Digital Equipment Corp. v. Department of Revenue

Durham, C.J.

(concurring) — Digital Equipment Corporation (Digital) seeks a refund of wholesale taxes on products that it manufactured outside Washington but sold in this state before August 11, 1987. Digital contends the Supreme Court’s decision in Tyler Pipe Indus., Inc. v. Washington State Dep’t of Revenue, 483 U.S. 232 , 107 S. Ct. 2810 , 97 L. Ed. 2d 199 (1987), should be applied retroactively, and that only a refund will provide Digital with a remedy that satisfies due process. Although I agree with the majority that Digital is not entitled to any relief, I disagree with the majority’s reasoning and with some of the assumptions made by the parties and our prior cases.

Digital contends recent Supreme Court authority calls into question our determination in National Can Corp. v. Department of Revenue, 109 Wn.2d 878, 889 , 749 P.2d 1286 , cert. denied, 486 U.S. 1040 (1988) (National Can II), that Tyler Pipe would apply only prospectively. I concur in the majority’s determination to overrule that holding. 76 However, we should not casually assume that an out-of- *196 state manufacturer like Digital has a valid discrimination claim under the old multiple activities exemption (MAE) or that the 1987 two-way credit scheme is the appropriate remedy for such discrimination. A review of the history of constitutional challenges to the MAE is necessary to properly evaluate Digital’s claims.

The multiple activities exemption before Tyler Pipe:

Washington’s business and occupation (B&O) tax system taxes both manufacturing and wholesaling. Since 1950, double tax liability for the same goods was limited by the MAE, which provided an exemption from the manufacturing tax for products that were also subject to the Washington wholesale tax. RCW 82.04.440 (1981). The effect of the MAE was such that only products that were sold outside of Washington were subject to the Washington manufacturing tax. Until the mid-1980’s, this system was repeatedly but unsuccessfully challenged on the theory that it discriminated against interstate commerce. Tyler Pipe, 483 U.S. at 237 (citing General Motors Corp. v. Washington, 377 U.S. 436 , 84 S. Ct. 1564 , 12 L. Ed. 2d 430 (1964)).

In 1984, the Supreme Court invalidated a West Virginia tax scheme that was similar to Washington’s B&O tax. Armco Inc. v. Hardesty, 467 U.S. 638 , 104 S. Ct. 2620 , 81 L. Ed. 2d 540 (1984). West Virginia imposed a 0.27 percent wholesale tax on goods sold in the state. Local manufactur *197 ers were exempt from the wholesale tax but paid a 0.88 percent tax on goods manufactured in the state. The Supreme Court found that this scheme discriminated against interstate commerce.

The tax provides that two companies selling tangible property at wholesale in West Virginia will be treated differently depending on whether the taxpayer conducts manufacturing in the State or out of it. Thus, if the property was manufactured in the State, no tax on the sale is imposed. If the property was manufactured out of the State and imported for sale, a tax of 0.27% is imposed on the sale price.

Armco, 467 U.S. at 642 . The fact that local manufacturers paid a higher tax rate on the manufacturing tax did not cure the discriminatory application of the wholesale tax. If the state where the goods were made also imposed a manufacturing tax, the out-of-state manufacturers would pay both a manufacturing and a wholesale tax while the local manufacturers would pay only a manufacturing tax. Armco, 467 U.S. at 642-44 .

The "internal consistency” test:

Rejecting the suggestion that the out-of-state manufacturers were required to prove a discriminatory impact, the Armco Court extended its application of the "internal consistency” test to claims of discrimination. "[A] tax must have 'what might be called internal consistency — that is the [tax] must be such that, if applied by every jurisdiction,’ there would be no impermissible interference with free trade.” Armco, 467 U.S. at 644 (citing Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 169 , 103 S. Ct. 2933 , 77 L. Ed. 2d 545 (1983)). The West Virginia tax system was not internally consistent because liability for the wholesale tax was dependent upon where the goods were manufactured.

