* City of Wenatchee v. Chelan County Public Utility District No. 1

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FILED
May 20, 2014
In the Office of the Clerk of Court
WA State Court of Appeals, Division III
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION THREE
CITY OF WENATCHEE, a municipal 	)
corporation, 	)
) 	No. 31195-3-111
Appellant, 	)
)
v. 	)
)
CHELAN COUNTY PUBLIC UTILITY 	)
DISTRICT NO.1, a municipal 	) 	PUBLISHED OPINION
corporation, 	)
)
Respondent. 	)
SIDDOWAY, C.J. 	This case calls upon us to decide whether one municipality
may tax the revenue of another municipality based on a general rather than specific
legislative grant of taxing authority, where the revenue is from activity that is proprietary
in character rather than governmental. To decide that question, we must discern the
principles on which this issue was decided by our Supreme Court in King County v. City
of Algona, 101 Wn.2d 789, 681 P.2d 1281 (1984). In Algona, the city of Algona assessed
a business and occupation tax on revenues generated by a King County solid waste plant
located in the city-a tax that the Supreme Court held was invalid.
Considering the decision in Algona in its entirety and bearing in mind the
language ofthe Washington Constitution and earlier and later decisions by our Supreme
 	 	 	 	 	 	 	 	 	 	 	 	 	

No. 31195-3-111
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Court, we hold that Algona was decided on the basis of the governmental character of the
activity that the city of Algona sought to tax. Because the utility tax that the city of
Wenatchee levied in this case was on activities that were proprietary (in whole or in large
part) we hold that the city enjoys the authority to levy and collect the tax from Chelan
County Public Utility District No.1, except to the extent that the district can demonstrate
that its revenues were derived from governmental activities. 	We therefore reverse the
trial court's declaratory judgment in favor of the district and remand for further
proceedings.
FACTS AND PROCEDURAL BACKGROUND
In April 1964, the city of Wenatchee adopted a utility tax on domestic water sales.
Chelan County Public Utility District No.1 (PUD), which provides water to 2,000
customers located within the city's limits, paid the utility tax on domestic water service
for many decades. In May 2012, however, it notified the city of its intent to stop paying
the tax on its water system revenues, having concluded that absent express statutory
authorization to the city to impose the tax the PUD enjoyed immunity from taxation
under the governmental immunity doctrine. By express authorization, the PUD means
legislation that not only authorizes a municipality to tax, but explicitly authorizes it to tax
other municipalities. The PUD is itself a municipal corporation authorized to own and
operate domestic water systems and to sell electric power. See chapter 54.04 RCW.
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The city and the PUD presented their disagreement over the city's authority to tax
to the Chelan County Superior Court through a declaratory judgment action by the city,
in which the PUD joined. No facts are in dispute.
The city's position is that RCW 35A.82.020, which grants code cities like
Wenatchee broad general authority to impose excise taxes for regulation or revenue,
includes the authority to tax domestic water sales by another municipality that take place·
within the city limits. Its position is that the governmental immunity doctrine only
applies when the municipality being taxed is operating in a sovereign capacity; in that
case (and only that case) it agrees that the legislative authorization to tax that
governmental function must be express in the sense urged by the PUD. Where a
municipality is operating in a proprietary capacity-as the PUD is, in selling domestic
water-the city contends that the governmental immunity doctrine does not apply and the
legislature's general grant of authority to impose an excise tax is sufficient.
The PUD's position is that the governmental immunity doctrine applies any time
one municipality seeks to tax another, so that express legislative authorization to tax
another municipality is always required. It views governmental immunity as grounded in
article VII, section 9 and article XI, section 12 of the Washington Constitution.
The trial court was persuaded by the arguments of the PUD, declared the utility
tax imposed by the city on the PUD's water system to be unlawful, and ordered the city
to cease charging the PUD for the tax. The city appeals.
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ANALYSIS
Central to the parties' disagreement and to our task on appeal is determining the
principle of law expressed in Algona that constituted the holding of that case. The
disposition reached by the Washington Supreme Court in Algona was that the city of
Algona lacked authority to assess a business and occupation (B&O) tax against King
County on revenues from a solid waste plant owned by the county that was located in the
city. The parties point to different statements of legal principle in Algona as accounting
for that disposition.
The PUD argues that the Algona court expressed the principle of law necessary to
its disposition when it said:
The general grant of taxation power on which Algona relies in RCW
35A.II.020 contains no express authority to levy a tax on the State or
another municipality. To allow [Algona] to impose the tax in this case
would violate the established rule that municipalities must have specific
legislative authority to levy a particular tax.
The governmental immunity doctrine provides that one municipality
may not impose a tax on another without express statutory authorization.
101 Wn.2d at 793 (citations omitted).
The city argues that the foregoing discussion in Algona cannot be read in isolation
and that it was implicitly based on the fact that Algona was seeking to tax revenue
derived from a governmental function. 	It argues that the court more clearly expressed the
principle of law necessary to its disposition when it said:
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[Algona] argues that governmental immunity should not apply
because the [King] County operation of a solid waste transfer station is
proprietary. This court has explicitly recognized that the disposal of solid
waste is a governmental function. 	Where the primary purpose in operating
the transfer station is public or governmental in nature, the county cannot
be subject to the city B & 0 tax, absent express statutory authority.
Id. at 794 (citation omitted).
The city also points to Burba v. City o/Vancouver, 113 Wn.2d 800, 783 P.2d 1056
(1989), in which the Supreme Court held that a city could constitutionally impose a
utility tax on a city-owned water and sewer utility-although without addressing Algona
or the doctrine of governmental immunity. It also points to Burns v. City o/Seattle, 161
Wn.2d 129, 164 P.3d 475 (2007) in which the Supreme Court noted an asserted
inconsistency between Algona and Burba. 	Without deciding what, precisely, Algona
held, the Burns court observed that a city's ability to impose an excise tax on revenue of a
utility "is not ... a settled issue of law" and that "it is by no means certain ... that the
doctrine of governmental immunity from taxation would prevent the [cities of Shoreline,
Burien, Lake Forest Park, SeaTac, and Tukwila] from imposing a utility tax on [Seattle
City Light]." Id. at 159-60.
