Opposition Brief — W. R. Grace & Co.-Conn. v. Washington Department of Revenue

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[OER OF THE SS

No. 99-31

In the

SUPREME COURT OF THE UNITED STATES

W.R. GRACE & Co.—CONN. and

CHRYSLER MOTORS CORPORATION,

Petitioners.

Vv.

W ASHINGTON DEPARTMENT OF REVENUE,

Respondent.

On Petition for a Writ of Certiorari to the

Supreme Court of Washington

RESPONDENT'S BRIEF IN OPPOSITION

CHRISTINE O. GREGOIRE

Attorney General

State of Washington

DONALD F. COFER*

WILLIAM BERGGREN COLLINS

Assistant Attorneys General

400 General Admin. Bldg.

P.O. Box 40123

Olympia WA 98504-0123

(360) 753-5528

Counsel for Respondent

* Counsel of Record

TABLE OF CONTENTS

este scitres be 0 5 jg CEM ALE STI EERE Rs l

a ee WE ATR El Sr l

I. Washington’s Taxes on Extracting,

Manufacturing, and Selling. ......0...cccccccccccccecececeses.. |

1. Prior Litigation Over the Extracting,

Manufacturing, and Selling B&O Taxes. ................ 3

Fr ne pitied oicrg tetra te %. 3

Fa ms 4

C. American National.Can and Digital

I tinbianiiadidiatie acne os. 5

III. Procedural History of This Case........c.ccc0.-...-........ 6

REASONS WHY THE PETITION SHOULD BE

SNE clsnenananiiniires tric El 1]

l. The Court Lacks Jurisdiction Because There

Is No Final Judgment. ..0.0.0.........ccccceccccscssecseseccoceee, 1]

II. Retroactive Application of the 1987 Two-Way

Credits Does Not Violate Due Process. ................ 13

A. The Court Below Erred in Giving 7yler

Pipe Retroactive Application. ........................ 13

B. Petitioners’ Argument that Retroactive

Application of the Two-Way Credits

Fails to Provide Them “Meaningful

Backward-Looking Relief” Is Meritless......... 13

C. Petitioners’ “Bait and Switch” Procedural

Due Process Argument Also Is Meritless....... 17

D. Petitioners’ Substantive Due Process

Argument Also Is Meritless. .......... Raseniedennedia 21

Ill. The Apportionment Question Petitioners Pose

Is So Explicitly Foreclosed by Prior Decisions

of This Court As To Leave No Room for Real

CVI» vsunncvescvenvelesteassstaints ndaendcidintiadiipssssced

COUIVC LAL FI AIe Cosconisccscvnnsonssgpnneh nannies idacedstadeiseaniammaaiicedaddendades 29

APP RIEP cc's ov cvsvecaecdassdabaauanneaanennelin Geatneiaeaearnaad la

ili

TABLE OF AUTHORITIES

Cases

American Mfg. Co. v. St. Louis,

EE ee tee 24, 26

American Nat'l Can Corp. vy.

Department of Rev.,

114 Wash. 2d 236, 787 P.2d 545, cert. denied, 498

U.S. Ek fea a - passim

Aponaug Mfg. Co. v. Stone,

314 U.S. 577 (1941), aff'g per

curiam 190 Miss. 805, | So. >) fl, | ree 26

Armco Inc. v. Hardesty,

|, 16

Associated Indus. v. Lohman.

SC | | men 14,18

Barclays Bank PLC v. Franchise

Tax Bd., 512 U.S. 298 (1994) ooo .cccccccccccecscsecesseseeseseceesecess. 16

Benjamin Franklin Thrifi Stores, Inc.

v. Henneford, 187 Wash. 472,

EL a 19

Bond v. Burrows, 103 Wash. 2d 153,

| ec eee 19

Central Greyhound Lines v. Mealey,

I 27

Chevron Oil Co. v. Huson,

MRE Se 4

Chicago Bridge & Iron Co. v.

Department of Rev., 98 Wash. 2d 814, 659 P.2d 463.

appeal dismissed for want of a substantial federal

question, 464 U.S. 1013 (1983)... ccccccccccesccecescessssceseecee. 26

City of Winchester v. American

Woodmark Corp., 252 Va. 98,

FF ee I inchlntsbiiiidicianiciann ae

Commonwealth Edison Co. v.

Montana, 453 U.S. 609 (1981) .............cccccccccccscecscccseees 205 27

Cox Broadcasting Corp. v. Cohn,

SP Cs Se Oe ea cncerttqeesevinenmnnninninnindiiinin 11,12

Department of Treasury v. Allied

Mills, Inc., 318 U.S. 740 (1943), aff'g per curiam 220

Ind. 340, 42 N.E.2d 34 LIFSPUIED cvcccitniicincincicsnsegsenbaiainaiipladicaie 26

Department of Treasury v. Wood

Preserving Corp., 313 U.S. 62 (1941) ..ccccccccccccccceccceccesceeee. 26

Digital Equip. Corp. v. Department of

Rev., 129 Wash. 2d 177, 916 P.2d 933 (1996), cert.

denied, RL ee 0: Rn Ce 6, passim

OD CR SN, Ge Us Fe Ca i ee ccececscanecetecvunccuateicmsiunnctinicuiiin 28

Field Enterprises v. Washington,

352 U.S. 806 (1956), aff'g per curiam 47 Wash. 2d

em | EE ee 26

Flynt v. Ohio, 451 U.S. 619 (1981)..........ccccccccsscevseseveeseees 11,12

Freeman v. Hewit, 329 U.S. 249

SE eer LSS ns eee HORE Ae Ns 16

General Motors Corp. v. City & County of

San Francisco, 69 Cal. App. 4th 448,

AIEEE Te 14, 23

General Motors Corp. v. Washington,

B0F iceeinibiniicniatiatendicntnbinsieninigniaiiansibiain 25

Hagen v. Uta, S10 U.S. S99 (1DD4) ccvcecccccccssocccesovescccesscccscees 25

Haring v. Prosise, 462 U.S. 306 (1983) ...........:ccccccccceeeeeereeees 25

Harper v. Virginia Dep't of Taxation,

$09 U.S. 86 (1993)......ccccccssrcccssssecccsseevsrseeerssensssssssscesnees 8, 18

Hathorn v. Lovorn, 457 U.S. 255

(1GBD) .cncrecerscccsesccesevcsnsvevevevecesescssnscossnnsnnnsessecsesenenveserensesenens 1]

Heck v. Humphrey, 512 U.S. 477

+ (1GDE)....ccccercoreccressesesorvecsvevesesseseseneesesssesesorsreoeneeaneseseonecessess 25

Heisler v. Thomas Collier Co.,

BGO U.S. 24S (192) ..coroccrcccssvseeveveevoveecersvcenvsevcvsccvonvesenssoosss 26

Hope Natural Gas Co. v. Hall,

ZTE U.S. 2B4 (1927). ..ccecsccssevesersesceccessecovocconseseessesesersenssones 26

International Harvester Co. v.

Department of Treasury,

322 U.S. 340 (1943).....ccoccovvesorserseceserovsscessesensevsenesscosensoeses 26

J.D. Adams Mfg. Co. v. Storen,

3O4 U.S. 307 (1938).....ccccccccccccrocesesosceccsvorevesssessseressscesenerees 28

James B. Beam Distilling Co. v.

Georgia, 501 U.S. 529 (1991) ..ccccceceeeeseeeeeeeeeesseetnenneeneneens 8

Jensen v. Henneford, 185 Wash. 209,

$3 P.2d GOT (1936). ccccovcrcccsescesevorsecsoscccssosescrosevencveseseneoseres 19

Lacoste v. Department of

Conservation, 263 U.S. 545 (1924) ........cccccceceeeeeeerseeeeeeeeees 26

M & Associates, Inc. v. City of

Irondale, 723 So.2d 592

(Abe. 19968) ..ccccccecceccoscrrvecesesssscvonsccsreossonsesorsesonnonsdnenseses 27, 28

McKesson Corp. v. Division of Alcoholic

Beverages & Tobacco, 496 U.S. 18 (1990) ........++. 13, passim

Moorman Mfg. Co. v. Bair,

437 U.S. 267 (1978) .cccccccovcesesseesecesevescovsvvssssessseoresevessenesveees 16

National Can Corp. v. Department of Rev., 105 Wash. 2d

327. 732 P.2d 134 (1986) (National Can 1) .....cccccccceeceeeeeeeees 4

National Can Corp. v. Department of

Rev., 109 Wash. 2d 878, 749 P.2d 1286, appeal

dismissed, cert. denied, 486 U.S. 1040 (1988)

eam aes COG TED cnccesitinttniintrtantcnteieeninsiiaininaeds 4, passim

Newsweek, Inc. v. Florida Dep't of

Revenue, 522 U.S. 442 (1998) .........cccccsceeseceerereeees 17, 18,21

Nipges v. Thornton, 119 Wash. 464,

BOOT. 17 (lead viictiniemeneeaidniniinstinameole 19

Norton Co. v. Departrent of Rev.,

FOS US FIO CUTE Pchivtntiesiciciidicitcssianinaniieiemmaaaan 26

Oklahoma Tax Commission v.

Jefferson Lines, 514 U.S. 175 (1995) oo... 17, passim

Oliver Iron Mining Co. v. Lord,

yO Rg ef) + | RRR eee er ee 26

Reich v. Collins, 513 U.S. 106 (1994) 0000s 17, 18, 21

Reynolds Metals Co. v. Washington,

65 Wash. 2d 882, 400 P.2d 310,

appeal dismissed for want of a substantial federal

question, 362 U.S. 160 (1DGS) .ccccecovcvsecsscosccsescseveseovees 24, 26

Reynoldsville Cusket Co. v. Hyde,

DEG UB. POD Ciera tricctcsrstncscvatintiinehsieaaaaiagaae 18

Simpson v. State, 26 Wash. App. 687,

615 P.2d 1297, review denied,

oR 8 i, ee 19

Sonneborn Bros. v. Cureton,

BOS Uae FOO Ce Pe ildctiicattendientdiniierteicieiet ane 26

Standard Pressed Steel Co. v

Department of Rev., 419 U.S. 560

CDT a Pecceuvccenvetsisusessboniemeeniadnmainaionsaaaneaaaa 25

vil

Stone v. Stapling Machines Co., 220 Miss. 470, 71 So. 2d

205, appeal dismissed for want of a substantial federal

question, 348 U.S. 802 (1954) .....ccccccceeeeeeeernereneeneenereees 26

Street v. New York, 394 U.S. 576

Tyler Pipe Indus., Inc. v. Department

of Rev., 96 Wash. 2d 785,

638 P.2d 1215, 1216 (19BZ)..cccccccevccceceverscessscccevescccrecosscsoees 20

Tyler Pipe Indus., Inc. v. Department

of Rev., 105 Wash. 2d 318,

FED ede Bee ee evcctccceceesotenssstscsessevsesacesecesosossovest 4

Tyler Pipe Indus., Inc. v. Washington

State Dep't of Rev., 483 U.S. 232 (1987) ........00 2, passim

United States v. Carlton, 512 U.S. 26

(RE. SL OES AR SRE Ice 22

United States v. Hemme,

Se Oy 22

United States v. Stauffer Chem. Co.,

ks of, ee 25

Utah Power & Light Co. v. Pfost,

Y J 8 7) ae 26

Westinghouse Electric Corp. v. King,

678 S.W.2d 19 (Tenn. 1984), appeal dismissed for

want of a substantial federal question, 470 U.S. 1075

COB D ccicdeatncrsnssacitntintettemeanevinnbneanniianecetinenennenirnmnenntin 26

Woodruff v. Parham, 8 Wall. 123 (1868) ........ccccccccceeeeeeeeeee 26

Statutes

SO We eee Se ee ee. Ge. FD. .cccasavbeates eeacdedeeces 5

Wash. Rev. Code § 82.04.230....5.......ccsccccsssssssrsseseererseeeeeeeenees l

Vill

ee. Ce, CD Bet siicecevinintinicctntitincinitanvatiabemmisensatiiaia l

ree, DED U. CED B Cie ucesnccccdicnsdedsccctisctovseues l

eT reer eee ee l

re es GED Bh ee ir iscecicesccesevesvodcsecevicnnnemnn 19

PUD a SAR Oe CED iccichenndinscscvenicsebeiibicaubdaniodaiione: 2

Wash. Rev. Code § $2.04.440(4).........cccccccoccsssssccsesescccssccccccesees 2

Wash. Rev. Code § 82.04.440(5).........cccccccccces cecvccccces 17

Wash. Rev. Code § 82.04.440(2)(1984)...... 22... cc cece cece eee eed

po Re kk. ee 19

pO kb nr 19

Wash. Rev. Code § 82.98.030.................ccccececcecvees 19

UR 6 NR oe ci ei ed

Be tie BSC itt rccettanntibeticncetied | cettnntialeael 1,11

Rules

Wash. Admin. Code § 458-20-19301(9)...... 0.0... ccc ccc cee eee 15

Wash. Admin. Code § 458-20-19301(8)(b)................46. 15

SRIEES TUES I WHITE tnccseecdcenecesacinsecesccenssensdemneunienntinnatie 27

Te es its tia Bis SUI ctniicceennientcnicnthidenenttadenugnbeentuniiiots 8

Treatises

R. Stern, E. Gressman, S. Shapiro & K. Geller, Supreme

Court Practice

PCy CP eee nccenrentinisidistheniiusinestiinesinininaciatedadiaeniiie 11

A ee ee

JURISDICTION

This Court lacks jurisdiction over the petition because

the decision of the Supreme Court of Washington is not a

“final judgment or decree” within the meaning of 28 U.S.C. §

1257(a). We discuss this jurisdictional issue at page 1 1, infra.

