Amicus Curiae Brief — Tyler Pipe Industries, Inc. v. Washington State Dept. of Revenue

IN THE

Supreme Court of the Write SRrvHs6

OCTOBER TERM, 1986 JOSEPH F. SPANIOL. Jr

CLERK

TYLER PIPE INDUSTRIES, INC..

Appellant.

vy. P}

STATE OF WASHINGTON DEPARTMENT OF REVENUE,

Appellee.

NATIONAL CAN CORPORATION, et al.,

Appellants,

vy. PI LLS

STATE OF WASHINGTON DEPARTMENT OF REVENUE,

Appe llee.

On Appeal from the Supreme Court of Washington

BRIEF OF THE

NATIONAL GOVERNORS’ ASSOCIATION,

NATIONAL LEAGUE OF CITIES,

NATIONAL ASSOCIATION OF COUNTIES,

INTERNATIONAL CITY MANAGEMENT ASSOCIATION,

NATIONAL CONFERENCE OF STATE LEGISLATURES,

AND U.S. CONFERENCE OF MAYORS

AS AMICI CURIAE IN SUPPORT OF APPELLEE

MARK C. RUTZICK BENNA RUTH SOLOMON *

Portland, Oregon Chief Counsel

3EATE BLOCH

PAUL J. LAWRENCE a

STATE & LOCAL LEGAL CENTER

Seattle, Washington " war = ae

. 444 North Capitol Street, N.W.

Of Counsel Pa

j ' Suite 349

Washinvton, D.C. 20001

(202) 638-1445

Counse ] of Ri cord for

Amici Curiae

WILZON - Eres PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

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QUESTIONS PRESENTED

1. Whether Washington’s gross receipts tax on manufac-

turing and wholesaling activities within the State dis-

criminates against interstate commerce, in violation of

the Commerce Clause, because a local manufacturer-

seller that pays the wholesale tax is protected from double

taxation by an exemption from the manufacturing tax.

2. Whether the Commerce Clause precludes the imposi-

tion of any gross receipts tax, given that gross receipts,

used as a measure of the tax base, may include value

derived from activities in other States.

3. Whether either the Commerce Clause or the Due

Process Clause precludes Washington from taxing an out-

of-state manufacturer that engages in regular, substan-

tial business activity in the State through independent

sales representatives rather than employees.

(i)

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED i

TABLE OF AUTHORITIES jets Vv

INTEREST OF THE AMICI CURIAE ....................-.----- 1

STATEMENT OF THE CASE | . 4

SUMMARY OF ARGUMENT 5

ARGUMENT enuideaitls 6

I. THE POWER TO TAX IS AT THE CORE OF

STATE SOVEREIGNTY, AND THE STATES

ARE ENTITLED TO SUBSTANTIAL DIS-

CRETION IN DESIGNING THEIR TAX SYS-

TEMS 6

A. The Power To Tax Is An Essential Attribute

Of State Power 7

B. The Choice Of A Tax Scheme Is An Exercise

Of Legislative, Not Judicial, Prerogative 8

Il. WASHINGTON’S GROSS RECEIPTS TAXES

ON MANUFACTURING AND WHOLESAL-

ING DO NOT DISCRIMINATE AGAINST IN-

TERSTATE COMMERCE 10

A. Armco Is Not Controlling In This Case 11

B. Washington’s Wholesaling Tax Does Not

Discriminate Against Interstate Commerce 14

C. The Application Of The Washington Manu-

facturing Tax Solely To Local Manufactur-

ers Selling Outside The State Does Not

Discriminate Against Out-Of-State Manu-

facturers Selling Within The State 17

(ili)

iv

TABLE OF CONTENTS—Continued

Page

D. The Washington Manufacturing Tax Does

Not Discriminate Against Local Manufac-

turers Selling Out Of The State eicedieeen 19

Ill. WASHINGTON’S TAX IS APPORTIONED

EXACTLY TO THE ACTIVITIES TAXED 21

A. The B & O Tax Does Not Result In Multiple

Taxation 21

B. Washington Is Entitled To Apportion By

Allocation hace loumnenseimiaaldes , 24

IV. TYLER PIPE HAS A SUFFICIENT NEXUS

TO WASHINGTON TO JUSTIFY APPLICA-

TION OF WASHINGTON’S TAXES TO IT 26

CONCLUSION 30

'

}

i

CASES:

Vv

TABLE OF AUTHORITIES

Page

Armco Inc. Hardesty, 467 U.S. 638 (1984) passim

Best & Co. v. Maxwell, 311 U.S. 454 (1940) 12

Boston Stock Exchange v. State Tax Comm'n, 429

U.S. 318 (1977) 10, 12, 17, 20, 21

Burger King Corp. v. Rudzewicz, 105 S.Ct. 2174

(1985) . " beeen - ‘a 29

Chicago Bridge & Iron Co. v. Washington Depart-

ment of Revenue, 98 Wn.2d 814, 659 P.2d 463,

appeal dismissed, 464 U.S. 1013 (1983) 9

City of Los Angeles v. Lyons, 461 U.S. 95 (1983) 13

Cohens v. Virginia, 19 U.S. (6 Wheat.) 264

(1821) 12

Commonwealth Edison Co. v. Montana, 453 U.S.

609 (1981) 8, 24

Complete Auto Transit, Inc. v. Brady, 430 U.S.

274 (1977) 10, 25, 26

Container Corp. of America v. Franchise Taz

Board, 463 U.S. 159 (1983) 3, 13, 22, 24

Exxon Corp. v. Wisconsin Department of Revenue,

447 U.S. 207 (1980) 7, 23, 25, 26

Flast v. Cohen, 392 U.S. 83 (1968) 14

General Motors Corp. v. Washington, 377 U.S. 436

(1964) 9, 27, 28

Gwin, White & Prince, Inc. v. Henneford, 305 U.S.

434 (1939) 13, 25

Halliburton Oil Well Cementing Co. v. Reily, 373

U.S. 64 (1963) 13

Hans Rees’ Sons, Inc. v. North Carolina, 283 U.S.

123 (1931) 22

Hanson v. Denckla, 357 U.S. 235 (1958) 29

Henneford v. Silas Mason Co... 300 U.S. 577

(1937) 20, 21

International Shoe Co. v. Washinaton, 326 U.S.

310 (1945) 29

Japan Line, Ltd. v. County of Los Angeles, 441

U.S. 434 (1979) 22

Maryland v. Lowisiana, 451 U.S. 725 (1981)..15, 17, 19, :

Mobil Oil Corp. v. Commissioner of Tares, 445

U.S. 425 (1980)

vi

TABLE OF AUTHORITIES—Continued

Page

Moorman Manufacturing Co. v. Bair, 437 U.S.