For reasons explained below, we conclude, first, that the provisions of the
Washington Constitution relied upon by the pun are not a source of limitation on local
taxing authority granted by the legislature; second, that RCW 35A.82.020's grant of
taxing authority is broad and, on its face, sufficient to support a municipality's taxation of
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another municipality's conduct of activity within its borders; and third, that the
legislature's use of more explicit language in statutes dealing with a city's taxation ofa
public utility district's sale of electricity does not support the conclusion that we should
ignore the plain language ofRCW 35A.82.020 in favor ofa more narrow authorization.
Turning to the governmental immunity doctrine, we recognize that it is a common
law doctrine implied where a government acts in its sovereign capacity. 	We conclude
that Algona's holding is consistent, and limits immunity from taxation to sovereign, not
proprietary, activities. Finally, we acknowledge the PUD's and amici's argument that
recent case law and legislation may support a water purveyor's claim that it has allocated
and recovered the cost of providing fire suppression services and that its revenue from
those fees is from a government function. 	Since the record is insufficient to determine
what, if any, revenues of the PUD might be immune from taxation on that basis, that
issue must be resolved upon remand to the trial court.
I. Article XI, section 12 and article VII, section 9 of the Washington
Constitution are not a source of limitation on local taxing
authority granted by the legislature
Article XI of the Washington Constitution, dealing with "County, City and
Township Organization," provides at its section 12 (entitled "Assessment and Collection
of Taxes in Municipalities"):
The legislature shall have no power to impose taxes upon counties, cities,
towns or other municipal corporations, or upon the inhabitants or property
thereof, for county, city, town, or other municipal purposes, but may, by
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general laws, vest in the corporate authorities thereof, the power to assess
and collect taxes for such purposes.
The general import of this section of the Washington Constitution is well settled.
In Larson v. Seattle Popular Monorail Authority, 156 Wn.2d 752, 758, 131 P.3d 892
(2006), our Supreme Court stated that the provision "clearly establishes that the state
legislature may delegate to the corporate authorities of municipalities the power to tax
such municipalities, their inhabitants, and property for local purposes," while at the same
time "expressly prohibit[ing the legislature] from direct taxation of municipalities and
their inhabitants and property for local purposes." The apparent objective of the
provision, frequently called the "home rule provision," was "to bar the state legislators,
whose members come from all parts of the state, from dictating local taxing policy and
instead to allow municipalities to control local taxation for local purposes." Id. at 756
n.3; Citizens for Financially Responsible Gov 't v. City of Spokane, 99 Wn.2d 339, 346,
662 P.2d 845 (1983) ("The focus of article 11, section 12 is to restrict the State from
imposing taxes on municipal corporations or inhabitants or property therein, for
municipal purposes.").
Article VII of the Washington Constitution, dealing with revenue and taxation,
provides at its section 9 (entitled "Special Assessments or Taxation for Local
Improvements"):
The legislature may vest the corporate authorities of cities, towns and
villages with power to make local improvements by special assessment, or
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by special taxation of property benefited. For all corporate purposes, all
municipal corporations may be vested with authority to assess and collect
taxes and such taxes shall be uniform in respect to persons and property
within the jurisdiction of the body levying the same.
"[S]imilar to article XI, section 12, [article VII, section 9] allows the legislature to
delegate taxing power to all municipal corporations." Larson, 156 Wn.2d at 757 nA.
Both of these constitutional provisions "are permissive in character and clearly
show that municipal corporations are without any inherent power of taxation, being
dependent upon legislative grant for their enjoyment of such power. The legislature may
give such authority or it may withhold it." Alfred Harsch, The Washington Tax System-
How It Grew, 39 WASH. L. REv. 944,950 (1964).
In Larson, the Supreme Court rejected a taxpayer argument that the Washington
Constitution-and these two provisions, in particular-could be read to limit a legislative
< delegation of local taxing authority to only those municipalities whose governing board
members are elected, not appointed. Noting that the taxpayers were unable to point to
language in the Washington Constitution that supported their position, the Supreme Court
cited the controlling principles of constitutional construction under which any effort to
"engraft" language onto the state constitution fails. As a general rule when interpreting
constitutional provisions, "we look first to the plain language ofthe text and will accord it
its reasonable interpretation." Larson, 156 Wn.2d at 757-58 (citing Wash Water Jet
Workers Ass 'n v. Yarbrough, 151 Wn.2d 470, 477, 90 P.3d 42 (2004)). If the test is
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clear, then no construction or interpretation is necessary. Id. at 758 (citing Wash. Water
Jet Workers Ass'n v. Yarbrough, 148 Wn.2d 403,431,61 P.3d 309 (2003) (Bridge, 1.,
dissenting)). In addition, "[a] party challenging a statute's constitutionality bears the
heavy burden of establishing its unconstitutionality," which is met only "if argument and
research show that there is no reasonable doubt that the statute violates the constitution."
Id. at 757 (citing Amalgamated Transit Union Local 587 v. State, 142 Wn.2d 183,205,
11 PJd 762,27 PJd 608 (2000)).
These same principles require rejection of the PUD's argument that articles VII
and XI of the Washington Constitution limit the legislature's power to delegate to
municipalities the power to tax other municipalities. The PUD cannot point to any
language in these constitutional provisions that imposes such a limitation. By contrast, a
different provision of the constitution (article VII, section 1) exempts the property of
municipalities from taxation, demonstrating that when the framers wished to provide
local governments with constitutional protection from taxation, they did.
Articles VII or XI of the Washington Constitution cannot be read to limit the
legislature's power to authorize municipal-on-municipal taxation.
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II. RCW 35A.82.020's grant of taxing authority is broad and, on its
face, sufficient to support one municipality's taxation of another
government's conduct of activity within its borders
The city relies for authority to impose its utility tax on RCW 35A.82.020. It was
adopted in 1967 and grants code cities the authority, among other matters, to levy a B&O
tax. Algona, 101 Wn.2d at 792. In relevant part, it provides that code cities
may exercise the authority authorized by general law for any class of city
... to impose excises for regulation or revenue in regard to all places and
kinds of business, production, commerce, entertainment, exhibition, and
upon all occupations, trades and professions and any other lawful activity.
RCW 35A.82.020.
