Washington-Oregon Shippers Co-op. Ass'n v. Schumacher

• Decision Date: 14 December 1961
• Docket Number: WASHINGTON-OREGON,No. 35726,35726
• Court: Washington Supreme Court
• Parties: SHIPPERS COOPERATIVE ASSOCIATION, INC., Respondent, v. William S. SCHUMACHER and Clark Squire, as Tax Commissioners of the State of Washington, Appellants.

Page 159

59 Wn.2d 159

367 P.2d 112

WASHINGTON-OREGON SHIPPERS COOPERATIVE ASSOCIATION, INC., Respondent, v. William S. SCHUMACHER and Clark Squire, as Tax Commissioners

of the State of Washington, Appellants.

No. 35726.

Supreme Court of Washington, Department 2.

Dec. 14, 1961.

Rehearing Denied Feb. 13, 1962.

John J. O'Connell Atty. Gen., Timothy R. Malone, Asst. Atty. Gen., for appellant.

Wright, Booth & Beresford, Robert O. Beresford, Fred H. Tolan, and Donald P. Lehne, Seattle, for respondent.

FINLEY, Chief Justice.

In this lawsuit respondent, Washington-Oregon Shippers Cooperative Association, Inc., (hereinafter referred to as WOSCA) is seeking to enjoin the State Tax Commission from collecting certain business and occupation taxes. The taxes were assessed pursuant to those provisions of Chapter 180, Laws of 1935 (as amended), which are presently codified as RCW 82.04.220 and RCW 82.04.290. WOSCA alleged that its business is entirely interstate in character, and that the tax amounted to (1) a direct burden on interstate commerce, violative of the commerce clause of the Federal Constitution, art. 1, § 8 cl. 3; and (2) a taking of property without due process of law in violation of the fourteenth amendment of the Federal Constitution and Art. I, § 3, of the Washington State Constitution. The trial court enjoined collection of the taxes, holding them to be a direct burden on interstate commerce.

Much of the following information describing the functions and operations of WOSCA is taken from the facts as stipulated by the parties litigant in trial court.

WOSCA is a nonprofit corporation, organized and existing under and by virtue of the laws of the state of Washington. Corporate membership consists of 119 business entities, with principal places of business in either Washington or Oregon--primarily in Seattle or Portland. Each member is engaged in a type of business involving acquisition and transportation of materials or products from sources outside the state of Washington. Carload, truckload, or volume rates usually are most advantageous; but members shipping individually often cannot order in quantities large enough to secure such lower rates. WOSCA was formed to provide services or the means whereby members would be able to consolidate shipments in order to gain the advantage of the volume (usually carload) rates. WOSCA handles no shipments of merchandise originating in Washington, and its services are available only to its members. WOSCA qualifies for an exemption under 49 U.S.C.A., § 1002(c), and, therefore is not subject to regulation by the Interstate Commerce Commission as a freight forwarder.

Each corporate member orders (independently of WOSCA) whatever commodities it desires. Thereupon, the commodities are shipped from the seller in care of WOSCA to loading or consolidation points in various eastern, midwestern and southern cities. An independent consolidator at the loading point, working pursuant to a contract with WOSCA, arranges the less-than-carload shipments in carload lots and directs the shipment to members (in care of WOSCA) at a convenient point in Washington or Oregon. (As a matter of practice, about 80% of the shipments come to Washington for the reason that most of the 119 members are established here. In this appeal we are not concerned with transactions involving Oregon members.) The shipments received at the designated points in Washington are sorted and delivered to the purchasing members by a distributor (who also works under a contractual arrangement with WOSCA). WOSCA has leased a warehouse in Seattle, where volume is greatest, for storage of the freight until distribution. Ownership of the merchandise in transit depends upon the contractual relationships between the buyers and sellers. Accordingly, each member handles its own claims when damage in shipment occurs.

A bill of lading and a manifest, setting forth the ownership and description of various components making up the carload, are prepared by the consolidator at loading point and delivered to the railroad or other carrier. A duplicate of each is sent to the firm of Fred H. Tolan & Associates, in Seattle, which functions as 'Traffic Consultant.' This firm, pursuant to a contract with WOSCA, handles the latter's records, pays freight and other charges due the carriers and independent contractors out of the operating capital of WOSCA, and also bills individual members for services performed.

