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

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AUG

No. 99-38 |

Bupreme Seurt, YS,

FILE

LERK

IN THE

Suprene Court of the United States

BUFFELEN WOODWORKING Co., et al.,

y Petitioners,

STATE OF WASHINGTON,

WASHINGTON DEPARTMENT OF REVENUE,

Respondent.

On Petition for a Writ of Certiorari to the

Supreme Court of Washington

BRIEF OF AMICUS CURIAE

COMMITTEE ON STATE TAXATION

IN SUPPORT OF PETITIONERS

DIANN L. SMITH

Vice President—Counsel

DOUGLAS L. LINDHOLM *

President/Erecutive Director

WILLIAM D. PELTZ

Bossy L. BURGNER

Chair and Vice Chair,

Lawyers’ Coordinating

Subcommittee

Committee On State Taxation

122 C Street, N.W.

Suite 330

Washington, D.C. 20001

(202) 484-5222

* Counsel of Record

WILSON - Epes PRINTING Co., INC. ~- 789-0096 - WASHINGTON, D.C. 20001

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES... ii

INTEREST OF THE AMICUS CURIAE . 1

SUMMARY OF THE ARGUMENT ....... 2

ARGUMENT 4

THE RETROACTIVE CREDIT OFFERED BY

THE STATE OF WASHINGTON TO REMEDY

AN UNCONSTITUTIONAL TAX VIOLATES

THE DUE PROCESS CLAUSE OF THE 14TH

AMENDMENT OF THE UNITED STATES CON-

STITUTION BECAUSE THE REMEDY IS NEI-

THER MEANINGFUL NOR CLEAR AND CER-

TAIN

a IEY serena acedinicaieiognidapianigicnnsetincabepiticiciemsdoneineeus 11

(i)

TABLE OF AUTHORITIES

CASES Page

Atchison, T. & S.F.R. Co. v. O’Conner, 223 U.S.

i... ; ae anae se ene Ces Aon 4,6

California v. Grace Brethren Church, 457 U.S. 393

CATIIEE DY ceunnevsishitsninsitpecssisibantaseiiieaiicadadaiie teeta 10

Columbia Steel Co. v. State, 192 P.2d 976 (Wash.

TTD witninticsicidinidtinnaaviciinateniaeeniesieecaa 5

Digital Equip. Co. v. Dep’t of Revenue, 916 P.2d

i SS) eee 8

Ford Motor Co. v. Dep’t of Treasury of Indiana,

te GS |) renee ee eee ee 9

General Motors Corp. v. City and Cty. of San

Francisco, 69 Cal. App. 4th 448 (1999) ............... 10

Harper v. Virginia Dep’t of Taxation, 509 U.S. 86

(1992) ....... 6

McKesson Corp. v. Division of Alcoholic Bev. &

Tobacco, 496 U.S. 18 (1998) 4,8

National Can Corp. v. Dep’t of Revenue, 749 P.2d

1286 (Wash), cert. denied, 48 U.S. 1040 (1988).. 3

Newsweek, Inc. v. Florida Dep’t of Revenue, 522

ee MI CI ceetterclinnccitlietal usa naiiilanied artic tes 10

Reich v. Collins, 483 U.S. 282 (1987) .............022..... 8

Tyler Pipe Industries, Inc. v. State Dep’t of Reve-

nue, 488 U.S. 232 (1987) . 4 3,5

STATUTES AND UNITED STATES

CONSTITUTIONS

Tax Injunction Act, 28 U.S.C. § 1841 ..000

U.S. Const. amend. IX ................. a aad

8 A enn

Wash. Rev. Code § 82.04.440 ......... sinioodadanaasiamaaaaians 5,

Wash. Rev. Code § 82.32.150 ia =

Wash. Rev. Code $ 82.82.180 ............22.2....cceccecnccocccoesee

1987 Wash. Laws, 2d Ex. Sess., ch. 3 § 2 ............... é

AWWORADw OO

In THE

Supreme Court of the United States

No. 99-38

BUFFELEN WoopworKING Co., et al.,

y Petitioners,

STATE OF WASHINGTON,

WASHINGTON DEPARTMENT OF REVENUE,

Respondent.