Our fundamental objective in interpreting a statute is to ascertain and carry out the
legislature's intent. Arborwood Idaho, L.L. C. v. City of Kennewick, 151 Wn.2d 359, 367,
89 P.3d 217 (2004). If the statute's meaning is plain on its face, then we must give effect
to that plain meaning as an expression of legislative intent. Dep't of Ecology v. Campbell
& Gwinn, L.L.c., 146 Wn.2d 1,9-10,43 P.3d 4 (2002). A tax statute must be construed
as a whole to ascertain the intent of the legislature. Grp. Health Coop. of Puget Sound,
Inc. v. Dep 't of Revenue, 106 Wn.2d 391,401, 722 P.2d 787 (1986).
When it comes to statutes dealing with taxation, legislative power is particularly
broad and it is inherent in the exercise of the power that the State, or here, its delegee,
within the scope of its delegation, be free to select the objects or subjects of taxation.
Commonwealth Title Ins. Co. v. City of Tacoma, 81 Wn.2d 391,394-95,502 P.2d 1024
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(1972). In construing RCW 35A.82.020 in particular, our Supreme Court has held that,
like the taxing authority of other classes of city, the licensing and taxing power granted
by the statute is "liberally construed to carry out the objectives" of the cities of the first
class. Harbour Vill. Apartments v. City of Mukilteo, 139 Wn.2d 604, 618 n.9, 989 P.2d
542 (1999) (Talmadge, 1., dissenting) (citing chapter 35.22 RCW; Citizens, 99 Wn.2d at
343-44); RCW 35A.01.010 (stating that "[a]11 grants of municipal power to
municipalities electing to be governed under the provisions of this title, whether the grant
is in specific terms or in general terms, shall be liberally construed in favor of the
municipality"). Nonetheless, if a tax statute is ambiguous, it must be construed most
strongly against the taxing authority. 	Grp. Health, 106 Wn.2d at 401.
There is no ambiguity in the statute's grant to code cities of the authority to
impose excises for revenue "in regard to all ... kinds of business ... and any other
lawful activity." The legislature may authorize a municipality to engage in business and
when it does, the municipality "may exercise its business powers in very much the same
way as a private individual." Okeson v. City of Seattle, 150 Wn.2d 540,549-50, 78 P.3d
1279 (2003). In acting in a proprietary capacity, '''a municipal corporation acts as the
proprietor ofa business.'" 	Burns, 161 Wn.2d at 155 (quoting Hite v. Pub. Util. Dist.
No.2 of Grant County, 112 Wn.2d 456,459, 772 P.2d 481 (1989». In the erection and
operation of waterworks and the like, a municipal corporation acts as a business concern.
Id.
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In light of the statute's grant of authority to municipalities to tax "all ... kinds of
business" and the legislature's directive that all grants of authority in Title 35A RCW,
whether specific or general, be liberally construed in favor of the municipality, RCW
35A.82.020's grant of authority is unambiguously broad enough to support the city of
Wenatchee's taxation of the PUD's conduct of business within its borders.
III. The legislature's use of more explicit language regulating taxation of
electricity in RCW 54.28.070 does not support ignoring the
plain language ofRCW 35A.82.020
Despite the breadth of the legislature's grant ofB&O taxing authority to
municipalities, both the PUD and amici point to the fact that a different statute, RCW
54.28.070, more explicitly authorizes taxation of public utility districts by cities. 	It
provides that a city in which a public utility district operates works, plants, or facilities
for the distribution and sale of electricity
shall have the power 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, exclusive of the revenues derived from the sale of electricity for
purposes of resale[,]
and that the district shall have the power, in tum, to "add the amount of such tax to the
rates or charges it makes for electricity so sold within the limits of such city or town."
RCW 54.28.070. From this, they argue that this degree of specificity is required any time
the legislature authorizes one local government to levy taxes against another.
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Chapter 54.28 RCW, including RCW 54.28.070, was initially enacted in 1941.
Among other things, it imposes a privilege tax on revenues from the generation,
distribution, and sale of electric energy that the Washington State Department of Revenue
collects from public utility districts and then shares with counties in which the public
utility districts operate. The state tax is imposed on the gross revenue from the sale of
electric energy, excluding any tax levied on the public utility district by a municipality.
RCW 54.28.011. Read as a whole, chapter 54.28 RCW imposes a regulatory scheme
controlling the different tax burdens to which public utility districts providing electrical
service are subjected, denies municipalities the authority to tax sales of electricity for
resale, and addresses how the municipal tax burden is taken into consideration in
calculating the gross revenues taxed by the State.
It was a little over 25 years after the legislature enacted RCW 54.28.070 that it
enacted RCW 35A.8.2.020, granting cities the broad local B&O taxation authority relied
upon by the city of Wenatchee. Had chapter 54.28 RCW been a pure delegation of
taxation authority, as RCW 35A.82.020 is, the PUD could reasonably argue that we
should read the two statutes alongside one another and attempt to harmonize them. But
unlike the legislature's delegation of local B&O taxing authority, chapter 54.28 RCW has
multiple regulatory objectives: not only what cities can tax but what they cannot; and the
fact that the municipal taxes may be passed through and, if they are, will be excluded in
determining gross revenue for state taxation. 	Given this marked difference between the
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objects of the provisions, it is unsurprising that RCW 35A.82.020 does not make any
explicit provision for taxing business when it is being carried on by a municipality.
Unlike RCW 54.28.070, it does not need to.
The existence of a differently framed statute addressed to different objects and
purposes is not relevant to our construction of the legislature's grant of local B&O taxing
authority.
IV. The governmental immunity doctrine is an implied doctrine that applies
only where one municipality seeks to tax the governmental
functions of another
We turn, now, to the governmental immunity doctrine, a longstanding implied
limitation on government-on-government taxation.
Well before the framing of the Washington Constitution in 1889, the roles of
different sovereigns in a constitutional scheme had been recognized as giving rise to
implied immunity from another government's taxation. McCulloch v. Maryland, 17 U.S.
(4 Wheat.) 316, 4 L. Ed. 579 (1819) struck down a tax that the state of Maryland had
imposed on a branch of a Bank of the United States, a federal instrumentality. Having
concluded that the bank had been constitutionally created, and recognizing that the power
to tax was the "power to destroy," the Court held that the States lacked power, "by
taxation or otherwise, to retard, impede, burden, or in any manner control, the operations
of the constitutional laws enacted by congress to carry into execution the powers vested
in the general government." 	17 U.S. at 431,436.
