Allis-Chalmers Corp. v. City of North Bonneville

• Decision Date: 13 July 1989
• Docket Number: ALLIS-CHALMERS,No. 55810-8,55810-8
• Parties: CORPORATION, Respondent, v. CITY OF NORTH BONNEVILLE, a municipal corporation, Appellant.
• Court: Washington Supreme Court

Page 108

113 Wn.2d 108

775 P.2d 953

ALLIS-CHALMERS CORPORATION, Respondent, v. CITY OF NORTH BONNEVILLE, a municipal corporation, Appellant.

No. 55810-8.

Supreme Court of Washington,

En Banc.

July 13, 1989.

James J. Mason, Tacoma, for appellant.

Bogle & Gates, D. Michael Young and Franklin G. Dinces, Seattle, for respondent.

BRACHTENBACH, Justice.

The primary issue is the constitutionality of the City of North Bonneville's business and occupation tax. The trial court held the tax unconstitutional as violative of the commerce clause. We affirm.

In 1976 the United States Army Corps of Engineers contracted with Allis-Chalmers Corporation (Allis-Chalmers) to purchase eight turbines for installation in the second power house at Bonneville Dam. The turbines were manufactured in Pennsylvania.

North Bonneville sought to tax Allis-Chalmers on the sale of the turbines, pursuant to North Bonneville Ordinance 285, ¹ which provided for a gross receipts tax on sales within the City. Section 28 of the ordinance provided an exemption from the gross receipts tax to local manufacturers who manufactured and sold their goods within the city. Such manufacturers were subject to a separate tax on the value of the goods manufactured.

North Bonneville's city clerk informed Allis-Chalmers of its business and occupation (B & O) tax, and, on September 27, 1983, the city administrator sent a letter to Allis-Chalmers assessing a total tax due of $235,385.00, including penalties and interest. The tax was assessed against the total sales price of the turbines. Allis- Chalmers maintained, however, that it was not subject to the tax.

In October 1983 Allis-Chalmers requested a hearing by the City Council, as permitted by Ordinance 285, § 46. North Bonneville scheduled a hearing, but delayed it at Allis-Chalmers' request. On September 11, 1984, Allis-Chalmers' appeal to the council was finally heard without an oral hearing. North Bonneville denied the appeal.

In July 1984, Ordinance 285 was amended by Ordinance 542, which deleted the proviso in section 28 of Ordinance 285 which had granted the exemption from the gross receipts tax to local manufacturers selling their goods within the boundaries of North Bonneville.

On August 27, 1984, Allis-Chalmers brought this suit against North Bonneville, alleging that Ordinance 285 in general and sections 26 and 28 in particular are unconstitutionally discriminatory under the commerce clause. Allis-Chalmers sought a declaratory judgment that North Bonneville could not tax Allis-Chalmers on any activity resulting from its contract with the Army Corps of Engineers. North Bonneville raised a statute of limitations defense, and counterclaimed for judgment in the amount of the tax, plus penalties, interest and attorney fees. In its reply to the counterclaim, Allis-Chalmers asserted as a defense the invalidity of the tax, incorporating by reference the portions of its complaint claiming Ordinance 285 unconstitutional.

The parties filed cross-motions for summary judgment. The trial court granted Allis-Chalmers' motion, on the ground that Ordinance 285 discriminates against interstate commerce on its face and therefore contravenes the commerce clause. The court concluded that Allis-Chalmers' suit was timely. The court ordered North Bonneville not to impose its B & O tax on Allis-Chalmers with respect to the 1976 contract with the Army Corps of Engineers, and dismissed the City's counterclaim. North Bonneville then moved for prospective application of the court's ruling. The motion was denied.

The City of North Bonneville appealed to Division II of the Court of Appeals. The appeal was certified to this court, which accepted certification.

The first question is whether a statute of limitations bars this suit. The trial court reasoned that a 3-year statute of limitations applies, RCW 4.16.080, and concluded that the limitations period commenced when the Army Corps of Engineers accepted the turbines and made final payment, i.e., the trial court considered these events to constitute the taxable event which in the court's view commenced the running of the limitations period. North Bonneville argues that the taxable event occurred in 1978-81, the time period during which the 1976 contract called for delivery of the turbines, and urges a 2-year statute of limitations, RCW 4.16.130. Allis-Chalmers suggests another approach: the 3- year statute applies, but runs from the date the taxes were assessed.

We need not and do not decide which was the taxable event because this suit is not barred by a statute of limitations. We necessarily reach the merits of the substantive issues because North Bonneville has asserted a counterclaim for the taxes it alleges are due. North Bonneville is not barred by any limitations period from doing so. While RCW 4.16.160 generally provides that a municipality is subject to the same limitations period as a private party, we have held that this statute does not apply in the case of a municipality collecting B & O taxes in a sovereign capacity. Tacoma v. Hyster Co., 93 Wash.2d 815, 821, 613 P.2d 784 (1980).

