                                                                                                         FILED
                                                                                                 COURT OF APPEALS
                                                                                                       DIVISION II

                                                                                                201[ 1 SEP 23   AM 9: 32

      IN THE COURT OF APPEALS OF THE STATE OF WASHII                                                                 GTON


                                                    DIVISION II

 BRAVERN RESIDENTIAL, II, LLC,                                                   No. 44730- 4- 11


                                        Appellant,


          v.

                                                                             PUBLISHED OPINION
 STATE OF WASHINGTON, DEPARTMENT
 OF REVENUE,


                                        Respondent.


         MAxA, J. —       Bravern Residential II, LLC (Bravern) appeals the trial court' s summary

judgment order dismissing its refund action against the Department of Revenue ( Department) for

retail sales and     business    and occupation ( B     & O) taxes payable on construction services performed


by   one of   its   members,   PCL Construction Services, Inc., ( PCL)        on property Bravern owned.

Under WAC 458 -20- 170( 2),           a " speculative   builder" –   a contractor that builds on property it

owns –   is   not subject   to   retail sales and   B &O taxes on its construction services. Bravern argues


that because PCL was one of its members, Bravern should be considered the entity performing

construction services and treated as a speculative builder. Bravern also argues that because PCL


received only credits to its capital account in exchange for its construction services, the tax

exemption in WAC 458 -20 -106 for the transfer of capital assets applies.


         We hold that ( 1) Bravern was not a speculative builder under WAC 458- 20- 170( 2)( b)


because PCL acting as a separate entity, and not Bravern, performed the construction services;

and ( 2) the exemption in WAC 458 -20 -106 for transfers of capital assets is inapplicable because

the   asset   transferred to Bravern – PCL' s        construction services – was not a capital asset.
44730 -4 -II




Accordingly, we affirm the trial court' s summary judgment dismissal of Bravern' s tax refund

action.



                                                FACTS


          Bravern is a limited liability company ( LLC) formed in 2007 for the purpose of building

a residential condominium tower known as Signature Residences at The Bravern, Tower 4 on

land Bravern owned in Bellevue. Bravern had two members: Bravern Residential Mezz II, LLC

 BRM),     a real estate development company, and PCL, a real estate construction company. BRM

had a 99 percent ownership interest in Bravern, and PCL had a one percent ownership interest.

BRM was the managing member and retained control over Bravern' s management.

          The Bravern LLC operating agreement obligated BRM to transfer title to land for the

development to Bravern and obligated PCL to contribute construction services and materials

pursuant   to   an attached " services addendum."   Clerk' s Papers ( CP) at 60. The services


addendum provided that PCL would perform and manage all of the work related to the


construction of Tower 4 in exchange for credits to its Bravern capital account. These capital

account credits would equal PCL' s cost of work and service overhead, not to exceed


  116, 226, 428. In order to obtain the credits, the services addendum authorized PCL to submit


periodic statements to Bravern setting forth the value of PCL' s activities.

          The operating agreement contemplated regular capital account distributions, from Bravern

to PCL. If PCL' s capital account exceeded one percent of the total capital contributions to

Bravern, then Bravern was allowed to make a distribution from PCL' s capital account to PCL in


an amount necessary to cause PCL' s capital account to return to one percent. Although Bravern

technically had discretion in making     these distributions, the operating agreement   penalized
44730- 4- 11




Bravern and BRM if Bravern did not make monthly capital account distributions to PCL. The

operating agreement provided that if PCL' s capital account balance exceeded one percent of

Bravern' s total unreturned capital for more than 20 days, the excess would accrue at a preferred

return rate of "prime plus       2. 5%   per annum."    CP   at   63. In addition, if PCL' s capital account


exceeded two percent for more than 15 days, PCL could require BRM to purchase PCL' s entire

interest in Bravern at a specified price unless PCL received a capital account distribution within

30 days. Bravern had the funds to make capital account distributions to PCL because the


operating agreement required BRM to contribute cash to Bravern when necessary to enable

Bravern to pay its expenses.

         After construction began on Tower 4, PCL submitted to Bravern monthly statements

showing the value of its construction services. That value then was credited to PCL' s capital

account.     The   value of   these services totaled    over $    121 million by the end of the project. PCL

then received monthly capital account distributions from Bravern for the construction activity

associated with each billing statement. Bravern never allowed PCL' s capital account to exceed

one percent of Bravern' s total capital contributions, so application of the preferred return clause


was never triggered. A few months after completing construction, PCL assigned its interest in

Bravern to BRM. PCL never received any distribution of profits from Bravern.

