Opposition Brief — Buffelen Wood Woodworking Co. v. Washington Department of Revenue (No. 99-38)

No. 99-38

In the

SUPREME COURT OF THE UNITED STATES

BUFFELEN WOODWORKING Co., ef al.,

Petitioners

STATE OF WASHINGTON, 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

No. 99-38

In the

SUPREME COURT OF THE UNITED STATES

BUFFELEN WOODWORKING CoO., ef al,

Petitioners,

Vv.

STATE OF WASHINGTON, 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

ie ENR REE Dt aOR Tes Slee hel Toe 6 See |

Cg SIESTA Sac SecA Se I

I. Washington’s Taxes on Extracting,

Manufacturing, and Selling......0......cccccccccccececeeec---.. I

Il. Prior Litigation Over the Extracting,

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

ey 3

Si HPI AID Bev sccsscscnievecivesevemscesececocnceseceeceeses. 4

C. American National Can and Digital

ETT TT 5

Ill. Procedural History of This Case.............000.............. 6

REASONS WHY THE PETITION SHOULD BE

BASRA a ae 1]

I. The Court Lacks Jurisdiction Because

There Is No Final Judgment........................... 1]

I]. Retroactive Application of the 1987 Two-Way

Credits Does Not Violate Due Process. ................ 14

A. Petitioners Are Entitled to No Relief for

Pre-7yler Pipe Tax Periods Because

Tyler Pipe Should Be Applied

co on oe, ee 14

B. Petitioner's Argument that Retroactive

Application of the Two-Way Credit Fails

to Provide Them "Meaningful Backward-

Looking Relief" Is Meritless............ ........ 15

C. Petitioners’ “Bait and Switch” Procedural

Due Process Argument Also Is Meritless....... 20

II]. The Apportionment Questions Petitioners

Pose Are So Explicitly Foreclosed by Prior

Decisions of This Court As To Leave No

Room for Real Controversy. ................ssssecscssssseeees 24

Se cisteabiaien tiniensdenncctiieindieneddaaiinpiiidiadns dbus 30

FR iickenciidccessciventasainendnbiccadetaenet acasienn la

ill

TABLE OF AUTHORITIES

Caw

American Mfg. Co. v. St. Louis,

ey ee a i echsenocsenvsabniaeslisisndidssiorcimasaaiiasenednei 26, 27

American Nat'l Can Corp. v.

Department of Rev.,

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

oa: RCE NER nn RCC ORR DIP RENO 2) 5, passim

Aponaug Mfg. Co. v. Stone,

314 U.S. 577 (1941), aff’g per

curiam 190 Miss. 805, 1 So.2d 763 (1941) oo... eee 27

Armco Inc. v. Hardesty,

A a I I vcieincuis ss ccthedittainiedphaiiatiessmsadidtccatanten dame 19

Associated Indus. v. Lohman,

Dae Cee Ee. Ce aitknessvitdidiniinietindtcsaaene 16, 22

Barclays Bank PLC v. Franchise

ee i Re re BT siteninteriininenidccivenicctinnsianiaians 19

Benjamin Franklin Thrift Stores, Inc.

v. Henneford, 187 Wash. 472,

Ce Id cit cs dikerities didaiaceaencenianaminbansuaearaita 23

Board of Directors of Rotary Int'l

v. Rotary Club of Duarte,

Pe SAE 8 WEF icietsisncsiarnetiensncticnniaedaninaseamnotedunion 26

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

ee ee FN cciicisidieks tii caitantconiniiacicaibdadeid aa claeacescuaen 23

Central Greyhound Lines v. Mealey,

FG Cr EE Ci iciepntiiainntinticuatiniacinsioiiiamadamena 29

Chevron Oil Co. v. Huson,

gS Ak 2 2 5 SRE OP NON een ARR IO MONE eo Deathe Rene Sete RANA 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

GUGTIE, SOF UD. TOTS CUFES) oeccceceveveesesesccceveseosovnvevetoreese 28

City of Winchester v. American

Woodmark Corp., 252 Va. 98,

a IEE © ED ccccodvuceennecenscdemvembeensssauaicabuaniiinann 29, 30

Commonwealth Edison Co. v.

PIE Se Urs Ge CREED civvicvcercicomeonimmnanian aaa

Cox Broadcasting Corp. v. Cohn,

TE RF yy. ) NO nct A MERRIE oa 12, 13

Dandridge v. Williams, 397 U.S. 471 (1970)............. 000008 15

Department of Treasury v. Allied

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

Ind. 340,

Oe Fe DF CEIPOED csvisesicinssevicnenentélonsesabeamananiaaiied 28

Department of Treasury v. Wood

Preserving Corp., 313 U.S. 62 (1941).............ccccccccccccesseeee 28

Digital Equipment Corp. v

Department of Rev., 129 Wash. 2d 177, 916 P.2d 933

(1996), cert. denied, 520 U.S. 1273 (1997)............. 6, passim

Evco v. Jones, 409 U.S. 91 (1972).......... ccc cccccecccsccsssscseeeeceeeees 30

Field Enterprises v. Washington,

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

ie SOS Fede CUE Ce Pee icrcrnerscetsinnstsicinieinlaiaubemamuaiiae 28

Flynt v. Ohio, 451 U.S. 619 (1981)... ccececcsssceseseees 12, 13

Freeman vy. Hewitt, 329 U.S. 249

General Motors Corp. v. City & County of

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

Be GE, TRE, Be Ca cceinrsrnnninseinntisictenieinliinbideaiiadateteene 16

Vv

General Motors Corp. v. Washington,

377 U.S. 436 (1964)....ccccccccsocsssssesscsssceserersssssssesseeesesessencees 28

Hagen v. Utah, 510 U.S. 399 (1994) ..cccccccsseseeeseeneeneneneneeeesens 28

Haring v. Prosise, 462 U.S. FOS CISES) ccceevesers cn eaiecesuntid 28

Harper v. Virginia Dep't of Taxation,

S09 U.S. 86 (1993)......cccccocscssccvesvescvsreceserssensseseersrersosees 15, 22

