Opinion ID: 2586114
Heading Depth: 3
Heading Rank: 3

Heading: Validity of the tax measure under the commerce clause

Text: ¶ 32 Finally, we reach Ford's argument that the current tax measure unduly burdens interstate commerce and, thus, violates the commerce clause of the United States Constitution. [3] A state tax on interstate commerce does not violate the commerce clause so long as 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). If a local taxing scheme fails any one of these four requirements, it is invalid. However, it has long been recognized that it is `not the purpose of the commerce clause to relieve those engaged in interstate commerce from their just share of state tax burden even though it increases the cost of doing the business.' Gen. Motors Corp. v. Washington, 377 U.S. 436, 439, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1964) (quoting W. Live Stock v. Bureau of Revenue, 303 U.S. 250, 254, 58 S.Ct. 546, 82 L.Ed. 823 (1938)), overruled on other grounds by Tyler Pipe, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199. Ford does not challenge that their activities within the Cities satisfy the substantial nexus prong of the Complete Auto Transit test. See Appellant Br. of Ford Motor Co. at 8. Thus, we address only the remaining three requirements. [4] ¶ 33 The fair apportionment prong ensures that each State taxes only its fair share of an interstate transaction. Okla. Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 184-85, 115 S.Ct. 1331, 131 L.Ed.2d 261 (1995). The prong has two parts: the tax must be internally consistent 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. Id. at 185, 115 S.Ct. 1331. External consistency depends on the practical effect of a tax, existing where a tax is economically justified, such that it does not reach[] beyond that portion of value that is fairly attributable to economic activity within the taxing State. Id. Where a state tax (or local tax, as here) creates the threat of real multiple taxation (though not by literally identical statutes), the tax is externally inconsistent. Id. Ford contends that the Cities' B & O tax, as applied to Ford, is not fairly apportioned because it violates both the internal and external consistency tests. ¶ 34 The Cities point out that this challenge has been settled previously and adversely to Ford. The Cities are correct. In General Motors, 107 Wash.App. at 55-60, 25 P.3d 1022, the Court of Appeals, Division One, explicitly held that Seattle's B & O tax is fairly apportioned. The Court of Appeals determined that Seattle's B & O tax on wholesaling is internally consistent because the measure of the tax includes only wholesale sales of goods delivered to Seattle, thereby preventing the possibility that the out-of-state automakers could be subjected to the identical tax in another state for the same vehicles and parts. The court also determined that Seattle's B & O tax was externally consistent because there was no evident danger of multiple taxation by outside jurisdictions and because a tax on the gross receipts of wholesaling activities is inherently apportioned. In reaching this conclusion, the court relied on the United States Supreme Court's decision in Tyler Pipe, 483 U.S. 232, 107 S.Ct. 2810. ¶ 35 In Tyler Pipe, the United States Supreme Court rejected appellant Tyler Pipe's apportionment challenge to Washington State's B & O tax, concluding that 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. Tyler Pipe, 483 U.S. at 251, 107 S.Ct. 2810. The Court noted that Washington's B & O tax on interstate sales by out-of-state manufacturers, which is measured by the gross proceeds of sales to Washington buyers, was `apportioned exactly to the activities taxed' even though part of the value of the wholesale transaction was attributable to manufacturing activity carried on in another State. Id. (quoting in part Standard Pressed Steel Co. v. Dep't of Revenue, 419 U.S. 560, 564, 95 S.Ct. 706, 42 L.Ed.2d 719 (1975)). ¶ 36 The Cities' wholesale B & O taxes are very similar in the relevant aspects to the state statute at issue in Tyler Pipe. The Cities' privilege tax is measured by the gross proceeds of all sales to buyers within the taxing jurisdiction. Sales at wholesale to these buyers is an activity separate from manufacturing, design, and the like, which under Tyler Pipe must be considered conducted entirely within the destination city. Because of this, no other state or jurisdiction within Washington can tax it. Ford faces no practical threat of multiple taxation due to the Cities' B & O taxes, so the ordinances are externally consistent. Even if the same ordinance were put into effect in every city across the nation, Ford would face no additional taxation as a result of being engaged in interstate commerce, so the ordinances are internally consistent. We conclude that the Cities' B & O taxes on wholesaling are, like the virtually identical Washington State statute, apportioned exactly to the activities taxed. ¶ 37 Ford relies primarily on a California case, a Pennsylvania Supreme Court case, and the United States Supreme Court's decision in Jefferson Lines to support its apportionment challenge. However, we find none of these cases persuasive. ¶ 38 In General Motors Corp. v. City of Los Angeles, 5 Cal.3d 229, 95 Cal.Rptr. 635, 486 P.2d 163 (1971), the California Supreme Court applied California constitutional provisions and the equal protection clause of the federal constitution to business privilege taxes on products manufactured and sold within the state of California. Since interstate commerce was not involved, the court was not required to examine the validity of the gross receipts tax under the commerce clause of the United States Constitution. Thus, the California holding is inapplicable in the instant case. ¶ 39 The Pennsylvania case actually contradicts Ford's argument. While the Pennsylvania Supreme Court did limit the reach of Philadelphia's business privilege tax on services to receipts from services performed in the city, it recognized and emphasized that in levying a gross receipts tax on activities involving manufacturing and