I) am oe ciall 8, 9, 22, 24

Norton Co. v. Department of Revenue, 340 U.S.

a eas 27

Power, Inc. v. Huntley, 39 Wn.2d 191, 235 P.2d

5: as > | eee ee die: 9

R. J. Reynolds Tobacco Co. v. Durham County,

N.C., Nos. 85-1021, 1022 (U.S. Dec. 9, 1986) 3, 12,

14, 15

Scripto, Inc. v. Carson, 362 U.S. 207 (1960) 28

Shaffer v. Carter, 252 U.S. 37 (1920) nal 29

Standard Pressed Steel Co. v. Washington Depart-

ment of Revenue, 419 U.S. 560 (1975) 9, 25, 27, 28

State Tax Comm'n v. Pacific States Cast Iron Pipe

Co., 372 U.S. 605 (1963) .-............ aa 22

Union Pacific Railroad v. Peniston, 85 U.S. (18

Wall.) 5 (1873) 7,8

Valley Forge Christian College v. Americans

United, 454 U.S. 464 hig : 13, 14

Wardair Canada, Inc. v. Florida Department of

Revenue, 106 S.Ct. 2869 (1986) 3

Xerox Corp. v. Harris County, Texas, 459 U.S. 145

(1982) .... _ . 14

CONSTITUTIONAL PROVISIONS:

Commerce Clause, U.S. Const. Art. I, § 8, cl. 3 passim

Due Process Clause, U.S. Const. Amend. XIV, § 1. passim

U.S. Const. Art. III, § 2 5, 13, 14

STATUTES:

Wash. Rev. Code § 82.04.220 4

Wash. Rev. Code § 82.04.440 4

Wash. Rev. Code § 82.94.440 (4) 10

BOOKS, TREATISES, ANU P [(ODICALS:

J. Aronson & J. Willey, Fi State and Local

frovernments (40h ed. | >) 2

4. Hamilton, The Fed fp No. 32 2,7

|, Hellerstein & W. Hellerstein, Cases and Mate-

rials o ate and Local Taxation (4th ed

IN THE

Siyprenw Cot of the Wuited States

OCTOBER TERM, 1986

—

Nos. 85-1963 and 85-2006

TYLER PIPE INDUSTRIES, INC.,

Appellant,

y. P}

STATE OF WASHINGTON DEPARTMENT OF REVENUE,

Appellee.

NATIONAL CAN CORPORATION, et al.,

Appellants,

ws

STATE OF WASHINGTON DEPARTMENT OF REVENUE,

Appellee.

On Appeal from the Supreme Court of Washington

BRIEF OF THE

NATIONAL GOVERNORS’ ASSOCIATION,

NATIONAL LEAGUE OF CITIES,

NATIONAL ASSOCIATION OF COUNTIES,

INTERNATIONAL CITY MANAGEMENT ASSOCIATION,

NATIONAL CONFERENCE OF STATE LEGISLATURES

AND U.S. CONFERENCE OF MAYORS

AS AMICI CURIAE IN SUPPORT OF APPELLEE

INTEREST OF THE AMICI CURIAE

The amici, organizations whose members include state,

county, and municipal governments and officials through-

out the United States, have a compelling interest in legal

‘ssues that affect state and local governments. This case

eoncerns the constitutionality of a business and occupa-

tion tax imposed by the State of Washington on busi-

2

nesses that manufacture or sell goods at wholesale in the

State. If this Court accepts the arguments raised against

the tax, the State has estimated that the actual and pro-

jected potential tax refund liability will exceed $423 mil-

lion, exclusive of interest. J.A. 205. In addition, because

a gross receipts tax is a kind of sales tax,’ the case has

significant potential to affect the ability of state and local

governments to impose sales taxes on national businesses.

Since 1944, the general retail sales tax has been the most

important tax source of state government.”

Since this Court’s decision in Armco Inc. v. Hardesty,

467 U.S. 638 (1984), invalidating a West Virginia tax,

Washington has been the only State that imposes a gen-

eral business and occupation tax. Washington imposes no

income tax, choosing instead to raise the revenue neces-

sary to fund essential state functions and other govern-

mental programs from the business and occupation tax,

as well as a sales tax. Amici are concerned that invalida-

tion of the tax challenged in this case will severely limit

the policy choices constitutionally available to state and

local governments in formulating tax policy and, in par-

ticular, will require Washington to overhaul its entire tax

structure. The power to raise revenue by imposing taxes

is the essence of sovereignty; and the States, as sovereigns

in our constitutional system of government, “possess an

independent and uncontrollable authority to raise their

own revenues for the supply of their own wants.” The

Federalist No. 32, at 198 (A. Hamilton) (Mentor ed.

1J. Hellerstein & W. Hellerstein, Cases and Materials on State

and Local Taxation 551 (4th ed. 1978).

* Forty-five States and the District of Columbia currently impose

sales taxes, which account for 32% of their tax collections. In

addition, as of October 1984, local sales taxes were imposed in 26

States. About 6,400 local governments annually collect $12.6 billion,

an average of 10.2% of 1984 tax revenues. In some cities, however,

sales taxes account for 60% of revenue. J. Aronson & J. Hilley,

Financing State and Local Governments 94 (4th ed. 1986) (citing

Census Bureau data).

3

1961). In our view, the Constitution requires the widest

possible latitude for state and local taxes and the exceed-

ingly sparing application of federal preemption under the

Commerce Clause or the Due Process Clause.

As a Nation, we have come to another turning point in

the balance of power and responsibilities between the fed-

eral government and state and local governments. For

years, the federal government has appropriated an in-

creasing share of the national income; but the reciprocity

previously provided through revenue sharing has been

abandoned, and grants-in-aid have been severely reduced.

Adding even further to the financial burden on state and

local governments is Congress’s increasing reliance on

state and local budgets to pay for social service programs

and benefits previously funded by the federal govern-

ment. The struggle of state and local governments for

economic solvency and self-sufficiency cannot be success-

ful if the limited tax base available to state and local gov-

ernments continues to be eroded through federal preemp-

tion. Increasingly, national businesses are asserting fed-

eral preemption of state’and local taxes to avoid paying

their fair share for the protection and the benefits that

government provides. E.g., R.J. Reynolds Tobacco Co. v.

Durham County. N.C.. Nos. 85-1021, 1022 (U.S. Dec. 9,

1986): Wardair Canada, Inc. v. Florida Departn ent of

Revenue, 106 S.Ct. 2369 (1986); Container Corp.

America v. Franchise Tax Board, 463 U.S. 159 1983

Such preemption not only imposes an unfair burden on

other taxpayers but undermines the State’s ability to gov-

ern because, quite simply, government services and ben-

TMT

its cost money. Amici therefore urge the Court to re-

+

affirm the standards developed in its recent cases: state

taxes are not invalid under the Supremacy Clause unless

|

di f conflict with constitutional principles or wit

av - eariy and ul i idably compelled.

i submit that the ecisions of the Washington

s ip) e Court are correct. I ePCauUuse this Court’s decision

\ ive a direct effect on matters of prime importance

4

to amici and their members, amici submit this brief to

assist the Court in its resolution of the case.*

STATEMENT OF THE CASE

Amici adopt appellee’s statement of the case and em-

phasize the following points. The appellant corporations

each conduct at least part of their business within the

State of Washington. They challenge the constitutional-

ity of Washington’s levy of its business and occupation

(“B & O”) tax. The B & O tax is assessed for the “act or

privilege of engaging in business activities” in the State

of Washington and is levied against the value of all prod-

ucts manufactured or sold at wholesale in the State.

Wash. Rev. Code § 82.04.220. The tax imposed is a per-

centage (0.44%) of the gross receipts derived from the

sale of the products.

The tax, levied uniformly on all intrastate or inter-

state businesses that manufacture or wholesale products

in Washington, contains a “multiple activities exemption,”

applicable to a business that both manufactures and sells

its product within the State. Wash. Rev. Code § 82.04.440.

That business is exempt from the manufacturing tax on

the product because it pays the wholesale tax on the same

product.

None of the appellants pays a gross receipts tax on

manufacturing or wholesaling to any other State. Appel-

lants challenge the B & O tax on the ground that it dis-

criminates against interstate businesses and is not fairly

apportioned to the activities performed in Washington.

Appellant Tyler Pipe also challenges the B & O tax on

the ground that the company does not have sufficient

“nexus” to the State of Washington to be subject to a

* Pursuant to Rule 36 of the Rules of this Court, the parties have

consented to the filing of this brief. Their letters of consent have

been filed with the Clerk of the Court.