On Petition for a Writ of Certiorari to the

Supreme Court of Washington

BRIEF OF AMICUS CURIAE

COMMITTEE ON STATE TAXATION

IN SUPPORT OF PETITIONERS

INTEREST OF THE AMICUS CURIAE

This brief is submitted by the Committee On State

Taxation (COST) as amicus curiae in support of the Peti-

tioners in the above captioned matter.1 COST is sub-

mitting this brief because its members have expressed

significant concern over the continued failure, as illustrated

by this case, of state taxing authorities and state courts

1 No counsel for a party authored this brief in whole or in part.

and no person or entity, other than amicus curiae, has made a

monetary contribution to the preparation or submission of this

brief. Written consents of the Petitioners and Respondent have

been obtained and filed with the Clerk of the Court.

to provide constitutionally sufficient remedies to taxpayers

for unconstitutional taxes.”

COST’s objective is to preserve and promote equitable

and nondiscriminatory state and local taxation of multi-

jurisdictional business entities. COST’s membership con-

sists of over 500 multistate corporations involved in inter-

state and international commerce. COST is a non-profit

trade association that was organized in 1969 as an ad-

visory committee to the Council of State Chambers of

Commerce and was separately incorporated on January 1,

1992. Many of COST’s members have business operations

in the State of Washington and pay the Washington busi-

ness and occupation tax. These members have pending

refund claims or assessments in Washington awaiting a

final determination as to whether Washington’s proffered

“remedy” meets due process standards. Thus, these mem-

bers will be directly affected by a decision of this Court

to review this case. Further, all of COST’s members are

involved from time to time in various constitutional chal-

lenges to state and local taxes which, when successful,

require a remedy. Thus, all of COST’s members are af-

fected by the articulation of the requirements for a remedy

to meet due process standards and by the states’ willing-

ness and ability to comply with these requirements.

As such, COST’s members are directly affected by this

case and have a strong interest in its outcome.

SUMMARY OF THE ARGUMENT

COST asks this Court to accept this case for review to

determine whether a state remedy for an unconstitutional

2COST is submitting a similar brief raising similar issues in

support of the Petitioners in W.R. Grace & Co.-Conn. and Chrysler

Motors Corporation v. Washington Department of Revenue, No.

99-31.

tax which retroactively imposes new and unexpected

record keeping and proof requirements on the injured

taxpayers is either a predeprivation remedy or “meaningful

backward looking relief’ and whether this new and un-

anticipated remedy imposed up to seven years after the tax

was due and in lieu of all statutory remedies previously

available is a “clear and certain” remedy. This Court

should review this case for two reasons: 1) to prevent

Washington, and by implication other states, from ignor-

ing the constitutionally mandated standards for remedies

of unconstitutional taxes; and 2) to articulate such a clear

and unequivocal definition of what constitutes a suf-

ficient remedy for an unconstitutional tax that both the

states and taxpayers can fairly and uniformly apply that

standard without significant further controversy.

This Court has already begun the process of defining

what constitutes a constitutionally sufficient remedy for

an unconstitutional tax. A taxpayer must be given either

a predeprivation remedy or “meaningful backward looking

relief,” McKesson Corp. v. Division of Alcoholic Bev. &

Tobacco, 496 U.S. 18 (1990) and the remedy must be

“clear and certain,” Atchison, T. & S.F.R. Co. v. O’Con-

ner. 223 U.S. 280, 285 (1912). The meaning of the key

terms of this constitutional standard—‘“meaningful” and

“clear and certain”’—must stil! be articulated. COST pro-

poses that “meaningful” backward looking relief means

that the taxpayer’s injury is erased. COST further pro-

poses that “clear and certain” means that the taxpayer

knew of its available remedies at the time the unconsti-

tutional tax was imposed. These standards are both vio-

lated in this case.

