Tyler Pipe Industries, Inc. v. State, Dept. of Revenue

• Citation: 715 P.2d 123,105 Wn.2d 318
• Decision Date: 06 March 1986
• Docket Number: No. 51110-1,51110-1
• Parties: TYLER PIPE INDUSTRIES, INC., a Delaware corporation, Appellant, v. STATE of Washington, DEPARTMENT OF REVENUE, Respondent. En Banc
• Court: United States State Supreme Court of Washington

Page 318

105 Wn.2d 318

715 P.2d 123

TYLER PIPE INDUSTRIES, INC., a Delaware corporation, Appellant, v. STATE of Washington, DEPARTMENT OF REVENUE, Respondent.

No. 51110-1.

Supreme Court of Washington,

En Banc.

March 6, 1986.

Cartano, Botzer, Larson & Birkholz, Thomas C. McKinnon, Thomas A. Sterken, Seattle, for appellant.

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

DOLLIVER, Chief Justice.

Tyler Pipe Industries, Inc. (Tyler Pipe) challenges a trial court ruling which upheld the constitutionality of Washington's business and occupation (B & O) tax against Tyler Pipe's commerce clause challenge. The trial court denied Tyler Pipe's request for a tax refund holding that the State had sufficient nexus to tax Tyler Pipe and that the federal interstate income tax act, 15 U.S.C. § 381 (1982), was inapplicable to Washington's B & O tax. We affirm the trial court.

The Washington Department of Revenue assessed B & O taxes against Tyler Pipe in the approximate amount of $130,000 for its wholesaling activities in Washington. The tax, assessed pursuant to RCW 82.04.220 and .270, is on gross receipts from sales to Washington customers between January 1, 1976 and September 30, 1980 (the audit period).

Tyler Pipe obtained a preliminary injunction against collection of this tax which we reversed in Tyler Pipe Indus., Inc. v. Department of Rev., 96 Wash.2d 785, 638 P.2d 1213 (1982). Tyler Pipe subsequently paid the taxes and filed this action for a refund. The trial court issued its memorandum opinion on June 15, 1984, denying Tyler Pipe's claim to a tax refund. A subsequent motion for reconsideration was denied. On August 4, 1985, we accepted this case for review as a companion case with National Can Corp. v. Department of Rev., 105 Wash.2d 327, 715 P.2d 128 (1986).

I

The facts, which were detailed by the trial court and for which there is substantial evidence ( Thorndike v. Hesperian Orchards, Inc., 54 Wash.2d 570, 343 P.2d 183 (1959) ), are as follows:

Tyler Pipe is a Delaware corporation with its principal place of business in Tyler, Texas. Tyler Pipe markets, sells, and distributes cast iron, pressure and plastic pipe and fittings, and drainage products nationwide. Tyler Pipe owns several subsidiaries which manufacture and sell pipe and plumbing products. Tyler-Texas and Tyler Plastics are wholly-owned subsidiaries of Tyler Pipe. These two corporations manufacture the products sold by Tyler Pipe to Washington customers. All products sold in Washington are manufactured outside the state.

Tyler Pipe is organized into 4 divisions: marketing, purchasing and distribution, finance, and industrial relations. The marketing division consists of the drainage, waste, vent (DWV) sales department and the utility sales department. Tyler Pipe markets its products through these two departments. Most of Tyler Pipe's customers are wholesale distributors. In Washington, both departments use the same sales representative, Ashe and Jones, Inc. of Seattle.

The DWV sales department includes a cast iron DWV sales manager, three regional sales managers, and a Wade, Inc. (Wade) sales manager. Wade is a wholly-owned subsidiary of Tyler, marketing items auxiliary to a DWV plumbing piping system. Wade shares with Tyler a substantial number of the same officers and employees. Wade has its own Washington sales representative, Mechanical Agents, Inc. (MA) of Seattle, which maintains an inventory of Wade products (owned by Wade in MA's warehouse in Seattle).

Tyler's regional sales manager, Warren VanDerbeck, is responsible for all DWV (including Wade) sales in a region including Washington state. Tyler Pipe's sales representative for Washington state, Ashe and Jones, Inc., is a Washington corporation and handles all sales functions pertaining to its products in this state; however, both Tyler Pipe and Wade are represented in certain southern Washington counties by Bridgeport Sales, Ltd. of Portland, Oregon. For every sale made in Washington, a commission is paid to the appropriate sales representative even if the customer directly contacts Tyler Pipe or its subsidiaries about the sale.

Virtually all information received by Tyler Pipe, or any subsidiary, regarding the Washington market for Tyler Pipe products is communicated from the sales representatives. This information is necessary to keep Tyler Pipe competitive in the marketplace. The sales representatives regularly act on behalf of Tyler Pipe. In addition to their solicitations, the sales representatives handle approximately two-thirds of the orders to Tyler Pipe from Washington customers.