STATEMENT

We begin with a brief description of the taxes at issue

in this case and prior litigation concerning those taxes. We will

then discuss the procedural history of this case.

I. Washington’s Taxes on Extracting, Manufacturing,

and Selling.

This case concerns Washington’s business and

occupation (B&O) taxes on the activities of extracting,

manufacturing, and selling. The extracting and manufacturing

taxes are imposed on the activities of extracting or

manufacturing in Washington. The measure of both taxes is

the “value of the products” extracted or manufactured in

Washington. Wash. Rev. Code §§ 82.04.230, .240. B&O

taxes also are imposed on the activity of selling, either at

wholesale or retail. The measure of the selling taxes is the

“gross proceeds of sales” in Washington. Wash. Rev. Code §§

82.04.250, .270.

It is important to understand that the extracting,

manufacturing, and selling B&O taxes are imposed only when

those activities take place in Washington. For example, a

business located in Washington does not pay any

manufacturing B&O tax with respect to products it

manufactures in another state or any selling B&O tax with

respect to products it sells in another state. Washington does

not have jurisdiction to tax extracting, manufacturing, or

selling activities that take place in other states. In this respect,

the B&O taxes differ from net income taxes that include within

their measure al! ©" @ business’s net income from every

jurisdiction derived “sm every business activity.

The B&O tax system now includes the two-way system

of credits suggested by this Court in 7yler Pipe Indus., Inc. v.

Washington State Dep't of Rev., 483 U.S. 232, 246 (1987).

Under the two-way credit system, all persons engaged in

extracting or manufacturing activities in Washington must pay

an extracting or manufacturing B&O tax. All persons engaged

in selling in Washington must pay a retailing or wholesaling

B&O tax.

Under the two-way credit mechanism, both local and

interstate businesses are entitled to a tax credit against

Washington's selling tax. The Washington B&O tax imposed

on the sale of a product may be reduced by the amount of any

extracting or manufacturing tax paid to Washington or another

jurisdiction on the activities of extracting or manufacturing the

product. Wash. Rev. Code § 82.04.440(2).

A credit also is available for Washington extractors or

manufacturers selling in interstate commerce. This is a credit

against Washington’s extracting or manufacturing tax. The

Washington tax imposed on the activities of extracting or

manufacturing a product may be reduced by the amount of any

selling tax paid to another jurisdiction on the activity of selling

the product. This credit is available only for selling taxes paid

to jurisdictions other than Washington. Wash. Rev. Code §

82.04.440(4).'

The two-way credit system ensures that interstate and

local businesses will bear the same tax burden on their

extracting, manufacturing, and selling activities.

' Citing the opinion of the court below, petitioners state that other

jurisdictions’ taxes must be “identical” to Washington’s taxes to qualify for

the two-way credits. Pet. 4. That is neither an accurate paraphrase of the

court's opinion nor an accurate description of Washington’s statute.

Petitioners’ description at pages 4-6 of the petition of the requirements for

claiming credits also is misleading. We discuss this point at page 15, infra.

Il. Prior Litigation Over the Extracting, Manufac-

turing, and Selling B&O Taxes.

A. Tyler Pipe.

Beginning in 1984, taxpayers brought over 300 actions

challenging the extracting, manufacturing, and selling B&O

taxes on Commerce Clause grounds. Petitioners W.R. Grace &

Co. (Grace) and Chrysler Motors Corporation (Chrysler) were

among a group of 71 appellants in 7yler Pipe, 483 U.S. 232

(1987). At that time, the B&O tax system did not have the

current two-way credit system. Instead, there was a “multiple

activities exemption,” which provided that “[p]ersons taxable

under [the Washington retailing or wholesaling taxes] shall not

be taxable under [the Washington extracting or manufacturing

taxes] with respect to extracting or manufacturing of the

products so sold.” Wash. Rev. Code § 82.04.440(2) (1984).

The former multiple activities exemption thus applied only to

local commerce.

In Tyler Pipe, this Court held “Washington’s multiple

activities exemption invalid.” 483 U.S. at 253. The multiple

activities exemption was defective because it applied only if a

business paid a Washington selling B&O tax. It did not apply

if a similar selling tax was paid to another state. This violated

the principle of internal consistency—‘that is the [tax] must be

such that, if applied by every jurisdiction, there would be no

impermissible interference with free trade.” Jd. at 247.

If every state imposed the extracting, manufacturing,

and selling taxes at issue in Tyler Pipe, an interstate

manufacturer would pay multiple taxes. For example, an

interstate manufacturer would pay a manufacturing B&O tax to

Washington and a selling gross receipts tax to another state

because the multiple activities exemption would not apply. A

local manufacturer would only pay Washington’s selling B&O

tax because the multiple activities exemption would apply to

excuse the manufacturing B&O tax.

An integral part of Tyler Pipe was the Court’s

explanation of how to repair the system. Washington could

make the multiple activities exemption internally consistent by

extending equivalent benefits to interstate commerce.

According to the Court: “The parallel condition precedent for

a valid multiple activities exemption eliminating exposure to

the burden of a multiple tax on manufacturing and wholesaling

would provide a credit against Washington tax liability for

wholesale taxes paid by local manufacturers to any State, not

just Washington.” /d. at 246. This credit prescription was

repeated later in the opinion when the Court stated that “an

expansion of the multiple activities exemption to provide out-

of-state manufacturers with a credit for manufacturing taxes

paid to another State would presumably cure the

discrimination.” /d. at 249.

A second significant holding in Tyler Pipe concerned

apportionment. This Court affirmed the Washington Supreme

Court’s holding that the selling B&O taxes paid by Tyler Pipe,

Grace, Chrysler, and many other petitioning taxpayers were

fairly apportioned. Ja. at 248-51.

B. National Can II.

Washington argued in 7yler Pipe that any decision

adverse to the State should have only prospective application.

Brief for Appellee at 44-48, Tr. of Oral Arg. at 44, Tyler Pipe

(Nos. 85-1963 and 85-2006). Acknowledging the argument,

this Court vacated the Washington Supreme Court’s judgments

in Tyler Pipe Indus., Inc. vy. Department of Rev., 105 Wash. 2d

318, 715 P.2d 123 (1986), and National Can Corp. vy.

Department of Rev., 105 Wash. 2d 327, 732 P.2d 134 (1986)

(National Can I), and remanded for further proceedings not

inconsistent with its opinion. 483 U.S. at 251-53.

On remand, the Washington Supreme Court held this

Court’s discrimination holding applied purely prospectively,

employing the federal civil retroactivity analysis of Chevron

Oil Co. v. Huson, 404 U.S. 97 (1971). National Can Corp. v.

Department of Rev., 109 Wash. 2d 878, 749 P.2d 1286, appeal

ow Pl ot adnaa

dismissed, cert. denied, 486 U.S. 1040 (1988) (National Can

Il). The Tyler Pipe plaintiffs therefore were denied any

refunds for taxable activities before June 23, 1987, the date of

this Court’s decision. The Tyler Pipe decision was purely

prospective because the decision did not apply retroactively to

the litigants in that case.

After the ruling in National Can IJ, hundreds of other

taxpayers dismissed their refund claims for tax periods before

the 7yler Pipe decision.

C. American National Can and Digital Equipment.

Tyler Pipe was handed down on June 23, 1987. Seven

weeks later, on August 11, 1987, Washington enacted the two-

way credit system suggested by this Court in 7yler Pipe to

eliminate the constitutional defects of the multiple activities

exemption. Wash. Rev. Code § 82.04.440; 1987 Wash. Laws,

2d Ex. Sess., ch. 3 (App. la-4a).

Under section 3 of the 1987 law, if a court determined

that relief was appropriate regarding the former multiple

activities exemption for any periods before the law’s August

12, 1987 effective date, refunds based on the two-way credits

were to be the exclusive relief available to taxpayers. Since

Tyler Pipe was purely prospective, no relief was appropriate

under section 3 for any periods before that decision. (App. 4a).

In American Nat'l Can Corp. v. Department of Rev.,

114 Wash. 2d 236, 787 P.2d 545, cert. denied, 498 U.S. 880

(1990), a large group of corporations, including Grace and

Chrysler, next challenged the 1987 two-way credit law, as weil

as its retroactive application to the seven-week “interim

period” after the Tyler Pipe decision from June 23 through

August 11, 1987. They claimed the 1987 law discriminated

against interstate commerce and violated principles of equal

protection and due process of law. /d at 241. In American

Nat'l Can, the Washington Supreme Court upheld the

constitutionality of the 1987 two-way credit law and applied it

retroactively to the seven-week interim period.

In Digital Equip. Corp. v. Department of Rev., 129

Wash. 2d 177, 916 P.2d 933 (1996), cert. denied, 520 U.S.

12735 (1997), the Washington Supreme Court reaffirmed its

holding in American Nat'l Can that retroactive application of

the two-way credits to the seven-week interim period was

constitutional. In Digital, five members of the court

questioned the court's earlier decision in National Can II that

Tyler Pipe should be given prospective application. Three

justices, in the lead opinion, concluded that the court in

National Can I] erroneously addressed an issue that was not

left open by the mandate. 129 Wash. 2d at 183-89, 194, 916

P.2d at 936-38, 941. Two other justices disagreed with this

conclusion, but stated in dictum that they disagreed with the

prospectivity holding in National Can Il. Id. at 195 & n.76,

916 P.2d at 942 & n.i. Four justices disagreed with the lead

opinion and would have followed National Can Il. They

concluded that departing from National Can I] would result in

selective prospectivity, which this Court has rejected. /d. at

205-10, 916 P.2d at 947-49.

Although the Digital court was divided over the

prospective application of Tyler Pipe, the justices agreed that

retroactive application of credits for gross receipts taxes paid to

other jurisdictions was a constitutional way to correct any

discrimination caused by the multiple activities exemption.’

Ill. Procedural History of This Case.

In July 1993, the Washington State Department of

Revenue (Department) issued three final tax assessments

against Grace, covering tax periods from January 1980 through

December 1990, for unpaid taxes and interest. Instead of

paying the assessments, Grace filed in the superior court a

complaint for declaratory judgment, injunctive relief, and

damages against the Governor, the Attorney General, the

Director of the Department, and the Department. The

> A more detailed summary of the Digital case, including the three

opinions of the Washington Supreme Court, appears at pages 6-10 of the

Department’s conditional cross-petition in Supreme Court No. 99-233.

i :

complaint alleged that, as to taxes assessed for periods through

June 23, 1987, the defendants were seeking to collect taxes this

Court had declared in 7yler Pipe to be in violation of the

Commerce Clause. The complaint further alleged that, as to

taxes assessed for periods after June 23, 1987, the defendants

were seeking to collect taxes that, despite the 1987 amendment

of Wash. Rev. Code § 82.04.440, continued to violate the

Commerce Clause. The Department asserted a counterclaim

for the unpaid taxes, interest, and penalties. Grace later

voluntarily dismissed the three individual defendants.

In February 1994, the Department issued tax

assessments against Chrysler for unpaid taxes and interest

covering tax periods from January 1984 through June 1988. In

July 1994, while its administrative appeal of the assessments

was still pending, Chrysler filed in the superior court a

complaint similar to the complaint in Grace for declaratory

judgment, injunctive relief, and damages against the Attorney

General, the Director of the Department, and the Department.

Chrysler later withdrew its administrative appeal and filed an

amended complaint seeking declaratory and injunctive relief

only against the Department, alleging Commerce Clause

violations similar to those alleged in Grace. As in Grace, the

Department asserted a counterclaim for the unpaid taxes,

interest, and penalties.

The taxpayers and the Department filed cross-motions

for partial summary judgment in both actions. The

Department’s motions sought dismissal of all claims of the

taxpayers with prejudice on the basis of issue preclusion. The

taxpayers’ motions sought orders declaring (1) that Tyler Pipe

applied retroactively, (2) that taxes imposed for any periods

before June 23, 1987 were “void and unenforceable,” (3) that

taxes imposed for any later periods discriminated against

interstate commerce, and (4) that neither claim preclusion nor

. issue preclusion barred the taxpayers’ requested relief.

