Ohio Tax The Power to Tax: Constitutional Issues with the Ohio CAT - - PDF document
26th Annual Tuesday & Wednesday, January 2425, 2017 Hya Regency Columbus, Columbus, Ohio Workshop QQ Ohio Tax The Power to Tax: Constitutional Issues with the Ohio CAT in a Global & Digital Economy Wednesday, January 25, 2017
26th Annual
Tuesday & Wednesday, January 24‐25, 2017
Hya Regency Columbus, Columbus, Ohio
The Power to Tax: Constitutional Issues with the Ohio CAT in a Global & Digital Economy
Wednesday, January 25, 2017 2:00 p.m. to 3:00 p.m.
Biographical Information Fredrick J. Nicely, Senior Tax Counsel, Council On State Taxation (COST) 122 C Street, NW, Suite 330, Washington, DC 20001-2109 202.484.5213 fnicely@statetax.org Fred Nicely is Senior Tax Counsel for the Council On State Taxation. Fred’s role as Senior Tax Counsel at COST extends to all aspects of the COST mission statement: “to preserve and promote equitable and nondiscriminatory state and local taxation of multijurisdictional business entities.” Before joining COST, Fred served in the Ohio Department of Taxation for four years as Deputy Tax Commissioner over Legal and for the prior seven years as the Department’s Chief Counsel. Fred’s responsibilities at the Department included testifying before legislative committees, participating as an alternative delegate for Ohio at Streamlined Sales Tax Project meetings, and reviewing legal documents issued by the Department, including deciding the merits of filing an appeal. He is a frequent speaker and author on Ohio’s tax system and on multistate tax issues generally. Fred also has extensive experience in public utility tax law, having served as an administrator of the Department’s public utility tax division. Fred’s undergraduate degree in psychology (with a concentration in accounting) is from the Ohio State University. He obtained his MBA and JD from Capital University in Columbus, Ohio. David D. Ebersole, Associate, McDonald Hopkins, LLC 250 West St., Suite 550, Columbus, OH 43215 (614) 484-0716 debersole@mcdonaldhopkins.com Dave is an associate attorney in McDonald Hopkins’ Tax and Benefits Group who advises clients on a multitude of tax issues, particularly state and local taxes. As a former Assistant Attorney General for the Ohio Attorney General, Mike DeWine, Dave has defended the Ohio Tax Commissioner in tax litigation before the Ohio Board of Tax Appeals and Ohio courts of appeal, including several cases before the Ohio Supreme Court. He has extensive experience with all types of state and local taxes. These taxes include the income tax, sales and use tax, excise tax, personal and real property tax, and Ohio’s gross receipts tax, the CAT. Through his practice Dave also advises clients with respect to federal tax matters, executive compensation, employee benefits, and estate planning. Dave attended The Ohio State University Max M. Fisher College of Business, where he earned his B.S. with honors in Accounting and Finance. He also graduated with honors from The Ohio State University Moritz College of Law. Christine T. Mesirow, Section Chief, Taxation, Ohio Attorney General Mike DeWine 30 E. Broad St.; 25th Floor, Columbus, OH 43215 614-995-3753 Fax: 866-459-6679 Christine.mesirow@ohioattorneygeneral.gov Christine has practiced in the area of state and local taxation for more than 25 years, in both the private and public sectors. She began her career in state & local tax as an assistant attorney general in the Taxation Section. Christine then moved to Dallas, where she gained experience in multistate tax issues affecting technology service providers as the state tax counsel for Electronic Data Systems Corp., representing the company in state tax controversies throughout the country. She later was a state & local tax consultant with PricewaterhouseCoopers and was of counsel with Bricker & Eckler
Counsel for the Ohio Department of Taxation. Christine’s broad range of experience in both tax controversy and tax administration issues provides her with an understanding of many issues confronted by those who must navigate the sometimes complex legal, policy and business issues challenging government and industry in the administration of and compliance with state tax law. Christine is a graduate of the Ohio State University Moritz College of Law.
Fred Nicely, Esq. Senior Tax Counsel Council on State Taxation Washington, DC David Ebersole, Esq. McDonald Hopkins LLC Columbus, OH Christine Mesirow, Esq. Section Chief Ohio Attorney General Columbus, OH
Crutchfield Corp. v. Testa
Computerized Technology
– Requires “Definite Link” or “Minimum Connection” to Tax – Fundamental Fairness and “Purposeful Availment”
– Because Congress has the power to regulate interstate commerce, states may not impose taxes that improperly interfere with interstate commerce.
430 U.S. 274 (1977)
– “Substantial Nexus” to tax; – No discrimination against interstate commerce; – “Fair Apportionment”; AND – “Fair Relation” to the benefits of taxing state
– National Geographic v. Bd. of Equal., 430 U.S. 551, 560‐ 561 (1977) – Use tax collection duty upheld for company with in‐ state magazine sales and in‐state advertising office – Nexus over the activity conducted by the taxpayer in the taxing state not needed
Physical Presence is Required to Impose Sales and Use
Quill Corp. v. North Dakota, 504 U.S. 298 (1992)
Commerce Clause requires physical presence for “substantial
nexus” for use tax collection duty
Due Process Clause does not require physical presence Congress has power to supersede Quill and the physical
presence rule, but so far has not
Nat’l Bellas Hess v. Dept. of Rev., 386 U.S. 753 (1967)
Time for U.S. Supreme Court to revisit after another 25 years?
– Fairness: Internet vs. brick‐and‐mortar retailers
(2015)
– Justice Kennedy concurs: Quill must be reconsidered because it “now harms States to a degree far greater than could have been anticipated earlier”
– Justice Breyer concurs: would take into account modern conditions for Due Process and personal jurisdiction in products liability cases
Minnesota, 358 U.S. 450 (1959)
– U.S. Supreme Court rejects Due Process and Commerce Clause challenges to MN net income tax on IA company that solicited sales orders for its products from a rented
234 La. 651, appeal dism’d, 359 U.S. 28 (1959)
– Dismissed on the authority of Northwestern States even though the taxpayer held no property interest in the taxing state
taxes on any company whose “only business activities” in that State consist of “solicitation of
– Applies only to sales of tangible personal property – Wis. Dept. of Rev. v. Wrigley Co., 505 U.S. 214 (1992) (de minimus exception available)
measured by gross receipts
– But see: IBM v. Dept. of Treasury, 496 Mich. 642 (2014) (modified gross receipts tax within Multistate Tax Compact definition of “income tax”); Diversified Ing. v. Testa (8th Cir.) (pending Ohio CAT challenge under PL 86‐272); Graphic Packaging v. Hegar (TX)
taxes not measured by net income
– Texas, Michigan, Ohio, Nevada – O.R.C. 5751.02(A) expressly states that P.L. 86‐272 is inapplicable to the Ohio CAT
gross receipts for the privilege of doing business in [Ohio]” – R.C. 5751.02(A)
Taxable Gross Receipts Annual Minimum Tax CAT $150k or less Need not register Need not register $150k+ to $1M $150 No additional tax $1M+ to $2M $800 0.26% x (Taxable Gross Receipts ‐ $1M) $2M+ to $4M $2,100 0.26% x (Taxable Gross Receipts ‐ $1M) More than $4M $2,600 0.26% x (Taxable Gross Receipts ‐ $1M)
levied include, but are not limited to, persons with substantial nexus with [Ohio].”
– R.C. 5751.02(A)
they have “bright line presence”
– $500k in annual Ohio taxable gross receipts; – $50k in Ohio property or payroll; OR – >25% of any of the above sourced to Ohio
Commerce and Due Process Clauses
– Three consolidated cases: Crutchfield Corp., Newegg, Inc., and Mason Companies, Inc.
– Internet Retailers exceed the bright line presence threshold of $500k in Ohio taxable gross receipts – No facilities or payroll in Ohio
factual findings
– Quill is limited to sales and use taxes – Pre‐Complete Auto interstate‐commerce immunity case law inapplicable – No distinction between gross receipts and income taxes for Commerce Clause purposes
“substantial nexus” requirement
– Burden on interstate commerce not “clearly excessive” – Legitimate state interest to “evenhandedly” tax in‐state and
privilege taxes such at the CAT
– Hypothetical: One sale could exceed $500k Ohio taxable gross receipts threshold
Appeals to determine whether internet retailers had a physical presence in Ohio
– “Economic Nexus” Issue
substantial nexus in all instances?
– Does physical presence standard apply to business privilege taxes? – Is Norton Co. v. Dept. of Rev., 340 U.S. 534 (1951) still good law? See also, Avnet (WA)
U.S. 310, 319 (1945)
boundary line between those activities which justify the subjection of a corporation to suit, and those which do not, cannot be simply mechanical or quantitative.”
upon the quality and nature of the activity in relation to the fair and orderly administration of the laws which it was the purpose of the due process clause to insure.”
Update P.L. 86‐272
Beyond sales of tangible personal property Beyond net income taxes to gross receipts taxes H.R. 2584 includes other measures
14‐day presence test Eliminate combined reporting “loophole”: may not include an entity’s
sales in sales factor if no “substantial nexus” with taxing state
Marketplace Fairness Act of 2015
Would grant states authority to require remote sellers to
collect sales/use tax
identified the “substantial nexus” standard, or test, for business privilege taxes?
– Ohio Supreme Court in Crutchfield rejects this language from Tyler Pipe Industries, Inc. v. Wash. Dept.
– Washington Supreme Court in Avnet cites Tyler Pipe to put burden on taxpayer to show instate sales office would not provide any post‐shipment services
applicable to police power regulations, not state taxes
substantial nexus through Pike’s balancing test
– “Burden imposed on interstate commerce clearly excessive in relation to the putative local benefits”
Direct Mail Industry?
– Computerized technology may distinguish
– South Dakota; SB 106 (2016), eff. May 1, 2016 – Alabama; Ala. Admin. Code 810‐6‐2‐90.03, eff. Jan. 1, 2016 – Tennessee; Tenn. Comp. R. & Regs. 1320‐05‐01.129
– DMA v. Brohl, 814 F.3d 1129 (10th Cir. 2016), cert denied to SCOTUS on Dec. 12, 2016
presence?
– The Court in Crutchfield found it unnecessary to address whether the internet retailers in the cases had a physical presence in Ohio
personal property under Ohio law
– Andrew Jergens Co. v. Wilkins, 109 Ohio St.3d 396 (2006); O.R.C. 5739.01(YY) – Canned software “always stored on a tangible medium that has physical existence”
Conversation between user’s computer and webserver,
and server of websites user visits
HTTP protocol is the language and the user’s IP address
tells website where to send content requested to view website
from website’s server and assembles the content to generate the website
– Content is stored on user’s computer as “cache”
– Website servers may instruct user’s to download content not only from their server but from other third party servers – Crutchfield’s website directed users to download content from servers in Ohio that a third party company called Akamai hosted
more specific info and only short‐term
– Text files usually stored on user’s hard drive – 1st Party and 3rd Party Cookies
– Mobile apps work like websites, tracking users and storing software content on user’s devices
State” create substantial nexus?