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A half century later but still before Washington statehood, the United States
Supreme Court held that "the immunity that federal instrumentalities and employees ...
enjoyed from state taxation, was to some extent reciprocal" and that "the existence of the
States implies some restriction on the national taxing power." Massachusetts v. United
States, 435 U.S. 444, 453,98 S. Ct. 1153,55 L. Ed. 2d 403 (1978) (emphasis added)
(citations omitted) (speaking of Collector v. Day, 78 U.S. (11 Wall.) 113,20 L. Ed. 122
(1871)). "The immunity of the Federal Government from state taxation is bottomed on
the Supremacy Clause, but the States' immunity from federal taxes was judicially implied
from the States' role in the constitutional scheme." Id.
The contours of the States' immunity implied from federal taxation waxed and
waned after Collector v. Day, with some opinions speaking of only "governmental"
activity being immune from taxation, not "proprietary" activity. See id. at 457. Later
decisions focused on whether the federal government was imposing a nondiscriminatory
tax on an activity that the government had traditionally taxed. See, e.g., New York v.
United States, 326 U.S. 572,584,66 S. Ct. 310, 90 L. Ed. 326 (1946) (finding no
restriction upon Congress "to include the States in levying a tax exacted equally from
private persons upon the same subject matter"). 	While the States' implied immunity
from federal taxation no longer turns on a governmental/proprietary distinction, it turns
on a similar concept; as explained in Massachusetts v. United States, the purpose of the
implied constitutional restriction on the national taxing power is not to give the States an
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advantage over private entities, "but rather is solely to protect the States from undue
interference with their traditional governmental functions." 435 U.S. at 459.
We agree with the city of Wenatchee that governmental immunity in Washington
is, like governmental immunity between the federal and state governments, an implied
immunity-and on the intrastate level, is one aspect of the general doctrine of sovereign
immunity. See Murray v. State, 62 Wn.2d 619, 384 P.2d 337 (1963) (discussing
governmental tax immunity in sovereign immunity terms).
In Algona, the Washington Supreme Court recognized that the majority of
jurisdictions adhere to the governmental immunity doctrine "on the theory that a local tax
imposed on a political subdivision such as a county is tantamount to a tax imposed on the
State." 	101 Wn.2d at 794. More recently, our Supreme Court observed that in
determining whether an action is sovereign or proprietary, we may look not only to
constitutional or statutory provisions indicating the sovereign nature of the power but
may also consider "traditional notions of powers that are inherent in the sovereign."
Wash. State Major League Baseball Stadium Pub. Facilities Dist. v. Huber, Hunt &
Nichols-Kiewit Constr. Co., 165 Wn.2d 679,687,202 P.3d 924 (2009).
"The principal test for determining whether a municipal act involves a sovereign
or proprietary function is whether the act is for the common good or whether it is for the
specific benefit or profit of the corporate entity." Id. (citing Okeson, 150 Wn.2d at 550).
In the context of utilities, the focus is on whether the utility "operates for the benefit of its
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customers, not the general public," or, stated differently, whether it "will [provide
service] to a customer that does not request service." Okeson, 150 Wn.2d at 550. 	Ifit
operates to serve customers, a utility is serving a proprietary function. 	See id.
Washington decisions have held that the operation of a water system or other
utility serving billed customers is a proprietary function. Russell v. City of Grandview,
39 Wn.2d 551, 553, 236 P.2d 1061 (1951) (citing prior Washington decisions for the
proposition that "a city engaged in [operating a water system] acts in its proprietary
capacity"); Pub. Uti!. Dist. No. 1 of Pend OreWe County v. Town of Newport, 38 Wn.2d
221,227-28,228 P.2d 766 (1951) (in the "'erection and operation of. .. waterworks and
the like ... a municipal corporation acts as a business concern'" (quoting 1 OSCAR L.
POND, A TREATISE ON THE LAW OF PUBLIC UTILITIES § 5, at 15 (4th ed. 1932))); City of
Moses Lake v. United States, 430 F. Supp. 2d 1164, 1174 (E.D. Wash. 2006) (recognizing
that "in Washington, operation of a municipal water system has not traditionally been
considered a power or duty which inheres in the sovereign, but rather a proprietary
activity for the advantage of each community").
The governmental immunity doctrine does not apply, then, to the PUD's
proprietary delivery of water to its customers. 1
1 Our concurring colleague is in good company in recognizing the imprecision of
the governmental/proprietary distinction. See, e.g., New York, 326 U.S. at 583
(abandoning the distinction as "untenable" for purposes of determining immunity of state
activities from federal taxation). It is nonetheless a distinction that Washington has
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V. Reasonably read, Algona is predicated on the governmental character of
the activity being taxed and, when governmental immunity is
implicated, a requirement that a legislative intent to tax sovereign
activity must also be express
Two Washington cases, City of Seattle v. State, 59 Wn.2d 150,367 P.2d 123
(1961) and Algona, establish that Washington adheres to the government immunity
doctrine, but not as an absolute constitutional exemption from taxation: the legislature
may tax or permit its agencies to tax even governmental activities of local governments.
Because of the implied tax immunity for governmental activity, however, any intent to
tax governmental activity must be express. 	Given the "express authorization" already
required for any constitutional grant of taxing authority, discussed in section I, above, we
continued to recognize. See, e.g., RCW 4.96.010 (speaking of municipalities as "acting
in a governmental or proprietary capacity," in waiving their sovereign immunity from
liability for tortious conduct); Okeson, 150 Wn.2d at 549 ("A municipal corporation is
generally considered to act in one of two capacities-a governmental capacity or a
proprietary capacity.").
For the reasons we discuss in the body of the opinion, the courts' view of where
water distribution falls on the governmental/proprietary divide may not matter, since it is
ultimately for the legislature to decide whether to authorize municipal taxation of even
governmental functions. 	Presumably the legislature is more concerned with whether
utility taxes are an important and appropriate source of revenue needed by local
governments for general municipal purposes than with whether we regard a public utility
district's operation as governmental or proprietary. 	Surveys suggest that most
Washington cities rely on a utility tax on water. See, e.g., ASS'N OF WASH. CITIES, TAX
AND USER FEE SURVEY: EXECUTIVE SUMMARY 4,6 (2012) (reporting that of231
responding cities and towns, representing 86 percent of the state's incorporated
population, 166 imposed a utility tax on water utilities at a rate ranging from 1.46 percent
to 36 percent, and averaging 9.3 percent), available at
https://www.awcnet.org/Portals/OlDocuments/ResearchlTUFS 12web.pdf).