The 1985 one-way credit scheme:

Following Armco, numerous firms sought relief from *198 Washington B&O taxes that they had already paid on grounds that the MAE discriminated against interstate commerce. In anticipation of the possible invalidation of the MAE under Armco, the 1985 Legislature amended the MAE to provide a credit against the manufacturing tax for wholesale taxes paid to another state. Final Legislative Report, 49th Sess., SSB 3678, at 303-04 (1985). This one-way credit scheme was to apply (1) only if a court found that the existing MAE discriminated against interstate commerce, and (2) only to tax reporting periods for which relief was found to be appropriate. Laws of 1985, ch. 190, § 1; RCW 82.04.440(4) (1985).

The modified MAE created a B&O tax system that satisfies the internal consistency test. That is, if every jurisdiction taxed both wholesale activity and manufacturing but also provided a credit against the manufacturing tax for wholesale taxes paid to any state, then every state would collect a wholesale tax and all manufacturers would be exempt from manufacturing taxes. The resulting tax burden would not depend upon whether the taxed goods were sold locally or across state lines. Consequently, the MAE, as modified by the 1985 one-way credit scheme, does not discriminate against interstate commerce.

Tyler Pipe:

Following Armco, numerous taxpayers demanded relief from their B&O tax liability. We initially rejected the argument that the MAE was discriminatory. National Can Corp. v. Department of Revenue, 105 Wn.2d 327 , 732 P.2d 134 (1986) (National Can I). Taxpayers appealed. The Supreme Court held that the MAE, as it existed before the 1985 amendments, was invalid “because it places a tax burden upon manufacturers in Washington engaged in interstate commerce from which local manufacturers selling locally are exempt.” Tyler Pipe, 483 U.S. at 253 . Tyler Pipe left this court to decide the necessary remedial issues on remand. Id.

Consistent with its limited holding, Tyler Pipe did not *199 analyze the 1985 one-way credit scheme remedy. The opinion nevertheless indicates that the 1985 Legislature’s understanding of the necessary remedy was correct. In defense of the existing MAE, the State argued that the manufacturing tax was similar to a use tax that the Supreme Court had previously upheld. The use tax exempted goods on which sales tax had already been paid in any state, not just in Washington. Tyler Pipe, 483 U.S. at 245 (citing Henneford v. Silas Mason Co., 300 U.S. 577 , 57 S. Ct. 524 , 81 L. Ed. 814 (1937)). Observing the significant distinction between the use tax and the Washington manufacturing tax, the Supreme Court rejected the State’s argument.

The parallel condition precedent for a valid multiple activities exemption eliminating exposure to the burden of a multiple tax on manufacturing and wholesaling would provide a credit against Washington tax liability for wholesale taxes paid by local manufacturers to any State, not just Washington.

Tyler Pipe, 483 U.S. at 246 (emphasis added). The credit against Washington manufacturing taxes for wholesale taxes paid to any state created a nondiscriminatory scheme that was constitutional under Silas Mason Co. This part of the Tyler Pipe opinion confirms the determination that the 1985 one-way credit scheme cured the discriminatory effect of the old MAE.

Remedies under Tyler Pipe:

Although the Supreme Court limited its holding to a determination that the old MAE discriminated against Washington manufacturers who sold their products outside the state, and expressly reserved all remedial issues for consideration by this court on remand, the Tyler Pipe opinion nevertheless speculated about possible remedies.

Compliance with our holding on the discrimination issue, however, would not necessarily preclude the continued as *200 sessment of the wholesaling tax. Either a repeal of the manufacturing tax or an expansion of the multiple activities exemption to provide out-of-state manufacturers with a credit for manufacturing taxes paid to other States would presumably cure the discrimination.

Tyler Pipe, 483 U.S. at 248-49 (emphasis added). It is difficult to discern what the Court meant by this comment. The suggestion that a credit for out-of-state manufacturing taxes is needed to cure the MAE flatly contradicts the passage quoted earlier which indicates that only a credit for out-of-state wholesale taxes is required.