5

state tax there. Tyler Pipe solicits substantial sales and

provides services to its customers in Washington through

exclusive sales agents who are independent contractors,

rather than employees of the company. Although these

agents perform services functionally equivalent to those

performed by direct employees of other companies, Tyler

Pipe argues that their status as independent contractors

creates a shield insulating it from tax liability.

SUMMARY OF ARGUMENT

This Court properly refuses to strike down a state tax

as unconstitutional absent a clear and convincing show-

ing that it has an unlawful effect. This restraint rec-

ognizes the essential power that States retain under our

federal system to raise revenue by taxation so that they

may provide the services and other attributes of a civil-

ized society. The Court has invalidated state taxes under

the Commerce Clause oniy when they conferred a direct

benefit on local business and when the litigant challenging

a tax has demonstrated that it suffers an actual adverse

impact.

The recent decision in Armco Inc. v. Hardesty, 467 U.S.

638 (1984), on its facts, merely stands for the proposi-

tion that a state tax is unconstitutional if it facially dis-

criminates against interstate commerce. Yet appellants,

relying on dicta in Armco, would extend its holding to

facially neutral taxes on the basis of hypothetical dis-

crimination. This departure from settled law is partic-

ularly disturbing because it ignores not only the tradi-

tional principles applicable to state tax challenges, but

also the concept that a litigant must establish injury in

fact to confer Article III standing. This Court should

reject appellants’ efforts to expand Armco.

When Washington’s B & O tax is judged by traditional

standards, it is clear, as this Court has held on three

previous occasions, that it passes constitutional muster.

The tax treats interstate and intrastate businesses equally

and allows them to make tax-neutral decisions. In short,

it does not discriminate against interstate commerce.

6

Appellants are no more successful on their fair appor-

tionment claim. Appellants have not shown that the tax

is out of all proportion to the business conducted in the

State, which is the apportionment standard applicable to

state taxation of interstate businesses. Appellants can

show at most an incidental burden of multiple taxation,

stemming from a partial overlap in the measures of vari-

ous taxes imposed by other States. Any such overlap,

however, results not from any infirmity in Washington’s

tax, but merely because Washington’s tax differs from

those of its neighbors. Washington is entitled to appor-

tion its gross receipts taxes by allocation and is not re-

quired to use an apportionment formula appropriate to

income taxes. Washington’s allocation taxes a business

exactly in proportion to its activity in the State.

Finally, appellant Tyler Pipe’s suggestion that a busi-

ness can avoid its fair burden of state taxation by relying

on independent contractors rather than employees to

solicit sales and to service clients must be rejected out of

hand. Tyler Pipe’s substantial business in Washington

enjoys the services and benefits conferred by the State;

whether it does so through direct employees or inde-

pendent contractors has no constitutional significance.

ARGUMENT

I. THE POWER TO TAX IS AT THE CORE OF STATE

SOVEREIGNTY, AND THE STATES ARE ENTI-

TLED TO SUBSTANTIAL DISCRETION IN DE-

SIGNING THEIR TAX SYSTEMS.

Appellants broadly challenge the specific tax scheme

enacted by the State of Washington. Appellants’ chal-

lenge is fueled in great part by dicta in this Court’s

recent opinion in Armco Inc. v. Hardesty, 467 U.S. 638

(1984). Certain language in Armco represents a dra-

matic departure from prior decisions judging the validity

of state tax systems. As we explain more fully in Part

II, Armco is not controlling here. But we also urge this

Court to recognize that the broad dicta in Armco are not

7

consistent with the respect that the Court traditionally

shows for state tax schemes, reflecting its appreciation of

the fundamental relationship between the power to tax

and the existence of vital state governments. In brief, the

Court has repeatedly recognized that (1) the power to

tax to raise revenue is an essential attribute of state

sovereignty, (2) the Constitution does not require uni-

formity among the States as to the type of taxes imposed,

and (3) the choice of a particular tax system is by its

nature legislative. These principles, more fully discussed

below, should inform this Court’s analysis, and, when

applied tc this case, demonstrate the constitutionality of

Washington’s tax scheme.

A. The Power To Tax Is An Essential Attribute Of

State Power.

The power to impose taxes in an inherent attribute of

state sovereignty. The States “possess an independent

and uncontrollable authority to raise their own revenues

for the supply of their own wants.” The Federalist No.

32, at 198 (A. Hamilton) (Mentor ed. 1961). Taxing

authority is essential if States are to provide services

and the other features of a “civilized society” to their

citizens and to those businesses, both intrastate and inter-

state, that choose to conduct business within a State’s

borders. See Exxon Corp. v. Wisconsin Department of

Revenue, 447 U.S. 207, 228 (1980); see also Union Pa-

cific Railroad v. Peniston, 85 U.S. (18 Wall.) 5, 33

(1873) (without the power to tax, “it is manifest the

state governments would be paralyzed’’).

Accordingly, constitutional limitations on a State’s

power to tax must be construed in light of the very real

needs of the State to raise revenue (id. at 30-31):

It cannot be that a State tax which remotely affects

the efficient exercise of a Federal power is for that

reason alone inhibited by the Constitution. To hold

that would be to deny to the States all power to tax

persons or property .... The States are, and they

must ever be, coexistent with the National govern-

8

ment. Neither may destroy the other. Hence the Fed-

eral Constitution must receive a practical construc-

tion. Its limitations and its implied prohibitions must

not be extended so far as to destroy the necessary

powers of the States, or prevent their efficient exer-

cise.

A “practical construction” of the Constitution confers

upon the States substantial discretion in levying taxes;

limitations imposed by the Commerce Clause or the Due

Process Clause should be sparingly applied only to the

most compelling cases of clear constitutional violation.

See Commonwealth Edison Co. v. Montana, 453 U.S. 609,

622 (1981) (“This Court has indicated that States have

considerable latitude in imposing general revenue taxes.’’).

B. The Choice Of A Tax Scheme Is An Exercise Of

Legislative, Not Judicial, Prerogative.

Appellants broadly attack the constitutionality of

Washington’s B & O tax, a gross receipts tax adopted as

a general revenue device. Although a State’s power to

tax is limited by the Commerce Clause, this Court has

steadfastly refused to substitute its judgment for that of

the state legislature as to the propriety of any paricular

tax system. The Constitution is neutral with respect to a

preference for any particular kind of tax. See Moorman

Manufacturing Co. v. Bair, 487 U.S. 267, 279 (1978). In

Moorman, this Court was faced with a challenge to an

income tax scheme that was unique among the States.

The “asserted constitutional flaw” of the challenged tax

was that “it is different from that presently employed

by a majority of States and that difference creates a risk

of duplicative taxation.” Jd. at 278. If that character-

istic itself made the tax unconstitutional, only a uniform

rule for state income taxes, imposed by the Court, could

have overcome the infirmity. This the Court refused to

do. ‘Although the adoption of a uniform code would un-

deniably advance the policies that underlie the Commerce

Clause, it would require a policy decision based on polit-

ical and economic considerations that vary from State to

State.” Jd. at 279. Accordingly, Washington’s B & O

9

tax is not infirm solely to the ground of its uniqueness

and the consequent difficulty in making it fit neatly with

the varying tax structures of other States.

The Court should be particularly reluctant to strike

down Washington’s B & O tax because it represents the

“longstanding tax policy” of the State. See Moorman

Manufacturing, 437 U.S. at 280 n.16. Washington has

levied a B & O tax since 1953 and has never levied a per-

sonal or corporate income tax, the only serious alternative

to a gross receipts tax. In fact, the State Supreme Court

has held that a corporate income tax is unconstitutional

under the uniformity clause of the state constitution.

