FILED 

### IOUOT OF APPEALS 2013 DEC 31 

### All 9: 15 STATE OF WAS1-1111CTOM Y— ___. PIJTY



### IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION II SPACE AGE FUELS, INC., Appellant,

V. STATE OF WASHINGTON, No. 44195 -1 - I1

PUBLISHED OPINION

WORSWICK, C.J. — Space Age Fuels, Inc., an Oregon corporation, appeals summary 

### judgment dismissing its claim for a refund ofbusiness and occupation tax payments. Space Age
argues that the dormant commerce prohibits Washington from taxing its activities 

### because they lacka substantial nexus with Washington. We disagree and affirm.



### s The "dormant" commerce clause is implied by article I, section 8, clause 3 ofthe United States 

### Constitution. Quill Corp.v.North Dakota, 504 U.S. 298, 309, 112 S. Ct. 1904, 119 L. Ed.2d 91 1992).No. 44195 -1 - II FACTS Space Age Fuels, Inc. is a retail and wholesale seller of fuel. Space Age is incorporated in Oregon and maintains its principal place of business in Clackamas, Oregon. Although all of 

### its retail fuel stations are in Oregon, approximately 40 of its wholesale customers are in Washington. Upon awholesale customer' s request, Space Age quotes fuel prices via telephone, fax, or email. Once it receives an order, Space Age delivers fuel to wholesale customers using vehicles it owns and operates. 2

Because 

### delivery is " another profit center," 

### Space Age marks up its fuel prices to account 

### fordelivery costs. Clerk's Papers (CP) at297. Thus, Space Age charges more for deliveries made at longer distances. Before transferring fuel from its delivery vehicle into a customer's storage tank, a Space Age employee will " stick the tank," i.e., measure its contents to ensure the tank can hold the fuel. When Space Age uses specialized vehicles to pump fuel into aboveground storage tanks for some customers, it charges more forthis extra pumping service.

But Space Age' s activities in Washington are limited. Space Age makes " no effort to secure new customers for its fuel in Washington" because it believes its wholesale customers 

### base their purchases solely on price. CP at 54. Thus, no Space Age employees have visited Washington to solicit sales or assess a customer' s needs. Further, Space Age does not own or 

### lease any real property in Washington, and it has no Washington - based employees or assets. Instead, Washington customers contact Space Age.

2 

### Rarely, Space Age delivers fuel by common carrier.
2No. 44195 -1 - II The Washington State Department ofRevenue audited Space Age' s books and records 

### forthe period between January 1, 2004, and June 30, 2007. During that time, Space Age grossed over $48 million from 1, 675 recorded sales to wholesale customers in Washington.3 Between 

### July 1, 2005, andthe end ofthe audit period, Space Age' svehicles drove 141,491 miles on Washington roadways. The Department determined that Space Age owed $235, 834 in unpaid business and occupation (B &O) taxes for its wholesaling activities in Washington during the audit period.4 The Department also assessed interest and penalties. 5 Space Age paid the tax assessment and then filed a claim for a refund in superior court, 

### arguingthat (1) therewas no substantial nexus between Space Age andthe State ofWashington; and (2) without such a nexus, imposition of the B &O tax violated the dormant commerce clause. 

### On cross motions for summaryjudgment,thetrial court grantedthe Department's motion,denied Space Age' s motion, and dismissed its refund claim. Space Age sought direct review in our Supreme Court. But our Supreme Court transferred the case to us. Order, Space Age Fuels, Inc. v. State, No. 86972 - 3 ( Wash. Oct. 30, 2012). 

