American Nat. Can Corp. v. State, Dept. of Revenue

• Decision Date: 01 March 1990
• Docket Number: No. 56348-9,56348-9
• Citation: 114 Wn.2d 236,787 P.2d 545
• Parties: AMERICAN NATIONAL CAN CORPORATION, et al., Appellants, v. STATE of Washington, DEPARTMENT OF REVENUE, and William R. Wilkerson, Director of Revenue of the State of Washington, Respondents.
• Court: Washington Supreme Court

Page 236

114 Wn.2d 236

787 P.2d 545

AMERICAN NATIONAL CAN CORPORATION, et al., Appellants, v. STATE of Washington, DEPARTMENT OF REVENUE, and William R Wilkerson, Director of Revenue of the State of Washington, Respondents.

No. 56348-9.

Supreme Court of Washington En Banc.

March 1, 1990.

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

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

UTTER, Justice.

On June 23, 1987, the United States Supreme Court partially invalidated Washington's business and occupation tax (hereinafter B & O tax). See Tyler Pipe Indus., Inc. v. Department of Rev., 483 U.S. 232, 253, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987). The Legislature amended the B & O tax statute on August 11, 1987. A group of businesses engaged in interstate commerce asks us to invalidate the newly amended statute. They also seek a refund for taxes paid during the 6 weeks which elapsed between the date of the Supreme Court decision, June 23, 1987, and the date the Legislature amended the statute, August 11, 1987. ¹ We refer to this period as the interim period.

We conclude that the new law is constitutional and applies to the interim period. Therefore, the litigants are entitled to the credits provided by this statute, but the litigants are not entitled to a full refund.

I

Washington imposes the B & O tax on the "privilege of engaging in business activities" in the state. RCW 82.04.220. It collects .44 percent of the gross receipts of wholesalers and retailers earned here and .44 percent of the value of products manufactured or extracted here. See RCW 82.04.220-250; RCW 82.04.270.

The B & O tax statute contained a "multiple activities exemption" prior to August 1987. See RCW 82.04.440 (1986). This provision protected manufacturers who wholesale or retail their products from double taxation by exempting them from the tax on manufacturing. RCW 82.04.440.

We rejected a constitutional challenge to this exemption in National Can Corp. v. Department of Rev., 105 Wash.2d 327, 732 P.2d 134 (1986). The United States Supreme Court reversed this decision in Tyler Pipe Indus., Inc. v Department of Rev., supra. ² It found that Washington's law discriminated against interstate commerce. Manufacturers who sold their products out of state had to pay a tax on manufacturing, while in-state manufacturers who sold their goods in state would pay a tax on the sale but not on the manufacture. See Tyler, 483 U.S. at 234, 107 S.Ct. at 2813. The Supreme Court left the issue of remedy open on remand. Tyler, 483 U.S. at 253, 107 S.Ct. at 2823. In National Can Corp. v. Department of Rev., 109 Wash.2d 878, 749 P.2d 1286, cert. denied, 486 U.S. 1040, 108 S.Ct. 2030, 100 L.Ed.2d 615 (1988), this court denied the taxpayers refunds for payments made prior to June 23, 1987, the date the Supreme Court's decision in Tyler took effect.

On August 11, 1987, the Washington Legislature passed the 1987 credit law, designed to remedy the constitutional defects the United States Supreme Court identified in Tyler. Laws of 1987, 2d Ex.Sess., ch. 3 (hereinafter 1987 credit law). This law attempts to remedy the problem by replacing the old "multiple activities exemption" with a "two-way credit." 1987 credit law, § 2, codified at RCW 82.04.440. The new law gives businesses a credit for gross receipts taxes paid to this or any other state.

The parties stipulated to a set of facts for purposes of this litigation. In response to interrogatories, the Department of Revenue has identified taxes in 58 jurisdictions which qualify for credit under the new law. See Clerk's Papers, at 787-90. Most of these taxes are local government taxes, not state taxes. The list does include three general state taxes, those of Delaware, Hawaii and Indiana.

The record reveals that interstate taxpayers have claimed $1,303,973 worth of credits between June 1987 and October 1988. Clerk's Papers, at 791. The record also shows that taxpayers have paid $2,769,978 in taxes during the 6-week interim period. The trial court ruled on cross motions for partial summary judgment on July 21, 1989. It ruled that the 1987 credit law was constitutional. On the other hand, it ruled that taxpayers owed no taxes for the interim period. Cross appeals ensued.