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No. 31 195-3-III
City of Wenatchee v. Chelan County Pub. Uti!. Dist. No. 1
will refer to the requirement for this additional layer of express authorization imposed by
Seattle v. State and Algona as a requirement of express authorization overcoming implied
governmental immunity.
To make clear the distinction, we examine two cases-Citizens, 99 Wn.2d 339,
and Hillis Homes, Inc. v. Snohomish County, 97 Wn.2d 804, 650 P.2d 193 (1982}-that
are cited in Algona and concern the constitutional requirement of express authorization
that applies to any grant of taxing authority. 	In Citizens, the Supreme Court considered
whether the legislature had granted authority to impose a local B&O tax to only the
legislative authority of a municipality, or more broadly to the municipality itself. The
objects of the grant of authority became important when voters in the city of Spokane
sought to repeal, by referendum, a B&O tax adopted by the city council. The city
attorney had opined that the grant of taxing authority was exclusively to the city council
and that petitions supporting the referendum to repeal should not be accepted for filing.
The Supreme Court began its analysis of local taxing authority by noting "[t]he
general rule [that] municipalities possess, with respect to taxation, only such power as has
been granted to them by the constitution or the general laws of the state." 99 Wn.2d at
343 (citing 16 EUGENE MCQUILLIN, THE LAW OF MUNICIPAL CORPORATIONS § 44.05 (3d
ed. 1981». It found "clear legislative authority for cities to enact a [local B&O] tax such
as that in [the city's] ordinance" and that in granting '''[a]ny city ... power,'" the
legislature had given authority to the city in general, not exclusively to the legislative
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No. 31195-3-III
City o/Wenatchee v. Chelan County Pub. Uti!. Dist. No.1
body. Id. (quoting RCW 35.22.280). The taxation by the city of another municipality
was not an issue in the case and there was no discussion of governmental tax immunity,
so the court's treatment ofthe need for "express authority" had nothing to do with
governmental immunity.
Hillis Homes addressed a challenge to the authority of Snohomish and San Juan
Counties to impose development fees. 	Both counties had adopted measures imposing
fees on new residential developments in response to financial difficulties precipitated by
population growth in the counties. The counties argued that the assessments were fees
rather than taxes and, alternatively, pointed for taxation authority to a statute allowing
counties to condition subdivision approval on the availability of public facilities. 	At issue
was whether the counties enjoyed the constitutionally required "express grant of authority
to impose such taxes [from] the Legislature." 97 Wn.2d at 808. The court concluded that
the required authority was lacking because the statute relied upon authorized the counties
only to condition subdivision approval on facilities, not to impose taxes to provide for
such facilities. As in Citizens, the counties were not seeking to tax municipalities and
governmental tax immunity was not an issue, so the discussion of "express authority"
was unrelated to immunity.
The different and more explicit authority required to tax governmental activity
was first raised in Seattle v. State. 	That case arose when the city of Seattle paid B&O tax
imposed by the State under protest and brought an action for refund. 	Relevant here was
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No. 31195-3-111
City of Wenatchee v. Chelan County Pub. Uti!. Dist. No. 1
its request for a refund of taxes that were imposed by the State on revenues derived from
certain city park operations. The revenues helped defray costs but park operations were
not profitable nor were they intended to be profitable. The city argued that the revenues,
being from governmental rather than proprietary activities, were immune from taxation.
While the B&O tax included "municipalities" within its definition of taxable "persons,"
the city argued that the legislature surely had not intended to tax a city's governmental
activities.
The court disagreed. 	While much of its decision was addressed to whether
revenues from "business" subject to the tax could be construed to include the
intentionally unprofitable generation of revenue to defray expenses of a public park, the
court eventually turned to the city's alternative claim of government immunity. As to
that, the court said:
It is unnecessary to consider whether the particular activities are
governmental or proprietary in nature, since there is no language in the
statute that makes such a distinction. As it is within the power of the
legislature to tax governmental activities of a municipality, we cannot
assume they have not done so by this enactment.
59 Wn.2d at 154. 	Several conclusions can be drawn from this terse analysis. First, and
as earlier discussed, is that the source of government immunity is not grounded in the
constitution, else the court would not say "it is within the power of the legislature to tax
governmental activities of a municipality." Second, the court did not dismiss a
governmental/proprietary distinction entirely, but only in light of the language of the
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No. 31195-3-111
City of Wenatchee v. Chelan County Pub. Uti!. Dist. No. 1
statute under examination. Third, it appears key to the court's disposition that
"municipalities" were explicitly included in the definition of "persons" subject to the tax
and yet no exception was made for their governmental activities.
Before turning to Algona, we address one last case-a case that Algona overrules
in part: City of Bellevue v. Patterson, 16 Wn. App. 386, 556 P.2d 944 (1976). In
Bellevue, the Court of Appeals reviewed a writ of mandamus compelling the
commissioners of a water district and a sewer district to comply with a B&O tax imposed
by the city of Bellevue. 	Some customers of each district resided within the city's
boundaries. 	The authority relied upon for the city's B&O tax was RCW 35A.82.020, the
same statute that the city of Wenatchee relies upon in this case.
Similar to the PUD's argument here, the commissioners argued that the
Washington Constitution required that "a legislative grant of the power to tax must
specifically enumerate those to be subjected to the tax" and, since the legislature had not
provided the basis for a tax "on sewer and water districts," the city of Bellevue lacked the
power to impose the tax. Id. at 387. 	Significantly, the appellate court analyzed the
district's position solely as a claim of exemption from tax. There was no discussion of
governmental immunity or the proprietary versus governmental activities in which
municipal corporations such as the districts might engage. Thus analyzed, the Bellevue
court held that "[t]he State may ... choose to exempt certain businesses but such is not to
be presumed by silence," that the burden of proving an exemption is on the person
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No.3U95-3-II1
City of Wenatchee v. Chelan County Pub. Uti!. Dist. No. 1
seeking the exemption, and, finally, that "[m]unicipal corporations as a class enjoy no
exemption from taxation." Id. at 388. For the last proposition, it cited Seattle v. State.
