Court Opinion

ID: 9601966
Source: CourtListenerOpinion
Date Created: 2023-08-22 01:50:54.408934+00
Date Added: 2024-06-11T15:15:22.844980
License: Public Domain

*49Dolliver, J.
(dissenting) — All parties to this case, as well as the majority, rely to some extent on Rena-Ware Distribs., Inc. v. State, 77 Wn.2d 514, 463 P.2d 622 (1970), which also involved the application of RCW 82.04.290. In contrast to the majority, I believe the principles enunciated in that case require the court to find for Penney. An extensive analysis of the facts and holding in Rena-Ware is necessary in order to understand its applicability.
Rena-Ware sold cookware through the use of door-to-door salespeople. Sales were made from approximately 30 district sales offices, including 2 in Washington, but all orders were received and processed at the home office in Opportunity, Washington. Deliveries were made from warehouses in a number of states. Rena-Ware did not manufacture the products but purchased them from various manufacturers. When a customer did not pay cash, a service charge, designated as such, was added to the purchase price. The service charge was the same regardless of the amount of the unpaid balance.
The Department of Revenue assessed the business and occupation tax upon the receipts from the service charge on the theory that the servicing of accounts is a business handled entirely within the state and that a tax upon it is not a burden on interstate commerce. Rena-Ware challenged the tax. It argued that the extension of credit and the servicing of credit accounts were inseparable components of the underlying sales transactions and therefore, since the sales were out of state, they were beyond the taxing authority of the State. The State, however, argued that the servicing of credit accounts is a distinct business separate and apart from the business of making sales at retail.
The court held (1) Rena-Ware's extension of credit and servicing of credit accounts producing service charge income constituted a distinct business separate and apart from the underlying retail sales transactions; and (2) Rena-Ware was engaged in this business within the State of *50Washington so as to subject it to the business and occupation tax under RCW 82.04.290. The court stated:
As the [State] points out, [Rena-Ware's] activities for which the service charge is made are not expressly covered in any section of the taxing act, nor are they expressly excluded. Since it was the intent of the legislature, set forth in RCW 82.04.220, to tax all business activities not expressly excluded, it is reasonable to conclude that the legislature intended to include this activity in the catch-all provision, RCW 82.04.290.
We are of the opinion that the Department of Revenue has correctly construed RCW 82.04.290, which levies a tax on "every person engaging within this state in any business activity . . . [including] the business of rendering any type of service which does not constitute a 'sale at retail' ..." The business activity of servicing installment accounts falls naturally within this definition, and it is our conclusion that the legislature intended that this activity should be taxed under this section rather than under RCW 82.04.250, taxing retail sales. This interpretation not only gives effect to the legislative intent evidenced in the taxing statutes, but harmonizes them with RCW 63.14.040, which regulates installment sales and requires that service charges be separately stated. The legislative approach to the problems dealt with in that statute indicates an awareness on the part of the members of that body that service charges on installment sales are not in fact a part of the purchase price.
The Department of Revenue has also levied a tax upon income which the appellant derives from management services which it renders to its wholly-owned Canadian and Washington subsidiaries. The appellant contends that this tax is improper since the officers and directors and the sales manager of the three companies are the same. In brief, the appellant would have us "lift the cor-, porate veil" and observe that in fact there is only one corporation.
If this case involved a fraud upon third persons, of course, the court would not permit the appellant to escape liability by means of the corporate structures which it employs. But we are not here concerned with such a case. The appellant has chosen to employ these structures for its own reasons, and we assume that it finds them advantageous. For purposes of the taxing *51statutes, they are separate entities. Mere common ownership of stock, the same officers, employees, etc., does not justify disregarding the separate corporate identities unless a fraud is being worked upon a third person. See Associated Oil Co. v. Seiberling Rubber Co., 172 Wash. 204, 19 P.2d 940 (1933).