         In August 2007, Bravern requested confirmation from the Department that Bravern

would   be treated     as a " speculative   builder" under WAC 458- 20- 170( 2)( a), which would allow it


to   avoid   paying   retail sales or    B &O   taxes on PCL' s construction services. In February 2008, the

Department issued a letter ruling denying Bravern' s request, determining that Bravern was not a

speculative builder. Bravern appealed the Department' s denial of its ruling request to the


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Department' s Appeals Division. The Appeals Division denied the appeal and upheld the


Department' s reasoning in its ruling denying speculative builder status to Bravern.

             Because there is no mechanism for direct judicial review of the Department' s denial of a


ruling      request,'   Bravern   paid $ 107, 842.   10 in taxes     on $   1, 135, 180 in services PCL provided for


the month of June 2009.2 Bravern then filed an action in superior court for a refund of those

taxes.3 Bravern moved for summary judgment, arguing that because PCL was a member of

Bravern, Bravern had constructed Tower 4 on its own land and therefore was a speculative


builder in accordance with the Department' s published construction guidelines for joint ventures.


The Department also moved for summary judgment, arguing that Bravern was required to pay

taxes on the services PCL performed because PCL had constructed Tower 4 on Bravern' s


property, and therefore was engaged in making a retail sale. The Department further argued that

Bravern was not a speculative builder because PCL received compensation for its services


independent of any right to Bravern' s profits. Alternatively, the Department argued that Bravern

was not entitled to a refund because RCW 82. 32. 655 specifically prohibited the type of tax

avoidance transactions in which Bravern was engaged.


             The trial court granted the Department' s summary judgment motion and denied

Bravern' s motion. Bravern appeals.




1 Booker Auction Co. v. Dep' t ofRevenue, 158 Wn. App. 84, 88 -89, 241 P. 3d 439 ( 2010).
2
    It is   unclear whether   this   amount was      for   retail sales   taxes or B & O   taxes, or both. If not a
speculative builder, as the purchaser of services Bravern would be required to pay retail sales
taxes.       As the   provider of services,   PCL     and not    Bravern     would   have the   obligation   to pay B & O
taxes.



3 Bravern' s potential tax liability for the entire project was significantly higher.
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                                                  ANALYSIS


A.       STANDARD OF REVIEW


         We review a trial court' s order granting summary judgment de novo. In re the Estate of

Bracken, 175 Wn.2d 549, 562, 290 P. 3d 99 ( 2012).           Summary judgment is appropriate where,

viewing the evidence in the light most favorable to the nonmoving party, there is no genuine

issue of material fact and the moving party is entitled to judgment as a matter of law. Loeffelholz

v.   Univ. of Wash., 175 Wn.2d 264, 271, 285 P. 3d 854 ( 2012). Here, the parties do not dispute


the material facts. Accordingly, the issue before us is whether the trial court correctly

determined that Bravern was not entitled to a tax refund, a question of law we review de novo.

Bracken, 175 Wn.2d at 562.


         To establish that a taxpayer is entitled to a refund, the taxpayer must prove that the tax


paid was incorrect and prove the correct amount of tax. RCW 82. 32. 180. In order to determine

whether the tax paid here was correct, we must interpret the applicable statutes and Department


regulations regarding speculative builders, which are questions of law we review de novo.

Skinner v. Civil Serv. Comm' n, 168 Wn.2d 845, 849, 232 P. 3d 558 ( 2010).


B.        REQUIREMENTS FOR " SPECULATIVE BUILDER" STATUS


          1.     Statutory Framework

          The State of Washington imposes a tax on the selling price of retail sales in the state,

                                   Former RCW 82. 08. 020( 1) ( 2010); RCW 82. 08. 050( 1).   Washington
payable    by   the   purchaser.




also   imposes a B & O     tax on the gross proceeds of retail sales in the state, payable by the business

owner.     Former RCW 82. 04. 250( 1) ( 2010). For both taxes, a " retail sale" includes tangible


personal property consumed and services rendered in constructing buildings on real property for

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consumers.         Former RCW 82. 04. 050( 2)( b) ( 2010); former RCW 82. 08. 010( 1)(           a) (   2010),


recodified as       RCW 82. 08. 010( 1)(   a)(   i); Dep' t of Revenue   v.   Nord Nw.   Corp., 164 Wn. App. 215,

224, 264 P. 3d 259 ( 2011), review denied, 173 Wn.2d 1019 ( 2012).


