Kinnear v. Hertz Corp.

• Decision Date: 29 January 1976
• Docket Number: No. 43811,43811
• Citation: 545 P.2d 1186,86 Wn.2d 407
• Parties: George KINNEAR, Director, Department of Revenue, State of Washington, and Multistate Tax Commission, Respondents, v. The HERTZ CORPORATION, Appellant.
• Court: Washington Supreme Court

Page 407

86 Wn.2d 407

545 P.2d 1186

George KINNEAR, Director, Department of Revenue, State of

Washington, and Multistate Tax Commission, Respondents, v. The HERTZ CORPORATION, Appellant.

No. 43811.

Supreme Court of Washington, En Banc.

Jan. 29, 1976.

Karr, Tuttle, Koch, Campbell, Mawer & Morrow, Joseph D. Holmes, Jr., Seattle, for appellant.

William D. Dexter, Gen. Counsel, Multistate Tax Commission, Olympia, for respondents.

HUNTER, Associate Justice.

This case concerns the validity of Article 8 of the Multistate Tax Compact, RCW 82.56.010--.050, and the application of its joint audit provisions to corporations, such as the appellant Hertz Corporation, that operate multistate businesses.

Article 8 of the Multistate Tax Compact states:

1. This article shall be in force only in those party states that specifically provide therefor by statute.

2. Any party state or subdivision thereof desiring to make or participate in an audit of any accounts, books, papers, records or other documents may request the commission to perform the audit on its behalf. In responding to the request, the commission shall have access to and may examine, at any reasonable time, such accounts, books, papers, records, and other documents and any relevant property or stock of merchandise. The commission may enter into agreements with party states or their subdivisions for assistance in performance of the audit. The commission shall make charges, to be paid by the state or local government or governments for which it performs the service, for any audits performed by it in order to reimburse itself for the actual costs incurred in making the audit.

3. The commission may require the attendance of any person within the state where it is conducting an audit or part thereof at a time and place fixed by it within such state for the purpose of giving testimony with respect to any account, book, paper, document, other record, property or stock or merchandise being examined in connection with the audit. If the person is not within the jurisdiction he may be required to attend for such purpose at any time and place fixed by the commission within the state of which he is a resident: Provided, That such state has adopted this article.

4. The commission may apply to any court having power to issue compulsory process for orders in aid of its powers and responsibilities pursuant to this article and any and all such courts shall have jurisdiction to issue such orders. Failure of any person to obey any such order shall be punishable as contempt of the issuing court. If the party or subject matter on account of which the commission seeks an order is within the jurisdiction of the court to which application is made, such application may be to a court in the state or subdivision on behalf of which the audit is being made or a court in the state in which the object of the order being sought is situated.

The provisions of this paragraph apply only to courts in a state that has adopted this article.

5. The commission may decline to perform any audit requested if it finds that its available personnel or other resources are insufficient for the purpose or that, in the terms requested, the audit is impracticable of satisfactory performance. If the commission, on the basis of its experience, has reason to believe that an audit of a particular taxpayer, either at a particular time or on a particular schedule, would be of interest to a number of party states or their subdivisions, it may offer to make the audit or audits, the offer to be contingent on sufficient participation therein as determined by the commission.

6. Information obtained by any audit pursuant to this article shall be confidential and available only for tax purposes to party states, their subdivisions or the United States. Availability of information shall be in accordance with the laws of the states or subdivisions on whose account the commission performs the audit, and only through the appropriate agencies or officers of such states or subdivisions. Nothing in this article shall be construed to require any taxpayer to keep records for any period not otherwise required by law.

7. Other arrangements made or authorized pursuant to law for cooperative audit by or on behalf of the party states or any of their subdivisions are not superseded or invalidated by this article.

8. In no event shall the commission make any charge against a taxpayer for an audit.

9. As used in this article, 'tax,' in addition to the meaning ascribed to it in Article II, means any tax or license fee imposed in whole or in part for revenue purposes.

