United Parcel Service, Inc. v. State, Dept. of Revenue

• Decision Date: 16 August 1984
• Docket Number: No. 50494-6,50494-6
• Citation: 687 P.2d 186,102 Wn.2d 355
• Parties: UNITED PARCEL SERVICE, INC., a corporation, Appellant, v. STATE of Washington, DEPARTMENT OF REVENUE, Respondent.
• Court: Washington Supreme Court

Page 355

102 Wn.2d 355

687 P.2d 186

UNITED PARCEL SERVICE, INC., a corporation, Appellant, v. STATE of Washington, DEPARTMENT OF REVENUE, Respondent.

No. 50494-6.

Supreme Court of Washington En Banc.

Aug. 16, 1984.

Perkins, Coie, Stone, Olsen & Williams, John Binns, Seattle, Schnader, Harrison, Segal & Lewis, Ralph S. Snyder, Richard Birns, Philadelphia, for appellant.

Kenneth Eikenberry, Atty. Gen., Jeffrey Goltz, Asst. Atty. Gen., Olympia, for respondent.

UTTER, Justice.

The issue before us is whether certain vehicles owned or leased by appellant are exempt, under RCW 82.12.0254, from the use tax imposed by RCW 82.12.020. We hold they are not.

Appellant United Parcel Service, Inc., seeks the benefit of a statutory exemption from the use tax imposed by RCW 82.12.020 on the use within this state, as a consumer, of tangible personal property. The exemption sought by UPS is that provided by RCW 82.12.0254 (formerly RCW 82.12.030(4)), which provides:

The provisions of this chapter shall not apply ... in respect to the use by the holder of a carrier permit issued by the Interstate Commerce Commission of any motor vehicle or trailer whether owned by or leased with or without driver to the permit holder and used in substantial part in the normal and ordinary course of the user's business for transporting therein persons or property for hire across the boundaries of this state if the first use of which within this state is actual use in conducting interstate or foreign commerce ...

UPS contends that it has been wrongfully denied the benefit of this exemption with respect to certain of its motor vehicles.

UPS operates a nationwide package delivery service on a "from and to all points" basis. In order to do this, UPS has developed an operating plan which works as follows: Packages to be picked up within an "operating area" are picked up at the shipper's address by a vehicle which UPS calls a "package delivery car" (the familiar brown van) and carried to an "operating center" which services that operating area. If a package is destined for an address within the same operating area, the package will remain at that center overnight and will be delivered on the next day by the same or another package delivery car operating out of that center.

When the package is destined for an address within another operating area, it is carried through a "feeder system". Sometimes, a transfer is made by a direct trip, but usually it is accomplished by passing the package through a centrally located "hub". A hub is a major dispatching and package-sorting center which services a large number of operating areas. At the hub, the package is sorted and then loaded onto another trailer for delivery to the operating center serving the consignee's address. Thus, packages are transferred from their points of origin to the nearest hub. They are then transported from hub to hub across the country until they reach the hub nearest their destinations. From there they go to the proper operating center and finally to the destination itself.

Ordinarily, trips between operating centers and hubs and between different hubs are carried out by tractors and trailers rather than by package delivery cars. Such trips may be carried out in three different ways. The first is by the direct trip of a single tractor-trailer combination. The second is by loading trailers on railroad flatcars. This method requires two different tractors for the complete trip--one to deliver the trailer to the railroad and one to pick it up. In the third method, two tractor-trailers set out from different locations, meet somewhere between those locations, exchange trailers, and return to their starting points.

UPS uses three kinds of vehicles to provide its unitary interstate service: package delivery cars, tractors, and trailers. The package delivery cars, because they normally operate only within a single operating area, usually do not cross state lines. Tractors and trailers which transport packages between operating areas and hubs and between different hubs frequently do cross state lines on a regular basis, depending on the particular way in which they are used. As a general rule, UPS assigns new tractors to long hauls and older tractors to short-haul routes. In the state of Washington, tractor drivers document each state border crossing by filling out a "linecrossing card." All of the UPS vehicles--tractors, trailers, and delivery cars alike--are used for the same purpose: to carry packages from a point of pickup to a point of delivery.

Of the total number of packages handled by UPS in Washington, over 70 percent are either picked up in Washington for delivery outside the state or delivered within Washington having originated outside the state. Thus, less than 30 percent of the packages carried in Washington constitute intrastate commerce.

