There have been interesting developments in three active court cases involving the City of Seattle. Let’s dive in.
First, a quick update on what’s happening with the legal challenge to the Fort Lawton affordable housing redevelopment plan. When last we discussed it, the attorney for plaintiff Elizabeth Campbell — her third so far in this case — had petitioned the court to withdraw from the case, which is entirely at the discretion of the judge. However, the City of Seattle objected, noting that Campbell’s attorney had failed to comply with the judge’s order to add the U.S. Army and Seattle Public Schools as co-defendants in the case and update the plaintiff’s complaint to include them. Judge Coughenour agreed with the city, gave Campbell’s attorney a new deadline to issue the updated complaint, and conditioned his withdrawal on the timely completion of that work.
That was apparently sufficient motivation for the attorney; he finished the new complaint, filed it with the court, and served it on the three plaintiffs, including the two new ones. Yesterday Judge Coughenour granted the attorney’s motion to withdraw. He also rescheduled the next status conference for the case to April 14, in order to give the two new defendants time to get up to speed on the case.
As of this writing, Campbell does not have a new attorney. She is allowed to represent herself as an individual, but under court rules her organization, the Discovery Park Community Alliance, must be represented in U.S. District Court by an attorney. We’ll see if she manages to find attorney #4 before the April hearing date — if not, Coughenour may decide to dismiss the case.
This is a case we haven’t discussed in quite a while. Rentberry challenged the city’s moratorium on online rent-bidding services, but lost in U.S. District Court on a technicality: the judge ruled that the company and the landlord serving as co-plaintiff did not have standing to sue. The plaintiffs appealed to the Ninth Circuit Court of Appeals, where the two sides have been filing the customary legal briefs (here and here are the latest). Oral arguments were scheduled for next Tuesday, March 3.
Then, in a surprise last Friday, the City of Seattle moved to postpone the oral arguments. The reasoning it gave in its filing was that the Seattle City Council is about to imminently repeal its moratorium on rent-bidding platforms, which would make the case moot. The brief said that the Council was expected to introduce the repeal bill this week (it didn’t), and vote on it as soon as next Monday (it won’t). Nevertheless, yesterday the appeals court granted the delay pending resolution of a possible repeal of the moratorium.
Having heard nothing of such an effort underway at the Council, SCC Insight inquired with the spokespersons for both the City Attorney and the Council as to what was going on. The City Attorney’s Office declined to comment, citing attorney-client privileged communications with the Council, for whom it serves as legal representative. The spokesperson for the Council was unable to tell me who was spearheading the effort or exactly why the moratorium was being repealed, but suggested that it might be related to the study conducted by the Office of Civil Rights on the impact of rent-bidding platforms such as Rentberry’s. The study report, issued last summer, was remarkably devoid of data — apparently insufficient to serve as grounds for a permanent ban on rent-bidding platforms. The Council spokesperson hinted that Council members might be asking the Office of Housing to do another study — which will take more time. The temporary moratorium has been in place for nearly two years now, after being renewed last spring for another twelve months. Now it is stretching the definition of “temporary,” and the Council members might be feeling the pressure to nuke it while the Office of Housing does a new study.
But another hypothesis for the repeal also exists: with the Washington State Supreme Court recently affirming the city’s “First in Time” tenant protection ordinance, the moratorium is no longer needed. The First in Time ordinance requires landlords to rent a unit to the first qualified tenant who applies; that is clearly incompatible with rent-bidding. So even if the moratorium is repealed, Rentberry’s service will still be illegal.
SCC Insight will provide updates as details become known.
This is a case that has been flying under the radar, perhaps because it’s an argument about arcane tax laws. But it might have outsized impact for the gig economy, so it’s worth a note.
KMS Financial Services is a company headquartered in Seattle that provides securities, insurance, and investment advisory services. It is a registered securities broker, with about 50 “overhead” employees in Seattle and about 350 “registered representatives” spread across the United States that work directly with clients to deliver financial services to them. KMS’s registered representatives are independent contractors paid on commission, while its headquarters staff are classified as employees.
Because KMS is based in Seattle, it is subject to the city’s B&O tax on gross profits earned in Seattle. Under state law, for services companies that do business across jurisdictions, the city may only charge B&O tax on the portion of the company’s profits earned in Seattle, and must “fairly apportion” it by by averaging the percentage of the services delivered in Seattle and the portion of the compensation (or “payroll”) the company paid in Seattle. The point of dispute in the lawsuit is how KMS’s compensation is apportioned to Seattle. The company included as compensation all of the commissions paid to its 350 registered representatives, which over the period in dispute totaled $70-79 million — of which 85% was outside Seattle. The City of Seattle, however, decided that since the registered representatives are classified as independent contractors, they should be excluded entirely; that left nearly all of the company’s compensation within Seattle’s borders. Under KMS’s calculation, only 14-20% of its compensation was in Seattle, and it owed the city $187,998 in B&O tax. But under Seattle’s method, the tax owed was nearly triple that: including interest and penalties, it said that KMS owed almost $700,000. KMS sued.
The district court agreed with the city, and tossed KMS’s case. But upon appeal, in a ruling yesterday the three-judge appeals court panel overturned the district court and ruled for the company. In its ruling, it said that the applicable state law makes no distinction between employees and independent contractors, and to the contrary the SEC’s rule-making specifically anticipates including compensation to both. Thus it found that whether KMS conducts its business through independent contractors or employees is “without constitutional significance” for the purposes of assessing B&O taxes in Washington.
As we know all too well given the recent debates over taxing big businesses, Washington state’s lack of an income tax already makes it an attractive place for many companies to set up shop. But yesterday’s ruling cements that status further for gig-economy companies, such as hot startup Convoy, who don’t need to worry that the city or state will be able to impose a B&O tax on their profits earned elsewhere. That doesn’t mean that there won’t be additional payroll taxes here, such as the one currently being considered in Olympia, or that one day there might be an income tax to help return the state’s regressive tax system to sanity. But for today, Washington’s status as a tax haven for businesses remains secure.
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