ARGUMENT

THE RETROACTIVE CREDIT OFFERED BY THE

STATE OF WASHINGTON TO REMEDY AN UN-

CONSTITUTIONAL TAX VIOLATES THE DUE

PROCESS CLAUSE OF THE 14TH AMENDMENT OF

THE UNITED STATES CONSTITUTION BECAUSE

THE REMEDY IS NEITHER MEANINGFUL NOR

CLEAR AND CERTAIN.

It is not hyperbole to state that the issue of remedies

for unconstitutional taxes is the single most important

issue in state and local tax today. States continue to im-

pose unconstitutional taxes and when a court ultimately

invalidates these taxes, many states nevertheless refuse to

provide the taxpayer with constitutionally sufficient relief.

This situation is a source of significant frustration* to

taxpayers and this Court is the only forum in which a

solution is available.

History of the Unconstitutional Tax to be Remedied

Washington imposes a business and occupation tax

(“B&O” tax) on companies manufacturing items in the

state and a separate B&O tax on companies selling items

in the state. However, under Washington’s original sys-

tem, a company both manufactured and sold items in the

State, it paid only the manufacturing tax (and was exempt

from the selling tax). This system was ruled unconstitu-

tional under the Commerce Clause in 1948 because it

discriminated against companies who manufactured items

in other states but sold the items in Washington. Colum-

3The lack of adequate remedies has become somewhat of a

depressing joke at taxpayer gatherings. Some taxpayers, after

years of ultimately successful litigation challenging a tax have

taken to cynically waving a dollar bill in the air and commenting

that they have not received even one dollar in refunds from the

suit. This is a sad commentary on the current system.

bia Steel Co. v. State, 192 P.2d 976 (Wash. 1948). The

tax was unconstitutional because local manufacturers

were exempt from the selling tax but out-of-state manu-

facturers were not.

Faced with an unconstitutional tax, Washington merely

reversed the exemption rules. Under the new system,

companies that sold items in the state were exempt from

the manufacturing tax on items they manufactured and

sold in the state. Wash. Rev. Code § 82.04.440(2).

Companies who only manufactured items in the state but

sold them in other states, continued to be subject to tax

on their manufacturing activities.

In 1987, this Court ruled this second tax scheme uncon-

stitutional. for the same reason that the first scheme was

invalidated. Tyler Pipe Industries, Inc. v. State Dep't of

Revenue, 483 U.S. 232 (1987). As before, the new tax

system discriminated against taxpayers who performed

only one activity in Washington. /d. at 253.

Washington, still unwilling to overhaul its tax system,

instead tacked on a credit mechanism in an attempt to

make its B&O tax constitutionally acceptable. Wash. Rev.

Code § 82.04.440. Under the new credit provision, if a

company paid a B&O tax on either manufacturing or sell-

ing in a state other than Washington, it could receive a

credit against its Washington tax for the other activity—

if the other state’s tax was substantially identical to Wash-

ington’s tax and was imposed on the same goods that

were also subjected to Washington’s tax. Essentially, the

credit mechanism is hollow since the income, franchise,

and sales taxes that most states impose on manufactur-

ers are disqualified from Washington’s credit. The leg-

islation creating the credit was effective August 12,

1987. 1987 Wash. Laws, 2d Ex. Sess., ch. 3 § 2. Wash-

ington applied this credit system retroactively, asserting

that the credit was the only remedy for tax declared un-

constitutional in 1987. It is this retroactive and exclusive

imposition of the credit that is at issue here.

Standards for Determining a Constitutional Remedy

A remedy to a tax declared unconstitutional must com-

ply with the requirements of the Due Process Clause of

the Fourteenth Amendment to the United States Constitu-

tion.* Harper v. Virginia Dep't of Taxation, 509 U.S. 86,

100 (1992). Under the Due Process Clause, a remedy is

constitutional only if it meets two tests: 1) the state must

provide either a predeprivation remedy or “meaningful

backward looking relief.” id.; and 2) the remedy must be

“clear and certain.” Atchison, T. & S.F.R. Co., 223 US.

at 285. The remedy at issue here, ostensible credits im-

posing additional substantive and procedural requirements

years after the tax in question was incurred, meets neither

of these requirements.