The dispute in this case centers on use taxes paid by UPS with respect to its "package delivery cars" operating within the state of Washington and 39 of its tractors. These vehicles either do not ever leave the state or do so only on fewer than 25 percent of their trips. The Department determined that these vehicles do not qualify for the use tax exemption because they were not used "in substantial part in the normal and ordinary course of the user's business for transporting therein persons or property for hire across the boundaries of this state ..." RCW 82.12.0254. Taxes were assessed in this dispute for the period from April 1, 1975, through March 31, 1979. The use tax paid on the 39 tractors amounts to $39,357; the tax paid on the delivery vans is in the neighborhood of $150,000.

UPS's petition for refund of the taxes paid was denied by the Department of Revenue in 1980, and by the Board of Tax Appeals in a decision dated October 26, 1981. The Board ruled that the Department of Revenue had properly assessed use tax on UPS vehicles shown to have been operating exclusively within the state. It also concluded that, with respect to vehicles not operating exclusively within the state, the Department properly assessed an annual use tax on vehicles which had crossed the borders of this state on less than 25 percent of their trips taken in the normal course of UPS business during the tax year. Finally, the Board held that the Department's interpretation of the exemption statute and use of the "line-crossing test" violated neither the interstate commerce clause nor the equal protection clauses of the United States Constitution or the Constitution of the State of Washington. UPS petitioned for review in Superior Court pursuant to RCW 34.04.130. On January 4, 1983, the court entered a written order and judgment affirming the Board of Tax Appeals. This appeal followed.

As this matter came before the Board of Tax Appeals for a formal hearing, judicial review of the Board's decision is governed by RCW 34.04.130 and 34.04.140. RCW 82.03.180. Review is on the record of the administrative tribunal itself not of the superior court. Franklin Cy. Sheriff's Office v. Sellers, 97 Wash.2d 317, 323-4, 646 P.2d 113 (1982), cert. denied 459 U.S. 1106, 103 S.Ct. 730, 74 L.Ed.2d 954 (1983). Issues of law are reviewed under the "error of law" standard of RCW 34.04.130(6)(d). Sellers, at 325, 646 P.2d 113. This standard "allows the reviewing court to essentially substitute its judgment for that of the administrative body, though substantial weight is accorded the agency's view of the law." Sellers, at 325, 646 P.2d 113.

Central to our disposition is the rule that tax exemptions are narrowly construed. Department of Rev. v. Schaake Packing Co., 100 Wash.2d 79, 83-4, 666 P.2d 367 (1983); Group Health Coop. v. State Tax Comm'n, 72 Wash.2d 422, 429, 433 P.2d 201 (1967).

I

The first question is whether the Board of Tax Appeals erred in ruling that appellant's vehicles which were used solely within the state of Washington could not qualify for exemption from the use tax.

Under RCW 82.12.0254, quoted above, a motor vehicle is exempt from use tax if:

1. the user holds an ICC permit;

2. the vehicle is used

a. in substantial part

b. in the normal and ordinary course of the user's business

c. for transporting therein persons or property for hire across the boundaries of the state; and

3. the first use of the vehicle in Washington is actual use in conducting interstate or foreign commerce.

The Department does not attempt to argue that the UPS vehicles have failed to meet the first and third of these elements. The controversy in this case centers on the second element, requiring that, in order to be exempt from the use tax, a vehicle must be:

used in substantial part in the normal and ordinary course of the user's business for transporting therein persons or property for hire across the boundaries of this state ...

(Italics ours.)

UPS contends that this language merely requires that a vehicle be used in substantial part to carry property which will cross or has crossed a state boundary. According to UPS, a vehicle need not itself cross a state boundary in order to qualify for exemption from the use tax. In other words, the boundary-crossing language in this exemption statute applies to the property being carried rather than the vehicle carrying it. Thus, all UPS vehicles would qualify for the exemption; the vehicles would have been used in substantial part in conducting interstate commerce because over 70 percent of the parcels carried by UPS are interstate parcels. Stipulation of fact 4.1. Even the delivery vans, most of which never cross a state boundary, could qualify for the exemption under this interpretation of RCW 82.12.0254.

The Department, on the other hand, contends that the Legislature did not intend to exempt from the use tax all motor vehicles substantially involved, directly or indirectly, in interstate commerce; rather, the exemption was intended to apply only to those motor vehicles which actually cross the boundaries of this...