National Can Corp. v. State Dept. of Revenue

• Decision Date: 06 March 1986
• Docket Number: No. 51910-2,51910-2
• Citation: 105 Wash.2d 327,715 P.2d 128
• Court: Washington Supreme Court
• Parties: NATIONAL CAN CORPORATION, Kalama Chemical, Inc., and Xerox Corporation, Appellants, v. STATE of Washington, DEPARTMENT OF REVENUE, Respondent. En Banc

Page 128

715 P.2d 128

NATIONAL CAN CORPORATION, Kalama Chemical, Inc., and Xerox Corporation, Appellants, v. STATE of Washington, DEPARTMENT OF REVENUE, Respondent.

No. 51910-2.

Supreme Court of Washington,

En Banc.

March 6, 1986.

Note: Opinion Superseded by 732 P.2d 134, 105 Wash.2d 327.

Bogle & Gates, John T. Piper, D. Michael Young, Franklin G. Dinces, James R. Johnston, Seattle, for appellants.

Kenneth Eikenberry, Atty. Gen., William B. Collins, Asst. Atty. Gen., Olympia, for respondent.

UTTER, Justice.

This is a direct appeal from the trial court where various commercial enterprises (Taxpayers) claimed Washington's multiple activities exemption to the business and occupation (B & O) tax, RCW 82.04.440, discriminates against interstate commerce in violation of the commerce clause, U.S. Const. art. 1, § 8. The trial court ruled there was no unlawful discrimination. We agree and hold for the respondent, Department of Revenue (Department), that the challenged exemption does not violate the commerce clause. Our holding makes it unnecessary to reach the other issues raised by the parties concerning the constitutionality of both the tax refund interest provision, RCW 82.32.060, and the proposed legislation, ESSB 3678, as well as the appropriate form of relief to be afforded Taxpayers.

Fifty-three separate actions for refunds of B & O taxes paid to the Department were filed. Each Taxpayer claimed the tax violates the commerce clause. These actions were joined for decision by the Thurston County Superior Court which granted the Department's motion for summary judgment and denied the Taxpayers' motions for injunctions against further collection of the B & O taxes in question. The 53 cases were consolidated for this appeal and, in addition, 52 other substantially similar actions are pending in Thurston County Superior Court. The amount in question is estimated to exceed $423 million.

Three plaintiffs were selected by the parties to serve as "test cases" in the appeal. Kalama Chemical, Inc., a representative plaintiff, manufactures its products in Washington and sells them outside of Washington. Xerox Corporation, the second representative plaintiff, manufactures its products outside Washington and sells them within Washington. The appellant in a companion case would appear to fit most closely within this category of plaintiffs. See Tyler Pipe Indus., Inc. v. Department of Rev., 105 Wash.2d 318, 715 P.2d 123 (1986). National Can Corporation, the third representative plaintiff, manufactures products in Washington for sale outside Washington, and also manufactures products outside Washington for sale in Washington. Kalama Chemical, Inc. seeks a refund of the manufacturing tax it paid ($495,000); Xerox Corporation seeks a refund of the wholesale tax it paid ($1.5 million); National Can Corporation seeks a refund of both the manufacturing and wholesale taxes it paid (approximately $900,000). The period in dispute is from 1980 to the present.

The issue before us is whether Washington's B & O tax exemption, RCW 82.04.440, violates the commerce clause because it (1) discriminates against interstate commerce, (2) is unfairly apportioned, or (3) is not fairly related to the services provided by the state.

Neither this court, nor the state Legislature, "is the final arbiter" of commerce clause issues. See Southern Pac. Co. v. Arizona ex rel. Sullivan, 325 U.S. 761, 65 S.Ct. 1515, 89 L.Ed. 1915 (1945). In an earlier challenge to this B & O tax, we recognized "our duty [is] to abide by controlling United States Supreme Court decisions construing the federal constitution." Association of Washington Stevedoring Cos. v. Department of Rev., 88 Wash.2d 315, 318, 559 P.2d 997 (1977); Department of Rev. v. Association of Wash. Stevedoring Cos., 435 U.S. 734, 98 S.Ct. 1388, 55 L.Ed.2d 682 (1978). This court's rulings on the constitutionality of the Washington B & O tax have generally withstood the United States Supreme Court's scrutiny, see, e.g., General Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1963); Standard Pressed Steel Co. v. Department of Rev., 419 U.S. 560, 95 S.Ct. 706, 42 L.Ed.2d 719 (1975), except when we have read the commerce clause too broadly and struck down the tax. See Association of Washington Stevedoring Cos. v. Department of Rev., 88 Wash.2d at 318-20, 559 P.2d 997.