         A contractor constructing a building on real property owned by a consumer is a " prime

contractor" under       WAC 458- 20- 170( 1)(       a).   A "consumer" includes a " person who is an owner,


lessee or has the right of possession to or an easement in real property which is being

constructed, repaired, decorated, improved, or otherwise altered by a person engaged in

business."      Former RCW 82. 04. 190( 4) ( 2010). The prime contractor is a seller of services, and


under former RCW 82. 08. 020( 1)( c) the consumer property owner must pay retail sales tax on the

amount charged for those services. Under former RCW 82. 04. 250( 1) the prime contractor also


must   pay B & O      taxes measured by the gross proceeds of the sale of its services.

            In contrast, a contractor constructing a building on real property it owns is not required to

pay   retail sales or    B & O taxes. WAC 458- 20- 170( 2)( b).          WAC 458- 20- 170( 2)( a) calls such a


person      a " speculative   builder."    A speculative builder is not required to pay these taxes on the

value of its construction services because it is not engaged in a retail sale. See Nord, 164 Wn.

App.   at   225.    Although speculative builders are not required to pay retail sales tax on the value of

their construction services, they " must pay sales tax upon all materials purchased by them and on

all charges made        by their   subcontractors."       WAC 458- 20- 170( 2)( e).




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      4



          2.     Regulatory Interpretation

          A determination of whether Bravern was a speculative builder requires interpretation of

WAC 458 -20 -170. When interpreting a regulation, we follow the same rules we use to interpret

a statute.     Tesoro   Ref. & Mktg. Co. v. Dep' t ofRevenue, 164 Wn.2d 310, 322, 189 P. 3d 28

 2008).     As with statutory interpretation, where a regulation is clear and unambiguous we must

give effect to that plain meaning. Overlake Hosp. Ass 'n v. Dep 't ofHealth, 170 Wn.2d 43, 52,

239 P. 3d 1095 ( 2010).        In ascertaining a regulation' s plain meaning, we also consider the context

in which the regulation appears, related regulations and statutes, and the statutory scheme of


which the regulation is a part. TracFone Wireless, Inc. v. Dep' t ofRevenue, 170 Wn.2d 273,

281, 242 P. 3d 810 ( 2010).          We also interpret a regulation in a manner that gives effect to all its

language without rendering any part superfluous. Grays Harbor Energy, LLC v. Grays Harbor

County,      175 Wn.    App.   578, 585, 307 P. 3d 754 ( 2013).        If a statute is ambiguous, we may apply

rules of statutory construction and look to other sources to discern legislative intent. Overlake

Hosp. Ass' n, 170 Wn.2d at 52.

             While `the ultimate authority' for determining a statute' s meaning remains with the

court, considerable deference will be given to the interpretation made by the agency charged

with   enforcing the     statute."    Nord, 164 Wn.   App.     at   229 ( quoting S. Martinelli &   Co. v. Dep' t of

Revenue, 80 Wn.         App. 930,     937, 912 P. 2d 521 ( 1996)). " Our paramount concern is to ensure


that the regulation is interpreted in a manner that is consistent with the underlying policy of the

statute."      Overlake Hosp. Ass 'n, 170 Wn.2d at 52.

          Finally, we must find that a tax applies unless the legislature has expressed a clear intent

to provide an exemption. TracFone, 170 Wn.2d at 296 -97. Tax exemptions may not be created


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by implication. TracFone, 170 Wn.2d at 297. And we construe tax exemptions narrowly.

HomeStreet, Inc. v. Dep' t ofRevenue, 166 Wn.2d 444, 455, 210 P.3d 297 ( 2009).

          3.   Bravern Did Not Perform Construction Services


          WAC 458- 20- 170( 2)( a) defines a speculative builder as " one who constructs buildings

for   sale or rental upon real estate owned     by   him." Bravern was not a contractor and performed


no construction services. However, Bravern argues that because PCL was one of its members,


the construction work PCL performed technically was performed by Bravern. Therefore,

Bravern claims that it was " one who constructs buildings" as required for speculative builder

status under   WAC 458- 20- 170( 2)(   a).    We disagree for three reasons.


          First, the Bravern operating documents show that PCL performed the construction work

as a separate entity from Bravern. The operating agreement required PCL, not Bravern, to

perform construction services. Further, the services addendum provided that PCL would receive


compensation from Bravern in the form of capital account credits and capital account


distributions for these construction services. These documents set up a thinly veiled sale of

services. PCL submitted to Bravern monthly statements showing the value of construction

services performed ( progress   billing      statements).       PCL then received monthly capital account

distributions from Bravern (payment for those services) in return. If Bravern had been


performing the work, PCL' s only payment would have been through Bravern' s profits on the

project. But there is no indication that the capital account payments were tied to Bravern' s


profits, and PCL actually did not receive any profit distributions from the project.

