Public Utility Dist. No. 2 of Grant County v. State

• Decision Date: 17 May 1973
• Docket Number: Nos. 41996,41997,No. 1,1,s. 41996
• Citation: 82 Wn.2d 232,510 P.2d 206
• Parties: PUBLIC UTILITY DISTRICT NO. 2 OF GRANT COUNTY, and Public Utility Districtof Chelan County, Respondents, v. The STATE of Washington, Appellant.
• Court: Washington Supreme Court

Page 232

82 Wn.2d 232

510 P.2d 206

PUBLIC UTILITY DISTRICT NO. 2 OF GRANT COUNTY, and Public Utility District No. 1 of Chelan County, Respondents, v. The STATE of Washington, Appellant.

Nos. 41996, 41997.

Supreme Court of Washington, En Banc.

May 17, 1973.

Slade Gorton, Atty. Gen., Timothy R. Malone, William D. Dexter, Asst. Attys. Gen., Olympia, for appellant.

Milne & Peterson, Robert A. Milne, Ephrata, Davis, Arneil, Dorsey & Kight, David J. Dorsey, Wenatchee, for respondents.

UTTER, Associate Justice.

Two public utility districts brought actions to recover state taxes paid, alleging such taxation discriminated against or burdened interstate commerce in violation of article 1, section 8, clause 3 of the United States Constitution. The utilities prevailed in superior court, and the State of Washington appeals.

The sole question under the facts in this appeal is whether the public utility tax imposed pursuant to RCW 82.16.020, ¹ which permits in its measurement gross income derived from sales of power by the Washington public utility districts to the Oregon utilities (RCW 82.16.050), ² is in violation of the commerce clause.

The respondent utility districts, during the years 1959 to 1963, had deducted the value of their power sales to the out-of-state Oregon public utilities from the gross income of their business, which serves as the measurement of the public utility tax. A field audit by the tax commission of the State of Washington revealed these deductions, claimed them improper, and issued tax assessments to recover the revenue avoided by the deductions. The districts protested the tax assessments and a hearing was held at which their petition for relief was denied. Following the tax board hearing, the districts paid the taxes under protest and brought separate actions to recover the amount paid. At trial the court overturned the decision of the hearing board and held that Public Utility District No. 1 of Chelan County and Public Utility District No. 2 of Grant County were entitled to their deductions of that income derived from out-of-state sales with the Oregon utilities.

The record shows that Chelan County PUD and Grant County PUD are municipal corporations, organized and existing under the laws of the State of Washington, who conduct their business activities solely within the state. Both utilities operate large hydroelectric generating dams on the Columbia River with the bulk of generated power being sold to other public utilities from within and without the state of Washington. The power generated and sold to the Oregon utilities is delivered to the purchaser at the dam switchyards in the state of Washington, with purchases involving the federal Priest Rapids Project ³ giving the purchaser the option of taking delivery at a nearby Bonneville Power Administration substation, also within the state of Washington. From these delivery points within the state of Washington, the Bonneville Power Administration transmits the power in accordance with the agreements between the selling and purchasing public utilities, be they in state or out of state.

Under the power sales contracts between the Washington public utility districts and the Oregon utilities, the points of delivery were within the state of Washington, and involved use of the federal transmission facilities of Bonneville. The Bonneville Power Administration owns and operates part of a high voltage electrical transmission grid throughout the Pacific Northwest. It is impossible to trace the flow of electricity throughout the grid from generator to purchaser, and to avoid this factual proof problem, the parties for trial purposes stipulated that the very same power delivered to the purchasers in this state ends up outside the state. Under the agreements between all the interested public utilities and Bonneville, the Oregon utilities are responsible for payment for the transmission services provided by Bonneville.

In deciding whether the taxing scheme under attack is violative of the commerce clause, extensive argument was made by the parties over the proper characterization of the tax and the related transactions in dispute. Historically, such characterization was determinative of the constitutional issue, but currently the courts have asked 'whether the statute under attack, whatever its name may be, will in its practical operation work discrimination against interstate commerce.' Best & Co. v. Maxwell, 311 U.S. 454, 455--456, 61 S.Ct. 334, 335, 85 L.Ed. 275 (1940). See Nippert v. Richmond, 327 U.S. 416, 66 S.Ct. 586, 90 L.Ed. 760 (1946). Whatever the name of the tax herein involved, which we find to be on 'the act or privilege of engaging' within the state in certain businesses, the fact that some portion of the 'gross income' which is used as the measurement for the tax is derived from interstate transactions does not necessitate striking down the statute.