. In opposing the taxpayers’ motions, the Department

argued, among other things, that the Tyler Pipe discrimination

Ee See oe ea eee

holding was not applied to the litigants in that case, and that

Grace and Chrysler were therefore urging as a choice-of-law

rule a form of selective prospectivity preciuded by James B.

Beam Distilling Co. v. Georgia, 501 U.S. 529 (1991), and

Harper v. Virginia Dep't of Taxation, 509 U.S. 86 (1993).

The trial court issued memorandum opinions in the two>

actions, which (1) denied the Department’s motions for partial

summary judgment based on issue preclusion, (2) denied the

taxpayers’ motions except for granting them partial summary

judgment that 7yler Pipe applied retroactively, and (3) sua

sponte granted the Department partial summary judgment that

the two-way credit law, when applied retroactively and

prospectively to all the assessment periods, was constitutional.

Two months later, the trial court entered what purported

to be “final judgments” pursuant to Wash. Super. Ct. Civ. R.

54(b) based on its memorandum opinions. (Pet. App. 72a-

91a). Both the Department and the taxpayers filed motions for

reconsideration, asking the trial court to reconsider its “final

judgments.” The taxpayers filed appeals to the Washington

Supreme Court in July 1996, long before the trial court heard

argument on the parties’ motions for reconsideration. The

Washington Supreme Court on its own initiative ordered the

two cases consolidated for purposes of appellate review and

granted the taxpayers’ motion for a stay until the trial court

resolved the motions for reconsideration.

While the parties’ motions for reconsideration were still

pending in the trial court, the Washington Supreme Court

issued its decision in Digital. The trial court then requested

additional briefing on the effect of that decision in Grace and

Chrysler. In a joint letter opinion and order issued in

December 1996 in Grace and Chrysler, the trial court

eventually denied the parties’ motions for reconsideration and

concluded that Digital confirmed its earlier ruling that 7yler

Pipe applies retroactively. (Pet. App. 60a-66a) In January

1997, the Department filed timely appeals to the Washington

ee ee a ee

Supreme Court, seeking review of the joint letter opinion and

order and the two “final judgments” entered in June 1996.

At that point the trial court still had not resolved the

Department's cross-claims in Grace and Chrysler. After

determining the amounts of the Department's judgments

against Grace and Chrysler, which involved deciding the

amounts of credits to which they were entitled, the trial court

entered in June 1997 final summary judgment orders in the two

cases. In substance, the trial court awarded Chrysler $125,000

in injunctive relief based on the two-way credits. Since Grace

did not pay any gross receipts taxes qualifying for the credits, it

received no injunctive relief. (Pet. App. 67a-7la; Cross-Pet.

App. la-Sa)

In July 1997, the Department filed timely supplemental

appeals to the Washington Supreme Court in both cases.

seeking review of the June 1997 final summary judgment

orders. Neither Grace nor Chrysler appealed from those final

orders.

Although Grace/Chrysler and Buffelen/Anheuser-Busch

were separately briefed and argued, the Washington Supreme

Court issued a single opinion to resolve the two consolidated

appeals. In its opinion, the court affirmed three key rulings of

the trial court. First, the court decided that Tyler Pipe applies

retroactively based only on “principles of stare decisis,”

concluding that a majority of the court had so held in Digital.

137 Wash. 2d at 592-93, 973 P.2d at 1017 (Pet. App. | 2a-13a).

Second, the current B&O tax system with its two-way credit

system complies with all Commerce Clause requirements. /d

at 596-98, 973 P.2d at 1018-19 (Pet. App. 16a-18a). Third,

retroactive application of the two-way credits to cure the

discrimination caused by the former multiple activities

exemption did not violate due process. /d at 598-603, 973

P.2d at 1019-22 (Pet. App. 18a-24a).

The court did not decide, however, several other federal

and state law questions raised by the Department. Instead, it

“preserv[ed]” those issues “for trial court resolution on

remand|.}” /d. at 584, 973 P.2d at 1013 (Pet. App. at 2a).

Although the court declined to decide those issues, the court

commented that they were “plainly the most significant and

meritorious” of the issues presented in the Department's cross-

appeals. /d. at 591, 973 P.2d at 1016 (Pet. App. 10a).

The court noted in particular that “Grace and Chrysler

were parties in both National Can I/Tyler Pipe and American

Nat'l Can.” Id. It explained that “[t]he former case rejected

the taxpayers’ apportionment argument” and that American

Nat'l Can both “noted the resolution of the apportionment

claim in 7yler Pipe” and “rejected taxpayers’ constitutional

challenges to Washington's amended B&O tax scheme.” /d. It

further noted that the taxpayers in American Nat'l Can,

including Grace and Chrysler, “conceded Washington's B&O

tax is fairly apportioned.” /d. at 591 n.7, 973 P.2d at 1016 n.7

(Pet. App. 10a). In conclusion, it stated:

Thus, with respect to many of the issues raised by the

taxpayers, they may well have had their day in court on

those issues, although the taxpayers assert that the

United States Supreme Court jurisprudence on taxation

and the Commerce Clause requires these issues to be

re-examined.

Id. at 591, 973 P.2d at 1016 (Pet. App. 10a).

The court explained that “given our disposition of this

case” (remand to the trial court for further action consistent

with its opinion), the court deemed it “unnecessary at this

time” to address the issue preclusion questions “decided by the

trial court in Grace/Chrysler.” Id. at 592 n.8, 973 P.2d at 1017

n.8 (Pet. App. Ila). The court underscored, however, that its

review of these issues was “specifically reserved . . . should

further review be required.” /d.

After briefly addressing the 7yler Pipe retroactivity

issue raised by the Department and then rejecting all the

taxpayers’ constitutional arguments, the court stated in

conclusion it was “affirm[ing] the trial court judgments on

these key points” and “remand[ing] the cases to the trial court

for further action consistent with this opinion.” Jd. at 604, 973

P.2d at 1022 (Pet. App. 25a).

REASONS WHY THE PETITION SHOULD BE DENIED

There is no basis for review in this case. The decision

of the Washington Supreme Court is correct, and petitioners

have not cited any decision of this Court or any other court in

conflict with the decision below. In fact the questions

presented by petitioners have long been settled. Moreover,

petitioners are trying to relitigate issues they lost in Tyler Pipe

and American Nat'l Can. The Court should not encourage this

kind of behavior. The petition should be denied.

I. The Court Lacks Jurisdiction Because There Is No

Final Judgment.

This Court has jurisdiction over “{f]inal judgments or

decrees rendered by the highest court of a State in which a

decision could be had[.]” 28 U.S.C. § 1257(a). If the decision

of the highest state court is not a final judgment, this Court

lacks jurisdiction over the case. Flynt v. Ohio, 451 U.S. 619

(1981). Traditionally, the Court requires state court judgments

to be final as to all of the legal and factual issues in the case,

not just the important ones or the federal ones. R. Stern, E.

Gressman, S. Shapiro & K. Geller, Supreme Court Practice 94

(7th ed. 1993). The controversy is not completely resolved

because the Washington Supreme Court “remand[ed] the cases

to the trial court for further action consistent with this opinion.”

137 Wash. 2d at 604, 973 P.2d at 1022 (Pet. 25a). See Hathorn

v. Lovorn, 457 U.S. 255, 262 (1982).

Under the Washington Supreme Court’s opinion, the

trial court must resolve federal and state law questions of issue

preclusion based on the judgments in 7yler Pipe and American

Nat'l Can. See 137 Wash. 2d at 584, 592, 973 P.2d at 1013.

1016-17 (Pet. App. 2a, 10a-1 1a).

This case does not fall within Cox Broadcasting ¢ ‘orp.

v. Cohn, 420 U.S. 469 (1975), which holds that a decision may

be a final judgment even though the case is remanded to a trial

court for further proceedings. First, under Cox a decision is

final if “the federal issue is conclusive or the outcome of

further proceedings preordained.” /d. at 479. The remaining

issues in this case are not controlled or preordained by the

Washington Supreme Court's decision sustaining the validity

of the B&O tax and the two-way credit, as petitioners argued

below.

Second, a decision is final if the federal issue “will

survive and require decision regardless of the outcome of

future state-court proceedings.” /d. at 480. In this case, at least

two of the constitutional issues will not survive if Washington

prevails on issue preclusion.

Third, a decision is final if “later review of the federal

issue cannot be had, whatever the ultimate outcome of the

case.” /d. at 481. In this case, all of the federal issues would

be preserved if petitioners prevail on the issue preclusion

questions remanded to the trial court.

Finally, the Court occasionally considers a decision

final where “reversal of the state court on the federal issue

would be preclusive of any further litigation on the relevant

cause of action{.]” /d. at 482-83. The Court has applied this

exception only when there were “identifiable federal statutory

or constitutional policies which would have been undermined

by the continuation of the litigation in the state courts.” . Flynt

v. Ohio, 451 U.S. at 622. In this case, there are no federal

policies that would be undermined by continuation of the

litigation. Indeed, as we have pointed out, this case involves

long-settled law.

Il. Retroactive Application of the 1987 Two-Way

Credits Does Not Violate Due Process.

A. The Court Below Erred in Giving Tyler Pipe

Retroactive Application.

Grace and Chrysler present four questions in their

petition. The first three involve objections under the Due

Process Clause to the retroactive application of the 1987 two-

way credit law to periods before June 23, 1987, the date of

Tyler Pipe, as the exclusive relief for retroactive application of

the Commerce Clause discrimination holding in Tyler Pipe.

Grace and Chrysler obviously are entitled to no relief under the

Due Process Clause for pre-7y/er Pipe periods unless the B&O

taxes assessed against them for such periods impermissibly

discriminated against interstate commerce. Thus, retroactive

application of 7yler Pipe is a necessary premise underlying

each of the petitioners’ Due Process questions.

The Washington Supreme Court erred in giving 7yler

Pipe retroactive application in this case. This question is

addressed in the Department's conditional cross-petition,

Supreme Court No. 99-233.

B. Petitioners’ Argument that Retroactive

Application of the Two-Way Credits Fails to

Provide Them “Meaningful Backward-

Looking Relief” Is Meritless.

Petitioners first argue that retroactive application of the

1987 two-way credit statute violates the Due Process Clause as

interpreted in McKesson Corp. vy. Division of Alcoholic

Beverages & Tobacco, 496 U.S. 18 (1990). Pet. 8-16. The

court beiow correctly concluded that this argument is meritless.

137 Wash. 2d at 594-98, 973 P.2d at 1018-19 (Pet. App. 14a-

18a).

As the court below recognized, and as petitioners now

are forced to concede, the McKesson line of cases holds that a

“State found to have imposed an impermissibly discriminatory

tax retains flexibility in responding to this determination,” and

that the Due Process Clause demands only that, “to cure the

illegality of the tax as originally imposed,” the State must

“ultimately collect a tax for the contested tax period” that no

longer impermissibly discriminates. 137 Wash. 2d at 594-95,

973 P.2d at 1018 (Pet. App. 14a-15a) (quoting McKesson, 496

U.S. at 39-40, and Associated Indus. v. Lohman, 511 U.S. 641,

656 (1994)). Retroactively extending the benefit of the two-

way credits to petitioners does exactly that, by completely

eliminating their “exposure to the burden of a multiple tax on

manufacturing and wholesaling.” Tyler Pipe, 483 U.S. at 246.”

Because petitioners must concede that the two-way

credit system provides a “clear and certain remedy” if it

“creates in hindsight a nondiscriminatory scheme,” their Due

Process Clause argument quickly changes to an argument that

the current system “discriminates against interstate commerce

today.” Pet. 11. The court below was familiar with

petitioners’ Commerce Clause discrimination arguments,

having answered the arguments previously when petitioners

made them in American Nat'l] Can. See 137 Wash. 2d at 586,

591, 5%, 973 P.2d at 1014, 1016, 1019 (Pet. App. 4a, 9a,

15a).

* Petitioners’ reliance on General Motors Corp. v. City & County

of San Francisco, 69 Cal. App. 4th 448, 81 Cal. Rptr. 2d 544 (1999), is

misplaced. The California court reasoned that the two-way credits this

Court suggested in Tyler Pipe (which Washington quickly adopted) “would

effectively make local and out-of-state manufacturers equally subject to

selling taxes and exempt from manufacturing taxes.” /d at 456, 81 Cal.

Rptr. 2d at 548-49. In contrast, the credits San Francisco proposed “would

not fully eliminate the discrimination suffered by General Motors[.]” /d

Rather than supporting petitioners’ argument, General Motors actually

undercuts it.

* Grace and Chrysler were parties in American Nat'l Can. Under

State issue preclusion rules, they should have been precluded from

relitigating this Commerce Clause discrimination issue—the necessary

foundation for the Due Process Clause question they are now attempting to

ar elt Pe MR Rt el ads tl ~

First, petitioners wrongly claim’ that the two-way credit

involves burdensome recordkeeping requirements, including

special records to trace which specific products manufactured

elsewhere are sold in Washington. Pet. 12. Washington only

requires the normal records maintained by a business, such as

sales contracts, shipping documents, and tax returns. Wash.

