Opinion ID: 2586114
Heading Depth: 2
Heading Rank: 2

Heading: The Tax Measure

Text: ¶ 23 The tax measure is the amount against which the tax rate is multiplied to find the amount of tax due. The tax measure of a B & O tax on wholesaling is generally the gross proceeds of sales of tangible personal property and services rendered by the business. 1B KUNSCH ET AL., supra, § 72.8, at 452. As noted above, both Cities' ordinances provide that the measure of their B & O tax upon wholesalers is the the gross proceeds of such sales of the business without regard to the place of delivery of articles, commodities or merchandise sold. SMC 5.45.050(C); see former TMC 6.68.220. In other words, Seattle and Tacoma tax Ford based on the gross receipts of its wholesale sales to local dealers in the respective cities. ¶ 24 Ford contends that this tax measure violates Washington law, the Cities' ordinances themselves, and the commerce clause of the United States Constitution. Instead, Ford would have us limit the tax measure to that portion of gross income created solely by Ford's in-city activities, such as business meetings. Ford construes the law in this area to prohibit the Cities from taxing income derived from such activities as design of vehicles, production, accepting dealer orders and receiving payments. This argument too is without merit.
¶ 25 First, Ford's argument that Washington law requires the Cities to piecemeal the tax measure among all of the jurisdictions in which all of the various activities related to the sale were conducted is a clear misreading of our decision in Lone Star Cement Corp. v. City of Seattle, 71 Wash.2d 564, 429 P.2d 909 (1967). In Lone Star Cement, we struck down on equal protection and privilege and immunities grounds the City of Seattle's B & O tax assessment on an out-of-state company who had plants in both Seattle and Concrete, Washington. The city attempted to measure its B & O tax by including the gross income from sales made at the Concrete plant, even when those sales were consummated outside of Seattle and the products delivered to places outside of Seattle. We disallowed the tax assessment on the products sold in Concrete, as these sales had no connection to the company's activities in Seattle and, thus, were beyond Seattle's taxing power. We did not, however, rule that Seattle could not tax Lone Star Cement on the entire gross receipts of sales to customers within Seattle, even when the products sold were manufactured elsewhere. In fact, Lone Star Cement paid B & O taxes on those products without protest. We only excluded from the measure of Seattle's B & O tax the revenue from products manufactured, sold, and delivered outside Seattle  revenue essentially unconnected to Seattle. ¶ 26 This was the same type of overreaching that the United States Supreme Court disallowed in Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434, 59 S.Ct. 325, 83 L.Ed. 272 (1939). There, the taxpayer marketed, shipped, and sold fruit in places throughout the country, including Washington State. Washington asserted that it had the authority to measure its B & O tax on all of the business's gross receipts from interstate activities, whether conducted inside or outside of Washington. The United States Supreme Court invalidated Washington's tax, because it was not apportioned to the activities within the state, but rather was impermissibly based upon the entire volume of interstate commerce in which the taxpayer participated. ¶ 27 Clearly, such is not the scenario here. By their very terms, the Cities' ordinances limit their taxing power to only those gross receipts derived from the sale of goods delivered into the Cities. This places the Cities' tax measure squarely within the boundaries allowed under Lone Star Cement and Gwin, White & Prince. The measure of tax would be invalid if it included all gross income earned by Ford on its interstate sales or even if it included gross income derived from sales made in other areas of this state. However, that is not the case with which we are presented. In this case, the Cities properly limited their tax measure to only those sales that were connected to Ford's business activities in their respective jurisdictions.
¶ 28 Second, the ordinances themselves are no more restrictive than Washington law requires. Ford is correct that under the terms of its own ordinances, the Cities may only measure the B & O tax based upon gross income derived from Ford's business activities in the cities. SMC 5.45.080(B) provides that the taxpayer shall allocate to the City that portion of the taxpayer's gross income or gross proceeds of sales that are derived from business activities performed in the City. Former TMC 6.68.220(B) requires the taxpayer engaged in the business of making sales at wholesale to pay tax on an amount equal to the gross proceeds of sales of such business. ¶ 29 However, Ford is not correct that the Cities have gone beyond permissible bounds in their application of the ordinances. The language Ford construes as restraining the Cities' power to reach any of Ford's interstate sales instead is merely designed to contain the measure of the tax within permissible bounds. Ford admits that it can be taxed on income derived from activities performed within the city. Appellant's Br. of Ford Motor Co. at 20. Revenue from sales to dealers in Seattle and Tacoma is derived from Ford's activities in the Cities because those activities create the opportunity for the sales. ¶ 30 Neither do the Cities' tax rules exclude all of Ford's interstate sales from the tax measure. Tacoma Tax Rule 103, defining where a sale is deemed to have occurred, is irrelevant in the present case, because B & O taxes do not depend upon where actual sales occur. Tacoma Tax Rule 103 (on file with Tacoma Fin. Dep't, Tax & License Div.). Another Tacoma Tax Rule, 193-A, excludes certain goods delivered to a purchaser at a point outside the state from wholesaling business taxes. Def.'s Ex. 28 at 769. However, this rule applies only when the goods originated in Tacoma and were sold to purchasers who were located in other cities or states. Wholesaling is considered a unitary activity occurring solely in the purchaser's jurisdiction the jurisdiction to which the goods are physically delivered. Tyler Pipe Indus. v. Wash. Dep't. of Revenue, 483 U.S. 232, 251, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987). Thus, when goods are sold by a wholesaler in Tacoma but delivered to a dealer who is outside Tacoma, the sale at wholesale is considered to have been made entirely in the dealer's jurisdiction, so Tacoma cannot tax it. Tacoma Tax Rule 193-A simply states this rule. Like the ordinances themselves, it restrains the tax measure to permissible bounds. ¶ 31 The dissent asserts that one of Seattle's tax rules limits the wholesaling tax to people actually selling goods within Seattle. Dissent at 5. We disagree. Seattle Business Tax Rule 5-44-194(2)(a) provides in part: Any person(s) who sells or leases personal property to buyers or lessees within the City are taxable under the retailing or wholesaling tax classification. . . . Seattle Bus. Tax Rule 5-44-194 (on file with Seattle Dep't of Executive Admin., Revenue & Consumer Affairs Div.). The words within the City follow the phrase buyers or lessees, not the phrase sells or leases, which tends to indicate that within the City modifies the nouns buyers and lessees. If the City of Seattle instead wanted these words to modify the verb sells, it could have phrased the rule differently, as it did in the very ordinance at issue here; in SMC 5.45.050(C), within the City immediately follows the verb engaging. Thus, it would appear that Seattle Business Tax Rule 5-44-194 was not intended to limit wholesaling taxes to people who sell within Seattle, but rather, to people who sell goods to purchasers who are located within Seattle. Like Tacoma's tax rules, this comports with the rule that wholesaling is deemed to occur entirely within the purchaser's jurisdiction.
¶ 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.