– Tyler Pipe Industries, Inc. v. Wash. Dept. of Rev., 483 U.S. 232 (1987)
– Continuous and systemic gathering of computer data to analyze behavioral patterns
– Tracking users on the web to gather data on the user and “re‐present” products or services
state employees or facilities
– Scripto, Inc. v. Carson, 362 U.S. 207 (1960) – Tyler Pipe Industries, Inc. v. Wash. Dept. of Rev., 483 U.S. 232 (1987)
– National Geographic v. Bd. of Equal., 430 U.S. 551 (1977) – Avnet v. Wash. Dept. of Rev., 384 P.3d 571 (Wa. 2016)
– In‐state sales representatives – In‐state installation, warranty, and/or service providers – In‐state third party webservers, e.g. Akamai
– New York: sales and use tax are facially constitutional where nexus established due to in‐state independent contractor posting links to remote seller’s website on its own website and earning commission for clicks, i.e. “click‐through” nexus
– New Mexico: in‐state activity on behalf of related member (brother‐sister entity) establishes nexus for purposes
– Geoffrey, Inc. v. South Carolina Tax Comm., 437 S.E. 2d 13 (S.C. 1993)
Commerce Clause due to licensing of trade name or trademark used in‐state
– Scioto Ins. Co. v. Okla. Tax Comm’n, 279 P.3d 782 (Okla. 2012) – KFC Corp. v. Iowa Dept. of Revenue, 792 N.W.2d 308 (Iowa 2010)
satisfies Commerce Clause
– Griffith v. ConAgra Brands, Inc., 728 S.E.2d 74 (W. Va. 2012)
Clause
– Gore Enterprise Holdings, Inc., 87 A.3d 1263 (Md. Ct. App. 2014)
income tax
– McDonald Hopkins, LLC – Phone: (614) 484‐0716 – Email: debersole@mcdonaldhopkins.com
– Senior Tax Counsel, Council on State Taxation – Phone: (202) 484‐5213 – Email: fnicely@cost.org
– Section Chief, Taxation Section, Ohio Attorney General – Phone: (614) 466‐5967 – Christine.Mesirow@OhioAttorneyGeneral.gov
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Crutchfield Corp. v. Testa, Slip Opinion No. 2016-Ohio-7760.]
NOTICE This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or
made before the opinion is published. SLIP OPINION NO. 2016-OHIO-7760 CRUTCHFIELD CORPORATION, APPELLANT AND CROSS-APPELLEE, v. TESTA, TAX COMMR., APPELLEE AND CROSS-APPELLANT. [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Crutchfield Corp. v. Testa, Slip Opinion No. 2016-Ohio-7760.] Taxation—Commercial-activity tax (“CAT”)—Physical presence is not necessary condition for imposing CAT because CAT’s $500,000 sales-receipts threshold is adequate quantitative standard that ensures that taxpayer’s nexus with Ohio is substantial—Burdens imposed by CAT on interstate commerce are not clearly excessive in relation to Ohio’s legitimate interest in imposing CAT evenhandedly on sales receipts of in-state and
assessments against appellant affirmed. (No. 2015-0386—Submitted May 3, 2016—Decided November 17, 2016.) APPEAL and CROSS-APPEAL from the Board of Tax Appeals,
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O’NEILL, J. {¶ 1} Appellant and cross-appellee, Crutchfield Corporation, appeals from the imposition of Ohio’s commercial-activity tax (“CAT”) on revenue it has earned from sales of electronic products that it ships into the state of Ohio. Crutchfield is based outside Ohio, employs no personnel in Ohio, and maintains no facilities in Ohio. The business Crutchfield does in this state consists solely of shipping goods from outside the state to its consumers in Ohio using the United States Postal Service or common-carrier delivery services. In this appeal, Crutchfield contests the issuance of CAT assessments against it, arguing that Ohio may not impose a tax on the gross receipts associated with its sales to Ohio consumers because Crutchfield lacks a “substantial nexus” with Ohio. Crutchfield argues that a substantial nexus within a state is a necessary prerequisite to imposing the tax under the federal dormant Commerce Clause. Further, citing case law interpreting this substantial-nexus requirement, Crutchfield argues that its nexus to Ohio is not sufficiently substantial because it lacks a “physical presence” in Ohio—i.e., property in the state or agents or employees acting in the state in connection with its sales. {¶ 2} Appellee and cross-appellant, the tax commissioner, advances a two- prong defense. First, he argues that the Commerce Clause case law does not impose a physical-presence requirement and that as a result, the $500,000 sales- receipts threshold set forth in the Ohio CAT statute satisfies the Commerce Clause requirement of a substantial nexus. Second, even if the Commerce Clause does impose a physical-presence requirement, the tax commissioner argues, Crutchfield’s computerized connections with Ohio consumers involve the presence of tangible personal property owned either by Crutchfield or by contractors acting specifically on Crutchfield’s behalf and the presence of that property on computers located in Ohio constitutes physical presence in this state.
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{¶ 3} We agree with the first prong of the tax commissioner’s argument, and we therefore do not address the second one. Our reading of the case law indicates that the physical-presence requirement recognized and preserved by the United States Supreme Court for purposes of use-tax collection does not extend to business-privilege taxes such as the CAT. We further conclude that the statutory threshold of $500,000 of Ohio sales constitutes a sufficient guarantee of the substantiality of an Ohio nexus for purposes of the dormant Commerce Clause. We therefore affirm the decision of the Board of Tax Appeals (“BTA”) and the assessments issued by the tax commissioner against Crutchfield. The CAT’s Statutory Bright-Line-Presence Standard {¶ 4} The CAT is imposed under R.C. 5751.02(A), which levies “a commercial activity tax on each person with taxable gross receipts for the privilege of doing business in this state.” To determine what constitutes “taxable gross receipts,” we look to R.C. 5751.01(G), which defines them as “gross receipts sitused to this state under section 5751.033 of the Revised Code.” In the case of sales of tangible personal property like those made by Crutchfield, R.C. 5751.033(E) informs us that the sales are “sitused to this state if the property is received in this state by the purchaser.” The statute specifies that when property is delivered “by motor carrier or by other means of transportation, the place at which such property is ultimately received after all transportation has been completed shall be considered the place where the purchaser receives the property.” Id. It is the tax commissioner’s position that by filling orders initiated
the receipts from Crutchfield’s sales qualify as “taxable gross receipts” under this provision. {¶ 5} Next, we turn back to the imposition of the CAT under R.C. 5751.02(A) on the “privilege of doing business.” The statute defines “doing business” as “engaging in any activity, whether legal or illegal, that is conducted
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for, or results in, gain, profit, or income, at any time during a calendar year.” Specifically, the statute states that the CAT is imposed on “persons with substantial nexus with this state,” id., a phrase defined at R.C. 5751.01(H)(3) to include persons having a “bright-line presence in this state.” R.C. 5751.01(I)(3) includes within the bright line of taxability those persons having “during the calendar year taxable gross receipts of at least five hundred thousand dollars.” {¶ 6} There are other statutory bases for imposing the CAT, but the bright- line standard of receipts from sales into the state that amount to $500,000 per calendar year is the one that is relevant in this appeal. We refer to this basis for imposing the CAT as the $500,000 sales-receipts threshold in this opinion. Factual Background {¶ 7} This is an appeal from a decision issued by the BTA on February 26, 2015, in consolidated case Nos. 2012-926, 2012-3068, and 2013-2021. The three BTA cases were appeals from three separate final determinations of the tax commissioner: In BTA case No. 2012-926, the tax commissioner issued 19 assessments covering audit periods that extended from July 1, 2005 (the inception of the CAT) to June 30, 2010. The assessments amounted to $65,689 in tax, $5,659.94 in preassessment interest, and $37,128.23 in penalties, for a total assessed amount of $106,239.43. In BTA case No. 2012-3068, the tax commissioner issued five assessments for five quarterly periods beginning July 2010 and ending September 2011. The assessments were based on estimated tax amounts of $10,000 per period; the total amount assessed with interest and penalties was $60,988.50. In BTA case No. 2013-2021, the commissioner issued assessments for the last quarter of 2011 and the first two quarters of 2012 based on estimated tax amounts of $10,000 per quarter. The assessments consisted of tax plus interest and penalties for a total amount of $39,703.01.
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{¶ 8} In each instance, Crutchfield contested the original assessments, advancing statutory and constitutional challenges. The tax commissioner issued three final determinations covering all the assessments. {¶ 9} The final determinations are substantially the same. Each final determination notes that Crutchfield is “a corporation based in Virginia,” that it functions as “a direct marketer that sells consumer electronics through the Internet from locations entirely outside of Ohio,” and that it “ships its merchandise via the U.S. Mail or using common carriers.” The final determinations rejected Crutchfield’s objections on the grounds that the taxpayer “has ‘substantial nexus with this state,’ as that phrase is defined in R.C. 5751.01(H),” inasmuch as Crutchfield “satisfies the third and/or fourth conditions in that division, and therefore is a person on whom the tax is levied.”1 {¶ 10} Next, the final determinations found that Crutchfield “sells consumer goods through orders received via the Internet and telephone orders,” noting that Crutchfield “admits that it has customers in Ohio to which it sells and ships these goods.” After further discussion of the relevant statutory provisions, the final determinations state that Crutchfield’s “overriding assertion is that the Commerce Clause of the United States Constitution precludes the State of Ohio from subjecting it to the commercial activity tax” and that Crutchfield maintains that “the nexus required is a ‘physical presence’ in the taxing state, which it alleges it did not have during the assessed periods.” {¶ 11} In all three cases, the tax commissioner found that Crutchfield had “more than $500,000 in sales to customers in Ohio” and that Crutchfield “failed to file and pay the commercial activity tax.” The commissioner made no factual
1 The “third condition,” R.C. 5751.01(H)(3), refers to the bright-line-presence provision atdivision (I) of the section, which imposes the tax given $500,000 in sales receipts; the “fourth condition” is a catchall at R.C. 5751.01(H)(4) that applies when a taxpayer “[o]therwise has nexus with this state to an extent that the person can be required to remit the tax imposed under this chapter under the Constitution of the United States.”
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finding regarding physical presence but instead noted that he lacked authority to “adjudicate the constitutionality of th[e] statutes.” At the BTA, Crutchfield stipulated that it did “not contest the amounts of estimated Ohio Commercial Activity Tax set forth on the assessments” while reasserting that it was immune from the tax. Proceedings at the BTA {¶ 12} At the BTA, Crutchfield offered the testimony of two company employees, its senior vice president of finance and its director of Internet
nexus anywhere but in its home state of Virginia. The latter testified concerning the general character of Crutchfield’s Internet marketing efforts, with the thrust being that no specific effort was targeted at Ohio. {¶ 13} With respect to the constitutional issues, the parties offered expert
conjunction with its customers’ use of computers in Ohio. The tax commissioner
Turow, while Crutchfield offered the written report of its own marketing expert, Eric Goldman. The conflicting expert opinions addressed the tax commissioner’s theory that interstate sales through the Internet involved “physical presence” because of the physical realities of online transactions. Crutchfield’s Arguments and the BTA’s Decision {¶ 14} Before the BTA, Crutchfield argued that its “gross receipts * * * cannot be taxed consistent with the Constitution,” inasmuch as Crutchfield “lacks the in-state business activity required by the Commerce Clause.” Crutchfield also argued that “[i]n addition to violating the Constitution,” the assessments against
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Crutchfield violated the provision of the CAT statute that excluded receipts when the tax could not constitutionally be applied.2 {¶ 15} In its decision, the BTA rejected Crutchfield’s reading of the statutory provisions by relying on the plain meaning of the bright-line $500,000 sales-receipts threshold and citing its earlier resolution of the issue in L.L. Bean,
BTA Nos. 2012-926, 2012-3068, and 2013-2021, 2015 WL 1048564 or 1048699, *4 (Feb. 26, 2015). As for Crutchfield’s constitutional challenge, the board noted that it lacked jurisdiction to decline to apply statutes on constitutional grounds.
commissioner. Standard of Review {¶ 16} This appeal presents questions of statutory construction and the constitutional validity of applying the CAT statute. These constitute legal questions, which we decide de novo without deference, Akron Centre Plaza, L.L.C. v. Summit Cty. Bd. of Revision, 128 Ohio St.3d 145, 2010-Ohio-5035, 942 N.E.2d 1054, ¶ 10. As for entertaining the Commerce Clause challenge to the application of the CAT statute, “the BTA receives evidence at its hearing, but we determine the facts necessary to resolve the constitutional question.” MCI Telecommunications Corp. v. Limbach, 68 Ohio St.3d 195, 198, 625 N.E.2d 597 (1994). Crutchfield Properly Raised its Constitutional Challenge to the CAT Assessments {¶ 17} In his cross-appeal, the tax commissioner renews an argument that we already rejected when we denied the commissioner’s motion to dismiss. See
2 Crutchfield’s BTA brief quoted former R.C. 5751.01(F)(2)(jj) (now (F)(2)(ll)), which excludesfrom the statutory definition of “gross receipts” “[a]ny receipts for which the tax imposed by this chapter is prohibited by the constitution or laws of the United States or the constitution of this state.”
