Harbour Village Apartments v. City of Mukilteo

Sanders, J.

The issue here is whether the City of Mukilteo’s residential dwelling unit fee (RDU fee) is a constitutional excise tax or an unconstitutional property tax. The trial court held in favor of the city on summary judgment, characterizing the tax as an excise. However disappointed property owners sought and obtained direct review in this court. And we reverse.

Mukilteo licenses businesses located within its corporate limits for regulation and revenue. Mukilteo Municipal Code (MMC) § 5.04.010. A base license fee is imposed for each business location in the amount of $61.00; however for businesses which rent or lease real property an RDU fee of $80.60 per dwelling unit rented, leased, or offered for rent or lease is imposed in addition to the base license fee. MMC § 5.04.070(A)(3). Unlike rental housing businesses, other *606businesses are taxed on the basis of $41.60 per full-time equivalent employee in addition to the base license fee. MMC § 5.04.070(A)(4).

Appellant property owners do not challenge the $61.00 base license fee but claim the $80.60 per unit RDU fee is in reality a tax on the rental property itself, neither authorized by statute nor calculated on the constitutionally required basis for a property tax. Both sides concede the proper characterization of the tax is dispositive; however both sides differ as to how it should be characterized.

Appellants are residential apartment owners in Mukilteo. In late 1996 Mukilteo enacted Ordinance 905, which amended preexisting municipal code provisions regarding business licensure and regulation, subjecting the renting, leasing, or offering of residential dwelling units to licensure and taxation.

The RDU fee first became due in 1997, and applies to the rental units owned by apartment owners. The RDU fee is imposed on residential rental properties rented or offered for rent. It does not apply to owner-occupied residential property or to any nonresidential real estate. The fee is not measured by the value of the property or the amount of rent collected, but simply is an annual flat fee on each rental dwelling unit actually rented or offered for rent in Mukilteo. Although the stated purpose of Ordinance 905 is to license residential dwelling units for regulation and revenue, and not to impose a property tax, income tax, or any other tax upon the act of owning property (MMC § 5.04-.010), we are asked to substantially and independently characterize the nature of the tax.

Aggrieved by the enactment of the RDU fee, the apartment owners commenced this action in the Snohomish County Superior Court, requesting: (1) a declaration the RDU fee is invalid; (2) an injunction barring Mukilteo from collecting the RDU fee; and (3) an order requiring Mukilteo to refund all RDU fees previously collected. The trial court, the Honorable Larry McKeeman, heard cross-motions for summary judgment and ruled in favor of Mukil*607teo, finding the RDU fee was an excise tax within Mukilteo’s authority. However, apartment owners disagree.

ANALYSIS

First, although it is denominated a “fee” in Ordinance 905, it is clear the RDU fee is, in fact, a tax because its central purpose is to raise revenue. See Covell v. City of Seattle, 127 Wn.2d 874, 879-89, 905 P.2d 324 (1995). AH parties appear to concede the RDU fee is a tax.

The central inquiry is therefore whether the RDU fee is an excise tax or a property tax. To answer this question we must recall “[t]he character of a tax is determined by its incidents, not by its name.” Jensen v. Henneford, 185 Wash. 209, 217, 53 P.2d 607 (1936) (citations omitted).1

The “incident” or measure of this tax is the mere ownership of that subclass of real property defined by its rental use. Each rental unit is directly taxed at $80.60 regardless of whether it is actually rented, the number of rental transactions associated with the property, or any other factors normally associated with ongoing business activity, including income. Nor is this RDU tax an excise on the mere privilege to conduct a rental business — that is already separately taxed at the rate of $61.00 per business location. Rather the incident of this tax is on rental property as such — and a tax on rental property is no less a tax on property.

