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Washington Court of Appeals Holds Retroactive Application of a Statute Unconstitutional

The Washington Court of Appeals has held that a statutory amendment barring the filing of 24 years of business and occupation (B&O) tax refund claims violates a taxpayer’s due process rights and is therefore unconstitutional. Tesoro Refining & Mkt

January 3, 2011

The Washington Court of Appeals has held that a statutory amendment barring the filing of 24 years of business and occupation (B&O) tax refund claims violates a taxpayer’s due process rights and is therefore unconstitutional. Tesoro Refining & Mktg. Co., No. 39417-1-II (Wash. Ct. App. Dec. 21, 2010). Tesoro Refining and Marketing Company (Tesoro), a Delaware corporation, operates an oil refinery in Washington. Tesoro manufactures and sells bunker fuel (a residual fuel oil that remains after gasoline and distillate fuel are extracted from crude oil) primarily to vessels engaged in foreign commerce for consumption outside the territorial waters of the United States. 

Prior to 2009, Washington law permitted a company that manufactured and sold a qualifying fuel (such as bunker fuel) to deduct amounts derived from the sale of the fuel against its manufacturing B&O tax liability. Tesoro did not take the deduction on its originally filed tax returns and later filed a refund claim for B&O taxes paid on bunker fuel manufactured and sold from 1999 to 2004. The Department of Revenue denied the refund claim after finding that the deduction applied only to the wholesaler and retailer B&O tax and not to the manufacturer B&O tax. Tesoro appealed the Department’s determination to the superior court. While the case was pending, in 2009, the Washington legislature amended the B&O tax deduction statute limiting the applicability of the B&O tax deduction to retailers and wholesalers of qualifying fuels prospectively and retroactively. The superior court held that Tesoro was not entitled to the deduction and granted summary judgment to the Department. Tesoro appealed the superior court’s decision.

Reversing the lower court’s decision, the Washington Court of Appeals concluded that the plain language of the per-2009 B&O tax deduction statute did not restrict the applicability of the B&O tax deduction to wholesale and retail B&O taxes. The court reasoned that, because the statutory language was clear, the Department could not alter the plain language to resolve an ambiguity that does not exist on the face of the statute. As a result, the court concluded that Tesoro was entitled to the B&O tax deduction under the pre-2009 statute.

The court also determined that the retroactive application of the 2009 amendment to the B&O tax deduction statute violated Tesoro’s due process rights because it impermissibly attempted to reach back 24 years. The court rejected the Department’s contention that the 2009 amendment was a mere “clarification” to the statute and made no change to the meaning of the pre-2009 statute. The court reasoned that the legislature may not apply a “clarification” retroactively for 24 years when it is in direct conflict with the reasonable expectations of qualifying taxpayers. The court further noted that “[t]he direct references to Tesoro’s lawsuit [in the 2009 amendment legislative history] and the fact that the 2009 act became effective the day before trial was set to begin evidences the type of improper targeting identified by [U.S. Supreme Court in United States v. Carlton, 512 U.S. 26 (1994)].” The court recognized that identifying and correcting significant revenue losses was a legitimate legislative purpose. However, it was not reasonable for the legislature to enact a retroactive amendment spanning 24 years in direct response to a taxpayer’s refund lawsuit.

As states continue to feel the effects of the economic downturn, states may attempt to impose retroactive taxes or eliminate taxpayer’s rights to refunds vis-à-vis retroactive legislation. Although the Tesoro court got it right, challenging retroactive taxation remains difficult as evidenced by recent decisions in Miller v. Johnson Controls, Inc., 296 S.W.3d 392 (Ky. 2009), cert. denied, 130 S. Ct. 3324 (2010),  and Exelon Corp. v. Dep’t of Revenue, 917 N.E.2d 899 (Ill. 2009), cert. denied, 130 S. Ct. 1699 (2010).

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