Opposition Brief — Washington Bankers Association, et al., Petitioners v. Washington, et al.
Supreme Court briefMay 4, 2022
Ask Donna
What actually matters in this document.
Text
No. 21-1066
In the Supreme Court of the United States
WASHINGTON BANKERS ASSOCIATION, A WASHINGTON
PUBLIC BENEFIT CORPORATION, AND AMERICAN
BANKERS ASSOCIATION, A DISTRICT OF COLUMBIA NONPROFIT CORPORATION,
PETITIONERS,
v.
STATE OF WASHINGTON, DEPARTMENT OF REVENUE OF
THE STATE OF WASHINGTON, AND VIKKI SMITH, AS
DIRECTOR OF THE DEPARTMENT OF REVENUE OF THE
STATE OF WASHINGTON,
RESPONDENTS.
ON PETITION FOR WRIT OF CERTIORARI
TO THE SUPREME COURT OF WASHINGTON
BRIEF IN OPPOSITION
ROBERT W. FERGUSON
Attorney General
NOAH G. PURCELL
Solicitor General
Counsel of Record
1125 Washington Street SE
Olympia, WA 98504-0100
360-753-6200
noah.purcell@atg.wa.gov
ALICIA O. YOUNG
Deputy Solicitor General
CAMERON G. COMFORT
Sr. Assistant Attorney
General
CHARLES ZALESKY
Assistant Attorney General
i
QUESTION PRESENTED
For over a century, this Court has held that
States may impose graduated tax rates based on a
company’s size or profitability. This Court has also
repeatedly held that when determining what tax rate
applies, States may consider a taxpayer’s nationwide
or worldwide income. Based on these settled rules,
States routinely charge higher tax rates to more
profitable businesses and exempt smaller businesses
from a range of state taxes and regulations.
Applying these principles, in 2019 Washington
adopted a higher corporate tax rate for financial
institutions with over $1 billion in annual profits. The
tax applies only to revenue such businesses earn in
Washington. The tax does not turn in any way on
where a business is headquartered. There are many
businesses based in Washington that owe the tax, and
many businesses based outside of Washington that do
extensive business in Washington but do not owe the
tax because their profits fall below $1 billion. The tax
does not, in any way, favor in-state over out-of-state
entities. The question presented is:
Does a state tax that treats in-state and out-ofstate companies identically violate the dormant
Commerce Clause merely because more profitable
companies face a higher tax rate?
ii
TABLE OF CONTENTS
INTRODUCTION ....................................................... 1
STATEMENT OF THE CASE ................................... 3
A.
Washington Enacted a Progressive
Tax on Wealthy Financial Institutions
Operating in the State, Whether
Based in Washington or Elsewhere ................ 3
B.
The Washington Supreme Court
Upheld the Tax ................................................ 7
REASONS TO DENY REVIEW................................. 9
A.
B.
The Washington Supreme Court’s
Decision Creates No Conflict with This
Court’s Decisions, as This Court Has
Never Suggested that State
Distinctions Based on Corporate
Income Violate the Dormant
Commerce Clause .......................................... 11
1.
The Washington Tax Meets All
of this Court’s Dormant
Commerce Clause
Requirements ...................................... 12
2.
Washington Is Not Taxing
Extra-Jurisdictional Income ............... 20
Reviewing this Tax Challenge Would
Not Resolve Distinctions Made by
Lower Courts in Fact-Bound
Regulatory Cases ........................................... 24
iii
C.
1.
There Is No Disagreement in
the Lower Courts About How to
Analyze Apportioned State
Taxes.................................................... 25
2.
No Court Has Held that
Profitability Is an
Impermissible Proxy for
Interstate Commerce .......................... 34
This Case Is a Poor Vehicle to Address
Dormant Commerce Clause Principles ......... 35
CONCLUSION ......................................................... 37
APPENDIX
Declaration of Charles Zalesky ................................. 1a
iv
TABLE OF AUTHORITIES
Cases
Am. Trucking Ass’ns Inc. v. Scheiner
483 U.S. 266 (1987) .................................... 15, 16, 19
Amerada Hess Corp. v. Director, Div. of
Taxation, New Jersey Dep’t of Treasury
490 U.S. 66 (1989) ..................................................14
Bacchus Imports, Ltd. v. Dias
468 U.S. 263 (1984) ..................................................8
Barclays Bank PLC v. Franchise Tax Bd.
of California
512 U.S. 298 (1994) .......................................... 15-16
Best & Co. v. Maxwell
311 U.S. 454 (1940) ................................................18
Black Star Farms, LLC v. Oliver
600 F.3d 1225 (9th Cir. 2010)................................31
Brady v. New York
607 N.E.2d 1060 (N.Y. 1992), cert. denied,
509 U.S. 905 (1993) ................................................22
Cachia v. Islamorada
542 F.3d 839 (11th Cir. 2008)...................... 8, 25, 32
v
Camps Newfound/Owatonna, Inc. v.
Town of Harrison
520 U.S. 564 (1997) ............................................8, 17
Cherry Hill Vineyards, LLC v. Lilly
553 F.3d 423 (6th Cir. 2008)............................27, 31
Colonial Pipeline Co. v. Traigle
421 U.S. 100 (1975) ................................................14
Commonwealth Edison Co. v. Montana
453 U.S. 609 (1981) ........................... 8, 12-13, 33-35
Complete Auto Transit, Inc. v. Brady
430 U.S. 274 (1977)..........................................10, 14
Container Corp. of Am. v. Franchise Tax Bd.
463 U.S. 159 (1983) ..........................................16, 35
Dep’t of Revenue of Kentucky v. Davis
553 U.S. 328 (2008) ................................................12
Exxon Corp. v. Governor of Maryland
437 U.S. 117 (1978) ...................................... 8, 19-20
Exxon Corp. v. Wisconsin Dep’t of Revenue
447 U.S. 207 (1980) ................................................35
Family Winemakers of California v. Jenkins
592 F.3d 1 (1st Cir. 2010) ............................ 8, 27, 31
vi
Ford Motor Co. v. Texas Dep’t of Transp.
264 F.3d 493 (5th Cir. 2001)..................................31
Fox v. Standard Oil Co.
294 U.S. 87 (1935) ..............................................9, 35
Fulton Corp. v. Faulkner
516 U.S. 325 (1996) .......................................... 17-18
General Motors Corp. v. Tracy
519 U.S. 278 (1997) ................................................16
Great Atl. & Pac. Tea Co. v. Grosjean
301 U.S. 412 (1937) ...................................... 9, 20-22
Hunt v. Washington State Apple Advert.
Comm’n
432 U.S. 333 (1977) ................................................18
Int’l Franchise Ass’n, Inc. v. City of Seattle
803 F.3d 389 (9th Cir. 2015), cert. denied,
578 U.S. 959 (2016) .......................................... 31-32
Island Silver & Spice, Inc. v. Islamorada
542 F.3d 844 (11th Cir. 2008)..........................25, 32
Jones v. Gale
470 F.3d 1261 (8th Cir. 2006), cert. denied,
549 U.S. 1328 (2007) ..............................................29
Kleinsmith v. Shurtleff
571 F.3d 1033 (10th Cir. 2009)..............................36
Matteson v. Dir. of Revenue
909 S.W.2d 356 (Mo. 1995) ....................................23
vii
Maxwell v. Bugbee
250 U.S. 525 (1919) ...................................... 9, 20-23
McNeilus Truck & Mfg., Inc. v. Ohio ex rel.
Montgomery
226 F.3d 429 (6th Cir. 2000)..................................27
New Energy Co. of Indiana v. Limbach
486 U.S. 269 (1988) ................................................12
Nw. States Portland Cement Co. v. Minnesota
358 U.S. 450 (1959) .................................... 12, 16, 18
Oklahoma Tax Comm’n v. Jefferson Lines, Inc.
514 U.S. 175 (1995) ..........................................12, 15
Rosenblatt v. City of Santa Monica
940 F.3d 439 (9th Cir. 2019), cert. denied,
140 S. Ct. 2762 (2020)............................................33
Saban Rent-a-Car LLC v. Arizona Dep’t of
Revenue
434 P.3d 1168 (Ariz.), cert. denied,
140 S. Ct. 195 (2019)........................................ 32-33
Salazar-Limon v. City of Houston
137 S. Ct. 1277 (2017)......................................11, 37
South Dakota v. Wayfair, Inc.
138 S. Ct. 2080 (2018)............................................24
Stevens v. State Tax Assessor
571 A.2d 1195 (Me.), cert. denied,
498 U.S. 819 (1990) ................................................23
viii
Trinova Corp. v. Michigan Dep’t of Treasury
498 U.S. 358 (1991) .......................................... 15-16
United States v. Kansas
810 F.2d 935 (10th Cir. 1987)................................22
Walgreen Co. v. Rullan
405 F.3d 50 (1st Cir. 2005),
cert. denied sub nom.
Perez-Perdomo v. Walgreen Co.