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143 Ohio St.3d 1414, 2015-Ohio-2911, 34 N.E.3d 928. Namely, the commissioner contends that “Crutchfield has failed to impart jurisdiction on the BTA, and therefore derivatively on this Court, to consider its as-applied constitutional challenges.” While the tax commissioner is correct that a failure to specify an as-applied challenge in the notice of appeal to the BTA would bar that kind of relief, the commissioner is wrong about the content of the notices of appeal that Crutchfield filed at the BTA. Each notice of appeal states in the sixth assignment of error that “[a]pplication of the CAT to Crutchfield would violate the Company’s rights under the Commerce Clause of the United States Constitution.” The notices of appeal also state that “Crutchfield is protected from imposition of the Commercial Activity Tax (‘CAT’) under the Commerce Clause
like the CAT, the [Supreme] Court has made clear that the physical presence standard is only satisfied through in-state activities by, or on behalf of, the taxpayer that are significantly associated with its ability to establish and maintain a market in the state.” {¶ 18} Taken together, these assertions adequately specify the constitutional error. We do not recognize any significance to the distinction between a facial or as-applied challenge in the present context; we find that the notices of appeal suffice to place both theories at issue, inasmuch as any facial challenge under the Commerce Clause nexus standard would necessarily have to demonstrate that the statute could not constitutionally be applied to Crutchfield itself; that would be a necessary predicate for showing that the statute is unconstitutional in all its applications. See Harrold v. Collier, 107 Ohio St.3d 44, 2005-Ohio-5334, 836 N.E.2d 1165, ¶ 37 (“A facial challenge to a statute is the most difficult to bring successfully because the challenger must establish that there exists no set of circumstances under which the statute would be valid”).
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The CAT Statute Manifests Clear Legislative Intent to Impose the CAT Based on the $500,000 Sales-Receipts Threshold {¶ 19} Crutchfield argues that the CAT statute may be construed and applied to avoid the constitutional infirmity that it raises here, but these arguments do not withstand close scrutiny. {¶ 20} First, Crutchfield argues that this court should strictly construe “doing business” under R.C. 5751.02(A) to avoid the constitutional infirmity, by holding that Crutchfield’s lack of physical presence means that it was not “doing business” in Ohio. But “doing business” is defined in R.C. 5751.02(A) solely for the purpose of establishing that “privilege of doing business,” the incidence of the tax, broadly includes profit-seeking activities. Interpreting the term “doing business” to exclude situations in which there is no physical presence simply would not be consistent with the broad intent reflected in the language of the provision. {¶ 21} Moreover, after defining “doing business,” R.C. 5751.02(A) proceeds to explicitly impose the tax on “persons with substantial nexus,” which includes, under R.C. 5751.01(I)(3), those persons who satisfy the $500,000 sales- receipts threshold. Thus, far from avoiding the constitutional infirmity, the “doing business” language of R.C. 5751.02(A) invites the constitutional challenge to be considered on its own terms. {¶ 22} Crutchfield asserts that the tax commissioner’s interpretation of R.C. 5751.02(A) “read[s] out of the statute [its] primary, in-state activities requirement.” But the statute speaks of taxing “the privilege of doing business in this state” without stating an “in-state activities requirement,” much less any reference to the additional requirement of physical presence within the state. Nor is there any ambiguity to be interpreted in Crutchfield’s favor in this section; the reference to a “physical presence” requirement is unambiguously absent, and the
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insistence that the tax is imposed on persons based on the $500,000 sales-receipts threshold is unambiguously incorporated by reference. {¶ 23} Second, Crutchfield contends that former R.C. 5751.01(F)(2)(jj) (now (F)(2)(ll)) should be construed to preempt imposition of the CAT based on the $500,000 sales-receipts threshold. That provision states that “ ‘[g]ross receipts’ excludes * * * [a]ny receipts for which the tax imposed by this chapter is prohibited by the constitution or laws of the United States or the constitution of this state.” According to Crutchfield, the “only reasonable interpretation of the exclusion is that the General Assembly wished to avoid conflict with all limitations on the State’s authority to impose a tax measured by gross receipts, including restrictions arising under the substantial nexus requirement of the dormant Commerce Clause.” {¶ 24} We disagree. The proposed interpretation is irreconcilable with the insistence in R.C. 5751.02(A) that the “[p]ersons on which the commercial activity tax is levied include, but are not limited to, persons with substantial nexus with this state.” (Emphasis added.) This language invokes by reference the $500,000 sales-receipts threshold for imposing the tax as part of the definition of “substantial nexus with this state” under R.C. 5751.01(H), but the language then proceeds to express legislative intent that the tax not even be bound by that expansive definition. This cannot be squared with attributing to the legislature an intent to acquiesce in the substantial-nexus/physical-presence test that Crutchfield advocates here. {¶ 25} Moreover, R.C. 5751.01(F)(2)(ll) excludes receipts from the “gross receipts” definition; it does not create an exception to the statute’s substantial- nexus definition. The exclusion requires the tax commissioner to disregard any receipts that by their character, or the character of the taxpayer itself, are immune
See NLO, Inc. v. Limbach, 66 Ohio St.3d 389, 394, 613 N.E.2d 193 (1993) (“The
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federal Supremacy Clause, Clause 2, Article VI, United States Constitution, prevents the state from taxing the federal government and its instrumentalities”). Under the statute’s definition of “[e]xcluded person,” R.C. 5751.01(E), “the state and its agencies, instrumentalities, or political subdivisions” are not subject to the CAT, R.C. 5751.01(E)(8), but the definition makes no mention of the federal government and its instrumentalities. As a result, it is the gross-receipts exclusion at R.C. 5751.01(F)(2)(ll) that removes the federal government and its instrumentalities from the operation of the CAT. It is unnecessary to find additional legislative purposes for the provision. {¶ 26} For the foregoing reasons, we reject Crutchfield’s statutory challenges to the CAT assessments. “Substantial Nexus” Does Not Require a Taxable “Local Incident” {¶ 27} Our analysis of this appeal under the Commerce Clause begins with a “before and after” view of the case law. The pivot point is Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977), which altered how the dormant Commerce Clause interacts with a state’s taxing powers. {¶ 28} Before Complete Auto, we characterized the United States Supreme Court case law as “enigmatic,” embodying “[a]t the opposite ends of the conceptual spectrum * * * two competing * * * propositions that (1) a state may not levy a tax for the privilege of engaging in interstate commerce * * * and (2) interstate commerce must pay its way in relation to the immediate benefits and protections afforded it by the state.” United Air Lines, Inc. v. Porterfield, 28 Ohio St.2d 97, 102, 276 N.E.2d 629 (1971). Whatever other effect it had, Complete Auto abolished the first of these two principles by embracing the doctrine of those cases in which the high court had “rejected the proposition that interstate commerce is immune from state taxation.” Complete Auto at 288. {¶ 29} In place of the old conceptual framework, the high court articulated the now familiar four-prong test, under which a state tax is valid if is “applied to
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an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.” Id. at 279. It is, of course, the requirement of a substantial nexus that is at issue in this appeal. {¶ 30} The main flaw in Crutchfield’s argument lies in its reliance on case law that embodies the since-discarded theory of interstate-commerce immunity from state taxation. Namely, Crutchfield cites cases in which a taxable “local incident” was required as a predicate for state taxation, because the privilege of engaging in interstate commerce was regarded as immune from state taxation. See also Freeman v. Hewit, 329 U.S. 249, 252, 254, 67 S.Ct. 274, 91 L.Ed. 265 (1946) (“by its own force,” the dormant Commerce Clause “created an area of trade free from interference by the States,” with the result that the Commerce Clause barred “a levy upon the very process of commerce across State lines”); Spector Motor Serv., Inc. v. O’Connor, 340 U.S. 602, 608, 71 S.Ct. 508, 95 L.Ed. 573 (1951) (invalidating tax that was “placed unequivocally upon the corporation’s franchise for the privilege of carrying on exclusively interstate transportation in the state”). Crutchfield then equates the taxable “local incident” required in earlier cases with “substantial nexus” under Complete Auto. {¶ 31} Crutchfield relies in particular on Norton Co. v. Dept. of Revenue, 340 U.S. 534, 71 S.Ct. 377, 95 L.Ed. 517 (1951). In Norton, a Massachusetts manufacturer had a Chicago office through which it made sales in Illinois; it separately engaged in a purely mail-order business in which in-state customers mailed an order to Massachusetts that was then filled by mailing the ordered items back to Illinois. Illinois assessed a retail-business tax measured by gross receipts against the manufacturer, which protested that it was engaged in interstate
{¶ 32} On appeal, the Supreme Court noted that the state statute exempted “ ‘business in interstate commerce’ as required by the Constitution.” Id. at 535-
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distinguish those transactions involving purely mail-order business; once identified, those transactions would be held immune from the state tax. Id. at 539. The linchpin of the court’s analysis is instructive: Where a corporation chooses to stay at home in all respects except to send abroad advertising or drummers to solicit orders which are sent directly to the home office for acceptance, filling, and delivery back to the buyer, it is obvious that the State of the buyer has no local grip on the seller. Unless some local incident
the vendor is not taxable. McLeod v. [J.E.] Dilworth Co., 322 U.S. 327 [64 S.Ct. 1023, 88 L.Ed. 1304 (1944)]. Of course, a state imposing a sales or use tax can more easily meet this burden, because the impact of those taxes is on the local buyer or user. Cases involving them are not controlling here, for this tax falls on the vendor. (Emphasis added.) Norton at 537. {¶ 33} At first blush, this passage could be mistaken for a statement about the substantiality of nexus, and that is precisely the error that Crutchfield makes. Read in context, however, the passage does not at all comment on “substantial nexus”; instead, it reflects the interstate-commerce-immunity theory, whereby the sales made by or through local agents in the state—such as the purchases in Ohio
{¶ 34} Crutchfield maintains that the local incident in a case like Norton equates to the substantial-nexus requirement of the Complete Auto test. That is
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privilege of engaging in interstate commerce, and the Supreme Court’s articulation of the substantial-nexus test was not intended to resurrect it. {¶ 35} Essentially, the same is true for the other pre-Complete Auto cases cited and relied upon by Crutchfield. In Standard Pressed Steel Co. v. Washington Dept. of Revenue, 419 U.S. 560, 562-563, 95 S.Ct. 706, 42 L.Ed.2d 719 (1975), the high court rejected the proposed analogy to Norton on the grounds that Norton presented the questions whether the in-state activity related to the interstate aspect of the business and whether the taxpayer had to prove the absence of such a relationship in order to “establish[ ] its immunity” from state taxation; by contrast, Standard Pressed Steel had an employee “with a full-time job within the State” that consisted of maintaining the seller’s relationship with its in-state customer, Boeing. In Gen. Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1964), the high court invoked the proposition as “ ‘beyond dispute * * * that a state may not lay a tax on the “privilege” of engaging in interstate commerce.’ ” Id. at 446, quoting Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458, 79 S.Ct. 357, 3 L.Ed.2d 421 (1959). But the court then distinguished the facts before it as involving taxation of the “in-state activities” performed by “out-of-state personnel”; though maintaining no office in the state, General Motors employees nonetheless regularly performed substantial services within the state to maintain dealer
