Appeal from Superior Court, Thurston (87-2-01627-4) County; Honorable William McPhee, Judge. Judgment Date: 11-18-94.
Smith, J., Dolliver, Johnson, J.j., Durham, C.j. (concurring by separate opinion) Alexander J., Guy, J. (dissenting by separate opinion) Madsen, Talmadge, J.j., Pekelis, J.p.t., Sanders, J. (did not participate)
SMITH, J.--Digital Equipment Corporation seeks direct review by this court of a Thurston County Superior Court order on summary judgment dismissing Digital's action for refund of or credit for business and occupation (B & O) taxes paid to the State of Washington between January 1, 1983 and August 11, 1987. We granted review. We affirm only the dismissal.
The questions presented in this case are: (1) whether United States Supreme Court decisions rendered subsequent to this court's 1988 decision in National Can II*fn1 have undermined that holding, which denied retroactive application of the Supreme Court's 1987 ruling in Tyler Pipe Industries v. Department of Revenue,*fn2 a case which struck down as unconstitutional Washington's business and occupation (B&O) tax exemption scheme; and (2) whether the remedy of retroactively applying the 1987 B&O tax credit legislation (RCW 82.04.440) meets the requirements of due process under the Fourteenth Amendment.*fn3
In 1984, a group of taxpayers filed suit for refunds of B&O taxes paid to the state of Washington. The taxpayers argued that the state's B&O tax exemption under RCW 82.04.440 violated the Commerce Clause of the United States constitution, article I, section 8, by providing to local
manufacturers selling goods in this state a tax exemption not available to manufacturers who sold goods out of state. This court ultimately rejected that argument in the companion cases of Tyler Pipe Industries v. Department of Revenue and National Can Corporation v. Department of Revenue.*fn4
In Tyler Pipe Industries v. Department of Revenue, the United States Supreme Court subsequently reversed both Tyler Pipe and National Can, holding that the tax exemption discriminated against interstate commerce in violation of the Commerce Clause.*fn5 The Court then remanded the case to this court for resolution of "remedial issues."*fn6 In National Can Corporation v. Department of Revenue (National Can II) we held that the Tyler Pipe decision operated only prospectively and thus no claims could be made for taxes which were paid prior to the decision in that case.*fn7
The Washington Legislature responded to the Supreme Court decision in Tyler Pipe by amending the B&O tax exemption statute on August 11, 1987. The amendment replaced the old multiple activities exemption with a two-way credit scheme. The amendment cured the constitutional defect identified by the Court in Tyler Pipe*fn8 by granting to businesses a credit for gross receipts taxes
paid to this or any other state.*fn9 Although the new credit law expressly stated it was to "take effect immediately,"*fn10 the Legislature intended that the new law would operate retroactively in the event of a court-ordered remedy.*fn11 The Legislature also intended that these tax credits would be the exclusive remedy available for those entitled to relief.*fn12
On August 27, 1987, Digital filed a complaint in the Thurston County Superior Court seeking refund of B&O taxes it paid between January 1, 1983 and July 31, 1987.*fn13 On December 29, 1988, Digital filed an amended complaint seeking an additional refund of taxes paid from June 23, 1987 through August 11, 1987, the interim period between the Tyler Pipe decision and the effective date of the 1987 legislation (the interim period).*fn14 The amended complaint also charged that the state's collection efforts of "said illegal taxes" were in violation of 42 U.S.C. § 1983, thus entitling Digital to attorney fees under 42 U.S.C. § 1988.*fn15
On April 11, 1994, Digital moved for an order of partial summary judgment to grant its tax refund request for the period January 1, 1983 through August 11, 1987 and an award of attorney fees.*fn16 The state cross-motioned for summary judgment on April 18, 1994, arguing for outright dismissal of Digital's action.*fn17 By opinion letter dated September 9, 1994, Judge William Thomas McPhee granted partial summary judgment in favor of the state
and dismissed Digital's refund claim as to all tax periods prior to June 23, 1987, but reserved ruling on taxes paid during the interim period pending further oral argument.*fn18 Digital then filed a motion for reconsideration on October 5, 1994.*fn19
On November 18, 1994, Judge McPhee entered an order denying Digital's motion for reconsideration, granting the state's motion for summary judgment and dismissing Digital's refund claim in its entirety with prejudice.*fn20 In dismissing Digital's claim, the trial court relied primarily on this court's holding in National Can II that the Tyler Pipe decision was to operate only on a prospective basis.*fn21
On December 16, 1994, Digital appealed direct to this court for review.*fn22 It argues that United States Supreme Court cases decided subsequent to National Can II have undermined this court's holding in that case, and those cases now require that Tyler Pipe be applied retroactively to tax periods predating its determination.*fn23 Digital also maintains that the 1987 tax credit law, RCW 82.04.440, does not provide it with meaningful redress for taxes it paid under the previous unconstitutional scheme, and hence violates its rights under the Due Process Clause of the Fourteenth Amendment.