Admin. Code § 458-20-19301(9). App. 15a-l6a. There is no

requirement for special records to trace specific products.

Instead, the Department authorizes taking credits based on a

“test period, formulary, or volume percentage basis{.|” Wash.

Admin. Code § 458-20-19301(8)(b). (App. 15a).

The trial court awarded Chrysler injunctive relief in the

amount of $125,000, based on prospective and retroactive

application of the two-way credits. The court did so without

requiring Chrysler to submit special records to trace which

specific products it manufactured elsewhere were sold in

Washington. Instead, Chrysler’s relief was based only on

general business records showing it paid a qualifying

manufacturing tax to the State of Delaware during the

contested periods. The parties stipulated to the amount based

on a formula estimating sales in Washington from Delaware.

The reason the trial court denied any injunctive relief to

Grace was not due to the absence of adequate records. Rather,

the corporate records obtained by the Department through

discovery showed conclusively that Grace, in contrast to

Chrysler, had paid no qualifying gross receipts taxes to any

other jurisdiction during any contested periods, including the

bring before this Court. The Washington Supreme Court remanded the case

to the trial court to reconsider this state law issue preclusion question.

* Petitioners are well aware that the Department does not require

special records because they made the same claim in American Nat'l Can.

In response, the Department submitted affidavits explaining what records

are required and how a test period is used to establish a claim for credits.

See App. 18a-26a. These affidavits were submitted in this case as part of

the Department’s argument that issue preclusion bars these petitioners, who

were parties in American Nat'l Can, from relitigating the validity of the

two-way credit under the Commerce Clause.

three tax years after enactment of the two-way credit statute in

1987. .

Second, petitioners rely on their own failure to qualify

for large amounts of credits and meaningless statistics to

contend that the two-way credit system discriminates against

interstate commerce “as a practical matter.” Pet. 12-14. This

argument was answered in American Nat'l Can, where similar

statistics were offered to prove the “continuing discriminatory

effect of Washington’s law.” 114 Wash. 2d at 240, 246-47,

787 P.2d at 547, 550. The statistics simply reflect the fact that

few states other than Washington currently impose gross

receipts taxes on businesses. That other sovereign states have

made different tax choices does not render Washington's tax

system discriminatory. The validity of one state’s tax system

does not depend on the tax laws of other states. Moorman Mfg.

Co. v. Bair, 437 U.S. 267, 277 n.12 (1978); Freeman v. Hewit,

329 U.S. 249, 256 (1946); see also Barclays Bank PLC vy.

Franchise Tax Bd., 512 U.S. 298, 338 (1994) (O’Connor, J.,

concurring in the judgment in part and dissenting in part)

(recognizing the “well-established proposition that States need

not conform their taxing practices to those of their

neighbors”).°

* This Court applies the hypothetical internal consistency test

precisely because “[{a]ny other rule would mean that the constitutionality of

{a State’s] tax laws would depend on the shifting complexities of the tax

codes of 49 other States[.]” Tyler Pipe, 483 U.S. at 247 (quoting Armco

Inc. v. Hardesty, 467 U.S. 638, 644-45 (1984)). Washington's two-way

credit system obviously is internally consistent. Furthermore, if every other

state actually imposed some form of gross receipts taxes on manufacturing

activities, at higher rates than Washington’s B&O taxes on selling activities,

an out-of-state manufacturer, such as Grace or Chrysler, would be “entitled

to an automatic, 100% credit” for its manufacturing taxes “against its B&O

selling taxes.” Without changing any feature of its tax system, Washington

would then provide “automatic credits” to interstate businesses. Pet. 11-12.

This demonstrates that the “comparative economic disadvantage for

interstate businesses” allegedly engendered by Washington’s two-way

credit system is the product of other states’ tax policy choices, not anything

inherent in the 1987 two-way credit law.

Third, petitioners argue that the two-way credit system

discriminates because interstate taxpayers “must prove that the

tax imposed by another jurisdiction” is “identical to

Washington’s B&O tax.” Pet. 14. This is petitioners’ way of

saying that the credits apply only to gross receipts taxes, not to

net income taxes, value added taxes, or franchise taxes. See

Wash. Rev. Code § 82.04.440(5). When presented with this

same argument in American Nat'l Can, the Washington

Supreme Court explained in detail why this “cannot constitute

facial discrimination.” 114 Wash. 2d at 241-44, 787 P.2d at

547-49. See Oklahoma Tax Commission v. Jefferson Lines,

514 U.S. 175, at 192 n.6 (1995) (discussing the requirement

that if states provide credits for payment of “in-state taxes,”

they must extend such credits to payment of “equivalent out-

of-state taxes”).

In short, neither the Due Process Clause question nor

the disguised Commerce Clause discrimination question

presented by petitioners is a substantial federal question.

oc Petitioners’ “Bait and Switch” Procedural

Due Process Argument Also Is Meritless.

Petitioners also argue the Washington Supreme Court’s

retroactive application of the 1987 two-way credit statute, as

the appropriate relief for the Washington court’s retroactive

application of 7yler Pipe’s discrimination ruling, conflicts with

this Court’s decisions in Reich v. Collins, 513 U.S. 106 (1994),

and Newsweek, Inc. v. Florida Dep't of Rev., 522 U.S. 442

(1998). Pet. 16-19. As the court below correctly concluded,

petitioners’ reliance on Reich and Newsweek as support for

their “bait and switch” attack on the 1987 credit statute is

misplaced. 137 Wash. 2d at 593-96, 598-99, 973 P.2d at 1017-

18, 1019-20 (Pet. App. 13a-15a, 18a-20a).

In Reich, the Georgia Supreme Court interpreted a

broadly worded statute authorizing a taxpayer to claim a refund

of “any and all taxes or fees which are determined to have been

erroneously or illegally assessed and collected from him” as

inapplicable when a tax statute is declared unconstitutional.

513 U.S. at 109. Therefore, the Georgia court dismissed the

refund action without addressing the merits of Reich’s federal

claims. /d. at 110. This Court reversed, holding that the Due

Process Clause did not permit Georgia to hold out a “clear and

certain” postpayment procedural remedy in the form of a

refund action and then, after taxpayers had paid disputed taxes,

to declare no such procedural remedy ever existed. /d. at 111.

In Newsweek, the Florida District Court of Appeal,

failing to consider this Court’s holding in Reich, interpreted

Florida law as permitting prepayment tax challenges and

therefore dismissed Newsweek’s postpayment refund action to

contest sales taxes the Florida Supreme Court earlier had held

to violate the First Amendment: This Court summarily

reversed, explaining that under Florida law there was a

longstanding practice of permitting taxpayers to bring refund

actions for taxes paid under an unconstitutional statute and that

the State did not dispute “this settled understanding” of Florida

law. Based on Reich, this Court held that Newsweek was

entitled to a clear and certain remedy and thus it could “use the

refund procedures to adjudicate the merits of its claim.”

The problem in Reich and Newsweek was that the state

went from a post-deprivation refund remedy to an exclusive

pre-deprivation remedy. Thus, it was impossible to challenge

taxes that had already been paid. Washington’s two-way credit

law did not “switch” the post-deprivation refund remedy to a

pre-deprivation remedy. The two-way credit law authorized

either refunds or injunctive relief necessary to cure the

constitutional defect in the multiple activities exemption. This

Court has recognized that states have the authority to tailor a

refund remedy to cure constitutional defects in their tax

systems. McKesson Corp. v. Division of Alcoholic Beverages

& Tobacco, 496 U.S. 18, 39-41, 44 n.27 (1990); Harper v.

Virginia Dep't of Taxation, 509 U.S. 86, 100-02 (1993);

Associated Indus. v. Lohman, 511 U.S. 641, 656 (1994);

Reynoldsville Casket Co. v. Hyde, 514 U.S. 749, 755-56

(1995).

Washington law offered these petitioners a choice of

either a prepayment procedural remedy (an injunction action

under Wash. Rev. Code § 82.32.150) or a postpayment

procedural remedy (a refund action under Wash. Rev. Code §

82.32.180). Petitioners chose to file injunction actions. In

sharp contrast to what occurred in Reich and Newsweek, the

courts below adjudicated the merits of their claims. That is all

the “process” petitioners were “due” in this situation. There

was no “bait and switch.” Petitioners received precisely the

prepayment procedural remedy promised by Washington law.

Petitioners’ apparent assertion that unii! August 1987

Washington law promised them complete injunctive relief on

demand-regardless of the merits of their constitutional claims-—

obviously is incorrect. The statute petitioners allegedly relied

upon (Pet. 18-19), Wash. Rev. Code § 82.32.150, provides no

direction to the courts as to what form or degree of anticipatory

relief, if any, is appropriate when a tax statute or its application

is declared unconstitutionally discriminatory. Such a question

of appropriate relief always has been determined on a case-by-

case basis by considering all pertinent provisions of federal and

state law, including any applicable state statutes enacted before

the action is concluded. See, e.g., American Nat'l Can, 114

Wash. 2d 236, 249-53 & n.4, 787 P.2d 545, 551-53 & n.4, cert.

denied, 498 U.S. 880 (1990); Bond v. Burrows, 103 Wash. 2d

153, 161-63, 690 P.2d 1168, 1172-73 (1984); Benjamin

Franklin Thrift Stores, Inc. v. Henneford, 187 Wash. 472, 484-

88, 60 P.2d 86, 91-93 (1936); Jensen v. Henneford, i85 Wash.

209, 220, 53 P.2d 607 (1936); Nipges v. Thornton, 119 Wash.

464, 467-68, 206 P. 17, 18-19 (1922); Simpsen v. State, 26

Wash. App. 687, 695-96, 615 P.2d 1297, 1301-02, review

denied, 94 Wash. 2d 1022 (1980); Wash. Rev. Code §

82.98.030.

Wash. Rev. Code § 82.32.150 is nothing more than a

procedural statute, conditionally waiving the State’s sovereign

immunity pursuant to Wash. Const. art. Il, § 26, which

provides that the Washington Legislature “shall direct by law,

SS LL Le PS ee TT ET eT

in what manner, and in what courts, suits may be brought

against the state.” The statute merely authorizes a court, in an

appropriate case, to issue an injunction on state or federal

grounds, notwithstanding the existence of an adequate legal

remedy in the form of a refund action. See Tyler Pipe Indus.,

Inc. v. Department of Rev., 96 Wash. 2d 785, 791, 638 P.2d

1213, 1216 (1982).’

Nor could petitioners reasonably believe they would

receive complete injunctive relief based on the vague dictum*®

in National Can II: “lf the taxes were collected in violation of

the constitution, then the state refund statutes would mandate

refunds.” 109 Wash.2d at 880-81, 749 P.2d at 1286. In that

dictum, the Washington court did not say that state law would

mandate full refunds if Tyler Pipe were applied retroactively; it

said “refunds” would be required. Two years after National

Can II, when the court actually confronted the question of

appropriate relief under Washington law for the Commerce

Clause discrimination holding in Tyler Pipe, the court squarely

held that “[fJull refunds are not appropriate” and that the

taxpayers instead were entitled to more limited refunds based

on the retroactive application of the two-way credit law.

American Nat'l Can, 114 Wash. 2d at 253, 787 P.2d at 583.

’ Petitioners also cite Wash. Rev. Code § 82.04.4286 in support of

their “bait and switch” argument. Pet. 18. That statute, which merely

expresses a legislative intent not to impose any tax that the constitution

would prohibit it from imposing, has no application in this case. By

retroactively curing the constitutional defects of the “multiple activities

exemption,” the Legislature was no longer “prohibited from taxing”

petitioners “under . . . the constitution or laws of the United States.” Thus,

in light of the McKesson line of cases, petitioners’ argument based on this

statute must fail as circular.

* As explained at page 4-5, supra, the Washington Supreme Court

held in National Can II that the discrimination ruling announced in Tyler

Pipe applied purely prospectively. Because the Washington Supreme Court

held the former multiple activities exemption was constitutional during all

the tax periods at issue in National Can II, see 109 Wash. 2d at 881, any

discussion of what would otherwise be appropriate retroactive relief in that

case obviously was unnecessary to the court’s decision.

Jette

Thus, in referring to “refunds” in National Can II, the court

probably meant refunds based on retroactive application of the

1985 and 1987 credit statutes.’

Even if petitioners’ characterization of Washington law

before August 1987 were accurate, however, it is immaterial.