Hathorn v. Lovorn, 457 U.S. 255

(1982),....ecececcccesscescccsesscsecscscereecsssnsesscsesesscersesteneessnsasensnessess 12

Heck v. Humphrey, 512 U.S. 477

(1994).....cccccocssosorsssrsesscoreserscererereresessrersscesnsessrsenserersnensorerses 28

Heisler v. Thomas Collier Co.,

260 U.S. 245 (1922).......ccscccsscsssserseerreessseesnesesseeesssereeseeseeees 27

Hope Natural Gas Co. v. Hall,

DTA U.S. 2B4 (1927). x-cccecceorescsecserssossossevencvvcoreresenevesssosconenes 27

International Harvester Co. v.

Department of Treasury,

FZ2Z U.S. 340. (1943)....ccecceverseccrccesscovecesesesooeevessvveseessssees 28, 29

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

3O4 U.S. 307 (1938).......ccccrercecsessvessroeseseseserserssensessssvecsssenees 30

James B. Beam Distilling Co. v

Georgia, 501 U.S. 529 (1991) ....ececeseeseecesseeeeseseetseneeneesees 15

Jensen v. Henneford, 185 Wash. 209,

53 P.2d 607 (1936)...........cccscccccsscsssssersesreeneeseeesesrsseeseeeees 23

Lacey Nursing Ctr., Inc. v.

Department of Rev., 128 Wash. 2d 40, 905 P.2d 338

(19D) ..cccvecvesserssseesereressensvensnsecenenecererseesneorsssesensesssenseneseesees 22

~—

Lacoste v. Department of

Conservation, 263 U.S. 545 (1924) .......cccccseceeeeeeeeeeeetereeeees 27

v1

M & Associates, Inc. v. City of

Irondale, 723 So.2d 592

SI SEI biaiek sisatia cisbuiialsppiihaniieniinsinsaneainiiandiasidabinsceiaiinenesenineti 29, 30

McKesson Corp. v. Division of Alcoholic

Beverages & Tobacco, 496 U.S. 18 (1990)........... 15, passim

Meagher v. Minnesota Thresher Mfg. Co., 145 U.S. 608,

ee ee eeenisisia is accecircssiiichanctibin thant isiginiaechaslcisaieiateitbaliiidiias 12

Moorman Mfg. Co. v. Bair,

Se ee TTI ais sseicotetssharirscnsediindieniogiainsdiceesadaasuadioadias 19

National Can Corp. v. Department of

Rev., 105 Wash. 2d 327, 732 P.2d

Re IE BN Ei cnticsceccnpnscinsnsnnvinsevivesncnietesinnimecsnt 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)(National Can II) ... .............. 4, passim

Newsweek, Inc. v. Florida Dep't of

Revenue, 522 U.S. 442 (1998) ...........cccceeseseeees 20, 21, 22, 24

Nipges v. Thornton, 119 Wash. 464,

a ilaisesienseaiesieitainibcniicinbecnitiishinnieciiadaniniebncinitenk 23

Norton Co. v. Department of Rev.,

ee As: SNe CUE Mictaidticcarlntessostiimssninpsinsinatcinthenieciuniinmens 28

Oklahoma Tax Commission v.Jefferson Lines, Inc.,514

fb es SEO Fe

Oliver Iron Mining Co. v. Lord,

ee es Fe iiaincieatiniincintadtiatisncinchaeestnenimabedebinedesan 27

Reich v. Collins, 513 U.S. 106 (1994) ..0.. ee. 20, 21, 22, 24

Rescue Army v. Municipal Court,

ee le re iiashasaitaitapviewiitetileneenbninaniiasoaiiites 13,14

Vii

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) .......s:sssceseeeeeeeeststereeeess 26, 27

Reynoldsville Casket Co. v. Hyde, |

514 U.S. 749 (1995).....cccccccssscessseceesseseeesssssceeceseetesseesenens 22

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

615 P.2d 1297, review denied,

94 Wash. 2d 1022 (1980).........:ccccscesceseeeeteeeeeeetseteeseesseneens 23

Sonneborn Bros. v. Cureton,

262 U.S. 506 (1923)........scessesseeeesrerserseereeeresesesessenteseneenesees 28

Standard Pressed Steel Co. v

Department of Rev., 419 U.S. 560

(1975) .ccececesscecsssssescessssceseeecscsseensnssssersncensesacseensasssnnencanenssees 28

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) ...-..s.cscsecseseereeneereeeeeneeeesenees 28

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

Tyler Pipe Indus., Inc. v. Department

of Rev., 105 Wash. 2d 318,

T15 P.2d 123 (1986).......:cscescescesceseresceseetsersetsetecesssasesneennenes 4

Tyler Pipe Indus., Inc. v. Washington

State Dep’t of Rev., 483 U.S. 232 (1987) ......-.-+. ... 2, passim

United States v. Stauffer Chem. Co.,

464 U.S. 165 (1984).......ccccccceeseseeseeeeeeeesteseeseeseasesnenesaesnes 28

Utah Power & Light Co. v. Pfost,

286 U.S. 165 (1932).......cccsccsccereresserssrsrecsssrssesersereessnsneeeees 27

Webb v. Webb, 451 U.S. 493 (1981)......:ceeceececeseeerereeteeseneeens 26

Vill

Westinghouse Electric Corp. v. King,

O78S.W.Zd 19 (Tenn. 1984), appeal dismissed for

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

( Ta piwientietiliannsscicvbhaibinalininiesanuinshiheneticcenisiioheiiiilnan Lutes. 28