RETROACTIVITY OF TYLER PIPE
This court was asked in National Can II to decide whether the United States Supreme Court's decision in Tyler Pipe, which declared Washington's B&O tax exemption
scheme unconstitutional, must be applied retroactively or applied only prospectively. In deciding the issue, we relied primarily on the retroactivity test outlined by the Supreme Court in Chevron Oil v. Huson.*fn24 In that case, three factors were enumerated for consideration in determining whether an appellate decision applies prospectively or retroactively: (1) whether the decision establishes a new rule of law by overruling clear past precedent or deciding an issue of first impression whose resolution was not clearly foreshadowed; (2) whether retroactive application would further or retard the purposes of the rule; and (3) whether retroactive application would be inequitable.*fn25 Employing the Chevron Oil criteria, we concluded that Tyler Pipe applied on a prospective basis only and did not render taxes collected prior to the date of its determination unconstitutional*fn26
However, as later observed by this court in Robinson v. Seattle,*fn27 the precedential weight to be accorded Chevron Oil has been called into question by recent United States Supreme Court decisions. In James B. Beam Distilling Co. v. Georgia, a taxpayer brought a refund suit against Georgia, claiming a state tax statute which favored alcohol products produced from local goods violated the Commerce Clause.*fn28 The lower courts agreed the statute was unconstitutional in light of the Supreme Court's decision in Bacchus Imports, Ltd. v. Dias striking down a similar Hawaii statute,*fn29 but concluded the taxpayer was not entitled to a
refund.*fn30 Using the test outlined in Chevron Oil, the Georgia Supreme Court held the Bacchus decision should not apply retroactively to facts antedating its pronouncement.*fn31
The United States Supreme Court reversed without considering the Chevron Oil rationale. It held that because the decision in Bacchus applied the rule to the parties then before the Court, that rule should apply to all cases still pending.*fn32 The Court reasoned that it was error "to refuse to apply a rule of federal law retroactively alter the case announcing the rule has already done so."*fn33 Although the Court in Bacchus had not explicitly addressed the question whether its holding should apply retroactively to facts predating its pronouncement, the Court in Beam concluded that retroactivity is assumed when the question of retroactivity is not reserved.*fn34 Writing for the majority, Justice Souter noted that "because the Bacchus opinion did not reserve the question whether its holding should be applied to the parties before it, . . ., it is properly understood to have followed the normal rule of retroactive application in civil cases."*fn35
In Harper v. Virginia Dep,t of Taxation, the Supreme Court was confronted with a Virginia tax statute which exempted from state income taxes only those retirement pensions paid by either state or local governments.*fn36 The Court had previously decided in Davis v. Michigan Dep't of Treasury that a similar tax imposed by Michigan violated the constitutional doctrine of intergovernmental tax immunity because it treated federal employees differently
from state employees.*fn37 After Davis, Virginia repealed the exemption statute.*fn38 Taxpayers sued the Virginia Department of Revenue seeking refund of taxes paid under the discriminatory scheme.*fn39
The trial court denied the refunds on the basis that the Davis decision did not apply retroactively the Virginia Supreme Court affirmed.*fn40 Applying the Chevron Oil test, the court held that Davis did not operate retroactively and that pre- Davis tax assessments thus were not improper.*fn41 Reasoning that because the Court in Davis had not ruled on whether to apply its holding to the litigants in that case, the Virginia court concluded that it remained free to apply the Chevron Oil analysis.*fn42 The Supreme Court reversed. Reiterating Justice Souter's conclusion in Beam, the Court again noted that once a case announcing a rule of federal law has applied that rule to the litigants before the court, no court may "'refuse to apply [that] rule retroactively'."*fn43 Citing Beam, the Court then articulated the following rule on retroactive application of a previous ruling:
When this Court applies a rule of federal law to the parties before it, that rule is the controlling interpretation of federal law and must be given full retroactive effect in all cases still open on direct review and as to all events, regardless of whether such events predate or postdate our announcement of the rule.
