Lamtec Corp.. v. Dep't of Revenue

• Decision Date: 20 January 2011
• Docket Number: No. 83579–9.,83579–9.
• Citation: 246 P.3d 788,170 Wash.2d 838
• Parties: LAMTEC CORPORATION, Petitioner,v.DEPARTMENT OF REVENUE, State of Washington, Respondent.
• Court: Washington Supreme Court

170 Wash.2d 838

246 P.3d 788

LAMTEC CORPORATION, Petitioner,

v.DEPARTMENT OF REVENUE, State of Washington, Respondent.

No. 83579–9.

Supreme Court of Washington, En Banc.

Argued Sept. 16, 2010.Decided Jan. 20, 2011.

Leslie R. Pesterfield, Jeffrey Duane Dunbar, E. Ross Farr, Ogden Murphy Wallace, P.L.L.C., Seattle, WA, Philip Albert Talmadge, Talmadge/Fitzpatrick, Tukwila, WA, for Petitioner.Peter B. Gonick, Washington Attorney General, Olympia, WA, for Respondent.CHAMBERS, J.

[170 Wash.2d 840] ¶ 1 Lamtec Corporation, based in New Jersey, manufactures insulation and vapor barriers. It sells its products nationwide and did more than $1.1 million in business in Washington State each year during the seven years at issue here. Lamtec has no offices or agents permanently in Washington but regularly sends representatives to visit customers. In 2004, the Department of Revenue (Department) determined that Lamtec's Washington sales were subject to Business and Occupation (B & O) tax. Lamtec argues that under the federal commerce clause it had an insufficient nexus to Washington to be subject to the State's B & O tax. Lamtec paid under protest and then filed a refund claim in superior court. The trial court dismissed Lamtec's action, and the Court of Appeals affirmed. Lamtec Corp. v. Dep't of Revenue, 151 Wash.App. 451, 215 P.3d 968 (2009). We affirm the Court of Appeals.

Facts

¶ 2 Lamtec manufactures its products at its facility in New Jersey and has no permanent facilities, office, address, phone number, or employees in Washington. It sells its products wholesale to customers who place orders by telephone. Washington customers ordered over $9 million worth of Lamtec's products from 1997 to 2003. About two or three times a year during the tax period at issue, three Lamtec sales employees visited major customers in Washington. During those visits, the employees did not solicit sales directly, but they answered questions and provided information about Lamtec products. The trial court found that approximately 50–70 such visits occurred during the period at issue, and the purpose of these visits was to maintain Lamtec's Washington market.

¶ 3 In May 2004, the Department requested a statement from Lamtec regarding its Washington business activities. Based on the company's response, the Department required Lamtec to register and submit a Master Business License Application. The company's application listed its estimated gross annual income in the state as “$100,001 and above.” Clerk's Papers (CP) at 427. The Department then assessed $45,599.76 in tax, $15,959.94 in penalties, and $9,996.42 in interest.¹ Lamtec unsuccessfully petitioned the Department for a correction.² Lamtec paid the tax under protest and challenged the tax in Thurston County Superior Court. Both Lamtec and the Department moved for summary judgment. The court granted the Department's motion, finding a substantial nexus between the taxed activities and Washington, and it concluded that the commerce clause does not prevent Washington from imposing the tax. Lamtec unsuccessfully appealed to the Court of Appeals on several issues ³ and petitioned for review only on the substantial nexus question. We granted review. Lamtec Corp. v. Dep't of Revenue, 168 Wash.2d 1009, 226 P.3d 782 (2010).

Standards of Review

¶ 4 This case raises questions of law on appeal from summary judgment. Our review is 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. Ski Acres, Inc. v. Kittitas County, 118 Wash.2d 852, 856, 827 P.2d 1000 (1992) (citing In re Bale, 63 Wash.2d 83, 86, 385 P.2d 545 (1963)). When its meaning is in doubt, a tax statute “must be construed most strongly against the taxing power and in favor of the taxpayer.” Ski Acres, 118 Wash.2d at 857, 827 P.2d 1000 (citing City of Puyallup v. Pac. Nw. Bell Tel. Co., 98 Wash.2d 443, 448, 656 P.2d 1035 (1982)). Taxes are presumed valid. However, while we interpret statutes to give effect to legislative intent and review summary judgments de novo, the taxpayers have the burden of proving they are factually exempt. RCW 82.32.180 (“At trial, the burden shall rest upon the taxpayer to prove that the tax as paid by the taxpayer is incorrect, either in whole or in part, and to establish the correct amount of the tax.”); 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))).