Woodruff v. Parham, 8 Wall. 123 (1868) ....ccccccccccccccc0c000--0--.. 28

Statutes

Wash. Rev. Code § 82.04.230..0.0.....ccccccccssccseccocceccocececseseeeececg. l

Wash. Rev. Code § 82.04.240.0000000.. 0c cooooeecccc cece cece. l

Wash. Rev. Code § 82.04.250.0.....ccccccccccccceccceeceeceeeoecoecececccce.. |

Wash. Rev. Code § 82.04.270...0000...000 0000000000000 -- ee. l

Wash. Rev. Code § 82.04.440(2) .o.o.coccccccccccccccecceceeeeceececececccce. 2

Wash. Rev. Code § 82.04.440(4)...0.00.0.0.0.00000.0.0-0-.--- 2

Wash. Rev. Code § 82.04.440(2)(1984)......000..00...00 3

Wash. Rev. Code § 82.32.150...0..cccccccccccccececeseecececceceeceseee..... 22

Wash. Rev. Code § 82.32.180........cccccccccccceseccecceceecessececeeeee... 22

Wash. Rev. Code § 82.98.030. 20.0.0... 0... coco cccecccccccccececeee. 23

1987 Wash. Laws, 2d Ex. Sess., Ch. 3 o.ccccccccccccccececcecescesecececeee. 5

1985 Wash. Laws, Ch. 190 § 4.0.0.0... occ cccccccccececececcecece. 23

Be leas Gee Pets tinsinesctesntaniiicide ei es 26

MUSC. 6H. 1,11

Rules

Wash. Admin. Code § 458-20-19301(9)....000....0.cc cece. 18

Wash. Admin. Code § 458-20-19301(8)(b)..............0....0.. 18

Ne Sate NUE em enietciciicnnsietsensansiniictensttonssenintecsectensenses 16

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

Court Practice

Q4 (7th ed. 1993).....cecccecceccsscccsccsseecssessssecsssesesecsesseseeseesseee 12

Constitutional Provisions

ef Sa Sen ae LE RT

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 11, 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 complex 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 all of a business’s net income from every

jurisdiction derived from every business activity.

2

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.

' Petitioners cite subsection (2) as the statutory basis for “Internal

Credits” for local commerce and subsection (4) as the statutory basis for

“External Credits” for interstate commerce. Pet. 6-7. To the extent those

statements suggest that the credits authorized by subsection (2) are limited

to local commerce or that the credits authorized by subsection (4) are the

only ones available to interstate commerce, they are inaccurate. Subsection

(2) also grants credits to interstate businesses. Petitioners’ descriptions of

the comparative “burdens” associated with “Internal Credits” and “External

Credits” also are misleading. We discuss this point at page 17-18, infra.

II. 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. Many but not all of the

current petitioners were among a group of 71 appellants in

Tyler 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 “[pJersons 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 7yler 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.” /d. at 247.

If every state imposed the extracting, manufacturing,

and selling taxes at issue in 7yler 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 7yler Pipe was the Court’s

explanation of how to repair the system. Washington could

4

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

and many of the current petitioners were fairly apportioned. /d.

at 248-51.

B. National Can I].

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. v. Department of Rev., \O0S Wash. 2d

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

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

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

I). The Tyler Pipe plaintiffs therefore were denied any

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

this Court’s decision. The 7yler Pipe decision was purely

prospective because the decision did not apply retroactively to

the litigants in that case.

After the ruling in National Can I/, 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. 1a).

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. (App.

4a). Since 7yler Pipe was purely prospective, no relief was

appropriate under section 3 for any periods before that

decision.

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 about one-half

of these petitioners, next challenged the 1987 two-way credit

law, as well as its retroactive application to the seven-week

“interim period” after the Tyler Pipe decision from June 23

through August 11, 1987. The corporations 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.

6

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

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

1273 (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 II 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.1. Four justices disagreed with the lead

opinion and would have followed National Can II. They

concluded that departing from National Can I] would result in

selective prospectivity, which this Court has rejected. Jd. 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.

III. Procedural History of This Case.

In December 1984, petitioner Buffelen Woodworking

Company filed a complaint for refund of manufacturing B&O

taxes, alleging that taxes it had paid since January 1980

violated the Commerce Clause. Buffelen was one of well over

300 refund actions filed between 1984 and 1990 challenging

Washington’s B&O taxes on Commerce Clause grounds.

Many of these actions involved more than one taxpayer. By

1994, slightly more than 100 actions remained, the rest having

been dismissed. On March 4, 1994, over the objection of the

defendant Washington State Department of Revenue

(Department), the trial court consolidated 103 of the actions

7

(with approximately 220 plaintiffs) for all purposes under the

caption of Buffelen Woodworking Co. v. State.

By 1997, only 47 of the 103 consolidated actions

remained, the rest having been dismissed by stipulation or by

motion of the Department. On May 15, 1997, the trial court

granted the plaintiffs’ motions to bring three more refund

actions under the March 1994 consolidation order, bringing the

total to 50 actions with approximately 115 named plaintiffs.

By 1994, two injunction actions presenting similar

issues also were pending before the same trial court: W.R.

