Title: City of Winchester v. American Woodmark Corp.

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  All the Justices 
 
CITY OF WINCHESTER 
 
OPINION BY JUSTICE LAWRENCE L. KOONTZ, JR. 
v.  Record No. 951621                  June 7, 1996 
 
AMERICAN WOODMARK CORPORATION 
 
 
FROM THE CIRCUIT COURT OF THE CITY OF WINCHESTER 
 
John E. Wetsel, Jr., Judge 
 
 
In this appeal, we consider whether a municipal government's 
assessment of a business, professional, and occupational license 
("BPOL") tax comported with the requirements of the Commerce 
Clause of the United States Constitution.
1  Under the specific 
facts of this case, we agree with the trial court's judgment that 
the assessment was not constitutional. 
 
I.  
 
Factual Background 
 
The case was decided on motion for summary judgment upon the 
pleadings and stipulations of fact.  American Woodmark 
Corporation (American Woodmark), a Virginia corporation, 
maintains its corporate headquarters in the City of Winchester 
(the City).  American Woodmark operates a number of 
manufacturing, storage, and distribution facilities throughout 
the United States, though none of these facilities is located 
within the City.
2  
                     
     
1U.S. Const. art. I, § 8, cl. 3 ("Congress shall have 
Power . . . [t]o regulate Commerce . . . among the several States 
. . .").  When construed to limit state taxation where Congress 
has not expressly legislated, the provision is generally referred 
to as the "dormant" Commerce Clause.  See Oklahoma Tax Comm'n v. 
Jefferson Lines, Inc., ___ U.S. ___, 115 S.Ct. 1331, 1335 (1995). 
 Here, for brevity, we will simply refer to the Commerce Clause. 
     
2We have previously addressed the nature of American 
Woodmark's business operations and its relationship with the City 
in American Woodmark v. City of Winchester, 250 Va. 451, 464 
 
On April 20, 1993, the Commissioner of Revenue for the City 
assessed BPOL taxes against American Woodmark for the years 1990 
and 1991 in the amount of $374,636.91 and $343,918.42, 
respectively.  On April 14, 1994, American Woodmark filed in the 
Circuit Court of the City of Winchester an application to correct 
these assessments of local taxes.  American Woodmark alleged that 
these assessments were not fairly apportioned and, thus, 
constituted an improper local restraint on interstate commerce in 
violation of the Commerce Clause. 
 
On March 17, 1995, American Woodmark filed a motion for 
summary judgment with a supporting memorandum.  Stipulations of 
fact and additional supporting memoranda were filed by the 
parties.  On May 12, 1995, the trial court filed a written 
opinion in which it found that the assessments against American 
Woodmark failed to satisfy the requirements of the Commerce 
Clause because the City had not fairly apportioned the 
assessments to tax only those gross receipts attributable to 
American Woodmark's business activities within the City.  After 
receiving the City's objections to its written opinion, the trial 
court entered a final order on June 5, 1995, granting summary 
judgment to American Woodmark and declaring the BPOL assessments 
made by the City invalid.  We awarded the City this appeal. 
 
II. 
 
Constitutional Restrictions on Taxation 
 
of Businesses Conducting Interstate Commerce 
 
The United States Supreme Court has long construed the 
                                                                  
S.E.2d 148 (1995). 
Commerce Clause as a restraint on state and local taxing power.  
See, e.g., Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824).  Modern 
jurisprudence regarding state and local taxation under the 
Commerce Clause emerged in the late 1930s, when the Court began 
to eschew formalistic distinctions that lacked substance and 
focused more on the practical effect of the tax imposed, or its 
effect despite any distinctions in form.  See, e.g., Western Live 
Stock v. Bureau of Revenue, 303 U.S. 250 (1938).  In prior 
decisions, the Court had merely held that a state or locality 
could regulate "local," but not "national," commerce.  Cooley v. 
Board of Wardens, 53 U.S. (12 How.) 299, 316-19 (1851). 
 
After 1938, the apportionment of a local tax to cover those 
activities rationally related to a taxing authority's power and 
interest became the central inquiry.  The Court announced that 
for a tax to be valid under the Commerce Clause, the tax cannot, 
in effect, reach revenue generated by activities lacking this 
nexus.  See, e.g., Central Greyhound Lines, Inc. v. Mealey, 334 
U.S. 653, 663 (1948). 
 
In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 
(1977), the Court spelled out this apportionment rule, announcing 
a four-part test to assess the validity of a local tax under the 
Commerce Clause.  The tax must be (1) applied to an activity with 
a substantial nexus with the taxing authority, (2) fairly 
apportioned, (3) nondiscriminatory to interstate commerce, and 
(4) fairly related to the services provided by the state or 
locality.  Id. at 279.  The Court also restated the realist 
approach, noting that the focus is not on the tax statute's 
formal language, but rather on its practical effect.  Id.; see 
also Oklahoma Tax Comm'n v. Jefferson Lines, Inc., ___ U.S. ___, 
___, 115 S.Ct. 1331, 1336 (1995). 
 
III. 
 
Application of the Commerce Clause to the Assessment 
 
 
The dispute in this case is whether the assessments in 
question satisfy the "fairly apportioned" prong of the 
constitutional test enunciated in Complete Auto.  This prong 
requires that an assessment be both internally and externally 
consistent.  Goldberg v. Sweet, 488 U.S. 252, 261 (1989).  An 
assessment is internally consistent if applying the text of the 
taxing statute, and assuming that every other jurisdiction 
applied the same statute, the taxpayer would not be subjected to 
a risk of double taxation.  Id. at 261.  An assessment is 
externally consistent if the assessment applies only to the 
"portion of the revenues from the interstate activity which 
reasonably reflects the in-state component of the activity being 
taxed."  Id. at 262 (citation omitted). 
 