{¶ 36} In Field Ents., Inc. v. Washington, 47 Wash.2d 852, 289 P.2d 1010 (1955), summarily aff’d, 352 U.S. 806, 77 S.Ct. 55, 1 L.Ed.2d 39 (1956), a Delaware corporation published World Book Encyclopedia and Childcraft; it maintained a Seattle office, where its representative took orders that were then filled outside the state with books mailed directly to the customers. The case was decided on the Commerce Clause ground that the in-state activity was sufficient,
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so that Washington’s business tax was not being laid on the privilege of engaging in interstate commerce. Although the interstate-commerce-immunity rationale does not appear on the face of the decision, it is manifest in its reliance on the earlier decision in B.F. Goodrich Co. v. State, 38 Wash.2d 663, 231 P.2d 325 (1951), which—although not itself explicitly mentioning interstate-commerce immunity—exhibits its adherence to the doctrine by its reliance on the United States Supreme Court’s decision in Norton. Quill Does Not Apply to Business-Privilege Taxes, Whether Measured by Income or by Receipts {¶ 37} The proper focal point of discussion of the physical-presence standard in the case law is Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). That is so because Quill explicitly considers the substantial-nexus prong of the Commerce Clause test in light of the change in that test effected by Complete Auto and finds the need for a physical presence under the circumstances presented in Quill. {¶ 38} Quill involved a challenge to the typical state-law requirement that
sales or use taxes3 incurred by in-state buyers when they ordered items for delivery into the state. In Quill, North Dakota imposed the administrative
regular or systematic solicitation of a consumer market in th[e] state.’ ” Id. at 302-303, quoting N.D.Century Code 57-40.2-01(6). The law thereby swept within its ambit mail-order firms that solicited business through advertising within the state. Id. at 303. When Quill resisted, a trial court upheld its position against
3 “As a corollary to its sales tax, North Dakota imposes a use tax upon property purchased forstorage, use, or consumption within the State.” Quill at 302; accord Proctor & Gamble Co. v. Lindley, 17 Ohio St.3d 71, 73, 477 N.E.2d 1109 (1985) (“R.C. 5739.02 imposes an excise tax on each retail sale made in Ohio, with R.C. 5741.02 imposing a complementary excise tax on the use
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the state on the authority of Natl. Bellas Hess, Inc. v. Dept. of Revenue of State of Illinois, 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967), which had held that requiring a Missouri mail-order business to collect the Illinois use tax violated due-process and Commerce Clause standards. The state supreme court reversed, allowing imposition of the collection responsibility on Quill. {¶ 39} On appeal, the United States Supreme Court reversed. First, the high court rejected the due-process ground of the Bellas Hess holding, concluding that the activity by which North Dakota sought to impose the obligation constituted purposeful availment of the state’s benefits and protections. Quill at 307-308. As for the Commerce Clause ground, however, the Quill court reaffirmed the holding of Bellas Hess and prohibited North Dakota’s imposition
{¶ 40} With respect to Commerce Clause case law, the court in Quill discerned that the substantial-nexus test carried forward the limitation, set forth in Bellas Hess, that out-of-state sellers could incur use-tax compliance obligations based only on physical presence in the state, Bellas Hess at 758 (distinguishing “between mail order sellers with retail outlets, solicitors, or property within a State, and those who do no more than communicate with customers in the State by mail or common carrier as part of a general interstate business”). Quill at 311- 313. {¶ 41} The Supreme Court had concluded in Bellas Hess that this continued limitation was justified by the burdens imposed on interstate commerce by multiple jurisdictions imposing use taxes with differing rates, exemptions, and record-keeping requirements. Bellas Hess at 759-760. In Quill, the court noted that the “settled expectations” of mail-order sellers arising from Bellas Hess may have facilitated such interstate business and that the physical-presence rule was therefore worth preserving. 504 U.S. at 316, 112 S.Ct. 1904, 119 L.Ed.2d 91.
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{¶ 42} We hold today that although a physical presence in the state may furnish a sufficient basis for finding a substantial nexus, Quill’s holding that physical presence is a necessary condition for imposing the tax obligation does not apply to a business-privilege tax such as the CAT, as long as the privilege tax is imposed with an adequate quantitative standard that ensures that the taxpayer’s nexus with the state is substantial. Here, that quantitative standard is the $500,000 sales-receipts threshold. {¶ 43} We discern the basis for our holding in Quill itself and the related United States Supreme Court precedents. First, Quill contains two passages that indicate that the physical-presence standard has not been articulated as a nexus requirement in the business-privilege-tax situation. In rejecting North Dakota’s argument that the court had eschewed such a “bright-line test” as physical presence, the Supreme Court conceded that “we have not, in our review of other types of taxes, articulated the same physical-presence requirement that Bellas Hess established for sales and use taxes”; the court then stated that “that silence does not imply repudiation of the Bellas Hess rule.” Quill at 314. The contrast was drawn even more trenchantly in the concluding passage of the opinion, in which the court noted that “our cases subsequent to Bellas Hess and concerning
requirement”; the court then observed that “our reasoning in those cases does not compel that we now reject the rule that Bellas Hess established in the area of sales and use taxes.” (Emphasis added.) Quill at 317. {¶ 44} Second, the case law post-Complete Auto establishes that for purposes of applying the four-prong Commerce Clause test, business-privilege taxes should be distinguished from transaction taxes such as the sales and use tax. In Oklahoma Tax Comm. v. Jefferson Lines, Inc., 514 U.S. 175, 115 S.Ct. 1331, 131 L.Ed.2d 261 (1995), a Minnesota bus company had collected and remitted the Oklahoma sales tax on transportation services for trips within Oklahoma but not
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for trips originating in Oklahoma and terminating outside the state. In bankruptcy proceedings, the state attempted to collect the unremitted tax through a vendor assessment; there, the state confronted a Commerce Clause defense. One aspect
apportioned to apply only to mileage within Oklahoma itself, see Cent. Greyhound Lines, Inc. v. Mealey, 334 U.S. 653, 68 S.Ct. 1260, 92 L.Ed. 1633 (1948) (holding unconstitutional an unapportioned tax on gross receipts of company that sold tickets for interstate bus travel). {¶ 45} The United States Supreme Court rejected that position, relying principally on the different identities of the taxpayer: the interstate seller of the bus ticket, on whom a gross-receipts tax is imposed, and the in-state purchaser of the ticket, on whom a sales tax is imposed. The high court stated: [Central Greyhound and Jefferson Lines] involve the identical services, and apportionment by mileage per State is equally feasible in each. But the two diverge crucially in the identity of the taxpayers and the consequent opportunities that are understood to exist for multiple taxation of the same taxpayer. Central Greyhound did not rest simply on the mathematical and administrative feasibility of a mileage apportionment, but on the Court’s express understanding that the seller-taxpayer was exposed to taxation by New Jersey and Pennsylvania on portions of the same receipts that New York was taxing in their entirety. The Court thus understood the gross receipts tax to be simply a variety
the location of the various interstate activities by which it was earned.
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(Emphasis added.) Jefferson Lines at 190. Accord Comptroller of Treasury of Maryland v. Wynne, ___ U.S. ___, 135 S.Ct. 1787, 1795, 191 L.Ed.2d 813 (2015) (seeing “no reason why the distinction between gross receipts and net income should matter” in evaluating Commerce Clause challenge to imposition of a state tax). {¶ 46} Thus, Jefferson Lines puts the United States Supreme Court on record that for purposes of applying the Complete Auto test, a gross-receipts tax
category as an income tax on that same seller—whereas the sales tax on the in- state purchaser occupies a different category. That reasoning tracks the background and purpose of Ohio’s CAT, which, enacted to replace the former corporate-franchise tax, is imposed on the privilege of engaging in income- producing activity but is measured by gross receipts instead of income. See Navistar, Inc. v. Testa, 143 Ohio St.3d 460, 2015-Ohio-3283, 39 N.E.3d 509, ¶ 1, 8; Beaver Excavating Co. v. Testa, 134 Ohio St.3d 565, 2012-Ohio-5776, 983 N.E.2d 1317, ¶ 23-24. {¶ 47} Under these precepts, we follow our own lead along with that of most state courts that, post-Quill, have explicitly rejected the extension of the Quill physical-presence standard to taxes on, or measured by, income. See Couchot v. State Lottery Comm., 74 Ohio St.3d 417, 425, 659 N.E.2d 1225 (1996) (“There is no indication in Quill that the Supreme Court will extend the physical- presence requirement to cases involving taxation measured by income derived from the state”); Capital One Bank v. Commr. of Revenue, 453 Mass. 1, 13, 899 N.E.2d 76 (2009) (declining to “expand the [United States Supreme] Court’s reasoning [in Quill] beyond its articulated boundaries” and upholding imposition
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Supreme Court has not extended the physical presence requirement beyond the realm of sales and use taxes”); KFC Corp. v. Iowa Dept. of Revenue, 792 N.W.2d 308, 328 (Iowa 2010) (“We * * * doubt that the United States Supreme Court would extend the ‘physical presence’ rule outside the sales and use context of Quill”). But see J.C. Penney Natl. Bank v. Johnson, 19 S.W.3d 831, 839 (Tenn.App.1999), in which an intermediate appellate court, rejecting the state’s argument that Quill did not apply, overruled the imposition of the state’s franchise and excise taxes on a bank in relation to the servicing of credit cards issued to Tennessee residents, on the ground that the bank had no offices or agents in the state.4 {¶ 48} We recognize that Crutchfield seeks to take refuge in a handful of state court decisions addressing gross-receipts taxes, but we find that those decisions are unavailing for reasons we discuss in the next section. Under Tyler Pipe, Physical Presence Is a Sufficient but not Necessary Condition for Imposing a Business-Privilege Tax {¶ 49} We are now in a position to fully address Crutchfield’s argument that “[f]or more than 50 years, in a series of cases decided both before and after Complete Auto, the Supreme Court has made clear that a state’s authority to impose a tax measured by gross receipts depends upon the taxpayer conducting business activities within the state that assist the company to develop and maintain a market there.” At oral argument, although Crutchfield stated that it was not arguing that the Quill standard per se applies to a privilege tax, it nonetheless invited us to read Tyler Pipe Industries, Inc. v. Washington State
has noted that the case involves a net-income tax, Michael T. Fatale, State Tax Jurisdiction and the Mythical “Physical Presence” Constitutional Standard, 54 Tax Lawyer 105, 139 (Fall 2000).
