Chicago Bridge & Iron Co. v. State, Dept. of Revenue

• Decision Date: 17 February 1983
• Docket Number: No. 48133-4,48133-4
• Citation: 98 Wn.2d 814,659 P.2d 463
• Court: Washington Supreme Court
• Parties: CHICAGO BRIDGE & IRON COMPANY, an Illinois corporation, Appellant, v. The STATE of Washington, DEPARTMENT OF REVENUE, Respondent.

Page 814

98 Wn.2d 814

659 P.2d 463

CHICAGO BRIDGE & IRON COMPANY, an Illinois corporation, Appellant, v. The STATE of Washington, DEPARTMENT OF REVENUE, Respondent.

No. 48133-4.

Supreme Court of Washington,

En Banc.

Feb. 17, 1983.

LeSourd, Patton, Fleming, Hartung & Emory, Daniel Woo, Francis A. LeSourd, Rodney Waldbaum, Seattle, for appellant.

Ken Eikenberry, Atty. Gen., Andrew C. Harvard, Asst. Atty. Gen., Olympia, for respondent.

BRACHTENBACH, Justice.

Appellant Chicago Bridge & Iron Company (CBI) seeks a refund of a portion of business and occupation (B & O) taxes paid on the gross receipts of sales of goods designed, manufactured, and installed for customers in Washington, but contracted for outside the state. CBI contends the tax is unconstitutional as a violation of due process (U.S. Const. amend. 14, § 1 and Const. art. 1, § 3) and the commerce clause (U.S. Const. art. 1, § 8, cl. 3). The trial court found the tax constitutional and denied CBI's refund request. We accepted direct review and affirm.

CBI is an Illinois corporation licensed to do business as a foreign corporation in Washington. The corporation designs, engineers, manfactures and installs large, welded steel-plate structures, such as storage tanks, silos, nuclear containment vessels, and hydroelectric generator components.

At issue here are 16 of a total of 149 contracts for CBI products, designed, manufactured, and installed for Washington customers during the audit period of 1967-75. For all 149 contracts the products were manufactured outside the state of Washington, but they were designed for use by a Washington customer and were delivered and permanently installed in this state. CBI voluntarily paid taxes on 133 contracts not at issue in this action.

The principal distinction between the 16 contracts included in this action and the other 133 contracts is that neither the negotiation for, nor the formalization of, the contracts in this action took place within the state of Washington or involved CBI's Seattle sales office. Because the negotiation and formalization of these contracts occurred out of state, CBI argues there was no "sales" activity within the state, and therefore a B & O tax measured by the gross proceeds of sales is improper.

For 13 of the 16 contested contracts, CBI installed or assembled its product in Washington and does not contest the assessment of B & O taxes on the portion of their revenue attributed to these in-state activities. ¹ It does contest, however, the B & O tax assessed on the total revenue from the sales.

For three of the contracts, CBI bifurcated its contract to design, manufacture and deliver the product from the contract to assemble and install the product. At the request of the purchaser, CBI entered into six separate written contracts concerning three products: three with Kamyr, Inc., for the design and fabrication of the product, and three with Kamyr, Inc.'s sister corporation, Kamyr Installations, Inc., for installation of the three products at Everett, Washington. As with all other contracts, a lump sum contract price represented the total of CBI's involvement, from design through installation, for these three products. Concerning the three contracts for design and fabrication, CBI maintains Washington has no jurisdiction to impose its B & O tax. CBI does not contest the imposition of the Washington B & O tax upon the three corresponding installation contracts and those contracts are not included in this action. The three Kamyr contracts will be given special attention in the analysis below.

First, however, some explanation of CBI's business operations may prove helpful. CBI generally performs all aspects of design, manufacture, delivery and installation of its product, and customers negotiate a single, lump-sum price for a finished, installed product. CBI's engineering, manufacturing, and installation operations are functionally integrated and coordinated from the first proposal to a customer through each phase of the design, manufacturing and installation process. This integration is accomplished through frequent communications among the divisions and departments of the company. Although CBI's products may be similar in function and appearance, each is custom made to the specifications of the customer. Each product here was designed and manufactured for permanent installation and use in Washington.

CBI maintains a sales office in Seattle, which is responsible for customers whose purchasing offices are located in Alaska, Washington, Oregon, Idaho and Montana. The Seattle sales office was not directly involved in the procurement of these 16 contracts, because the principal offices of the corporate purchasers were not in its district. Nonetheless, the Seattle office was informed, as a matter of courtesy and pursuant to CBI's general practices, of contracts which involved work within its territory. This information was usually received through informational copies of the contract or correspondence.