Grace & Co.—Conn. v. State and Chrysler Motors

Corporation v. State. Grace and Chrysler were not

consolidated with Buffelen, but the taxpayers in those cases

were represented by the same counsel. In April 1996, the trial

court heard cross-motions for partial summary judgment in

Grace and Chrysler. The Department’s motions were limited

to questions of issue preclusion. The taxpayers’ motions

sought only interlocutory orders declaring (1) that 7yler Pipe

applied retroactively, (2) that taxes assessed against them for

any periods before June 23, 1987 were “void and

unenforceable,” (3) that taxes assessed against them for any

later periods discriminated against interstate commerce, and (4)

that neither claim preclusion nor issue preclusion barred the

taxpayers’ requested relief.

The trial court denied the Department’s motions and

granted the two taxpayers’ motions in part, ruling that 7yler

Pipe applied retroactively. In addition, the trial court 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.

After further proceedings, the trial court entered final summary

judgment orders in Grace and Chrysler in June 1997.

On May 23, 1997, the plaintiffs in the 50 consolidated

Buffelen actions noted a joint motion for partial summary

judgment for hearing on June 20, 1997. Like the taxpayers’

motions in Grace and Chrysler, the Buffelen motion sought

8

only an interlocutory order declaring that (1) Tyler Pipe

applied retroactively to invalidate taxes allegedly paid by the

plaintiffs for pre-7yler Pipe tax periods, (2) due process

required that the plaintiffs receive full refunds of any

unconstitutional taxes they might have paid, and (3) neither

issue preclusion nor claim preclusion barred any plaintiff from

obtaining the relief sought in the motion. The Department

made no cross-motion for summary judgment in response to

the plaintiffs’ motion, but moved to strike certain evidence

offered in support of their motion and filed seven affidavits

demonstrating that the plaintiffs were not entitled to the relief

sought in their motion.

Consistent with its earlier rulings in Grace and

Chrysler, the trial court granted the Buffelen plaintiffs’ motion

only in part, concluding that the Tyler Pipe discrimination

ruling applies retroactively. The trial court concurrently

advised the parties of its intent to enter sua sponte an order in

Buffelen granting partial summary judgment to the Department

like the sua sponte orders in Grace and Chrysler. The

Department opposed entry of such an order in its favor because

of several other issues in Buffelen that were unresolved.

including claim preclusion, issue preclusion, and standing.

The 50 cases consolidated in Buffelen involved

approximately 115 named plaintiffs. The consolidated case

was unwieldy and, as a result, the record is far from complete.

Petitioners assert that they engage in a combination of

manufacturing and selling activities in interstate commerce and

have paid the Washington manufacturing or selling taxes. Pet.

2-3. This statement is inaccurate. For example, one of the

petitioners, Hecla Mining Company, seeks a refund of only

extracting B&O taxes. The misstatement illustrates a central

problem in the case. There are so many petitioners that their

claims are confused and the record is inadequate.

For many of the petitioners, there is no admissible

evidence in the record that they engaged in manufacturing or

extracting or even that they paid B&O taxes of any kind to

9

Washington. There also is a substantial dispute about the tax

periods involved in these consolidated actions that the trial

court refused to resolve. The trial court declined to rule which

if any of the petitioners have standing to litigate the

constitutional issues it decided. Since many of the petitioners

also were parties in Tyler Pipe and American Nat'l Can. they

may be barred by issue preclusion from relitigating the

apportionment issue resolved in Washington’s favor in Tyler

Pipe and the issue of the validity of the two-way credit

resolved in Washington’s favor in American Nat'l Can. Many

of the petitioners also may be barred by claim preclusion from

bringing successive refund actions for the same tax periods

involved in Tyler Pipe and American Nat'l Can. The trial court

also refused to address these issues.

On July 18, 1997, before entering a summary judgment

order in Buffelen, the trial court granted the plaintiffs’ motion

to modify the March 1994 order consolidating the Buffelen

cases. The court severed three plaintiffs, Anheuser-Busch.

Inc., Apple Computer, Inc., and Herman Miller, Inc.. and

“consolidated” all their refund claims under the caption of

Anheuser-Busch, Inc. v. State. These three plaintiffs asserted

that even if Washington’s selling B&O taxes were

constitutional, they were not subject to them because they did

not sell the products in Washington. These “place of sale

claims” provided an independent state law basis for granting

refunds to these petitioners. The trial court did not rule on

these “place of sale claims.”

After the trial court severed the three Anheuser-Busch

plaintiffs, it entered single sua sponte summary judgment

orders in Buffelen and in Anheuser-Busch. Pet. 61a-80a. In the

two orders, the trial court ruled that Tyler Pipe should be

applied retroactively, but that refunds for pre-7y/er Pipe tax

periods would be limited to amounts based on credits for any

gross receipts taxes the plaintiffs paid to other jurisdictions.

Because all the plaintiffs waived any refund claims based on

such credits for all tax periods at issue in their refund actions.

ESE ee

10

the trial court awarded no tax refunds to any of them. The

court’s sua sponte summary judgment orders dismissed the

plaintiffs’ refund claims with prejudice, except for those of the

three plaintiffs in the consolidated Anheuser-Busch action. The

court also entered findings under Wash. Super. Ct. Civ. R.

54(b) in Anheuser-Busch to permit the parties to appeal that

interlocutory partial summary judgment order.

