Coast Pacific Trading, Inc. v. State, Dept. of Revenue, 52158-1

• Decision Date: 22 May 1986
• Docket Number: No. 52158-1,52158-1
• Citation: 719 P.2d 541,105 Wn.2d 912
• Parties: COAST PACIFIC TRADING, INC. and Coast Pacific Export, Inc., Appellants, v. STATE of Washington, DEPARTMENT OF REVENUE, Respondent.
• Court: Washington Supreme Court

Page 912

105 Wn.2d 912

719 P.2d 541

COAST PACIFIC TRADING, INC. and Coast Pacific Export, Inc., Appellants, v. STATE of Washington, DEPARTMENT OF REVENUE, Respondent.

No. 52158-1.

Supreme Court of Washington En Banc.

May 22, 1986.

Bell & Ingram, P.S., William Ingram, David Carson, Everett, for appellants.

Kenneth Eikenberry, Atty. Gen., James Tuttle, Asst. Atty. Gen., Olympia, for respondent.

McGavick, Graves, Beale & McNerthney, Ray Graves, L. Paul Alvestad, Tacoma, amici curiae for Manke Lumber Co.

Bogle & Gates, John Piper, Franklin Dinces, Seattle, amici curiae for Longview Fibre Co.

UTTER, Justice.

Coast Pacific Export, Inc., and Coast Pacific Trading, Inc., seek immunity from Washington's business and occupation tax for certain sales of timber to foreign customers. The corporations claim they fall within a Department of Revenue regulation, WAC 458-20-193C, that defines a tax exemption for export sales. However, the trial court ruled that the corporations' sales do not qualify for the exemption of Rule 193C. We affirm the trial court's decision.

The parties do not dispute the facts. The two appellants, Coast Pacific Export, Inc., and Coast Pacific Trading, Inc., are engaged in the business of purchasing logs domestically and selling them overseas. Coast Pacific Export is wholly owned by Coast Pacific Trading.

Coast Pacific generally conducts business under the "standing order" method. Coast Pacific's customers instruct it on how much timber they will need for the year, and what quality and type they desire. After the taxpayer receives these standing orders it procures the logs. Logs are purchased by Coast Pacific from three sources. About half of its logs come from major timber companies, which sell the logs already sorted and "rafted" together in the water. Coast Pacific also purchases from smaller independent operators, which deliver the logs by truckload to "log yards" where Coast Pacific sorts and rafts them. Finally some logs come from joint ventures; in these situations the logs are also delivered to log yards for sorting and rafting by Coast Pacific.

A towing company, an independent third party, moves the rafted logs from the log yard into storage, and eventually from storage to shipside for loading. It stores the logs in a fresher-water, protected holding area, primarily near the mouth of the Snohomish River. Most of Coast Pacific's logs move from the log yard into storage; however, logs that are scheduled to be loaded onto a ship within 2 weeks bypass storage.

The arrangements with the towing company are essentially unwritten. It arranges and charges (after 30 days) for raft storage and its boomstick, towing, and storage charges are billed to Coast Pacific's customers. Usually, however, it will not move the rafted logs "under the hook," alongside, or otherwise into a location from which the logs can be loaded aboard ship until Coast Pacific provides a verbal release. Coast Pacific does not give a verbal release until it has received final payment from its customer.

The Department of Revenue audited both Coast Pacific corporations for the calendar years 1978-81. It selected for taxation certain sales with "F.O.B." ("free on board") delivery locations that were not alongside or on board a ship. Pursuant to Rule 193C, the Department did not attempt to tax sales with "F.A.S." ("free alongside ship") delivery points, ¹ nor did the Department attempt to tax sales with shiploading or imminent-loading F.O.B. delivery points. Virtually all of the logs designated for taxation had been delivered into storage and had remained in storage for more than 2 weeks before delivery to ocean-bound vessels.

The Department concluded that Coast Pacific Trading owed $14,232 in business and occupation tax, and that Coast Pacific Export owed $75,479.90. Both assessments were issued in March 1982. Coast Pacific protested and appealed the assessments. On August 4, 1983, a formal hearing was conducted by the Board of Tax Appeals. The taxpayers presented testimony, exhibits, and evidence. On June 8, 1984, a final decision was entered. The Board entered 14 findings of fact and 12 conclusions of law. The Board decided that the sales identified in the audit did not qualify for the tax exemption described in WAC 458-20-193C.

