Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-12-01339/USCOURTS-caDC-12-01339-0/pdf.json

Parties Involved:
Morpho Detection, Inc.
Petitioner
Transportation Security Administration
Respondent

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 4, 2013 Decided May 28, 2013

No. 12-1339

MORPHO DETECTION, INC.,

PETITIONER

v.

TRANSPORTATION SECURITY ADMINISTRATION,

RESPONDENT

On Petition for Review of an Order of 

the Transportation Security Administration

Matthew S. Hellman argued the cause for the petitioner.

Jonathan R. Prouty, Senior Trial Counsel, United States

Department of Justice, argued the cause for the respondent.

Stuart F. Delery, Principal Deputy Assistant Attorney General,

Jeanne E. Davidson, Director, and Kirk T. Manhardt, Assistant

Director, were on brief. 

Before: HENDERSON, BROWN and KAVANAUGH, Circuit

Judges.

Opinion for the Court filed by Circuit Judge HENDERSON.

KAREN LECRAFT HENDERSON, Circuit Judge: Morpho

Detection, Inc. (Morpho), a California-based corporation that

designs and builds explosive and other threat detection

technology, contracted with the Federal Aviation Administration

USCA Case #12-1339 Document #1438014 Filed: 05/28/2013 Page 1 of 14
2

(FAA), on behalf of its then-newly established Transportation

Safety Administration (TSA), to supply its Explosive Detection

System (EDS) to United States airports.1 After Morpho installed

EDSs at two airports in the state of Washington, the Washington

Department of Revenue (Revenue Department) assessed

Morpho $5,278,217 in state use and business taxes based on

their installation. Morpho sought an increase of the contract

price to compensate for the state assessments as “after-imposed

tax[es]” pursuant to Clause 3.4.2-7(c) of the Acquisition

Management System (AMS).2

 TSA rejected Morpho’s claim on

the ground Washington’s taxes are not compensable afterimposed taxes under AMS Clause 3.4.2-7(c). We agree with

TSA that the taxes are not after-imposed taxes within the

meaning of the AMS and, accordingly, we deny Morpho’s

petition for review.

I.

On November 23, 2001, in response to a congressional

mandate to equip U.S. airports with “sufficient explosive

detection systems to screen all checked baggage no later than

1

The contracting entity was InVision Technologies, Inc., of which

Morpho is the successor (after multiple corporate realignments and

name changes). For ease of identification, we refer to the contracting

party throughout as Morpho. 

2

“The FAA’s [AMS] was developed in response to Congress’

directive ‘notwithstanding the provisions of Federal acquisition law,’

to provide for more timely and cost-effective acquisitions of

equipment and materials. The Office of Dispute Resolution for

Acquisition is a review body that was created pursuant to this

mandate, and it handles protests and contract disputes that arise under

the [AMS].” Multimax, Inc. v. FAA, 231 F.3d 882, 884 n.1 (D.C. Cir.

2000) (quoting 49 U.S.C. § 40110(d) (2006)).

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3

December 31, 2002,”3

 the FAA issued a “solicitation” for a

fixed-price contract to provide EDSs to U.S. airports. The

solicitation did not specify particular airports for EDS

installation but “covered all 50 states, as well as Puerto Rico and

Guam.” Decl. of John (“Jack”) Handrahan at 2, ¶ 8 (filed Dec.

16, 2011) (dated Oct. 14, 2011) (JA 569). In February 2002,

Morpho and TSA entered into an “undefinitized letter contract

under the provisions of the [FAA AMS],” which “constitute[d]

an authorization for [Morpho] to commence work on . . .

stand-alone explosives detection systems.” Letter from TSA

Contracting Officer to Morpho at 1 (dated Feb. 15, 2002) (JA

187). The letter contract stated that the FAA had “a mandate to

acquire and install airport security equipment throughout the

country” and that the order would include 450 units. Id. at 2, 3

(JA 188, 189). The parties “definitiz[ed] the letter contract” on

September 6, 2003, as “fully integrated” Contract No. DTFA01-

02-C-00023 (Contract 00023). Amendment of Solicitation/

Modification of Contract No. 2 (Sept. 6, 2003) (JA 201). 

