Avista Energy, currently the hottest-performing subsidiary of Spokane-based Avista Corp., has been slapped with an additional $13.5 million business-and-occupation tax assessment by the Washington state Department of Revenue for its energy-trading activities. The company is appealing the assessment administratively, though, and is preparing to go to court to challenge the tax bill if necessary.


Patrick Lynch, an Avista Corp. spokesman, declined to comment on the substance of the dispute, beyond whats disclosed in routine financial documents the company has filed with the U.S. Securities and Exchange Commission.


However, he said, We look at this as being a fairly unique issue since the now thriving wholesale-energy marketing business didnt exist until just a few years ago. Avista Energy has been among the nations largest sellers of wholesale power.


In its recently released 2000 annual report, Avista Corp. disclosed that Avista Energy had received the notice of assessment from the DOR after the state agency conducted an audit on the company for the years 1997 through mid-2000.


Washingtons business-and-occupation, or B&O, tax generally applies to gross receipts from business activities, except for financial trading involving stocks, bonds, and futures contracts, in which case just gains from the transactions are taxed. Avista Energy trades electricity and natural gas as commodities for consumption, including to commercial and industrial end-users, and also for resale, through price-speculative futures contracts, options, and other derivative commodity instruments.


Avista Corp. said in its annual report that the Department of Revenue made a distinction in its audit between certain types of trades entered into by Avista Energy. As a result, the DOR is attempting to apply tax to the gross receipts rather than the trading gains on about 20 percent of Avista Energys trading volume for the audit period, the company said. Avista Energy believes that all of the trading activity should be subject to tax on the trading gains only, and taxes have been accrued and paid based on this position.


Avista filed an administrative appeal in March, and said in its most recent quarterly report that it expects a ruling by the end of this year. In the event a satisfactory determination is not received from the administrative process, Avista Energy is prepared to seek recourse through the courts, the company said.


DOR representatives wouldnt discuss the particulars of the Avista case, saying they are prohibited by privacy laws from talking about any audits the agency performs on businesses.


However, state Rep. Larry Crouse, R-Spokane, who co-chairs the House committee on technology, telecommunications, and energy, says the disputed assessment is based on DORs interpretation of state tax law that the Legislature changed last year in an effort to reduce taxes for energy traders. The Legislature unanimously approved a bill that expanded exemptions to both a 1.5 percent service B&O tax and a 3.87 percent public-utility tax as they pertained to utilities and power marketers in the state that buy and sell wholesale energy.


The bill, House Bill 2755, which Crouse assisted Rep. Jeff Gombosky, D-Spokane, in sponsoring, expanded B&O tax exemptions to apply to revenues derived from the sale of electrical energy for resale within or outside the state. Unlike with expanded exemptions to the public-utility tax, though, the expanded B&O tax exemptions werent made retroactive.


The law changes were partly an outgrowth of a DOR revenue study on the effects of state and local taxes on the emerging wholesale-energy industry. The study found, among other things, that state tax law, unless revised, could cost the state millions of dollars because of differing tax burdens on in-state and out-of-state companies competing in that market.


Crouse says he doesnt fault DOR for being aggressive in pursuing taxes it believes the state is owed, but he questions its use of a loophole to go after Avista Energy and says he hopes that the two parties can resolve the dispute through negotiation.


Any time youre tapping your utilities for more money, that (cost) is being passed on directly to customers, and the current volatile energy market makes this a particularly poor time to be boosting customers energy costs even further, he says.


Avista Corp. reported net income of $28.8 million, or 61 cents a diluted share, in its most recent quarter, due largely to Avista Energys strong performance. Avista Corp.s energy trading and marketing activities, dominated by Avista Energy, accounted for net income of $161.8 million last year, easily offsetting combined losses of about $74 million by affiliates Avista Utilities, Avista Ventures, and the parent companys information and technology lines of business.


Avistas energy trading and marketing activities didnt have nearly that kind of star power in earlier, formative years that cover most of the DOR audit period. They generated net income of just $5.4 million in 1997 and $14.1 million in 1998, on revenues of $247 million and $2.4 billion, respectively, followed by a loss of about $60.7 millionon nearly $6.7 billion in revenuesin 1999.


Bad energy trades that year triggered a sharp plunge in the companys stock value and the filing of several class-action lawsuits on behalf of shareholders, followed later by the resignation of the companys chairman, president, and CEO, T.M. Tom Matthews.