Eight years later, the Supreme Court decided Algona. 	It disposed of the case by
agreeing with King County that its governmental activity of operating a solid waste plant
within the city of Algona was immune from B&O tax. At issue in this case is its holding.
Did the disposition turn on the governmental character of the activity and the doctrine of
government immunity? Or was the court essentially agreeing with the position the
districts had taken in Bellevue-that a legislative grant of authority to tax even
proprietary activities of water and sewer districts must explicitly identify such districts as
subject to the tax?
We conclude that the holding in Algona was the court's clear statement that
"[w]here the primary purpose in operating the transfer station is public or governmental
in nature, the county cannot be subject to the city B & 0 tax, absent express authority."
101 Wn.2d at 794. As authority for this statement, Algona cites Salt River Project
Agricultural Improvement and Power District v. City of Phoenix, 129 Ariz. 398, 631 P.2d
553 (Ct. App. 1981), a case it cites elsewhere as the principal authority for the theory of
governmental immunity to which the majority of jurisdictions subscribe. See Algona,
101 Wn.2d at 793-94.
Salt River held that while the city of Phoenix could impose an excise tax on the
sale of water by another municipality-an agricultural improvement and power district
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No. 31195-3-III
City of Wenatchee v. Chelan County Pub. Uti!. Dist. No. 1
it could not tax payments for electricity at cost that the district received incident to a
contract under which an irrigation district assisted it in "accomplish[ing] the primary
governmental purpose of each: drainage and irrigation." 631 P.2d at 557. While
recognizing that "sales of water by cities to consumers are held to be proprietary business
activities of the cities, rather than governmental acts," the court also recognized that an
irrigation district "may act in a proprietary as well as a governmental capacity." 	Id. at
555. In citing repeatedly to Salt River, the Algona court surely understood and
subscribed to its reasoning that the proprietary activities of a municipality, like the
business activities of private parties, are subject to taxation.
This holding that only governmental activities are immune from taxation is
consistent with Algona's partial overruling of Bellevue. 	As the Algona court recognized,
the court in Bellevue "analyzed the issue presented only in terms of exemptions from
taxation. The issue of municipal corporation immunity from such a tax was never
raised." 	101 Wn.2d at 792-93. Given its different focus, Bellevue implied that a
municipality was always subject to a general tax encompassing its activities. Taking into
consideration the doctrine of governmental immunity, Algona held that if the activities
being taxed were governmental rather than proprietary, then a more explicit
authorization--overcoming the immunity that would otherwise be implied-was
necessary. Algona therefore understandably overruled Bellevue "as to its provisions that
are inconsistent with this opinion." Id. at 795.
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No. 31 I 95-3-1I1
City of Wenatchee v. Chelan County Pub. Util. Dist. No. 1
We will grant that the rationale for the decision in Algona would be more clear if
the decision had talked about the governmental (as opposed to proprietary) function
presented by solid waste disposal before stating a number of principles limiting taxation
of municipalities. 	Because it does not, the PUD argues that the court's statements about
the limits on Algona's ability to tax King County's activities apply broadly to limit
taxation of any municipal activity, proprietary or governmental.
We would point out, however, that when the court finally does reach the
governmental/proprietary distinction late in the opinion, it does so in a way that suggests
that its analysis up to that point was all predicated on the governmental character of solid
waste disposal. The court turns to the proprietary/sovereign function distinction not to
address the county's contention that its activity was governmental but instead to address,
and reject, the city's contention "that governmental immunity should not apply because
the County operation ofa solid waste transfer station is proprietary." Id. at 794.
The decision in Algona would also have been clearer if the court's discussion of
the need for "express authorization" had made the distinction that, with the benefit of
hindsight, we have made here: when governmental immunity is implicated, a two-layered
express authorization is needed. Not only must the legislature provide an express grant
of general taxing authority but, if it intends to tax governmental functions of a
municipality, there must be an additional expressed intention overcoming what would
otherwise be the implied immunity from tax of those functions.
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No. 31195-3-111
City of Wenatchee v. Chelan County Pub. Util. Dist. No. 1
In this case, the city of Wenatchee imposed B&O tax on the PUD's sale of
domestic water. Because a municipality engaged in selling water acts in its proprietary
capacity, the trial court erred in concluding that the PUD was immune from taxation.
VI. Additional concerns of the PUD and amici
The PUD and amici express the concern that our decision in this case will have
wide-ranging implications for other public utility districts and for water-sewer districts,
and that interlocal agreements are a superior method for addressing taxation of sales of
domestic water. Our role is to decide the issue presented for decision by the parties
before us based on existing law. Any argument that the law should be changed should be
addressed to the legislature.
The PUD and amici also argue that water purveyors engage in a governmental
function to the extent they provide fire hydrants for fire protection purposes. They point
to Lane v. City of Seattle, 164 Wn.2d 875, 194 P.3d 977 (2008), in which the Washington
Supreme Court held that a city's activity of providing fire protection is governmental;
that collection of the associated costs from water system users through a hydrant fee is a
tax, not a regulatory fee; that, if adopted as a tax, the city can impose a tax to finance its
fire hydrant system; and that where a city, by ordinance, requires a utility to provide
hydrant service, then under the state accountancy statute, RCW 43.09.210, it must pay the
utility for the service. 	They point to City of Tacoma v. City of Bonney Lake, 173 Wn.2d
584,269 P.3d 1017 (2012), in which the court held that a municipality can oblige itself to
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No. 31195-3-111
City of Wenatchee v. Chelan County Pub. Uti!. Dist. No. 1
provide a hydrant system to another municipality under a franchise agreement and acts in
its proprietary capacity in doing so; that where it freely contracts to provide the service, it
may not charge for the service under the accountancy statute; and that a charge for
hydrants is not necessarily always a tax, but could be a fee depending on how it is levied.
Finally, they point to the legislature's recent enactment of chapter 70.315 RCW, effective
July 28,2013, by which the legislature has found that water purveyors playa public
service role of providing water for fire protection and has authorized water purveyors to
allocate and recover the costs of fire suppression water facilities and services.