CBI has permanent employees, project managers, who supervise and coordinate the installation and cost controls associated with the contracts. These individuals generally perform a site survey at the installation site in Washington when the contract is first obtained, and visit the site during the installation process.

Installation requires extensive site preparation and onsite assembly of parts. Permanent CBI foremen supervise the installation process. The persons who do the actual moving of equipment and materials and the welding necessary to the installation of the products are hired by CBI from local Washington union hiring halls. Other permanent CBI employees visit the Washington installation sites to ensure customer specifications and CBI standards are being achieved.

The total number of CBI employees in Washington during the audit period ranged from 11 to 309.

Beginning in 1969 and throughout the audit period, CBI also maintained a warehouse in Tacoma, Washington for the central storage and maintenance of equipment used in the installation of its products. The warehouse had a maximum staff of four persons.

I

An analysis of this case necessarily begins with the challenged tax statute. RCW 82.04.220 imposes a business and occupation tax for "the act or privilege of engaging in business activities." For wholesale and retail sales, the tax is measured by the application of rates against the gross proceeds of sales. RCW 82.04.220. During the audit period, the amount of the tax was computed as the gross proceeds of sales of the business multiplied by the rate of forty-four one-hundredths of 1 percent. RCW 82.04.250; RCW 82.04.270(1). " 'Gross proceeds of sales' means the value proceeding or accruing from the sale of tangible personal property and/or for services rendered," without any deduction for costs of material or labor or any other expenses. RCW 82.04.070.

The statute also provides for the deduction from the measure of tax amounts which the State is prohibited from taxing under the state or federal constitution. RCW 82.04.430(6) (subsequently recodified as RCW 82.04.4286). Thus, if this tax were in violation of the due process or commerce clauses, it would also be in violation of RCW 82.04.430(6).

II

Turning first to the due process issue, we note that due process and commerce clause challenges, while theoretically different, are closely related. National Bellas Hess, Inc. v Department of Rev., 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967). Therefore, much of our analysis here will be equally applicable to the commerce clause discussion and vice versa.

Due process focuses on whether a state is taxing beyond its jurisdictional reach. National Bellas Hess, 386 U.S. at 756, 87 S.Ct. at 1391. The test applied to state taxation of interstate business under the due process clause is two pronged: (1) There must be a "minimal connection" or "nexus" between the interstate taxing activities and the taxing state; and (2) the income attributed to the state for tax purposes must be rationally related to " 'values connected with the taxing State.' " Moorman Mfg. Co. v. Bair, 437 U.S. 267, 273, 98 S.Ct. 2340, 2344, 57 L.Ed.2d 197 (1978); Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 436-37, 100 S.Ct. 1223, 1231, 63 L.Ed.2d 510 (1980); Exxon Corp. v. Department of Rev., 447 U.S. 207, 219-20, 100 S.Ct. 2109, 2118-2119, 65 L.Ed.2d 66 (1980). Nexus is established if the corporation "avails itself of the 'substantial privilege of carrying on business' within the State". Mobil, 445 U.S. at 437, 100 S.Ct. at 1231, quoting Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444-45, 61 S.Ct. 246, 249-250, 85 L.Ed. 267, 130 A.L.R. 1229 (1940).

CBI has isolated the 16 contracts in this action because the Seattle sales office was not involved in the contract procurement activities. Yet, United States Supreme Court cases reveal that the presence and participation of a sales office in state is not decisive in determining the existence of nexus.

In Standard Pressed Steel Co. v. Department of Rev., 419 U.S. 560, 95 S.Ct. 706, 42 L.Ed.2d 719 (1975) the absence of a sales office in state did not insulate an out-of-state manufacturer from paying Washington's business and occupation tax on items sold to a Washington customer. Nexus was established through the presence of an engineer in Washington who, while not involved in the sales, routinely consulted with the customer regarding its needs for the manufactured product.

In General Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12

L.Ed.2d 430 (1964), the out-of-state manufacturer employed in-state, district managers who supervised the independent dealers and in-state service representatives who assisted in any trouble experienced. In addition, some out-of-state personnel performed activities in state and General Motors maintained a parts warehouse in Seattle. The Court concluded that such a maze of local connections prohibited...