*608Both Jensen, 185 Wash. 209, and Apartment Operators Ass’n of Seattle, Inc. v. Schumacher, 56 Wn.2d 46, 351 P.2d 124 (1960), concerned a tax on rental income rather than a tax on the property itself. We held the distinction was without a difference as “the mere right to own and hold property cannot be made the subject of an excise tax, because to tax by reason of ownership of property is to tax the property itself.” Jensen, 185 Wash. at 218 (citations omitted).

To the same effect is Schumacher where we held “a tax upon rents from real estate is a tax upon the real estate itself’ and an invalid property tax. Schumacher, 56 Wn.2d at 47. Once again, and obviously, a tax on the property itself — that which we have here — is the ultimate evil which was only approximated in Schumacher.

The city misplaces its reliance on Black v. State, 67 Wn.2d 97, 406 P.2d 761 (1965). There Black was subjected to a $17,000 sales tax on a $425,000 ship lease payment because it was “an excise tax on the transaction of leasing tangible personal property. It is not a tax on property.” Id. at 99. But here it is not the rental transaction which is taxed — indeed there need not even be a rental transaction — rather it is the fact of ownership of rental property which is taxed.

As this ordinance imposes a tax on rented property, and only rental property, it violates the constitutional prohibitions against nonuniform taxation of real property. Wash. Const, art. VII, § 1 (amend. 81).2 As it is based on the number of units, not value, it violates the ad valorem requirement. Wash. Const, art. VII, § 2 (amend. 79). And because it is a nonstatutorily authorized tax on property, it is also in excess of the statutory, and hence, constitutional taxing authority of the municipality. Wash. Const, art. VII, *609§ 5;3 San Telmo Assocs. v. City of Seattle, 108 Wn.2d 20, 23, 735 P.2d 673 (1987) (“[W]hile Const, art. 7, § 9 and Const. art. 11, § 12 authorize the Legislature to grant municipalities the power under certain conditions to levy taxes, there must be a specific legislative pronouncement allowing for the tax in order for the tax to be valid.” (citations omitted)); Hillis Homes, Inc. v. Snohomish County, 97 Wn.2d 804, 808, 650 P.2d 193 (1982).

The trial court is reversed, the RDU fee is invalidated, and this case is remanded to the trial court for further appropriate proceedings consistent with this opinion. Appellants shall recover their costs.

Smith, Johnson, Madsen, Alexander, and Ireland, JJ., concur.

The nature of a tax is revealed by examining the subject matter of the tax and the incidents of the tax, “i.e., the manner in which it is assessed and the measure of the tax.” Weaver v. Prince George’s County, 281 Md. 349, 379 A.2d 399, 403 (1977). See also Reed v. City of New Orleans, 593 So. 2d 368, 371 (La. 1992) (“The nature of a tax is determined not by its title, but by its incidents, attributes and operational effect. The realities and substance of the tax must be examined, not its form.”). Numerous jurisdictions follow this hermeneutic. See, e.g., Dawson v. Kentucky Distilleries & Warehouse Co., 255 U.S. 288, 292-93, 41 S. Ct. 272, 65 L. Ed. 638 (1921); City of Louisville v. Sebree, 308 Ky. 420, 214 S.W2d 248, 253 (1948); Weekes v. City of Oakland, 21 Cal. 3d 386, 579 P.2d 449, 452, 146 Cal. Rptr. 558 (1978); Goodenough v. State, 328 Mich. 56, 43 N.W.2d 235, 239 (1950); Armstrong v. Sewer Improvement Dist. #1, 201 Okla. 531, 199 P.2d 1012, 1015 (1948); Franklin Soc’y for Home Bldg. Sav. v. Bennett, 282 N.Y. 79, 24 N.E.2d 854, 857 (1939). The “incident” of a tax (its “manner” and “measure”) is that to which the tax attaches itself and burdens. See Oxford English Dictionary 152 (1933).

“[A]11 real estate shall constitute one class . . .

“No tax shall he levied except in pursuance of law; and every law imposing a tax shall state distinctly the object of the same to which only it shall be applied.”