We understand the PUD and amici to contend that if a water purveyor allocates its
costs of fire suppression facilities and services and recovers them as fees, then those fees
are revenue from a governmental activity and thereby immune from taxation absent some
contrary and explicit legislative intent. Because this case was decided in the trial court on
the basis that the PUD was immune from B&O taxation altogether, we have no record
indicating whether revenues on which the city of Wenatchee has levied a tax include
revenues from hydrant or fire suppression fees that might be immune from tax. The
issue, if it exists, must be addressed in the first instance by the trial court.
We reverse the trial court's declaratory judgment declaring the B&O tax imposed
by the city of Wenatchee on the PUD's revenues unlawful and ordering that the city
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No.31195·3-III
City of Wenatchee v. Chelan County Pub. Uti!. Dist. No. 1
cease charging the PUD taxes on its water system revenues, and remand for further
proceedings consistent with this opinion.
Sid~fCJ=
I CONCUR:
Brown, J.
28
 	 	 	 	 	 	 	 	 	 	 	 	 	

No. 31195-3-III
FEARING, J. (concurring) - 	The issue in this suit is whether a city may tax the
revenue received by a public utility district for the sale of domestic water within the city
limits. The issue, in tum, is resolved by asking whether the provision of domestic water
is a proprietary or governmental function? The author of the lead opinion, as always,
provides a thorough analysis and answers correctly that, under the current state of the
law, the provision of domestic water is a proprietary function and thus the city of
Wenatchee may collect a tax from the Chelan County Public Utility District (PUD).
Russell v. City of Grandview, 39 Wn.2d 551,553,236 P.2d 1061 (1951); Pub. UtiI. Dist.
No.1 of Pend GreWe County v. Town ofNewport, 38 Wn.2d 221,228 P.2d 766 (1951);
City of Moses Lake v. United States, 430 F. Supp. 2d 1164 (E.D. Wash. 2006). 	I concur
in this ruling.
I write separately because I consider current distinctions between a proprietary
function and a governmental function, particularly in the context of domestic water
delivery, to be outdated. If I could decide the case without the weight of precedence, I
would consider the distribution of drinking water to be a quintessential governmental
function that should not be taxed. If the provision of potable water is not a governmental
function, then the public utility district should not engage in the supplying of water but
allow a proprietor to offer the service.
 	 	 	 	 	 	 	 	 	 	 	 	 	

No. 31195-3-111
City of Wenatchee v. Chelan County Pub. Utility Dist. No.1 (concurrence)
Washington courts have enunciated various tests for determining whether a
function is proprietary or governmental in nature. 	Sometimes, the tests overlap. 	Some
tests may be inconsistent with other tests. 	Some tests are more general and others more
specific.
1 can identify six tests employed by Washington courts to separate proprietary
from governmental functions. First, the principal test in distinguishing the two is whether
the act performed is for the common good of all, a governmental function, or whether it is
for the special benefit or profit of the corporate entity, proprietary function. Skagit
County Pub. Hosp. Dist. No. 304 v. Skagit County Pub. Hosp. Dist. No.1, 177 Wn.2d
718,728-29,305 PJd 1079 (2013); Okeson v. City of Seattle, 150 Wn.2d 540,550, 78
PJd 1279 (2003); Lakoduk v. Cruger, 47 Wn.2d 286,288-89,287 P.2d 338 (1955);
Hagerman v. City of Seattle, 189 Wash. 694, 701,66 P.2d 1152 (1937). 	Second, a
governmental function is based upon a municipal corporation '" [acting as an arm] of the
state ... to promote the public welfare generally'" whereas a proprietary function is
based upon the municipality'" administer[ing] the local and internal affairs of the
territory which is incorporated, for the special benefit and advantage of the urban
community embracing within the corporation boundaries.'" 	Wash. State Major League
Baseball Stadium Pub. Facilities Dist. v. Huber, Hunt & Nichols-Kiewit Constr. Co., 165
Wn.2d 679,687,202 P.3d 924 (2009) (quoting 1 EUGENE MCQUILLIN, THE LAW OF
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No. 31195-3-111
City of Wenatchee v. Chelan County Pub. Utility Dist. No. 1 (concurrence)
MUNICIPAL CORPORATIONS § 2.09, at 158 (3d ed. 1999)). Third, a public entity acts in a
proprietary rather than a governmental capacity when it engages in businesslike activities
that are normally performed by private enterprise; whereas, governmental functions are
those generally performed exclusively by governmental entities. Fabre v. Town of
Ruston, 	Wn. App. _,321 P.3d 1208 (2014); Stiefel v. City of Kent, 132 Wn. App.
523,529, 132 P.3d 1111 (2006). Fourth, governmental functions involve performing
activities for the public health, safety, and welfare. Fabre, 321 P.3d 1208. Fifth, the
purchase of a commodity furnished for comfort by a municipality involves a proprietary
function. 	Okeson, 150 Wn.2d at 550; Twitchell v. City of Spokane, 55 Wash. 86, 89, 104
P. 150 (1909). 	Sixth, a proprietary function comprises the municipal corporation
providing a service only to those who request it. Okeson, 150 Wn.2d at 550.
The six tests collide in the context of the supply of domestic water. Potable water
is provided by a municipal corporation not for its own profit. The PUD is not a for-profit
organization. The PUD provides water for the common good. 	Water is essential to
human life. Thus, under the first and principal test of a governmental function, the
provision of domestic water should be considered a governmental function.
The second test cuts both ways. The conveyance of drinkable water is for the
general welfare. Yet, the service, as provided by an individual municipality, is targeted
towards a limited urban community. The third test operates in favor of a governmental
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No. 31195-3-III
City o/Wenatchee v. Chelan County Pub. Utility Dist. No.1 (concurrence)
function. The public sector supplies about 85 percent of water needs. l 	The fourth test
also leans in favor of water supply being a governmental function, since water involves
the public health and welfare. The fifth and sixth tests militate in favor of water delivery
being a proprietary function.
