United States

U.S. Supreme Court requests response to retroactivity petition

State supreme court upheld retroactive legislation in Dot Foods case


On Nov. 3, 2016, the U.S. Supreme Court requested the Washington Department of Revenue respond to the taxpayer’s petition for a writ of certiorari before deciding whether to review Dot Foods Inc. v. Department of Revenue (Dot Foods II). The state’s response is due Dec. 5, 2016.


On March 17, 2016, the Washington Supreme Court issued its decision in Dot Foods II, holding that the retroactive application of the business and occupational (B&O) tax direct seller’s exemption did not violate a taxpayer’s rights under due process, collateral estoppel, or separation of powers principles.

The taxpayer, an Illinois-based food reseller, sold products to service companies in Washington state through its wholly owned subsidiary. The taxpayer qualified for a direct seller’s B&O tax exemption under Washington Code Section 82.04.423 from 1997 until 2000, when the Washington Department of Revenue narrowed the interpretation of the statute. The taxpayer was later assessed B&O under audit for the 2000 through 2004 periods, paying the tax due, and continuing to pay the B&O tax during the pendency of the appeal to avoid penalties and interest.

Addressing that appeal in 2009, the Washington Supreme Court held in Dot Foods Inc. v. Department of Revenue (Dot Foods I), that the revised interpretation of Section 82.04.423 was contrary to the statue’s plain and unambiguous language. Pursuant to the decision in Dot Foods I, the taxpayer requested a refund for B&O taxes paid from January 2005 through August 2009 – periods that were not under the Dot Foods I decision.

In April 2010, the Washington state legislature responded to the decision in Dot Foods I by amending Section 82.04.423, retroactively narrowing the scope of Section 82.04.423 and prospectively repealing the direct seller’s exemption. In July 2010, based upon the retroactive application of the 2010 amendment, the Department denied the taxpayer’s refund request for the periods not covered under the litigation of Dot Foods I, that is, the periods from May 2006 through August 2009.

The taxpayer and the Department ultimately negotiated a settlement for the refund periods covered by Dot Foods I and partially for the periods after the decision. The taxpayer then sought a refund for B&O taxes paid from May 2006 through December 2007 (a period ending when the taxpayer’s business practices changed). After the department denied its refund request, the taxpayer brought a refund action against the department, challenging the retroactive application of the amendment – the subject of this appeal.


The Washington Supreme Court examined whether due process, collateral estoppel, and separation of powers should disallow retroactive application of the amended statute.

Due Process

First, the court held that the retroactive application of the 2010 amendment did not violate due process. In making that determination, the court followed the standard set in United States v. Carlton, finding that retroactive legislation will prevail against a due process claim if the legislation is supported by a legitimate legislative purpose furthered by rational basis. In this case, the court sided with the department in finding that the prevention of large and devastating revenue loss to the state was a legitimate legislative purpose and was clearly rationally related to the legitimate legislative purpose of preventing revenue loss.

Relying on Tesoro Refining & Marketing Co. v. Department of Revenue, the taxpayer asserted that the purported 27-year retroactivity period was irrational on its face. The court disagreed, noting its decision in W.R. Grace & Co. v. Department of Revenue, which upheld a 37-year retroactivity period. The court stated that, while the 2010 amendment could theoretically date back to the enactment of the statute, the issue in this case was whether the 2010 amendment applied retroactively to the taxpayer’s May 2006 to December 2007 tax period, which is only four years. The court continued by explaining that in practical terms, the 2010 amendment could not reach back 27 years because the statute of limitations limits retroactive application of the amendment to four years and a four year period is well within the range of retroactivity periods that the court has previously upheld.    

Collateral Estoppel

The taxpayer’s collateral estoppel argument rested on the position that the May 2006 through December 2007 interim tax periods were encompassed by the judgment in Dot Foods I, which prevented the Department from assessing the B&O tax under the 2010 amendment. In finding the taxpayer’s collateral estoppel claim to be without merit, the court noted that the facts and the applicable law here were distinguishable from those of Dot Foods I. Specifically, the facts and law in Dot Foods I arose out of the taxpayer’s refund request for the January 2000 through April 2006 tax periods whereas the periods at issue here were May 2006 through December 2007. In response, the taxpayer asserted that under collateral estoppel principles, the decision in Dot Foods I should extend the interim tax periods because the prior tax appeal adjudicated the taxpayer’s exempt status under former Section 82.04.423. The court rejected this argument by applying a plain and ordinary meaning to the statute and by citing federal case law supporting the premise that separate tax periods give rise to separate causes of action for collateral estoppel purposes.

Separation of Powers

Lastly, the court rejected the taxpayer’s separation of powers argument. The court explained that the legislature violates separation of power when it infringes on a judicial function. The court also stated that it has been unwilling to find an infringement where the legislature was careful enough not to reverse the court’s decision. The court explained that in this case, the legislature was careful not to reverse the Washington Supreme Court’s decision and therefore, it had not infringed on a judicial function.


Dot Foods II is one of several state tax retroactivity cases that have recently petitioned the U.S. Supreme Court for review. In 2010, the court denied review of Miller v. Johnson Controls, a Kentucky Supreme Court decision upholding the retroactive application of a combined reporting amendment, and in 2012, the court denied review of General Motors v. Department of Treasury, a Michigan Court of Appeals decision that found retroactive application of a use tax exemption provision for a car dealer’s use of a car before resale was permissible. While it is not clear whether the the U.S. Supreme Court will hear Dot Foods II, taxpayers should be aware that the court is considering a case concering retroactivity – an issue taxpayers have wanted reviewed by the court for years. 


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