See Power, Inc. v. Huntley, 39 Wn.2d 191, 235 P.2d 173

(1951). As an expression of the political will of the peo-

ple of the State of Washington, the choice of a B & O tax

should be respected by this Court.

An adverse decision on the apportionment issue in this

case may well preclude any gross receipts taxes, notwith-

standing this Court’s repeated judgment that the tax is

constitutional.* Appellants argue that Washington must

apportion part of the manufacturing value or wholesale

price of a product to activity in other States. But a gross

receipts tax is a tax on gross receipts, 7.e., all of a busi-

ness’ receipts within the taxing jurisdiction. Accordingly,

a holding that Washington may not constitutionally tax

all of the gross receipts of manufacturing or wholesaling

activity within the State is essentially a holding that no

gross receipts tax may ever be imposed.

An adverse decision on the discrimination issue may

also force Washington to abandon its gross receipts tax

system. The discrimination challenge is based on the

multiple activities exemption, which protects local manu-

facturer-sellers from double taxation by exempting them

4General Motors Corp. v. Washington, 377 U.S. 436 (1964);

Standard Pressed Steel Co. v. Washington Department of Revenue,

419 U.S. 560 (1975); Chicago Bridge & Iron Co. v. Washington

Dep't of Revenue, 98 Wn.2d 814, 659 P.2d 463, appeal dismissed, 464

U.S. 1018 (1983).

10

from paying the manufacturing tax on the same goods on

which they have paid the wholesale tax.° As we discuss

more fully below (pp. 16-17), the multiple activities

exemption serves two essential purposes: to prevent dis-

crimination against local business, and fairly to “encour-

age the growth and development of intrastate commerce

and industry” (see Boston Stock Exchange v. State Tax

Comm'n, 429 U.S. 318, 336 (1977)). A decision that

Washington must impose a double gross receipts. tax on

its local manufacturer-wholesalers would leave the State

with only two choices: either adopt taxing policies that

are plainly harmful to the economic future of the State,

or abandon its strongly held political consensus against

income taxation. This is a choice that Washington should

not have to make.

II. WASHINGTON’S GROSS RECEIPTS TAXES ON

MANUFACTURING AND WHOLESALING DO NOT

DISCRIMINATE AGAINST INTERSTATE COM-

MERCE.

The constitutional test for the validity of a state tax is

found in Complete Auto Transit, Inc. v. Brady, 430 U.S.

274, 279 (1977), which held that a tax is valid under the

Commerce Clause if it “is applied to an activity with a

substantial nexus with the taxing State, is fairly appor-

tioned, does not discriminate against interstate commerce,

*In an attempt to protect the source of the essential revenue col-

lected through the B & O tax, the Washington state legislature,

after this Court’s decision in Armco, enacted a contingent tax

credit available to companies that manufacture out of the State,

to go into effect if there were a judicial decision that the multiple

activities exemption discriminated against interstate commerce.

The credit would be available to out-of-state manufacturers against

Washington’s wholesaling tax for amounts paid as gross receipts

taxes on manufacturing in other States. Wash. Rev. Code

§ 82.04.440(4). Appellants’ claims of discrimination, however, are

not limited to the failure of the current tax scheme to provide the

credit contained in this fallback provision. Should the Court accept

any of these broader arguments, the fallback provision might not be

sufficient to sustain the multiple activities exemption, which is in-

tegral to Washington’s gross receipts tax system.

11

and is fairly related to the services provided by the State.”

Appellants National Can, et al., rest their argument

primarily on the contention that Washington’s gross re-

ceipts taxes on manvdfacturing and wholesaling discrimi-

nate against interstate commerce. Appellants also chal-

lenge the fair apportionment prong of the test. Appel-

lant Tyler Pipe challenges the nexus, fair apportionment,

and discrimination prongs of the test.

_

A. Armco Is Not Controlling In This Case.

All the appellants rest their discrimination claims pri-

marily upon the Court’s opinion in Armco. But Armco is

not controlling here. Armco stands only for the proposi-

tion that a state tax that facially discriminates against

interstate commerce in invalid. The issue in Armco, as

the Court noted, was whether “West Virginia’s wholesale

gross receipts tax, from which local manufacturers are

exempt, unconstitutionally discwiminates against inter-

state commerce.” 467 U.S. at 639 (emphasis supplied).

The Court found that it did. Jd. at 642. West Virginia

sought to overcome this facial discrimination by arguing

that the wholesale tax was a constitutionally acceptable

equivalent for the State’s manufacturing tax, which was

not assessed against out-of-state businesses. J/bid. The

Court rejected this argument because of differences in

the rates and the bases of the two taxes. Jd. at 643.

Having rejected West Virginia’s only defense to the

facial discrimination of the wholesaling tax, the Court

need not have gone any further; and had the opinion

stopped there, the discrimination challenge in this case

might well not be before the Court. This Court has re-

peatedly upheld the Washington gross receipts tax, and

none of the discussion of facial discrimination aids appel-

lants, who in fact do not rely on the holding of Armco.

Appellants’ challenge arises only because the Armco

opinion contains certain generalized assumptions and

broad conclusions regarding the validity of state tax

schemes. These statements, which were not necessary to

dispose of the case, are properly regarded as dicta and

12

therefore not controlling precedent. See R.J. Reynolds

Tobacco Co. v. Durham County, N.C., Nos. 85-1021, 1022

(U.S. Dee. 9, 1986); Cohens v. Virginia, 19 U.S. (6

Wheat.) 264, 399 (1821). They should, in particular, be

treated as noncontrolling dicta because they represent

such serious departures from the Court’s prior cases. In

at least three respects, the Armco opinion breaks with the

Court’s long-standing approach to discrimination claims.

First, the Court did not evaluate the combined effect of

the West Virginia manufacturing and wholesale taxes,

and thus did not consider the actual effect of the State’s

tax system on Armco. In fact, as a practical matter, the

tax scheme imposed a substantially higher tax rate on an

in-state manufacturer than on an out-of-state wholesaler.

But the Court explicitly stated that it would not require

Armco to prove “actual discriminatory impact on it.”

467 U.S. at 644. This approach departs from the estab-

lished test that unconstitutional discrimination means

actual discrimination against interstate commerce in the

form of a direct commercial advantage to local business.

See Boston Stock Exchange, 429 U.S. at 329.

Second, and more important, for the first time ever,

the Court judged the West Virginia tax system solely on

the basis of hypothetical discrimination arising from the

interplay of that system with taxes that could be (but in

fact were not) imposed by other States. The Court never

found, and could not find on the record before it, that the

West Virginia tax system had an actual discriminatory

impact on interstate commerce. As Justice (now Chief

Justice) Rehnquist noted in dissent, the impact of West

Virginia’s system as a whole fell more heavily on intra-

state than on interstate commerce. 467 U.S. at 647. The

discriminatory impact was found only by reference to hy-

pothetical taxes that other States might impose. Prior

cases, however, demand that state taxes challenged under

the Commerce Clause be judged by their “practical opera-

tion” (Best & Co. v. Maxwell, 311 U.S. 454, 456 (1940) )

13

or “actuality of operation” (Halliburton Oil Well Cement-

ing Co. v. Reily, 373 U.S. 64, 69 (1963) ).°

Third, the Court employed, also for the first time, the

principle of “internal consistency” as a test for uncon-

stitutional discrimination. Although the Court had pre-

viously announced the internal consistency standard as a

measure of the fair apportionment of a state income tax

(see Container Corp. of America v. Franchise Tax Board,

463 U.S. 159 (1983)), no case had suggested that the

internal consistency principle was relevant in determining

whether a state tax was discriminatory.

