Avnet, Inc. v. State, Dep't of Revenue

• Decision Date: 28 April 2015
• Docket Number: No. 45108–5–II.,45108–5–II.
• Citation: 348 P.3d 1273,187 Wash.App. 427
• Parties: AVNET, INC., Respondent/Cross Appellant, v. STATE of Washington, DEPARTMENT OF REVENUE, Appellant/Cross Respondent.
• Court: Washington Court of Appeals

187 Wash.App. 427

348 P.3d 1273

AVNET, INC., Respondent/Cross Appellant

v.STATE of Washington, DEPARTMENT OF REVENUE, Appellant/Cross Respondent.

No. 45108–5–II.

Court of Appeals of Washington, Division 2.

April 28, 2015.

As Amended May 19, 2015.

Rosann Fitzpatrick, Joshua Weissman, Washington Attorney General, Olympia, WA, for Appellant/Cross–Respondent.

Scott M. Edwards, Daniel A. Kittle, Lane Powell PC, Seattle, WA, for Respondent/Cross–Appellant.

Opinion

BJORGEN, A.C.J.

¶ 1 Avnet Inc. challenges the assessment by the Department of Revenue (Department) of business and occupation (B & O) tax on two categories of sales of goods delivered to Washington addresses. The trial court granted summary judgment to Avnet regarding one category of sales and to the Department regarding the other. The Department appeals, arguing that the B & O tax applies to all of Avnet's Washington-bound sales. Avnet cross-appeals, arguing that both the Department's own rules and the federal constitution's commerce clause¹ prohibit the State from imposing the B & O tax on either of the disputed categories of sales.

¶ 2 Because the B & O statute and regulations subject both categories of Avnet's Washington-bound sales to the B & O tax consistently with the commerce clause, we reverse the grant of summary judgment to Avnet and remand for entry of judgment in favor of the Department. We otherwise affirm.

FACTS

¶ 3 Avnet Inc., a New York corporation headquartered in Arizona, describes itself as “one of the largest distributors of electronic components, computer products and embedded technology serving customers globally.” Clerk's Papers (CP) at 194, 424. All of Avnet's products ship from distribution centers outside Washington. During the period at issue here, however, Avnet maintained an office in Redmond, Washington with more than 40 employees, serving customers in Washington and eastern Idaho and conducting other activities related to market and product development.

¶ 4 Following an audit, the Department determined that Avnet had miscalculated the amount of B & O tax due² for 2003 through 2005 by improperly excluding two categories of sales of Washington-bound products described as “National Sales” and “Third Party Drop–Shipped Sales.” CP at 195. The Department determined that Avnet owed, with interest included, $556,330 in back taxes from the audit period, $386,179 of which arose from the Washington-bound national and drop-shipped sales at issue here.

¶ 5 The national sales category involves transactions where an Avnet customer places an order from a location outside Washington with an Avnet sales office outside Washington, but directs Avnet to ship some or all of the products to one of the customer's Washington facilities. The drop-shipped sales category also involves an Avnet customer located outside Washington placing an order with an Avnet sales office outside Washington. In this type of sale, however, Avnet's customer directs Avnet to ship products to a third party located in Washington, generally the Avnet customer's own customer. Nothing in the record indicates that Avnet's Redmond office participated in soliciting or filling orders, investigating customer credit, or providing technical support to the end users in the specific sales at issue in this appeal.

¶ 6 After an unsuccessful administrative appeal, Avnet paid the contested amount under protest and filed this action in Thurston County Superior Court. Both parties moved for summary judgment. After hearing argument, the trial court granted Avnet's motion and denied the Department's as to the drop-shipped sales, but granted the Department's motion and denied Avnet's as to the national sales. The Department appeals and Avnet cross-appeals.

ANALYSIS

I. Standard of Review

¶ 7 An appellate court reviews a grant of summary judgment de novo and performs the same inquiry as the trial court. Macias v. Saberhagen Holdings, Inc., 175 Wash.2d 402, 407–08, 282 P.3d 1069 (2012). A party moving for summary judgment bears the burden of demonstrating that there is no genuine issue of material fact. Atherton Condo. Apartment–Owners Ass'n Bd. of Dirs. v. Blume Dev. Co., 115 Wash.2d 506, 516, 799 P.2d 250 (1990). A court should grant summary judgment only if “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” CR 56(c).

¶ 8 The meaning of a statute is a question of law we also review de novo. Dep't of Ecology v. Campbell & Gwinn, LLC, 146 Wash.2d 1, 9, 43 P.3d 4 (2002). The “fundamental objective” of statutory interpretation “is to ascertain and carry out the Legislature's intent.” Campbell & Gwinn, 146 Wash.2d at 9–10, 43 P.3d 4. Where a “statute's meaning is plain on its face, then the court must give effect to that plain meaning as an expression of legislative intent.” Campbell & Gwinn, 146 Wash.2d at 9–10, 43 P.3d 4. Such plain meaning “is discerned from all that the Legislature has said in the statute and related statutes which disclose legislative intent about the provision in question.” Campbell & Gwinn, 146 Wash.2d at 11–12, 43 P.3d 4. If “the statute remains susceptible to more than one reasonable meaning” after such inquiry, it is ambiguous and we must “resort to aids to construction, including legislative history.” Campbell & Gwinn, 146 Wash.2d at 12, 43 P.3d 4.