The billings to individual members cover (a) the amount of freight, (b) the amount of the consolidator's charge, including any advance made by the consolidator for the individual member, and (c) an agreed amount per hundredweight for services performed by Fred H. Tolan & Associates. The billings also include various service charges, as itemized in the Appendix attached hereto. Miscellaneous expenses are added to the bill of each member according to an agreed apportionment arrangement. Payments are made to WOSCA, and deposited in its account.

The operating capital of WOSCA is derived as follows: Each member is required to pay an amount equal to its best estimate of its largest weekly freight bill. If such estimate proves to be inadequate for covering expenses of operation, the member is so advised promptly and requested to make a larger contribution. As long as members make payments promptly, the fund thus established remains substantially intact. Any withdrawing member receives return of his deposit or whatever portion is left of it. There are no shares of stock. In the event excess money accumulates, each member receives a 'dividend,' apportioned according to the tonnage shipped.

Fred H. Tolan & Associates pay the usual state and city business and occupations taxes on all sums paid for services rendered. The independent consolidators and distributors pay their own business and occupations taxes if required in their jurisdictions.

WOSCA owns no property. Its work is performed by independent contractors, except for corporate policy and planning decisions made by the Board of Trustees. No office is maintained; the contract with Fred H. Tolan & Associates requires that firm to provide all office supplies and equipment. The corporate name of WOSCA has two telephone listings in Seattle: one at the warehouse leased by WOSCA; the other at the offices of Fred H. Tolan & Associates.

The State Tax Commission originally sought to collect the tax by measuring all sums paid by each member of WOSCA for freight bills, together with service charges added thereto. However, no tax was claimed measured by that portion of the billing representing advances by consolidators at loading points. The Tax Commission has abandoned a portion of its claim for taxes, since it is appealing only insofar as the trial court judgment enjoins the collection of taxes measured by those gross proceeds which (1) are obtained from Washington members of WOSCA for services rendered by WOSCA, and which (2) are in addition to amounts paid by these members for the actual transportation charges by carriers. The Tax Commission, then, is maintaining that all proceeds derived from charges for services itemized in the Appendix attached hereto, which are paid to WOSCA by its Washington members, are properly includable in the measure of the tax.

It will be observed that some of the services included in the measure of the tax involve activity occurring outside of the State of Washington. Logically, perhaps, the question of whether or not the state has jurisdiction under the due process clauses of the Federal and State Constitutions to tax proceeds derived as a result of those activities should be answered before the commerce clause implications are discussed. Is the tax fairly apportioned to services rendered in Washington? Or, to put it another way, does to tax amount to an attempt by the State of Washington to extend its taxing powers outside of its boundaries?

WOSCA makes no purchases or sales in interstate commerce. The only real activity performed by WOSCA, except for the policy-making function of its Board of Trustees, is that of entering into contractual arrangements with independent contractors. Although some of the contracts entered into by WOSCA concern activities occurring outside of the state, WOSCA is not engaged in these activities; it merely procures them as a service for its members. Such service also includes: use of the corporate name when shipping items; immediate payment of shipping charges; providing all risk insurance; door delivery service; regular billing service, enabling satisfaction of all charges with one payment. The performance of these services is a local activity, even though the services are rendered in connection with an interstate transaction. See Mohegan International Corp. v. City of New York (1961), 9 N.Y.2d 69, 211 N.Y.S.2d 161, 172 N.E.2d 546; cert. den. 366 U.S. 764, 81 S.Ct. 1671, 6 L.Ed.2d 854 (1961). Local activity far more obscure was held validly taxable in B. F. Goodrich v. State (1951), 38 Wash.2d 663, 231 P.2d 325; Cert. den. 342 U.S. 876, 72 S.Ct. 167, 96 L.Ed. 659.

That transactions occur between WOSCA and its members cannot be denied. WOSCA promotes and provides services, and members make payments to WOSCA for these services. It is axiomatic that a corporation exists as an entity, separate and apart from its members. The gross receipts received from these transactions between the corporation and the members may be taxed, because WOSCA is providing services and is thereby engaging in business within the state. The fact that a portion of the service provided by WOSCA involves activities which occur outside of the state is not controlling.

In State of Wisconsin v. J. C. Penney Co. (1940), 311 U.S. 435, 61 S.Ct. 246, 250, 85 L.Ed. 267, reh. den. 312 U.S. 712, 61 S.Ct. 444, 85 L.Ed. 1143, the court said:

'The fact that a tax is contingent upon events brought to pass without a state does not destroy the nexus...