sales, the state of origin can tax the manufacturing activity, and the state of destination can tax the selling activity, without requiring apportionment. Phila. Eagles Football Club, Inc. v. City of Philadelphia, 573 Pa. 189, 823 A.2d 108, 129 (2003). ¶ 40 Finally, this court has previously rejected the argument that Jefferson Lines somehow required us to revisit and overturn Tyler Pipe's holding. W.R. Grace & Co. v. Dep't of Revenue, 137 Wash.2d 580, 597, 973 P.2d 1011 (1999). In W.R. Grace, we reaffirmed that the measure of our state's B & O tax on engaging in wholesaling activities is fairly apportioned and constitutional. In sum, none of the cases relied upon by Ford put into doubt Seattle's constitutional ability to measure its tax by the entire gross proceeds of sales to dealers located in Seattle. ¶ 41 A tax violates the third prong of the Complete Auto Transit test only if it treats interstate and intrastate commerce differently. Chi. Bridge & Iron Co. v. Dep't of Revenue, 98 Wash.2d 814, 830, 659 P.2d 463 (1983). Ford argues the Cities' B & O taxes are discriminatory because they are not fairly apportioned. This argument fails for two reasons. First, we have already determined that the Cities' B & O tax schemes do not run afoul of Complete Auto Transit's fair apportionment requirement. Second, Ford confuses the third prong of the test with the second. The antidiscrimination prong is not about apportionment, but rather about whether a transaction is taxed more heavily because it crosses state lines. ¶ 42 The taxpayers in Chicago Bridge & Iron raised a third prong challenge to the State's B & O tax. We rejected their argument, noting that Washington's tax scheme treats interstate and intrastate business equally, making no distinction between them. We concluded that under the state statute, both in-state and out-of-state wholesalers are taxed only once on their gross proceeds based on sales made within Washington. ¶ 43 So it is with the Cities' B & O tax scheme. The Cities' tax scheme only taxes the gross proceeds derived from sales made and delivered to their respective jurisdictions. Their tax measure includes receipts from all products delivered into the jurisdiction, regardless of the place of origin. The fact that Ford may be taxed on manufacturing by the State where its products are manufactured, as well as taxed by Washington State and one of the Cities, does not constitute discrimination against interstate commerce and does not present grounds for this court to declare the Cities' B & O tax scheme unconstitutional. Accord Am. Nat'l Can Corp. v. Dep't of Revenue, 114 Wash.2d 236, 241-46, 787 P.2d 545 (1990). We find that, like Washington State, the Cities impose their B & O wholesaling taxes equally upon interstate and intrastate business, making no distinction between them. ¶ 44 A tax violates the fourth prong of the Complete Auto Transit test only if the measure of the tax bears no relationship to the taxpayers' presence or activities in a State. Commonwealth Edison Co. v. Montana, 453 U.S. 609, 629, 101 S.Ct. 2946, 69 L.Ed.2d 884 (1981). We noted in Chicago Bridge & Iron that this prong is easily met. Chi. Bridge & Iron, 98 Wash.2d at 832, 659 P.2d 463. This fourth requirement does not address the rate or amount of the tax. Id. Nor does it require, as Ford asserts, that we compare the actual value of the services provided by the Cities with the income taxed. Instead, the fourth prong is tied to the first, nexus, and requires that the tax measure, as well as the tax incident, be `tied to the earnings which the State . . . has made possible.' Id. (quoting Commonwealth Edison, 453 U.S. at 626, 101 S.Ct. 2946 (quoting Wisconsin v. J.C. Penney Co., 311 U.S. 435, 446, 61 S.Ct. 246, 85 L.Ed. 267 (1940))). ¶ 45 In Chicago Bridge & Iron, we concluded that although the taxpayer formalized its construction contracts outside the state, its presence and activities in Washington were fairly related to the services provided by the State. In reaching our decision, we looked at the taxpayer's specific activities in Washington, such as maintaining an office and selling products to consumers here, and at the services provided by the State broadly, such as police and fire protection, the presence of a trained work force, and the general `advantages [accorded to the taxpayer] of a civilized society.' Chi. Bridge & Iron, 98 Wash.2d at 832, 659 P.2d 463 (quoting Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 445, 99 S.Ct. 1813, 60 L.Ed.2d 336 (1979)). ¶ 46 This prong is also easily satisfied in this case. In addition to Ford's meetings with its dealers within the limits of the Cities, Ford's presence in the Cities allows for its products to be delivered to, marketed, and sold in the Cities  activities that clearly bear a relationship to the gross proceeds it receives from area dealers. Furthermore, as in Chicago Bridge & Iron, the Cities more broadly provide Ford with an orderly and civilized place to conduct its business activities. ¶ 47 In sum, there is no authority that supports Ford's assertion that the tax measure imposed on the activity of wholesaling must be broken down and apportioned to the places where each discrete step in the wholesaling process is conducted. Both Washington law and holdings of the United States Supreme Court treat wholesaling as a single, unitary activity, separate from the manufacturing and design processes. Accordingly, a long line of precedent sanctions using the gross proceeds from wholesale sales delivered into a jurisdiction as the measure of a B & O tax, when the taxpayer is engaged in the business of fostering wholesale sales within the taxing jurisdiction. The Cities' B & O tax measure is in accordance with this jurisprudence. Furthermore, because the Cities' B & O tax scheme meets all four requirements of the Complete Auto Transit test, we find that it does not violate the federal commerce clause. The fact that some portions of the wholesaling process take place outside of the taxing jurisdiction is not controlling and does not, as Ford asserts, require the Cities to exclude such activities from the tax measure.