There are strong reasons why the Armco dicta should

not be deemed controlling in this or any other case. Fore-

most is that the application of a “hypothetical discrimina-

tion” test is completely at odds with the constitutional

prerequisites for standing imposed by the “cases and con-

troversies” requirement of Article III, § 2 of the Constitu-

tion. See, e.g., Valley Forge Christian College v. Amer-

icans United, 454 U.S. 464, 471-72 (1982). One of the

fundamental requirements for standing is a showing of

“some actual or threatened injury” to the plaintiff. Ibid.

“Abstract injury is not enough” (City of Los Angeles v.

Lyons, 461 U.S. 95, 101 (1983) ), and standing is not con-

ferred as a result of a “conjectural” or “hypothetical”

injury. Id. at 102.

The actual injury requirement should defeat jurisdic-

tion of a claim based solely upon the taxpayer’s ability to

® In Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434 (1939),

the Court invalidated a Washington gross receipts tax that was

not fairly apportioned to activities within the State. See id. at 439.

The Court did not require a showing of actual discrimination

through multiple taxation, but found that the absence of fair ap-

portionment was itself sufficient to invalidate the tax. The Court

did not hold that a fairly apportioned tax could be struck down

without any showing of actual discrimination against interstate

commerce. The current Washington gross receipts taxing system

is fairly apportioned, as we show below (pp. 21-25) ; and, therefore,

nothing in Gwin, White suggests that it is invalid.

14

imagine a tax in another State which, in combination

with the challenged tax, might result in discrimination

against an interstate business. The Court has consistently

applied rigorous standing requirements to taxpayer suits.

See Valley Forge; Flast v. Cohen, 392 U.S. 883 (1968).

To be sure, appellants have an economic, rather than po-

litical or social, stake in the outcome of this case: they

would like to avoid some or all of their tax obligations to

the State of Washington. Nevertheless, a claim of a hypo-

thetical tax burden is simply not a case or controversy

involving the “actual or threatened injury” required un-

der Article III.

If appellants’ claims are addressed, this Court’s recent

opinion in R.J. Reynolds Tobacco Co. v. Durham County,

N.C., Nos. 85-1021, 1022 (U.S. Dec. 9, 1986), indicates

the appropriate course. Reynolds disposed of a similar

challenge to a state tax based on dictum in a previous

opinion, Xerox Corp. v. Harris County, Texas, 459 U.S.

145 (1982), which had suggested that any state property

tax imposed on imported goods stored in customs bonded

warehouses was invalid. In Reynolds, the Court unani-

mously upheld a state tax imposed on goods imported and

stored for domestic use, easily limiting Xerox to its facts

and its narrow holding, which concerned only goods stored

for re-export. We urge the Court in this case similarly

to separate the facts and the holding of Armco from its

dicta. The West Virginia wholesaling tax under review in

that case was found to discriminate on its face against

interstate business. The Washington tax at issue here

does not. When the dicta in Armco are stripped away,

as Reynolds teaches, Washington’s tax clearly passes con-

stitutional muster. This Court has so held on three prior

occasions. See note 4, supra.

B. Washington’s Wholesaling Tax Does Not Discrimi-

nate Against Interstate Commerce.

The actual holding in Armco provides no support for

appellants’ challenge to the wholesaling tax because

Armco held only that a facially discriminatory tax vio-

15

lated the Commerce Clause. The Washington wholesaling

tax is not discriminatory on its face or in its operation.

Every wholesaler in the State pays a wholesaling grcss

receipts tax of 0.44%. The tax applies equally to whole-

salers who manufacture within the State and wholesalers

who manufacture outside the State. Every wholesaler is

treated the same as every other wholesaler.

Appellants’ argument that the Washington wholesaling

tax nevertheless violates the Commerce Clause relies on

Maryland v. Louisiana, 451 U.S. 725 (1981). National

Can Br. 7-8; Tyler Pipe Br. 16-17. In Maryland, a num-

ber of States and pipeline companies challenged Loui-

siana’s first-use tax as applied to natural gas brought into

Louisiana from the Outer Continental Shelf (“OCS”).

Id. at 728. Louisiana imposed an equivalent severance

tax on natural gas produced within the State. Jd. at 731.

Three aspects of the first-use tax favored local interests

and discriminated against interstate commerce. First,

there was an exemption from the tax for OCS gas used

for certain purposes within Louisiana but not outside

Louisiana. Second, a full credit against the first-use tax

was given to producers of gas in Louisiana but not to

producers in other States. Third, other tax cred'ts had

the effect of shielding Louisiana consumers, but not con-

sumers in other States, from the impact of the tax. On

these bases, the Court held that Louisiana’s first-use tax

was protectionist legislation; it was found to impose as

much tax as possible on producers and consumers outside

the State and as little tax as possible on producers and

consumers within the State. Jd. at 757, 758.

The only element of the Louisiana first-use tax scheme

that bears any resemblance to the Washington wholesal-

ing tax is the credit that was given to producers of OCS

gas who also produced gas subject to the Louisiana sever-

ance tax. Appellants argue that this credit is similar in

effect to Washington’s multiple activities exemption,

available to local manufacturers if they pay the wholesal-

ing tax. But that exemption differs radically from Loui-

16

siana’s first-use tax credit, which was granted for local

economic activity unrelated to production of OCS gas.

Thus, an OCS gas producer with unrelated production in

Louisiana gained a “direct commercial advantage” over

an otherwise identical OCS gas producer having no other

production in Louisiana. The tax scheme therefore could

be said to discriminate against out-of-state companies.

Washington’s multiple activities exemption grants no

“direct commercial advantage” to a local manufacturer.

It does not reward a business for engaging in other eco-

nomic activity in Washington. All goods are subject to

the same rate of tax; both interstate and intrastate busi-

nesses are treated neutrally. In fact, the effect of the

Washington multiple activities exemption is precisely the

opposite of Louisiana’s first-use tax credit. The exemp-

tion equalizes tax burdens placed on goods manufactured

in Washington and goods manufactured elsewhere, by en-

suring that an item manufactured and sold in Washing-

ton will not be subject to a greater tax burden than the

same item sold in Washington but manufactured else-

where.

The multiple activities exemption serves two essential

purposes. First, the exemption prevents discrimination

against local business. Without the exemption, local

manufacturers that sell their products in the State would

pay two gross receipts taxes (one for manufacturing and

one for wholesaling), while out-of-state manufacturers

selling in the state would pay one gross receipts tax (for

wholesaling). In the real world, and contrary to the

purely hypothetical situations postulated by appellants,

no other State imposes a gross receipts tax on manufac-

turing. Thus, without the multiple activities exemption,

local manufacturers would be disadvantaged in competing

with out-of-state manufacturers for sales within the State.

The second essential purpose of the multiple activities

exemption, consistently recognized as legitimate for a

state tax system, is fairly to “encourage the growth and

development of intrastate commerce and industry.” Bos-

17

ton Stock Exchange, 429 U.S. at 336. In Boston Stock

Exchange, the Court expressly recognized the validity of

“two activities for the price of one” encouragement.

While striking down a facially discriminatory amendment

to a state tax, the Court approved the State’s previous

law (id. at 330); that law imposed a tax if any one of

five taxable events occurred within the State, but if more

than one taxable event occurred in the State, only one tax

was payable (id. at 322). Washington’s gross receipts

tax does just the same.

For these reasons, the Washington wholesaling tax

does not discriminate against interstate commerce. The

statute on its face applies to all wholesaling within the

State, and the exemption from the manufacturing tax

granted to in-state manufacturers merely ensures that

no goods will be taxed twice. The tax is a model of a

neutral tax that affects all businesses equally. Neither

Maryland v. Louisiana nor any other decision of this

Court supports the invalidation of such a tax under the

Commerce Clause.