The six tests listed above lead to some razor thin, if not silly, distinctions, even
outside the context of domestic water. 	Under Washington decisions, provision of
electricity serves a proprietary function of the government. City o/Tacoma v. Taxpayers,
108 Wn.2d 679,694, 743 P.2d 793 (1987). Nevertheless, providing streetlights is a
governmental function. 	Okeson, 150 Wn.2d at 550. A municipality's operation of traffic
signals also involves a sovereign or governmental function. 	Okeson, 150 Wn.2d at 550.
On the one hand, dispensing of medical and psychiatric care constitutes a proprietary
function. Petersen v. State, 100 Wn.2d 421,671 P.2d 230 (1983). 	On the other hand, a
1 U.S. CONGRESSIONAL BUDGET OFFICE, FUTURE INVESTMENT IN DRINKING
WATER AND Wastewater Infrastructure 4 (2002) ("For both drinking water and
wastewater, systems owned by the public sector-by local governments or special local
or regional government authorities-serve the large majority of households. Although
community drinking water systems owned by the private sector account for over half of
all such systems, they serve only about 15 percent of households; private wastewater
systems that treat household sewage account for roughly 20 percent of the total, but serve
few households-perhaps 3 percent."); JOSEPH 1. SAX ET AL., LEGAL CONTROL OF
WATER RESOURCES 14 (4th ed. 2006) ("Most urban and suburban water uses, moreover,
depend on municipalities and public utilities for their water. The municipality or utility
may in tum get its water from a governmental water agency.").
4
 	 	 	 	 	 	 	 	 	 	 	 	 	

No. 31195-3-111
City of Wenatchee v. Chelan County Pub. Utility Dist. No.1 (concurrence)
rural health district furnishing health care services acts in a governmental capacity.
Skagit, 177 Wn.2d at 729. Construction and maintenance of city streets is a proprietary
function. 	Goggin v. City of Seattle, 48 Wn.2d 894, 897, 297 P.2d 602 (1956). But
supervision and control of streets is a governmental function. 	Goggin, 48 Wn.2d at 897.
Operation of a sewage system is a proprietary function. 	Hayes v. City of Vancouver, 61
Wash. 536,112 P. 498 (1911). The disposal of waste is a governmental function. 	King
County v. City ofAlgona, 101 Wn.2d 789, 794, 681 P.2d 1281 (1984); City of Spokane v.
Carlson, 73 Wn.2d 76,81,436 P.2d 454 (1968). Finally, as already noted, the provision
of domestic water is a proprietary function. Russell, 39 Wn.2d at 553. Nevertheless,
supplying water for fire protection services is a governmental function. Stiefel, 32 Wn.
App. at 530.
King County, 101 Wn.2d 789, a tax case like our case, stands for the proposition
that operating a solid waste plant is a governmental, not a proprietary, function. 1 see no
relevant distinction between operating a solid waste plant and operating a potable water
delivery system. Both fulfill basic human needs for survival, one supplying sanitary
drinking water and the other providing sanitary treatment of waste. Although each
function can be furnished by a private business, each function is typically provided by a
governmental entity. The Algona decision does not inform us how customers paid for the
service, but 1 suspect that King County charged a user fee for disposal of waste, a factor
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No. 31195-3-III
City of Wenatchee v. Chelan County Pub. Utility Dist. No. I (concurrence)
supposedly crossing the line into the territory of a proprietary function. 	King County also
likely only provided the service to those who requested it.
"[A]n ever-growing segment of the population get their drinking water from
public entities (62% in 1950; 85% [in 2004])." John D. Leshy, The Federal Role in
Managing the Nation's Groundwater, 11 HASTINGS W.-Nw. J. ENVTL. L. & POL'y 1, 1
(2004). 	State or local authorities, delivering the water, function without an aim for profit
and instead operate on the ethos of providing an essential service for the common good.
Clean and sufficient water supply is paramount to the strength of the nation and local
communities.2 "Clean water and sanitation are crucial to our public health, our quality of
life, and our economic prosperity." Janet C. Neuman, Going with the Flow: A Water Law
Journey, 42 ENVTL. L. 29, 34 (2012); see also Lawrence O. Gostin et aI., The Law and
the Public's Health: A Study of Infectious Disease Law in the United States, 99 COLUM.
L. REv. 59, 77-78 (1999).
2 SAX ET AL., supra, at 2 ("Along with air, water is our most crucial natural
resource."); Barton H. Thompson, Jr., Water Law As A Pragmatic Exercise: Professor
Joseph Sax's Water Scholarship, 25 Ecology L. Q. 363, 381 (1998) ("[W]hen water is
transferred, the community loses a natural resource, which it either began with or
acquired earlier through governmental or community efforts. Because of water's inherent
importance to an economy, the community also fears that its crucial resources, and thus
its options for the future, are reduced.").
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No. 31195-3-111
City of Wenatchee v. Chelan County Pub. Utility Dist. No.1 (concurrence)
At least one Washington statute recognizes the provision of domestic water as a
governmental service. RCW 36.70A.030(18) defines "urban governmental services" or
"urban services" to include
those public services and public facilities ... historically and typically
provided in cities, specifically including storm and sanitary sewer systems,
domestic water systems, street cleaning services, fire and police protection
services, public transit services.
(Emphasis added.)
Other states recognize the importance of the governmental service of domestic
water delivery. The provision of potable water is similar in nature to garbage removal,
sanitation, and fire protection. Bjornestad v. Hulse, 229 Cal. App. 3d 1568,281 Cal.
Rptr. 548 (1991). Thus, the California court ruled that a special law, providing that only
one designated landowner per parcel in a water district could vote in a district election or
be a member of a district's governing board of directors, was unconstitutional under
equal protection clauses of the California and United States Constitutions, since a water
. district performed a governmental function.
In Washington Township, Bergen County v. Village of Ridgewood, 26 N.J. 578,
141 A.2d 308 (1958), the New Jersey court noted that to maintain the governmental
versus proprietary function as a test with regard to water delivery is specious. That court
wrote, and I conclude:
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No. 31195-3-111
City o/Wenatchee v. Chelan County Pub. Utility Dist. No.1 (concurrence)
The distinction is illusory; whatever local government is authorized to do
constitutes a function of government, and when a municipality acts
pursuant to granted authority it acts as government and not as a private
entrepreneur .... Surely the supply of water cannot be deemed to be a
second-class activity in the scheme of municipal functions.
141 A.2d at 311.
,:1Fearin~ IS
8