Opinion ID: 2113449
Heading Depth: 1
Heading Rank: 4

Heading: The Wholesalers' Tax is Fairly Apportioned.

Text: A fairly apportioned tax ensure[s] that each State taxes only its fair share of an interstate transaction. [14] In order for a tax to be fairly apportioned, it must be apportioned in a way that is both internally and externally consistent. Internal consistency is preserved when the imposition of a tax identical to the one in question by every other State would add no burden to interstate commerce that intrastate commerce would not also bear.... External consistency, on the other hand, looks not to the logical consequences of cloning, but to the economic justification for the State's claim upon the value taxed, to discover whether a State's tax reaches beyond that portion of value that is fairly attributable to economic activity within the taxing State. [15] Ford has stipulated to the internal consistency of the Wholesalers' Tax. A challenge on external consistency grounds must do more than show that the apportionment formula ... may result in taxation of some income that did not have its source in the taxing State.... [16] Rather, the taxpayer must prove 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.' [17] In other words, the taxpayer must show that there is no rational relationship between the tax measure attributed to the state and the contribution of local business activity to the entire value. [18] All that is required of the tax is that the apportionment formula dividing the tax base be reasonable. [19] The United States Supreme Court has shied away from the extensive judicial lawmaking required to craft a single acceptable apportionment formula. [20] As a result, states are generally afforded wide latitude in determining how to divide the tax base to ensure that they tax only their fair share of interstate activity. [21] The Supreme Court has approved several methods, including: (1) a federal income tax computation based on a single-factor method using the proportion of the company's gross sales within the state; [22] and (2) a gross receipts tax imposed on the activity of wholesaling based on the proportion of gross wholesale proceeds from sales in the State. [23] The Court has recognized the inherent risk that this might result in some overlap in taxation, but has found this overlap to be not constitutionally significant. [24] In Moorman Manufacturing Co. v. Bair, [25] the state of Iowa apportioned income for its state income tax by a ratio of Iowa destination sales to the taxpayer's total sales. In contrast, Illinois used a three-factor formula based on the ratios of property, payroll, and sales. The taxpayer argued that the Commerce Clause required the use of the three-factor formula to avoid multiple taxation. The Court held that the Iowa single factor method did not violate the Commerce Clause because the Commerce Clause did not forbid all overlap in taxation. [26] The Court further explained that, had Iowa imposed a gross receipts tax on Iowa destination sales precisely the tax at issue herethe tax would be plainly valid, even though such a tax would have been more burdensome than the net income tax at issue. [27] In Tyler Pipe Industries v. Washington State Department of Revenue, [28] the United States Supreme Court found a gross receipts tax analytically similar to Delaware's Wholesalers' Tax was fairly apportioned and passed constitutional muster. The appellant sought a refund of wholesale taxes it paid on goods that were manufactured outside of Washington but were shipped and sold to customers within the state. It argued that the tax did not fairly apportion the tax burden between the appellant's activities in Washington and its activities in other states. In upholding the tax, the Court explained: Washington taxes the full value of receipts from in-state wholesaling or manufacturing; thus, an out-of-state manufacturer selling in Washington is subject to an unapportioned wholesale tax even though the value of the wholesale transaction is partly attributable to manufacturing activity carried on in another State that plainly has jurisdiction to tax that activity. This apportionment argument rests on the erroneous assumption that through the ... tax, Washington is taxing the unitary activity of manufacturing and wholesaling. We have already determined, however, that the manufacturing tax and wholesaling tax are not compensating taxes for substantially equivalent events in invalidating the multiple activities exemption. Thus, the activity of wholesalingwhether by an in-state or an out-of-state manufacturermust be viewed as a separate activity conducted wholly within Washington that no other State has jurisdiction to tax. [29] In Delaware, the Superior Court has held that the Wholesalers' Tax is fairly apportioned and passes constitutional muster. In Saudi Refining, Inc. v. Director of Revenue, [30] the taxpayer shipped crude oil from outside Delaware via tankers to a refinery located in Delaware City. Title, custody, and risk of loss passed to the refinery at the first flange of the outer intake valve of the refinery. Although the title passed in Delaware, the Superior Court's decision regarding apportionment was based solely on the delivery requirement: Delaware seeks to tax only sales that are consummated by physical delivery within the state. This comports with the requirement that a state tax only that portion of the revenues from interstate activity which reasonably reflect the in-state component of the activity being taxed. [31] Relying on Saudi Refining, Ford contends that it does not physically deliver any vehicles to Delaware because title passes at gate release. However, this ignores the fact that Ford's customers contracted not just to purchase goods, but to have them delivered to a destination in Delaware as well. Although title and risk of loss pass to Ford's customers at gate release, Ford retains continuous and considerable control over the delivery process, stands in a contractual relationship with the carrier, is the named beneficiary on the cargo insurance, and takes responsibility for issues arising during delivery. Moreover, Ford dedicates a portion of its national advertising efforts to increasing its market share in Delaware. Tyler Pipe is squarely on point. In that case, Washington required out-of-state manufacturers to pay a gross receipts tax on the sale of all goods delivered to buyers within the state, regardless of whether title to those goods passed to the buyer at some point outside the state. Delaware's Wholesalers' Tax, like the tax at issue in Tyler Pipe, poses no risk of impermissible multiple taxationit applies only to gross receipts from sales of tangible personal property physically delivered within this State to the purchaser or the purchaser's agent.... [32] Ford contends that this definition permits states in which the vehicle are delivered to the mixing areas and destination ramps to impose the same tax, but this argument overlooks that the dealer is the purchaser and that physical delivery to the dealer occurs only in Delaware. Only Delaware has the jurisdiction to tax this separate activity conducted wholly within this State. [33] Therefore, as in Tyler Pipe, the Wholesalers' Tax is not out of all appropriate proportion to the business transacted in this state, nor is the result grossly disproportionate.