C. The Application Of The Washington Manufacturing

Tax Solely To Local Manufacturers Selling Outside

The State Does Not Discriminate Against Out-

Of-State Manufacturers Selling Within The State.

In challenging the Washington wholesale gross receipts

tax as discriminatory, appellants seem to recognize that

this tax applies to all sellers without exception. Yet Xerox

and others argue that the application of the manufactur-

ing tax to local manufacturers only when they sell outside

the State somehow makes discriminatory the tax imposed

on the selling activity of out-of-state manufacturers.

Stated another way, they argue that because local manu-

facturers who sell their products in the State are exempt

from the manufacturing tax, the selling tax is discrim-

inatory as applied to out-of-state manufacturers. This

argument is without merit for several reasons. Whether

viewed by itself or as part of the entire gross receipts tax

18

scheme, the manufacturing tax is discriminatory neither

on its face nor in its effect on out-of-state manufacturers.

First, the manufacturing tax applies identically to in-

state and out-of-state manufacturers selling goods in

Washington. Neither group pays any manufacturing tax.

In-state manufacturers are exempt from the manufactur-

ing tax under the multiple activities exemption, and out-

of-state manufacturers are not subject to the tax. In

addition, because in-state and out-of-state manufacturers

are subject to the same rate of wholesaling tax in Wash-

ington, their overall state tax burden is the same.

The record is barren of any evidence that any other

State imposes a gross receipts tax on manufacturing.

Thus, none of the out-of-state manufacturers selling in

the State can be said to pay any higher taxes than a local

manufacturer-seller. Because the “actuality of operation”

of the Washington tax system does not discriminate

against any of the appellants, none of them has standing

to challenge the tax.’

In any event, Washington’s wholesaling gross receipts

tax would not be invalid even if another State imposed a

manufacturing gross receipts tax, and a manufacturer in

that State selling in Washington were thus subject to a

greater total tax burden than a Washington manufac-

turer. Whether Washington provides an exemption for

in-state manufacturers should be of no concern to an out-

of-state manufacturer because it is not subject to the

manufacturing tax either. As applied to out-of-state man-

ufacturers, Washington’s system is the same as one that

taxes only wholesaling.

™To the extent that dicta in Armco would excuse a showing of

“actual discrimination,” it should either be read in the light of the

fact confronting the Court in that case, i.c., a statute that was

facially discriminatory, or disregarded in favor of the decades of

precedent examining the actual operation of challenged state taxes.

See discussion supra, at pp. 11-14.

19

In Armco, the Court described precisely this type of

tax as permissible under the Commerce Clause. The

Court stated (467 U.S. at 645):

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.

Thus, the claim that the exemption of Washington whole-

salers from the manufacturing tax makes discriminatory

the application of the wholesaling tax to out-of-state

manufacturers lacks merit, even if they are subject to a

manufacturing tax in another state.

D. The Washington Manufacturing Tax Does Not Dis-

criminate Against Local Manufacturers Selling Out

Of The State.

A number of appellants represented by Kalama manu-

facture in Washington products that they sell outside the

State. This group claims that Washington’s manufactur-

ing tax discriminates against them because they have to

pay the tax while local manufacturers who sell their

products in-state are exempt.

This argument finds no support in Armco, because, in

Armco, all West Virginia manufacturers paid the same

tax regardless of where they sold their products. Mary-

land v. Louisiana also offers no comfort to these appel-

lants because it did not involve a challenge to a manufac-

turing tax on any products originating in Louisiana. The

tax was imposed on a product brought into Louisiana

from the Outer Continental Shelf, and its effect was to

allow a product to be sold in Louisiana at a lower price

20

than the same product could be sold in other States.

Maryland, 451 U.S. at 756. The Washington statute

works no such discrimination. To the contrary, it is

designed merely to equalize the impact of the gross re-

ceipts tax on all manufactured goods. Goods manufac-

tured in Washington and shipped elsewhere bear a tax

burden of 0.44% when they leave the State; if they are

sold to a consumer in the State, they bear the same 0.44%

tax when they leave the stream of commerce in Washing-

ton. Although the exporter pays the manufacturing tax,

and the local seller pays the wholesaling tax, the dollar

tax burden on each is identical. Thus, the Washington

tax system does not enable a consumer in Washington to

purchase manufactured goods at a lower price than a

consumer of the same goods in another State.

The exemption of local wholesalers from the manufac-

turing tax is necessary to avoid unfair treatment of local

business. If Washington imposed gross receipts taxes on

both the local manufacture and the local sale of products,

its consumers would have a clear economic incentive to

travel to neighboring States to purchase goods. Similar

economic consequences, resulting from the imposition of a

retail sales tax on goods sold in the State without a com-

pensating use tax on goods brought into the State, have

led the States to impose compensating use taxes, long

upheld by this Court. See Henneford v. Silas Mason Co.,

300 U.S. 577 (1937). Washington’s multiple activities

exemption is the obverse of the same coin; like a com-

pensating use tax, it treats out-of-state and domestic

goods equally in order to avoid incentives to residents to

make purchases in other States.*®

The Washington gross receipts taxing system must be

viewed in its entirety, just as this Court viewed the

8 Such “[e]qual treatment of interstate commerce . . . has been

the common theme running through the cases in which this Court

has sustained ‘compensating,’ state use taxes.” Boston Stock Ex-

change, 429 U.S. at 331.

21

Washington sales and use tax system in Henneford. So

viewed, it represents the State’s attempt to achieve equal-

ity in the treatment of all goods manufactured or sold at

wholesale in Washington. The multiple activities exemp-

tion is a necessary element of that equality. Without that

exemption, local business would suffer an actual discrimi-

nation measurable in dollars and cents. With the exemp-

tion, interstate commerce suffers neither actual nor mean-

ingful hypothetical discrimination.

Finally, appellants contend that the Washington taxing

scheme is flawed because it provides an incentive for busi-

nesses to move into the State of Washington to avoid pay-

ing both the hypothetical manufacturing tax in the other

State and the actual wholesaling tax in Washington. Even

if such an incentive existed, however, it would provide no

basis for invalidating a state tax under the Commerce

Clause. In Boston Stock Exchange (429 U.S. at 336-37)

and again in Armco (467 U.S. at 642), this Court made

it clear that so long as a State does not engage in “im-

permissible discrimination against interstate commerce,”

it is free to use its taxing system to encourage the growth

or relocation of business within the State. Because Wash-

ington’s taxing system does not so discriminate, any incen-

tive that it may provide for businesses to relocate to

Washington is of no constitutional significance.

III. WASHINGTON’S TAX IS APPORTIONED EX-

ACTLY TO THE ACTIVITIES TAXED.

A. The B & O Tax Does Not Result In Multiple Taxa-

tion.

Appellants assert that the Washington tax is invalid

because it is not fairly apportioned. This argument rests

solely on claims of multiple taxation. See Brief of Amici

Amcord, et al. (“Amcord”), adopted in National Can Br.

17. But it is clear that, in the context of interstate com-

merce, the risk of multiple taxation cannot, in and of it-

self, be the basis for invalidating a state tax. Moreover,

Amecord ignores the distinction between a gross receipts

tax (such as the B & O) and an income-based tax. As a

22

consequence, Amcord misstates the tax burden that may

constitutionally be imposed on interstate commerce and

urges the application of an improper apportionment test.