Because North Bonneville is entitled to seek to collect its B & O tax, and is not barred from doing so, Allis-Chalmers may assert as a defense to that counterclaim the constitutionality of the ordinance. Statutes of limitations never run against defenses arising out of the transactions sued upon. Ennis v. Ring, 56 Wash.2d 465, 471, 353 P.2d 950 (1959); J.C. Felthouse & Co. v. Bresnahan, 145 Wash. 548, 549, 260 P. 1075 (1927). In incorporating in its reply to North Bonneville's counterclaim its challenge to the constitutionality of Ordinance 285, Allis-Chalmers has asserted a defense respecting the same transaction upon which North Bonneville bases its counterclaim: the applicability of Ordinance 285's tax to the sale of the turbines.

Finally, on this matter, we do not agree with North Bonneville's contention that Ordinance 285, § 46 precludes this suit. That section provides that an aggrieved taxpayer "may appeal to the City Council" by filing a written notice of appeal within 10 days of notice of tax due. By its terms the section is permissive, and compliance with the 10-day period is clearly not a condition precedent to suit.

The commerce clause protects free trade among the states. Armco Inc. v. Hardesty, 467 U.S. 638, 642, 104 S.Ct. 2620, 2624, 81 540 (1984); National Can Corp. v. Department of Rev., 109 Wash.2d 878, 888, 749 P.2d 1286 cert. denied, --- U.S. ----, 108 S.Ct. 2030, 100 L.Ed.2d 615 (1988). The type of tax scheme provided for by Ordinance 285, before repeal of the exemption, was the same as that invalidated in Armco. There, the West Virginia wholesale gross receipts tax was held to violate the commerce clause because local manufacturers were exempt from the tax. West Virginia argued that no discrimination in favor of local, intrastate commerce occurred because taxpayers manufacturing in the state were subject to a higher manufacturing tax. The Court disagreed, stating that gross manufacturing and wholesaling are not substantially equivalent events on which compensating taxes might be imposed. Armco, 467 U.S. at 642-43, 104 S.Ct. at 2622-23. Discrimination was found under the West Virginia scheme because, if any of the other states imposed a manufacturing tax, as they had the right to do, then a manufacturer from that state selling in West Virginia would have to pay both the manufacturing tax and West Virginia's wholesale gross receipts tax, as opposed to a local manufacturer who would have to pay only the wholesale tax. Armco, at 644, 104 S.Ct. at 2623.

As was true of the West Virginia tax, under Ordinance 285 an out-of-state manufacturer selling within North Bonneville could be subjected to heavier taxes than a local manufacturer selling within North Bonneville. In other words, a transaction originating from out-of-state could be taxed more heavily than one originating within North Bonneville, in violation of the commerce clause. Thus, under Armco, Ordinance 285, before amendment, was unconstitutional. ² Moreover, this court invalidated as violative of the commerce clause this state's pre-1950 B & O tax which had the same taxing scheme as that of Ordinance 285. Columbia Steel Co. v. State, 30 Wash.2d 658, 192 P.2d 976 (1948). See also Tyler Pipe Indus., Inc. v. WashingtonState Department of Rev., 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987) (finding similar Washington State B & O tax scheme enacted in 1950 violative of the commerce clause).

North Bonneville argues, however, that it has negated the possibility of discriminatory impact of Ordinance 285 by showing that no local manufacturer has been exempted from the gross receipts tax and by repeal of the exemption. Therefore, North Bonneville reasons, the issue is moot.

Contrary to North Bonneville's view, the fact that the exemption may not have been applied to any local manufacturer does not save the constitutionality of the statute. In Armco, the argument was made that the out-of-state seller should have to prove actual discriminatory effect. The Court rejected the argument, stating that this was not the test. Armco, 467 U.S. at 644, 104 S.Ct. at 2623. "[A] tax must have 'what might be called internal consistency--that is the [tax] must be such that, if applied by every jurisdiction,' there would be no impermissible interference with free trade." (Citation omitted.) Armco, at 644, 104 S.Ct. at 2623. See also Tyler Pipe, 483 at 247-48, 107 S.Ct. at 2820. Thus, the risk of multiple burdens on interstate commerce underlay the facially discriminatory effect of the West Virginia and Washington B & O taxes, as recognized by this court in National Can, 109 Wash.2d at 889, 749 P.2d 1286. See also Columbia Steel, 30 Wash.2d at 662-63, 192 P.2d 976; Westinghouse Elec. Corp. v. Tully, 466 U.S. 388, 406-07, 104 S.Ct. 1856, 1867-68, 80 L.Ed.2d 388 (1984) ("[w]hen a tax, on its face, is designed to...