Tyler Pipe never actually explained how the Washington wholesale tax discriminates against interstate commerce. Since 1950, the wholesale tax has been uniformly applied to both in-state and out-of-state manufacturers. That tax was levied on Washington sales without regard to where the goods were manufactured and therefore did not discriminate against interstate commerce. We had previously held that out-of-state manufacturers who pay only Washington wholesale taxes cannot complain of the discriminatory effect of the MAE. B. F. Goodrich Co. v. State, 38 Wn.2d 663, 668 , 231 P.2d 325 , cert. denied, 342 U.S. 876 (1951). 77

Furthermore, the application of the Supreme Court’s suggestion creates a tax scheme that violates the internal consistency test. Under such a system, Washington would tax both wholesaling and manufacturing but would provide (1) a credit against the manufacturing tax for wholesale taxes paid in Washington (the MAE) and (2) a credit against the wholesale tax for "manufacturing taxes paid to other States” (the suggestion above). If every state adopted such a system, locally manufactured goods sold in-state would be subject to only the wholesale tax. In contrast, goods sold in interstate commerce would be subject to only the manufacturing tax in the state where they were made.

*201 Fortunately, the Supreme Court’s reservation of all remedial issues for resolution by this court made this erroneous suggestion dicta. See National Can II, 109 Wn.2d at 889 . We have never actually held that out-of-state manufacturers are entitled to relief under Tyler Pipe or that a credit for out-of-state manufacturing taxes is necessary. Our consideration of these issues was quickly overtaken by events.

The 1987 tuio-way credit scheme:

Less than a month after the Supreme Court’s Tyler Pipe decision, the 1987 Legislature further modified the MAE. Based on the unfortunate reference to a credit for out-of-state manufacturers, the Legislature concluded that "language in the [Tyler Pipe] decision suggests the one-way credit may not be a sufficient remedy.” Final Legislative Report, 50th Sess., SB 6078, at 115 (1987). This language convinced the 1987 Legislature that it was required to further amend the MAE. See American Nat’l Can Corp. v. Department of Revenue, 114 Wn.2d 236 , 787 P.2d 545 , cert. denied, 498 U.S. 880 (1990) (National Can III). The Legislature quickly passed new amendments to the MAE that provided a credit against wholesale taxes for manufacturing taxes paid to any state. 78 Laws of 1987, 2d Ex. Sess., ch. 3, § 2; RCW 82.04.440(2) (1987).

This two-way credit scheme applies prospectively from the effective date of the amendment, August 11, 1987. Like the 1985 one-way credit scheme, it applies retroactively only to the extent that a court has determined that a taxpayer is entitled to relief from the existing MAE. Laws of 1987, 2d Ex. Sess., ch. 3, § 3; RCW 82.04.440 (1987). On remand from Tyler Pipe, we did not consider the effect of either the 1985 or 1987 amendments to the MAE *202 because we held that Tyler Pipe only applied prospectively. National Can II, 109 Wn.2d at 749 . 79

The present case:

Tyler Pipe held that the MAE discriminated against Washington manufacturers who sold their products outside the state. 483 U.S. at 253 . Our determination in B. F. Goodrich Co. that out-of-state manufacturers cannot complain of the discriminatory effect of the MAE has not been reversed. 80 Nevertheless, Digital asserts that it is entitled to a refund for the wholesale taxes it has already paid. We can easily dispose of that claim on its merits. 81

*203 Assuming, arguendo, that Digital has a valid discrimination claim, the first issue is whether retroactive application of Tyler Pipe in turn triggers the retroactive application of the 1987 two-way credit scheme. The unfortunate dicta in Tyler Pipe has given rise to an almost universal assumption that the 1987 two-way credit scheme is necessary to cure the discrimination created by the old MAE. 82 A careful analysis reveals that this assumption is incorrect.

By its own terms, the 1987 scheme applies retroactively only if the MAE "as it existed before August 11, 1987” is invalidated by a court. Laws of 1987, 2d Ex. Sess., ch. 3, § 3; RCW 82.04.440 (1987). The MAE "as it existed before August 11, 1987” includes the potential retroactive application of the one-way credit scheme created by the 1985 amendments to RCW 82.04.440. As noted earlier, Tyler Pipe invalidated the oldest version of the MAE, not the version of the MAE which included the 1985 one-way credit scheme. See Tyler Pipe, 483 U.S. at 237 n.8.