546 U.S. 1131 (2006) ........................................26, 30
Wal-Mart Puerto Rico, Inc. v. Zaragoza-Gomez
834 F.3d 110 (1st Cir. 2016) ....................................8
Wal-Mart Stores, Inc. v. Texas Alcoholic
Beverage Comm’n
945 F.3d 206 (5th Cir. 2019), cert. denied,
141 S. Ct. 874 (2020)........................................ 30-31
Walters v. State ex rel. Oklahoma Tax Comm’n
935 P.2d 398 (Okla. Civ. App. 1996) ............... 22-23
Wheeler v. State
249 A.2d 887 (Vt.), appeal dismissed for
want of a substantial federal question,
396 U.S. 4 (1969)....................................................23
Wiesmueller v. Kosobucki
2009 WL 4722197 (W.D. Wis. Dec. 4, 2009) .........28
Wiesmueller v. Kosobucki
571 F.3d 699 (7th Cir. 2009)..................................28
ix
Wiesmueller v. Kosobucki
667 F. Supp. 2d 1001 (W.D. Wis. 2009) ................28
Wine & Spirits Retailers, Inc. v. Rhode Island
481 F.3d 1 (1st Cir.), cert. denied,
552 U.S. 889 (2007) .......................................... 29-30
Wisconsin v. J.C. Penney Co.
311 U.S. 435 (1940) ................................................15
Constitutional Provisions
U.S. Const. art. I, § 8, cl. 3 ...........10-14, 19, 28, 33, 35
Statutes
2019 Wash. Sess. Laws 3661 (ch. 420, § 1)
(codified as Finding in
Wash. Rev. Code § 82.04.29004) .............................4
2019 Wash. Sess. Laws 3661-63 (ch. 420, § 2),
codified as Wash. Rev. Code § 82.04.29004 ............3
Wash. Rev. Code § 82.04.220(1) ............................3, 14
Wash. Rev. Code § 82.04.290(2)(a)(i) ..........................3
Wash. Rev. Code § 82.04.29004(1) ..............................4
Wash. Rev. Code § 82.04.29004(2)(e)(i) ..................4, 6
Wash. Rev. Code § 82.32.045(5)(a),
amended by 2022 Wash. Sess. Laws,
ch. 295, § 2................................................................3
x
Other Authorities
First Interstate Bank, 18 First Interstate
Bank Branches in Washington,
https://locations.firstinterstate
bank.com/wa.html (last visited Apr. 28, 2022) .......6
Umpqua Bank, 64 Locations in Washington,
https://locations.umpquabank.com/wa#:~:text
=64%20Locations%20in%20Washington&text
=We%27ve%20made%20it%20easy,store%2C
%20all%20in%20one%20place
(last visited Apr. 28, 2022) ......................................6
Washington State Legislature
bill information website,
https://app.leg.wa.gov/billsummary?BillNum
ber=2167&Year=2019&Initiative=false .................4
1
INTRODUCTION
Nothing in the Washington Supreme Court’s
unanimous decision below warrants this Court’s
review. The Washington court faithfully applied this
Court’s precedent and created no split amongst lower
courts, and petitioners offered no persuasive evidence
on the sole issue they ask this Court to review. This
Court should deny certiorari.
Washington imposes a gross receipts tax on
businesses operating in the state. Like many states,
Washington charges different rates based on the
company’s industry and profitability. For example,
Washington exempts small businesses with annual
revenue below $125,000, and charges higher rates to
companies at certain profit levels in some industries.
In 2019, Washington adopted a graduated tax
rate for financial institutions operating in the state.
The tax applies only to revenue financial institutions
earn in Washington, and it does not depend in any
way on where the company is based. Most financial
institutions pay 1.75% of their Washington revenue
in tax, but companies with annual profits above
$1 billion pay 2.95%. Several financial institutions
based in Washington pay the additional tax,
and many financial institutions based outside of
Washington that do business in the state do not owe
the tax, because their profits are below $1 billion.
Petitioners challenged the tax before it took
effect, claiming that it discriminated on its face, in
purpose, and in effect. The Washington Supreme
Court rejected all of these arguments. Petitioners seek
review only on their discriminatory effects claim, but
they satisfy none of this Court’s criteria for certiorari.
2
First, the decision below is entirely consistent
with this Court’s precedent. This Court has never
suggested that charging a higher tax rate based on
corporate income discriminates against interstate
commerce. To the contrary, this Court has repeatedly
authorized States to set tax rates by referring to
nationwide or worldwide income, as here. This Court
has also repeatedly held that a state tax is not
discriminatory merely because it is primarily (or even
solely) paid by companies based outside the state. The
decision below faithfully applied this case law, while
petitioners largely ignore it.
Second, the decision below creates no
disagreement among lower courts about any legal
principle. States routinely apply higher tax rates to
more profitable businesses and exempt smaller
businesses from taxes and regulations. Petitioners’
theory would call all such laws into question. While
fact-bound cases in the lower courts have generated
different outcomes as to whether certain other
regulatory
distinctions
discriminate
against
interstate commerce, none of those cases involved a
tax distinction based on corporate income, as here.
Finally, this case offers a poor vehicle to
address the question presented. Petitioners ask this
Court to address only how to decide whether a law has
discriminatory effects, yet they challenged this law
before it took effect and offered no evidence of its real
effects. Their allegations of discriminatory purpose
are inaccurate and irrelevant to their claim.
Ultimately, they simply ask this Court to reassess
their claim of discriminatory effects and reach a
different result. That is no basis for certiorari.
3
STATEMENT OF THE CASE
A.
Washington Enacted a Progressive Tax on
Wealthy Financial Institutions Operating
in the State, Whether Based in
Washington or Elsewhere
Washington imposes a gross receipts tax,
known as the business and occupation or “B&O” tax,
for “the act or privilege of engaging in business
activities” within the state. Wash. Rev. Code
§ 82.04.220(1). The tax applies to virtually all
businesses, including banks and other financial
institutions, except small businesses with gross
receipts of less than $125,000 per year. Wash. Rev.
Code § 82.32.045(5)(a), amended by 2022 Wash. Sess.
Laws, ch. 295, § 2. Any financial institution engaged
in business within the state, regardless of its
corporate domicile or principal office location, is
subject to B&O tax on gross income derived from its
Washington
business
activities.
Currently,
Washington imposes a B&O tax rate of 1.75% for most
financial institutions and other service businesses.
Wash. Rev. Code § 82.04.290(2)(a)(i).
In 2019, Washington enacted an additional
1.2% B&O tax that applies to extremely profitable
financial institutions operating in the state.
2019 Wash. Sess. Laws 3661-63 (ch. 420, § 2), codified
as Wash. Rev. Code § 82.04.29004. The tax applies
only to revenue earned in Washington. Pet. App. 3a.
The express purpose of the additional tax is to raise
revenue to “fund[ ] schools and essential services,”
combat “wealth disparity . . . between the wealthy few
and the lowest income families,” and make
4
Washington’s tax system less regressive. 2019 Wash.
Sess. Laws 3661 (ch. 420, § 1)1 (codified as Finding in
Wash. Rev. Code § 82.04.29004); see also Pet. App. 4a
(discussing legislative findings).
The Washington legislature achieved these
goals by imposing the additional tax on only
“[s]pecified financial institutions” operating in the
state. Wash. Rev. Code § 82.04.29004(1). A “specified
financial institution” is any financial institution “that
is a member of a consolidated financial institution
group that reported on its consolidated financial
statement for the previous calendar year annual net
income of at least one billion dollars . . . .” Wash. Rev.
Code § 82.04.29004(2)(e)(i); Pet. App. 64a.
Washington’s legislature chose the $1 billion net
income threshold to limit the tax to only those
extremely wealthy financial institutions that have
“profited the most from the recent economic expansion
. . . .” Pet. App. 4a (quoting section 1 of the Act). As a
result of the additional tax, Washington’s B&O tax on
financial institutions is a graduated tax, with most
financial institutions paying the lower 1.75% rate,
while extremely profitable “specified financial
institutions” pay the rate of 2.95%.
1 The relevant Washington session law, and other public
documents relating to the 2019 legislation, are available through
the Washington State Legislature bill information website,
https://app.leg.wa.gov/billsummary?BillNumber=2167&Year=2
019&Initiative=false.
5
The tax is fairly apportioned. Pet. App. 3a n.1
(citing Washington’s apportionment statute, Wash.
Rev. Code § 82.04.460). It is “not measured against a
financial institution’s national or global income,” but
instead “is limited (apportioned) to only the income
associated with Washington business activity.”
Pet. App. 20a.
The tax contains no exemptions, deductions, or
credits benefiting in-state businesses over their
out-of-state counterparts. Companies owe the tax
regardless of their corporate domicile; they receive no
benefit from being based in Washington and face no
added cost if based outside of Washington. And in
practice, the tax has applied to numerous financial
institutions with a commercial domicile or principal
office in Washington. Pet. App. 14a (citing Clerk’s
Papers 371); BIO App. at 2a-3a.2 Roughly eight
percent of the businesses that pay the tax are based
in Washington. BIO App. at 3a. Meanwhile, numerous
financial institutions based outside of Washington,
but doing business in the state, do not pay the
tax because they do not have $1 billion in global
2 The data the Washington Supreme Court relied
on to determine the number of Washington-based financial
institutions that paid the additional tax was limited to just the
first three months of tax collections. Pet. App. 4a. Since then, the
State has collected the additional tax from over twenty
Washington-based financial institutions, representing over eight
percent of all financial institutions that have paid the tax.
