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

• Decision Date: 23 November 2016
• Docket Number: No. 92080-0,92080-0
• Citation: 187 Wash.2d 44,384 P.3d 571
• Parties: Avnet, Inc., Petitioner, v. Washington Department of Revenue, Respondent.
• Court: Washington Supreme Court

187 Wash.2d 44

384 P.3d 571

Avnet, Inc., Petitioner,

v.Washington Department of Revenue, Respondent.

No. 92080-0

Supreme Court of Washington, En Banc.

Argued May 12, 2016

Filed Nov. 23, 2016

Scott M. Edwards, Ryan P. McBride, Lane Powell PC, P.O. Box 91302, 1420 5th Ave., Ste. 4200, Seattle, WA, 98111-9402, for Petitioner.

Rosann Fitzpatrick, Washington Attorney General, Joshua Weissman, Charles E. Zalesky, Attorney General of Washington, 7141 Cleanwater Dr. S.W., P.O. Box 40123, Olympia, WA, 98504-0123, for Respondent.

Gregg D. Barton, Perkins Coie LLP, 1201 3rd Ave., Ste. 4900, Seattle, WA, 98101-3099, as Amicus Curiae on behalf of Council on State Taxation.

Robert Andrew Battles, Association of Washington Business, 1414 Cherry St. S.E., Olympia, WA, 98501-2341, as Amicus Curiae on behalf of Association of Washington Business.

Hugh Davidson Spitzer, Foster Pepper PLLC, 1111 3rd Ave., Ste. 3000, Seattle, WA, 98101-3292, Sheldon Laskin, Multistate Tax Commission, 444 N Capitol Street N.W., Suite 425, Washington, DC, 20001, as Amicus Curiae on behalf of Multistate Tax Commission.

MADSEN

, C.J.

¶1 Avnet Inc. is a New York corporation, headquartered in Arizona, and is a major distributor of electronic components and computer technology worldwide. Avnet sells products through its headquarters in Arizona and through its many regional sales offices, including one in Redmond, Washington. Following an audit, the Washington State Department of Revenue (Department) determined that from 2003 to 2005, Avnet underreported its business and occupations (B & O) tax liabilities by failing to include its national and drop-shipped sales in its tax filings. “National sales” are delivered to a Washington facility owned by Avnet's customer, even though the customer placed the order from an office outside Washington. “Drop-shipped sales” are slightly different in that they are delivered to a third party in Washington at the request of Avnet's customer—usually Avnet's buyer's customer. This case requires us to evaluate whether national and drop-shipped sales are subject to Washington's B & O tax under the dormant commerce clause and the Department former “Rule 193” (i.e., former WAC 458–20–193 (1992)

). U.S. CONST. art. I, § 8, cl. 3. We hold that neither the dormant commerce clause nor Rule 193 bar the imposition of a B & O tax to Avnet's national and drop-shipped sales delivered in Washington.

FACTS

¶2 Avnet is “one of the largest distributors of electronic components, computer products and embedded technology serving customers globally.” Clerk's Papers (CP) at 424; see also CP at 194-95. From 2003 through 2005, Avnet earned more than $200 million in revenue from its wholesale of goods shipped into Washington from an out-of-state warehouse. Approximately $80 million of its gross receipts came from national and drop-shipped sales. In a “national sale,” Avnet makes a wholesale sale to a customer with branch offices in multiple states. The products are delivered to the customer at its Washington branch, but the goods are billed to the customer's out-of-state office. For example, a corporation purchases products for delivery to its offices in Seattle, Washington, but directs Avnet to send the bill to its corporate headquarters in Delaware. In a “third-party drop shipment” or “drop shipment,” an out-of-state customer places a wholesale order and directs Avnet to deliver the product to its customer in Washington. For example, a Montana corporation places an order with Avnet and—instead of having it shipped to Montana and then reshipping it to Spokane—directs that it be delivered to its customer in Spokane.

¶3 Avnet has 35 offices in the United States, including an office in Redmond, Washington. Although all of Avnet's products ship from distribution centers outside Washington, there is no difference between the products ordered through the Arizona branch or the Washington branch, and the staff in the Redmond office are able to serve its Washington customers whose orders are placed elsewhere. During the relevant period, Avnet employed over 40 employees at its branch office in Redmond, Washington. Although the Redmond office was not involved in the specific national and drop-shipped sales at issue, its presence and business activities in Washington was extensive. Of the over 40 employees, 16 to 18 were account managers who managed customer account portfolios that were each estimated to generate $4 million in annual sales revenue. The Redmond branch also employed sales and marketing representatives, engineers, and technology consultants. Avnet's Washington employees were instrumental in marketing and selling products, establishing and improving customer relations, providing design services to help with the development of new products, and offering technical and engineering support to its Washington customers.