The retroactive application of Tyler Pipe’s invalidation of the pre-1985 MAE triggers the retroactive application of the 1985 one-way credit scheme. RCW 82.04.440(4)(a) (1985). The question then becomes whether that version of the MAE is constitutional. As the 1985 Legislature anticipated, that version of the MAE does not discriminate against interstate commerce. Tyler Pipe does not hold otherwise. In the absence of any final court decision holding that the 1985 one-way credit scheme is discriminatory, the retroactive application of the 1987 scheme is not triggered. Consequently, the 1985 one-way credit scheme *204 applies retroactively to all tax periods before August 11, 1987. 83

Due Process:

The determination that the MAE, as amended by the 1985 one-way credit scheme, does not discriminate against interstate commerce is not the end of the inquiry. Digital was still taxed under the old version of the B&O tax system. Therefore, we must determine whether the retroactive application of the 1985 one-way credit scheme is a constitutionally adequate remedy as applied to Digital. Although Digital challenges the 1987 scheme, the issue is actually whether the 1985 one-way credit scheme satisfies due process.

Due process requires that a state provide a "clear and certain remedy” from the burden of unconstitutional taxes. McKesson Corp. v. Division of Alcoholic Beverages & Tobacco, Dep’t of Business Regulation, 496 U.S. 18, 39 , 110 S. Ct. 2238 , 110 L. Ed. 2d 17 (1990) (citing Atchison, Topeka & Santa Fe Ry. Co. v. O’Connor, 223 U.S. 280 , 32 S. Ct. 216 , 56 L. Ed. 436 (1912)). Where a tax is unconstitutional in its entirety, such as where the tax is beyond the state’s power to impose, a state may have no alternative but to refund the unlawfully collected taxes. However, where a tax is unconstitutional only to the extent that it discriminates against interstate commerce, the state enjoys flexibility in curing the defect. McKesson, 496 U.S. at 39-40 .

[T]he State’s duty under the Due Process Clause to provide a 'clear and certain remedy’ requires it to ensure that the tax as actually imposed on petitioner and its competitors during the contested tax period does not deprive petitioner of tax moneys in a manner that discriminates against interstate commerce.

*205 McKesson, 496 U.S. at 43 .

The retroactive application of the 1985 one-way tax credit scheme creates a non-discriminatory B&O tax scheme. The wholesale tax credit against manufacturing taxes is available without regard to whether the goods are sold locally or out of state. The wholesale tax is levied on all goods sold in Washington without regard to where they were manufactured. Although some Washington manufacturers may be entitled to relief under the one-way credit scheme, the wholesale taxes actually imposed on out-of-state manufacturers, like Digital, are nondiscriminatory as applied. As a result, Digital is not entitled to any relief from those taxes.

Conclusion:

I would hold that (1) Tyler Pipe applies retroactively, (2) the 1985 one-way credit scheme applies to all tax periods before August 11, 1987, and (3) this remedy satisfies due process. I would disapprove the incorrect assumptions made in National Can II and National Can III to the extent that they are inconsistent with this analysis.

Alexander, J., concurs with Durham, C.J.

Under James B. Beam Distilling Co. v. Georgia, 501 U.S. 529 , 111 S. Ct. 2439, 2446 , 115 L. Ed. 2d 481 (1991), full retroactive application of a new rule of law is the norm, and it is error for a court to refuse to retroactively apply a rule of law after the case announcing the rule has already done so. The majority and the dissent assume that the issue is, therefore, whether the Supreme Court applied Tyler Pipe to the parties before it. The majority finds that Tyler Pipe did not reserve the issue of retroactivity and therefore applies retroactively. The *196 dissent suggests that the Supreme Court left the issue of retroactivity to this court.