Meanwhile, on August 5, 2003, the parties had entered a second

contract—Contract No. DTSA20-03-C-01900 (Contract 01900)

—for a different model EDS. 

Each of the EDS contracts provided for on-site installation

by Morpho: “The Contractor shall install and integrate EDS

when directed by the C[ontracting ]O[fficer] by individual

3

The Congress directed: “The Under Secretary of Transportation

for Security shall take all necessary action to ensure that . . . explosive

detection systems are deployed as soon as possible to ensure that all

United States airports [regularly serving a DOT certificated carrier]

have sufficient explosive detection systems to screen all checked

baggage no later than December 31, 2002, and that as soon as such

systems are in place at an airport, all checked baggage at the airport is

screened by those systems . . . .”). Aviation and Transportation

Security Act, Pub. L. No. 107-71 § 110(b), 115 Stat. 597, 615 (Nov.

19, 2001) (codified at 49 U.S.C. § 44901(d)(1)(A)). 

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delivery orders.” Contract No. 00023 § 3.92 (JA 231); Contract

No. 00019 § 3.92 (JA 383); see also Contract 00023

Amendment of Solicitation/Modification of Contract No.4, at 2

(Apr. 27, 2004) (amending contract to require specifically that

Morpho provide “rigging and installation services” as fixedprice line item) (JA 300). Although the parties seem to have

treated “task orders” (orders requesting specifically described

services) and “delivery orders” (orders requesting delivery of

fixed-price line items) interchangeably, the contracts included

a slightly different procedure for each. In the case of the former,

the TSA Contracting Officer submitted a “Draft” task order to

Morpho, which then prepared a cost estimate and forwarded it

to the Contracting Officer, while the latter was prepared by TSA

based on the contractual line item price. Contract No. 00023 §§

H.2 (JA 265-66), H.3 (JA 266-67); Contract No. 01900 §§ H.2

(JA 417-18), H.3 (JA 418-19). In both cases, the TSA

Contracting Officer reviewed the order for “acceptability,

accuracy and completeness” and transmitted it to Morpho for

review and signature. If Morpho found the contract as written

“unacceptable,” it was directed to “immediately notify the

Contracting Officer and detail the reasons for its position.” Id.

§§ H.2(c), H.3(c). Pursuant to these provisions, for example, in

July 2003, after receiving a draft task order to install EDS units

at the Seattle Airport, Morpho sent TSA a proposal providing

“an estimate for the placement of two each [EDS units] at

Seattle Airport” and requesting “a written notice to proceed

under a task order issued under the current contract.” Letter

from Morpho to TSA Contracting Officer at 1, 2 (dated July 16,

2003) (JA 511) (July 2003 Proposal); see also Letter from

Contracting Officer to Morpho (dated July 6, 2004) (JA 513)

(accepting Morpho’s proposal “to provide rigging for the new

installation of two [EDS units] at Spokane International Airport

[], with no impact to cost, schedule, or performance under

Delivery Order 3”). The July 2003 Proposal specifically noted:

“Washington State gross sales tax of 8.8% has not been included

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in the above pricing if it is applicable.” July 2003 Proposal at 2

(JA 512). No other tax was mentioned in the proposal—nor are

state taxes referenced elsewhere in documents relating to

individual task/delivery orders so far as the appellate record and

briefing reveal.

On April 22, 2008, the Revenue Department assessed

Morpho combined use and Business and Occupation (B&O)

taxes of $5,423,645 based on a partial tax audit for the period

January 1, 2002 to March 31, 2006, during which period

Morpho had installed EDSs under Contracts 00023 and 01900

at two Washington State airports—Seattle-Tacoma and

Spokane—under fifteen task/delivery orders. After Morpho

appealed the taxes administratively, the Revenue Department

issued a “Final Executive Level Determination” requiring

Morpho to pay use and B&O taxes of $5,278,217—an amount,

Morpho claims, that “substantially exceeded the gross revenue

that Morpho received for its services at the Washington

airports.” Pet’r Br. 22 (emphasis in original). The Revenue

Department determined Morpho was subject to the taxes

because of its status as a statutory “consumer”—a prerequisite

to liability for both the use tax and the B&O tax.4

4

The use tax 

(1) . . . is hereby levied and there shall be collected from

every person in th[e] state . . . for the privilege of using

within th[e] state as a consumer: (a) Any article of tangible

personal property purchased at retail . . . or produced or

manufactured by the person so using the same, or otherwise

furnished to a person engaged in any business taxable under

RCW 82.04.280 (2) or (7) . . . .