BIO App. at 2a-3a.
6
profits. BIO App. at 3a. For example, Umpqua Bank,
which is headquartered in Oregon, has 64 branches in
Washington,3 and does not owe the tax because its
total profit is below $1 billion. BIO App. at 4a. First
Interstate Bank, headquartered in Montana, has
eighteen branches in Washington,4 and likewise does
not owe the tax because its total profit falls below
$1 billion. BIO App. at 4a. The only relevant factors
for imposing the higher tax rate are whether the
financial institution meets the definition of a
“specified financial institution” in Wash. Rev. Code
§ 82.04.29004(2)(e)(i), and whether it conducts
business activity in the state. These factors apply
equally to in-state and out-of-state businesses.
In short, the tax distinguishes based solely on
corporate income; it draws no distinction between
in-state and out-of-state businesses. Thus, an
out-of-state bank earning over $1 billion in net profits
would pay the same B&O tax rate even if it chose to
move its corporate domicile to Washington, because
the state of incorporation has nothing to do with
whether the institution is subject to the tax or the
amount of the tax.
Umpqua Bank, 64 Locations in Washington,
https://locations.umpquabank.com/wa#:~:text=64%20Locations
%20in%20Washington&text=We%27ve%20made%20it%20easy,
store%2C%20all%20in%20one%20place (last visited Apr. 28,
2022).
3
4 First Interstate Bank, 18 First Interstate Bank
Branches
in
Washington,
https://locations.firstinterstate
bank.com/wa.html (last visited Apr. 28, 2022).
7
B.
The Washington Supreme Court Upheld
the Tax
Several months before the additional tax
became effective, petitioners (the Washington
Bankers Association and American Bankers
Association, hereafter “Washington Bankers”) filed an
action seeking to invalidate the tax. The Washington
Bankers first argued that the Washington legislature
passed the tax without meeting state constitutional
requirements addressing when bills are introduced.
The trial court rejected this argument as
unsupported, and the Washington Bankers did not
appeal that ruling. See generally Pet. App. 35a n.10
(summarizing the Washington Bankers’ failed state
constitutional claim).
The Washington Bankers also argued that the
tax impermissibly discriminated against interstate
commerce. The trial court rejected the Washington
Bankers’ claim that the tax discriminated on its face,
but agreed that the tax had a discriminatory effect
and purpose. Pet. App. 55a.
The Washington Supreme Court unanimously
reversed, holding that the tax “does not discriminate
against interstate commerce in effect or in purpose.
Rather, it applies equally to all financial institutions
meeting the $1 billion income threshold, irrespective
of whether they are based inside or outside of
Washington.” Pet. App. 45a.
With respect to the Washington Bankers’ claim
that the tax had a discriminatory effect, the court first
explained that this Court “has routinely upheld state
statutes against discriminatory effect claims when
such laws mainly and even solely apply to
8
out-of-state interests.” Pet. App. 11a (citing, among
other cases, Commonwealth Edison Co. v. Montana,
453 U.S. 609 (1981), and Exxon Corp. v. Governor of
Maryland, 437 U.S. 117 (1978)).
The court next explained that the Washington
Bankers had failed to offer persuasive evidence of any
actual discriminatory effect on interstate commerce,
arguing only that the tax imposed an “added cost,”
which alone could not demonstrate prohibited
discriminatory effect. Pet. App. 16a.
Finally, the court distinguished cases cited by
the Washington Bankers as involving materially
different state laws that either imposed a barrier to
competition on out-of-state entities or granted a
benefit to in-state entities. Pet. App. 17a-19a
(discussing and distinguishing Bacchus Imports, Ltd.
v. Dias, 468 U.S. 263 (1984), Family Winemakers of
California v. Jenkins, 592 F.3d 1 (1st Cir. 2010), and
Cachia v. Islamorada, 542 F.3d 839 (11th Cir. 2008));
Pet. App. 24a-25a (discussing and distinguishing
Camps Newfound/Owatonna, Inc. v. Town of
Harrison, 520 U.S. 564 (1997), and Wal-Mart Puerto
Rico, Inc. v. Zaragoza-Gomez, 834 F.3d 110 (1st Cir.
2016)). Unlike these cases, the facially neutral, fairly
apportioned Washington tax does not prevent or limit
out-of-state competition, and applies “equally to inand out-of-state entities” that earn “revenue related
to Washington business activity.” Pet. App. 26a.
The court also thoroughly discredited the
Washington Bankers’ claim of a discriminatory
purpose by pointing out that the Washington Bankers
had “mischaracterize[d]” remarks made by the prime
sponsor of the legislation and had ignored “the explicit
9
legislative findings and purpose of the tax measure.”
Pet. App. 26a-27a. The court further explained that
the Washington Bankers relied on snippets of
legislative debate taken entirely out of context.
Pet. App. 29a-30a. The comments cited as evidence of
an improper legislative motive actually pertained to
proposed amendments to the tax that did not pass
and that “would have provided B&O tax credits
contrary to the goals of the underlying legislation.”
Pet. App. 31a.
The court found the relevant legislative history
entirely consistent with the Washington legislature’s
express, nondiscriminatory intent. Pet. App. 28a-29a,
31a-33a. That intent “was not to penalize out-of-state
financial institutions but to raise revenue for state
services by imposing a progressive tax on the most
prosperous taxpayers.” Pet. App. 28a.
REASONS TO DENY REVIEW
For over a century, this Court has routinely
held that graduated corporate taxes based on a
company’s size or profitability do not offend any
constitutional limits on a state’s taxing authority. See,
e.g., Fox v. Standard Oil Co., 294 U.S. 87, 100 (1935)
(citing cases). Additionally, it has long been settled
that States may refer to nationwide or worldwide
property or income in setting their graduated tax
rates. See, e.g., Maxwell v. Bugbee, 250 U.S. 525, 539
(1919); Great Atl. & Pac. Tea Co. v. Grosjean, 301 U.S.
412, 424-25 (1937). For three distinct reasons, the
Washington Bankers offer no compelling reason for
this Court to reevaluate these longstanding rules or to
review Washington’s progressive tax on extremely
wealthy financial institutions operating in the state.
10
First, this Court’s precedent supports the
Washington Supreme Court’s decision below. This
Court has repeatedly authorized States to set tax
rates by referring to nationwide or worldwide
property or income, and it has never suggested that a
tax rate distinction based on corporate income
discriminates against interstate commerce in effect or
purpose. Washington’s tax completely satisfies this
Court’s test for reviewing dormant Commerce Clause
challenges to state and local taxes, set out in Complete
Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).
Second, there is no conflict in the lower courts
as to whether States may distinguish between
taxpayers based on their corporate income. States
routinely apply higher tax rates to larger or more
profitable businesses, and also routinely exempt
smaller businesses from a wide range of taxes
and regulations. The Washington Bankers’ theory
would call all such laws into question. While
fact-bound cases in the lower courts have generated
different outcomes in considering whether certain
other regulatory distinctions discriminate against
interstate commerce, none of those cases have
involved an apportioned tax or drawn a distinction
based on corporate income, as here.
Third, this case provides a poor vehicle to
address the question presented. The Washington
Bankers ask this Court to address only how to decide
whether a law has discriminatory effects, yet they
challenged Washington’s law before it even took effect
11
and offered no evidence of how it operates in practice.
Much of their Statement focuses on allegations
of discriminatory purpose, but the Washington
Supreme Court properly debunked those allegations,
and the Washington Bankers present no legal
argument about that issue here. Ultimately, they
merely invite this Court to reweigh the evidence
(or lack of evidence) of discriminatory effect in the
hope that a second review will reach a different result.
This Court should decline. See Salazar-Limon v. City
of Houston, 137 S. Ct. 1277, 1278 (2017) (Alito, J.,
concurring in the denial of certiorari) (this Court
“rarely grant[s] review where the thrust of the claim
is that a lower court simply erred in applying a settled
rule of law to the facts of a particular case”).
A.
The
Washington
Supreme
Court’s
Decision Creates No Conflict with This
Court’s Decisions, as This Court Has
Never Suggested that State Distinctions
Based on Corporate Income Violate the
Dormant Commerce Clause
The Washington Bankers claim that the
Washington
Supreme
Court’s
decision
is
“irreconcilable” with this Court’s precedent. See
Pet. 19-28. The Washington Bankers are wrong. The
tax upheld below does not discriminate against
interstate commerce and meets all other established
dormant Commerce Clause requirements. Additionally, Washington is not taxing extra-jurisdictional
income. Rather, it has imposed a progressive tax on
the Washington revenue of financial institutions that
is directly associated with their ability to pay.
12
1.
The Washington Tax Meets All of
this Court’s Dormant Commerce
Clause Requirements
The Commerce Clause vests in Congress the
authority “[t]o regulate Commerce . . . among the
several States[.]” U.S. Const. art. I, § 8, cl. 3. It also
imposes on the States a negative limitation that
serves to prevent “economic protectionism[,] that is,
regulatory measures designed to benefit in-state
economic interests by burdening out-of-state
competitors.” Dep’t of Revenue of Kentucky v. Davis,
553 U.S. 328, 337-38 (2008) (quoting New Energy Co.
of Indiana v. Limbach, 486 U.S. 269, 273-74 (1988)).