The trial court denied the Department’s motions for

reconsideration in both consolidated actions on September 5,

1997. The plaintiffs in both Buffelen and Anheuser-Busch

appealed to the Washington Supreme Court, which granted

their motion to consolidate the two appeals. The plaintiffs in

Grace and Chrysler earlier had appealed to the Washington

Supreme Court, which had consolidated their two appeals at

the suggestion of those plaintiffs. The Department cross-

appealed in all four cases, seeking review of the trial court’s

rulings that 7y/er Pipe applied retroactively. In Buffelen and

Anheuser-Busch, the Department also sought review of the trial

court’s refusal to resolve the questions of standing, issue

preclusion, and claim preclusion.

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 7yler 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. 1 la-12a).

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

system complies with all Commerce Clause requirements. 137

Wash. 2d at 596-98, 973 P.2d at 1018-19 (Pet. App. 15a-17a).

Third, retroactive application of the two-way credits to cure the

discrimination caused by the former multiple activities

exemption does not violate due process. 137 Wash. 2d at 598-

603, 973 P.2d at 1019-22 (Pet. App. 18a-24a).

1]

The court did not decide, however, several other federal

and state law questions raised by the Department, including

standing, issue preclusion, and claim preclusion, that are

intertwined with the federal questions presented by petitioners.

Instead, the court “preserv[ed]” those questions “for trial court

resolution on remand, as may be necessary.” 137 Wash. 2d at

584, 973 P.2d at 1013 (Pet. App. 2a). Although the court

declined to decide the standing, issue preclusion, and claim

preclusion issues, the court commented that they were “plainly

the most significant and meritorious” of the issues presented in

the Department’s cross-appeals. 137 Wash. 2d at 591 & n.7.

973 P.2d at 1016 & n.7 (Pet. App. 9a-1 1a).

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.” 137 Wash. 2d at 604, 973 P.2d at 1022 (Pet. App.

25a). All the plaintiffs in Buffelen and Anheuser-Busch. except

Grace and Chrysler, filed a joint petition to this Court. Grace

and Chrysler also filed a joint petition, No. 99-31. The

Department filed a conditional cross-petition, No. 99-223, in

response to the joint petition in No. 99-31.

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. Many of the

petitioners merely are trying to relitigate issues they lost in

Tyler Pipe and American Nat'l Can. 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

12

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 also requires state court

judgments to be final as to all parties and issues. For example,

if there are multiple defendants, the record must show that the

judgment concludes the controversy as to all of them.

Meagher v. Minnesota Thresher Mfg. Co., 145 U.S. 608, 611

(1892); R. Stern, E. Gressman, S. Shapiro & K. Geller,

Supreme Court Practice 94 (7th ed. 1993). Since the claims of

all the petitioners have been consolidated into a single case, the

decision below must resolve the controversy completely as to

all of them. 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 determine which, if any, of the petitioners has

standing to litigate the questions presented in their petition.

The trial court must also resolve federal and state law questions

of issue preclusion based on the judgments in Tyler Pipe and

American Nat'l Can. There also are unresolved questions of

claim preclusion, which would prevent petitioners that were

parties in Tyler Pipe or American Nat'l Can from bringing

successive refund actions for the same tax periods. See 137

Wash. 2d at 584, 592, 973 P.2d at 1013, 1016-17 (Pet. App. 2a,

10a-1la). Finally, the trial court must address the “place of

sale claims” of the petitioners in Anheuser-Busch.

This case does not fall within Cox Broadcasting Corp.

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.” Jd. at 479. The remaining

issues in this case are not controlled or preordained by the

13

Washington Supreme Court’s decision sustaining the validity

of the B&O tax and the two-way credit.

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

survive and require decision regardless of the outcome of

future state-court proceedings.” Jd. at 480. In this case, the

constitutional issues will not necessarily all survive if

Washington substantially prevails on standing, issue

preclusion, and claim preclusion. Nor will the issues survive in

Anheuser-Busch if those petitioners prevail on their “place of

sale claims.”

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

issue cannot be had, whatever the ultimate outcome of the

case.” Jd. at 481. In this case, the federal issue might be

preserved if some petitioners prevail on standing, issue

preclusion, and claim preclusion, or if the Anheuser-Busch

petitioners are unsuccessful in their “place of sale claims.”

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[.]” Jd. 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.

If this case falls within Cox Broadcasting, the Court should

decline to exercise its discretionary jurisdiction because the

record is inadequate for review. The trial court did not require

petitioners to prove the factual predicates of their claims. See

pages 8-9, supra. This Court has refused to exercise its

jurisdiction when confronted with such an inadequate record.

For example, in Rescue Army v. Municipal Court, 331 U.S. 549

(1947), an appellant sought review of a city ordinance

governing charitable solicitations. The Court observed that it

14

follows “a policy of strict necessity in disposing of

constitutional issues” such that it will not resolve a

constitutional question unless it is necessary. Jd. at 568-69.

One rule the Court applies as part of this policy is to examine

“if the record presents some other ground upon which the case

may be disposed of].]” /d. at 569.

In Rescue Army, the Court refused to exercise its

jurisdiction because the record was inadequate. Jd at 575

(“The record presents only bare allegations that he was charged

criminally with violating [the ordinance] and that those

sections are unconstitutional, on various. assignments, as

applied to his alleged solicitations.”) The same is true in this

case. The Court should not exercise its jurisdiction until it has

an adequate record before it to resolve all the federal questions

raised in the case.

II. Retroactive Application of the 1987 Two-Way

Credits Does Not Violate Due Process.

A. Petitioners Are Entitled to No Relief for Pre-

Tyler Pipe Tax Periods Because Tyler Pipe

Should Be Applied Prospectively.

Before turning to petitioners’ due process arguments,

there is an independent basis for sustaining the Washington

Supreme Court’s decision that the Buffelen petitioners are not

entitled to refunds for periods before Tyler Pipe. There is no

possible basis for pre-7yler Pipe relief unless that decision

applies retroactively. Thus, the question whether Tyler Pipe

applies retroactively is a “necessary predicate” to both of

petitioners’ Due Process Clause questions.