 In this case, the trial court held that the assessments 
were internally consistent because if every taxing jurisdiction 
applied the tax as set out in the City's ordinance the taxpayer 
would be allowed to deduct amounts paid to other taxing 
jurisdictions and therefore would not be subject to multiple 
taxation.  That holding is not challenged on appeal.
3  Thus, we 
                     
     
3 American Woodmark argues on brief that this holding was 
erroneous; however, cross-error was not assigned to the trial 
court's holding and we will not consider this argument.  Rule 
5:18(b). 
need consider only whether the assessments comply with the 
requirements of external consistency. 
 
To prevail in a claim that a tax assessment fails the 
external consistency test, a taxpayer must "'demonstrate that 
there is no rational relationship between the income attributable 
to the State and the intrastate values of the enterprise.'"  
Amerada Hess Corp. v. Director, Division of Taxation, New Jersey 
Department of the Treasury, 490 U.S. 66, 75 (1989)(quoting 
Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, 
180 (1983)).  There is no specific formula which must be adopted 
by a taxing jurisdiction to satisfy the external consistency 
test, but "an objecting taxpayer has the burden to demonstrate by 
clear and cogent evidence that the income attributed to the State 
is in fact out of all appropriate proportions to the business 
transacted . . . in that State, or has led to a grossly distorted 
result."  Jefferson Lines, ___ U.S. at ___, 115 S.Ct. at 1343 
(citations and internal quotation marks omitted). 
 
The City argues that the trial court's determination that 
the assessments were not externally consistent was erroneous 
because American Woodmark failed to meet its burden of proof.  
The City contends that the record shows that American Woodmark is 
a highly centralized, unitary business and its corporate 
headquarters contributes value to its business.  According to the 
City, all the taxpayer's gross receipts are in some way 
attributable to the headquarters office and presumably could all 
be used as the basis for the assessments.  Thus, in the absence 
of quantified evidence of the specific value of the numerous 
functions performed by the headquarters in Winchester, the 
taxpayer did not carry its burden of proof and, the City 
concludes, the trial court erred in holding that the assessments 
were invalid. 
 
We disagree.  In the circumstances here, where the City 
based its assessments on 100% of the taxpayer's revenues, 
American Woodmark was not required to produce evidence of a 
specific level of value attributable to its Winchester operation 
to prevail in its assertion that the assessments were not 
externally consistent and, thus, were in violation of the 
Commerce Clause.  American Woodmark presented uncontested 
evidence that, during the years in question, it operated 24 
facilities in 13 different states.  These facilities included 
manufacturing and distribution centers as well as service and 
sales offices.  Common sense compels the conclusion that these 
operations added value to American Woodmark's business product 
and were revenue producing activities.  By definition, 
assessments based on 100% of American Woodmark's revenues 
included revenues realized from value produced in locations other 
than in the taxing jurisdiction.  Given the number of facilities 
and operations outside Winchester, it is equally axiomatic that 
the value added to the product by the Winchester operations could 
not possibly produce 100% of the revenues.  Therefore, we 
conclude that American Woodmark has met its burden of proof by 
presenting clear and cogent evidence that the income which the 
City through its assessments attributed to operations conducted 
in Winchester is "out of all appropriate proportions to" and has 
"no rational relationship" to the business transacted in 
Winchester.  Accordingly, the trial court properly held that the 
City's assessments of its BPOL tax against American Woodmark for 
1990 and 1991 were invalid. 
 
Contrary to the City's assertion, this conclusion is 
consistent with our analysis in Short Brothers, Inc. v. Arlington 
County, 244 Va. 520, 423 S.E.2d 172 (1992).  In that case we 
upheld Arlington County's assessment for a business license tax 
based on the taxpayer's total gross receipts because the evidence 
showed that the taxpayer's sole business facility in the United 
States was in Arlington County and that it conducted all of its 
revenue-generating operations from that facility.  We concluded 
that "[i]f there was any legitimate basis on which to allocate 
those receipts to another taxing jurisdiction, Short had the 
burden to produce such evidence.  It has not carried that 
burden."  Id. at 527, 423 S.E.2d at 176; see also Ryder Truck 
Rental, Inc. v. County of Chesterfield, 248 Va. 575, 579-80, 449 
S.E.2d 813, 816 (1994).  The only difference between the result 
in Short Brothers and the instant case is that here the 
stipulated facts showed a "legitimate basis on which to allocate 
[American Woodmark's] gross receipts to another taxing 
jurisdiction." 
 
IV. 
 
Summary Judgment 
 
Finally, we turn to the City's assertion that summary 
judgment was improper.  The City argues that it should have been 
permitted to develop a more complete record in order to 
demonstrate that its assessments were proportionate to the 
activity conducted by American Woodmark within the City.  We 
disagree.  No material facts were in dispute.  The stipulations 
of fact fairly and completely outline the nature of American 
Woodmark's business operations and the function of the 
headquarters unit within those operations.  While the City might 
have been able to establish with a full evidentiary hearing the 
portion of gross receipts attributable to the operations of the 
headquarters unit, as we noted above, it is beyond the realm of 
conception that it could have established all gross receipts as 
attributable to such operations, thus justifying the failure to 
make an apportionment in the original assessments. 
 
V. 
 
Conclusion 
 
In short, we hold that under the specific facts of this 
case, the City failed to apportion the BPOL tax assessments as 
required by the Commerce Clause.  Accordingly, the judgment of 
the circuit court will be affirmed. 
 
Affirmed.