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recognizing a “very similar” type of physical-presence standard in the privilege- tax context. {¶ 50} We disagree. The most accurate characterization of Tyler Pipe, and one that is fully consistent with Complete Auto and with the Quill court’s own reading of the case law, is that a taxpayer’s physical presence in a state constitutes a sufficient basis for the state to impose a business-privilege tax. We conclude that in construing Tyler Pipe, it is unwarranted to leap from the principle that physical presence is a sufficient condition for imposing a tax to the logically distinct proposition that physical presence is a necessary condition to impose the tax.5 And as discussed, although Quill recognized physical presence as a necessary condition for imposing the obligation to collect use taxes, that requirement does not extend to business-privilege taxes as a general matter. {¶ 51} This conclusion derives from not just Tyler Pipe but also the state court decisions addressing gross-receipts taxes: in each case, a physical presence was found that in turn furnished a sufficient condition for upholding the imposition of the state tax. Koch Fuels, Inc. v. Clark, 676 A.2d 330, 334 (R.I. 1996) (noting that the taxpayer “shipped approximately 25.6 million gallons of oil into Rhode Island” over which it “retained title, possession and risk of loss * * * up until the point it reached the flange in Providence”); Saudi Refining, Inc. v.
“a significantly greater presence in Delaware than [the taxpayer in Koch Fuels]
5 Crutchfield seizes upon a passage that the United States Supreme Court quoted from the statesupreme court decision to bolster its claim: “ ‘[T]he crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.’ ” Tyler Pipe at 250, quoting Tyler Pipe Industries, Inc. v. State Dept. of Revenue, 105 Wash.2d 318, 323, 715 P.2d 123 (1986). But this passage does not, contrary to Crutchfield’s suggestion, articulate a constitutional standard for nexus; instead, it states the state-law standard embodied in the pertinent state nexus regulation. See Tyler Pipe, 105 Wash.2d at 233, 715 P.2d 123, citing Wash.Adm.Code 458-20-193B. The constitutional holding is simply that such a connection is sufficient under the Commerce Clause.
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did in Rhode Island”); Ariz. Dept. of Revenue v. O’Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A., 192 Ariz. 200, 206, 963 P.2d 279 (App.1997) (detailing Arizona contacts of Indiana seller, including installation activity of its agents in the state, that would permit imposition of Arizona gross-receipts tax on that seller); Short Bros. (USA), Inc. v. Arlington Cty., 244 Va. 520, 526, 423 S.E.2d 172 (1992) (taxpayer chose the taxing jurisdiction as its place of business and conducted all its revenue-generating operations from that office). Given our reading of the United States Supreme Court cases, there is no reason for us to view those decisions as authority for the proposition that physical presence would have been a necessary condition as well. The $500,000 Sales-Receipts Threshold Adequately Ensures Substantial Nexus for Purposes of Imposing the CAT {¶ 52} The final point of our analysis has been implicit in some of our earlier discussion, but we make it explicit here. We hold that the $500,000 sales- receipts threshold complies with the substantial-nexus requirement of the Complete Auto test. {¶ 53} In so holding, we express our view that the quantitative standard is necessary to make the CAT applicable to a remote seller such as Crutchfield, because the Commerce Clause standard does require the nexus to be “substantial.” This means that in order to render receipts susceptible to taxation by Ohio, the Commerce Clause requires more than the “ ‘definite link’ ” to this state, or the “ ‘purpose[ful] avail[ment]’ ” of Ohio’s protections, that would satisfy due process, Corrigan v. Testa, __ Ohio St.3d __, 2016-Ohio-2805, __ N.E.3d __, ¶ 30, 32, quoting Quill, 504 U.S. at 306, 307, 112 S.Ct. 1904, 119 L.Ed.2d 91. The United States Supreme Court has recently reiterated: By prohibiting States from discriminating against or imposing excessive burdens on interstate commerce without congressional
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approval, [the dormant Commerce Clause] strikes at one of the chief evils that led to the adoption of the Constitution, namely, state tariffs and other laws that burdened interstate commerce. (Emphasis added.) Wynne, ___ U.S. ___, 135 S.Ct. at 1794, 191 L.Ed.3d 813. {¶ 54} In applying the substantial-nexus standard without Quill’s physical- presence requirement, we take recourse to more general principles for applying the Commerce Clause limitation. As a general matter, when a state statute “regulates even-handedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.” Pike v. Bruce Church, 397 U.S. 137, 145-146, 90 S.Ct. 844, 25 L.Ed.2d 174 (1970). Obviously the imposition of the CAT on remote sellers has an effect on interstate commerce, and Ohio must assure that the adverse impact does not become “clearly excessive” in relation to the legitimate exercise of its taxing authority. Were the state to tax all receipts without any regard for the volume of Ohio sales, the CAT could become clearly excessive as to a business with a very small amount of such receipts. The General Assembly has sensibly attempted to foreclose that possibility by setting a minimum sales-receipts threshold. {¶ 55} Crutchfield points out that the number chosen by the General Assembly, $500,000, can be seen as arbitrary to some degree, but no reason is advanced why a higher number ought to have been selected.6 Instead, Crutchfield relies on the physical-presence requirement, which we have determined is not a
6 The $150,000 threshold, which under R.C. 5751.04(B) is the usual amount that triggers the CATregistration requirement, is not at issue in this appeal. Crutchfield has not raised the point, and even assuming that the $150,000 threshold might apply to an out-of-state retailer like Crutchfield, Crutchfield would have no standing to advance such a claim because it accepts the premise that it had receipts in excess of the $500,000 threshold.
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necessary condition here. Although any threshold amount, whether selected by the legislature or the courts, may “seem to reasonable and intelligent persons to represent the drawing of artificial and arbitrary boundaries or lines,” we have recognized that the drawing of such lines is justified for the purpose of defining the legal obligations of the taxpaying public. Powhatan Mining Co. v. Peck, 160 Ohio St. 389, 394, 116 N.E.2d 426 (1953); In re Sears’ Estate, 172 Ohio St. 443, 448, 178 N.E.2d 240 (1961). {¶ 56} We hold that given the $500,000 sales-receipts threshold, the burdens imposed by the CAT on interstate commerce are not “clearly excessive” in relation to the legitimate interest of the state of Ohio in imposing the tax evenhandedly on the sales receipts of in-state and out-of-state sellers. As a result, the tax satisfies the substantial-nexus standard under the dormant Commerce Clause, and we decline to address the tax commissioner’s alternative argument that the physical-presence standard has been satisfied. Conclusion {¶ 57} For the foregoing reasons, we affirm the decision of the BTA and uphold the CAT assessments against Crutchfield. Decision affirmed. O’CONNOR, C.J., and PFEIFER, O’DONNELL, and FRENCH, JJ., concur. KENNEDY, J., dissents, with an opinion joined by LANZINGER, J. _________________ KENNEDY, J., dissenting. {¶ 58} This case is not about the wisdom of imposing a business-privilege tax on Ohio corporations or the constitutionality of the commercial-activity tax (“CAT”) in general. This case is about whether online purchases made by Ohio residents—or even a single Ohio resident—from an out-of-state business create a substantial nexus between that business and Ohio for purposes of the dormant Commerce Clause if the transactions meet the statutory threshold of $500,000 in
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Ohio sales. While I am sympathetic to all Ohio-based businesses that must pay a business-privilege tax such as the CAT, this court nevertheless should follow the law as it exists today. Therefore, I must dissent. {¶ 59} The power to regulate interstate commerce is given to Congress under Article I, Section 8, Clause 3 of the United States Constitution. If Congress is silent—neither preempting nor consenting to state regulation—and a state attempts to regulate in the face of that silence, the United States Supreme Court, going back to Gibbons v. Ogden, 22 U.S. 1, 231-32, 238-39, 6 L.Ed. 23 (1824) (Johnson, J., concurring), has interpreted the Commerce Clause to limit state regulation of interstate commerce through what has come to be known as the dormant Commerce Clause. Accordingly, the Commerce Clause is both an express grant of power to Congress and an implicit limit on the power of state and local government. See Comptroller of the Treasury of Maryland v. Wynne, __ U.S. __, 135 S.Ct. 1787, 1794, 191 L.Ed.2d 813 (2015). {¶ 60} The majority interprets Congress’s silence as authorizing Ohio to tax a corporation based solely on its Internet sales in Ohio when it has no physical presence in the state and the only connection it has with Ohio is Ohioans’ purchases of its products. This reasoning runs counter to the United States Supreme Court’s reasoning in Quill Corp. v. North Dakota, which is the last word from that court on this issue. 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). {¶ 61} While the shifting seats on the high court might present the possibility the court will overturn its past precedents on the dormant Commerce Clause and hold that a business-privilege tax does not violate the dormant Commerce Clause, until that day, we are bound by the court’s prior holdings and by Congress’s inaction on this issue, given its power to regulate interstate
State Dept. of Revenue, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987).
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Therefore, I would remand this matter to the Board of Tax Appeals (“BTA”) for a determination of whether appellant, Crutchfield Corporation, has a physical presence in Ohio under Quill.