In National Can II, 109 Wash. 2d 878, 749 P.2d 1286,

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

Washington Supreme Court initially held that the Commerce

Clause discrimination ruling this Court announced in Tyler

Pipe applied purely prospectively. Now, years later, the court

below has reversed course and applied Tyler Pipe retroactively.

As a result, Tyler Pipe has been applied prospectively to some

15

litigants and retroactively to others. This is exactly the kind of

selective prospectivity this Court condemned in James B. Beam

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

Virginia Dep't of Taxation, 509 U.S. 86 (1 993).

The Washington Supreme Court erred in giving 7yler

Pipe retroactive application. As the prevailing party below, the

Department may defend its orders of dismissal against

petitioners on any ground properly raised below, whether that

ground was relied upon, rejected, or even considered by the

courts below. Dandridge v. Williams, 397 U.S. 471. 475 n.6

(1970). If the Court were to review either of the Due Process

Clause questions presented by petitioners, the Department

would defend its orders of dismissal on the basis of. this

selective prospectivity question it argued and preserved below.”

B. Petitioners’ Argument that Retroactive

Application of the Two-Way Credits Fails to

Provide Them “Meaningful Backward-

Looking Relief” Is Meritless.

Petitioners devote most of their petition to an argument

that retroactive application of the 1987 two-way credit statute

violates the Due Process Clause as interpreted in McKesson

Corp. v. Division of Alcoholic Beverages & Tobacco, 496 U.S.

18 (1990). Pet. 12-24. The court below correctly concluded

that this argument is meritless. 137 Wash. 2d at 594-98. 973

P.2d at 1018-19 (Pet. App. 13a-17a).

Petitioners seem to suggest that retroactive application

of the two-way credit statute is “inadequate” because it “does

not comport with any of the three alternatives this Court

specified in McKesson as the permissible retrospective cures

for a discriminatory tax scheme.” Pet. 15-16. That argument is

? This selective prospectivity question is addressed more fully in

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

16

based on an obvious misreading of McKesson.’ As the court

below recognized, the McKesson line of cases hold that a

“State found to have imposed an impermissibly discriminatory

tax retains flexibility in responding to that 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. 13a-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.*

Petitioners also attempt to compare this relief to the

hypothetical retroactive tax scheme proposed by Florida and

rejected by this Court in McKesson, arguing that “Washington

* In Digital, 129 Wash. 2d 177, 191, 916 P.2d 933 (1996), cert.

denied, 520 U.S. 1273 (1997), the taxpayer made the same erroneous

argument.

* Petitioners’ reliance on the California Court of Appeal’s decision

in 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 Ty/er Pipe (which

Washington quickly adopted) “would effectively make local and out-of-

state manufacturers equally subject to selling taxes and exempt from

manufacturing taxes.” Jd. 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. Furthermore, when the

California court discussed the Washington Supreme Court’s approval in

Digital of retroactively applying the two-way credits, the California court

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, less than one-third of these petitioners

have refund claims for any periods before January 1983, and only three

petitioners made any attempt to prove they ever might have been “double

taxed.”) Regardless of how petitioners interpret the California intermediate

appellate court’s decision, however, surely they understand that the decision

would not create a “conflict” on an “important federal question” within the

meaning of Rule 10(b). See Pet. 14-15.

17

did not apply the credits” for pre-7yler Pipe tax periods “as to

intrastate commerce[.]” Pet. 15-16. That is not a valid

comparison. There is nothing “hypothetical” about the refunds

Washington offered to pay petitioners for any gross receipts

taxes they paid to other jurisdictions. That petitioners spurned

this relief does not make it any less “actual.” And since

retroactively granting the credits to interstate businesses

completely eliminates their “exposure to the burden of a

multiple tax on manufacturing and wholesaling,” Tyler Pipe,

483 U.S. at 246, we cannot perceive how McKesson mandates

that petitioners receive any additional retroactive relief.

Petitioners next assert they “paid Washington over

$100,000,000” of unconstitutional taxes, but received “zero

relief.” Pet. 16-18. They attribute the result to burdensome

“procedures and requirements” that were “impossible” for

them to satisfy. Pet. 13, 18. However, as explained above,

beyond bare allegations, there is almost nothing in the record

suggesting that petitioners paid any B&O taxes—constitutional

or otherwise—to Washington during the periods in contest.

Furthermore, in rejecting petitioners’ due process arguments,

the court below understood the rea/ reason why petitioners

received “zero relief’: “Because the taxpayers waived any

refund claims based on [credits for gross receipts taxes paid to

other jurisdictions], the trial court awarded no tax refunds to

any of them.” 137 Wash. 2d at 589, 973 P.2d at 1015 (Pet.

App. 7a). Petitioners cannot turn their tactical decision to

refuse any relief into the foundation for a federal claim under

the Due Process Clause.

Petitioners wrongly claim’ that the two-way credit

involves burdensome recordkeeping requirements including

; 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. 24a-32a. These affidavits were submitted in this case as part of the

Department’s argument that issue preclusion bars many of the petitioners,

18

special records to trace which specific products manufactured

elsewhere are sold in Washington. Pet. 15 n. 16, 20.

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.18a-

19a. 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.

18a).°

Finally, petitioners argue at length that the 1987 two-

way credit system cannot “create in_ hindsight a

nondiscriminatory scheme” because that system allegedly

“continues to discriminate against interstate commerce.” Pet.