As applied to state taxes, the “dormant” Commerce
Clause prohibits state taxation that “ ‘discriminates
against interstate commerce . . . by providing a direct
commercial advantage to local business.’ ” Oklahoma
Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 197
(1995) (quoting Nw. States Portland Cement Co. v.
Minnesota, 358 U.S. 450, 458 (1959) (alteration in
Oklahoma Tax Comm’n)). “Thus, States are barred
from discriminating against foreign enterprises
competing with local businesses” or from
discriminating against “activity occurring outside the
taxing state[.]” Id. at 197.
It is well established that a state tax does not
discriminate against interstate commerce merely
because its economic impact falls primarily or
exclusively on businesses based out of state.
Commonwealth Edison, 453 U.S. at 618. Many
industries, from oil and gas to biomedical engineering
to tobacco, have their headquarters concentrated in
just a few states, but that has never been understood
to prohibit all other states from taxing income of those
13
companies. To conclude otherwise, as this Court
succinctly held, “would require a significant and, in
our view, unwarranted departure from the rationale
of our prior discrimination cases.” Commonwealth
Edison, 453 U.S. at 619.
The principle articulated in Commonwealth
Edison makes perfect sense. A company that chooses
to maintain its headquarters outside a state while, at
the same time, conducting business within the state,
should not be protected from the state’s neutral tax
laws based on where it chooses to incorporate. To
conclude otherwise would allow a company doing
extensive business in a state to avoid the state’s
neutral taxes on in-state income simply by moving its
headquarters. No relevant authority supports that
illogical result.
The tax at issue here is not a protectionist
measure designed to provide a competitive advantage
to local business. It is a progressive measure designed
to ask more of all wealthy financial institutions,
in-state and out-of-state alike, that conduct business
in Washington. Consistent with the holding in
Commonwealth Edison, the tax does not offend
the dormant Commerce Clause merely because the
majority of financial institutions subject to the surtax
have elected to conduct their in-state business
activities from a corporate headquarters elsewhere.
To accept the notion that a state tax could be rendered
invalid based on the business address or state of
incorporation of those subject to the tax would be
an extreme restriction on state sovereignty and an
“unwarranted departure” from this Court’s prior
discrimination cases.
14
The Washington tax also meets all other
dormant Commerce Clause requirements, as this
Court has routinely sustained “ ‘nondiscriminatory,
properly apportioned’ ” taxes on interstate business
activity “ ‘when the tax is related to a corporation’s
local activities and the State has provided benefits
and protections for those activities for which it is
justified in asking a fair and reasonable return.’ ”
Complete Auto, 430 U.S. at 287 (quoting Colonial
Pipeline Co. v. Traigle, 421 U.S. 100, 108 (1975)). This
Court has repeatedly applied the “Complete Auto
standard” when evaluating a state tax against a
Commerce Clause challenge. Amerada Hess Corp. v.
Director, Div. of Taxation, New Jersey Dep’t of
Treasury, 490 U.S. 66, 72-73 (1989). Under that
standard, a state tax is permissible when it applies in
practical effect “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, 430 U.S. at 279.
Washington’s tax on wealthy financial
institutions operating in the state easily meets the
four Complete Auto criteria. The tax applies only to
financial institutions with substantial nexus with the
state and only to their revenue in Washington.
Wash. Rev. Code § 82.04.220(1). It is fairly
apportioned, as recognized by the Washington
Supreme Court and implicitly conceded by the
Washington Bankers. Pet. App. 20a-21a; Pet. 26. It
applies evenly to in-state and out-of-state enterprises,
satisfying the discrimination prong of Complete Auto,
as discussed above. And the Washington Bankers
have not argued, much less established, that the tax
15
exceeds the “ ‘protection, opportunities and benefits’
for which the State can exact a return.” Barclays Bank
PLC v. Franchise Tax Bd. of California, 512 U.S. 298,
312 (1994) (quoting Wisconsin v. J.C. Penney Co.,
311 U.S. 435, 444 (1940)).
Apportionment of the tax base is a crucial
feature of most state business activity taxes. As this
Court has previously held, unapportioned taxes—
while not per se invalid, see Oklahoma Tax Comm’n,
514 U.S. at 199—create a risk of providing an unfair
advantage to local businesses. For instance, in
American Trucking Associations, Inc. v. Scheiner,
483 U.S. 266, 286 (1987), this Court invalidated
Pennsylvania’s unapportioned highway use tax that,
in practical effect, imposed a cost per mile on out-ofstate carriers “that is approximately five times as
heavy as the cost per mile borne by local trucks[.]”
By contrast, apportionment of the tax base
greatly reduces the risk of taxing out-of-state activity
and is a key attribute of many nondiscriminatory
state taxes, a point emphasized in Trinova Corp. v.
Michigan Department of Treasury, 498 U.S. 358
(1991). Trinova Corp. involved a challenge to
Michigan’s value-added tax. In that case (as here), the
party challenging the tax could not “point to any
treatment of in-state and out-of-state firms that is
discriminatory on its face[.]” Id. at 384. Instead, the
challenger argued that the dormant Commerce
Clause “ ‘has a deeper meaning that may be
implicated’ ” when evaluating a facially neutral state
tax. Id. at 385 (quoting Am. Trucking Ass’ns, 483 U.S.
at 281). This Court agreed that the Commerce Clause
requires something more than “mere facial
neutrality.” Id. at 385. But fair apportionment
16
sufficed to provide that “something more.” See
Trinova Corp., 498 U.S. at 385 (“The ‘deeper meaning’
to which American Trucking refers is embodied
in the requirement of fair apportionment[.]”).
Because Michigan taxed only a fairly-apportioned
slice of interstate business activity, the taxpayer
could show no actual discrimination. Instead,
(like the Washington Bankers here) the taxpayer’s
discrimination claim boiled down to a “vague
accusation” of inconsistent treatment of businesses
located outside the state. Id.
The Court in Trinova Corp. clearly recognized
that a fairly apportioned state tax is unlikely to
discriminate against interstate commerce. This has
been a consistent theme in numerous cases decided
over the past sixty years. See, e.g., General Motors
Corp. v. Tracy, 519 U.S. 278, 298 n.12 (1997) (“In the
realm of taxation, the requirement of apportionment
. . . assur[es] that interstate activities are not unjustly
burdened by multistate taxation.”); Container Corp.
of Am. v. Franchise Tax Bd., 463 U.S. 159, 171
(1983) (“[I]n the interstate commerce context . . . the
anti-discrimination principle has not in practice
required much in addition to the requirement of fair
apportionment.”); Nw. States Portland Cement,
358 U.S. at 462 (fair apportionment prevents state
taxes that place interstate commerce at a competitive
disadvantage).
A properly apportioned state tax prevents the
state from taxing value earned outside its borders.
This is true even if the tax falls on extremely large
corporations engaged in interstate or international
commerce. Barclays Bank, 512 U.S. at 312; Container
Corp., 463 U.S. at 171.
17
The Washington Bankers discuss a number of
cases that they contend are “irreconcilable” with the
Washington Supreme Court’s decision, but each is
inapt. Several of the cases struck down laws that
explicitly favored in-state over out-of-state commerce.
For instance, they mistakenly contend that the
decision below cannot be squared with Camps
Newfound/Owatonna, 520 U.S. 564. Pet. 19, 21. But
in that case, this Court invalidated a facially
discriminatory property tax exemption that applied
with full force to charities operated principally for the
benefit of state residents, but provided a more limited
or no tax benefit to charities that principally benefited
nonresidents. Camps Newfound/Owatonna, 520 U.S.
at 575-76. The Washington tax contains no similar
exemption, and does not confer any benefit to in-state
businesses that is denied to out-of-state businesses.
The Washington tax also differs in key respects
from the tax invalidated in Fulton Corp. v. Faulkner,
516 U.S. 325 (1996), which involved North Carolina’s
“intangibles tax” that applied to the value of corporate
stock owned by persons in the state. Under that tax,
“residents were entitled to calculate their tax liability
by taking a taxable percentage deduction equal to the
fraction of the issuing corporation’s income subject to
tax in North Carolina.” Id. at 328. Thus, a taxpayer
owning stock in a corporation doing no business in
North Carolina was taxable on 100% of its value,
while a taxpayer owning stock in a corporation doing
all of its business in North Carolina was not taxed
at all. Id.
18
The tax at issue here is easily distinguishable.
