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This spring, the Washington Supreme Court decided the case Dot Foods, Inc. v. Wash. Dept of Revenue, in which it held that the Washington Department of Revenue’s (DOR) imposition of the Business and Occupation (B & O) tax, by way of the retroactive application of a statute that was amended in 2010 to remove Dot Foods’ exempt status, was not a Due Process violation. 

Dot Foods is a family owned and operated food redistributor, headquartered in Mt. Sterling, Illinois. It has eight distribution centers, in California, Georgia, Idaho, Illinois, Maryland, Missouri, New York, and Tennessee, and dispatches more than 112,000 products to distributors in all 50 states and over 25 countries. 

Dot Foods argued that the DOR’s imposition of the B & O tax violated its Due Process rights, that the DOR should be collaterally estopped from removing the exemption, and thirdly, that the tax assessment violated the separation of powers doctrine.

Due Process

Dot Foods asserted that retroactive application of the 2010 amendment that deprived the company of its tax exempt status was a Due Process violation. The court’s analysis focused on whether the statute was “supported by a legitimate legislative purpose furthered by rational means.” The court also recognized that retroactive legislation must satisfy an additional burden, such that is must “simply” be justified by a “rational legislative purpose.” 

In construing whether there was a legitimate legislative purpose, the court looked at the amended statute itself, whose primary objective was to prevent “large and devastating revenue losses.” In addition, the amendment was necessary because the previous version had created a “strong incentive” for in-state businesses to move outside Washington. On the strength of these reasons, the court concluded that the amended statute served a legitimate legislative purpose. 

In observing that its duty was to apply the “most relaxed form of judicial scrutiny,” the court proceed in a manner that was highly deferential to the state’s lawmakers, especially in light of the near-absolute plenary power that they have in tax matters. Accordingly, the court determined it was not in the position to “question the wisdom or desirability” of the legislation, “so long as there is any reasonable basis” upon which it was made. 

Next, the court examined whether the amendment was rationally related to the legislative purpose, in which case it would be found constitutional. 

On this point, Dot Foods took issue with the fact that the 2010 amendment was made retroactive to the statute’s original enactment, 27 years prior. The court disputed the premise of this argument, pointing out that, among other things, the retroactivity period applicable to Dot Foods was only four years, and that the statute of limitations would functionally limit the amended statute’s retroactive application anyway. 

Asserting that it is the “function – rather than the length – of a retroactivity period that should determine whether it comports with Due Process protections,” the court thus concluded that the 2010 amendment was “rationally related to the legislature’s legitimate, stated purpose” of preventing revenue losses. For these reasons, there was no Due Process violation.

Collateral estoppel

Dot Foods also argued that the DOR could not assess the B & O tax against it because the issue had already been litigated to a final determination, thus collaterally estopping the action. The previous litigation, known as Dot I, which also involved a B & O tax exemption, ended in Dot Foods’ favor, and triggered the amendment at issue here. At issue for Dot Foods in Dot I was just over $500,000, while the DOR asserted that the state stood to lose more than $150 million in revenue were the court to find in the company’s favor. 

The court dispensed with this contention on the grounds that Dot I did not address an identical issue because the tax periods in question were not the same. The court disagreed with Dot Foods’ related points as well. As with Dot Foods’ first argument, the court again disagreed that collateral estoppel should preclude the DOR from collecting the B & O tax.

Separation of powers

Finally, Dot Foods declared that the retroactive removal of its tax-exempt status violated the separation of powers doctrine, which may preclude lawmakers from infringing upon a judicial function, by working around it, or trying to curtail or diminish it in some way.

Once again, the court disagreed with Dot Foods, because it failed to provide any evidence of legislative infringement on the decision in Dot I. The court also reiterated that the time frame in question in Dot I was not the same as in this case, another reason that there could be no separation of powers violation. 

The court concluded by noting that the legislature was “careful to avoid trespassing on the judicial function…[o]ur jurisprudence requires us to show the legislature equal respect in this case by upholding the retroactive application of this amendment…” 

Next steps

On September 9, 2016, Dot Foods filed a petition for writ of certiorari with the United States Supreme Court. This time the company is focusing only on its Due Process claim, by posing the following question: “…whether, or under what circumstances, imposing additional tax beyond the year preceding the legislative session in which the law was enacted violates due process.” 
 
Numerous entities filed amicus briefs, such as the American College of Tax Counsel, the Council on State Taxation, the Tax Executives Institute, Inc., and the Institute for Professionals in Taxation (ITP). Their concerns all flow from their need for the Supreme Court to step in and clarify the constitutionally acceptable limits of applying retroactive tax legislation. More specifically, for example, ITP’s amicus brief contends that “[r]etroactive legislation is anathema to the American legal tradition and to the most basic concepts of notice and due process,” and that it is “inefficient, deters investment, and undermines governmental legitimacy.”

The DOR waived its right to respond to Dot Foods’ petition, but on November 3, 2016, the court requested one anyway, before it considers whether to hear the case. That response is due December 5, 2016.
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