¶ 9 The rules of statutory construction also apply to the interpretation of administrative regulations adopted pursuant to statutory authority. Cannon v. Dep't of Licensing, 147 Wash.2d 41, 56, 50 P.3d 627 (2002). In this context, appellate courts “interpret[ ] a WAC provision to ascertain and give effect to its underlying policy and intent.” Cannon, 147 Wash.2d at 56, 50 P.3d 627. “Rules and regulations are to be given a rational, sensible interpretation,” and courts will not consider them “ ambiguous simply because different interpretations are conceivable.” Cannon, 147 Wash.2d at 56–57, 50 P.3d 627. As with statutes, courts do not generally apply canons of construction to unambiguous administrative regulations. Cannon, 147 Wash.2d at 57, 50 P.3d 627. Courts should, however, “avoid a literal reading of a provision if it would result in unlikely, absurd, or strained consequences.” Cannon, 147 Wash.2d at 57, 50 P.3d 627.

¶ 10 “When its meaning is in doubt, a tax statute ‘must be construed most strongly against the taxing power and in favor of the taxpayer.’ ” Lamtec Corp. v. Dep't of Revenue, 170 Wash.2d 838, 842–43, 246 P.3d 788 (2011) (quoting Ski Acres, Inc. v. Kittitas County, 118 Wash.2d 852, 857, 827 P.2d 1000 (1992) ). Courts presume, however, that taxes are valid. Lamtec, 170 Wash.2d at 843, 246 P.3d 788. A party challenging the imposition of a tax thus bears the burden of proving that some exemption applies. Lamtec, 170 Wash.2d at 843, 246 P.3d 788 ; RCW 82.32.180. Where a court finds ambiguity in a provision providing for a tax exemption or deduction, the court must strictly construe the provision against the taxpayer. Simpson Inv. Co. v. Dep't of Revenue, 141 Wash.2d 139, 149–50, 3 P.3d 741 (2000).

II. The Department's Appeal

¶ 11 We begin with the Department's appeal, which challenges the trial court's grant of summary judgment to Avnet as to the drop-shipped sales. The Department argues that under applicable statutes and regulations the drop-shipped sales are subject to the B & O tax. Avnet contends that the trial court correctly ruled that the B & O tax does not apply to its Washington-bound drop-shipped sales because Avnet did not receive the goods in Washington within the meaning of the Department's own regulations.³ The Department is correct.

A. The B & O Statute and Implementing Regulations

¶ 12 Washington imposes the B & O tax “for the act or privilege of engaging in business activities” in the state. Former RCW 82.04.220 (1961);⁴ Lamtec, 170 Wash.2d at 843 . The statute requires “every person” who conducts activities here “with the object of gain, benefit, or advantage to the taxpayer or to another person or class, directly or indirectly” to pay a percentage of the gross receipts of any resulting proceeds. Former RCW 82.04.140 (1961); Former RCW 82.04.220; Lamtec, 170 Wash.2d at 843 .

¶ 13 For wholesale sales, the statute imposes “[u]pon every person engaging within this state in the business of making sales at wholesale” a B & O tax “equal to the gross proceeds of sales of such business multiplied by the rate of 0.484 percent.” RCW 82.04.270. The statute defines “[s]ale” as “any transfer of the ownership of, title to, or possession of property for a valuable consideration.” RCW 82.04.040(1). In interpreting this statute, our Supreme Court has held that “ ‘the legislature intended to impose the business and occupation tax upon virtually all business activities carried on within the state,’ and to ‘leave practically no business and commerce free of ... tax.’ ” Simpson, 141 Wash.2d at 149, 3 P.3d 741 (alteration in original) (quoting Time Oil Co. v. State, 79 Wash.2d 143, 146, 483 P.2d 628 (1971) and Budget Rent–A–Car of Wash.-Or., Inc. v. Dep't of Revenue, 81 Wash.2d 171, 175, 500 P.2d 764 (1972) ).

¶ 14 In the drop-shipped sales, Avnet did not deliver the products to its own buyer outside Washington. Instead, it delivered the products to its buyer's customer in this state. Thus, the only transfer of possession of property to any buyer occurred within the State of Washington. Under the terms of RCW 82.04.040 and .270, read consistently with the interpretive principles noted above, this brought the drop-shipped sales within the reach of the B & O tax.

¶ 15 This conclusion is supported by WAC 458–20–103 (WAC Rule 103),⁵ which defines when a sale takes place in Washington for tax purposes:

[f]or the purpose of determining [B & O] tax liability of persons selling tangible personal property, a sale takes place in this state when the goods

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