The credit does not provide an adequate predeprivation

remedy or “meaningful backward looking relief” because

the record keeping requirements and the narrow interpre-

tation of a tax qualifying for the credit make the credit an

illusion rather than a real remedy. The Taxpayers’ Peti-

tion for Writ of Certiorari (“Taxpayers’ Petition”) fully

discusses the issue (Buffelen Brief pp. 12-17, Grace/Chrys-

ler Brief pp. 8-16), and COST will not repeat the explana-

tion other than to support the Taxpayers’ position and to

emphasize the importance of this issue to the taxpaying

community.

Taxpayers should not be expected to anticipate all of

the possible remedies a tax authority might create after

the tax authority has lost the battle to legitimatize an un-

4[Njor shall any State deprive any person of life, liberty, or

property, without due process of law... . U.S. Const. amend. XIV,

$1.

constitutional tax. Record keeping, like that required in

this case, is a very expensive and time consuming process,

and is unnecessary for any business purpose of most com-

panies. This case, whether accepted by this Court or not,

sets the standard for taxpayer expectations. If this case is

not accepted and reversed, then the “anything goes” atti-

tude of the Washington Department of Renevue will be

the standard. At best, taxpayers will be forced to choose

between anticipating all of the possible remedies years

before the constitutionality of a tax is finally decided (in-

cluding preparing records and conforming business activi-

ties to comply with all possible future scenarios) or decid-

ing to give up on a possible remedy because the cost of

anticipatory preparation is too high. Realistically, a tax-

payer will never be able to anticipate all possible remedies

a state could devise and, thus, will frequently be left with-

out any recourse. None of thcse alternatives supports a

fair and equitable tax system governed by the standards

of due process. Accordingly, Washington’s determination

of what constitutes a constitutional remedy should be re-

viewed and reversed.

The credit also does not provide a “clear and certain”

remedy because the credit was not available at the time

the tax was incurred and retroactively replaces remedies

that were and, according to Washington’s statutes, are

still provided by statute to the taxpayers. McKesson

Corp., 496 U.S. at 39 n.22 (1990). To be “clear and

cértain,” a remedy must, at a minimum be a remedy that

the taxpayer was aware of at the time it decided to pay

the tax (rather than take some other course of action).

The terms “clear and certain” indicate that the remedies

are specifically defined and guaranteed. Absent such sim-

ple notice a remedy cannot be clear and certain.> Wash-

5 COST is not addressing whether states could offer a constitu-

constitutionally adequate credit as a remedy, rather than a refund,

ington’s credit system runs afoul of this standard, and

thus for this reason also, Washington’s decision should be

reviewed and reversed.

Finally, the remedy provided by Washington actually

violates one of the clear standards already articulated by

this Court—a state may not “bait and switch” in apply-

ing a remedy. Reich v. Collins, 513 U.S. 106 (1994).

In Reich v. Collins, the taxpayer challenged the constitu-

tionality of a state tax under a statutory refund provision.

Id. The state tax code provided for both predeprivation

challenges (protests) and post-deprivation challenges (re-

fund suits). After the tax was ruled unconstitutional, the

state tried to avoid paying the refund by arguing that

since the taxpayer could have challenged the tax before

paying the tax, the taxpayer had paid the tax voluntarily

and no refund was due. 7d. at 110. This Court soundly

rejected this argument. 7d. at 111. “Bait and switch”

in the consumer protection world occurs when a com-

pany advertises a product, such as a television, for a

very low price in order to entice a customer to enter

the store. Once in the store, the customer is told that the

store does not have that product but is offered a similar

but different product for a more expensive price. Fre-

quently, because the customer is already at the store and

is prepared to make a purchase, the customer will buy the

substitute and the store will make a higher profit than

it would have made on the advertised product. This is

just what Washington did here: it offered injunctive and

refund relief for illegal taxes (Wash. Rev. Code §$ 82.