In Washington Sav-Mor Oil Co. v. Tax Comm'n, 58 Wn.2d 518, 523, 364 P.2d 440 (1961), the plaintiff sought to avoid business and occupation taxes imposed under RCW 82.04, upon the ground that it was making sales to a wholly-owned subsidiary corporation. We said:
The appellant asks us to disregard its separate existence, not in order to prevent fraud or injustice, but in order to gain an advantage. This we cannot do. The legislature has not seen fit to exclude transactions between affiliated corporations, and we find in the facts of this case nothing which would justify the judicial engrafting of such an exclusion upon the statute.
In that case, the parent was selling goods to its subsidiary. Here the appellant is selling its services. There is no other significant distinction between the cases. What we said there is applicable here. The appellant is rendering valuable services to its subsidiary and is receiving remuneration for them. This activity is taxable under the statutes. The trial court correctly sustained the Department of Revenue's ruling on this matter.
Rena-Ware, at 517-18.
The principles to be derived, from Rena-Ware are: (1) Service charge income received in exchange for the extension of the privilege of paying for goods over a time period represents income from the "business activity" of servicing credit accounts, which constitutes a distinct business separate and apart from the underlying retail sale transactions giving rise to the credit account; and (2) This "business activity" is engaged in where the processing, maintaining and record-keeping functions incidental to the servicing of the credit card accounts are performed.
Again, in contrast to the majority, I agree with the assertion of Penney that the situation in this case is a mirror image to that in Rena-Ware. In Rena-Ware, as here, authority and responsibility for the servicing of credit accounts was separated from that of retail sales. In Rena-*52Ware, the company maintained warehouses and district sales offices in numerous states and cities in support of its retail sales operations while all essential credit account servicing functions were performed in the home office in Washington. In this case, Penney operates retail sale outlets in Tacoma and other parts of Washington while all essential credit account servicing functions are performed in Portland, Oregon. In Rena-Ware, the taxpayer's primary business was the generation of retail sales. The deferred balance credit accounts of Rena-Ware arising from retail credit sales were controlled by the regional credit office responsible for servicing credit accounts. The same is true here.
In terms of factual distinctions between the two cases, this case provides even greater support for application of the principles enunciated in Rena-Ware. In Rena-Ware there was a direct link between the consummation of the retail sale and the generation of service charge income. The sale was consummated only when the order and application for credit were submitted by the customer in the customer's own state and then approved by the Rena-Ware office in Washington. Upon approval, a finance charge was immediately assessed. Despite this direct link between the retail sale and the generation of service charge income, the court ruled that Rena-Ware's credit account servicing activities constituted a distinct business, separate and apart from its retail sales activities. Furthermore, despite the direct link between the salesperson's contact with the out-of-state customer which led to a retail credit sale and the automatic assessment of a service charge, the court ruled that no part of the activities encompassed within Rena-Ware's service charge "business" was carried on outside the state.
Here, in contrast, there was no such direct link between the consummation of a retail sale and the generation of finance charge income. When the Portland credit office approved a credit card sale in a Washington outlet, that act in itself did not give rise to any finance charge since the purchaser could avoid these charges by paying the purchase price in full when it was billed. Finance charge income was *53generated only when, after the retail sale was consummated and after the customer received the bill, the customer chose to defer payment of the purchase to a subsequent billing period.
Thus, unlike Rena-Ware where each retail credit sale automatically gave rise to service charge income, in this case the generation of finance charge income was completely divorced from the underlying retail credit sales. When a Penney credit card holder decided to defer payment for a credit sale to a subsequent billing period, the customer was in effect deciding to borrow the unpaid balance from Penney at a specific interest rate. Penney's finance charge income was thus derived solely from the independent decisions of its credit card holders as to the method of financing their credit purchases after their initial billing.
To justify the imposition of the tax, the majority states at page 44:
It is the credit sale which places Penney in the position of potentially receiving a finance charge. The local activities which promote the sale on credit are sufficient to bring the finance charge income within the taxing statute. If all purchasers who buy on credit pay their accounts within 30 days and thereby avoid incurring a finance charge, then the measure of tax will be zero. The credit sale is the triggering business activity; the imposition of Penney's finance charge is the measuring device by which the State can assess its B & 0 tax. All activities which establish credit status for customers, as well as the credit sale itself and those services provided to customers in the Portland office, are business activities which give rise to the finance charge.