Wash. Rev. Code § 82.12.020 (2001 through 2006). The B&O tax is

imposed on, inter alios, “every person . . . engaging in activities which

bring a person within the definition of consumer contained in RCW

82.04.190(6).” Wash. Rev. Code § 82.04.280 (2001 through 2006).

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On December 24, 2008, Morpho filed a “Request for

Interpretation of Contract Terms and Equitable Adjustment”—

in procurement argot, a “contract dispute”—with the Office of

Dispute Resolution for Acquisition (ODRA), which adjudicates

disputes under the FAA’s AMS. See Findings and

Recommendations, Contract Dispute of Morpho Detection, Inc.,

Docket No. 08-TSA-039 (June 8, 2012) (ODRA Decision) (JA

30).5 In its filing, Morpho requested an equitable adjustment

increasing the contract price of both contracts to compensate for

the Washington taxes, which it claimed were “after-imposed

tax[es]” justifying a price increase under AMS Clause

3.4.2-7(c). On June 8, 2012, ODRA issued its decision,

recommending that Morpho’s contract dispute be denied. In an

order issued July 9, 2012, the TSA Administrator “adopt[ed] the

ODRA’s findings and den[ied Morpho’s] contract dispute in its

entirety.” Morpho Detection, Inc., Docket No. 08-TSA-039 at

1 (July 9, 2012). Morpho timely petitioned for review of TSA’s

decision.

5

The ODRA decision was prepared by a dispute resolution officer

and approved by his director. Established in 2001 as an agency within

the Department of Transportation, TSA was instructed to use AMS for

“acquisitions of equipment, supplies, and materials by the

Transportation Security Administration.” Aviation and Transportation

Security Act, § 101(a), 115 Stat. at 601 (codified at 49 U.S.C. § 114(o)

(2001)). Although the Congress transferred the TSA to the

Department of Homeland Security in 2002, TSA continued to use

FAA’s AMS until June 23, 2008. See Homeland Security Act, Pub.

L. No. 107-296, § 424, 116 Stat. 2135, 2185 (2002); Consolidated

Appropriations Act, 2008, Pub. L. No. 110-161, sec. 6, div. E, tit. V,

§ 568, 121 Stat. 1844, 2092 (2007) (repealing 49 U.S.C. § 114(o)); see

also Coal. of Airline Pilots Ass’ns v. FAA, 370 F.3d 1184, 1186 (D.C.

Cir. 2004). The dispute before us relates to contracts entered into

before June 23, 2008.

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II.

We have jurisdiction over Morpho’s petition for review

under 49 U.S.C. § 46110.6

 AMS Clause 3.4.2-7, titled “Federal,

State, and Local Taxes—Fixed-Price, Noncompetitive

Contract,” provides generally: “Unless otherwise provided in

this contract, the contract price includes all applicable Federal,

State, and local taxes and duties.” ODRA Decision at 3 (quoting

AMS cl. 3.4.2-7(b)). It sets out an exception, however, for an

“after-imposed tax,” which may be recovered from the FAA

notwithstanding the absence from the contract of an express

provision therefor: “The contract price shall be increased by the

amount of any after-imposed tax . . . .” Id. (quoting AMS cl.

3.4.2-7(c) (emphasis added)). Morpho claims the Washington

taxes are “after-imposed” taxes requiring a commensurate

increase in the contract price of the two contracts under the

exception. TSA responds that the Washington taxes are not

“after-imposed” within the meaning of AMS Clause 3.4.2-7(c)

because the authorizing statutes went unchanged during the

contract terms and, in any event, the contracts do not incorporate

6

This section provides in relevant part:

[A] person disclosing a substantial interest in an order

issued by the Secretary of Transportation . . . may apply for

review of the order by filing a petition for review in the

United States Court of Appeals for the District of Columbia

Circuit . . . . The petition must be filed not later than 60

days after the order is issued.