In Washington Tel. Co. v. State, 77 Wash.2d 923, 929, 468 P.2d 687, 691 (1970), we disposed of this assertion by stating:

It is clear that the state is '. . . exacting a constitutionally fair demand for that aspect of interstate commerce to which it bears a special relation.' General Motors Corp. v. Washington, 377 U.S. 436, 440, 84 S.Ct. 1564, 1568, 12 L.Ed.2d 430.

Also, we stated in McKinnis Travel Serv. v. State, 78 Wash.2d 229, 232, 472 P.2d 392, 394 (1970): 'the mere fact that an activity being taxed is an integral part of interstate commerce does not render the tax Per se invalid.' The privilege of engaging in business within the state is within the state's constitutional taxing powers. Crown Zellerbach Corp. v. State, 45 Wash.2d 749, 278 P.2d 305 (1954).

The only critical factor when 'gross receipts' are involved is that they must be apportioned according to their connection with local events, to avoid cumulative taxation. See Washington Tel. Co. v. State, Supra, 77 Wash.2d at 929, 468 P.2d 687. However, as in Washington Tel. Co., there is no need of apportionment since the totality of the plaintiffs' revenue earning activities occurs within the state. Convoy Co. v. Taylor, 53 Wash.2d 439, 334 P.2d 772 (1959); General Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1963). Moreover, 'A taxpayer has the burden of proving that a state tax, as applied, fails to achieve a fair apportionment' (Crown Zellerbach Corp. v. State, Supra 45 Wash.2d at 763, 278 P.2d at 313) and there is absolutely no evidence in the record alleging this unfairness.

This primary concern 'with the actuality of operation', however, is not an invitation to an ad hoc analysis of the difficult problem of a state tax alleged to violate the commerce clause. Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64, 69, 83 S.Ct. 1201, 10 L.Ed.2d 202 (1963). The refutation of the mechanical tests in Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 58 S.Ct. 546, 82 L.Ed. 823 (1938) has led to use of the following tests:

(1) Whether the tax places an extra burden on interstate commerce not borne by intrastate commerce, or erects barriers, placing out-of-state businesses at a disadvantage when competing locally; The discrimination test. (2) Whether the interstate commerce involved is subject to the risk of repeated exactions of the same nature from other states; The multiple burden test.

Washington-Oregon Shippers Coop. Ass'n v. Schumacher 59 Wash.2d 159, 167, 367 P.2d 112, 116 (1961). See also, H & B Communications Corp. v. Richland, 79 Wash.2d 312, 314, 484 P.2d 1141 (1971); McKinnis Travel Serv. v. State, Supra. In this case, we need only address ourselves to the first consideration, the discrimination test, for no argument has been advanced that multiple burdens exist. ⁴

The mere placement of a burden or barrier on interstate commerce does not alone dictate a finding of an unconstitutional discrimination; rather such burdens or barriers must be of the quality that are not 'borne by intrastate commerce' or place 'out-of-state businesses at a disadvantage when competing locally.' As an example, the argument that the tax imposed on the Washington utilities amounts to an unconstitutional burden on interstate commerce because it may be passed on by contract at the time of sale to the out-of-state utilities (and ultimately to their customers) has been repeatedly rejected for two basic reasons:

(1) it was not the purpose of the commerce clause to relieve those engaged in interstate commerce of their just share of state tax burdens, merely because an incidental or consequential effect of the tax is an increase in the cost of doing the business . . . (2) Not all state taxation is to be condemned because, in some manner, it has an effect upon commerce between the states, and there are many forms of tax whose burdens, when distributed through the play of economic forces, affect interstate commerce, which nevertheless fall short of the regulation of the commerce which the Constitution leaves to Congress.

McGoldrick v. Berwind-White Coal Mining Co., 309 U.S. 33, 46--47, 60 S.Ct. 388, 392, 84 L.Ed. 565 (1940). ⁵

In deciding the issue of this appeal, a proper analysis must take the whole scheme of taxation into account to determine whether the actual operation of that taxing structure in its relationship to intrastate and interstate commerce results in an unconstitutional discrimination against the latter. ⁶

Under the tax scheme here at issue, RCW 82.16.020 and .050(2), the respondent public utility districts argue that we find discrimination of interstate commerce by only evaluating the moment at which the sales of power occur. Allegedly, to be compared, is the sale to Oregon utilities for resale in the state of Oregon, with a similar sale of power to a Washington utility for resale in the state of Washington. In the former sale, the Washington utilities may not claim a deduction under RCW 82.16.050(2), whereas in the latter sale a deduction may be claimed. This type of factual...