The Court then stated that:
When [it] does not "reserve the question whether its holding should be applied to the parties before it," . . . an opinion announcing a rule of federal law "is properly understood to have followed the normal rule of retroactive application" and must be "read to hold . . . that its rule should apply retroactively to the litigants then before [it]." Furthermore, the legal imperative "to apply a rule of federal law retroactively after the case announcing the rule has already done so" must "prevail over any claim based on a Chevron Oil analysis."
Relying on this new "express reservation test," the Court rejected the state court's reasoning that the issue of retroactivity had not been addressed in Davis*fn46 It pointed out that in Davis the question of retroactivity had not been reserved by the Court; and since remedial issues had been considered, it had necessarily applied the rule announced in Davis to the litigants before it.*fn47 That being the case, the Court applied the Davis rule retroactively to the tax years at issue in the Harper taxpayers' refund action.*fn48 The Court is thus considered to have applied a decision to the parties before it when it has not reserved the question whether its holding should be retroactively applied.*fn49
When the Supreme Court remands a case exclusively for resolution of remedial issues, it has not reserved the
question of retroactive application of that case.*fn50 Once it has applied a decision to the litigants in one case, it must do so with respect to all others not barred by res judicata or procedural requirements,*fn51 regardless of any conclusion derived from application of Chevron Oil principles.*fn52 The normal rule, then, is retroactive application of a new pronouncement of federal law unless the Court declares otherwise.*fn53 Chevron Oil no longer controls in this area.*fn54
To the extent our decision in National Can II holds that Tyler Pipe applies only on a prospective basis, we overrule it. The rule derived from Beam and Harper is clear: when the United States Supreme Court remands a case, unless it explicitly reserves the issue of retroactive application of that case,*fn55 the normal rule of retroactivity is assumed. In Tyler Pipe, the Court remanded only on the issue of remedies, and did not reserve the question of retroactive application of its holding in the case.*fn56 Therefore, it follows that the benefit of the Tyler Pipe holding properly might
extend to Digital, inasmuch as it would not be barred by either procedural requirements or by res judicata.
With retroactive application of the Tyler Pipe decision, Digital conceivably might be entitled to some type of relief. However, as Digital readily concedes, retroactive application of Tyler Pipe does not necessarily entitle it to a refund.*fn57 Our determination that Digital might be entitled to some form of relief in light of Tyler Pipe brings the 1987 credit law into operation.*fn58 But Digital argues the 1987 credit law, as an exclusive remedy, does not meet the requirements of federal due process.*fn59
A declaration by the United States Supreme Court that a tax scheme is unconstitutional does not, as a matter of federal law, require refund of taxes illegally collected.*fn60 Rather, "a State found to have imposed an impermissibly discriminatory tax retains flexibility in responding to this determination."*fn61 To provide relief consistent with federal due process principles, however, a state may choose to provide a predeprivation remedy, such as "a meaningful opportunity for taxpayers to withhold contested tax assessments and to challenge their validity in a predeprivation hearing."*fn62 "On the other hand, if no such ...