Washington’s tax on extremely profitable financial
institutions does not include a deduction mechanism
similar to the deduction that doomed the North
Carolina tax. More importantly, the amount of a
company’s revenue subject to Washington’s tax does
not increase based on the amount of business
conducted outside the state. To the contrary, it is
measured by the apportioned gross income from
in-state activity. See Pet. App. 3a n.1. The
apportionment mechanism fairly attributes gross
income to the degree the specified financial institution
conducts business in the state; and similar
apportionment mechanisms have been approved
many times over. See, e.g., Nw. States Portland
Cement, 358 U.S. at 460. That is the exact opposite
of North Carolina’s tax—where the tax base
increased “to the degree” the issuing corporation
conducted business outside the state. Fulton Corp.,
516 U.S. at 333.
The Washington Bankers also err in relying on
two other cases originating from North Carolina,
Best & Co. v. Maxwell, 311 U.S. 454 (1940), and Hunt
v. Washington State Apple Advertising Commission,
432 U.S. 333 (1977). See Pet. 20-21. Neither case
involved a fairly apportioned tax. Rather, Best & Co.
involved a flat (unapportioned) licensing fee that had
the effect of discouraging the free flow of commerce,
and Hunt involved a regulation on in-state
advertising that effectively barred out-of-state apple
growers from advertising the superior quality of their
products. In both cases, the challengers demonstrated
an actual discriminatory effect. Best & Co., 311 U.S.
at 456-57; Hunt, 432 U.S. at 353.
19
The Washington tax is much different. Unlike
unapportioned taxes and disparate restrictions on
advertising, this tax applies evenhandedly to in-state
and out-of-state businesses, and erects no economic
barriers to competition from outside the state. Those
with sufficient consolidated net income to meet the
$1 billion threshold pay the additional tax regardless
of their principal business location, and those with
consolidated net income under $1 billion pay only the
standard B&O tax regardless of their principal
business location. As noted above, many businesses
that are based in Washington are subject to the tax,
and many banks that are based outside of Washington
but do extensive business in the state are exempt from
the tax. The Commerce Clause “is not offended” when,
as here, “state boundaries are economically
irrelevant.” Am. Trucking Ass’ns, 483 U.S. at 283.
Finally, the Washington Bankers claim that
the decision below conflicts with Exxon Corp.,
437 U.S. 117, but there is no conflict. In Exxon Corp.,
this Court upheld a Maryland law barring certain oil
companies from operating retail gas stations even
though only out-of-state oil producers were impacted.
Id. at 126-27. The Washington Bankers claim this law
did not “discriminate against interstate commerce
because it left unaffected numerous interstate”
companies, Pet. 23, but they fail to mention that
Washington’s tax leaves unaffected many interstate
banks operating in Washington, i.e., any bank with
less than $1 billion in annual profits. See supra 5-6.
The Washington Bankers also emphasize that Exxon
Corp. cited “three ways in which the [Maryland] law
might have discriminated but did not”: it did not
20
“[1] prohibit the flow of interstate goods, [2] place
added costs upon them, [3] or distinguish between
in-state and out-of-state companies in the retail
market.” Pet. 23 (quoting Exxon Corp., 437 U.S. at 126
(first alteration ours)). They claim that the
Washington Supreme Court held that a tax can
be discriminatory only if all three characteristics are
present. Pet. 23. That is inaccurate. The Washington
Bankers did not argue that the tax possessed the first
or third characteristics. They argued only that the tax
“place[d] added costs upon them.” Pet. 23. The
Washington Supreme Court correctly held that added
costs alone cannot possibly suffice to show
discriminatory effects, because every tax and
regulation raises costs to some degree. Pet. App. 16a17a. Nothing in Exxon Corp. is to the contrary, and
the Washington court cannot be faulted for declining
to consider the other two elements when the
Washington Bankers never asserted they were
present.
2.
Washington Is Not Taxing ExtraJurisdictional Income
The Washington Bankers also err as a matter
of law when they contend that States may not apply a
higher tax rate triggered by “global profits.” Pet. 26.
Although the Washington Bankers apparently
concede that States may impose graduated business
activity taxes, they ignore cases such as Maxwell and
Grosjean that unambiguously hold that States may
consider property or income from outside the state
when determining the tax rate that applies to in-state
property or activity.
21
In Maxwell, 250 U.S. at 534, this Court upheld
a New Jersey inheritance tax system that required
the inclusion of the decedent’s entire estate, including
property located outside the state that the state could
not tax, in determining the rate that applied to
property the state could tax. This Court reasoned that
when a state “levies taxes within its authority,
property not itself taxable by the state may be used as
a measure of the tax imposed.” Id. at 539. A tax
computation that considers out-of-state property “is in
no just sense a tax upon the foreign property[.]” Id.
The rationale in Maxwell also applies to state
income and license taxes on in-state business activity.
For instance, in Grosjean, 301 U.S. 412, this Court
upheld a Louisiana “chain store” license tax where the
amount of tax an in-state store owed ranged from a
low of $10 if the store was part of a group of ten or
fewer stores to a high of $550 if the store was part of
a group of more than five hundred stores. Id. at 418.
The tax statute looked to the total number of stores in
the group regardless of where each member store was
located. The Great Atlantic & Pacific Tea Company
and other chain stores challenged the tax, arguing
that the state was attempting to tax “property and
activities which are beyond the state’s jurisdiction,”
thereby “burdening interstate commerce” by favoring
“intrastate chains.” Id. at 419. This Court rejected
that argument, holding that it ignores “the
advantages and economic effects of the chain as a
whole and of each unit; and ignores the possibility
that a chain-store company of national scope might
well be incorporated in Louisiana, whose stores in
that state would be rated for taxation according to its
total stores within and without the state.” Id. at 422.
22
Applying the holdings in Maxwell and
Grosjean, lower federal and state courts have
uniformly held that the tax rate imposed in a
graduated state tax system can properly consider
nontaxable income or property. As an example, the
Tenth Circuit Court of Appeals in United States v.
Kansas, 810 F.2d 935 (10th Cir. 1987), upheld a
graduated state income tax that included military pay
earned by an active duty military member in
computing the tax rate that applied to the taxpayer’s
non-military income. Although Kansas could not tax
the military pay under a federal statute, it could
include that income in determining the applicable tax
rate. Id. at 938. Consistent with the holdings in
Maxwell and Grosjean, the Court of Appeals held that
“the mere inclusion of military compensation in a
formula determining the rate of tax on income from
Kansas sources does not constitute a tax on the
military income” itself. Id.
Similarly, New York’s highest court has
explained that “[i]t has long been the rule that States
may refer to nontaxable out-of-State assets in setting
their rates for taxable assets.” Brady v. New York,
607 N.E.2d 1060, 1063 (N.Y. 1992) (citing Maxwell
and Grosjean), cert. denied, 509 U.S. 905 (1993).
When the issue is “how to determine the rate on
income” the state may tax, states plainly may consider
income that is beyond the state’s jurisdiction to tax.
Id. at 1064.
Numerous other courts have reached the same
conclusion. See, e.g., Walters v. State ex rel. Oklahoma
Tax Comm’n, 935 P.2d 398, 402 (Okla. Civ. App. 1996)
23
(upholding Oklahoma’s graduated income tax,
concluding that “[u]se of out-of-state income to
calculate a tax rate for in-state income in no way
represents a tax on the out-of-state income”);
Matteson v. Dir. of Revenue, 909 S.W.2d 356, 358
(Mo. 1995) (upholding Missouri’s graduated income
tax that included all of the taxpayer’s income in
determining the rate that applied to in-state income,
citing Maxwell ); Stevens v. State Tax Assessor,
571 A.2d 1195, 1197 (Me.) (same), cert. denied,
498 U.S. 819 (1990); Wheeler v. State, 249 A.2d 887,
891 (Vt.) (same), appeal dismissed for want of a
substantial federal question, 396 U.S. 4 (1969). The
Washington Bankers and amici curiae point to no
contrary cases. See Pet. 26-28 (citing no authority
holding that graduated state taxes cannot consider
“global profits” in establishing the applicable tax
rate); Br. Amicus Curiae of Council on State Taxation
6-20 (citing no authority holding that states cannot
consider “pre-apportionment global net income” in
establishing the applicable rate).5
There is no principled difference between the
higher state tax on in-state chain stores upheld in
Grosjean and the higher B&O tax on the in-state
business activity of extremely profitable financial
institutions upheld by the Washington Supreme
Court. Additionally, this Court has recently cautioned
5 The other amicus briefs filed in support of the petition
do not meaningfully address the States’ authority to enact
graduated tax rates.
24
against applying its “Commerce Clause decisions [to]
prohibit the States from exercising their lawful
sovereign powers in our federal system[.]” South
Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 2096 (2018).
The rule the Washington Bankers ask this Court to
adopt would overturn decades of precedent and call
into question the tax policies of countless States. This
Court should decline that invitation.
B.
Reviewing this Tax Challenge Would Not
Resolve Distinctions Made by Lower
Courts in Fact-Bound Regulatory Cases
Virtually ignoring the entire body of cases that
address tax rate distinctions, the Washington
Bankers instead seek to manufacture a conflict from
lower court decisions addressing state regulations
prohibiting or limiting out-of-state competition.
See Pet. 10-19. But rather than demonstrate a
disagreement on a legal principle, the Washington
Bankers merely cite cases that reach different
conclusions based on different facts and different
regulatory structures, only one of which even involves
taxes. Not one of the cases the Washington Bankers
cite involves an apportioned tax or a statutory
distinction based on corporate income, like
Washington’s tax. In any event, consideration of total
income or profit to set a tax rate simply is not a proxy
for interstate commerce, and a contrary conclusion
would undermine countless such laws across the
country.