{¶ 62} Before delving into the specifics of this case, it is worth summarizing the constitutional framework at issue. Congress has the power to regulate commerce among the states; this includes the power to authorize the states to place burdens on interstate commerce. Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 434, 66 S.Ct. 1142, 90 L.Ed. 1342 (1946). Absent such congressional approval, a state law violates the dormant Commerce Clause if it imposes an undue burden on both out-of-state and local producers engaged in interstate activities or if it treats out-of-state producers less favorably than their local competitors. See, e.g., Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 25 L.Ed.2d 174 (1970); Philadelphia v. New Jersey, 437 U.S. 617, 624, 98 S.Ct. 2531, 57 L.Ed.2d 475 (1978); Granholm v. Heald, 544 U.S. 460, 472, 125 S.Ct. 1885, 161 L.Ed.2d 796 (2005). As we noted earlier this year, the United States Supreme Court has described the purpose of the dormant Commerce Clause as follows: “By prohibiting States from discriminating against or imposing excessive burdens on interstate commerce without congressional approval, [the dormant Commerce Clause] strikes at one of the chief evils that led to the adoption of the Constitution, namely, state tariffs and other laws that burdened interstate commerce.” (Brackets sic.) Corrigan v. Testa, __ Ohio St.3d __, 2016-Ohio-2805, __ N.E.3d __ ¶ 16, quoting Wynne, __ U.S. __, 135 S.Ct. at 1794, 191 L.Ed.2d 813. {¶ 63} The Commerce Clause grants Congress the authority to regulate (1)
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“the use of the channels of interstate commerce,” (2) “the instrumentalities of interstate commerce, or persons or things in interstate commerce, even though the threat may come only from intrastate activities,” and (3) “those activities having a substantial relation to interstate commerce, * * * i.e., those activities that substantially affect interstate commerce.” United States v. Lopez, 514 U.S. 549, 558-559, 115 S.Ct. 1624, 131 L.Ed.2d 626 (1995). Federal circuit courts that have examined the issue agree that the Internet is a “channel” or “instrumentality”
(11th Cir.2003); United States v. Extreme Assocs., Inc., 431 F.3d 150, 161 (3d Cir.2005). {¶ 64} The majority relies on the absence of United States Supreme Court decisions directly on point and treats this case as though it exists in a vacuum. It does not. And the majority’s approach ignores the clues that we do have—all of which point to a business’s physical presence in the state as the lynchpin of a substantial nexus between the business and the state. The most relevant cases are those dealing with sales and use taxes—Quill, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91, is the latest—and a case evaluating a similar gross-receipts tax, Tyler Pipe, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199. In all those cases, the businesses subject to the taxes had a physical presence in the taxing jurisdictions, and the majority should not ignore these cases. {¶ 65} In Quill, the United States Supreme Court reaffirmed the Bellas Hess rule that the physical presence of the business established the necessary substantial nexus with the state when a state sought to impose use-tax-collection duties on mail-order sellers. Quill at 311, citing Natl. Bellas Hess, Inc. v. Illinois
companies in Quill and Bellas Hess were solely mail-order companies that had no in-state physical locations and made contact with the states only by delivering goods through the mail and other common carriers. Quill at 302; Bellas Hess at
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753-754. The Bellas Hess court created a bright-line rule that a state can require an out-of-state mail-order retailer to collect use taxes only when the retailer has a physical presence in the state. Bellas Hess at 757-758. The court noted, however, that the physical presence could be satisfied by local agents, who need not even be regular employees. Id., citing Scripto, Inc. v. Carson, 362 U.S. 207, 80 S.Ct. 619, 4 L.Ed.2d 660 (1960) (ten independent brokers sufficient for state to mandate use-tax collection). Nevertheless, those agents must be physically in the state to provide the substantial nexus necessary to defeat a taxpayer’s Commerce Clause challenge. {¶ 66} In the years after Quill, this court applied Quill, holding that an
establish a substantial nexus with the state because the company did not have a physical presence in Ohio and, therefore, Ohio could not force the out-of-state company to collect use taxes. SFA Folio Collections, Inc. v. Tracy, 73 Ohio St.3d 119, 123, 652 N.E.2d 693 (1995). {¶ 67} I see no evidence that gross-receipts taxes are meaningfully different from use taxes for substantial-nexus purposes, and I view Tyler Pipe’s reliance on physical presence as more indicative of a requirement than an option. That opinion suggests as much by its lack of other nexus-producing details. There, the Supreme Court evaluated a gross-receipts tax (which I view as similar to business-privilege taxes like the CAT—both are measured by gross receipts), specifically concerning the sufficiency of Tyler Pipe’s connection with the state to justify its imposition of the tax on the company’s sales. 483 U.S. at 249-250, 107 S.Ct. 2810, 97 L.Ed.2d 199. The company had no office, property, or employees residing in the state. Id. at 249. Moreover, it manufactured all its pipe products
representative located in the state. Id. That independent contractor (and its salespeople) did enough local work to maintain Tyler Pipe’s market and protect
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its interests that it constituted a sufficient nexus with the state and justified the state’s gross-receipts tax. Id. at 250, citing Scripto at 211. {¶ 68} Nowhere in Tyler Pipe did the Supreme Court indicate that anything less than a third-party contractor operating within a taxing state on a taxpayer’s behalf would satisfy the substantial-nexus requirement established in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). Yet the majority brushes Tyler Pipe aside, concluding that “it is unwarranted to leap from the principle that physical presence is a sufficient condition for imposing a tax to the logically distinct proposition that physical presence is a necessary condition to impose the tax.” (Emphasis sic.) Majority
that physical presence is merely sufficient, not necessary. Absent evidence that an expansion is warranted—and we have none—I will not ignore the mandates of federal constitutional law. {¶ 69} The majority’s reliance on state-court decisions that speculate as to the unlikelihood of the Supreme Court expanding Quill’s physical-presence requirement beyond sales and use taxes is unwarranted. Half of those cases involved physical presence, and the other half fell under a different type of tax that the Supreme Court has not held to require physical presence. To be sure, even this court has speculated about the physical-presence requirement. See Couchot v. State Lottery Comm., 74 Ohio St.3d 417, 425, 659 N.E.2d 1225 (1996). Couchot, however, involved an out-of-state resident who bought an Ohio lottery ticket in Ohio and redeemed it in Columbus. That is quintessential physical-presence-based substantial nexus. In KFC Corp. v. Iowa Dept. of Revenue, a corporation licensed intangible intellectual property for use by its in- state franchisees. 792 N.W.2d 308 (Iowa 2010). Although the corporation lacked property or employees in the state, the Iowa Supreme Court concluded that the franchisees’ physical presence in the state coupled with the value of the
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intangibles sufficiently localized KFC’s income from the franchisees’ transactions in the state such that Iowa could tax it. Id. at 323. In support of this conclusion, the KFC court cited Internatl. Harvester Co. v. Wisconsin Dept. of Taxation, 322 U.S. 435, 441-442, 64 S.Ct. 1060, 88 L.Ed. 1373 (1944) (“A state may tax such part of the income of a non-resident as is fairly attributable * * * to events or transactions which, occurring there, are subject to state regulation and which are within the protection of the state and entitled to the numerous other benefits which it confers”). It is true that Internatl. Harvester was a due-process case, but the Supreme Court rendered that decision at a time when due process and the Commerce Clause were considered coextensive. See id. at 444; Quill, 504 U.S. at 305, 112 S.Ct. 1904, 119 L.Ed.2d 91. {¶ 70} The other two decisions upon which the majority relies in questioning the physical-presence requirement are inapplicable here because they deal with a type of tax specific to banks—financial-institution excise taxes. See Capital One Bank v. Commr. of Revenue, 453 Mass. 1, 899 N.E.2d 76 (2009); MBNA Am. Bank, N.A. v. Indiana Dept. of State Revenue, 895 N.E.2d 140 (Ind.Tax 2008). The Supreme Court has never addressed, much less stated, a physical-presence requirement for financial-institution excise taxes. Therefore, the state courts’ reasoning in these financial-institution-tax cases is not applicable to the case at bar. {¶ 71} Because half of them involve sufficient physical presence and the
{¶ 72} The majority’s citations to state-court decisions addressing gross- receipts taxes are a step in the right direction but provide no sounder a foundation for its decision today. Interestingly, the majority places great weight on the fact that each case involved a physical presence in the state sufficient to uphold
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imposition of the tax. It then somehow reads all these state-court physical- presence cases to mean that “there is no reason for us to view those decisions as authority for the proposition that physical presence would have been a necessary condition as well.” Majority opinion at ¶ 51. That extrapolation is not well founded. {¶ 73} The physical-presence requirement is grounded in the reasoning that the dormant Commerce Clause is designed to prevent regulation and taxation from being an undue burden on interstate commerce. Undue burdens on interstate commerce may be avoided not only by a case-by-case evaluation of the actual burdens imposed by particular regulations or taxes, but also, in some situations, by the demarcation of a discrete realm of commercial activity that is free from interstate taxation. Quill, 504 U.S. at 314-315, 112 S.Ct. 1904, 119 L.Ed.2d 91. This reasoning is not limited to sales and use taxes, and the language of Quill should be applied as written—applying to the “discrete realm of commercial activity” at issue in the case, which was commercial activity involving companies without a physical presence in the taxing state. Id. This reasoning is in line with common sense because these companies should not be forced to comply with Ohio’s CAT based solely on the fact that Ohioans choose to buy products from them. Under the CAT as construed by the majority, a business could be forced to pay Ohio taxes if just one Ohioan spent more than $500,000 on its products. It is easy to imagine an Ohio manufacturing business ordering one machine from an out-of-state business, and that would trigger a requirement for that business to comply with the CAT. The business could have no other connection with the state, but Ohio could drag it into Ohio’s taxing scheme based on one act of interstate commerce.
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This is an undue burden on interstate commerce of the sort that the Quill court was attempting to avoid. {¶ 74} I recognize that Quill might be overturned by the Supreme Court or abrogated by an act of Congress. Only two members of the Quill court remain on the bench—Justices Kennedy and Thomas—and Justice Kennedy has expressed his opinion that the case should be revisited in light of the technological changes caused by the proliferation of online retailers. Direct Marketing Assn. v. Brohl, __ U.S. __, 135 S.Ct. 1124, 1135, 191 L.Ed.2d 97 (2015) (Kennedy, J., concurring) (“Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill”). Nevertheless, Quill is the law of the land, and it must be followed. {¶ 75} Congress could also authorize the states to impose taxes on out-of- state retailers like Crutchfield. In his concurring opinion in Quill, which was joined by Justices Kennedy and Thomas, Justice Scalia wisely remarked that whatever constitutional rule the court fashioned based on the dormant Commerce Clause was subject to revision by Congress: “Congress has the final say over regulation of interstate commerce * * *. We have long recognized that the doctrine of stare decisis has ‘special force’ where ‘Congress remains free to alter what we have done.’ ” Quill at 320 (Scalia, J., concurring), quoting Patterson v. McLean Credit Union, 491 U.S. 164, 172-173, 109 S.Ct. 2363, 105 L.Ed.2d 132 (1989). Proposed legislation is pending in Congress that would abrogate the Quill rule and permit states to require online retailers to collect sales taxes. See Marketplace Fairness Act of 2015, S.698, 114th Congress (introduced in Senate
commerce to ensure that there is an equal playing field between in-state and out-
{¶ 76} Currently, Ohio responds to this gap in taxation by imposing the use tax on purchases that are not subject to sales tax. See R.C. 5741.12(B).
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Ohioans are asked to voluntarily report on line 12 of the personal-income-tax Form 1040 the amount of out-of-state purchases made over the Internet that are not subject to sales tax. Ohio Department of Taxation, 2015 Universal IT 1040 Individual Income Tax Return, http://www.tax.ohio.gov/Portals/0/forms /ohio_individual/individual/2015/PIT_IT1040.pdf (accessed Oct. 21, 2016). If Ohioans report out-of-state purchases, they must pay a use tax at a rate equal to the sales-tax rate in their county. Ohio Department of Taxation, Ohio 2015 Instructions for Filing Personal Income Tax 17, http://www.tax.ohio.gov/portals/0/forms/ohio_individual/individual/2015/PIT_IT 1040_Booklet.pdf (accessed Oct. 21, 2016). Just as it would require an act of Congress to require out-of-state retailers to collect sales taxes, federal legislation is necessary before Ohio can impose the CAT on out-of-state businesses. It is not the role of this court to bless a state’s attempt to regulate interstate commerce through a taxing scheme just because Congress has been silent. {¶ 77} I understand and am sympathetic to the arguments made by amici curiae Ohio Manufacturers’ Association, Ohio State Medical Association, Ohio Dental Association, and Ohio Chemistry Technology Council because “they have a critical and substantial interest in ensuring that this tax is applied fairly and equitably.” However, the desire to “fairly” apply the CAT to out-of-state companies cannot supersede binding United States Supreme Court precedent, see Complete Auto Transit, 430 U.S. at 274, 97 S.Ct. 1076, 51 L.Ed.2d 326, and Quill, 504 U.S. at 298, 112 S.Ct. 1904, 119 L.Ed.2d 91. I disagree with amici curiae when they state that none of the Supreme Court’s decisions “state that a physical presence was the sine qua none [sic] for finding that a substantial nexus existed.” As stated above, the reasoning that the Supreme Court used in Quill and Tyler Pipe to determine whether a substantial nexus exists between an out-of-state business and a taxing state turns on whether or not the out-of-state business has a physical presence in the taxing state.
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{¶ 78} As for the BTA’s assertion that Crutchfield’s computerized connections with Ohio consumers constitutes physical presence in this state, the BTA never made a factual determination that Crutchfield has a physical presence in Ohio. On the contrary, the BTA concluded that “under the plain language set forth therein, the pertinent CAT statutes do not impose such an in-state presence requirement.” Since it did not believe that in-state physical presence was a requirement, the BTA did not make a finding as to Crutchfield’s in-state presence. “The BTA is responsible for determining factual issues * * *.” Vandalia-Butler City Schools Bd. of Edn. v. Montgomery Cty. Bd. of Revision, 130 Ohio St.3d 291, 2011-Ohio-5078, 958 N.E.2d 131, ¶ 12. In my view, it is the BTA’s responsibility to evaluate the evidence and make a factual determination whether Crutchfield has a physical presence in Ohio.
