* Wedbush Securities, Inc., Appellant V. City Of Seattle Respondent

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IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
WEDBUSH SECURITIES, INC.,
a California corporation,
Respondent,
v.
THE CITY OF SEATTLE, a municipal
corporation,
Appellant.
No. 71932-7-1
DIVISION ONE
PUBLISHED OPINION
FILED: August 10, 2015
Trickey, J. — Business and occupation (B&O) taxes may be assessed for
the privilege of doing business in a city. 	Under RCW 35.102.130 an employer is
required to pay taxes on both payroll and service income. 	When that service
income is derived from customer contacts by telephone and the Internet, the entire
amount is subject to the B&O tax. This is particularly true here, where the employer
established an office in the city of Seattle primarily to compete with other similar
businesses. We affirm.
FACTS
Wedbush 	Securities, 	Inc. 	(Wedbush) 	is 	a 	registered 	securities
broker/dealer, 	headquartered 	in 	Los Angeles, 	California. 	It 	has offices 	and
customers throughout the United States, including Seattle, Washington. 	The
Seattle office has a retail stock brokerage for telephone and Internet customers;
and 	for 	institutional 	investors, 	a 	sales 	department. 	Wedbush 	employs
approximately 28 	people in 	Seattle and 	its 	income 	is 	primarily derived from
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No. 71932-7-1/2
commissions received for services performed by its employees. 	The majority of
contact with customers occurs through the telephone and the Internet.
The city of Seattle (City) conducted an audit for the period from January 1,
2008 through June 30, 2012. The City concluded that Wedbush had underpaid its
taxes by failing to include income derived from all its customers. 	For the audit
period, Wedbush had a total gross service revenue of $28,670,412.02, which the
City argues should have been reported in its entirety. 	Instead, Wedbush only
reported revenue that was obtained from those clients with Seattle addresses.
The hearing examiner upheld the City's B&O tax assessment. 	Wedbush
filed a writ of review in superior court challenging the hearing examiner's decision.1
The superior court affirmed the hearing examiner.
Wedbush appeals, arguing that the City misapplied the service income
factor in the statutory apportionment formula by including income derived from all
customers rather than income derived only from those customers who had Seattle
addresses.
ANALYSIS
In an appeal of a statutory writ, we review the findings offact for substantial
evidence and whether the conclusions of law as applied are erroneous. 	Getty
Images. Inc. v. Citv of Seattle. 163 Wn. App. 590, 599, 260 P.3d 926 (2011).
When, as here, the appellant does not assign error to the hearing examiner's
findings, they are verities on appeal. General Motors Corp. v. Citv of Seattle. Fin.
Dep't. 107 Wn. App. 42, 47-48, 25 P.3d 1022 (2011).
RCW 7.16.120.
 	 	 	 	 	 	 	 	 	 	 	 	 	

No. 71932-7-1/3
A B&O tax is assessed for the privilege of conducting business in the taxing
jurisdiction. 	Ford Motor Co. v. Citv of Seattle. Exec. Servs. Dep't. 160 Wn.2d 32,
44,156 P.3d 185 (2007) (upholding cities' imposition of B&O tax on gross receipts
of wholesale auto sales to independent dealers within cities).
Under Seattle Municipal Code (SMC) 5.55.140(B), the City's assessment is
prima facie correct.2 	American Honda Motor Co.. Inc. v. Citv of Seattle. Dep't of
Exec. Admin., 167 Wn. App. 578, 583 n.4, 273 P.3d 498 (2012). 	We review de
novo the applicability of a city taxation ordinance as a legal question. 	Avanade.
Inc. v. Citv of Seattle. 151 Wn. App. 290, 297, 211 P.3d 476 (2009).
On January 1, 2008, RCW 35.102.130 established new allocations and
apportionment requirements for cities with a gross receipt business tax.3 	Under
RCW 34.102.130, gross income subject to tax under the service and other
business activities classification is apportioned using a two-factor formula. 	The
two factors are payroll and service income. The state mandated that municipalities
in Washington 	use a prescribed two-factor apportionment method for service
classification tax payers such as Wedbush, while businesses selling tangible
personal property allocate the income to the jurisdiction where delivery takes
place.
Wedbush does not dispute that the two-factor formula is applicable to it.
Rather, Wedbush claims that the City misconstrued its ordinance as requiring itto
2 SMC 5.55.140(B) provides:
The Director's assessment or refund denial shall be regarded as prima facie
correct, and the person shall have the burden to prove that the tax assessed or
paid by him is incorrect, either in whole or in part, and to establish the correct
amount of tax.
3The City adopted RCW 35.102.130 in SMC 5.45.081.
 	 	 	 	 	 	 	 	 	 	 	 	 	