Neither Reich nor Newsweek overruled the McKesson line of

cases, which permitted the State of Washington to retroactively

“reformulate and enforce” its B&O taxes “during the contested

tax period[s] in any way that treats petitioner[s! and [their]

competitors in a manner consistent with the dictates of the

Commerce Clause.” McKesson, 496 U.S. at 40. That is

precisely what the Washington Legislature did in 1987 and

what the Supreme Court of Washington did below. Reich and

Newsweek are consistent with the McKesson line of cases

because the changes from a post-deprivation remedy to a pre-

deprivation remedy in Reich and Newsweek were unrelated to

curing the underlying discrimination problems with the taxes at

issue.

In short, this Due Process Clause question presented by

petitioners is not a substantial federal question.

D. Petitioners’ Substantive Due Process

Argument Also Is Meritless.

Petitioners also argue the Washington Supreme Court’s

retroactive application of the 1987 two-way credit statute, as

the appropriate relief for the Washington court’s retroactive

application of Tyler Pipe’s discrimination ruling, violates

substantive due process limitations on retroactive legislation.

Pet. 20-23. Without citing any relevant supporting authority,

petitioners contend that section 3 of the 1987 statute (App. 4a)

is unsupported by any legitimate legislative purpose and is

“applied so far back in time” as to violate the Due Process

” Unlike the taxpayers in Reich and Newsweek, it is hard to fathom

how the court’s dictum in National Can II could have induced these

petitioners to take any actions they otherwise would not have taken. Even

now, they still have not paid the taxes assessed against them.

Clause. The court below, applying this Court’s precedents,

correctly concluded that these arguments have no substance.

137 Wash. 2d at 599-603, 973 P.2d at 1020-21 (Pet. App. 20a-

24a).

United States v. Carlton, 512 U.S. 26 (1994), clarifies

that a retroactive tax provision violates substantive due process

limitations only if the provision fails the usual minimal

rationality due process test applied to economic legislation

generally. /d. at 35; see id. at 40 (Scalia, J., concurring in the

judgment). That is, the retroactive application of a new tax

provision must be so arbitrary and irrational as to be wholly

unrelated to any legitimate purpose.

In American Nat'l Can, the Washington Supreme Court

previously answered the similar argument of Grace and

Chrysler questioning the Legislature’s motivation behind the

1987 statute, stating:

[T]he State’s desire to maintain its revenues is proper.

Indeed, the Supreme Court has repeatedly stated that

the commerce clause does not relieve those engaged in

interstate commerce from their just share of state tax

burden even though it increases the cost of doing

business. State tax revenues fund every beneficial

action the state takes.

114 Wash. 2d at 247, 787 P.2d at 550.

As for petitioners’ argument that the period of

retroactivity is excessive, it is important to remember that the

1987 statute was curative legislation that offered relief to

interstate manufacturers. The statute did not increase even one

taxpayer’s tax burden. Even before Carlton, this Court had

held that before a retroactive tax provision could be challenged

under the Due Process Clause, the tax provision must, as a

threshold matter, at least leave the taxpayer “worse off” than

the taxpayer would have been under the prior tax law. See

United States v. Hemme, 476 U.S. 558, 568-71 (1986). The

1987 statute did not defeat any reasonable expectations of these

petitioners. Grace’s tax obligations remained the same as

before the legislation; Chrysler’s were reduced by $125,000.'°

In short, this Due Process Clause question presented by

petitioners is not a substantia! federal question.

fll. The Apportionment Question Petitioners Pose Is So

Explicitly Foreclosed by Prior Decisions of This

Court As To Leave No Room for Real Controversy.

Petitioners argue their petition should be granted “to

confirm that apportionment of gross receipts taxes is a

constitutional mandate to taxing states.” Pet. 29. Petitioners

state the question as “Is the Commerce Clause violated by the

State of Washington’s imposition of an unconstitutional gross

receipts tax scheme and discriminatory tax credit without

apportioning the tax as this Court requires under Oklahoma

Tax Commission v. Jefferson Lines, Inc., 514 U.S. 175

(1995)?” Pet. i.

Petitioners’ question misstates Washington law.

Washington does not impose its B&O tax system “without

apportioning the tax[es].” Washington taxes only extracting,

manufacturing, and selling activities that take place in this

state. If a Washington business manufactures a product in

'° Petitioners’ reliance in regard to this question on General

Motors Corp. v. City & County of San Francisco, 69 Cal. App. 4th 448, 81

Cal. Rptr. 2d 544 (1999), is somewhat ironic. When the California court

discussed the Washington Supreme Court’s approval in Digital of

retroactively applying the two-way credits, it distinguished Digital as

involving “recent tax years” (August 1987 credits applied retroactively to

January 1983) and a taxpayer that candidly conceded “it had not been

double taxed.” /d Thus, the California court did not perceive its holding to

be in conflict with that of the Washington Supreme Court in Digital. Here,

in Chrysler’s case, the two-way credits were applied retroactively only back

to January 1984. And in Grace’s case, although Grace refused to concede

the point, the Department proved conclusively that it, like Digital, had not

been “double taxed.” Based on the evidence submitted, applying a

summary judgment standard, the trial court found that Grace was “not

entitled to any multiple activities tax credit for the period January 1, 1980,

through December 31, 1990.” Cross-Pet. App. 3a (No. 99-233).

RT CNR SRR OME SO BORET MIN ER. OR AE AED RE ED COME RT GR RCN SNORE Or ACES CE ee OO RE NET en NEES

California and sells it in Oregon, not one cent of the gross

receipts from those activities will be subject to B&O tax. None

of Washington’s B&O taxes are unapportioned. Its extracting,

manufacturing, and selling B&O taxes all are inherently

apportioned because the taxes apply only when those taxed

activities (extracting, manufacturing, or sales) occur in

Washington.

The petition of Grace and Chrysler is vague as to which

of these B&O taxes they are challenging as_ unfairly

apportioned. In the assessments that it attacked below,

Chrysler was assessed only for unpaid selling B&O taxes.

Consequently, these were the only B&O taxes it challenged (or

had standing to challenge) on apportionment grounds. In the

assessments it attacked, Grace was assessed primarily for

unpaid selling B&O taxes, but also for a relatively small

amount of unpaid manufacturing B&O taxes for one of its

division’s manufacturing operations in Washington. In the

courts below, Grace, like Chrysler, directed its apportionment

arguments only to the selling B&O taxes, the same taxes both

of them previously challenged unsuccessfully in Tyler Pipe."'

Therefore, we will assume petitioners’ apportionment question

is limited to Washington’s selling B&O taxes.’

'' This also was the only apportionment issue addressed in the

Washington Supreme Court’s opinion below. The court below stated that

petitioners “ask us to ignore our own and the United States Supreme

Court’s rulings and revisit the apportionment issue.” 137 Wash. 2d at 596,

973 P.2d at 1019 (Pet. App. 16a-17a). The court cited none of this Court’s

or its own decisions involving apportionment challenges to manufacturing

taxes, e.g., American Mfg. Co. v. St. Louis, 250 U.S. 459 (1919); Reynolds

Metals Co. v. Washington, 65 Wash. 2d 882, 400 P.2d 310, appeal

dismissed for want of a substantial federal question, 382 U.S. 160 (1965),

which suggests that the court was not addressing such a question.

'? The only hint in their petition that petitioners might also be

attempting to challenge Washington’s manufacturing B&O tax on

apportionment grounds is their citation to a trade journal article discussing

“an unapportioned manufacturing tax measured by gross receipts.” Pet. 26-

27. In reviewing state court decisions under 28 U.S.C. § 1257, however,

this Court will not consider a federal question unless it was either addressed

As_ petitioners acknowledge, Pet. 24, this Court

unanimously upheld Washington’s selling B&O taxes as fairly

apportioned in Tyler Pipe be se

the activity of wholes«ing—whether by an in-state or

an out-of-state manufacturer—must be viewed as a

Separate activity conducted wholly within Washington

that no other State has jurisdiction to tax. See

Moorman Mfg. Co. v. Bair, 437 U.S., at 280-81 (gross

receipts tax on sales to customers within State would be

“plainly valid”); Standard Pressed Steel Co. vy.

Washington Revenue Dept., 419 U.S., at 564 (selling

tax measured by gross proceeds of sales is “apportioned

exactly to the activities taxed”).

483 U.S. at 251.7

In rejecting the apportionment challenge renewed by

Grace and Chrysler here,'* this Court in Tyler Pipe applied

settled Commerce Clause case law. For well over a century,

this Court has upheld nondiscriminatory gross receipts taxes on

interstate sales of goods imposed by the state of destination.

Standard Pressed Steel Co. y. Department of Rev., 419 U.S.

560 (1975); General Motors Corp. v. Washington, 377 U.S.

by or properly presented to the state courts. Street v. New York, 394 U.S.

576, 581-85 (1969).

"i rejecting the apportionment argument of Grace and Chrysler

in Tyler Pipe, this Court correctly observed that it rested “on the erroneous

assumption that through the B&O tax, Washington is taxing the unitary

activity of f manufacturing and wholesaling.” 483 U.S. at 251.

* Grace and Chrysler were parties in National Can I, No. 85-2006,

and litigated in Tyler Pipe whether Washington’s B&O selling taxes are

fairly apportioned. Therefore, federal common law rules of issue preclusion

should have prevented them from relitigating this same issue in the courts

below. See, e.g., Heck v. Humphrey, 512 U.S. 477, 488 n.9 (1994): United

States v. Stauffer Chem. Co., 464 U.S. 165 (1984). If this Court were to

review the fourth question presented by petitioners, it would first need to

address this threshold federal issue preclusion question. See, e. g., Hagen v.

Utah, 510 U.S. 399, 409 (1994); Haring v. Prosise, 462 U.S. 306, 313-17

(1983).

436 (1964); Field Enters., Inc. v. Washington, 352 U.S. 806

(1956), aff'g per curiam 47 Wash. 2d 852, 289 P.2d 1010

(1955); Norton Co. v. Department of Rev., 340 U.S. 534

(1951); /nternational Harvester Co. v. Department of Treasury,

322 U.S. 340 (1944); Department of Treasury v. Allied Mills,

Inc., 318 U.S. 740 (1943), aff'g per curiam 220 Ind. 340, 42

N.E.2d 34 (1942); Department of Treasury v. Wood Preserving

Corp., 313 U.S. 62 (1941); Sonneborn Bros. v. Cureton, 262

U.S. 506 (1923); Woodruff v. Parham, 8 Wall. 123 (1868); see

also Westinghouse Elec. Corp. v. King, 678 S.W.2d 19 (Tenn.

1984), appeal dismissed for want of a substantial federal

question, 470 U.S. 1075 (1985); Chicago Bridge & Iron Co. v.

Department of Rev., 98 Wash. 2d 814, 659 P.2d 463, appeal

dismissed for want of a substantial federal question, 464 U.S.

1013 (1983); Stone v. Stapling Machs. Co., 220 Miss. 470, 71

So. 2d 205, appeal dismissed for want of a substantial federal

question, 348 U.S. 802 (1954).

For nearly a century, this Court also has consistently

rejected Commerce Clause challenges to state or local gross

receipts taxes on manufacturing, extracting, and producing

activities measured, like Washington’s B&O taxes, by the

value of the products. Commonwealth Edison Co. v. Montana,

453 U.S. 609, 617 & n.7 (1981) (extracting); Aponaug Mfg.

Co. v. Stone, 314 U.S. 577 (1941), aff’g per curiam 190 Miss.

805, 1 So. 2d 763 (1941) (manufacturing); Utah Power & Light

Co. v. Pfost, 286 U.S. 165 (1932) (generating electricity); Hope

Natural Gas Co. v. Hall, 274 U.S. 284 (1927) (extracting);

Lacoste v. Department of Conservation, 263 U.S. 545 (1924)

(extracting); Oliver Iron Mining Co. v. Lord, 262 U.S. 172

(1923) (extracting); Heisler v. Thomas Colliery Co., 260 U.S.

245 (1922) (extracting); American Mfg. Co. v. St. Louis, 250

U.S. 459 (1919) (manufacturing); see also Reynolds Metals Co.

v. Washington, 65 Wash. 2d 882, 400 P.2d 310, appeal

dismissed for want of a substantial federal question, 382 U.S.

160 (1965) (manufacturing).

eerie

Petitioners seem to contend that this Court overruled

both these lines of cases sub silentio in Oklahoma Tax Comm'n

v. Jefferson Lines, Inc., 514 U.S. 175 (1995). See Pet. 24-26.

In Jefferson Lines, this Court upheld Oklahoma’s sales tax on

the full price of a ticket for interstate transportation services as

consistent with the Commerce Clause. 514 U.S. at 177, 200.

Jefferson Lines might have rendered “suspect” the continuing

authority of Central Greyhound Lines, Inc. v. Mealey, 334 U.S.

653 (1948), see Jefferson Lines, 514 U.S. at 179, 189-92 &

nn.5-6, 195-96 & n.7; id. at 200-01 (Scalia, J., concurring in

the judgment); id. at 201-06 (Breyer, J., dissenting), but it did

not undermine in the slightest the above lines of cases

concerning taxes imposed on production or sales of goods.