{¶ 79} While I am sympathetic to Ohio-based businesses that are forced to pay a business-privilege tax such as the CAT, I nevertheless must follow the law as it is exists today. The power to regulate interstate commerce rests exclusively with Congress under Article I, Section 8, Clause 3 of the United States
a state’s ability to tax an out-of-state business depends on a substantial nexus created by a physical presence, Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91; see also Tyler Pipe Industries, Inc. v. Washington State Dept. of Revenue, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199, I must
presence under Quill. LANZINGER, J., concurs in the foregoing opinion. _________________
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Brann & Isaacson, Martin I. Eisenstein, David W. Bertoni, and Matthew
appellee. Michael DeWine, Attorney General, and Daniel W. Fausey and Christine Mesirow, Assistant Attorneys General, for appellee and cross-appellant. Macey, Wilenski & Hennings, L.L.C., and Peter G. Stathopoulos; and Robert Alt, urging reversal for amici curiae Buckeye Institute for Public Policy Solutions, Mackinac Center for Public Policy, NetChoice, and American Catalog Mailers Association, Inc. Fredrick Nicely and Nikki Dobay, urging reversal for amicus curiae Council on State Taxation. Goldstein & Russell, P.C., Eric F. Citron, and Thomas C. Goldstein, urging affirmance for amici curiae National Governors Association, National Conference of State Legislatures, Council of State Governments, National Association of Counties, National League of Cities, U.S. Conference of Mayors, International City/County Management Association, International Municipal Lawyers Association, and Government Finance Officers Association. Bricker & Eckler, L.L.P., Mark A. Engel, and Anne Marie Sferra, urging affirmance for amici curiae Ohio Manufacturers’ Association, Ohio State Medical Association, Ohio Dental Association, and Ohio Chemistry Technology Council. Bruce Fort, urging affirmance for amicus curiae Multistate Tax Commission. _________________
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Mason Cos., Inc. v. Testa, Slip Opinion No. 2016-Ohio-7768.]
NOTICE This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or other formal errors in the opinion, in order that corrections may be made before the opinion is published. SLIP OPINION NO. 2016-OHIO-7768 MASON COMPANIES, INC., APPELLANT AND CROSS-APPELLEE, v. TESTA, TAX COMMR., APPELLEE AND CROSS-APPELLANT. [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Mason Cos., Inc. v. Testa, Slip Opinion No. 2016-Ohio-7768.] Commercial-activity tax—Commerce Clause—Physical presence of an interstate business within Ohio is not a necessary condition for imposing the
(No. 2015-0794—Submitted May 3, 2016—Decided November 17, 2016.) APPEAL and CROSS-APPEAL from the Board of Tax Appeals, Nos. 2012-1169 and 2012-2806. ____________________ O’NEILL, J. {¶ 1} We decide this case as a companion case to Crutchfield Corp. v. Testa, __ Ohio St.3d __, 2016-Ohio-7760, __ N.E.3d __, with which this case was consolidated for purposes of oral argument. Appellant and cross-appellee, Mason Companies, Inc., is based in Wisconsin, and it appeals from the imposition of
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Ohio’s commercial-activity tax (“CAT”) on revenue it has earned from its sales of goods through orders received via telephone, mail, and the Internet. Like Crutchfield, Mason Companies contests its CAT assessments because it operates
{¶ 2} The 24 assessments at issue here cover the period from July 1, 2005, through September 30, 2011. In determining that our holding in Crutchfield requires us to affirm these assessments, we rely on Mason Companies’ decision to restrict its protest to the imposition of the tax, while not contesting the amounts of tax assessed, to conclude that Mason Companies satisfied the $500,000 sales- receipts threshold, triggering its CAT liability during that period. See R.C. 5751.01(H)(3) and (I)(3). Mason Companies, however, asserts that Ohio’s CAT violates the Commerce Clause of the United States Constitution and that therefore Ohio had no authority to tax any of those receipts. {¶ 3} Just as in Crutchfield, we first confront a cross-appeal by the tax commissioner concerning whether Mason Companies properly raised and preserved its constitutional challenge. The circumstances of the present case being no different from those in Crutchfield, we resolve the cross-appeal against the tax commissioner’s position on the authority of Crutchfield. Similarly, we rely on Crutchfield to reject Mason Companies’ contentions that the CAT statutes should be construed to preclude the assessments at issue in this appeal. {¶ 4} In Crutchfield, we held that under the Commerce Clause, the physical presence of an interstate business within Ohio was not a necessary condition for imposing the obligations of the CAT law, given that the $500,000 sales-receipts threshold adequately assured that the taxpayer’s nexus with Ohio was substantial pursuant to R.C. 5751.01(H)(3) and (I)(3). Crutchfield Corp., __ Ohio St.3d __, 2016-Ohio-7760, __ N.E.3d __, ¶ 3, 5. Applying that holding here resolves Mason Companies’ constitutional challenge under the Commerce Clause. It also makes
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unnecessary consideration of whether Mason Companies’ Internet contacts with its Ohio customers constituted a physical presence for Commerce Clause purposes. {¶ 5} For the foregoing reasons, we affirm the decision of the BTA and uphold the CAT assessments against Mason Companies. Decision affirmed. O’CONNOR, C.J., and PFEIFER, O’DONNELL, and FRENCH, JJ., concur. LANZINGER and KENNEDY, JJ., dissent and would reverse the decision of the Board of Tax Appeals for the reasons stated in the dissenting opinion in 2015- 0386, Crutchfield v. Testa. _________________ Brann & Isaacson, Martin I. Eisenstein, and David W. Berton; and Baker Hostetler and Edward J. Bernert, for appellant and cross-appellee. Michael DeWine, Attorney General, and Daniel W. Fausey and Christine Mesirow, Assistant Attorneys General, for appellee and cross-appellant. Macey, Wilenski & Hennings, L.L.C., and Peter G. Stathopoulos; and Robert Alt, urging reversal for amici curiae Buckeye Institute for Public Policy Solutions, Mackinac Center for Public Policy, NetChoice, and American Catalog Mailers Association, Inc. Fredrick Nicely and Nikki Dobay, urging reversal for amicus curiae Council
Goldstein & Russell, P.C., Eric F. Citron, and Thomas C. Goldstein, urging affirmance for amici curiae National Governors Association, National Conference
Counties, National League of Cities, U.S. Conference of Mayors, International City/County Management Association, International Municipal Lawyers Association, and Government Finance Officers Association.
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Bricker & Eckler, L.L.P., Mark A. Engel, and Anne Marie Sferra, urging affirmance for amici curiae Ohio Manufacturers’ Association, Ohio State Medical Association, Ohio Dental Association, and Ohio Chemistry Technology Council. Bruce Fort, urging affirmance for amicus curiae Multistate Tax Commission. _________________
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Newegg, Inc. v. Testa, Slip Opinion No. 2016-Ohio-7762.]
NOTICE This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or other formal errors in the opinion, in order that corrections may be made before the opinion is published. SLIP OPINION NO. 2016-OHIO-7762 NEWEGG, INC., APPELLANT AND CROSS-APPELLEE, v. TESTA, TAX COMMR., APPELLEE AND CROSS-APPELLANT. [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Newegg, Inc. v. Testa, Slip Opinion No. 2016-Ohio-7762.] Commercial-activity tax—Commerce Clause—Physical presence of an interstate business within Ohio is not a necessary condition for imposing the
(No. 2015-0483—Submitted May 3, 2016—Decided November 17, 2016.) APPEAL and CROSS-APPEAL from the Board of Tax Appeals, No. 2012-0234. ____________________ O’NEILL, J. {¶ 1} We decide this case as a companion case to Crutchfield Corp. v. Testa, __ Ohio St.3d __, 2016-Ohio-7760, __ N.E.3d __, with which this case was consolidated for purposes of oral argument. According to the tax commissioner’s final determination, appellant and cross-appellee, Newegg, Inc., is “the second largest on-line only retailer in the United States selling information technology and
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computer electronics products.” Orders are filled from processing centers in California and New Jersey. Newegg appeals from the imposition of Ohio’s commercial-activity tax (“CAT”) on revenue it has earned from sales of computer- related products that it ships into the state of Ohio. Like Crutchfield, Newegg contests its CAT assessments based on Newegg’s being operated outside Ohio, employing no personnel in Ohio, and maintaining no facilities in Ohio. {¶ 2} The six assessments at issue here cover the period from July 1, 2005, through a first-quarter 2011 estimate. In determining that our holding in Crutchfield requires us to affirm the assessments at issue here, we rely on the stipulation that “Newegg does not contest the amounts of actual and estimated Ohio gross receipts” on which the assessments are based. For tax years 2005 through 2009, Newegg stipulated to receipts of $272,289,269, which formed the basis for CAT assessments totaling $447,580 for that period. The receipts for 2010 through March 2011 were estimated at nearly $20 million per quarter, and Newegg stipulated to those amounts also. Consequently, Newegg satisfied the $500,000 sales-receipts threshold, triggering its CAT liability during that period. See R.C. 5751.01(H)(3) and (I)(3). Newegg, however, asserts that Ohio’s CAT violates the Commerce Clause of the United States Constitution and that therefore Ohio had no authority to tax any of those receipts. {¶ 3} Just as in Crutchfield, we first confront a cross-appeal by the tax commissioner concerning whether Newegg properly raised and preserved its constitutional challenge. The circumstances of the present case being no different from those in Crutchfield, we resolve the cross-appeal against the tax commissioner’s position on the authority of Crutchfield. Similarly, we rely on Crutchfield to reject Newegg’s contentions that the CAT statutes should be construed to preclude the assessments at issue in this appeal. {¶ 4} In Crutchfield, we held that under the Commerce Clause, the physical presence of an interstate business within Ohio is not a necessary condition for
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imposing the obligations of the CAT law, given that the $500,000 sales-receipts threshold adequately assures that the taxpayer’s nexus with Ohio is substantial pursuant to R.C. 5751.01(H)(3) and (I)(3). Crutchfield Corp., __ Ohio St.3d __, 2016-Ohio-7760, __ N.E.3d __, ¶ 3, 5. Applying that holding here resolves Newegg’s constitutional challenge under the Commerce Clause. It also makes unnecessary consideration of whether Newegg’s Internet contacts with its Ohio customers constituted a physical presence for Commerce Clause purposes. {¶ 5} For the foregoing reasons, we affirm the decision of the BTA and uphold the CAT assessments against Newegg. Decision affirmed. O’CONNOR, C.J., and PFEIFER, O’DONNELL, and FRENCH, JJ., concur. LANZINGER and KENNEDY, JJ., dissent and would reverse the decision of the Board of Tax Appeals for the reasons stated in the dissenting opinion in 2015- 0386, Crutchfield v. Testa. _________________ Brann & Isaacson, Martin I. Eisenstein, David W. Bertoni, and Matthew P. Schaefer; and Baker Hostetler and Edward J. Bernert, for appellant and cross- appellee. Michael DeWine, Attorney General, and Daniel W. Fausey and Christine Mesirow, Assistant Attorneys General, for appellee and cross-appellant. Macey, Wilenski & Hennings, L.L.C., and Peter G. Stathopoulos; and Robert Alt, urging reversal for amici curiae Buckeye Institute for Public Policy Solutions, Mackinac Center for Public Policy, NetChoice, and American Catalog Mailers Association, Inc. Fredrick Nicely and Nikki Dobay, urging reversal for amicus curiae Council
Goldstein & Russell, P.C., Eric F. Citron, and Thomas C. Goldstein, urging affirmance for amici curiae National Governors Association, National Conference
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Counties, National League of Cities, U.S. Conference of Mayors, International City/County Management Association, International Municipal Lawyers Association, and Government Finance Officers Association. Bricker & Eckler, L.L.P., Mark A. Engel, and Anne Marie Sferra, urging affirmance for amici curiae Ohio Manufacturers’ Association, Ohio State Medical Association, Ohio Dental Association, and Ohio Chemistry Technology Council. Bruce Fort, urging affirmance for amicus curiae Multistate Tax Commission. _________________
PUBLISH UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT _________________________________ DIRECT MARKETING ASSOCIATION, The Plaintiff - Appellee, v. BARBARA BROHL, in her capacity as Executive Director, Colorado Department
Defendant - Appellant, and MULTISTATE TAX COMMISSION; INTERESTED LAW PROFESSORS; THE RETAIL INDUSTRY LEADERS ASSOCIATION; RETAIL LITIGATION CENTER, INC.; COLORADO RETAIL COUNCIL; NATIONAL GOVERNORS ASSOCIATION; NATIONAL CONFERENCE OF STATE LEGISLATURES; COUNCIL OF STATE GOVERNMENTS; NATIONAL ASSOCIATION OF COUNTIES; NATIONAL LEAGUE OF CITIES; UNITED STATES CONFERENCE OF MAYORS; INTERNATIONAL CITY/COUNTY MANAGEMENT ASSOCIATION; INTERNATIONAL LAWYERS ASSOCIATION; GOVERNMENT FINANCE OFFICERS ASSOCIATION; TAX FOUNDATION, Amicus Curiae.