In Container Corp. of America v. Franchise Tax Board,

462 U.S. 159 (1983), the Court held that the test for the

validity of state taxes imposed on interstate businesses,

like appellants, is not whether a tax may result in mul-

tiple taxation, but whether the “taxpayer can prove ‘by

clear and cogent evidence’” that the tax “is in fact ‘out

of all appropriate proportions to the business transacted

._.. in that state.” Jd. at 169-70 (quoting Moorman

Manufacturing Co., 437 U.S. at 274, and Hans Rees’ Sons,

Inc. v. North Carolina, 283 U.S. 123, 135 (1931)).°

Accordingly, appellants’ and Amcord’s claims of multiple

taxation must fail because, quite simply, they have not

established by clear and convincing evidence a tax wholly

out of proportion to their activities in Washington.

Rather than meet this test, appellants and Amcord

offer a simplistic and superficial argument. They con-

tend that because Washington’s tax is assessed against

100% of the gross receipts from the sale of goods, it is a

tax on their full value, and therefore constitutes multiple

taxation if any other State imposes a tax based on the

value of the same goods.’ Thus, National Can contends

that it is exposed to multiple taxation because it is subject

to a California income tax that uses a base including the

® Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 451

(1979), which concerned a state tax on foreign commerce, is irrele-

vant here.

10 Appellants’ argument proves far too much. Their focus on

whether the full value of the goods is subject to tax in Washington

would seem to render vulnerable even a retail sales tax on any

product subject to a gross receipts tax or included in the gross

receipts used as the measure of an income tax. The State of des-

tination may constitutionally impose a sales tax (see, e.g., State

Tax Comm'n v. Pacific States Cast Iron Pipe Co., 372 U.S. 605

(1963) ); and the Court has never suggested that its validity de-

pends on whether it results in the cumulative taxation of more

than 100% of the value of the goods.

23

gross receipts of all sales, including those in Washington.

Similarly, Kalama contends that it is subject to multiple

taxation because it is subject to an income tax in Illinois

based on the proceeds of the sale in that State of goods

that it manufactures in Washington.

Washington’s gross receipts tax is so different from

other States’ income taxes that unlawful multiple taxation

cannoy result. The B & O tax does not use the same

measyrement of value as an income tax—one taxes the

valué of doing business in a State, the other the value of

the income produced. The two systems are no more com-

parable than apples and oranges. This Court has often

recognized the varying effects and incidents of different

kinds of taxes that tax different values, and has upheld

the application of state taxes against the claim that they

posed a risk of multiple taxation in violation of the Com-

merce Clause.

In Exxon Corp. v. Wisconsin Department of Revenue,

447 U.S. 207, 228 n.12 (1980), the Court distinguished a

severance tax from an income tax, and upheld the appli-

cation of the state apportionment formula to net income

from oil and gas production even though producing States

might impose a severance tax on the gross value of the

mineral extracted or the quantity of production. The

B & O tax at issue here is very similar to a severance tax,

which has in fact been likened to an occupation tax

(ibid.) ; both measure the tax against gross value rather

than net income. Ibid. Thus, the B & O tax ean be

imposed without regard to any state income taxes to

which appellants may be subject.

Similarly, in Mobil Oil Corp. v. Commissioner of Taxes,

445 U.S. 425 (1980), the Court distinguished an ad

valorem property tax from an income tax, noting that

“[{t]axation by apportionment and taxation by allocation

to a single situs are theoretically incommensurate ... .”

Id. at 444. Thus, the Court upheld the application of

Vermont’s income tax to an apportioned share of dividend

income even on the assumption that New York, as the

24

State of commercial domicile, could impose an unappor-

tioned tax on those dividends. The Court noted simply

that Vermont’s tax was constitutional because the State

sought to tax income, not ownership. Id. at 444-46.

These cases make clear that different types of state

taxation do not present even the risk of multiple taxation.

In some cases, the Court has gone further, upholding state

taxes even if they produced actual multiple taxation. In

Moorman Manufacturing Co., the Court rejected the claim

that “the Commerce Clause prohibits any overlap in the

computation of taxable income by the States.” 437 U.S.

at 278. Thus, Iowa’s tax was upheld in spite of the

Court’s recognition that the State’s apportionment of its

tax base resulted in multiple taxation. See also Con-

tainer Corp., supra (upholding the tax at issue even

though it resulted in actual double taxation) .™

As noted above, there is no showing in this case of any

actual multiple taxation. Thus, the Court need go no

further than to recognize, as it has done repeatedly, that

the imposition of different types of state taxes creates not

even a risk of multiple taxation. Unless the Court is now

prepared to prefer as a matter of constitutional law one

system over another, it should not invalidate a state tax

system merely because it may present the risk of multiple

taxation by being “different from the ... practice of

[a] neighbor.” Moorman Manufacturing, 437 U.S. at

280 n.16.

B. Washington Is Entitled To Apportion By Allocation.

Appellants’ and Amcord’s apportionment challenge

rests on application of the income tax apportionment

test. Because of the differences, noted above, between a

gross receipts tax and an income tax, the imposition of a

formula appropriate to an income tax would invalidate

11]f multiple taxation resulting from different tax schemes pre-

sents a significant obstacle to interstate commerce, the conflict is

appropriate for resolution by congressional legislation or through

interstate compacts. See Commonwealth Edison, 453 U.S. at 628.

25

any gross receipts tax. Washington’s tax should be up-

held if it is “apportioned to its activities within the

state.” Gwin, White & Prince, Inc. v. Henneford, 305

U.S. 434, 439 (1939) (quoted in Standard Pressed Steel

Co. v. Washington Department of Revenue, 419 U.S. 560,

564 (1975)). As this Court concluded in Standard

Pressed Steel, the Washington tax meets this test.

A gross receipts tax by definition taxes the value of

100% of the receipts of the taxed activity (e.g., manu-

facturing or wholesaling) and should not be held invalid

merely because it does so. It is invalid only if levied

against activities that occur outside of the State. In other

words, the gross receipts tax must be “fairly related to

the services rendered by [the State], which include police

and fire protection, the benefit of a trained work force,

and the ‘advantages of a civilized society.’”” Exxon Corp.,

447 US. at 228.

The challenged tax here is levied solely at activities

occurring within the State of Washington and “is ‘appor-

tioned exactly to the activities taxed,’ all of which are

intrastate.” Standard Pressed Steel, 419 U.S. at 564.

Washington taxes manufacturing within the State and

sales at wholesale within the State. Amcord’s argument

(Br. 9) that goods sold at wholesale in Washington may

have received “value” in another State is irrelevant be-

cause Washington’s wholesaling tax is not a tax on “value

added” but a tax on the privilege of engaging in business

within the State.’** This Court has firmly rejected the

notion that the Commerce Clause prohibits a tax on the

aspects of interstate commerce occurring within a State.

See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274

(1977). That is all that the Washington B & O tax

reaches.

12 Because a gross receipts tax is a type of sales tax (J. Hellerstein

& W. Hellerstein, op. cit. 551), formula apportionment is no more

appropriate for a gross receipts tax than for a retail sales tax.

See Standard Pressed Steel, 419 U.S. at 564.

26

IV. TYLER PIPE HAS A SUFFICIENT NEXUS TO

WASHINGTON TO JUSTIFY APPLICATION OF

WASHINGTON’S TAXES TO IT.

Appellant Tyler Pipe raises an argument not pursued

by the other appellants—that there is an _ insufficient

“nexus” between Tyler Pipe and the State of Washington

to justify the imposition of the gross receipts tax on its

sales within the State. (See Br. 10-13). The existence of

a “substantial nexus” with the taxing State is part of the

Commerce Clause test set out in Complete Auto Transit,

430 U.S. at 279. Tyler Pipe also contends that there is

not a “minimal connection” between its activities and the

State of Washington sufficient to support the Washington

tax against the limitations imposed by the Due Process

Clause. As Tyler Pipe recognizes (Br. 11), the two tests

are similar. See, e.g., Exxon Corp., 447 U.S. at 228

(equating the due process nexus requirement with the

Commerce Clause test). Both arguments rest primarily

on the fact that Tyler Pipe maintains no office in Wash-

ington and fills orders directly from its Texas headquar-

ters.