No. 71932-7-1/4
report all income no matter where the customer resides. 	RCW 35.102.130(3)(b)4
provides:
The service income factor is a fraction, the numerator of which is the
total service income of the taxpayer in the city during the tax period,
and the denominator of which is the total service income of the
taxpayer everywhere during the tax period. Service income is in the
city if:
(i) The customer location is in the city; or
(ii) The income-producing activity is performed in more than
one 	location 	and 	a 	greater 	proportion 	of 	the 	service-income-
producing activity is performed in the city than in any other location,
based on costs of performance, and the taxpayer is not taxable at
the customer location; or
(iii) The service-income-producing activity is performed within
the city, and the taxpayer is not taxable in the customer location.
Since 2008, as posted on its web site, the City has interpreted "customer
location" as the place where the majority of physical contacts with a customer
occur.5 	In accord with that interpretation, there is no customer location because
there are no physical contacts, thus triggering RCW 35.102.130(3)(b)(ii). 	The
majority of the contacts take place in Seattle.
Wedbush argues that the term "contact" is not ambiguous and that it
necessarily means any contact. 	The City argues that the word "contacts" is
ambiguous and that its 	interpretation 	is in accordance with 	normal statutory
construction rules. 	Where terms are not defined in a statue, courts turn to their
ordinary and contemporary dictionary meaning. 	Skagit County Pub. Hosp. Dist.
No. 1 v. State. Dep't of Revenue. 158 Wn. App. 426, 437-38, 242 P.3d 909 (2010);
Port of Seattle v. State. Dep't of Revenue. 101 Wn. App. 106, 111, 1 P.3d 607
(2000). 	Webster's 	Third 	New 	International 	Dictionary 	490 	(2002) 	defines
4 See SMC 5.45.081(F)(2).
5 Certified Appeal Board Record at 67.
 	 	 	 	 	 	 	 	 	 	 	 	 	

No. 71932-7-1/5
"contacts" as an "association or relationship (as in physical or mental or business
or social meeting or communication)"; "a condition or instance of meeting." 	Thus,
the 	City's interpretation that the word "contacts" means 	physical contacts is
appropriate.
In construing revenue statutes, courts use the usual maxims of construction.
3A Sutherland Statutory Construction § 66.3 (6th ed. 2005). 	Accordingly,
courts assume that every clause in a legislative enactment is intended and has
meaning, giving 	effect to all 	language, rendering 	no portion 	meaningless or
superfluous. 	Getty Images. 163 Wn. App. at 600; AOL. LLC v. Wash. State Dep't
of Revenue. 149 Wn. App. 533, 542, 205 P.3d 159 (2009).
RCW 35.102.130 has cascading clauses to determine whether the service
income is in the city. 	The first clause to determine service income (i) provides
contacts as the determining factor of income. If there are no contacts, then clauses
(ii) or (iii) come into play. 	Both of those clauses trigger a test of performance as
the mechanism with which to establish income for the service factor when the
customer contact is not established. 	Clause (ii) provides that where the income
producing activity is in more than one location but the greater proportion of that
service income is performed within the city rather than any other location, the
income is attributed to the place of business in the city. 	Likewise clause (iii)
provides for the income 	produced 	in 	the city where 	it 	is the sole basis of
performance.
Thus, to give meaning to RCW 35.102.130(3)(b)(ii) and (iii), one has to
interpret "customer location" as the place where physical contact occurs. To hold
 	 	 	 	 	 	 	 	 	 	 	 	 	

No. 71932-7-1/6
otherwise would render the place of performance tests contained in clauses (ii)
and (iii) meaningless.
The B&O tax is imposed for the "privilege of engaging in business activities
within the City." 	SMC 5.45.050. 	Wedbush leases real property in the city and at
all times 	its employees 	use the facilities therein. 	Wedbush's 	representative
testified that the revenue generated in the Seattle office was generated through
several operations that occur in other states. 	Wedbush argued that the business
performed in Seattle is limited to an employee answering the telephone, taking an
order, and placing that order on the computer which executes the trade.
Although some of Wedbush's activities that occur outside the Seattle area
probably generate some revenue, Wedbush failed to provide any documentation
or support thereof. 	On the record before the hearing examiner, the majority of
income as defined in clause (ii) takes place in Seattle.
Moreover, when asked by the hearing examiner why Wedbush needed an
office in Seattle, Wedbush responded that itwas in order to attract business in the
locale:
[C]ompetitor-wise. 	Is why you need an office in Seattle. If you'rethe
only one that doesn't have an office in Seattle, you're obviously not
going to be able to gain the, any kind of business up against some
of the larger wire houses in town. 	Everybody has a pretty much an
office 	somewhere, 	from 	Edward 	Jones 	to 	Smith 	Barney 	to
WedbushJ6]
Wedbush has maintained a business in Seattle for approximately 45 years.
Seattle is the place of performance of the service income producing activity.
Clerk's Papers at 75.
 	 	 	 	 	 	 	 	 	 	 	 	 	

No. 71932-7-1/7
The City's interpretation gives meaning to all sections of RCW 35.102.130.
Accordingly, the superior court was correct in upholding the hearing examiner's
decision.
Affirmed.
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WE CONCUR:
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