II

The taxpayers argue that the new tax law discriminates against interstate commerce, violates principles of equal protection, and violates their rights to due process of law. We believe the new law does not discriminate against interstate commerce and that the equal protection and due process arguments have no merit.

Article 1, section 8, clause 3 of the United States Constitution gives Congress the power to regulate interstate commerce. For over a century the United States Supreme Court has inferred limitations on state taxation of interstate commerce from the negative implications of this affirmative grant of power. See generally Hellerstein, State Taxation of Interstate Business: Perspectives on Two Centuries of Constitutional Adjudication, 41 A.B.A.Tax Law. 37 (1987).

In recent years, the Supreme Court has required that state taxes meet a 4-part test articulated in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). Under this test, state taxation of interstate business must (1) tax only interstate activities having a sufficient connection to the taxing state (nexus requirement); (2) be fairly apportioned to taxpayer's activities in the state (apportionment requirement); (3) not discriminate against interstate commerce (nondiscrimination requirement); and (4) be fairly related to the services provided by the state.

The taxpayers claim that the law as amended discriminates against interstate commerce, just as its predecessor did. They concede that the new tax meets the other requirements of Complete Auto Transit. Brief of Appellants, at 24.

The United States Supreme Court held that the predecessor of the new law discriminated on its face. See Tyler. The Court's suggestions to our Legislature on how to remedy the constitutional violation follow from this understanding. The Court wrote:

Either a repeal of the manufacturing tax or an expansion of the multiple activities exemption to provide out-of-state manufacturers with a credit for manufacturing taxes paid to other States would presumably cure the discrimination....

483 U.S. at 249, 107 S.Ct. at 2821.

The Legislature chose to provide manufacturers with a credit for manufacturing taxes paid to other states. It also created parallel credits for seller's taxes and extractor's taxes. The credit applies only to gross receipts taxes. 1987 credit law, § 2.

The taxpayers do not challenge the interpretation of the statute or the department's selection of taxes. If they did, section 1 of the legislation would require this court to construe the statute to avoid constitutional difficulties. See 1987 credit law, § 1. Nor do they argue that the Legislature or the department failed to provide credits for every manufacturing tax. The taxpayers in effect concede that the Legislature did what the Supreme Court said was necessary in Tyler.

But they object to the fact that by its terms the new law grants no credits for income taxes or excise taxes paid in other states. See Brief of Appellants, at 28-30, 42. This state, however, does not have a corporate income tax. Taxpayers apparently argue that Washington must give them a deduction for taxes which Washington does not exact from local manufacturers. Washington's failure to do this cannot constitute facial discrimination. Facial discrimination must involve giving local businesses a credit not available to interstate businesses.

The United States Supreme Court struck down the predecessor tax because it lacked "internal consistency." Tyler, at 247, 107 S.Ct. at 2820; see generally The "Internal Consistency" Test is Alive and Well: Tyler Pipe Industries, Inc. v. Washington Department of Revenue, 41 A.B.A.Tax Law. 587 (1987). Internal consistency has little to do with consistency within the statute. Rather, an internally consistent tax is one that would not impermissibly burden free trade if applied by every jurisdiction. Tyler, at 247, 107 S.Ct. at 2820. ³

If every jurisdiction had a tax like the one Washington had when the Supreme Court decided Tyler, all states would discriminate against interstate commerce. The manufacturer-sellers in a state would pay only one tax. A business which manufactured in one state and sold in another would pay taxes on both the value of the manufactured goods and on the sales receipts.

If every jurisdiction in the union had a B & O tax as amended in 1987, no discrimination would occur. Every interstate business could claim a credit for taxes paid in sister states. Neither intrastate nor interstate businesses would pay double tax.

The Supreme Court's recent decision in Goldberg v. Sweet, --- U.S. ----, 109 S.Ct. 582, 102 L.Ed.2d 607 (1989), shows that internal consistency does not require states to grant credits for dissimilar taxes. In that case, the Court upheld a state tax on telecommunications. The Court explained:

To be internally consistent, a tax must be structured so that if every State were to impose an identical tax, no multiple taxation would result. Thus, the internal consistency test focuses on the text of the challenged statute and hypothesizes a situation where other States have passed an identical statute....

Appellant Sprint argues that ... under Armco [Inc. v. Hardesty, 467 U.S. 638, 104 S.Ct. 2620, 81 L.Ed.2d 540 (1984) ], a court evaluating the internal consistency of a challenged tax must also compare the tax to the similar, but not identical, taxes imposed by other States. Sprint misreadsArmco. If we were to determine the internal consistency of one State's tax by comparing it with slightly different taxes imposed by other States,...