49 U.S.C. § 46110 (a); see Roberts v. Napolitano, 463 Fed. App’x 4,

4 (D.C. Cir. 2012) (“Pursuant to 49 U.S.C. § 46110, exclusive

jurisdiction to review ‘an order’ issued by TSA is vested in the courts

of appeals.” (citing 49 U.S.C. § 46110(a), (c))).

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AMS Clause 3.4.2-7 or its exception.7

 We agree with TSA that

if the exception is incorporated in the contracts—an issue we do

not decide—Morpho has no recourse thereunder because the

Washington taxes are not “after-imposed” taxes.8

 An “after-imposed tax” is defined as

any new or increased Federal, State, or local tax or

duty, or tax that was excluded on the contract date but

whose exclusion was later revoked or amount of

exemption reduced during the contract period, other

than an excepted tax, on the transactions or property

covered by this contract that the Contractor is required

to pay or bear as the result of legislative, judicial, or

administrative action taking effect after the contract

date.

ODRA Decision at 3 (quoting AMS cl. 3.4.2-7(a)(3) (emphasis

added)). Morpho acknowledged before ODRA that the

7

ODRA similarly declined to decide the incorporation issue but

noted that neither the November 23, 2001 solicitation nor any of the

contract documents expressly incorporates AMS Clause 3.4.2-7. See

ODRA Decision 22, 5 (¶¶ 3, 6), 10 (¶ 22). By contrast, both contracts

expressly incorporate numerous other AMS contract provisions. See

Contract 0023 at I-1 to -2 (JA 277-78); Contract 01900 at I-1 to -2

(JA 430-31).

8

The parties disagree on the applicable standard of review. TSA

asserts that its decision is “subject to the familiar determination of

whether [its] decision is ‘arbitrary or capricious or contrary to law.’ ” 

Resp’t Br. 13 (quoting Multimax, Inc. v. FAA, 231 F.3d 882, 886

(D.C. Cir. 2000) (quoting 5 U.S.C. § 706(2)(A); citing J.A. Jones

Mgmt. Servs. v. FAA, 225 F.3d 761, 764 (D.C. Cir. 2000)). Morpho

contends, to the contrary, that our review is de novo. Pet’r Br. 17-20. 

We need not resolve the dispute because, even under the more

exacting de novo review, we conclude the subject state taxes are not

“after-imposed” within the meaning of AMS Clause 3.4.2-7(c).

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Washington use and B&O taxes in question “ ‘have existed for

some time’ ”—indeed “since 1975.” ODRA Decision at 24

(quoting Morpho Final Submission Brief 12 (filed Dec. 16,

2011) (Morpho ODRA Brief)) (quotation marks omitted); see

also Pet’r Br. 25 n.8 (“To be sure, Washington’s tax was enacted

by the Washington legislature long before Morpho ever

submitted its tax proposal.”); see generally Washington v.

United States, 460 U.S. 536, 538-40 & n.3 (1983) (describing

circumstances of 1975 enactment expanding statutory definition

of “consumer” to make certain taxes applicable to federal

contractors).9

 Morpho nonetheless argued that Washington had

“never assessed these taxes against contractors in a similar

posture” and that Washington’s “novel interpretation and

application of law constitutes an imposition of a new State tax

that [Morpho] is required to pay or bear as a result of legislative,

judicial, or administrative action taking effect after the contract

date.” ODRA Decision at 24 (quoting Morpho ODRA Brief 12)

(quotation marks omitted) (JA 53); see also Pet’r Br. 33-38. For

taxing purposes, Washington defines “consumer” to include 

(6) Any person engaged in the business of constructing,

repairing, decorating, or improving new or existing

buildings or other structures under, upon, or above

real property of or for the United States, any

instrumentality thereof, or a county or city housing

authority created pursuant to chapter 35.82 RCW,

9

The history of Washington’s statutory definition of “consumer”

is tortuous. See Washington v. United States, 460 U.S. at 538-40. The

United States Supreme Court made clear, however, that the definition

was amended in 1975 to remediate the problem caused by the fact that

Washington’s “tax system could not . . . be applied to construction for

the Federal Government because the Supremacy Clause prohibits

States from taxing the United States directly” with the “result . . . that

for federal projects the legal incidence of the tax falls on the contractor

rather than the landowner.” Id.