Indeed, in Jefferson Lines, this Court cited Commonwealth

Edison, International Harvester, and Tyler Pipe, without

questioning their holdings or their reasoning. See id. at 183,

188-89, 192 n.6, 199-200. The Washington Supreme Court

below simply followed settled apportionment rules applied in

this Court’s controlling precedents, as was its duty.

Petitioners state that “subsequent to Jefferson Lines, the

Supreme Courts of Alabama and Virginia have struck down

unapportioned gross receipts taxes on interstate manufacturers”

on Commerce Clause grounds, citing M & Assocs., Inc. v. City

of Irondale, 723 So.2d 592 (Ala. 1998), and City of Winchester

v. American Woodmark Corp., 252 Va. 98, 471 S.E.2d 495

(1996). Pet. 26. The decision below is not in conflict with

either of those decisions. There is no suggestion whatsoever in

either M & Assocs. or American Woodmark that Jefferson

Lines undermined this Court’s apportionment holding in Tyler

Pipe.

The gross receipts taxes the Virginia and Alabama

courts struck down in American Woodmark and M & Assocs.

'S Petitioners do not explicitly argue that the court below has

decided an “important federal question” in a way that “conflicts” with

Jefferson Lines, M & Assocs., or American Woodmark, within the meaning

of Rule 10. It obviously has not.

a ee ea ae ee ee a

differed dramatically from the Washington selling B&O taxes,

which apply only to sales that take place in Washington. In

American Woodmark, the city attempted to apply its gross

receipts tax to 100% of the company’s nationwide gross

revenues, merely because the company’s headquarters building

was in the city. 471 S.E.2d at 496, 498. The company

operated 24 facilities in 13 different states, including

manufacturing plants, distribution centers, and service and

sales offices. None of those facilities were located in the city

and almost none of the company’s customers were either. /d.

Similarly, in M & Assocs., the city attempted to apply

its gross receipts tax to all the company’s receipts from sales,

including sales in other states, again merely because the

company’s headquarters building was in the city. 723 So. 2d at

592-93. The Alabama court correctly held that the city’s tax

failed the “internal consistency” test. Jd. at 598-99. Thus. the

local gross receipts taxes in American Woodmark and M &

Associates truly were unapportioned.

In contrast, the selling B&O taxes this Court upheld in

Tyler Pipe (when Grace and Chrysler previously litigated this

question) are inherently apportioned because they are imposed

only on sales in Washington. No other state could

constitutionally impose a similar gross receipts tax on the same

sales. See, e.g., Evco v. Jones, 409 U.S. 91 (1972); J.D. Adams

Mfg. Co. v. Storen, 304 U.S. 307 (1938).

Despite petitioners’ strained arguments to the contrary,

Pet. 28-29, Washington’s selling B&O taxes, as well as the

B&O tax system as a whole with the two-way credits,

obviously are internally consistent and externally consistent.

In short, the Commerce Clause apportionment question

presented by petitioners is not a substantial federal question.

CONCLUSION

For these reasons, the petition for a writ of certiorari

should be denied.

Respectfully submitted.

August 30, 1999

CHRISTINE O. GREGOIRE

Attorney General

State of Washington

DONALD F. COFER*

WILLIAM BERGGREN COLLINS

Assistant Attorneys General

Counsel for Respondent

*Counsel of Record

APPENDIX

1987 WASH. LAWS, 2ND EX. SESS. CH. 3

BUSINES’ AND OCCUPATION TAX-—

| MULTIPLE ACTIVITIES-TAX CREDITS

; AN ACT Relating to business and occupation taxation

: of multiple activities; amending RCW 82.04.440; creating new

sections; and declaring an emergency.

Be it enacted by the Legislature of the State of Washington:

NEW SECTION. Sec. 1. The legislature finds that the

invalidation of the multiple activities exemption contained in

RCW 82.04.440 by the United States Supreme Court now

requires adjustments to the state’s business and occupation tax

to achieve constitutional equality between Washington

taxpayers who have conducted and will continue to conduct

business in interstate and intrastate commerce. It is the intent

of this act to preserve the integrity of Washington’s business

and occupation tax system and impose only that financial

burden upon the state necessary to establish parity in taxation

between such taxpayers.

cab aitnalianeed Maret

Thus, this act extends the system of credits originated in

RCW 82.04.440 in 1985 to provide for equal treatment of

taxpayers engaging in extracting, manufacturing or selling

regardless of the location in which any of such activities

occurs. It is further intended that RCW 82.04.440, as amended

by section 2 of this act, shall be construed and applied in a

manner that will eliminate unconstitutional discrimination

between taxpayers and ensure the preservation and collection

of revenues from the conduct of multiple activities in which

taxpayers in this state may engage.

Sec. 2. Section 82.04.440, chapter 15, Laws of 1961 as

last amended by section 1, chapter 190, Laws of 1985 and

RCW 82.04.440 are each amended to read as follows:

Pleiadian Pal ala ee Rie alan 5 it Rt Scale Dainty

Se NES Ab RRL DS STI Ps i

(1) ((Bxeeptas- provided ta subsections 2) and 43464

this—section,)) Every person engaged in activities which are

dierent

within the purview of the provisions of two or more of sections

RCW 82.04.230 to 82.04.290, inclusive, shall be taxable under

each paragraph applicable to the activities engaged in.

(2) Persons taxable under RCW 82.04.250 or

SOA 2 shall Het tet ttt he ttt Ee

; ; ; > >

. av. 7 : OD ot;

~ -- -

preducis-se-seld)) be allowed a credit against those taxes for

any (a) manufacturing taxes paid with respect to the

manufacturing of products so sold in this state, and/or (b)

extracting taxes paid with respect to the extracting of products

so sold in this state or ingredients of products so sold in this

state. Extracting taxes taken as credit under section (3) of this

section may also be taken under this subsection, if otherwise

allowable under this subsection. The amount of the credit shall

not exceed the tax liability arising under this chapter with

respect to the sale of those products.

(3) Persons taxable under RCW 82.04.240 or

82.04.260 subsection (4) shall ((net-be+taxable-under RCW

$2-04.230)) be allowed a credit against those taxes for any

extracting taxes paid with respect to extracting the ingredients

of the products so manufactured in this state. The amount of

the credit shall not exceed the tax liability arising under this

chapter with respect to the manufacturing of those products.

( aay ;

sasriedi Nts 2 a eaeaggien yt agpedien a dae

{

(6}-As-previded-ina}-of this-subsection;)) Persons

taxable under RCW 82.04.230, 82.04.240, or subsection (2),

(3), (4), (5), or (7) of RCW 82.04.260 with respect to extracting

or manufacturing products in this state shall be allowed a credit

against those taxes for any (i) gross receipts taxes paid to

another state with respect to the sales of the products so

extracted or manufactured in this state, (11) manufacturing taxes

paid with respect to the manufacturing of products using

ingredients so extracted in this state, or (iii) manufacturing

taxes paid with respect to manufacturing activities completed

in another state for products so manufactured in this state. The

amount of the credit shall not exceed the tax liability arising

under this chapter with respect to the extraction or

manufacturing of those products.

((¢})) (5) For the purpose of this ((subsectien;))

section:

(a) “Gross receipts tax” means a tax:

(i) Which is imposed on or measured by the gross

volume of business, in terms of gross receipts or in other terms,

and in the determination of which the deductions allowed

would not constitute the tax an income tax or value added tax,

and

(ii) Which is also not, pursuant to law or custom,

separately stated from the sales price.

(( He) eee the pe pe tt atte |) Cb) State

means (i) the state of Washington, (ii) a state of the United

States other than Washington, or any political subdivision

((thereef-or)) of such other state, (iii) the District of Columbia,

and (iv) any foreign country or political subdivision thereof.

imposed on the act or privilege of engaging in business as a

manufacturer, and includes (i) the taxes imposed in RCW

82.04.240 and subsections (2), (3). (4), (5), and (7) of RCW

82.04.260, and (ii) similar gross receipts taxes paid to other

States.

(d) “Extracting tax” means a gross receipts tax

imposed on the act or privilege of engaging in business as an

extractor, and includes the tax imposed in RCW 82.04.230 and

similar gross receipts taxes paid to other states.

> «666 29 «66

(e) “Business”, “manufacturer”, “extractor”, and other

terms used in this section have the meanings given in RCW

82.04.020 through 82.04.212, notwithstanding the use of those

terms in the context of describing taxes imposed by other

states.

NEW SECTION. Sec. 3. If it is determined by a court

of competent jurisdiction, in a judgment not subject to review,

that relief is appropriate for any tax reporting periods before

the effective date of this act, in respect to RCW 82.04.440 as it

existed before the effective date of this act, it is the intent of the

legislature that the credits provided in RCW 82.04.440 as

amended by section 2 of this act shall be applied to such

reporting periods and that relief for such periods be limited to

the granting of such credits.

NEW SECTION. Sec. 4. If any provision of this act or

its application to any person or circumstance is held invalid,

the remainder of the act or the application of the provision to

other persons or circumstances is not affected.

NEW SECTION. Sec. 5. This act is necessary for the

immediate preservation of the public peace, health, and safety,

the support of the state government and its existing public

institutions, and shall take effect immediately.

Passed the Senate August 10, 1987.

Pass the House August 10, 1987.

Approved by the Governor August 11, 1987.

Filed in Office of Secretary of State August 11, 1987.

eS eS s.

WAC 458-20-19301 Multiple activities tax credits.

(1) Introduction. Under the provisions of RCW 82.04.440 as

amended effective August 12, 1987, Washington state’s

business and occupation taxes imposed under chapter 82.04

RCW were adjusted to achieve constitutional equality in the

tax treatment of persons engaged in intrastate commerce

(within this state only) and interstate commerce (between

Washington and other states). The business and occupation tax

system taxes the privilege of engaging in specified business

activities based upon “gross proceeds of sales” (RCW

82.04.070) and the “value of products” (RCW 82.04.450)

produced in this state. In order to maintain the integrity of this

taxing system, to eliminate the possibility of discrimination

between taxpayers, and to provide equal and uniform treatment

of persons engaged in extracting, manufacturing, and/or selling

activities regardless of where performed, a statutory system of

internal and external tax credits was adopted, effective August

12, 1987. This tax credits system replaces the multiple

activities exemption which, formerly, assured that the gross

receipts tax would be paid only once by persons engaged in

more than one taxable activity in this state in connection with

the same end products. Unlike the multiple activities

exemption which only prevented multiple taxation from within

this state, the credits of the new system apply for gross receipts

taxes paid to other taxing jurisdictions outside this state as

well.

(2) Definitions. For purposes of this section the

following terms will apply.

(a) “Credits” means the multiple activities tax credit(s)

authorized under this statutory system also referred to as

MATC.

(b) “Gross receipts tax” means a tax:

(i) Which is imposed on or measured by the gross

volume of business, in terms of gross receipts or in other terms,

and in the determination of which the deductions allowed

Ee ee Ne ie SL TL ON eT A Me pe rs eae SO ce OR ee

would not constitute the tax an income tax or value added tax;

and

(11) Which is not, pursuant to law or custom, separately

stated from the selling price.

on the act or privilege of engaging in business as an extractor,

and includes the tax imposed by RCW 82.04.230 (tax on

extractors) and similar gross receipts taxes paid to other states.

(d) “Manufacturing tax” means a gross receipts tax

imposed on the act or privilege of engaging in business as a

manufacturer, and includes:

(i) The taxes imposed in RCW 82.04.240 (tax on

manufacturers) and subsections (2) through (5) and (7) of

RCW 82.04.260 (tax on special manufacturing activities) and

(11) Similar gross receipts taxes paid to other states.

The term “manufacturing tax,” by nature, includes a

gross receipts tax upon the combination of printing and

publishing activities when performed by the same person.

(e) “Selling tax” means a gross receipts tax imposed on

the act or privilege of engaging in business as a wholesaler or

retailer of tangible personal property in this state or any other

state. The term “selling” has its common and ordinary

meaning and includes the acts of making either wholesale sales

or retail sales or both.

(f) “State” means:

(i) The state of Washington,

(ii) A state of the United States other than Washington

or any political subdivision of such other state,

(iii) The District of Columbia,

(iv) Territories and possessions of the United States,

and

(v) Any foreign country or political subdivision

thereof.

(g) “Taxes paid” means taxes legally imposed and

actually paid in terms of money, credits, or other emoluments

to a taxing authority of any “state.” The term does not include

taxes for which liability for payment has accrued but for which

payment has not actually been made. This term also includes

business and occupation taxes being paid to Washington state

together with the same combined excise tax return upon which

MATC are taken.

(h) “Business,” “manufacturer,” “extractor.” and other

terms expressly defined in RCW 82.04.020 through 82.04.212

have the meanings given in those statutory sections regardless

of how the terms may be used for other states’ taxing purposes.