25
1.
There Is No Disagreement in the
Lower Courts About How to Analyze
Apportioned State Taxes
None of the cases the Washington Bankers
discuss to claim a circuit split involve apportioned
taxes based on profit, which is what is at issue here.
Instead, the cases almost exclusively focus on
regulatory distinctions that are alleged to prohibit or
substantially limit competition in a local market. The
Washington tax does not implicate this legal principle
because it does not limit competition. Moreover, even
if relevant to the tax challenge at hand, the cases cited
by Washington Bankers merely demonstrate that
different facts and different regulatory regimes lead
to different outcomes.
The Washington Bankers start their quest to
identify a circuit split with two cases that involved
state regulatory schemes that prohibited retail
businesses categorized as “formula,” “large chain,” or
“franchise” from competing in a local market. Pet. 12
(citing Cachia, 542 F.3d 839; Island Silver & Spice,
Inc. v. Islamorada, 542 F.3d 844 (11th Cir. 2008)). In
two opinions issued the same day, the Eleventh
Circuit found that complete prohibitions on such
retail establishments served to “exclude national
chain[s] from competition in the local market,”
thereby
“discriminating
against
interstate
commerce.” Cachia, 542 F.3d at 843; Island Silver &
Spice, 542 F.3d at 846-47. No such prohibition is at
issue here. Financial institutions with over
$1 billion in worldwide profits operate extensively in
Washington, and the Washington Bankers offer no
evidence that the tax has discouraged any such
institution from entering the Washington market.
26
Similarly, the Washington Bankers overstate
the import of Walgreen Co. v. Rullan, 405 F.3d 50, 56
(1st Cir. 2005), cert. denied sub nom. Perez-Perdomo v.
Walgreen Co., 546 U.S. 1131 (2006). See Pet. 15.
There, the First Circuit concluded that a law that
allowed Puerto Rico’s Secretary of Health to “block a
new pharmacy . . . simply because of the adverse
competitive effects that the new pharmacy will have
on existing pharmacies” (which were almost entirely
locally-owned) had the effect of discriminating against
interstate commerce, particularly where existing
pharmacies wielded “substantial influence in the
enforcement” of the regulation. Walgreen Co.,
405 F.3d at 55-56. Importantly, the evidence adduced
at trial established that the law as applied by the
Secretary effectively allowed the established,
primarily local, pharmacies “to manipulate the
regulatory scheme for [their] own advantage” and
effectively prohibit non-locally owned pharmacies
from operating in Puerto Rico. Id. at 57. Washington’s
law does no such thing.
Other cases relied upon by the Washington
Bankers have found discriminatory effect from laws
that essentially render it impossible for out-of-state
companies to compete with their in-state
counterparts. Pet. 13-14. For example, the Sixth
Circuit invalidated an Ohio law that required truck
remanufacturers to obtain and provide Ohio
customers with binding agreements from local dealers
to service their vehicles, which, the court noted,
effectively required the out-of-state remanufacturers
27
to either “start purchasing chassis from in-state
dealers, or else stop doing business in Ohio.” McNeilus
Truck & Mfg., Inc. v. Ohio ex rel. Montgomery, 226
F.3d 429, 442 (6th Cir. 2000).
For the same reason, the Sixth Circuit also
invalidated a law that prohibited small farm wineries
from shipping wine to Kentucky customers unless the
wine was purchased by the customer in person at the
winery. Cherry Hill Vineyards, LLC v. Lilly, 553 F.3d
423, 432-33 (6th Cir. 2008). The court found
discriminatory effect because the prohibition both
made it “economically and logistically infeasible” for
the out-of-state small farm wineries to sell to in-state
customers, and benefited in-state interests by
virtually eliminating competition for in-state wineries
and requiring the out-of-state wineries to go through
in-state wholesalers. Id. at 433.
The Washington Bankers also point to
Family Winemakers, 592 F.3d at 11, where the First
Circuit found discriminatory effect after concluding
that “the totality of the evidence” demonstrated that
a law limiting distribution options for wineries
above 30,000 gallons “significantly alter[ed] the
terms of competition between in-state and
out-of-state wineries to the detriment of the
out-of-state wineries[.]” See Pet. 14. The court there
painstakingly reviewed the regulatory scheme and
found that the “ultimate effect ” was to “artificially
limit the playing field in this market in a way that
enables Massachusetts’s wineries to gain market
share against their out-of-state competitors.”
Family Winemakers, 592 F.3d at 12.
28
None of the above cases had anything to do
with taxes or distinctions based on corporate
income. Rather, each of them reviewed distinctions
that effectively prohibited out-of-state businesses
from competing against similarly-situated in-state
counterparts to access in-state customers. In
contrast, Washington’s tax does not limit in any way
out-of-state financial institutions from competing
with in-state financial institutions.
The Washington Bankers cite two more cases
with even less relevance here.
First, the Washington Bankers overstate the
Seventh Circuit’s holding in Wiesmueller v.
Kosobucki, 571 F.3d 699 (7th Cir. 2009), where
Wisconsin exempted graduates of in-state law schools
from the requirement to take the Wisconsin Bar exam
to practice law in Wisconsin. Pet. 12-13. The sole issue
on appeal was whether the district court erred in
dismissing the lawsuit for failure to state a claim.
Wiesmueller, 571 F.3d at 701. The Seventh Circuit
concluded that the “case was dismissed prematurely,”
and remanded the case for development of a factual
record. Id. at 707. The court cautioned, however, that
it was not professing a “view on the ultimate
outcome[.]” Id. And, on remand, it appears this claim
went nowhere. Wiesmueller v. Kosobucki, 667 F. Supp.
2d 1001 (W.D. Wis. 2009) (declining to prematurely
address new claim); Wiesmueller v. Kosobucki, 2009
WL 4722197 (W.D. Wis. Dec. 4, 2009) (decertifying
class). Like the other cases the Washington Bankers
rely upon, this case only reinforces that dormant
Commerce Clause challenges are highly fact-specific.
29
Second, the Washington Bankers point to Jones
v. Gale, 470 F.3d 1261 (8th Cir. 2006), cert. denied, 549
U.S. 1328 (2007) (Pet. 14), but there, the Eighth
Circuit found the law to be facially discriminatory
based on an exemption from the prohibition on
corporate farming for “family farm corporations” in
which at least one family member resided on or
worked on the farm. Jones, 470 F.3d at 1267-68. By its
own language, the exemption favored locally-owned or
managed family farms over family farms owned and
managed by out-of-state families. Id.
The Washington Bankers contrast the abovedescribed cases with a body of cases they say “allow
state and local authorities to use proxies for interstate
commerce to disadvantage out-of-state interests.”
Pet. 16-19. But none of the cases the Washington
Bankers cite so hold, and, as with the cases described
above, each of the cases is highly fact-dependent.
The Washington Bankers first point to the First
Circuit’s decision in Wine & Spirits Retailers, Inc. v.
Rhode Island, 481 F.3d 1 (1st Cir.), cert. denied,
552 U.S. 889 (2007), which upheld a prohibition on
franchise and chain-store arrangements being
licensed to sell liquor at retail. Pet. 16-17. The First
Circuit there, however, found that the plaintiffs had
“adduced no evidence that the prohibition on
franchise and chain-store arrangements, in itself, has
had, or threatens to have, a debilitating or unfair
impact either on competition in general or . . . on
out-of-state enterprises in particular.” Wine & Spirits
Retailers, 481 F.3d at 14. The First Circuit
distinguished the case before it—where the district
30
court found after a full trial that there was no
compelling evidence of discriminatory effect—from
another First Circuit case in which “[s]tatistical data
adduced at trial ‘strongly indicate[d]’ that the statute
suppressed competition and favored local interests.”
Wine & Spirits Retailers, 481 F.3d at 14 (first
alteration ours) (distinguishing and quoting Walgreen
Co., 405 F.3d at 56). Rather than recite any rule
categorically foreclosing proxy arguments, the First
Circuit in Wine & Spirits Retailers simply noted that
“bare claim[s], without more, fail[ ] to pass muster,”
and such claims require “developed augmentation,
with evidentiary support.” Id. at 15. The very fact that
the First Circuit has issued decisions falling on both
sides of the alleged “circuit split” here only highlights
that the Washington Bankers have identified no
legitimate legal disagreement. They have instead
identified an unremarkable pattern of courts reaching
different outcomes based on the evidence about
different regulatory schemes.
Wal-Mart Stores, Inc. v. Texas Alcoholic
Beverage Commission, 945 F.3d 206 (5th Cir. 2019),
cert. denied, 141 S. Ct. 874 (2020), is also
distinguishable on its facts from decisions striking
down discriminatory regulations. See Pet. 17-18. The
evidence in Wal-Mart established that a ban on public
corporations being licensed to sell liquor applied to
in-state and out-of-state corporations alike, and,
notwithstanding the ban, out-of-state residents owned
and operated multiple stores that were licensed to sell
liquor. Wal-Mart Stores, 945 F.3d at 220, 223. The
Fifth Circuit emphasized that the discriminatory
31
effects analysis looks at whether a statute provides “a
‘competitive advantage to in-state interests vis-à-vis
similarly situated out-of-state interests.’ ” Wal-Mart
Stores, 945 F.3d at 219 (quoting Ford Motor Co. v.