17-24. The court below was familiar with these arguments,

having answered them previously in American Nat'l Can. See

137 Wash. 2d at 586, 591, 596, 973 P.2d at 1014, 1016, 1019

(Pet. App. 4a, 9a, 15a).’

First, petitioners argue that “strict criteria” for

qualification of other states’ taxes exclude “the vast majority”

of those taxes, thereby creating “facial discrimination.” Pet.

19-20, 23. 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

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

the two-way credit.

° For example, the trial court awarded Chrysler tax credits in the

amount of $125,000 based only on general business records, with no

requirement of product tracing. See Respondent’s Brief in Opposition

W.R. Grace-Conn. v. State, Supreme Court. No. 99-31.

” About one-half of these petitioners were parties in American

Nat'l Can. App. 22a-23a. Under state issue preclusion rules, they should

have been precluded from relitigating this issue. The Washington Supreme

Court remanded the case to the trial court to address this issue preclusion

question.

19

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, Inc., 514 U.S. at 175, 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”).

Second, in a related argument, petitioners rely on their

own failure to qualify for the credits and meaningless statistics

to contend that the two-way credit system discriminates against

interstate commerce “in practical effect.” Pet. 17-22. This

argument also 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. Hewitt, 329 U.S. 249, 256 (1946): see also

Barclays Bank PLC v. 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)). Petitioners must concede

that Washington’s two-way credit system is internally consistent.

Furthermore, if every other state actually imposed some form of gross

receipts taxes on extracting, manufacturing, and selling activities, at higher

rates than Washington’s B&O taxes on those three activities, what

petitioners call the External Credit would “eliminate 100%” of interstate

manufacturers’ selling B&O tax liabilities and would “eliminate 100%” of

20

Third, based on the false premise that Washington does

not offer equivalent credits to interstate businesses, petitioners

argue that the two-way credit system gives local manufacturers

a “half-price deal” denied to interstate manufacturers. Pet. 21-

23. This is the same as the “two privileges” argument rejected

in American Nat'l Can. 114 Wash. 2d at 245-46, 787 P.2d at

549. Noticeably lacking supporting authority, the argument

amounts in substance to an assertion that the negative

Commerce Clause prohibits a state from ever providing a credit

for one of its taxes against another—regardless of whether the

state also provides an equivalent credit for similar out-of-state

taxes. The decisions of this Court hold to the contrary. See

Jefferson Lines, 514 U.S. at 192 n.6.’

In short, neither the Due Process Clause question nor

the Commerce Clause discrimination question presented by

petitioners is a substantial federal question.

Cc. 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. 3-4, 7-12. As the court below correctly

concluded, petitioners’ reliance on Reich and Newsweek as

support for their “bait and switch” attack on the 1987 credit

their manufacturing B&O tax liabilities. Without changing any feature of

its tax system, Washington would then have an “automatic External Credit.”

Pet. 18-19. This demonstrates that the alleged “profound disparities in the

actual benefits conferred” by Washington’s two-way credit system are the

product of other states’ tax policy choices, not anything inherent in the 1987

two-way credit law.

* At pages 21-24 of the petition, petitioners also present what in

substance are arguments that Washington’s taxes are unfairly apportioned.

We discuss apportionment at pages 24-30, infra.

21

Statute is misplaced. 137 Wash. 2d at 593-96, 598-99, 973

P.2d at 1017-18, 1019-20 (Pet. App. 12a-15a, 18a-19a).

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

refunds 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

22

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 pursue refund 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

postpayment procedural remedy promised by Washington law.

Petitioners’ assertion that until August 1987

Washington law promised them full refunds of any taxes they

paid is both incorrect and immaterial. The statute petitioners

allegedly relied upon (Pet. 9), Wash. Rev. Code § 82.32.180,

has never required full refunds whenever a tax statute is

declared unconstitutionally discriminatory. It is merely a

conditional waiver of the State’s sovereign immunity pursuant

to Wash. Const. art. Il, § 26, which provides that the

Washington Legislature “shall direct by law, in what manner,

and in what courts, suits may be brought against the state.”

Lacey Nursing Ctr., Inc. v. Department of Rev., 128 Wash. 2d

40, 48-54, 905 P.2d 338, 342-45 (1995).

As such, it is only a procedural statute. It provides no

direction to the courts as to what form or degree of backward-

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

application is declared invalid. 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

23

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, 185 Wash. 209.

220, 53 P.2d 607 (1936); Nipges v. Thornton, 119 Wash. 464,

467-68, 206 P. 17, 18-19 (1922); Simpson 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.

Moreover, petitioners were on notice, as of April 30,

1985, that they definitely would not be entitled to full refunds

under Washington law if they were to obtain a judgment that

the former multiple activities exemption statute discriminated

against interstate commerce. That was the effective date of the

conditional one-way credit law, which limited potential refunds

to selling gross receipts taxes paid to other jurisdictions. 1985

Wash. Laws Ch. 190, § 4. App. Sa.

Nor could petitioners reasonably believe they would

receive full refunds based on the vague dictum’? later

appearing in National Can II: “If 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 7yler Pipe, the

court squarely held that “[fJull refunds are not appropriate” and

that the taxpayers instead were entitled to more limited refunds

'° As explained at page 4, 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.

24

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.

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."

Regardless of whether petitioners’ characterization of

Washington law before August 1987 is 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.

Ili. The Apportionment Questions Petitioners Pose Are

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

resolve a question left open” by this Court’s earlier decisions.

That question, according to petitioners, is “Does an

unapportioned tax on the gross income of interstate

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

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

take any actions they otherwise would not have taken. National Can I] was

issued in 1988, after the last of the petitioners’ taxes allegedly were paid in

November 1987 in reliance on the State’s “bait.” See Pet. 8, 11.