Analysis

¶ 5 Washington imposes a gross receipts tax (B & O tax) “for the act or privilege of engaging in business activities” on “every person that has a substantial nexus with this state.” Former RCW 82.04.220 (1961); ⁴ see also Ford Motor Co. v. City of Seattle, 160 Wash.2d 32, 39, 156 P.3d 185 (2007). A tax on an out-of-state corporation must satisfy both the requirements of the due process clause of the Fourteenth Amendment and the commerce clause. Quill Corp. v. North Dakota, 504 U.S. 298, 305, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). The due process inquiry considers whether the corporation has sufficient contacts with the taxing state such that imposing the tax “does not offend ‘traditional notions of fair play and substantial justice.’ ” Int'l Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 90 L.Ed. 95 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463, 61 S.Ct. 339, 85 L.Ed. 278 (1940)). Although Lamtec calls our attention to a case where the Court of Appeals struck down a B & O tax assessment on due process grounds, it does not allege such a violation here. Pet'r's Suppl. Br. at 11–16 (citing City of Tacoma v. Fiberchem, Inc., 44 Wash.App. 538, 722 P.2d 1357 (1986)).

¶ 6 Instead, Lamtec argues that the assessment violates the “negative” or “dormant” commerce clause. The dormant commerce clause “prevents state regulation of interstate commercial activity even when Congress has not acted ... to regulate that activity” but does not “relieve those engaged in interstate commerce from their just share of state tax burden.” Black's Law Dictionary 305 (9th ed. 2009); W. Live Stock v. Bureau of Revenue, 303 U.S. 250, 254, 58 S.Ct. 546, 82 L.Ed. 823 (1938). Under modern dormant commerce clause jurisprudence, in order for a state to tax an out-of-state corporation, the tax must be (1) “applied to an activity with a substantial nexus with the taxing State,” (2) “fairly apportioned,” (3) nondiscriminatory with respect to interstate commerce, and (4) “fairly related to the services provided by the State.” Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977); see also Ford, 160 Wash.2d at 48–49, 156 P.3d 185. Lamtec disputes only whether it has a “substantial nexus” with Washington State.

¶ 7 Lamtec argues that an entity has sufficient nexus with Washington for purposes of the B & O tax only if it has a “physical presence” here and contends that it does not have such a presence. Pet'r's Suppl. Br. at 3 (citing Nat'l Bellas Hess, Inc. v. Dep't of Revenue, 386 U.S. 753, 758, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967)); Quill, 504 U.S. at 309, 112 S.Ct. 1904. The Department suggests that this case is not a good vehicle for considering whether physical presence is required because, in its view, Lamtec clearly maintains such a presence and, alternatively, that the physical presence requirement is limited to sales and use taxes and does not apply to the B & O tax. Instead, in the Department's view, a business is subject to Washington's B & O tax if “ ‘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.’ ” Resp'ts' Suppl. Br. at 5 (quoting Tyler Pipe Indus., Inc. v. Wash. State Dep't of Revenue, 483 U.S. 232, 250, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987)).

¶ 8 We note that Lamtec and the Department each interprets “physical presence” differently. Lamtec contends that the physical presence test requires a “small sales force, plant, or office” in the taxing state. Quill, 504 U.S. at 315, 112 S.Ct. 1904. Lamtec suggests a “brick and mortar” presence or at least an established sales force within the taxing state is required to establish the requisite nexus. Lamtec effectively urges us to adopt the “bright-line” physical presence test required for sales and use taxes established by Bellas Hess, 386 U.S. at 758, 87 S.Ct. 1389, in the mail order context. The Department concedes the company does not have a brick and mortar presence but argues that under Tyler Pipe, 483 U.S. at 250, 107 S.Ct. 2810, significantly less activity within a state is sufficient to establish a nexus for B & O taxes.

¶ 9 The United States Supreme Court has made clear that an established sales force is sufficient to satisfy the nexus requirement. It has not held that an established sales force (or a physical presence) is a requirement to establish the requisite nexus. “Whether or not a State may compel a vendor to collect a sales or use tax may turn on the presence in the taxing State of a small sales force, plant, or office.” Quill, 504 U.S. at 315, 112 S.Ct. 1904 (emphasis added) (citing Nat'l Geographic Soc. v. Cal. Bd. of Equalization, 430 U.S. 551, 97 S.Ct. 1386, 51 L.Ed.2d 631 (1977) (finding the presence of two small offices sufficient for imposition of a duty to collect sales and use tax even though the activities conducted, soliciting advertising, did not relate directly to the taxed sales)). In National Geographic, 430 U.S. at 556, 97 S.Ct. 1386, the United States Supreme Court reserved judgment on California's “slightest presence” rule, finding the society's continuous presence “sufficient” for nexus. This language does...