility taxes without regard to the state tax."
The harmonization principle in Am. Legion Post 149 and In re Det. of Strand drives the analytical move: the AG interprets the two statutes to apply to different taxpayer types so that neither becomes superfluous. RCW 35.22.280(32) covers IOUs; RCW 54.28.070 covers PUDs, with its specific measurement rule.
Citations and references
Statutes:
- RCW 35.22.280(32) (First Class city licensing authority)
- RCW 54.28.011 (gross revenue definition)
- RCW 54.28.020 (state tax on PUDs)
- RCW 54.28.070 (city tax on PUDs)
Constitutional provisions:
- Wash. Const. art. VII, § 9
- Wash. Const. art. XI, § 12
Cases:
- Watson v. City of Seattle, 189 Wn.2d 149, 401 P.3d 1 (2017)
- Cmty. Telecable of Seattle, Inc. v. City of Seattle, 164 Wn.2d 35, 186 P.3d 1032 (2008)
- Pacific Tel. & Tel. Co. v. City of Seattle, 172 Wash. 649, 21 P.2d 721 (1933)
- Puget Sound Energy, Inc. v. City of Bellingham, 163 Wn. App. 329, 259 P.3d 345 (2011)
- Am. Legion Post 149 v. Dep't of Health, 164 Wn.2d 570, 192 P.3d 306 (2008)
- In re Det. of Strand, 167 Wn.2d 180, 217 P.3d 1159 (2009)
Prior AG opinions:
- AGO 2016 No. 1
Source
Original opinion text
Attorney General Bob Ferguson
CITIES AND TOWNS—TAXATION—DISTRICT, PUBLIC UTILITY—Method For Measuring Municipal Public Utility Taxes
A city or town may impose a public utility tax on the revenue generated by an investor-owned utility under RCW 35.22.280(32), and on the revenue generated by a public utility district under RCW 54.28.070. The definition of "gross revenue" in RCW 54.28.011 applies to tax imposed on the revenue of a public utility district but not on the revenue of an investor-owned utility.
September 11, 2018
The Honorable Ann Rivers
Senator, District 18
PO Box 40418
Olympia, WA 98504-0418
Cite As:
AGO 2018 No. 7
Dear Senator Rivers:
By letter previously acknowledged, you have requested our opinion on a question we have paraphrased as follows:
Do the definitions and any other provisions in RCW 54.28, such as the definition of "gross revenue" in RCW 54.28.011, limit the authority of First Class cities to levy a utility tax using their authority under RCW 35.22.280(32)?
BRIEF ANSWER
The answer to your question depends upon the nature of the entity subject to the tax. The authority of a city to impose a utility tax on a private, investor-owned utility derives from RCW 35.22.280(32), which is the general business licensing authority of a city. Taxes imposed under RCW 35.22.280(32) are not limited by RCW 54.28. In contrast, the authority of a city to impose a utility tax on a public utility district (PUD) is found in RCW 54.28.070, and that statute expressly limits the tax based on the definition of "gross revenue" found in RCW 54.28.011. Therefore a city utility tax imposed on a private, investor-owned utility is not limited by the definition of "gross revenue" in RCW 54.28.011, while a similar tax imposed on a public utility district is so limited.
[original page 2]
BACKGROUND
Your question arises in relation to a city within your district that imposes a city utility tax under the authority of the city's general business licensing authority.[1] That statute provides a First Class city with the authority to "grant licenses for any lawful purpose, and to fix by ordinance the amount to be paid therefor[.]" RCW 35.22.280(32). The city measures its tax on "the gross revenue derived from the sale of electricity within the city limits[.]" Vancouver Mun. Code § 5.96.020. The city imposes this tax on electricity sold by "every person, firm, corporation and municipal corporation, including any public utility district." Vancouver Mun. Code § 5.96.020. Utilities, however, pass the local tax on to their customers, collecting from them the amount of the tax in addition to other charges for electricity.
The state also imposes a utility tax, specifically on electricity sold by PUDs. RCW 54.28.020. The state tax is imposed pursuant to a series of statutes codified in RCW 54.28. The state tax is measured by the gross revenue derived from engaging in the business "of operating works, plants or facilities for the generation, distribution and sale of electric energy." RCW 54.28.020. The legislature has statutorily defined "gross revenue" to mean
the amount received from the sale of electric energy, which also includes any regularly recurring charge billed to consumers as a condition of receiving electric energy, and excluding any tax levied by a municipal corporation upon the district pursuant to RCW 54.28.070.
RCW 54.28.011. Thus, for the state tax, gross revenue does not include the amount of tax levied by a municipal corporation, such as a city. RCW 54.28.011.
RCW 54.28.070 authorizes "[a]ny city or town in which a public utility district operates works, plants or facilities for the distribution and sale of electricity . . . to levy and collect from such district a tax on the gross revenues derived by such district from the sale of electricity within the city or town[.]" Thus, if a city levies a tax on a PUD, the same definition of "gross revenue" found in RCW 54.28.011 applies, and, as a result, the amount of gross revenue would not include the amount of any tax levied by the city.