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including the installing or attaching of any article of

tangible personal property therein or thereto, whether

or not such personal property becomes a part of the

realty by virtue of installation . . . .

Wash. Rev. Code § 82.04.190 (2001 through 2006) (emphases

added). Morpho maintains that, “at a minimum, the text,

history, and purpose of the Washington tax statute demonstrate

that it is ambiguous and that it does not plainly support the

imposition of the tax here.” Pet’r Br. 34. The statutory

definition does indeed seem ambiguous in that the meaning of

“real property of or for the United States” is unclear. The statute

may mean, as Morpho contends, that the “real property” must

be, conjunctively, both “of” and “for” the United States—which

the two airport properties are not because each is “of” (i.e.,

belongs to) local authorities, not the United States. 

Alternatively, the phrase may be read to mean the person must

be “engaged in the business of constructing, repairing,

decorating, or improving new or existing buildings or other

structures,” disjunctively, either “under, upon, or above real

property of . . . the United States” or “for the United States,” see

Revenue Department Determination at 6 n.6 (JA 554)—the

meaning that the Revenue Department used to tax Morpho as a

consumer and that TSA adopts. See Unification Church v. INS,

762 F.2d 1077, 1084 (D.C. Cir. 1985) (“We start with the

proposition that the word ‘or’ is often used as a careless

substitute for the word ‘and’; that is, it is often used in phrases

where ‘and’ would express the thought with greater clarity. That

trouble with the word has been with us for a long time.”

(quoting De Sylva v. Ballentine, 351 U.S. 570, 573 (1956))); see

also United States v. Fisk, 70 U.S. (3 Wall.) 445, 447 (1865)

(“[C]ourts are often compelled to construe ‘or’ as meaning

‘and,’ and again ‘and’ as meaning ‘or.’ ”). The ambiguity,

however, avails Morpho nought. 

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To be “after-imposed,” a tax must be (1) either a “new or

increased” tax or one that was “excluded on the contract date but

whose exclusion was later revoked or amount of exemption

reduced during the contract period” and (2) one “that the

Contractor is required to pay or bear as the result of legislative,

judicial, or administrative action taking effect after the contract

date.” ODRA Decision at 3 (quoting AMS cl. 3.4.2-7(a)(3)). 

The Washington use and B&O taxes fail the first prong of the

test because they were neither “new” nor “increased” nor subject

to an “exclusion . . . revo[cation]” or “exemption reduc[tion]”:

they were in existence and fixed at the same rates throughout the

terms of Contract 00023 and Contract 01900—and the key

statutory definition of “consumer” likewise remained the same

throughout. See Wash. Rev. Code §§ 82.12.020, 82.04.280

(2001 through 2006), supra note 4 (taxing provisions); Wash.

Rev. Code § 82.04.190 (2001 through 2006) (“consumer”

definition). The taxes fail the second prong as well as there was

no “legislative, judicial, or administrative action taking effect

after the contract date” “as the result of” which Morpho was

“required to pay or bear” the taxes assessed. 

Morpho contends the Revenue Department proceeding that

resulted in the final assessment constitutes a qualifying

“administrative action.” As an initial matter, we decline to read 

“administrative action” so broadly as to include every

administrative assessment as a matter of course; so read, AMS

Clause 3.4.2-7(c)’s after-imposed-tax exception would swallow

the tax-inclusive presumption of its rule—that “[u]nless

otherwise provided in th[e] contract, the contract price includes

all applicable Federal, State, and local taxes and duties”—

because virtually every tax involves an administrative

assessment. We will not adopt a reading that would so render

the FAA’s general rule a nullity. Instead we accept the natural

reading of the language, namely, that it is directed to a

governmental action—which may include an administrative

assessment—that effects a substantive change in the statutory

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taxing provisions or the interpretation thereof. See, e.g.,

Morrison-Knudsen Co. v. United States, 427 F.2d 1181 (Ct. Cl.