Tyler Pipe’s sales in Washington are solicited by inde-

pendent sales representatives rather than through its own

employees. These representatives “handle all sales func-

tions pertaining to [Tyler Pipe’s] products in [the] state”

and receive a commission on all sales made in their terri-

tory even if the customer contacts Tyler Pipe directly.

J.S. App. in 85-1963, B-9. The representatives “maintain

and improve [its] name recognition, market share, good-

will, and individual customer relations” and transmit to

Tyler Pipe “[vlirtually all [the] information” concern-

ing the Washington market that is “necessary to keeping

[it] competitive in the marketplace.” Jd. at B-9 to B-10.

There is no question that, if the activities of Tyler

Pipe’s sales representatives were performed instead by

employees, the “substantial nexus” and “minimal connec-

tion” tests under the Commerce Clause and the Due

Process Clause, respectively, would be easily satisfied.

That much is settled by this Court’s decision in Standard

27

Pressed Steel, which upheld the imposition of the very

tax at issue here upon an out-of-state manufacturer be-

cause of the presence in the State of a single employee

who serviced a single customer. That employee performed

services quite similar to, although not even as extensive

as, those performed for Tyler Pipe by its independent

sales representatives. In Standard Pressed Steel, the em-

ployee operated out of his home, consulting with the cus-

tomex concerning its needs, and following up on sales

after delivery of the product. Orders were sent directly

to, and filled by, Standard Pressed Steel from its out-of-

state home office, to which all payments were also sent.

This Court found a sufficient “nexus” for Commerce

Clause purposes between the employee’s local activities

in Washington and Standard Pressed Steel’s interstate

sales. The opinion distinguished Norton Co. v. Depart-

ment of Revenue, 340 U.S. 534 (1951), on which Tyler

Pipe places heavy reliance, because in that case, the State

had not established a sufficient factual nexus between

Norton’s Chicago office and some of the sales made di-

rectly from its Worcester, Massachusetts, headquarters.

The Court found that Standard Pressed Steel’s situation

more closely resembled that in General Motors Corp. v.

Washington, 377 U.S. 486 (1964), where the activities

of non-selling district managers and service representa-

tives were held sufficiently substantial “with relation to

the establishment and maintenance of sales, upon which

the tax was measured.” Id. at 447, quoted in 419 US. at

563.

The Court decisively rejected Standard Pressed Steel’s

due process challenge to the tax as “verg[ing] on the

frivolous.” 419 U.S. at 562. The Court explained that

the employee “made possible the realization and contin-

uance of valuable contractual relations between the tax-

payer and its customer.” Jbid. In effect, the Court ap-

plied a “but for” test, upholding the tax because the

Company would not have been able to make the sales on

which it was being taxed but for the activities of the

employee.

28

Similarly, in the present case, the local activities of

the independent sales representatives provide a sufficient

nexus to satisfy the Commerce Clause and sufficient mini-

mal contacts to satisfy the Due Process Clause. Those

sales representatives engage in substantial activity “with

relation to the establishment and maintenance of sales,

upon which the tax [is] measured” (General Motors

Corp., 377 U.S. at 447) and “|make] possible the realiza-

tion and continuance of valuable contractual relations”

(Standard Pressed Steel, 419 U.S. at 562) between Tyler

Pipe and its customers in the State of Washington.

Tyler Pipe nevertheless argues that it cannot be taxed

because it is represented in Washington by independent

sales representatives who are not its employees. The very

same formalistic argument was unsuccessfully urged in

Scripto, Inc. v. Carson, 362 U.S. 207 (1960), where the

Court held that the Due Process Clause does not differ-

entiate between independent sales representatives and

direct employees with regard to state tax liability. In

Scripto, the Court upheld a Florida statute requiring a

Georgia company, with no full-time employees in Florida,

to collect and pay use taxes for goods sold in Florida

through independent sales representatives. The Court ex-

plained (id. at 211-12):

True, the “salesmen” are not regular employees of

appellant devoting full time to its service, but we

conclude that such a fine distinction is without con-

stitutional significance. The formal shift in the con-

tractual tagging of the salesman as “independent”

neither results in changing his local function of solic-

itation nor bears upon its effectiveness in securing

a substantial flow of goods into Florida . . . . More-

over, we cannot see, from a constitutional standpoint

“that it was important that the agent worked for

several principals.” ... The test is simply the nature

and extent of the activities of the appellant in

Florida.

As the Scripto decision exemplifies, this Court has

examined constitutional challenges to state taxes in terms

29

of real situations rather than legal forms. Tyler Pipe,

for reasons of its own convenience, has opted to handle its

Washington sales by contractual relations with independ-

ent agents rather than through its own employees. Its

Washington sales should not be exempt from state tax

simply because of the form of business association

through which it chooses to conduct its business.

The Court has firmly rejected any such formalistic de-

pendence on physical presence in the State in another

context, the due process requirements for a state court’s

exercise of jurisdiction over a nonresident defendant.

There is no question that Washington state courts may

assert jurisdiction over Tyler Pipe on the basis of its

substantial activities there. The exercise of judicial ju-

risdiction satisfies due process concerns when the de-

fendant’s contacts with the forum state “proximately

result from actions by the defendant himself that

create a ‘substantial connection’ with [that] state.”

Burger King Corp. v. Rudzewicz, 105 S. Ct. 2174, 2184

(1985), citing McGee v. International Life Ins. Co.,

355 U.S. 220, 223 (1957). A defendant that “purpose-

fully avails itself of the privilege of conducting activities

within the forum state” (Hanson v. Denckla, 357 US.

235, 253 (1958)), may not avoid the jurisdiction of its

courts “merely because the defendant did not physically

enter the forum state.” Burger King, 105 S.Ct. at 2184.

Such a rule is fair because of the “inescapable fact of

modern commercial life that a substantial amount of

business is transacted solely by mail and wire communi-

cations across state lines, thus obviating the need for phys-

ical presence within a State in which business is con-

ducted.” Ibid. For the same reasons, Tyler Pipe should

be required to bear its fair share of Washington’s taxes.

“The activities which establish {the company’s] ‘pres-

ence’ subject it alike to taxation by the state and to suit

to recover the tax.” International Shoe Co. v. Washing-

ton, 326 U.S. 310, 321 (1945); see also Shaffer v. Carter,

252 U.S. 37, 49 (1920).

30

To permit the label that a business may place on its

relationships with the agents who create its profits to

obscure the benefits that these agents and the business

itself receive from the State would place a premium on

the creativity of the business community to devise cor-

porate arrangements that will insulate it from paying its

fair share of state taxes. This Court’s encouragement of

such creativity would serve no legitimate purpose, but

would severely jeopardize the States’ ability to raise suf-

ficient revenue in a fair and equitable manner. Tyler

Pipe’s challenges to the Washington tax should therefore

be rejected.

CONCLUSION

The judgments of the Washington Supreme Court

should be affirmed.

Respectfully submitted,

MARK C. RVTZICK BENNA RUTH SOLOMON *

Portland, Oregon Chief Counsel

BEATE BLOCH

PAUL J, LAWRENCE STATE & LOCAL LEGAL CENTER

Seattle, Washington 444 North Capitol Street, N.W.

Of Counsel Suite 349

Washington, D.C. 20001

(202) 638-1445

* Counsel of Record for

Amici Curiae

December 24, 1986