Ashland Oil, Inc. v. Rose

• Citation: 350 S.E.2d 531,177 W.Va. 20
• Decision Date: 12 November 1986
• Docket Number: No. 16962,16962
• Parties: ASHLAND OIL, INC. v. Herschel H. ROSE, III, State Tax Commissioner.
• Court: West Virginia Supreme Court

Page 531

350 S.E.2d 531

177 W.Va. 20

ASHLAND OIL, INC. v. Herschel H. ROSE, III, State Tax Commissioner.

No. 16962.

Supreme Court of Appeals of

West Virginia.

Nov. 12, 1986.

Charlie Brown, Atty. Gen., Gregory A. Morgan, Asst. Atty. Gen., Tax Div., Charleston, for appellants.

Thomas R. Goodwin, Susan C. Whittenmeier, Goodwin & Goodwin, Charleston, Larry A. Carver, State Tax Counsel, Ashland, for appellee.

Syllabus by the Court

1. The decision of the United States Supreme Court in Armco, Inc. v. Hardesty invalidated the West Virginia Business and Occupation Tax on wholesale sales by out-of-state manufacturers. 467 U.S. 638, 104 S.Ct. 2620, 81 L.Ed.2d 540 (1984).

2. "In determining whether to extend full retroactivity, the following factors are to be considered: First, the nature of the substantive issue overruled must be determined. If the issue involves a traditionally settled area of law, such as contracts or property as distinguished from torts, and the new rule was not clearly foreshadowed, then retroactivity is less justified. Second, where the overruled decision deals with procedural law rather than substantive, retroactivity ordinarily will be more readily accorded. Third, common law decisions, when overruled, may result in the overruling decision being given retroactive effect, since the substantive issue usually has a narrower impact and is likely to involve fewer parties. Fourth, where, on the other hand, substantial public issues are involved, arising from statutory or constitutional interpretations that represent a clear departure from prior precedent, prospective application will ordinarily be favored. Fifth, the more radically the new decision departs from previous substantive law, the greater the need for limiting retroactivity. Finally, this Court will also look to the precedent of other courts which have determined the retroactive/prospective question in the same area of law in their overruling decisions." Syl. pt. 5, Bradley v. Appalachian Power Co., 163 W.Va. 332, 256 S.E.2d 879 (1979).

BROTHERTON, Justice:

This is a West Virginia Business & Occupation Tax case in which the parties dispute the scope of application of the United States Supreme Court's decision in Armco, Inc. v. Hardesty, 467 U.S. 638, 104 S.Ct. 2620, 81 L.Ed.2d 540 (1984). The State Tax Commissioner appeals from a summary judgment granted by Judge Workman of the Kanawha County Circuit Court, which held that business and occupation tax assessed on Ashland Oil, Inc.'s wholesale sales was invalid under Armco. We agree with the circuit court that the Armco decision applies to the facts of this case. We nevertheless reverse the summary judgment, because in our opinion the holding in Armco should be applied prospectively only.

The appellee, Ashland, is a Kentucky corporation qualified to do business in West Virginia. It is an integrated oil company engaged in a wide variety of business enterprises. Pursuant to an agreement between a previous tax commissioner and Ashland, the State Tax Department conducted a detailed audit of Ashland's fiscal years ending September, 1975 and September, 1976. The audit resulted in a deficiency assessment in the amount of $181,313.22 for business and occupation tax on wholesale sales with West Virginia destinations. Ashland filed a petition for reassessment and objected to the proposed adjustments. The Commissioner upheld the assessment of tax in an administrative decision dated April 21, 1981. ¹ Ashland filed a timely appeal to the Circuit Court of Kanawha County.

At the administrative level, and also in briefs filed in the circuit court, the controversy focused on whether various sales operations of Ashland had sufficient nexus with the State of West Virginia to support the imposition of the business and occupation tax. The Commissioner concluded in his administrative decision that the contacts of the corporation as a whole were sufficient to support the imposition of tax on all sales having West Virginia destinations. Ashland, however, contended throughout the proceedings that sales by separate marketing units should be evaluated separately for nexus with the state. Prior to resolution of this issue in the circuit court, the United States Supreme Court decided Armco, Inc. v. Hardesty, 467 U.S. 638, 104 S.Ct. 2620, 81 L.Ed.2d 540 (1984), and the circuit court granted Ashland summary judgment on that basis.

I.