The proper formulation of the retroactivity issue here, however, is whether this court, in National Can II, should have retroactively applied Armco Inc. v. Hardesty, 467 U.S. 638 , 104 S. a. 2620, 81 L. Ed. 2d 540 (1984) (the case which invalidated a similar West Virginia tax scheme). See Tyler Pipe, 483 U.S. at 251-52. Notwithstanding our efforts in National Can Corp. v. Department of Revenue, 105 Wn.2d 327 , 732 P.2d 134 (1986) (National Can I) to distinguish Armco, that case in fact required the partial invalidation of the Washington business and occupation (B&O) tax scheme. The relevant new rule of law was Armco, not Tyler Pipe.

Armco did not reserve the issue of retroactivity and can, therefore, be understood to apply retroactively. Because the Supreme Court applied Armco retroactively, it was error, under Beam, for this court to not follow suit in National Can II.

Tyler Pipe discussed, but did not overrule, this case. 483 U.S. at 236 nn.7, 9.

Tyler Pipe suggested a credit for out-of-state manufacturing taxes. 483 U.S. at 249 . The two-way credit scheme appears to provide a credit for all manufacturing taxes, including those paid in Washington. RCW 82.04.440(2), (5)(c) (1987).

The new B&O tax system was challenged again in American Nat’l Can Corp. v. Department of Revenue, 114 Wn.2d 236, 787 P.2d 545 (1990), cert. denied, 498 U.S. 880 (1990) (National Can III). In that case, we upheld the prospective application of the 1987 two-way credit scheme against new discrimination claims. We reversed the trial court’s determination that taxpayers were entitled to a refund for B&O taxes paid during the "interim period” between the decision in Tyler Pipe (June 23,1987) and the effective date of the 1987 amendments (August 11, 1987). Both holdings were based on the parties’ concessions and assumptions that the 1987 two-way credit scheme remedied the discrimination identified in Tyler Pipe. National Can III, 114 Wn.2d at 242, 244, 249, 250 . We also accepted the State’s concession that taxpayers were entitled to the two-way credit remedy during the interim period. National Can III, 114 Wn.2d at 249 .

See n.77, infra.

The majority suggests that this case became academic after it was determined that Digital had not been double taxed, i.e., paid any out-of-state manufacturing taxes in addition to its Washington wholesale taxes on the same goods. Majority at 192-93. This observation implies that such double taxation is a necessary or sufficient element of a discrimination claim. Neither is the case.

The application of two states’ differing tax schemes may expose interstate commerce to double taxation without discriminating against such commerce.

It is true, as the State of Washington appearing as amicus curiae points out, that Armco would be faced with the same situation that it complains of here if Ohio (or some other State) imposed a tax only upon manufacturing, while West Virginia imposed a tax only upon wholesaling. In that situation, Armco would bear two taxes, while West Virginia sellers would bear only one. But such a result would not arise from impermissible discrimination against interstate commerce but from fair encouragement of in-state business.

Armco Inc., 467 U.S. at 645 .

Conversely, a tax scheme that does not result in double tax liability may be discriminatory. Relief from the West Virginia wholesale tax did not require the out-of-state manufacturers to establish that they actually paid any out-of-state manufacturing taxes. Armco Inc., 467 U.S. at 644 . Likewise, Washington manufacturers who sell their products outside this State need not show that *203 they actually paid out-of-state wholesale taxes. The remedy in such cases may be limited to an expansion of the tax exemption to provide a credit for similar out-of-state taxes (which may not benefit taxpayers who were not doubly taxed). But until some remedy is provided and the tax scheme is rendered nondiscriminatory as applied, the absence of double taxation does not establish that a taxpayer has not suffered discrimination.

Relying on National Can III, the majority assumes that the retroactive invalidation of the MAE brings the 1987 two-way credit scheme into operation. Majority at 189.

The assumption in National Can III that the 1987 scheme applies to the interim period appears to be incorrect. However, that assumption was based on the State’s concession that it applied. See n.79 infra. The State makes the same concession here. Br. of Resp’t at 10.