          Second, Washington law treats a member of an LLC as a separate person from the LLC


entity itself. Nord, 164 Wn. App. at 230. This concept is reflected in RCW 25. 15. 070( 2)( c),

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which provides that an LLC is a separate legal entity. Similarly, the court in Nord emphasized

the " well established legal principle that a business entity is a distinct, separate ` person' from its

owners."    Nord, 164 Wn. App. at 230. Because PCL and Bravern are separate entities, Bravern

cannot be treated as the entity performing the construction services that PCL actually performed.

         Third, WAC 458- 20- 170( 2)( f)provides that a joint venture performing construction on

land owned by a co- venturer is not a speculative builder because it is constructing upon land

owned by others.4 The present situation is different: PCL (the member) performed, construction
services on    property   owned   by Bravern ( the   LLC). However, based on the principle stated above


that the owners of an LLC are separate from the LLC entity, WAC 458- 20- 170( 2)( f)must be

applied to this situation as well. See Nord, 164 Wn. App. at 220, 229 -30 ( holding that an LLC

member building on property owned by the LLC was not a speculative builder because the

member and      the LLC   were separate entities).    As a result, under the terms of WAC 458- 20 -


170( 2)( f) Bravern was not a speculative builder because its member PCL was constructing on

property Bravern owned.

         Based on a plain reading of WAC 458- 20- 170( 2)( a) and ( f), Bravern was not a

speculative builder because one of its members as a separate entity, and not Bravern itself,




4
    WAC 458- 20- 170( 2)( f) provides:   "   Persons, including corporations, partnerships, sole
proprietorships, and joint ventures, among others, who perform construction upon land owned by
their corporate officers, .
                          shareholders, partners, owners, co- venturers, etc., are constructing upon
land owned by others and are taxable as sellers under this rule, not as ` speculative .builders.' "
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                                                                             5
performed      the   construction   services on   Bravern'   s   property.       Accordingly, we hold that the trial

court did not err in dismissing Bravern' s tax refund action.

          4.    Department Construction Guidelines


          Bravern argues that its claim to speculative builder status was supported by ( 1) the

Department'      s construction guidelines, (     2) previous Department determinations regarding

speculative builders, and ( 3) previous letter rulings from the Department regarding other entities.

These documents are immaterial because then cannot contradict the plain language of WAC 458-

20- 170( 2), upon which we base our conclusion that Bravern was not a speculative builder. See


Overlake Hosp. Ass 'n, 170 Wn.2d at 52. Therefore, we need not consider these arguments.

However, because agency interpretations may be relevant in interpreting regulations, we will

address the Department' s construction guidelines.


          The Department' s construction guidelines upon which Bravern relies provide:


          If construction services are performed by a member [of a joint venture] as a separate
          entity on land owned by one of the other entities ( the joint venture entity or
          landowner), the construction services are taxable as custom prime contracting. The
          contractor must collect retail sales tax on the full contract price (labor and materials)
          from the landowner.         This is true even if the contractor is a member of the joint
          venture.



          When a joint venture owns the land and the contractor performs construction
          services as a member of the joint venture (versus a separate entity), the joint venture
          is   a speculative   builder.   In this case, the work performed by the contractor is a
          contribution     to the capital of the   joint     The joint venture entity must pay
                                                           venture.

          retail sales tax or use tax on materials purchased or produced for incorporation into
          the real estate.




5 For the same reasons, PCL was not a speculative builder. Although PCL performed
construction services, those services were performed on property owned by Bravern —a                         separate


entity.

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      4




        To be treated as a speculative builder, a joint venture entity must actually exist and
        the joint venture entity must own the land and perform the construction itself.


        Where a member is guaranteed a fixed amount as compensation for construction
         services independent of any right to profit or gain, such amount is taxable as custom
        prime contracting.


CP at 488.


         The first three paragraphs of these guidelines are consistent with our analysis. If a

member of a joint venture performs construction services as a separate entity rather than as a

joint venture member, the transaction is taxable " even if the contractor is a member of the joint

venture."     CP at 488. The guidelines state that to qualify as a speculative builder, the joint

venture must " perform     the   construction   itself." CP at 488. We concluded above that Bravern


was not a speculative builder because PCL was performing construction services as a separate

entity from Bravern and because PCL, not Bravern, was performing the construction. The
guidelines support this conclusion.