### 3 The number ofactual deliveries "would likely be much higher" than the number ofrecorded sales because Space Age' s books used.a single sales entryto record all deliveries to a single customer in a given month. CP at 81. 4 The B &O tax is imposed on " the act or privilege of engaging in business activities." Former RCW 82. 04.220 ( 1961). After the audit period, the legislature amended RCW 82.04.220 to, inter alia, incorporate the constitutional requirement of a " substantial nexus with this state." LAWS of 2010, 1 st Spec. Sess., ch. 23, § 102; see also LAWS of 2011, 1 st Spec. Sess., ch. 20, § 101. 5 The Department further assessed nominal amounts of unpaid retail sales taxes, retail B &O taxes, and hazardous substance taxes. Space Age has not sought refunds of these amounts.No. 44195 -1 - II ANALYSIS



### Space Age argues thatthe trial court erroneously granted the Department' s motion for 

### summaryjudgment because the dormant commerce clause prohibits the Departmentfrom taxing Space Age. We disagree. 

### We reviewan order granting summaryjudgment de novo and engage in the same inquiry 

### asthe trial court. TracFone Wireless, Inc.v. Dep' t ofRevenue, 170 Wn.2d 273, 280 - 81, 242 P.3d 810 ( 2010). 

### Summaryjudgment is appropriate when there is no genuine issue ofmaterial fact and the moving party is entitled to judgment as a matter of law. CR 56( c). We consider the evidence and draw all reasonable inferences in the light most favorable to the nonmoving party. 

### Schaafv. Highfield, 127 Wn.2d 17, 21, 896 P.2d 665 ( 1995). Two clauses ofthe United States Constitution limit a state' s powerto tax interstate commerce: ( 1) the Fourteenth Amendment due process clause and (2) the " dormant" commerce clause implied by article I, section 8, clause 3. 

### Quill Corp.v. North Dakota, 504 U.S. 298, 301, 305, 112 S. Ct. 1904, 119 L. Ed. 2d 91 ( 1992). Under the due process clause, an out - of - state 

### taxpayer must have sufficient minimum contacts with the taxing state such thattaxation "does -
not offend traditional notions of fair play and substantial justice." Int' l Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S. Ct. 154, 90 L. Ed. 95 ( 1945) ( internal quotation marks omitted). Space 

### Age does not challenge its tax liability on due process grounds. Next,the dormant commerce clause prohibits a state from discriminating against or 

### unduly burdening interstate commerce. Quill,504 U.S. at 312. Yet a state maytax interstate

commerce if the tax ( 1) applies to an activity having a substantial nexus with the taxing state, ( 2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly
MNo. 44195 -1 - I1



### related to the services provided bythe state. Complete Auto Transit, Inc.v. Brady,430 U.S. 274, 279, 97 S. Ct. 1076, 51 L. Ed. 2d 326 ( 1977). 

### Space Age contests onlythe first element: it denies having a substantial nexus with Washington.6 

### Whether an out -

of - state company has a substantial nexus with Washington is a question 

### oflaw reviewed de novo. See Lamtec Corp. v. Dep't ofRevenue, 170 Wn.2d 838, 842, 246 P.3d 788, cent. denied, 132 S. Ct. 95 (2011). Taxes are presumed valid, and the company bears the 

### burden ofshowing that a substantial nexus does not exist. Lamtec, 170 Wn.2d at 843. A substantial nexus exists when a company's activities in Washington are both 

### substantial and significantly associated with its abilityto establish and maintain a market in Washington for its sales. 

### Tyler Pipe Indus., Inc. v. Wash. Dep't ofRevenue, 483 U.S. 232, 250, 107 S. Ct. 2810, 97 L. Ed. 2d 199 ( 1987); Lamtec, 170 Wn.2d at 851. A company' s physical presence in Washington can establish a substantial nexus. Lamtec, 170 Wn.2d at 845; see Nat' l 

### Geographic Soc'yv. Cal.Bd.ofEqualization, 430 U.S. 551, 562, 97 S. Ct. 1386, 51 L.Ed.2d 631 ( 1977). Further, periodic visits can create a physical presence in Washington. Lamtec, 170 