Tyler Pipe's Washington sales representatives perform any local activities necessary for maintenance of Tyler Pipe's market and protection of its interests because Tyler has no personnel designated as employees residing in Washington. The sales representatives are involved in all Tyler Pipe Washington sales transactions either actively or available to assist, if necessary. The sales functions of these representatives are essentially identical to those of the factory salesmen who represent Tyler in certain other parts of the country.

Neither Tyler Pipe nor any subsidiary paid to any other state any tax measured in whole or in part by sales in Washington, or income resulting from those sales, during the audit period. Neither Tyler Pipe nor any subsidiary paid any real or personal property taxes in Washington during or for the audit period.

II

The first issue is whether Washington's B & O tax discriminates against interstate commerce thereby violating the commerce clause of the United States Constitution. The four requirements for a valid state tax on interstate commerce under the commerce clause are as follows: (1) there must be a sufficient connection or nexus between the interstate activities and the taxing state; (2) the tax must be fairly apportioned; (3) the tax must not discriminate against interstate commerce; and (4) the tax must be fairly related to the services provided by the state. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 1079, 51 L.Ed.2d 326, reh'g denied, 430 U.S. 976, 97 S.Ct. 1669, 52 L.Ed.2d 371 (1977). Accord, Chicago Bridge & Iron Co. v. Department of Rev., 98 Wash.2d 814, 659 P.2d 463 (1983). The key factor in determining the constitutionality of Washington's B & O tax focuses on whether the tax discriminates against interstate commerce. As we held in the companion case of National Can Corp. v. Department of Rev., 105 Wash.2d 327, 715 P.2d 128 (1986), Washington's B & O tax does not discriminate against interstate commerce and the recent United States Supreme Court case of Armco Inc. v. Hardesty, 467 U.S. 638, 104 S.Ct. 2620, 81 L.Ed.2d 540, reh'g denied, --- U.S. ----, 105 S.Ct. 285, 83 L.Ed.2d 222 (1984) is distinguishable.

III

The key issue in this case and the basis of Tyler Pipe's challenge is whether its connections with the State of Washington were sufficient to satisfy constitutional standards for imposition of Washington's B & O tax under the due process and commerce clauses of the United States Constitution. Due process and commerce clause arguments are closely related, especially concerning the nexus issue, and will be considered together. Chicago Bridge & Iron Co. v. Department of Rev., supra, 98 Wash.2d at 819, 659 P.2d 463.

The United States Supreme Court has held the due process clause of the Fourteenth Amendment imposes two requirements on a state before it can tax income generated in interstate commerce: (1) some minimal connection or "nexus" between the interstate activities and the taxing state and (2) a rational relation between the income attributed to the state and the intrastate value of the enterprise. Mobil Oil Corp. v. Comm'r, 445 U.S. 425, 436-37, 100 S.Ct. 1223, 1231-32, 63 L.Ed.2d 510 (1980); Moorman Mfg. Co. v. Bair, 437 U.S. 267, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978).

The Department of Revenue has stated the requisite minimal connection or "nexus" in WAC 458-20-193B. See RCW 82.32.300. Under 193B, 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.

This functional approach is in accord with Standard Pressed Steel Co. v. Department of Rev., 419 U.S. 560, 95 S.Ct. 706, 42 L.Ed.2d 719 (1975). In Standard Pressed Steel, the United States Supreme Court found a sufficient nexus for gross receipts tax when an out-of-state corporation had only one in-state employee. This employee had the responsibility of maintaining a relationship with the corporation's primary customer. No sales or orders were taken by the employee. The employee, however, regularly consulted with the customer regarding its needs for the manufactured product. The Supreme Court based its decision on the employee's activities which "made possible the realization and continuance of valuable contractual relations between" the corporation and its primary customer. Standard Pressed Steel Co., at 562, 95 S.Ct. at 708.

While not denying the activities of Tyler Pipe's sales representatives within this state helped it to establish and maintain its Washington customers, Tyler Pipe claims that because these sales representatives are independent contractors, their activities should not be considered under a due process "nexus" test.

The United States Supreme Court has indicated the characterization of an in-state sales representative as an "independent contractor" is without constitutional significance with regard to the nexus issue. Scripto, Inc. v. Carson, 362 U.S. 207, 80 S.Ct. 619, 4 L.Ed.2d 660 (1960). In Scripto, the Court determined that allowing the characterization of the taxpayer's in-state agent as an independent contractor to be a determining factor in whether a company would be taxed "would open the gates to a stampede of tax...