¶4 The Department audited Avnet's taxes and concluded that from 2003 to 2005, Avnet underreported its B & O tax liabilities. In particular, the Department found Avnet failed to include national and drop-shipped sales in its tax filings. The Department auditor assessed Avnet $556,037 in taxes and interest. Avnet appealed to the administrative appeals division of the Department. The appeals division affirmed the Department's tax assessment. Avnet paid the tax assessment under protest and filed a refund action in Thurston County Superior Court. The superior court ruled that the national sales, but not the drop-shipped sales, were subject to the B & O tax. Both Avnet and the Department cross appealed the superior court's ruling. The Court of Appeals held that Avnet's B & O tax liability included both national and drop-shipped sales. Avnet, Inc. v. Dep't of Revenue, 187 Wash.App. 427, 448–49, 348 P.3d 1273 (2015)

.

¶5 Avnet petitioned this court for review, which we granted. Avnet, Inc. v. Dep't of Revenue , 184 Wash.2d 1026, 364 P.3d 120 (2016)

. Avnet argues that the dormant commerce clause bars the imposition of a B & O tax on its national and drop-shipped sales into Washington, which do not utilize the Redmond office in the placing or completion of the sale. Alternatively, even if the taxes are constitutionally permissible, Avnet maintains that under these facts, Rule 193 prevented the Department from assessing the taxes. At issue is whether Avnet carried its burden of proving that its national and drop-shipped sales are sufficiently dissociated from its in-state activities to avoid B & O tax liability by showing that its Redmond office played no part in the sales. Additionally, we must determine whether Rule 193 barred the B & O taxes and, if so, whether the Department was bound to follow an interpretive rule.

¶6 We hold that merely showing that an in-state office was not involved in the placing or completion of a national or drop-shipped sale is insufficient to dissociate from the bundle of in-state activities that are essential to establishing and holding the market for its products. We also hold that under the plain language of Rule 193, imposition of the B & O taxes to Avnet's national and drop-shipped sales was proper, and therefore decline to address whether an agency is bound by its interpretive rules.

STANDARD OF REVIEW

¶7 Questions of law on appeal from summary judgment are reviewed de novo. Dreiling v. Jain, 151 Wash.2d 900, 908, 93 P.3d 861 (2004)

(citing Rivett v. City of Tacoma , 123 Wash.2d 573, 578, 870 P.2d 299 (1994) ). We interpret statutes so as to implement the legislature's intent. Dep't of Ecology v. Campbell & Gwinn, LLC, 146 Wash.2d 1, 9, 43 P.3d 4 (2002). “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) ). However, courts presume taxes are valid. Id. at 843, 246 P.3d 788. Avnet therefore bears the burden of proving an exemption applies. Id. ; RCW 82.32.180 (“the burden shall rest upon the taxpayer to prove that the tax as paid by the taxpayer is incorrect”); Gen. Motors Corp. v. Washington, 377 U.S. 436, 441, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1964)

(“ ‘a taxpayer claiming immunity from a tax has the burden of establishing his exemption.’ ” (quoting Norton Co. v. Dep't of Revenue, 340 U.S. 534, 537, 71 S.Ct. 377, 95 L.Ed. 517 (1951) )), overruled on different grounds by

Tyler Pipe Indus., Inc. v. Wash. State Dep't of Revenue, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987). If

there is ambiguity in a provision providing an 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)

.

ANALYSIS

Washington's B & O Tax Structure

¶8 Washington imposes a gross receipts, or B & O, tax on wholesalers “for the act or privilege of engaging in business activities.” Former RCW 82.04.220

(1961);¹

see also

Ford Motor Co. v. City of Seattle, 160 Wash.2d 32, 39, 156 P.3d 185 (2007). Every person who conducts business activities in Washington “with the object of gain, benefit, or advantage to the taxpayer or to another person or class, directly or indirectly” and who “has a substantial nexus with this state” must pay a percentage of its gross receipts of any resulting proceeds. Former RCW 82.04.140 (1961); former RCW 82.04.220 ; Lamtec, 170 Wash.2d at 843, 246 P.3d 788. This court has held that “it is obvious that the legislature intended to impose the business and occupation tax upon virtually all business activities carried on within the state.”

Time Oil Co. v. State, 79 Wash.2d 143, 146, 483 P.2d 628 (1971)

. The B & O tax is to be imposed as broadly as constitutionally allowed. See

Coast Pac. Trading, Inc. v. Dep't of Revenue, 105 Wash.2d 912, 917–18, 719 P.2d 541 (1986) (“This court has ruled repeatedly that when the Legislature enacted the business and occupation tax the...