In 1972, eight states, including Washington, set up the Multistate Tax Commission in accordance with Article 8, and designated it as their lawful agent in the area of sales and use tax audits. In May, 1972, the Commission informed Hertz of this development and demanded that Hertz make available, pursuant to Article 8, the records and other items necessary for the determination of Hertz' sales and use tax liability in the various states. Hertz resisted this demand and in June, 1972, respondents Kinnear and the Multistate Tax Commission commenced an action for declaratory judgment. On January 17, 1975, the trial court granted respondents' motion for summary judgment and thus held that the Multistate Tax Commission has the authority to conduct joint sales and use tax audits for the member states pursuant to Article 8 of the Mulstistate Tax Compact.

Appellant Hertz Corporation appeals from this decision. It initially contends that because the Compact as a whole is unconstitutional and because Article 8 cannot be separated from the Compact, it was therefore error for the trial court to sustain the constitutional validity of Article 8 alone. We reject this contention for two reasons.

First, the specific issue before the trial court was whether or not the Commission has the power and authority to conduct a sales and use tax audit of Hertz pursuant to Article 8. As a result, the only relevant part of the Compact was Article 8, and, by implication, the articles necessary for its implementation, E.g., Article 6, which sets up the Commission. None of the articles of the Compact except Article 8 have any direct connection with the authority of the Commission to conduct interstate audits. For example, Articles 3 and 4 deal with state income taxes and Article 7 is concerned with uniform regulations and forms. Article 8 is determinative as far as the joint audit functions of the Commission are concerned. Therefore, the trial court properly limited its consideration to Article 8 and, by implication, the articles that support Article 8.

Second, because the validity of Article 8 could be considered alone under the doctrine of severability, See State v. Anderson, 81 Wash.2d 234, 236, 501 P.2d 184 (1972), we reject appellant's argument that the constitutionality of Article 8 must be determined by looking at the Compact as a whole. The Compact itself indicates an intent to preserve and enforce so much of the Compact as is constitutional. See Multistate Tax Compact, Article 12. ¹ Also, the joint audit provisions fulfill the first listed purpose of the Compact contained in Article 1 because when the Commission acts pursuant to Article 8, it directly '(f)acilitate(s) proper determination of state and local tax liability of multistate taxpayers . . .' The legislature undoubtedly would have approved Article 8 and its implementing provisions without regard to the validity of other Compact provisions. Because any potentially invalid Compact provisions would be severable in any event, the trial court did not err in limiting its ruling to Article 8.

Appellant's next contention presents the major issue in this appeal. Appellant contends that the provisions of the Multistate Tax Compact implementing joint audits pursuant to Article 8 constitute an unconstitutional interstate agreement. Appellant argues that in the absence of congressional approval, the joint audit provisions violate U.S.Const. art. 1, § 10, clause 3, which provides as follows:

No State shall, without the Consent of the Congress . . . enter into any Agreement or Compact with another State, or with a foreign Power . . .

This language has not been literally applied, however, and we hold that the provisions implementing Article 8 do not constitute an unconstitutional agreement between states. The Compact provisions in question are consistent with the practical interpretation given by the United States Supreme Court to U.S.Const. art. 1, § 10, clause 3.

The language in U.S.Const. art. 1, § 10, clause 3, was authoritatively construed in Virginia v. Tennessee, 148 U.S. 503, 13 S.Ct. 728, 37 L.Ed. 537 (1893), a case involving the validity of an interstate compact that settled a boundary dispute. The United States Supreme Court discussed the constitutional language above at some length even though the case was resolved on the ground that Congress impliedly had approved the Compact. See Virginia v. Tennessee, supra at 525, 13 S.Ct. 728. With regard to the clause in question, the Supreme Court stated:

Looking at the clause in which the terms 'compact' or 'agreement' appear, it is evident that the prohibition is directed to the formation of any combination tending to the increase of political power in the states, which may encroach upon or interfere with the just supremacy of the United States.

Virginia v. Tennessee, supra at 519, 13 S.Ct. at 734. The Supreme Court approved this view of U.S.Const. art. 1, § 10, clause 3, shortly thereafter. In Wharton v. Wise, 153 U.S. 155, 170, 14 S.Ct. 783, 38 L.Ed. 669 (C.C.E.D.Va.1894), it applied this same interpretation to a similar clause in the Articles of Confederation, which governed the interstate agreement at issue in that case. The rule of Virginia v. Tennessee, supra, has been accepted in many cases since then. See, e.g., State v. Doe, 149 Conn. 216, 223--25, 178 A.2d 271 (1962) ...