### Wn.2d at 846. Thus, a company may have aphysical presence in Washington even though it lacks a " brick and mortar address within the state." Lamtec, 170 Wn.2d at 851; see Standard
6 Citing Quill, 504 U.S. at 313 & n.7, Space Age asserts that the dormant commerce clause' s requirement of a substantial nexus is more stringent than the due process clause' s minimum contacts requirement. Space Age then calls our attention to Miller Brothers Co. v. Maryland, 347 U.S. 340, 74 S. Ct. 535, 98 L. Ed. 744 ( 1954), a case in which taxation of an out - of - state 

### companyviolated due process. In Miller Brothers, a Delaware company' s occasional delivery of products to Maryland customers via its own vehicles did not establish minimum contacts with Maryland. 347 U.S. at 345. But given more recent developments in the law of minimum contacts, " the continued authority of Miller Brothers is in considerable doubt." Brown' s Furniture, Inc. v. Wagner, 171111. 2d 410, 426, 665 N.E.2d 795, cent. denied, 519 U.S. 866 1996); 

### see Quill,504 U.S. at 307 -08 (quoting Burger King Corp. v. Rudaewicz, 471 U.S. 462, 476, 105 S. Ct. 2174, 85 L. Ed. 2d 528 ( 1985)).No. 44195 -1 - II



### PressedSteel Co. v. Wash. Dep'tofRevenue, 419 U.S. 560, 562, 95 S. Ct.706, 42 L. Ed. 2d 719 1975). Space Age' s regular deliveries establish its physical presence in Washington. See Lamtec, 170 Wn.2d at 845 - 46. These deliveries are substantial because Space Age' s recorded 

### sales to Washington customers occurred, on average, more than once per day during the audit 

### period. In addition, Space Age' s vehicles drove extensively on Washington roads while 

### delivering over $48 million offuel to Washington customers. Further, Space Age conducts substantial activities in Washington because, as awholesale 

### fuel distributor, Space Age sells both the commodity offuel andthe service ofdeliveryto 

### customers in Washington. The commodity sales occur in Washington when SpaceAge employees stickthe tank and transfer fuel into its Washington customers' storage tanks. See RCW 82. 04.040( 1). Space Age charges more to make deliveries at longer distances, and it also 

### charges more to pump fuel into aboveground tanks when necessary. Both Space Age' s physical presence in Washington and its delivery activities are 

### significantly associated with its abilityto establish and maintain a market in Washington forits
sales. Tyler Pipe, 483 U.S. at 250. Because a substantial nexus exists, the Department' s B &O tax assessment did not violate the dormant commerce clause.

### 7 Complete Auto, 430 U.S. at 279. 

### Arguing to the contrary, Space Age contends that delivery alone cannot establish a substantial nexus. In support ofthis contention, Space Age relies on ( 1) the example given in an 7 We reject Space Age' s assertion that this analysis " fails to acknowledge the difference between Due Process Clause analysis and Commerce Clause analysis." 

### Reply Br. ofAppellant at 17. We do not base our decision on whether Space Age has purposefully directed its activities at Washington residents so as to establish minimum contacts with this state. See Quill, 504 U.S. at 308.

onNo. 44195 -1 - II

interpretive rule published 

### by the Department, (2) Space Age' s own assertion that nexus - creating 

### activities are activities designed to generate sales, and (3) the reasoning supporting the brightline test applied in Quill, 504 U.S. 298. A. The Department' s Interpretive Rule 

### Arguing that delivery alone cannot establish a substantial nexus, Space Age asserts that the Department tookthe same viewwhen promulgating an interpretive rule, WAC 458 - 20- 193( 11). 8 Butthis assertion lacks relevance to the issue before us forthree reasons. First, an interpretive rule such as WAC 458 - 20-193( 11) is " not binding on the courts at
all. "

### 9 Ass'n ofWash: Bus.v. Dep'tofRevenue, 155 Wn.2d 430, 447, 120 P.3d 46 (2005). Second, we give no deference to an agency' s interpretative rule unless it reasonably interprets an ambiguous statute that the legislature has charged the agency with administering and enforcing. Edelman v. State ex rel. Pub. Disclosure Comm' n, 152 Wn.2d 584, 590, 99 P.3d 386 (2004). Even if WAC 458 - 20- 193( 11) interpreted the dormant commerce clause —and it does not do

so —we would not deferto its interpretation because the Department does not administer or enforce the commerce clause ofthe United States Constitution. 

