Armco, Inc. v. Hardesty, 15437

• Citation: 303 S.E.2d 706,172 W.Va. 67
• Decision Date: 25 May 1983
• Docket Number: No. 15437,15437
• Court: Supreme Court of West Virginia
• Parties: ARMCO, INC., etc. v. David C. HARDESTY, Jr., State Tax Commr., etc.

Page 706

303 S.E.2d 706

172 W.Va. 67

ARMCO, INC., etc. v. David C. HARDESTY, Jr., State Tax Commr., etc.

No. 15437.

Supreme Court of Appeals of West Virginia.

May 25, 1983.

Syllabus by the Court

1. For the purposes of the Due Process and the Commerce Clauses of the United States Constitution, where a business has been found to have a substantial nexus with this State, and where there is a rational relationship between the tax imposed on its business activity within this State, and the protection, opportunities, and benefits afforded by the State, the tax will be upheld unless it is shown that the tax discriminates against interstate commerce or is not fairly apportioned.

2. Where a unitary business has a substantial nexus in this State through its qualifying to do business in this State, and engaging in operations such as coal mining and sales of metal products, we are not required to separate the activities of its various divisions doing business in this State and treat them separately for purposes of determining whether in isolation they have a sufficient connection to this State to warrant imposition of a business and occupation tax.

3. Whether there is a rational relationship or fair apportionment of a tax to the local services and benefits afforded a taxpayer must also be answered by viewing the taxpayer's total activities in this State. West Virginia's business and occupation tax is composed of a number of individual taxes tied to specific business activities occurring within this State. Thus, the business and occupation tax bears a relationship or apportionment to business activity in this State because the tax is imposed based on the value of the business activity occurring within the State.

4. The Commerce Clause of the United States Constitution does not dictate an iron rule of equality between taxes laid by a State on different types of business activity.

5. Section 1 of Article X of the West Virginia Constitution does not require that the same rate of business and occupation tax be applied to all classes of business activity and callings to which the tax is applied. The Legislature may prescribe different rates for different businesses and callings, but the rate of taxation must be uniform and equal within each classification.

Chauncey H. Browning, Jr., Atty. Gen. and Robert Digges, Jr., Asst. Atty. Gen., Charleston, for appellant.

Spilman, Thomas, Battle & Klostermeyer and G. Thomas Battle, Charleston, for appellee.

MILLER, Justice:

This is an appeal by the State Tax Commissioner from an order of the Circuit Court of Kanawha County which set aside a business and occupation tax deficiency assessment against Armco, Inc. The circuit court concluded that the wholesale classification provisions of the business and occupation tax law (W.Va.Code, 11-13-1, et seq.) did not apply to the operations of certain divisions of Armco, Inc. The circuit court's conclusion was based principally on its view that these divisions did not have a sufficient business nexus with the State of West Virginia to support the imposition of the tax. On appeal the State Tax Commissioner claims that the circuit court erred in failing to find a sufficient nexus. We agree, and we reverse the decision of the Circuit Court of Kanawha County.

Armco, Inc., is an Ohio corporation qualified to hold property and do business as a foreign corporation in West Virginia. The corporation is divided into a number of divisions, four of which are relevant to the proceedings now before us: the Mining Division, the Steel Group, the Union Wire Rope Group, and the Metal Products Division. The proceeding out of which the present appeal arises involved the operations of the four dividions between January 1, 1970, and December 31, 1975.

During the period in question the Mining Division was extensively involved in mining, cleaning, and selling coal in West Virginia. The record indicates that during this period the company operated at least four mines which produced substantial amounts of coal. For instance, there is evidence that in the year 1974 alone, Armco's Number 7 Mine produced 545,288 tons of clean coal; Mine 11E produced 48,069 tons; Mine Number 8 produced 686,728 tons; and Mine Number 9 produced 257,815 tons. In the proceedings below the company did not challenge the fact that through its mining operations it had a business nexus with West Virginia.

The Steel Group of Armco produced certain steel products at nine plants located in seven states. There were no manufacturing facilities in West Virginia. This Group had no sales offices in West Virginia, but sold its products through its Cincinnati, Ohio office and its Pittsburgh, Pennsylvania office. There was evidence that the Cincinnati and Pittsburgh offices each sent two salesmen into West Virginia once every four to six weeks. The salesmen were not residents of West Virginia and had specific territories which included portions of other states. There was also evidence that one salesman went to Wheeling from Pittsburgh twice a month.