1970) (statutory increase in social security taxes constituted

“after-imposed” tax under parallel Federal Acquisition

Regulation). The assessment here effected no such change.

While Morpho asserts the use and B&O taxes “had never

been assessed against a contractor doing work on non-federal

property,” Pet’r Br. 37, it does not claim the Revenue

Department’s assessment here reflects a reversal of the state’s

previous interpretation or application of the statutes at issue. Cf.

Cannon Structures, Inc., IBCA 3968-98, 99-1 BCA ¶ 30,236,

1999 WL 85531 (Interior Bd. of Contract Appeals Feb. 10,

1999) (concluding Arizona state tax assessed on pipeline

construction on Indian reservation was “newly imposed and

collected” based on “Arizona’s decision not to tax construction

projects on Indian reservations at the time Appellant entered into

its contract with the Government” and the subsequent “decision

by Arizona to resume collecting [state tax] in connection with

projects on Indian reservations”) (dictum). To the contrary,

Morpho’s counsel asserted to ODRA that “ ‘[n]o Washington

court ha[d] addressed’ the questions he raised regarding the

definition of ‘consumer,’ making them ‘issues of first

impressions.’ ” ODRA Decision at 27 n.18 (quoting declaration

of lawyer who represented Morpho in administrative

proceeding); see also id. at 26 (“[Morpho] does not cite to prior,

contrary interpretations of the statute, whether in case law,

official tax guides, or even the press.”). Moreover, ODRA

undertook its own investigation which “independently ha[d] not

found any contrary legal interpretation, despite the long history

of applying the use tax to federal contractors within the State of

Washington,” id. at 26—a determination Morpho has not

gainsaid. Nor is this a case where the “administrative action”

adopted an interpretation inconsistent with the express statutory

language, which, as we have explained and Morpho has

acknowledged, is ambiguous. See supra p. 10; Pet’r Br. 12

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13

(“ODRA further rejected Morpho’s contention that the

Washington tax statute was ambiguous . . . .”). In sum, Morpho

was not “required to pay or bear [the use and B&O taxes] as the

result of . . . administrative action taking effect after the contract

date.” AMS cl. 3.4.2-7(a)(3) (emphasis added).

 Finally, we find unpersuasive Morpho’s claim of unfair

surprise—its complaint that “at the time Morpho submitted the

proposal, Morpho did not know that the Detection Systems

would be installed in Washington” and that “the tax had never

been assessed against a contractor doing work on non-federal

property” there. Pet’r Br. 22, 37 (emphasis in original). 

Morpho knew from the start the specification contract “covered

all 50 states,” which could include Washington (and knew for

certain it did so include Washington when Morpho submitted

cost estimates for the individual Washington airport

task/delivery orders). Moreover, given the ambiguous language

of Wash. Rev. Code § 82.04.190(6), Morpho should have known

it might reasonably be determined to be a “consumer” whose

business activities in Washington were subject to the use and

B&O taxes.10 Accordingly, Morpho could have expressly

excluded the use and B&O taxes from the contract price in the

individual Washington task/delivery orders—either in its cost

estimate proposal responding to a draft task order, as it had

excluded the Washington sales tax in its July 2003 Proposal,

supra pp. 4-5—or in response to the Contracting Officer’s

transmission of the final task/delivery order. But it did not. In

any event, Morpho’s uncertainty does not render the use and

B&O taxes “after-imposed” within the meaning of AMS Clause

10Whether the Revenue Department’s statutory construction is

correct as a matter of public policy or of legislative intent is a question

left to the Washington state courts where Morpho is currently

challenging the tax assessment “on a variety of state-law grounds.” 

Pet’r Br. 6 n.4. We conclude only that it is a permissible interpretation

of the ambiguous language.

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3.4.2-7(c). As we have explained, the Washington taxes

assessed against Morpho do not satisfy the after-imposed tax

exception’s precisely limned terms.

For the foregoing reasons, we deny Morpho’s petition for

review.

So ordered. 

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