32.150; 82.32.180), but when the taxpayers came to

court to obtain the advertised remedy, the state said, “we .

won't provide the statutory relief, but what we can offer

but only suggests that this remedy must be apparent at the time

the tax was paid by the taxpayer.

you are these new, costly credits.” The Petitioners came

to court expecting refunds and injunctive relief for the

unconstitutional tax; the refunds and injunctive relief

were authorized by statute; and the credit statute did not

exist at the time the Petitioners paid the unconstitutional

taxes. Therefore, the Petitioners are owed the statutory

relief originally provided.

Procedural Reason for Accepting the Case for Review

An unequivocal definition of the requirements of a con-

Stitutional remedy for an unconstitutional tax and a man-

date to the states to provide this relief is also necessary

because of the limited forums available to a taxpayer to

pursue its remedies. A taxpayer generally cannot chal-

lenge the constitutionality of a state or local tax in the

lower federal courts. U.S. Const. amend. XI; 28 U.S.C.

§ 1341. The Eleventh Amendment ® prohibits suits for

monetary damages against a state in federal court and

thus prevents all suits for state tax refunds. Ford Motor

Co. v. Dep’t of Treasury of Indiana, 323 U.S. 459, 462

(1945). The Tax Injunction Act, as interpreted, prohibits

taxpayers from bringing any action in federal court if

there is a “plain, speedy, or efficient” remedy at state law,

Newsweek, Inc. v. Florida Dep’t of Revenue, 522 U.S.

442, 444 (1998). Most of the cases interpreting the Tax

Injunction Act have determined that state refund or pro-

test systems are plain, speedy and efficient and thus juris-

diction in the federal courts is generally prohibited. See,

e.g., id.; California v. Grace Brethren Church, 457 U.S.

393 (1982). While this Court has accepted several state

tax cases in each of its terms in recent memory, review

by this Court is anything but guaranteed. Thus, taxpay-

6“[J]udicial power ... shall not . . . extend to any suit...

commenced or prosecuted against one of the United States Citi-

zens.” U.S. Const. amend. XI.

ers are usually limited to a state court as the final arbiter

of what is an adequate remedy. In order to ensure that

these state courts provide a constitutionally sufficient rem-

edy, COST respectfully requests this Court to accept this

case for review.

Finally, the constitutionality of a retroactive remedy

imposed in lieu of statutory remedies which requires new,

burdensome, and unexpected record keeping and proof

requirements needs to be addressed by this Court because

State courts addressing similar remedies for similar taxes

have reached contrary results. In the case at bar, the

Washington Supreme Court approved of the retroactive

application of the credit as the sole remedy for the un-

constitutional tax. In General Motors Corp. v. City and

Cty. of San Francisco, 69 Cal. App. 4th 448 (1999).7

the California Court of Appeal came to the opposite con-

clusion and mandated full refunds rather than the taxing

authority’s proffered conditional, partial refunds. Thus,

Washington and California courts have adopted different

standards for what constitutes a constitutional remedy and

this difference can be reconciled only in this Court.

7 Like Tyler Pipe, the tax at issue in General Motors was also

a tax on manufacturing and selling activities with the local manu-

facturers exempt from the selling tax. Once the tax was declared

unconstitutional, the City in General Motors, like Washington here,

provided no refund or assessment abatements but instead offered

a retroactive partial refund if the taxpayer met certain record-

keeping requirements and proved payment of other taxes.

CONCLUSION

For the reasons stated above, and because taxpayers

throughout the country have a significant concern over

the current refusal by states to provide truly meaningful,

clear and certain remedies for unconstitutional taxes,

COST respectfully requests the Court to accept this case

for review.

Respectfully submitted,