### 8 WAC 458-20- 193( 11)( a) provides: 

### Company A is located in California. It sells machine parts at retail and wholesale. 

### Company B is located in Washington and it purchases machine parts for its own use from Company A. 

### Company A uses its own vehicles to deliver the machine parts to its customers in Washington for receipt in this state. The sale is subject to the retail sales and B &O tax if the seller has nexus, or use tax if nexus is not present. 

### 9 WAC 458 -

20- 193( 11) is an interpretive rule because ( 1) its violation does not subject a person 

### to apenaltyand (2) it merely "sets forththe agency' s interpretation ofstatutory provisions it administers." RCW 34.05. 328(5)( c)( ii).
7No. 44195 -1 - II



### Third,WAC 458 -

20-193( 11) illustrates onlywhat taxes apply and who must paythem in interstate transactions. In the example of WAC 458-20- 193( 11)( a), an out - of - state seller uses its own vehicles to deliver products to an in - state buyer. The seller pays Washington sales and B &O taxes " ifthe seller has nexus "; otherwise, the in - state buyer pays Washington use taxes. 10 WAC 458-20- 193( 11)( a). Thus WAC 458-20- 193( 11)( a) shows merely that a substantial nexus 

### is necessaryto tax an out - of - state seller; it does not attemptto showwhether a substantial nexus exists given a particular set offacts. We do not consider this provision further. B. 

### Activity Designed To Generate Sales Space Age next contends that a substantial nexus can exist only by virtue ofan activity that is " designed to generate sales." Br. ofAppellant at 22. Space Age then attempts to 

### distinguish its activities from the nexus - creating activities in Tyler Pipe, Standard PressedSteel, and Lamtec. We disagree because generating sales is not the touchstone ofall nexus - creating 

### activity. As stated above, asubstantial nexus exists when acompany's activities in Washington are significantly associated with [its] abilityto establish and maintain amarket inthis state for the sales." Tyler Pipe, 483 U.S. at 250 (internal quotation marks omitted). 

### In Lamtec, an out -

of - state company sent agents to Washington about two or three times
per year to meet with major customers. 170 Wn.2d at 841. The agents shared information about the company' s insulation and vapor barrier products, but they did not solicit sales 

### directly. 170 Wn.2d at 840 -

41. Nonetheless, our Supreme Court held that the agents' visits created a substantial nexus because the visits were significantly associated with the company' s ability to

io Sales and B &

### O taxes are paid to the Department by the seller. See RCW 82.04.220; RCW 82.08.050. In contrast, use taxes are paid bythe buyer. See RCW 82. 12.020.
N.No. 44195 -1 - II

establish and maintain a market for its products in Washington. 170 Wn.2d at 851. Whether the agents' visits generated sales was not determinative. 

### Likewise in Standard Pressed Steel, a Pennsylvania company sold nuts and bolts to Washington customers, principally Boeing. 419 U. S. at 561. 

### The company had a single Washington employee, and the employee operated out of his home. 419 U.S. at 561. The 

### employee, along with a group ofengineers who periodicallytraveled to Washington, consulted 

### with Boeing aboutits needs and addressed any difficulties withthe company's nuts and bolts. 419 U.S. at 561. 

### However, the employee did not take Boeing' s orders, accept its payments, or deliver nuts and bolts. 419 U.S. at 561. Yet the Court held that a B &O tax assessment did not 

### violate the dormant commerce clause because the company' s Washington employee " made possible the realization and continuance ofvaluable contractual relations" between the company and its Washington customers. 419 U.S. at 562. Lamtec and Standard Pressed Steel take a broader view ofestablishing and maintaining a 

### market than Space Age' s narrow emphasis on generating sales would allow. Attempting to distinguish these cases as well as Tyler Pipe, Space Age appears to argue that (1) business - 

### relationships are essential to generating sales and (2) Space Age has no business relationship 

## with any ofits 40 Washington customers, each ofwhom buys fuel onthe exclusive basis ofits

1No. 44195 -1 - II
price.

