BELLINGHAM - The Washington Court of Appeals has sided with the city in a dispute with Puget Sound Energy over more than $900,000 in tax revenue.
In a lawsuit filed in March 2009, PSE contended that the city had improperly billed PSE for an additional $919,662 in tax and penalty owed for the period from Jan. 1, 2004, to Sept. 30, 2008. That billing was based on a 2008 audit conducted by a private firm, Tax Recovery Services LLC, that gets 25 percent of amounts recovered from taxpayers under the terms of its contract with the city.
PSE paid the bill, but then challenged it in Whatcom County Superior Court.
The city charges all utilities in the city a tax of 6 percent on gross income. PSE adds that amount to each customer's bill and forwards the tax money from its customers to the city. But the city's auditor contended that PSE's "gross income" also includes the tax revenue it collects from its customers, and therefore the electric company owes the city an additional 6 percent of the 6 percent it collects from its customers to cover the tax.
That might sound unfair, but city attorneys cited law and previous court cases indicating that "gross income" includes all income with no deductions allowed beforehand. They argued that the city had the clear legal right to apply its utility tax to the revenue PSE collects from its customers to pay the tax, and that PSE's earlier practice of deducting those tax collection revenues from its gross income had been incorrect.
In June 2010, Whatcom County Superior Court Judge Ira Uhrig agreed and granted the city a summary judgment. A three-judge appeals court panel upheld Uhrig's decision in a ruling filed Monday, Aug. 29.
"Because the revenue that PSE receives by virtue of passing the city utility tax on to its customers is 'value proceeding or accruing' to PSE, such revenue is properly subject to the city utility tax. Thus, the city's tax assessment did not improperly include that revenue in calculating PSE's utility tax liability," Judge Stephen Dwyer wrote.
PSE spokeswoman Dorothy Bracken provided a written statement in response to the court's ruling.
"We are disappointed with the appellate court's decision regarding the application of Bellingham utility taxes," Bracken's emailed statement said. "It is an unfortunate ruling for the citizens of Bellingham since it will lead to higher taxes on their utility bills."
Bracken said PSE is still deciding whether it will take the case to the Washington State Supreme Court.
Assistant City Attorney Peter Ruffato said if PSE were to prevail in the case, the city would take a hit on future utility tax collections, but as of now the city is collecting the utility tax that the court rulings allow.
