Tyler Pipe Industries, Inc v. Washington State Department of Revenue National Can Corporation v. Washington State Department of Revenue, s. 85-1963

• Citation: 97 L.Ed.2d 199,483 U.S. 232,107 S.Ct. 2810
• Decision Date: 23 June 1987
• Docket Number: Nos. 85-1963,85-2006,s. 85-1963
• Parties: TYLER PIPE INDUSTRIES, INC., Appellant v. WASHINGTON STATE DEPARTMENT OF REVENUE. NATIONAL CAN CORPORATION, et al., Appellants v. WASHINGTON STATE DEPARTMENT OF REVENUE
• Court: United States Supreme Court

483 U.S. 232

107 S.Ct. 2810

97 L.Ed.2d 199

TYLER PIPE INDUSTRIES, INC., Appellant

v WASHINGTON STATE DEPARTMENT OF REVENUE.

NATIONAL CAN CORPORATION, et al., Appellants

v. WASHINGTON STATE DEPARTMENT OF REVENUE.

Nos. 85-1963, 85-2006.

Argued March 2, 1987.

Decided June 23, 1987.

Syllabus

Washington imposes a business and occupation (B & O) tax on the privilege of engaging in business activities in the State, including manufacturing in the State and making wholesale sales in the State. The measure of the wholesale tax is the gross proceeds of sales, and the measure of the manufacturing tax is the value of the manufactured product. However, under the B & O tax's "multiple activities exemption," local manufacturers are exempted from the manufacturing tax for the portion of their output that is subject to the wholesale tax. Application of the exemption results in local manufacturers' paying the wholesale tax on local sales, local manufacturers' paying only the manufacturing tax on their out-of-state sales, and out-of-state manufacturers' paying the wholesale tax on their sales in Washington. The same tax rate is applicable to both wholesaling and manufacturing activities. In both of the cases under review, which originated as state-court tax refund suits by appellants, local manufacturers who sold their goods outside Washington and out-of-state manufacturers who sold their goods in Washington, the trial court held that the multiple activities exemption did not discriminate against interstate commerce in violation of the Commerce Clause. In No. 85-1963, appellant Tyler Pipe Industries, Inc. (Tyler)—an out-of-state manufacturer who sold its products in Washington but had no property or employees in Washington, and whose solicitation of business in Washington was conducted by an independent contractor located in Washington—also asserted that its business did not have a sufficient nexus with Washington to justify the collection of the tax on its wholesale sales there. The trial court upheld the B & O tax. The Washington Supreme Court affirmed in both cases.

Held:

1. Washington's manufacturing tax discriminates against interstate commerce in violation of the Commerce Clause because, through the operation of the multiple activities exemption, the tax is assessed only on those products manufactured in Washington that are sold to out-of-state customers. The exemption for local manufacturers that sell their prod- ucts within the State has the same facially discriminatory consequences as the West Virginia tax exemption that was invalidated in Armco Inc. v. Hardesty, 467 U.S. 638, 104 S.Ct. 2620, 81 L.Ed.2d 540, and the reasons for invalidating the tax in that case also apply to the Washington tax. The facial unconstitutionality of Washington's tax cannot be alleviated by examining the effect of other States' tax legislation to determine whether specific interstate transactions are subject to multiple taxation. Nor can Washington's imposition of the manufacturing tax on local goods sold outside the State be saved as a valid "compensating tax." Manufacturing and wholesaling are not "substantially equivalent events," id., at 643, 104 S.Ct., at 2623, such that taxing the manufacture of goods sold outside the State can be said to compensate for the State's inability to impose a wholesale tax on such goods. Henneford v. Silas Mason Co., 300 U.S. 577, 57 S.Ct. 524, 81 L.Ed. 814, distinguished. To the extent that the ruling here is inconsistent with the ruling in General Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430—where the B & O tax was upheld as against claims that it unconstitutionally taxed unapportioned gross receipts and did not bear a reasonable relation to the taxpayer's in-state activities—that case is overruled. Pp. 239-248.

2. The activities of Tyler's sales representative in Washington adequately support the State's jurisdiction to tax Tyler's wholesale sales to in-state customers. The showing of a sufficient nexus cannot be defeated by the argument that the taxpayer's representative was properly characterized as an independent contractor rather than an agent. Cf. Scripto, Inc. v. Carson, 362 U.S. 207, 80 S.Ct. 619, 4 L.Ed.2d 660. Nor is there any merit to Tyler's contention that the B & O tax does not fairly apportion the tax burden between its activities in Washington and its activities in other States. Such contention rests on the erroneous assumption that, through the B & O tax, Washington is taxing the unitary activity of manufacturing and wholesaling. The manufacturing tax and the wholesaling tax are not compensating taxes for substantially equivalent events, and, thus, the activity of wholesaling—whether by an in-state or an out-of-state manufacturer—must be viewed as a separate activity conducted wholly within Washington that no other State has jurisdiction to tax. Pp. 248-251.