99 66

(3) Scope of credits. This integrated tax credits system

is intended to assure that gross receipts from sales or the value

of products determined by such gross receipts are taxed only

one time, whether the activities occur entirely within this state

or both within and outside this state. External tax credits arise

when activities are taxed in this state and similar activities with

respect to the same products produced and sold are also subject

to similar taxes outside this state. There are five ways in which

external tax credits may arise because of taxes paid in other

states.

(a) Products or ingredients are extracted (taken from

the ground) in this state and are manufactured or sold and

delivered in another state which imposes a gross receipts tax on

the latter activity(s). The credit created by payment of the

other state’s tax may be used to offset the Washington

extracting tax liability.

(b) Products are manufactured, in whole or in part, in

this state and sold and delivered in another state which imposes

a gross receipts tax on the selling activity. Again, payment of

the other state’s tax may be taken as a credit against the

Washington manufacturing tax liability.

outside this state upon which a gross receipts tax is paid in the

state of extracting, and which are sold and delivered to buyers

here. The other state tax payment may be taken as a credit

against Washington’s selling taxes.

(d) Similarly, products are manufactured, in whole or

in part outside this state and sold and delivered to buyers here.

Any other state’s gross receipts tax on manufacturing may be

taken as a credit against Washington’s selling tax.

(e) Products are partly manufactured in this state and

partly in another state and are sold and delivered here or in

another state. The combination of all other states’ gross

receipts taxes paid may be taken as credits against

Washington’s manufacturing and/or selling taxes.

Thus, the external tax credits may arise in the flow of

commerce, either upstream or downstream from the taxable

activity in this state, or both. Products extracted in another

state, manufactured in Washington state, and sold and

delivered in a third state may derive credits for taxes paid on

both of the out of state activities.

Internal tax credits arise from multiple business

activities performed entirely within this state, all of which are

now subject to tax, but with the integrated credits offsetting the

liabilities so that tax is only paid once on gross receipts. Under

this system Washington extractors and manufacturers who sell

their products in this state at wholesale and/or retail must report

the value of products or gross receipts under each applicable

tax classification. Credits may then be taken in the amount of

the extracting and/or manufacturing tax paid to offset the

selling taxes due. There are three ways in which credits may

arise because of taxes paid exclusively in this state.

(f) Products are extracted in Washington and directly

sold in Washington. Extracting business and occupation tax

and selling business and occupation tax must both be reported

but the payment of the former is a credit against the latter.

(g) Similarly, ingredients are extracted in Washington

and manufactured into new products in this state. The

extracting business and occupation tax reported and paid may

be taken as a credit against manufacturing tax reported.

(h) Products manufactured in Washington are sold in

Washington. Again, the payment of the manufacturing tax

reported may be credited against the selling tax (wholesaling

and/or retailing business and occupation tax) reported.

All of the external and internal tax credits derived from

any flow of commerce may be used, repeatedly if necessary, to

offset other tax liabilities related to the production and sale of

the same products.

(4) Eligibility for taking credits. Statutory law places

the following eligibility requirements and limitations upon the

MATC system.

(a) The amount of the credit(s), however derived, may

not exceed the Washington tax liability against which the

credit(s) may be used. Any excess of credit(s) over liability

may not be carried over or used for any purpose.

(b) The person claiming the credit(s) must be the same

person who is legally obligated to pay both the taxes which

give rise to the credit(s) and the taxes against which the credit

is claamed. The MATC is not assignable.

actually paid before credit may be claimed against any other

tax liability. Tax liability merely accrued is not creditable.

(d) The business activity subject to tax, and against

which credit(s) is claimed, must involve the same ingredients

or product upon which the tax giving rise to the credit(s) was

paid. The credits must be product-specific.

(e) The effective date for developing and claiming

credit(s) for products manufactured in Washington state and

sold and delivered in other states which impose gross receipts

selling taxes is June 1, 1987.

eee:

10a

(f) The effective date for developing and claiming all

credits other than those explained in subsection (e) above, is

August 12, 1987.

(g) Persons who are engaged only in making wholesale

or retail sales of tangible personal property which they have not

extracted or manufactured are not entitled to claim MATC.

Also, persons engaged in rendering services in this state are not

so entitled, even if such services have been defined as “retail

sales” under RCW 82.04.050. (See WAC 458-20-194 for rules

governing apportionment of gross receipts from interstate

services. )

(5) Other states’ qualifying taxes. The law defines

“gross receipts tax” paid to other states to exclude income

taxes, value added taxes, retail sales taxes, use taxes, or other

taxes which are generally stated separately from the selling

price of products sold. Only those taxes imposed by other

states which include gross receipts of a business activity within

their measure or base are qualified for these credit(s). The

burden rests with the person claiming any MATC for other

states’ taxes paid to show that the other states’ tax was a tax on

gross receipts as defined herein. Gross receipts taxes generally

include:

(a) Business and occupation privileges taxes upon

extracting, manufacturing, and selling activities which are

similar to those imposed in Washington state in that the tax

measure or base is not reduced by any allocation,

apportionment, or other formulary method resulting in a

downward adjustment of the tax base. If costs of doing

business may be generally or routinely deducted from the tax

base, the tax is not one which is similar to Washington state’s

gross receipts tax.

(b) Severance taxes measured by the selling price of

the ingredients or products severed (oil, logs, minerals, natural

products, etc.) rather than measured by costs of production,

stumpage values, the volume or number of units produced, or

some other formulary tax base.

ee A AP Cae SER ie ae

ee ee ee ke

lla

the gross volume of business in terms of gross receipts or other

financial terms rather than units of production or the volume of

units sold.

Other states’ tax payments claimed for MATC must be

identifiable with the same ingredients or products which

incurred tax liability in Washington state, i.e., they must be

product specific.

(d) The department will periodically publish an excise

tax bulletin listing current taxes in other jurisdictions which are

either qualified or disqualified for credit under the MATC

system.

(6) Deductions in combination with MATC. Effective

August 12, 1987, with the enactment of the MATC system, the

liability for actual payment of tax by persons who extract,

manufacture, and sell products in this state was shifted from

the selling activity (wholesaling or retailing) to the production

activity (extracting and/or manufacturing). As explained, the

payment of the production taxes may now be credited against

the liability for selling taxes on the same products. However,

the deductions from tax provided by chapter 82.04 RCW

(business and occupation tax deductions) may still be taken

before tax credits are computed and used, with noted

exceptions. In order for the MATC system to result in the

correct computation of tax liabilities and credit applications,

the tax deductions which may apply for any reporting period

must be taken equally against both levels of tax liability

reported, i.e., at both the production and selling levels. Failure

to report tax deductions in this manner will result in

overreporting tax due and may result in overpayment of tax.

Thus, with the exceptions noted below, tax deductions formerly

reported only against selling activities should now be reported -

against production activities as well. All such deductions, the

result of which is to reduce the measure of tax reported, should

be taken against both the production taxes (extracting or

——— ee eee PE ee NS ON, FEF ON SENET

12a

manufacturing) and the selling taxes (wholesaling and/or

retailing equally.

(a) Example:

(i) A company manufactures products in Washington

which it also sells at wholesale for $5,000 and delivers to a

buyer in this state. The buyer defaults on part of the payment

and the seller incurs a $2,000 credit loss which it writes off as a

bad debt during the tax reporting period. The bad debt

deduction provided by RCW 82.04.4284 must be shown on

both the manufacturing-other line and the wholesaling-other

line of the combined excise tax return. Taking the deduction

on only one of those activities results in overreported tax

liability on the $2,000 loss.

(b) Exceptions. The deductions generally provided by

RCW 82.04.4286, for interstate or foreign sales (where goods

are sold and delivered outside this state) may not be taken

against tax reported at the production level (extracting or

manufacturing). This is because the MATC system itself

provides for tax credits instead of tax deductions on gross

receipts from transactions involving goods produced in this

state and sold in interstate or foreign commerce. Thus,

deductions which eliminate transactions from tax reporting

may be taken only against selling taxes.

of the combined excise tax return (Column #3) on each

applicable tax classification line and detailed on the back side

of the return, as usual, before MATC is taken.

(d) It is not the intent of the MATC law to invalidate or

nullify the business and occupation tax exemption for taxable

amounts below minimum (see WAC 458-20-104). Thus any

person whose gross receipts or value of products reported

under any single tax classification with respect to the

production and sale of any product is less than the minimum

taxable amount will not incur tax liability merely because of

the requirement to report those gross receipts or value of

13a

products on the same product under other tax classifications as

well.

(i) Example: A person both manufactures and sells at

wholesale $2,000 worth of widgets in the first quarter of a tax

year. The requirement to report the $2,000 tax measure under

both the manufacturing-other classification and the whole-

saling-other classification gives the false appearance of $4,000

in gross receipts during this quarter. However, only the

amount reported under the manufacturing-other classification

need be considered to determine eligibility for the amount-

below-minimum exemption.

(7) How and when to take MATC. The credits

available under the MATC system are all to be taken on the

combined excise tax return beginning in August, 1987 and

thereafter. The return form has been modified to accommodate

these credits. Each tax return upon which MATC has been

taken must be accompanied by a completed Schedule C. This

schedule details the business activities and credits

computations. The line by line instructions insure that no more

or no less credits are claimed than are authorized under the law.

(8) Consolidation of tax liabilities and credits. Under

the MATC system a person’s Washington tax liability for all

activities involved in that person’s production and sale of the

same ingredients or products (extracting, and/or manufacturing,

and/or selling) is to be reported only at the time of the sale of

such products or at the time of that person’s own use of such

products for commercial or industrial consumption. All of the

taxable activities are to be reported on that same periodic

excise tax return. Also, all external and internal tax credits

derived from the payment of any gross receipts taxes on any of

these activities are to be taken at that time. Thus, the taxable

activities and the tax credits are procedurally consolidated for

reporting. This consolidation generally overcomes any need to

track ingredients or products from their extraction to their sale.

It also overcomes any need to report and pay Washington tax

liability during one reporting period and to take credits against

14a

that tax liability in a different reporting period. Thus, except as

noted below, there can be no credit carryovers or carrybacks

under this system.

(a) Exception. Where different tax periods are

assigned by Washington state and another state to a company

doing business both within and outside Washington state, the

other state’s gross receipts tax on the same products may not

yet have been paid when the Washington tax is due for

reporting and payment. In such cases the Washington tax due

must be timely reported and paid during the period in which

the sale is made. The external credit arising later, when the

other state’s tax is paid, may be taken as a credit against any

Washington business and occupation tax reported during that

later period. Thus, the limitation that the MATC must be

product-specific by being limited to the amount of Washington

tax paid on the same products does not mean that the credit(s)

can only be used against precisely those same Washington

taxes paid.

(i) In the situation described in subsection (a) above, if

there is not sufficient Washington business and occupation tax

due for payment in the later period, when the external tax credit

arises, to allow for utilization of the entire credit, the amount of

any overage may be carried forward and taken against

Washington taxes reported in subsequent reporting periods

until fully used.

When filing such exception returns, the full amount of

any credits should be claimed, even though that credit amount

will exceed the amount of tax liability reported for that period.

The department of revenue itself will make the necessary

adjustments and will perform the carrying over of any excess

credits into future reporting periods.

(ii) In the same situation, if the person entitled to claim

such credit overage is no longer engaged in taxable business in

this state or for any other reason does not incur sufficient

Washington business and occupation tax liability to fully

utilize the perfected credit overage, a tax refund will be issued.

ef bag Siete yer een each) Sh tae eee a eed

15a

(iii) No tax refunds, MATC carryovers, or MATC

carrybacks will be allowed under any circumstances other than

those explained above.

(b) Special circumstances may arise where it is not

possible to specifically identify ingredients or products as they

move from production to sale (e.g., fungible commodities from

various sources stored in a common warehouse). In such cases

the taxpayer should seek advance approval from the

department, in writing, for tax reporting and credit taking on a

test period, formulary, or volume percentage basis, subject to

audit verification.

(9) Recordkeeping requirements. Persons claiming the

MATC must keep and preserve such records and documents as

may be necessary to prove their entitlement to any credits taken

under this system (RCW 82.32.070). It is not required to

submit copies of such proofs when credits are claimed or

together with the Schedule C detail. Rather, such records must

be kept for a period no less than five years from the date of the

tax return upon which the related tax credits are claimed. Such

records are fully subject to audit for confirmation of the

validity and amounts of credits taken. Records which must be

preserved by persons claiming external tax credits include:

(a) Copies of sales contracts, or other written or

memorialized evidence of any sales agreements, including

purchase and billing invoices showing the origin state and

destination state of products sold.

(b) Copies of shipping or other delivery documents

identifying the products sold and delivered, reconcilable with

the selling documents of subsection (a) above, if appropriate.

. similar such documents which will reflect the intercompany or

interdepartmental movement of extracted ingredients or

manufactured products where no sale has occurred.

l6a

(d) Copies of tax returns or reports filed with other

States’ taxing authorities showing the kinds and amounts of

taxes paid to such other states for which MATC is claimed.

