General Motors Corp. v. City of Seattle

• Court: Washington Court of Appeals
• Writing for the Court: BAKER, J.
• Citation: General Motors Corp. v. City of Seattle, 25 P.3d 1022, 107 Wash.App. 42 (Wash. App. 2001)
• Decision Date: 07 May 2001
• Docket Number: No. 47562-2-I, No. 46152-4-I, No. 47561-4-I.
• Parties: GENERAL MOTORS CORPORATION, Appellant, v. CITY OF SEATTLE, Finance Department and City of Seattle, Office of the Examiner, Respondents. Chrysler Corporation, Appellant, v. City Of Seattle, Finance Department and City of Seattle, Office of the Examiner, Respondents.

25 P.3d 1022

107 Wash.App. 42

GENERAL MOTORS CORPORATION, Appellant, v. CITY OF SEATTLE, Finance Department and City of Seattle, Office of the Examiner, Respondents.

Chrysler Corporation, Appellant, v. City Of Seattle, Finance Department and City of Seattle, Office of the Examiner, Respondents.

Nos. 46152-4-I, 47562-2-I, 47561-4-I.

Court of Appeals of Washington, Division 1.

May 7, 2001.

Publication Ordered June 11, 2001.

Steven L. Gross, City of Seattle Law Department, Cynthia Unwin Seu, Seattle, for Respondents.

Scott M Edwards, John Thomas Piper, Perkins Coie, Seattle, for Appellants.

BAKER, J.

General Motors Corporation (GM) and Chrysler Corporation challenge the City of Seattle's jurisdiction to impose on them a business and occupation tax measured by their gross receipts on wholesale auto sales to Seattle dealers. They claim that their contacts with the City are not sufficient to establish nexus under the federal Commerce Clause and alternatively, that the measure of tax is not fairly apportioned to the automakers' marketing activities within the City. Because their in-city advertising, sales/service calls, and marketing/service of warranties significantly impact the automakers' ability to maintain their market in Seattle, we hold that substantial nexus exists to impose the tax. Further, because well established Supreme Court precedent holds that business and occupation tax measured by gross receipts on wholesale sales is inherently apportioned, we affirm.

I

General Motors Corporation and Chrysler Corporation manufacture and sell automobiles and related parts and accessories to independent dealers located within the City of Seattle. Neither GM nor Chrysler maintains an office or bases any of their employees in the City. In fact, no direct solicitation of business occurs within the City. The automakers receive orders for autos and parts via computer, and the goods are shipped f.o.b.¹ factory via common carrier.

They do, however, conduct substantial marketing activities in Seattle. They send sales, service, and parts representatives on a monthly basis to visit their Seattle dealers. These representatives discuss market conditions with the dealers. They also impart information about new products and discuss retail customer satisfaction levels. The service representatives discuss problems that may be occurring with a certain make of automobile. They also make themselves available to speak with dissatisfied retail customers regarding product quality. GM employees make approximately 500 contacts per year to Seattle dealerships.

In addition, both GM and Chrysler direct national advertising to Seattle. Although the actual contract for advertising and ad preparation is performed outside the City, GM directs a portion of that advertising to the City in the sum of just under $6 million annually. Chrysler's advertising structure is similar.

The automakers' warranty program associated with the sales of new automobiles also serves a marketing function, because customers prefer to purchase automobiles with a warranty. The dealers market the availability of the warranties on behalf of the automakers and perform repair services for which they are paid by Chrysler and GM.

Chrysler requires its dealers to place large, permanent signs on dealership properties advertising Chrysler automobiles. Seattle dealers lease three of these signs from Chrysler. During the relevant audit period, GM also owned real property in Seattle, but it was not established that the property factored into the sales or marketing of GM products in any way.

During the years 1986-1995, Chrysler paid a business and occupation tax to the City of Seattle measured by the gross receipts of its wholesale sales in the City. In like manner, the City assessed tax against GM for the years 1986-1998. Both GM and Chrysler appealed the assessments to the City's Department of Finance. The hearing examiner affirmed and the automakers sought review by the Superior Court of King County, which also affirmed.² The automakers appeal.

II

Judicial review of a hearing examiner's decision is authorized by statutory writ of review under RCW 7.16.³ On review, we must determine whether any rule of law affecting the parties' rights has been violated to their prejudice and whether the factual determinations were supported by substantial evidence.⁴ Because neither party disputes the findings of fact entered in this matter, they are verities on appeal⁵ and our sole task is to determine whether the hearing examiner erred in applying the law to the facts as it found them.