3. Appellee's argument against retroactive application of any adverse decision here should be considered, in the first instance, by the Washington Supreme Court on remand. Cf. Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 104 S.Ct. 3049, 82 L.Ed.2d 200. Pp. 251-253.

105 Wash.2d 318, 715 P.2d 123, and 105 Wash.2d 327, 732 P.2d 134 (1986), vacated and remanded.

STEVENS, J., delivered the opinion of the Court, in which BRENNAN, WHITE, MARSHALL, BLACKMUN, and O'CONNOR, JJ., joined, and in Part IV of which SCALIA, J., joined. O'CONNOR, J., filed a concurring opinion, post, p. ----. SCALIA, J., filed an opinion concurring in part and dissenting in part, in Part I of which REHNQUIST, C.J., joined, post, p. ----. POWELL, J., took no part in the consideration or decision of the cases.

D. Michael Young, Seattle, Wash., for appellants in No. 85-2006.

Neil J. O'Brien, Dallas, Tex., for appellant in No. 85-1963.

William Berggren Collins, Olympia, Wash., for appellees.

Justice STEVENS delivered the opinion of the Court.

In Armco Inc. v. Hardesty, 467 U.S. 638, 104 S.Ct. 2620, 81 L.Ed.2d 540 (1984), we held that West Virginia's gross receipts tax on the business of selling tangible property at wholesale discriminated against interstate commerce because it exempted local manufacturers. The principal question in these consolidated appeals is whether Washington's manufacturing tax similarly violates the Commerce Clause of the Constitution because it is assessed only on those products manufactured within Washington that are sold to out-of-state purchasers. We conclude that our reasons for invalidating the West Virginia tax in Armco also apply to the Washington tax challenged here.

I

For over half a century Washington has imposed a business and occupation (B & O) tax on "the act or privilege of engag- ing in business activities" in the State. Wash.Rev.Code § 82.04.220 (1985). The tax applies to the activities of extracting raw materials in the State,¹ manufacturing in the State,² making wholesale sales in the State,³ and making retail sales in the State.⁴ The State has typically applied the same tax rates to these different activities. The measure of the selling tax is the "gross proceeds of sales," and the measure of the manufacturing tax is the value of the manufactured products. §§ 82.04.220, 82.04.240.

Prior to 1950, the B & O tax contained a provision that exempted persons who were subject to either the extraction tax or the manufacturing tax from any liability for either the wholesale tax or the retail tax on products extracted or manufactured in the State.⁵ Thus, the wholesale tax applied to out-of-state manufacturers but not to local manufacturers. In 1948 the Washington Supreme Court held that this wholesale tax exemption for local manufacturers discriminated against interstate commerce and therefore violated the Commerce Clause of the Federal Constitution. Columbia Steel Co. v. State, 30 Wash.2d 658, 192 P.2d 976 (1948). The State Supreme Court rejected the State's argument that the taxpayer had not suffered from discrimination against interstate commerce because it had not proved that it paid manu- facturing tax to another State.⁶ The Washington Supreme Court also dismissed the State's contention that if the State in which a good was manufactured did not impose a manufacturing tax, the seller of the good would have a competitive advantage over Washington manufacturers:

"[T]he situation obtaining in another state is immaterial. We must interpret the statute as passed by the legislature. In our opinion the statute marks a discrimination against interstate commerce in levying a tax upon wholesale activities of those engaged in interstate commerce, which tax is, because of the exemption contained in § 8370-6, not levied upon those who perform the same taxable act, but who manufacture in the state of Washington." Id., at 664, 192 P.2d, at 979.

Two years later, in 1950, the Washington Legislature responded to this ruling by turning the B & O tax exemption scheme inside out. The legislature removed the wholesale tax exemption for local manufacturers and replaced it with an exemption from the manufacturing tax for the portion of manufacturers' output that is subject to the wholesale tax.⁷ The result, as before 1950, is that local manufacturers pay the manufacturing tax on their interstate sales and out-of-state manufacturers pay the wholesale tax on their sales in Washington. Local manufacturer-wholesalers continue to pay only one gross receipts tax, but it is now applied to the activity of wholesaling rather than the activity of manufacturing. Although the tax rate has changed over the years—it is now forty-four hundredths of one percent, or 0.44%, of gross receipts the relevant provisions of Washington's B & O tax are the same today as enacted in 1950.⁸

The constitutionality of the B & O tax has been challenged on several occasions,⁹ most strenuously in General Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1964). In that case a bare majority of the Court upheld the tax;...