You ask whether any provision of RCW 54.28, including the definition of "gross revenue" in RCW 54.28.011, limits the authority of First Class cities to levy a utility tax using their authority under RCW 35.22.280(32).
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ANALYSIS
Washington cities depend on legislative grants of authority to impose taxes, lacking any inherent authority to do so under the state constitution. Const. art. VII, § 9; art. XI, § 12; see also Cmty. Telecable of Seattle, Inc. v. City of Seattle, 164 Wn.2d 35, 41, 186 P.3d 1032 (2008). Your question concerns two statutory delegations of authority under which cities may tax utilities: RCW 35.22.280(32) and RCW 54.28.070. We consider each of them in turn, as well as the statutory restrictions on that authority. We answer your question by concluding that RCW 35.22.280(32) authorizes the imposition of a municipal utility tax against investor-owned utilities. The revenue against which this tax is calculated may include revenue that the utility collects by passing on the tax to its customers. RCW 54.28.070 provides a city with authority to tax PUDs, but the definition of "gross revenue" in RCW 54.28.011 governs how the tax is measured.
"RCW 35.22.280 enumerates the broad legislative powers delegated to first class cities[.]" Watson v. City of Seattle, 189 Wn.2d 149, 167, 401 P.3d 1 (2017). This statute authorizes First Class cites to "grant licenses for any lawful purpose, and to fix by ordinance the amount to be paid therefor[.]" RCW 35.22.280(32). This licensing authority serves dual purposes: "(1) For regulation; (2) for revenue." Pacific Tel. & Tel. Co. v. City of Seattle, 172 Wash. 649, 654, 21 P.2d 721 (1933).
First class cities have "broad statutory taxing authority pursuant to RCW 35.22.280(32)" to tax businesses for the privilege of doing business within city limits, unless otherwise restricted by statute. Watson, 189 Wn.2d at 171. RCW 35.22.280(32) grants First Class cities sufficiently broad authority to impose a public utility tax. Puget Sound Energy, Inc. v. City of Bellingham, 163 Wn. App. 329, 337, 259 P.3d 345 (2011) (cities have broad authority to impose utility taxes without regard to the state tax). A city's authority under RCW 35.22.280(32) is not limited by the fact that the state also imposes its own utility tax under RCW 54.28.020. The similarity in name and subject of the tax notwithstanding, "the city is not required to classify for taxation purposes the activities [of the taxpayer] in the same manner as does the state[.]" Id. at 337.
The authority to tax under RCW 35.22.280(32) is limited by its own terms, however. RCW 35.22.280(32) is, by its own terms, authority to license a business. See Watson, 189 Wn.2d at 167 (describing the authority granted by RCW 35.22.280(32) as the authority to levy an excise tax associated with a business license). In contrast, the tax authorized by RCW 54.28.070 applies only to a city's taxation of the revenue of a PUD. RCW 54.28.070.
Construing RCW 35.22.280(32) as authority to tax investor-owned utilities but not PUD's harmonizes the statue with the separate authority for a city to impose a utility tax against a PUD. RCW 54.28.070. Am. Legion Post 149 v. Dep't of Health, 164 Wn.2d 570, 588, 192 P.3d 306 (2008) ("Statutes are to be read together, whenever possible, to achieve a 'harmonious total statutory scheme . . . which maintains the integrity of the respective statutes.'" (Alteration in original source.)). If RCW 35.22.280(32) and RCW 54.28.070 did not differ, then one or the other
[original page 4]
of them would be superfluous, a result that statutory construction seeks to avoid. In re Det. of Strand, 167 Wn.2d 180, 189, 217 P.3d 1159 (2009) ("Under rules of statutory construction 'no part of a statute should be deemed inoperative or superfluous unless it is the result of obvious mistake or error.'").
RCW 54.28.070 allows a city to impose a tax on a PUD's gross revenue from the sale of electricity. The term "gross revenue" for purposes of that statute is defined to exclude "any tax levied by a municipal corporation upon the district[.]" RCW 54.28.011. Therefore, by its own terms, the municipal utility tax authorized by RCW 54.28.070 applies only to "gross revenue" as defined by RCW 54.28.011. That definition excludes "any tax levied by a municipal corporation upon the district pursuant to RCW 54.28.070." RCW 54.28.011.
Reading RCW 35.22.280(32) and RCW 54.28.070 together, we conclude that the former statute authorizes a First Class city to impose a utility tax against investor-owned utilities, while the latter authorizes a municipal utility tax against PUDs. For a tax on electricity sold by an investor-owned utility, the tax may be assessed against amounts that the utility collects from its customers to pay the tax. Puget Sound Energy, 163 Wn. App. at 338-39. For a tax on electricity sold by a PUD, the tax is measured by "gross revenue" as defined in RCW 54.28.011.
We trust that the foregoing will be useful to you.
ROBERT W. FERGUSON
Attorney General
JEFFREY T. EVEN
Deputy Solicitor General
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[1] Although your question arises with regard to a specific city, our analysis is necessarily general. Attorney General Opinions do not focus on specific disputes, but address state law more generally. AGO 2016 No. 1, at 3. Our analysis is, however, limited to the law applicable to cities of the First Class, which are addressed in RCW 35.22. The law with regard to other classes of cities may be similar or different.