### 11 But Space Age fails to account forLamtec' s statementthat a company' s physical
presence can establish a substantial nexus. 170 Wn.2d at 845. Moreover, Space Age ignores the 

### extent to which its deliveries make possible "the realization and continuance" ofsales to its
customers. Standard Pressed Steel, 419 U.S. at 562. Space Age' s argument is unpersuasive. C. The Quill Bright - Line Test 

### Lastly, Space Age argues that its deliveries did not create anexus underthe reasoning of Quill, 504 U.S. 298. We disagree. 

### In Quill,the United States Supreme Court reaffirmed its prior holding that "avendor 

### whose only contactswith thetaxing State are by mail orcommon carrier lacks the `substantial
nexus' required 

### by the Commerce Clause." 

### 504 U.S. at 311, 317 (citing Nat' l Bellas Hess, Inc.

v. Dep' t ofRevenue ofIll.,386 U.S. 753, 87 S. Ct. 1389, 18 L. Ed. 2d 505 ( 1967), overruled on
other grounds 

### by Quill, 504 U.S. at 308). Thus Quill preserved the " safe harbor" protecting the 

### mail - order industry from state salestaxes since Bellas Hess. 504 U.S. at 315 -16. Space Age asserts that it would fall within this safe harbor ifit had made its deliveries by

common carrier. It then argues, " Given the Commerce Clause' s structural concerns about the 

### effects ofstate regulation on the national economy, there is no reason forthe constitutionality of the tax to turn on the method 

### by which the fuel is delivered." Br. ofAppellant at 25. But this

11 

### Unlikethe companies selling specialized products in Tyler Pipe, Standard Pressed Steel, and 

### Lamtec, Space Age sells acommodity: a commercial good (namely fuel) forwhich the quality does notvaryfrom one source to another. Thus it is plausible that business relationships, 

### advertising, and branding do not generate Space Age's sales. But Space Age' s president stated that 

### delivery is " another profit center," i.e., a service for which Space Age charges its customers. CP at 297. That statement belies Space Age' s factual assertion that its customers make 

### purchases basedsolely on price. In otherwords, Space Age'swholesale customers buy its fuel partly because Space Age delivers itto them.
10No. 44195 -1 - II



### argument contradicts Quill. Quill fully considered the commerce clause' s structural concerns and maintained a bright - line rule. 12 504 U.S. at 312, 315. 

### That rule is unavailing to Space Age because it delivered fuel in its own vehicles, not 

### by common carrier. 13 

### Similarly unavailing isthe Board ofTaxAppeals' s recent decision finding no substantial nexus in Sage VFoods, LLCv. Dep't ofRevenue, No. 11 -704, 2012 WL4794242 (Wash. Bd. of Tax Appeals Aug. 31, 2012). In Sage, an out - of - state company engaged a common carrier to 

### deliver its food product to Washington customers, using rail cars leased bythe out - of - state company. Sage, 2012 WL 4794242 at * 7 -8. 

### But unlike the company in Sage, Space Age did not deliver its fuel by common carrier. Each of Space Age' s arguments fails. Because Space Age has a substantial nexus with Washington, the Department' s B &O tax assessment did not violate the dormant commerce
clause. Affirmed. 

## We c,1ncur:

J. Worswick, C. J.

1"2 Quill recognized, " Like other bright - line tests, the Bellas Hess rule appears artificial at its edges .... This artificiality, however, is more than offset 

### by the benefits of a clear rule." 504 U.S. at 315. 

### 13 Because Space Age does not come within the safe harbor of Quill and Bellas Hess, we do not address the Department' s assertion thatthe safe harbor protects a company only from sales and use taxes, and not from all taxes including the B &O tax. See Lamtec, 170 Wn.2d at 848 - 49.
11