GM and Chrysler first challenge the City's jurisdiction to impose a business and occupation tax by arguing that they do not engage in business activities as defined by Seattle Municipal Code 5.44. SMC 5.44.400 levies and collects a business and occupation tax from every person for the privilege of engaging in business activities within the City. The code defines the term "business" broadly to include "all activities engaged in with the object of gain, benefit or advantage to the taxpayer ... directly or indirectly."⁶ "Engaging in business" is further defined as "commencing, conducting or continuing in business and includes any business activity... whereby employees ... solicit sales, enter into contracts, deliver products or services, perform other business activities, endeavor to maintain a share of the market within the City, or the business entity avails itself of the benefits of an economic market in the City."⁷

The activities of GM and Chrysler within the City plainly fall within these broad definitions. Although they may not be characterized as direct selling activities, they nevertheless constitute "other business activities" that are designed to assist the automakers in "maintain[ing] a share of the market within the City." The automakers' reliance on the former Seattle Business Tax Rule (SBTR) 2 in effect during the relevant period does not assist them.⁸ Although the rule listed examples of business activities that did not include the automakers' activities, it concluded with the proviso that the examples were illustrative only and that the list was not all-inclusive. We are satisfied that the automakers "avail [themselves] of an economic market" within the City.

The automakers next combine a statutory construction argument with a constitutional nexus challenge. They claim that their activities within the City do not satisfy "statutory nexus" under SMC 5.44.422, the language of which parallels the rule for determining nexus under Commerce Clause analysis. They then proceed to argue a constitutional nexus argument. The City argues that the section is merely a tool by which to measure tax due. Both parties are correct.

SMC 5.44.422 requires that taxpayers that have no place of business within the City, but nevertheless engage in wholesale sales within the City, allocate to Seattle for tax purposes:

[T]he gross proceeds of all sales in which the taxpayer's business activity within the City is either a determining element in the transaction or, under the facts and circumstances, a significant factor in making or holding the market here. Mere delivery of goods, without accompanying efforts to maintain an economic market, shall not constitute a determining element in affecting a transaction.⁹

Under Commerce Clause analysis, "the crucial factor governing nexus is whether the activities performed in [the] state on behalf of the taxpayer are significantly associated with the taxpayer's ability to establish and maintain a market in [the] state¹⁰ for the sales."¹¹ Thus, while the code section certainly operates as an instrument of measure by which to determine tax due, as the automakers contend, the section effectively sets forth the constitutional test for Commerce Clause nexus as well. Because one analysis will resolve both the constitutional issue and the automakers' statutory obligations under SMC 5.44.422(A), we proceed to review the automakers' challenges under the federal Commerce Clause.

III

The United States Constitution grants to Congress the power to "regulate Commerce ... among the several States."¹² Within that express grant is a negative command, commonly known as the "dormant Commerce Clause," which prohibits a State from imposing any tax that discriminates against interstate commerce or out-of-state economic interests.¹³ It is not the purpose of the Commerce Clause "to relieve those engaged in interstate commerce from their just share of state tax burden even though it increases the cost of doing the business."¹⁴ But it is essential that each State taxes "only its fair share of an interstate transaction."¹⁵

In Complete Auto Transit, Inc. v. Brady, the United States Supreme Court held that a state tax would withstand a challenge under the Commerce Clause if 1) it is applied to an activity with a substantial nexus with the taxing State; 2) it is fairly apportioned; 3) it does not discriminate against interstate commerce; and 4) it is fairly related to the services provided by the State.¹⁶ The automakers in this case challenge the City's jurisdiction to tax under prongs 1 and 2 of the Complete Auto test.

The automakers first argue that their activities within the City are not sufficient to constitute substantial nexus under the Commerce Clause. In Tyler Pipe Industries, Inc. v. Washington State Department of Revenue, the Supreme Court approved the Washington Supreme Court's test for nexus in the context of business and occupation taxes as follows:

[The] crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer's ability to establish and maintain a market in this state for the sales.¹⁷

Tyler Pipe was an out-of-state manufacturer that made wholesale sales to companies within Washington State.¹⁸ It maintained no office, owned no property, and based no employees in the State of...