Coast Pacific then instituted an action in the Superior Court for Snohomish County for recovery of the taxes it had paid. Coast Pacific filed a motion for summary judgment on October 16, 1984, and argued the motion on December 7. At oral argument the Department of Revenue also moved for summary judgment. On January 30, 1985, the trial court filed a memorandum opinion in favor of the Department of Revenue. It decided that the business and occupation tax imposed by the Department was constitutional under the United States Supreme Court decision of Department of Rev. v. Association of Washington Stevedoring Cos., 435 U.S. 734, 98 S.Ct. 1388, 55 L.Ed.2d 682 (1978). The court also decided that the log sales did not qualify for a tax exemption even if WAC 458-20-193C controlled instead of Supreme Court decisions.

Coast Pacific appealed to Division One of the Court of Appeals, and that court transferred the case to this court. Two parties, Manke Lumber Company and Longview Fibre Company, have filed amicus curiae briefs to support Coast Pacific.

The United States Constitution's "Import-Export Clause" provides that:

No state shall, without the consent of the congress, lay any imposts or duties on imports or exports U.S. Const. art. 1, § 10. From 1886 until the 1970's the United States Supreme Court reasoned that the constitution prohibited all taxes on imports or exports, and the Court's analysis focused on determining whether a local tax reached an "import" or "export." With respect to exports, the dispositive issue was whether the tax reached goods that had entered the "export stream," the final, continuous journey out of the country. See, e.g., Kosydar v. National Cash Register Co., 417 U.S. 62, 70-71, 94 S.Ct. 2108, 2113, 40 L.Ed.2d 660, (1974); Coe v. Errol, 116 U.S. 517, 526, 527, 6 S.Ct. 475, 478, 29 L.Ed. 715, (1886). As soon as the final journey began, tax immunity attached.

In 1976, the United States Supreme Court initiated a different approach to Import-Export Clause cases. In Michelin Tire Corp. v. Wages, 423 U.S. 276, 96 S.Ct. 535, 46 L.Ed.2d 495 (1976), the Court did not analyze whether stored goods were "imports." Instead, the Court analyzed whether the tax on those goods was unconstitutional as an "impost" or "duty." In Department of Rev. v. Association of Washington Stevedoring Cos., supra, the Court similarly did not analyze whether Washington's business and occupation tax on stevedoring services reached "exports." Instead, the Court again analyzed the nature of the tax. In both decisions the Court concluded that the constitutionality of a challenged import or export tax must be determined in light of the history and purpose of the Import-Export Clause, and in both decisions the Court found the taxes constitutional. Commentators have concluded that the decisions signal a reluctance to invalidate state taxation schemes under the Import-Export Clause. See, e.g., Comment, Constitutional Law--Nondiscriminatory Ad Valorem Property Tax May Be Applied to Imports, 30 Rutgers L.Rev. 193, 205-08 (1976).

The Department of Revenue established a rule to define the circumstances in which a taxpayer can qualify for an "export sales" exemption from Washington's business and occupation tax. See WAC 458-20-193C. The parties agree that in this enactment the Department intended to codify the requirements for immunity established by United States Supreme Court decisions. However, the Department has not changed Rule 193C since the United States Supreme Court initiated its change of analysis. In this case the Department of Revenue abandoned reliance on Rule 193C in Superior Court, and argued that the court should use Stevedoring to decide whether Coast Pacific qualifies for a tax exemption.

The trial court ruled that under Stevedoring the tax assessed on Coast Pacific's log transactions is constitutional. Coast Pacific does not challenge this decision; instead, Coast Pacific argues on appeal that 193C provides a tax exemption despite the United States Supreme Court's decisions in Michelin and Stevedoring. Coast Pacific reasons that Washington can provide greater protection to exporters from business and occupation taxes if it so chooses.

The Department of Revenue cannot use Rule 193C to expand the tax immunity of exporters beyond the exemptions provided by statute or required by the constitution. The Legislature has allocated to the Department the authority only to establish procedural rules. ² The Department cannot contradict a substantive legislative enactment by administrative regulation.

[T]he department is without authority to amend the statute by regulation. It cannot properly carve out an exemption ... when the statute makes no such exemption.

Budget Rent-A-Car of Washington-Oregon, Inc. v. Department of Rev., 81 Wash.2d 171, 176, 500 P.2d 764 (1972). This court has ruled repeatedly that when the Legislature enacted the business and occupation tax the Legislature intended "to tax all business activities not expressly excluded". Rena-Ware Distributors, Inc. v. State, 77 Wash.2d 514, 517, 463 P.2d 622 (1970). In the case of imports and exports, the Legislature has provided that a deduction is available only for tax amounts "which the state is prohibited from taxing under the Constitution ... of the United States." RCW 82.04.4286. ³ Arguably, the Michelin and Stevedoring decisions have reduced the scope of the constitutional prohibition of export and import taxes. We reject Coast Pacific's argument that Rule 193C increases the deduction available to exporters.

We also reject the arguments of Coast Pacific and amicus on behalf of Longview Fibre Company that Coast Pacific's log...