This is, of course, exactly the same argument used by Rena-Ware: that the extension of credit ("the local activities which promote the sale on credit") and the servicing of credit accounts ("the imposition of Penney's finance charge") were components of the underlying sales transaction and could not be separated. In Rena-Ware, we refused to follow this argument and found the business activity of servicing credit accounts to be a business separate and *54apart from the sales transaction which gave rise to the credit account. No doubt the majority can ignore this analysis if it chooses. It is difficult to put much faith in the consistency of judicial analysis if the chief guideline appears to be that the taxpayer will pay. At the very least, the majority ought to announce it has overruled Rena-Ware.
The other part of the majority position seems to be that Rena-Ware was small and Penney is big: "A traveling salesman selling cookware is hardly in the same retailers' league as is Penney." Majority opinion, at 45. I would suppose legislation could be passed which would have a different standard for door-to-door salespersons and giant retailers. The legislature did not choose to do so. Nor should we. We are bound by the terms of the statute which apply to large and small alike.
It is true that Penney engages in extensive credit sales activities within Washington. These activities consist principally in processing credit card purchases, handling credit applications, and handling merchandise returns, all of which are directly related and attributable to the generation of retail credit sales. Simply because a Penney customer maintains a continuing credit relationship or credit line with a local retail outlet does not change the essential fact that such relationship, from the perspective of the credit-related activities of the retail outlet, is related solely to the credit sale side of the transaction.
In Rena-Ware, the company's generation of service charge income would not have been possible but for the initial sale contact made by the out-of-state salesperson. In the case of Penney's retail activities, however, a retail credit sale does not automatically give rise to finance charge income as in Rena-Ware, nor does the mere fact that such sales contacts are repeated and continuing change their essential nature as being sales related.
Finance charge income cannot, of course, be generated without there first being credit sales. There is a clear, factual boundary, however, between a retail credit sale and the *55generation of finance charge income. The occurrence of a credit sale is not an appropriate bridge to the contention that the business activities responsible for the finance charge income include all the activities of Penney performed in Washington directed to the generation of credit sales.
The granting of credit is a part of the retailing business and is a cost of that business. If the customer pays within, say, 30 to 60 days, so that there is no service charge, the cost of providing credit becomes a cost of doing retail business. The enhancement of business which the retailer hopes will come from the extension of credit is, of course, already taxed by the State in its assessment of the business and occupation tax against the gross retail sales. RCW 82.04-.250.
All of the functions essential to the generation and collection of finance charges — recording of credit card transactions, preparation of billing statements, crediting of account payments, and monitoring and enforcement of delinquent accounts — were the responsibility of and were performed at the Portland credit office. The logic of the reasoning in Rena-Ware supports the conclusion that Penney "engaged" in the "business activities" responsible for producing the finance charge income solely at its Portland credit office and not within the State of Washington.
The majority cites J.C. Penney Co. v. Hardesty, 264 S.E.2d 604 (W. Va. 1979). The case is not in point; it is barren of the analysis used by this court in Rena-Ware. The West Virginia court uses a "substantial contacts" analysis to justify imposition of the tax (Miller, J., concurring, at 618). It does not discuss or analyze the question of whether the servicing of credit accounts is a business separate and distinct from the retail sale giving rise to the credit account.
The case of Department of State Revenue v. J.C. Penney Co.,_Ind. App._, 412 N.E.2d 1246 (1980), is likewise not relevant. The Indiana court uses a "minimal activity" analysis to hold the tax inapplicable. Again, as in Hardesty, *56this court fails to engage in the kind of analysis which is set forth in Rena-Ware to determine whether there was a "business activity".
I can well understand the desire of the State to get all the revenue it can. I do have difficulty sympathizing with the State shifting its analysis of the characteristics of the credit and service charge activities of a retailer as it suits its purpose. While it may be this is a natural and inevitable characteristic of the taxing authorities, I see no reason why the court should become a party to this duplicity.
Brachtenbach, C.J., concurs with Dolliver, J.
Reconsideration denied December 17, 1981.