(e) Copies of cancelled checks or other proofs of actual

tax payment to the other state(s) giving rise to the MATC

claimed.

(f) Copies of any other state(s) taxing statutes, laws,

ordinances, and other appropriate legal authorities necessary to

establish the nature of the other states’ tax as a gross receipts

tax, as defined in this section.

(g) Failure to keep and preserve proofs of entitlement

to the MATC will result in the denial of credits claimed and the

assessment of all taxes offset or reduced by such credits as well

as the additional assessment of interest and penalties as

required by law. (See RCW 82.32.050.)

(10) MATC in combination with other credits. The tax

credits authorized under this system may be taken in

combination with other tax credits available under Washington

law. Such other credit programs, however, authorize credit

carryovers from reporting period to period until the credits are

fully utilized. Thus, the MATC must be computed and used to

offset business and occupation tax liabilities during any tax

reporting period before any other program credits to which a

claimant may be entitled are claimed or applied. Failure to

compute and take the MATC before applying other available

credits may result in the loss of the other credit benefits.

(11) Superseding provisions. The MATC provisions of

this section supersede and control the provisions of other

sections of chapter 458-20 WAC (other tax rules) relating to

intrastate, interstate, and foreign transactions to the extent that

such provisions are or appear to be contrary or conflicting.

(12) Unique or special credit situations—-Appeals. The

provisions of this section generally explain the nature of the

MATC system and the tax credit qualifications, limitations, and

claiming procedures. The complexity of the integrated tax

;

17a

reporting and credit taking procedures may develop situations

or questions which are not addressed herein. Such matters and

requests for specialized rulings should be submitted to the

department of revenue for prior determination before credits

are claimed. Generally, prior determinations will be provided

within sixty days after the department receives the information

necessary to make such a ruling. Adverse rulings, tax credit

denials, or tax assessments resulting from audits or other

examinations of returns upon which the MATC is claimed may

be administratively appealed under the provisions of chapter

82.32 RCW and WAC 458-20-100.

IN THE SUPERIOR COURT OF THE STATE

OF WASHINGTON

FOR THURSTON COUNTY

AMERICAN NATIONAL _ )

CAN CORPORATION, )

et al., )

)

Plaintiffs, ) NO. 88-2-00680-3

)

VS. )

) AFFIDAVIT OF

STATE OF WASHINGTON,) FRED DANG IN

DEPARTMENT OF ) RESPECT TO

REVENUE, and WILLIAM _ ) DETERMINATION OF

R. WILKERSON, ) MULTIPLE TAX

) CREDIT

Defendants. )

)

STATE OF WASHINGTON )

) Ss.

County of Thurston )

FRED DANG, having been first duly sworn on oath,

deposes and says:

l. I am a Revenue Auditor employed by the

Washington State Department of Revenue and have served in

that position during the times pertinent to this affidavit. I am

over the age of eighteen, competent to testify in this matter,

and have personal knowledge of all matters set forth in this

affidavit.

2. In 1988 I conducted an excise tax audit of the

plaintiff taxpayer identified under the terms of a protective

order in this matter as No. 46. The audit of this taxpayer

resulted from the Department of Revenue’s usual audit

19a

;

selection process and was conducted for the taxable periods

January 1, 1984 through December 31, 1987.

3. During the course of audit I noted that no claim

had been made by the taxpayer for the business and occupation

multiple activities tax credit (MATC credit) for which the

taxpayer might otherwise be eligible for the limited interval

July 1, 1987 through December 31, 1987 included in my audit

period.

4. In conducting the audit examination |

determined that the taxpayer might be entitled to the MATC

credit with respect to products manufactured within the state of

Washington and which were subjected to selling gross receipts

taxes in the states of Indiana and Hawaii.

5. For purposes of confirming the MATC credit

allowable to the taxpayer I audited the existing records of the

corporation as follows:

(a) I utilized a test period which contained portions

of the months of October and November 1987.

(b) I then made reference to the taxpayer’s existing

records summarizing sales of manufactured products made into

the various states including Indiana and Hawaii.

numbers examined for the test period I determined that 54.65%

of the product volume sold into Indiana was produced in

Washington. I further determined that the comparable

percentage for Hawaii sales from Washington manufacturing

sources was 20.62%.

(d) _I then calculated the Indiana and Hawaii taxes

payable on this apportioned volume of sales within the two

states from Washington sources, thereby producing the

allowable MATC credit.

6. My audit was conducted by examining records

compiled and maintained by the taxpayer for purposes other

than the computation of the MATC credit. The MATC credit

allowed for the Indiana tax as a result of my audit was $7,211.

The credit was allowed for the period June through December

1987. On an annualized basis, this credit closely approximates

a oe ee ene ee

20a

what the taxpayer has identified in paragraph 8 of its affidavit,

which I have read, as its credit entitlement based upon a review

of its “production, distribution and sales system” records. The

MATC credit allowed for taxes paid to Hawaii, which are not

mentioned in the taxpayer’s affidavit, was $810.

/s/ Fred Dang

FRED DANG

SUBSCRIBED AND SWORN TO before me this 19th

day of July, 1989.

/s/ LoRay W. Walker

NOTARY PUBLIC in and for the

State of Washington, residing

at Olympia.

My commission expires: 10-1-89

: 2la

IN THE SUPERIOR COURT OF THE STATE

OF WASHINGTON

FOR THURSTON COUNTY

AMERICAN NATIONAL

CAN CORPORATION,

et al.,

Plaintiffs, NO. 88-2-00680-3

VS.

STATE OF WASHINGTON LES JASTER IN

DEPARTMENT OF RESPECT TO

REVENUE, and WILLIAM THE MULTIPLE

R. WILKERSON, ACTIVITIES TAX

CREDIT

Defendants.

)

) AFFIDAVIT OF

)

STATE OF WASHINGTON )

) SS.

County of Thurston )

LES JASTER, having been first duly sworn on oath

deposes and says:

i. I am a regional audit manager of the

Washington State Department of Revenue and previously

served as the supervisor of Audit Review for such agency. |

am over the age of eighteen, competent to testify in this matter,

and have personal knowledge of all matters set forth in this

affidavit.

y A I have been employed by the Department of

Revenue for approximately twenty-one years.

3. My responsibilities in the position of regional

audit manager and supervisor of Audit Review require that |

provide advice and instructions to the agency’s tax auditors in

22a

the administration and application of the Washington multiple

activities credit (hereinafter the “MATC credit”) which is

allowed as a credit against Washington business and

occupation taxes for certain gross receipts taxes paid to other

states and jurisdictions. These responsibilities include the

giving of similar advice and instructions to auditors in regard to

the application of the Department of Revenue’s administrative

rule (WAC 458-20-19301) which implements the statutory

credit.

4. In connection with the above-referenced action |

have recently examined affidavits submitted by several of the

plaintiffs herein which are generally titled “Affidavit

Regarding Potential Claim for the Washington Multiple

Activities Credit”. Because of the protective order obtained by

plaintiffs | am required to identify the corporate taxpayers

submitting these affidavits by number rather than by name. I

am informed and therefore believe that the court has been

provided with an index to identify these taxpayers. The

taxpayer affidavits which I have reviewed are as follows;

Taxpayer Nos. 4 15 34 50 64

10 17 39 52 67

11 18 46 56 57

12 23 49 59 72

I have also reviewed the initial affidavits submitted by these

taxpayers with the exception of two taxpayers which did not

submit such initial affidavits.

5. A substantial number of the affidavits contain

the same language which states that based upon the taxpayers’

analysis of their production, distribution and sales records they

believe themselves to be eligible for MATC credits, in amounts

they specifically state, for gross receipts taxes paid to other

jurisdictions. Such affidavits, however, proceed to say that the

requirements of the law, as administered by the Department of

Revenue preclude their claim of the MATC credit because the

costs of “identifying, producing and preserving” the

documentation required by the Department of Revenue

significantly exceed the financial benefit of the credit. Certain

23a

of the affidavits allege, in conclusionary fashion and without

detail, the costs that would be incurred in setting up a unique

accounting system to be able to claim such credits.

6. The representations contained in these affidavits

misconstrue the requirements of the law for claiming credits as

the law is administered by the Department of Revenue.

rd The recordkeeping requirements set forth in the

Department’s administrative rule (WAC 458-20-19301) pertain

to records that a taxpayer generates in the ordinary course of

business. The rule does not require the independent generation

of records for the sole purpose of establishing qualification for

the MATC credit.

8. The affidavits submitted by taxpayers further

imply that the Department requires the exact tracing of any and

all manufactured items from their place of origin to destination

before consideration will be given to allowance of tax credit.

This is inaccurate.

9. Further, the affidavits suggest that by reference

to the records maintained by the taxpayers in the ordinary

course of business relating to their production, distribution and

sales systems, the taxpayers could calculate an appropriate

MATC credit, but the Department’s recordkeeping

requirements and methods of administering the tax credit

would disallow the benefit. This, too, is in error.

10. The Department will utilize records otherwise

maintained by the taxpayer which may permit the tracing of

goods to determine the movement from point of manufacture

or extraction to sale for purposes of confirming the allowable

MATC credit. The Department will analyze such records for a

given taxpayer agreed upon by the Department and the

taxpayer (e.g., one or more months) and apply the results of

that test period to the entire audit period.

11. However, where existing or readily obtainable

records do not permit the identification of specific products

from their places of origin to ultimate destination, the

Department is prepared to accept statistical evidence

Ce a ee nS Te ee

24a

maintained in the ordinary course of business as confirmation

of the taxpayers’ entitlement to credit.

12. For example, a manufacturing business can

demonstrate from records it otherwise maintains that 10% of

the products it manufactures outside of Washington is

attributable to jurisdictions that impose a gross receipts

manufacturing tax that would qualify as a credit against the tax

imposed for sales made to Washington customers. The

taxpayer’s records further demonstrate that of its total

production outside Washington, 5% of the production is sold

into Washington. The taxpayer neither generates nor maintains

records in the ordinary course of business to establish from

which manufacturing sources the Washington products

emanated and in what amounts. In such circumstances the

Department would deem 10% of the Washington products to

have had their origin in that jurisdiction imposing the gross

receipts manufacturing tax which may be used as a credit

against Washington’s selling tax.

13. The administration of the rule in this manner for

purposes of the MATC credit is consistent with the adjustments

the Department allows in certain comparable situations

exemplified by the following:

(a) Bad Debts (RCW 82.04.4284). A company can

demonstrate from its existing records that a given percentage of

its accounts receivable on a nationwide basis results in bad

debts. It can determine from such records what portion of its

accounts are generated in Washington, but has no records to

demonstrate the exact dollar amount of Washington bad debts.

The Department will allow a deduction for bad debts computed

by applying the nationwide percentage to the known

Washington accounts.

(b) Manufactured and Purchased Products. A

Washington manufacturer is required from time to time to

supplement its manufactured products by purchasing the same

products in order to fulfill its sales commitments. It makes

sales within and outside of Washington. If such purchased

products are used to fill out-of-state orders, the taxpayer has no

25a

obligation for Washington’s selling business and occupation

tax. Conversely, a selling tax will be paid on sales made in-

state. Correspondingly, manufacturing tax must be paid with

respect to products manufactured within the state and used to

fill out-of-state orders. The taxpayer maintains no records in

the ordinary course of business which show what specific

products sold within and outside the state are attributable to the

manufacturing and purchasing activities. In the absence of

such records, the Department will not disallow an exemption

from tax for some part of the out-of-state sale orders which

may, in fact, have been filled by purchased products but will

deem that result to have taken place by apportioning out-of-

state sales by reference to the taxpayer’s records of total

manufacturing and purchasing activity.

14. The administration of the MATC credit by the

Department of Revenue in the manner described in J 10-12 of

this affidavit is exemplified by recent audits of two plaintiff

taxpayers who have filed affidavits concerning the multiple

activities credit (taxpayer Nos. 15 and 46). The court is

referred to the affidavits of Robert M. Beith and Fred Dang,

filed concurrently with this affidavit, which describe the audits

of these two taxpayers respectively.

15. Such use of existing records for purposes of

supporting and confirming the entitlement to the MATC credits

will not in my judgment necessitate the creation of unique and

elaborate accounting systems alleged by the taxpayers in their

affidavits nor the generation of additional accounting records

designed solely for the purposes of establishing entitlement to

the credit.

16. Having noted the representations contained in

the affidavits of the taxpayers identified in | 4, to the best of

my knowledge the Department of Revenue has not required a

taxpayer, including any of the plaintiffs, to establish a claim for .

the MATC credit by the introduction of a new accounting

system or the separate development of records which would

26a

require the identification or tracking of specific manufactured

or extracted products from their place of origin to destination.

/s/ Les Jaster

LES JASTER

SUBSCRIBED AND SWORN TO before me this 20th