Texas Dep’t of Transp., 264 F.3d 493, 501 (5th Cir.
2001)). Because the ban applied equally to in-state
and out-of-state public corporations, and equally
excluded other kinds of in-state and out-of-state
companies, it was not discriminatory.
The Washington Bankers try to create a conflict
between the Ninth Circuit’s decision in Black Star
Farms, LLC v. Oliver, 600 F.3d 1225 (9th Cir. 2010),
and Family Winemakers and Cherry Hill Vineyards.
But these cases do not conflict. Instead, the courts
reached different conclusions based on different
evidence of discriminatory effects. Specifically, the
plaintiffs in Family Winemakers and Cherry Hill
Vineyards did not substantiate their claims with
sufficient evidence. Id. at 1232, 1235 (distinguishing
Cherry Hill Vineyards, where the “plaintiffs presented
evidence that the requirement favored in-state
wineries and burdened out-of-state wineries”). By
comparison, the evidence elicited in Black Star
Farms, 600 F.3d at 1232, established that “ ‘almost
twice as many out-of-state wineries than in-state
wineries [had] already obtained’ the necessary
licenses” to be able to sell wine directly to Arizona
consumers, which plaintiffs in that case argued
benefitted mostly in-state wineries.
The Washington Bankers also identify
International Franchise Association, Inc. v. City of
Seattle, 803 F.3d 389 (9th Cir. 2015), cert. denied,
578 U.S. 959 (2016), as a source of potential conflict,
32
but again their arguments fall short. See Pet. 16.
At issue there was a law imposing a minimum wage
that mandated earlier adoption by large employers,
which was defined to include franchises affiliated with
large networks. Int’l Franchise, 803 F.3d at 397-98.
The Ninth Circuit concluded that at the preliminary
injunction stage of proceedings, the franchise
association plaintiff did not “provide substantial
evidence of discriminatory effects on out-of-state
firms ” or interstate commerce. Id. at 406. “It [did] not
show that interstate firms will be excluded from the
market, earn less revenue or profit, lose customers, or
close or reduce stores,” or that “new franchisees
will not enter the market or that franchisors will
suffer adverse effects.” Id. at 406-07. The court
acknowledged cases like Cachia and Island Silver, but
noted a logical distinction between the measures at
issue in those cases, which precluded or substantially
limited competition, from those like the one at issue
in International Franchise, which simply imposed
additional regulatory requirements on certain
business structures. Id. at 404 n.7.
The Washington Bankers fare no better in their
attempt to create a conflict from the holding in Saban
Rent-a-Car LLC v. Arizona Department of Revenue,
434 P.3d 1168 (Ariz.), cert. denied, 140 S. Ct. 195
(2019), the only case they cite that even addressed a
state tax. See Pet. 17. There, the plaintiffs abandoned
all other claims and argued only that a rental car
surcharge was invalid because it was motivated by the
intent to discriminate against out-of-state consumers.
Saban Rent-a-Car, 434 P.3d at 1172. But, as the
Arizona Supreme Court concluded, “the surcharge
applies equally to resident and non-resident car rental
33
agencies . . . and is calculated and imposed without
regard to their customers’ residencies.” Saban Rent-aCar, 434 P.3d at 1172. Nothing about the measure
“suggests an intent to treat in-state and out-of-state
interests differently or engage in the type of ‘economic
protectionism’ at odds with the Commerce Clause.” Id.
And, under Commonwealth Edison, a tax is not
discriminatory just because it is borne primarily by
out-of-state consumers. Id.
Lastly, the Washington Bankers briefly
reference Rosenblatt v. City of Santa Monica, 940 F.3d
439 (9th Cir. 2019), cert. denied, 140 S. Ct. 2762
(2020), which addressed a restriction on vacation
rentals. Pet. 17. They suggest without citing any
evidence that the restriction “overwhelmingly”
affected out-of-state visitors (as opposed to
Californians). But the Ninth Circuit noted that the
restriction “applies equally to renters and propertyowners from outside California, California residents
outside of Santa Monica, and Santa Monica residents
themselves.” Rosenblatt, 940 F.3d at 450. And the
plaintiffs there did “not adequately allege that
the ordinance increases the relative market share of
local businesses,” or cause a “net negative effect on
commerce outside of California.” Id. Rosenblatt
unremarkably confirms that a regulation that only
incidentally affects interstate commerce does not
exceed dormant Commerce Clause constraints.
Far from demonstrating a circuit split on
an issue material to this case, the Washington
Bankers’ proffered cases show only that lower courts
examine each dormant Commerce Clause challenge
34
individually based on case-specific arguments and
evidence. Besides being fact-specific, the cases almost
exclusively address restrictions on access to local
retail markets. In contrast, this Court has established
an entirely distinct body of law addressing
constitutional challenges to taxes. Part A supra p. 3.
Reviewing this tax challenge will not resolve any
ambiguity the Washington Bankers complain of in the
lower courts regarding regulatory barriers to in-state
markets.
2.
No Court Has Held that Profitability
Is an Impermissible Proxy for
Interstate Commerce
Using ability to pay as a basis for different tax
rates is not equivalent to discriminating against
out-of-state interests. The higher tax rate here applies
to hugely profitable financial institutions, wherever
they are based. Any out-of-state bank can operate in
Washington without owing the surtax unless its
consolidated annual net income exceeds $1 billion.
And any bank with net income above $1 billion owes
the tax, whether based in Washington or not.
The Washington Bankers suggest that the
$1 billion income delineation in Washington’s
graduated tax structure is impermissible because
most of the companies that earn $1 billion or more
happen to be headquartered outside of Washington.
Pet. 10. Accepting this argument would call into
question any number of taxes and regulations that
states impose on industries—like tobacco or oil—
that are primarily headquartered in a few states. But
this Court has already rejected the argument that “a
state tax must be considered discriminatory . . . if the
35
tax burden is borne primarily by out-of-state” entities.
Commonwealth Edison Co., 453 U.S. at 618.
Additionally, in matters of state taxation, “state[s]
may tax the large chains more heavily than the small
ones, and upon a graduated basis[.]” Fox, 294 U.S. at
100. Likewise, states may tax interstate business
activity when the tax is fairly apportioned to the
business transacted in the state. Container Corp.,
463 U.S. at 170-71; Exxon Corp. v. Wisconsin Dep’t of
Revenue, 447 U.S. 207, 219 (1980). Washington’s
graduated B&O tax is consistent with all of these
cases.
It is no accident that the Washington Bankers
cite only one tax case, and no cases that involved a
fairly apportioned state tax, in support of their
argument that lower court “confusion” mandates this
Court’s review. Fairly apportioned state taxes like
the B&O tax at issue here do not limit competition
in the way that a regulatory barrier does.
C.
This Case Is a Poor Vehicle to Address
Dormant Commerce Clause Principles
Much of the Washington Bankers’ petition is
irrelevant to the legal question they ask this Court to
address, and as to that question, this case presents a
terrible vehicle. As the Washington Bankers note,
laws can discriminate in violation of the dormant
Commerce Clause in three distinct ways: on their face,
in purpose, or in effect. Pet. 1. Their petition
addresses only the “last category,” Pet. 1, claiming
that “[t]he lower courts are sharply divided over how
to determine that a statute has an impermissibly
discriminatory effect[.]” Pet. 10. This framing of the
issue may have helped the Washington Bankers
36
inaccurately claim a legal conflict, but it utterly
undermines the idea that this case presents an
opportunity to resolve any legal issue.
To begin with, while the Washington Bankers
claim that this case presents a perfect opportunity for
this Court to explain how courts should resolve
whether a law has discriminatory effects, they filed
this lawsuit before Washington’s law even took effect.
Claims of discriminatory effect rightly depend on
evidence of such effects, see, e.g., Kleinsmith v.
Shurtleff, 571 F.3d 1033, 1040 (10th Cir. 2009)
(citing cases), yet the Washington Bankers introduced
absolutely no evidence about how this law actually
operates in practice.
Without any such evidence, the Washington
Bankers’ “proxy” argument rests almost entirely
on a distorted discussion of the legislative history
of Washington’s tax. They start with the notion that
the Washington legislature rushed this tax
through the legislative process. Pet. 4. But this
has nothing to do with discriminatory effects, and,
in fact, the legislation was introduced more than
two weeks before the end of Washington’s 2019
legislative session and “followed the standard
legislative process,” which included a robust debate in
both the state House and Senate. Pet. App. 34a.
The Washington Bankers also incorrectly claim
in their Statement that the Washington legislature
enacted the additional tax for a discriminatory
purpose. Pet. 5-6. But they never argue that this
Court should resolve that issue, and in any event the
Washington Supreme Court expressly rejected their
factual claims, pointing out that the legislature’s
37
express statement of intent was consistent with the
legislative history, Pet. App. 28a-29a, 31a-33a, and
that the Washington Bankers improperly based their
claim of legislative fraud on snippets of legislative
debate taken out of context. Pet. App. 29a-31a.