25

manufacturers violate the Commerce Clause requirement of

fair apportionment?” Pet. 24.'”

Petitoners’ question misstates Washington law.

Washington does not impose a tax on the “gross income of

interstate manufacturers.” Washington only taxes extracting,

manufacturing, and selling activities that take place in this

state. If a Washington business manufactures a product in

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

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

of Washington’s B&O taxes are unapportioned. The

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.

It is unclear what “unapportioned” Washington tax on

“interstate manufacturers” petitioners are referring to. They

reluctantly acknowledge that this Court unanimously upheld

Washington’s selling B&O taxes as fairly apportioned in Tyler

Pipe,’ but state that this Court “has not addressed

apportionment” of Washington’s B&O tax on “manufacturing

activities.” Pet. 26. Thus, they seem to argue that the

“question left open” by this Court’s earlier decisions is whether

Washington’s manufacturing and extracting B&O taxes are

fairly apportioned."

'? Elsewhere, petitioners state the question as “Does such a tax

credit scheme, without apportionment, satisfy the nondiscrimination and

apportionment requirements of the commerce clause, as interpreted in this

Court’s decisions?” Pet. i. Petitioners have not cited, and the Department

is unaware of, any decision of this Court interpreting the negative

Commerce Clause as requiring a tax credit—as opposed to a tax—to be

apportioned.

3 In rejecting the taxpayers’ apportionment argument 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 manufacturing and wholesaling.” 483 U.S. at 251.

* At the end of their argument, however, petitioners ask this Court

to “requir[e] apportionment of gross receipts taxes on selling and

26

However, while petitioners did challenge the selling

B&O taxes on apportionment grounds, petitioners did not

present an apportionment challenge to the manufacturing and

extracting B&O taxes in the Washington Supreme Court. In

reviewing state court decisions under 28 U.S.C. § 1257, this

Court will not consider a federal question unless it was either

addressed by or properly presented to the state courts. Street v.

New York, 394 U.S. 576, 581-85 (1969). The Washington

Supreme Court’s opinion below did not address any

apportionment issue other than the one resolved by this Court

in Tyler Pipe. 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).'°

When the highest state court’s decision is silent on a

federal question presented in a petition, this Court assumes that

the issue was not properly presented below, Board of Directors

of Rotary Int'l v. Rotary Club of Duarte, 481 U.S. 537, 550

(1987), and the petitioner bears the burden of defeating that

assumption by demonstrating that the state courts had “a fair

opportunity to address the federal question that is sought to be

presented,” Webb v. Webb, 451 U.S. 493, 501 (1981).

Even if this Court were to conclude that petitioners

properly presented below the question whether Washington’s

manufacturing and extracting taxes are fairly apportioned, the

question is not substantial. For nearly a century, this Court has

consistently reyected Commerce Clause challenges to state or

local gross receipts taxes on manufacturers or extractors

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

manufacturing businesses,” which suggests their petition also challenges

Washington’s selling B&O taxes on apportionment grounds. Pet. 30.

'* The court cited none of this Court’s or its own decisions

involving apportionment challenges to manufacturing or extracting 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.

27

products manufactured or extracted. 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 Jron

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 US. 160 (1965)

(manufacturing). This question is well-settled.

Another Commerce Clause question petitioners may be

asking this Court to consider is the one they litigated below:

whether Washington’s selling B&O taxes are fairly

apportioned. They concede that this question is not “left open”

by this Court’s earlier decisions, admitting that this Court has

repeatedly rejected apportionment challenges to these taxes in a

“series of decisions culminating in Tyler Pipe.” Pet. 29 n.34.

In Tyler Pipe, this Court unanimously upheld

Washington’s selling B&O taxes as fairly apportioned because

the activity of wholesaling—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.

28

In rejecting the apportionment challenge renewed by

petitioners 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. v. Department of Rev., 419 U.S.

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

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); International 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).

In Jefferson Lines, 514 U.S. 175, upon which

petitioners rely, this Court upheld Oklahoma’s sales tax on the

'© The record below shows that 19 of these petitioners were parties

in National Can I, No. 85-2006, and litigated in Tyler Pipe whether

Washington’s B&O selling taxes are fairly apportioned. (App. 21a).

Therefore, federal common law rules of issue preclusion should have

prevented these petitioners and any other petitioners in privity with 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 third 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).

29

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.

Nor does the Washington Supreme Court’s decision

below create any “split of authority among the states” on this

apportionment issue, as petitioners argue. Pet. 30. The

decision below is not in conflict with either City of Winchester

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

(1996), or M & Assocs., Inc. v. City of Irondale, 723 So.2d 592

(Ala. 1998)."7

The gross receipts taxes the Virginia and Alabama

courts struck down in American Woodmark and M & Assocs.

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

'’ There is no suggestion whatsoever in either American

Woodmark or M & Assocs. that Jefferson Lines undermined this Court’s

apportionment holding in Tyler Pipe.

30

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. /d. 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 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). Washington’s selling

B&O taxes obviously are internally consistent and are fairly

apportioned.

In short, neither of the Commerce Clause

apportionment questions presented by petitioners is a

substantial federal question.

CONCLUSION

For these reasons, the petition for a writ of certiorari

should be denied.

Respectfully submitted.

CHRISTINE O. GREGOIRE

Attorney General

State of Washington

DONALD F. COFER*

WILLIAM BERGGREN COLLINS

Assistant Attorneys General

Counsel for Respondent

*Counsel of Record

August 30, 1999