Opinion ID: 2586114
Heading Depth: 1
Heading Rank: 6

Heading: Taxing out-of-state sales violates the commerce clause

Text: ¶ 68 The commerce clause grants the United States Congress the power to regulate commerce with foreign nations, and among the several states, and with the Indian Tribes. U.S. CONST. art. I, § 8, cl. 3. The negative implication of this power prohibits a state (or city) from passing legislation that improperly burdens interstate commerce. Okla. Tax Comm'n v. Jefferson Lines, 514 U.S. 175, 179, 115 S.Ct. 1331, 131 L.Ed.2d 261 (1995) ([W]e have consistently held [the commerce clause] to contain a further, negative command, known as the dormant Commerce Clause, prohibiting certain state taxation even when Congress has failed to legislate on the subject.). Therefore, a local tax is valid only when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). ¶ 69 Each city's tax is measured by gross proceeds of out-of-state sales and therefore does not apportion the activities taxed. See Standard Pressed Steel Co. v. Dep't of Revenue, 419 U.S. 560, 564, 95 S.Ct. 706, 42 L.Ed.2d 719 (1975); Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434, 440, 59 S.Ct. 325, 83 L.Ed. 272 (1939) (Although the tax, measured by gross receipts, to some extent burdened the commerce, it was held that the burden did not infringe the commerce clause. Since it was apportioned exactly to the activities taxed, all of which were intrastate, the tax was fairly measured by the value of the local privilege or franchise.). No matter the trigger  be it engaging in business activities leading to making sales or making the sales themselves  each city nevertheless is not apportioning its respective tax between activity inside its jurisdiction and activity outside. Rather, each city is taxing 100 percent of sales that occur outside its jurisdiction in violation of the commerce clause. ASARCO, Inc. v. Idaho State Tax Comm'n, 458 U.S. 307, 315, 102 S.Ct. 3103, 73 L.Ed.2d 787 (1982) (As a general principle, a State may not tax value earned outside its borders.). ¶ 70 In Tyler Pipe, the United States Supreme Court found the activities of Tyler's sales representatives adequately support the State's jurisdiction to impose its wholesale tax on Tyler. Tyler Pipe Indus., Inc. v. Wash. State Dep't of Revenue, 483 U.S. 232, 251, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987). But unlike Ford, Tyler Pipe sold its products in Washington. And while Tyler Pipe's activities could be taxed, the Court was careful to note the constitutional limitations on imposing a wholesale tax: 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. Id. at 251, 107 S.Ct. 2810. Clearly, Ford's wholesaling activities were not conducted wholly within Washington; its vehicles were sold in Michigan  title, ownership, and possession are transferred when Ford delivers the vehicles to a common carrier at its factory in Michigan. ¶ 71 The cities' tax on sales made in Michigan also burdens interstate commerce because of the threat of double taxation. The Supreme Court has said there is a risk of double taxation whenever one State's act of overreaching combines with the possibility that another State will claim its fair share of the value taxed. Jefferson Lines, 514 U.S. at 184, 115 S.Ct. 1331. For example, the Supreme Court has found that when [a] substantial part of [the taxed activity] is outside the state . . ., the tax, though nominally imposed upon appellant's activities in Washington, by the very method of its measurement reaches the entire interstate commerce service rendered both within and without the state. . . . Gwin, White, 305 U.S. at 438, 59 S.Ct. 325; see also Gen. Motors Corp. v. City of Los Angeles, 5 Cal.3d 229, 241, 95 Cal. Rptr. 635, 486 P.2d 163, 171 (1971) (The gross receipts arising from this category of transactions must be apportioned in a manner which fairly reflects the proportion of in-city to out-of-city selling activities.). ¶ 72 Here the vehicles were made and sold in Dearborn, Michigan. Michigan may tax these sales. Jefferson Lines, 514 U.S. at 184, 115 S.Ct. 1331 (It has long been settled that a sale of tangible goods has a sufficient nexus to the State in which the sale is consummated to be treated as a local transaction taxable by that State.). Consequently, when cities in Washington tax these sales it impermissibly burdens interstate commerce. ¶ 73 While Ford engages in some business activities within Seattle and Tacoma, its vehicles were sold in Michigan. Under the plain meaning of both cities' ordinances, neither Seattle nor Tacoma is allowed to tax sales in Michigan. Furthermore, allowing this tax clearly violates the dormant commerce clause as it taxes extraterritorial activities and threatens double taxation. ¶ 74 I dissent. WE CONCUR: TOM CHAMBERS, CHARLES W. JOHNSON and JAMES M. JOHNSON, JJ.