With these red herrings cast aside, it becomes
clear that all the Washington Bankers are asking
this Court to do is reweigh the evidence as to
discriminatory effects. But they made no record
demonstrating such effects. And even presuming
there was some merit to their contention that the
Washington Supreme Court misapplied the law when
it concluded that the tax has no discriminatory effect,
this case would still not warrant further review, as
this Court “rarely grant[s] review where the thrust of
the claim is that a lower court simply erred in
applying a settled rule of law to the facts of a
particular case.” Salazar-Limon, 137 S. Ct. at 1278
(Alito, J., concurring in the denial of certiorari).
CONCLUSION
The petition for a writ of certiorari should be
denied.
RESPECTFULLY SUBMITTED.
ROBERT W. FERGUSON
Attorney General
ALICIA O. YOUNG
Deputy Solicitor General
NOAH G. PURCELL
Solicitor General
Counsel of Record
CAMERON G. COMFORT
Sr. Assistant Attorney
General
1125 Washington Street SE CHARLES ZALESKY
Assistant Attorney General
Olympia, WA 98504-0100
360-753-6200
May 4, 2022
APPENDIX
1a
DECLARATION OF CHARLES ZALESKY
CHARLES ZALESKY hereby declares and
states as follows:
1.
I am a resident of the State of
Washington, am over the age of 18, and have personal
knowledge of the facts provided herein.
2.
I am an Assistant Attorney General with
the Washington Attorney General’s Office, assigned to
the Revenue and Finance Division. Among my duties
is to advise the Washington State Department of
Revenue regarding excise tax issues and to represent
the Department in excise tax litigation. As part of my
duties, I am permitted to access tax return
information relevant to cases I am assigned, which is
otherwise
protected
from
disclosure
under
Washington’s tax confidentiality statute, Revised
Code of Washington § 82.32.330.
3.
I am one of the attorneys representing
the State of Washington, Department of Revenue, in
the litigation initiated by the Washington Bankers
Association and American Bankers Association
(Petitioners) to challenge the constitutionality of the
additional 1.2 percent Business and Occupation
(B&O) tax imposed on extremely profitable banks and
financial institutions.
WASHINGTON-BASED FINANCIAL
INSTITUTIONS ARE PAYING THE
ADDITIONAL TAX
4.
The additional B&O tax is codified in
Washington Revised Code § 82.04.29004, and became
effective January 1, 2020. Petitioners initiated their
challenge to the tax before its effective date, and by
2a
the time the challenge was resolved at the trial court
level in June 2020, the tax had been in effect for less
than six months.
5.
During the trial court proceedings, the
Department was able to provide statistics pertaining
to the tax payments it received from specified
financial institutions during the first three months of
2020. Those statistics showed that during that threemonth period the State received tax payments under
the additional tax from 153 taxpayers, three of which
listed their state of incorporation or principal business
location as Washington State. Although the names
and identifying information of those taxpayers that
paid the tax is confidential tax information under
Revised Code of Washington § 82.32.330, the number
of taxpayers paying the tax is not confidential and was
part of the record available to the Washington
Supreme Court when it rejected the Petitioners’
constitutional challenge to the additional tax.
6.
In February 2022, I received from the
Washington State Department of Revenue updated
statistics pertaining to tax payments it received from
specified financial institutions. The updated statistics
covered the first two years of tax collections. During
that two year time period, the Department received
payments from 253 specified financial institutions.
7.
The Washington Secretary of State
maintains an online searchable database of domestic
and foreign business entities that are registered with
the state, at https://ccfs.sos.wa.gov/#/. Of the 253
taxpayers that paid the surtax during 2020 and 2021,
twenty-one are listed with the Washington Secretary
of State as incorporated or formed in Washington, or
3a
as having their principal office address in
Washington. The twenty-one Washington-based
financial institutions represent just over eight percent
(8%) of the total number of institutions that paid the
tax during its first two years.
NON-WASHINGTON BANKS OPERATING IN
THE STATE ARE EXCLUDED FROM THE
ADDITIONAL TAX
8.
The additional tax imposed by Revised
Code of Washington § 82.04.29004 only applies to
financial institutions that are part of a consolidated
group earning at least one billion dollars during the
previous calendar year. The tax does not apply to
financial institutions operating in Washington that do
not meet this criteria.
9.
The website maintained by the FDIC
shows that as of April 15, 2022, there are 78 active
FDIC-insured banks that have at least one branch in
Washington State. https://banks.data.fdic.gov/bank
find-suite/bankfind?activeStatus=1&branchOffices=
true&pageNumber=1&resultLimit=100&stalp=WA
(last viewed April 21, 2022). Of those 78 currently
active banks, 40 list their principal business location
as within Washington State, and 38 list their
principal business location as outside Washington
State.
10.
Of the 38 non-Washington banks
currently operating within Washington, many are
small or mid-sized banks that would not be subject to
the additional B&O tax on extremely profitable
financial institutions. By way of example, the
following twelve non-Washington banks have not
reported sufficient net income on their 2021 Federal
4a
Financial Institutions Examination Council (FFIEC)
income statement to meet the one billion dollar net
income threshold.
First Interstate Bank, FDIC Cert. # 1105.
Net income reported on Schedule R1,
line 14, of 2021 FFIEC form 041 =
$217,007,000.
Available online at https://cdr.ffiec.gov/
Public/ViewFacsimileDirect.aspx?ds=call&idT
ype=fdiccert&id=1105&date=12312021
Gateway First Bank, FDIC Cert. # 15118.
Net income reported on Schedule R1,
line 14, of 2021 FFIEC form 041 =
$85,985,000.
Available online at https://cdr.ffiec.gov/
Public/ViewFacsimileDirect.aspx?ds=call&idT
ype=fdiccert&id=15118&date=12312021.
Bank of Eastern Oregon, FDIC Cert. # 16243.
Net income reported on Schedule R1,
line 14, of 2021 FFIEC form 051 = $7,427,000.
Available online at https://cdr.ffiec.gov/
Public/ViewFacsimileDirect.aspx?ds=call&idT
ype=fdiccert&id=16243&date=12312021.
Umpqua Bank, FDIC Cert. # 17266.
Net income reported on Schedule R1,
line 14, of 2021 FFIEC form 041 =
$428,591,000.
5a
Available online at https://cdr.ffiec.gov/
Public/ViewFacsimileDirect.aspx?ds=call&idT
ype=fdiccert&id=17266&date=12312021.
Community Bank, FDIC Cert. # 17445.
Net income reported on Schedule R1,
line 14, of 2021 FFIEC form 051 = $3,074,000.
Available online at https://cdr.ffiec.gov/
Public/ViewFacsimileDirect.aspx?ds=call&idT
ype=fdiccert&id=17445&date=12312021.
Twin River Bank, FDIC Cert. # 22993.
Net income reported on Schedule R1,
line 14, of 2021 FFIEC form 051 = $1,889,000.
Available online at https://cdr.ffiec.gov/
Public/ViewFacsimileDirect.aspx?ds=call&idT
ype=fdiccert&id=22993&date=12312021.
Bank of Hope, FDIC Cert. # 26610.
Net income reported on Schedule R1,
line 14, of 2021 FFIEC form 041 =
$215,025,000.
Available online at https://cdr.ffiec.gov/
Public/ViewFacsimileDirect.aspx?ds=call&idT
ype=fdiccert&id=26610&date=12312021.
Glacier Bank, FDIC Cert. # 30788.
Net income reported on Schedule R1,
line 14, of 2021 FFIEC form 041 =
$298,336,000.
Available online at https://cdr.ffiec.gov/
Public/ViewFacsimileDirect.aspx?ds=call&idT
ype=fdiccert&id=30788&date=12312021
6a
Pacific Premier Bank, FDIC Cert. # 32172.
Net income reported on Schedule R1,
line 14, of 2021 FFIEC form 041 =
$360,645,000.
Available online at https://cdr.ffiec.gov/
Public/ViewFacsimileDirect.aspx?ds=call&idT
ype=fdiccert&id=32172&date=12312021.
Bank of the West, FDIC Cert. # 3514.
Net income reported on Schedule R1,
line 14, of 2021 FFIEC form 031 =
$974,457,000.
Available online at https://cdr.ffiec.gov/
Public/ViewFacsimileDirect.aspx?ds=call&idT
ype=fdiccert&id=3514&date=12312021.
Sunflower Bank, National Association, FDIC
Cert. # 4767.
Net income reported on Schedule R1,
line 14, of 2021 FFIEC form 041 =
$49,182,000.
Available online at https://cdr.ffiec.gov/
Public/ViewFacsimileDirect.aspx?ds=call&idT
ype=fdiccert&id=4767&date=12312021.
Northwest Bank, FDIC Cert. # 58752.
Net income reported on Schedule R1,
line 14, of 2021 FFIEC form 041 =
$14,331,000.
Available online at https://cdr.ffiec.gov/
Public/ViewFacsimileDirect.aspx?ds=call&idT
ype=fdiccert&id=58752&date=12312021.
7a
I certify under penalty of perjury under the
laws of the State of Washington that the foregoing is
true and correct.
EXECUTED in Tumwater, Washington, this
22nd day of April 2022.
s/ Charles Zalesky
CHARLES ZALESKY
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.