         Further, the fourth quoted paragraph contains an independent rule: construction services

are taxable if the member contractor is " guaranteed a fixed amount as compensation for

construction services    independent    of   any   right   to   profit or gain."   CP at 488. Here, Bravern relies


on   the operating   agreement provision     stating: " No       Member shall be entitled to any guaranteed

payment from the      Company." CP at 64. But Bravern' s operating agreement and services

addendum provided that in exchange for PCL performing the construction work, PCL would

receive a credit to its capital account in the amount of the cost of the work. Further, the

agreement was structured so that Bravern essentially had no choice but to make regular cash

distributions to PCL from that capital account as construction progressed and PCL did receive


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44730 -4 -II




distributions totaling over $ 121 million. Finally, these payments clearly had no connection with

any profits from the project, which would not even begin to accrue until construction was

complete and PCL received full payment for its work.

        Despite the form      of   the operating   agreement —    stating that no payments were guaranteed

  there is no question that in substance the agreement ensured that PCL would receive full

compensation for its construction services regardless of whether the project made any profit. As

a result, the fourth paragraph of the construction guidelines also does not support a finding that

Bravern was a speculative builder.


        5.     Application of RCW 82. 32. 655


        As an alternative ground for denying the tax refund, the Department argues that RCW

82. 32. 655 specifically prohibits the type of "tax avoidance transactions" in which Bravern was

engaged.     Because   we   hold that Bravern is    not a speculative     builder   and   is   required   to pay B & O


and sales taxes on PCL' s construction services, we need not address this issue.

C.      CAPITAL ACCOUNT CREDITS SUBJECT TO TAX


        Bravern    also claims     that its transactions   with   PCL   were not subject       to B & O and retail



sales taxes under WAC 458 -20 -106. Bravern argues that because PCL contributed services only

in exchange for credits to its capital account, there was no " sale" of services and therefore the


activity was not subject to tax.6 We disagree.
         A   contractor   performing    retail construction   must pay B & O tax on the gross proceeds


from the sale, which is the " value proceeding or accruing from the sale" of the construction




6 As noted above, Bravern would only have been obligated to pay retail sales tax on these
transactions.    PCL   would   have been    obligated   to pay B & O     tax.

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services. RCW 82. 04. 070. This includes " the consideration, whether money, credits, rights, or

other   property   expressed    in terms   of   money, actually         received or accrued."   RCW 82. 04. 090


 emphasis added).       Similarly, for retail sales tax the " sales price" means the " total amount of

consideration ...     including   cash, credit,       property,     and services."   Former RCW 82. 08. 010( 1)( a)


 emphasis added).       Here, PCL received Bravern capital account credits in exchange for its


construction services. Under the plain language of RCW 82. 04. 090, these credits constituted the


 value proceeding or accruing" from the sale of those services, which under RCW

82. 08. 010( 1)( a) constituted compensation for PCL' s services. Therefore, these credits were

subject   to B & O tax and retail sales tax.


          Bravern nevertheless argues that under WAC 458 -20 -106, PCL' s capital account credits


         taxable.
were non -              WAC 458 -20 -106         provides     that "[   a] transfer of capital assets to or by a

business is deemed not taxable to the extent the transfer is accomplished through an adjustment


of   the beneficial interest in the business."          This includes transfers of "capital assets to a


partnership or joint venture in exchange for an interest in the partnership or joint venture; or by a

partnership or joint venture to its members in exchange for a proportional reduction of the

transferee' s interest   in the partnership      or   joint   venture."    WAC 458 -20 -106.


          But this   regulation requires    the transfer       of "capital assets."    WAC 458 -20 -106. Our


Supreme Court has defined a " capital asset" for purposes of this regulation to be " something that

is held only for     use —   a device or article kept, maintained, employed and utilized in the conduct

and operation of      the business."   Budget Rent - -Car v. Dep' t ofRevenue, 81 Wn.2d 171, 176, 500
                                                   A

P. 2d 764 ( 1972) (   emphasis omitted).         PCL' s compensation may have been in the form of a

capital account credit, but the transfer subject to taxation was PCL' s provision of construction


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44730- 4- 11



services to Bravern. There is no indication that construction services constitute a capital asset for

purposes of WAC 458 -20 -106. As a result, WAC 458 -20 -106 does not apply to the transfer of

those construction services from PCL to Bravern.

        We affirm.




 We concur:




 LSE, J.




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