Armco, like Ashland Oil, was a diversified corporation embroiled in a dispute with the State Tax Department over the ability of the State of West Virginia to impose business and occupation tax on certain of its wholesale sales to West Virginia customers. This Court reversed a decision of the Circuit Court of Kanawha County, and reinstated an assessment of tax against Armco, holding: (1) Armco was a unitary business with a substantial nexus to West Virginia, and it was not necessary to consider each division of the corporation separately to determine whether tax could be imposed; (2) there was a rational relationship of the tax to the local services and benefits afforded by the State of West Virginia to Armco, and the tax was fairly apportioned; (3) West Virginia's tax on wholesale sales, from which in-state manufacturers were exempt, did not discriminate against out-of-state manufacturers in violation of the commerce clause, because in-state manufacturers paid a higher tax on gross proceeds from manufacturing; and (4) the tax did not violate the "equal and uniform" clause of the West Virginia Constitution. Armco, Inc. v. Hardesty, --- W.Va. ----, 303 S.E.2d 706 (1983).

In an opinion delivered by Justice Powell, the United States Supreme Court reversed that decision, and held that the West Virginia Business and Occupation Tax on wholesale sales unconstitutionally discriminated against interstate commerce, because taxpayers who manufactured their products in West Virginia were exempt from the tax. Armco, Inc. v. Hardesty, 467 U.S. at 639, 104 S.Ct. at 2621. ²

The Commerce Clause prohibits a state from discriminating between transactions because of some interstate element. Boston Stock Exchange v. State Tax Comm'n, 429 U.S. 318, 328, 97 S.Ct. 599, 605, 50 L.Ed.2d 514 (1977). The Supreme Court in Armco found our tax scheme discriminatory on its face, because it taxed certain transactions (wholesale sales) more heavily when they crossed state lines than when they occurred within West Virginia. 467 U.S. at 642, 104 S.Ct. at 2622. The Court refuted this Court's reasoning that out-of-state manufacturers suffered no actual discrimination, saying that the manufacturing tax could not be deemed a "compensating tax" for the wholesale tax on out-of-state businesses, both because manufacturing and wholesaling are not "substantially equivalent events," and because the statute did not provide for any reduction of the manufacturing tax when goods manufactured in West Virginia were sold out-of-state. 467 U.S. at 643-44, 104 S.Ct. at 2623-24. Departing from the clear course of recent decisions on this issue, see, e.g., Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 & n. 8, 97 S.Ct. 1076, 1079 & n. 8, 51 L.Ed.2d 326 (1977); Department of Revenue v. Association of Wash. Stevedoring Cos., 435 U.S. 734, 750, 98 S.Ct. 1388, 1399, 55 L.Ed.2d 682 (1978), the Court said that no actual discriminatory impact was required to establish a Commerce Clause violation. It applied instead the "internal consistency" standard previously used to assess the validity of state net income taxes: "[T]he tax must be such that, if applied by every jurisdiction, there would be no impermissible interference with free trade." 467 U.S. at 644, 104 S.Ct. at 2624, quoting Container Corp. v. Franchise Tax Bd., 463 U.S. 159, 169, 103 S.Ct. 2933, 2942, 77 L.Ed.2d 545 (1983). Prior to Armco, this test had been used only in net income tax cases, where net income must be apportioned among the states in which the taxpayer does business. In gross receipts tax cases apportionment has not been considered necessary, because the source of receipts can be determined directly. ³

In this case, the Tax Commissioner asserts that the exemption for in-state wholesalers was struck down in the Armco decision and not the wholesale tax on out-of-state manufacturers. The taxpayer argues to the contrary, and the text of the Armco opinion supports the taxpayer's position. The opening paragraph of the Supreme Court's opinion reads:

In this appeal an Ohio corporation claims that West Virginia's wholesale gross receipts tax, from which local manufacturers are exempt, unconstitutionally discriminates against interstate commerce. We agree and reverse the state court's judgment upholding the tax.

467 U.S. at 639, 104 S.Ct. at 2621. As pointed out by counsel for the taxpayer, if the exemption and not the wholesale tax had been struck down, it would not have been necessary to reverse the judgment upholding the wholesale tax.

Armco did, then, strike down the tax on wholesale sales, at least as applied to out-of-state manufacturers. ⁴ The State Tax Commissioner does not dispute that Ashland is an out-of-state manufacturer selling at wholesale within West Virginia. The circuit court was, therefore, correct in concluding that the assessment against Ashland came within the holding of the United States Supreme Court in Armco.

II.

The Commissioner's second line of defense is that the Armco decision should be applied prospectively only, i.e., only from the date of decision, June 12, 1984, forward. The Commissioner filed a petition for rehearing with the United States Supreme Court on this basis, and the petition was denied. Resolution of the retroactivity issue is, therefore, left to this Court. ⁵

Although statutes normally operate prospectively only, judicial decisions ordinarily operate retroactively. The courts of this country long have recognized exceptions to the rule of retroactivity, however. See, e.g., Great Northern Ry. v. Sunburst Oil &...