We find ourselves today in a similar situation. For over 30 years, Washington's B & O tax has been repeatedly upheld by the federal courts against charges that it discriminated against interstate commerce. See B.F. Goodrich Co. v. State, 38 Wash.2d 663, 231 P.2d 325, cert. denied, 342 U.S. 876, 72 S.Ct. 167, 96 L.Ed. 659 (1951). In B.F. Goodrich, we held that the B & O tax does not discriminate against interstate commerce because, under that law, all wholesalers are taxed identically. We relied on the theory that any multiple-tax burdens on interstate commerce, whereby out-of-state businesses must pay a manufacturing tax in another state plus a wholesale tax in Washington, were merely "an inevitable consequence of the power of the several states to tax". 38 Wash.2d at 669, 231 P.2d 325; see also General Motors Corp. v. State, 60 Wash.2d 862, 376 P.2d 843 (1962) (B & O tax upheld against charges of discrimination, applying the Goodrich analysis). The Supreme Court affirmed, General Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1964), but specifically declined to pass on the question of discrimination in the form of multiple-tax burdens because the appellant there failed to demonstrate any actual multiple-tax burden by showing that another state levied an equivalent tax.

In Chicago Bridge & Iron Co. v. Department of Rev., 98 Wash.2d 814, 832, 659 P.2d 463 (1983), this court upheld the tax against charges of discrimination in the form of multiple-tax burdens. The court cited Moorman Mfg. Co. v. Bair, 437 U.S. 267, 277 n. 12, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978), for the proposition that the multiple-tax burdens experienced by interstate businesses are a "consequence of the combined effect of different states' laws" and were not caused by Washington's taxing scheme. 98 Wn.2d at 832. The United States Supreme Court dismissed the subsequent appeal "for want of a federal question," Chicago Bridge & Iron Co. v. Washington Dept. of Rev., 464 U.S. 1013, 104 S.Ct. 542, 78 L.Ed.2d 718 (1983), which we understand to be a decision on the merits. Washington v. Confederated Bands and Tribes of the Yakima Indian Nation, 439 U.S. 463, 476 n. 19, 99 S.Ct. 740, 749 n. 19, 58 L.Ed.2d 740 reh'g denied, 440 U.S. 940, 99 S.Ct. 1290, 59 L.Ed.2d 500 (1979).

Taxpayers assert, however, that a recent Supreme Court case, Armco, Inc. v. Hardesty, 467 U.S. 638, 104 S.Ct. 2620, 81 L.Ed.2d 540 (1984), ¹ effectively overrules, sub silentio, these 30 years of Supreme Court doctrine. As a result of their reading of Armco, Taxpayers ask this court to strike down the state's B & O tax and refund all monies allegedly improperly received under it since 1980.

Due to factual differences between the West Virginia tax, challenged in Armco, see 104 S.Ct. at 2621-22, and the Washington tax, we do not believe the United States Supreme Court is requiring us to forge new commerce clause doctrine and disregard earlier decisions not overruled. We are unable to find such a command in the Armco decision. We are also troubled by the "free-rider" effect of Taxpayers' argument. As Taxpayers conceded at oral argument, their interpretation of Armco would force the State to forego taxing a substantial number of in-state transactions where state services had admittedly been furnished. This implies that a state, to make up the deficit, must impose a double tax burden on in-state manufacturer-wholesalers.

The Commerce Clause Issues

RCW 82.04.220 imposes, in general, a tax upon the privilege of engaging in business activities in Washington. The tax is measured by the application of rates against (1) the value of the products, (2) gross proceeds of sales, or (3) the gross income of the business, whichever is applicable. RCW 82.04.240 imposes a tax upon Washington manufacturers. RCW 82.04.270 taxes every person who sells products at wholesale in Washington. The disputed provision, RCW 82.04.440, provides that persons taxable under RCW 82.04.270 (wholesalers) shall not be taxed under RCW 82.04.240 (as local manufacturers). Thus, local manufacturers who wholesale their products strictly in Washington pay only the wholesaling tax. Further, a local extractor of a product who wholesales in Washington pays only the wholesaling tax, just as do out-of-state extractors. RCW 82.04.440. Under RCW 82.04.240, in-state manufacturers and extractors who sell their products out of state, pay only the manufacturing tax, at a rate substantially identical to that paid by in-state wholesalers.

A state B & O tax must pass a 4-prong test to be valid under the commerce clause: (1) There must be a sufficient nexus or connection between the taxing state and the activity taxed; (2) the tax must be fairly apportioned; (3) the tax cannot discriminate against interstate commerce in favor of local commerce; and (4) the tax must be fairly related to the services provided by the taxing state. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 1079, 51 L.Ed.2d 326 (1977). Department of Rev. v. Association of Washington Stevedoring Cos., 435 U.S. 734, 98 S.Ct. 1388, 55 L.Ed.2d 682 (1978). Appellants contend that Washington's B & O tax fails the last three prongs of this test. Because the heart of Taxpayers' complaint is that the statute fails the third prong, discrimination, that issue is addressed first. The second (fairly apportioned) and fourth (fairly related) prongs will be addressed together. Nexus is not at issue in this case, but is contested in the companion case. See Tyler Pipe Indus., Inc. v. Department of Rev., 105 Wash.2d 318, 715 P.2d...