The salesmen were not authorized to accept or reject orders from West Virginia customers. Orders were forwarded to the Group's out-of-state offices where they were accepted or rejected. Goods ordered were shipped from out-of-state facilities by common carrier, and title passed to the common carrier at the out-of-state pick-up points. Follow-up calls by the salesmen were made to check customer satisfaction, and occasionally representatives of the Steel Group were called upon to investigate customer complaints and perform service work.

The Union Wire Rope Group's activities were similar to those of the Steel Division. It had a mill in Kansas City and warehouses in Ashland, Kentucky, and Pittsburgh, Pennsylvania. It maintained no inventory in West Virginia. It had no resident service or sales representatives in West Virginia, and it maintained no offices in the State. It had three salesmen--one each from Ashland, Kentucky; Pittsburgh, Pennsylvania, and Greensboro, North Carolina--who visited West Virginia once or twice a month. They took all orders subject to acceptance at Middletown, Ohio. The Group shipped goods into West Virginia in the same way as the Steel Division. The Union Wire Rope Group was not authorized to sell the Steel Division's products, and the Steel Division did not handle the Wire Rope Group's products.

Armco's Metal Products Division which produced and sold a number of construction products maintained an office in South Charleston, West Virginia. During the 1970-75 period two sales engineers and a secretary worked out of the office. The office managed the sales of all the Metal Products Division's products except metal buildings. The Division's metal buildings were sold by franchisees who were West Virginia residents operating in this State. They had agreements authorizing them to utilize the corporate name and trademarks, as well as corporate advertisements. Armco shared advertising expenses with its franchisees in order to promote sales.

On appeal Armco contends that because of the Due Process and the Commerce Clauses of the United States Constitution, the business and occupation tax cannot be imposed on the activities of the Steel Group, the Union Wire Rope Group, or on the sales of metal buildings by its Metal Products Division. Specifically, Armco claims that the operations of these divisions must be viewed separately, and, when so viewed, they do not have a substantial business nexus with West Virginia, and that the taxes imposed upon these divisions are not fairly apportioned.

I.

The Due Process Clause and the Commerce Clause of the Constitution of the United States contain standards that must be met in order to sustain state taxation of a business which conducts both local and interstate business. In Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207, 219-20, 100 S.Ct. 2109, 2118, 65 L.Ed.2d 66, 79 (1980), the Supreme Court of the United States summarized the requirements of due process:

"The Due Process Clause of the Fourteenth Amendment imposes two requirements for such state taxation: a 'minimal connection' or 'nexus' between the interstate activities and the taxing State, and 'a rational relationship between the income attributed to the State and the intrastate values of the enterprise.' Mobil Oil Corp. v. Commissioner of Taxes, [445 U.S. 425], at 436, 437 [100 S.Ct. 1223, 1231, 63 L.Ed.2d 510, 520]. See Moorman Mfg. Co. v. Bair, [437 U.S. 267], at 272-273 [98 S.Ct. 2340, 2344, 57 L.Ed.2d 197, 204]; National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753, 756 [87 S.Ct. 1389, 1391, 18 L.Ed.2d 505, 508] (1967); Norfolk & Western R. Co. v. State Tax Comm'n, 390 U.S. 317, 325, [88 S.Ct. 995, 1000, 19 L.Ed.2d 1201, 1207] (1968)."

The requirements of the Commerce Clause overlap somewhat on the Due Process standards as illustrated by the Commerce Clause test given in Department of Revenue of Washington v. Association of Washington Stevedoring Cos., 435 U.S. 734, 750, 98 S.Ct. 1388, 1399, 55 L.Ed.2d 682, 697 (1978):

"The Court repeatedly has sustained taxes that are applied to activity with a substantial nexus with the State, that are fairly apportioned, that do not discriminate against interstate commerce, and that are fairly related to the services provided by the State. E.g., General Motors Corp. v. Washington, 377 U.S. 436 [84 S.Ct. 1564, 12 L.Ed.2d 430] (1964); Northwestern Cement Co. v. Minnesota, 358 U.S. 450 [79 S.Ct. 357, 3 L.Ed.2d 421, 67 A.L.R.2d 1292] (1959); Memphis Gas Co. v. Stone, 335 U.S. 80 [68 S.Ct. 1475, 92 L.Ed. 1832] (1948); Wisconsin v. J.C. Penney Co., 311 U.S. 435 [61 S.Ct. 246, 85 L.Ed. 267, 130 A.L.R. 1229] (1940); see Complete Auto Transit, Inc. v. Brady, 430 U.S. at 279, and n. 8 [97 S.Ct. 1076, at 1079, and n. 8, 51 L.Ed.2d 326]."

It would appear that the Due Process "minimal connection or nexus" is related to the Commerce Clause "activity with a substantial nexus with ...