FILED United States Court of Appeals Tenth Circuit
February 22, 2016
Elisabeth A. Shumaker Clerk of Court Appellate Case: 12-1175 Document: 01019574558 Date Filed: 02/22/2016 Page: 1
_________________________________ APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO (D.C. NO. 1:10-CV-01546-REB-CBS) _________________________________ Frederick R. Yarger, Solicitor General (Cynthia H. Coffman, Attorney General, Stephanie Lindquist Scoville, Senior Assistant Attorney General, Grant T. Sullivan, Assistant Solicitor General, Claudia Brett Goldin, First Assistant Attorney General, Daniel D. Domenico, Solicitor General, and Melanie J. Snyder, Chief of Staff, with him
Colorado, appearing for Defendant-Appellant. George S. Isaacson (Matthew P. Schaefer, with him on the briefs), Brann & Isaacson, Lewiston, Maine, appearing for Plaintiff-Appellee. Darien Shanske, University of California, Davis School of Law, Davis, California, Kirk J. Stark, University of California, Los Angeles, School of Law, Los Angeles, California, and Alan B. Morrison, George Washington University School of Law, Washington, DC, for Amicus Curiae Interested Law Professors. Lisa Soronen, Executive Director, State & Local Legal Center, Washington, DC, and Ronald A. Parsons, Jr., Johnson, Abdallah, Bollweg & Parsons, LLP, Sioux Falls, South Dakota, for Amicus Curiae National Governors Association, National Conference of State Legislatures, Council of State Governments, National Association of Counties, National League of Cities, United States Conference of Mayors, International City/County Management Association, International Municipal Lawyers Association, and Government Finance Officers Association. Helen Hecht, Lila Disque, and Sheldon Laskin, Multistate Tax Commission, Washington, DC, for Amicus Curiae Multistate Tax Commission. Deborah White, Retail Industry Leaders Association and Retail Litigation Center, Arlington, Virginia; Tom Goldstein and Eric Citron, Goldstein & Russell, P.C., Bethesda Maryland, for Amicus Curiae Retail Industry Leaders Association, Retail Litigation Center, Inc. and Colorado Retail Council. Joseph D. Henchman, Tax Foundation, Washington, DC, and Joseph P. Kennedy, Kennedy Kennedy & Ives, LLC, Albuquerque, New Mexico, for Amicus Curiae Tax Foundation. _________________________________
Appellate Case: 12-1175 Document: 01019574558 Date Filed: 02/22/2016 Page: 2
Before BRISCOE, GORSUCH, and MATHESON, Circuit Judges. _________________________________ MATHESON, Circuit Judge. _________________________________
When a neighborhood bookstore in Denver sells a book, it must collect sales tax from the buyer and remit that payment to the Colorado Department of Revenue (“Department”). When Barnes & Noble sells a book over the Internet to a Colorado buyer, it must collect sales tax from the buyer and remit. But when Amazon sells a book
situation is largely the product of the Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which held that, under the dormant Commerce Clause doctrine, a state may not require a retailer having no physical presence in that state—e.g., Amazon as opposed to Barnes & Noble—to collect and remit sales tax on the sales it makes there. Faced with Quill, many states, including Colorado, rely on purchasers themselves to calculate and pay a use tax on their purchases from out-of-state retailers that do not collect sales tax. But few in Colorado or elsewhere pay the use tax despite their legal
1 The parties dispute the precise rate of non-compliance. As the Department
points out, the 75% compliance rate that DMA cites encompasses both sales and use taxes on all Internet sales, including those by retailers with a physical presence that must collect taxes. It reports the compliance rate on remote retail sales with no collection Continued . . .
Appellate Case: 12-1175 Document: 01019574558 Date Filed: 02/22/2016 Page: 3
compel out-of-state retailers to collect sales tax has cost state and local governments significant revenue and disadvantaged in-state retailers, who must collect sales tax at the point of sale. Justice Kennedy recently said this “may well be a serious, continuing injustice faced by Colorado and many other States.” Direct Mktg. Ass’n v. Brohl (“Brohl II”), 135 S. Ct. 1124, 1134 (2015) (Kennedy, J., concurring). In 2010, Colorado attempted to address use tax non-compliance by enacting a law (“Colorado Law”) that imposes notice and reporting obligations on retailers that do not collect sales tax. Plaintiff-Appellee Direct Marketing Association (“DMA”)—a group of businesses and organizations that market products via catalogs, advertisements, broadcast media, and the Internet—has challenged this law as violating the dormant Commerce Clause. DMA argues the Colorado Law unconstitutionally discriminates against and unduly burdens interstate commerce. The district court agreed with both arguments, granted summary judgment to DMA, and permanently enjoined the Department from enforcing the Colorado Law. See Direct Mktg. Ass’n v. Huber, No. 10-cv-01546-REB-
Brief of National Governors Ass’n et al. as Amici Curiae in Support of Defendant- Appellant Supporting Reversal at 10, Direct Mktg. Ass’n v. Brohl, No. 12-1175 (10th Cir. argued Sept. 29, 2015) (estimating household use-tax compliance at 0-5%, excluding motor vehicle purchases). As the Department notes, any figure in the record would be significantly lower than the 98.3% compliance rate for sales taxes.
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CBS, 2012 WL 1079175, at *10-11 (D. Colo. Mar. 30, 2012). Defendant-Appellant Barbara Brohl, Executive Director of the Department, appeals.2 We have jurisdiction under 28 U.S.C. § 1291. We reverse because the Colorado Law does not discriminate against nor does it unduly burden interstate commerce.
Colorado has imposed a sales tax since 1935 and a use tax since 1937. The taxes are complementary. The sales tax is paid at the point of sale and the use tax is paid when property is stored, used, or consumed within Colorado but sales tax was not paid to a
tax system under the dormant Commerce Clause, the Supreme Court described it as follows: The practical effect of a system thus conditioned is readily perceived. One
compete upon terms of equality with retail dealers in other states who are exempt from a sales tax or any corresponding burden. Another effect, or at least another tendency, must be to avoid the likelihood of a drain upon the revenues of the state, buyers being no longer tempted to place their orders in other states in the effort to escape payment of the tax on local sales. Henneford v. Silas Mason Co., 300 U.S. 577, 581 (1937). The methods for collecting sales and use taxes vary. In-state retailers subject to sales tax collection are tasked with assorted requirements—for example, obtaining a
2 When this lawsuit was filed in district court, the executive director was Roxy
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license, calculating state and local taxes, accounting for exemptions, collecting the tax, filing a return, remitting the tax to the state, and keeping certain records. In-state retailers are also liable for any sales taxes they do not collect and may be subject to fines or criminal penalties for non-compliance. Because Colorado cannot compel out-of-state retailers without a physical presence in the state to collect taxes, the state requires purchasers themselves to calculate and remit use taxes on their purchases from out-of-state retailers. The regimes differ greatly in effectiveness—compliance with the sales tax is extremely high, and compliance with the use tax is extremely low. To assist the state in collecting use tax from in-state purchasers, most seemingly unaware of their tax responsibility,3 the Colorado legislature passed a law in 2010 that imposes three obligations on retailers that do not collect sales taxes—“non-collecting retailers”4: (1) to send a “transactional notice” to purchasers informing them that they may be subject to Colorado’s use tax, see Colo. Rev. Stat. § 39-21-112(3.5)(c)(I); 1 Colo.
3 See David Gamage & Devin J. Heckman, A Better Way Forward for State
Taxation of E-Commerce, 92 B.U. L. Rev. 483, 489 (2012).
4 A “non-collecting retailer” is defined as “a retailer that sells goods to Colorado
purchasers and that does not collect Colorado sales or use tax.” 1 Colo. Code Regs. § 201-1:39-21-112.3.5(1)(a)(i). Retailers who made less than $100,000 in total gross sales in Colorado in the previous calendar year, and who reasonably expect gross sales in the current calendar year to be less than $100,000, are exempt from the notice and reporting obligations. Id. § 201-1:39-21-112.3.5(1)(a)(iii).
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Code Regs. § 201-1:39-21-112.3.5(2);5 (2) to send Colorado purchasers who buy goods from the retailer totaling more than $500 an “annual purchase summary” with the dates, categories, and amounts of purchases, reminding them of their obligation to pay use taxes
1:39-21-112.3.5(3); and (3) to send the Department an annual “customer information report” listing their customers’ names, addresses, and total amounts spent, Colo. Rev.
Department.
DMA filed a facial challenge to the Colorado Law in federal district court in 2010. Among other claims,6 it contended that the Colorado Law violates the dormant Commerce Clause because it discriminates against and unduly burdens interstate commerce. On March 30, 2012, the district court granted summary judgment to DMA on both
Department from enforcing the Colorado Law. Id.
5 The transactional notice requirement can be satisfied in various ways, including
an online pop-up window, a packing slip, or other methods.
6 DMA originally brought eight claims for relief, including First and Fourteenth
Amendment challenges, but its motion for summary judgment included only the two dormant Commerce Clause challenges. We are presented only with those challenges on this appeal.
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On August 20, 2013, this panel held that the district court lacked jurisdiction to hear DMA’s challenge under the Tax Injunction Act (“TIA”). See Direct Mktg. Ass’n v. Brohl (“Brohl I”), 735 F.3d 904, 906 (10th Cir. 2013); 28 U.S.C. § 1341. We remanded the case to the district court to dismiss DMA’s claims and dissolve the permanent
On December 10, 2013, the district court dismissed DMA’s claims and dissolved the permanent injunction. Shortly thereafter, it dismissed the remainder of DMA’s eight claims without prejudice. DMA then sued the Department in state court. It also petitioned for certiorari to the Supreme Court, seeking review of the Tenth Circuit’s dismissal of its claims based on the TIA. On February 18, 2014, the state district court preliminarily enjoined enforcement
interstate commerce in violation of the dormant Commerce Clause. Direct Mktg. Ass’n v.
(unpublished). It rejected DMA’s argument that the Colorado Law placed an undue burden on interstate commerce, declining to extend Quill’s holding regarding tax collection to regulatory measures. Id. at 24-30. On July 1, 2014, the Supreme Court granted DMA’s petition for certiorari. In response to this development, the Colorado state court stayed its proceedings and did not resolve the parties’ cross-motions for summary judgment. On March 3, 2015, the
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Supreme Court held the TIA did not strip the federal courts of jurisdiction to hear DMA’s challenge and reversed Brohl I. Brohl II, 135 S. Ct. at 1131. It remanded the case for further proceedings. In the wake of Brohl II’s determination that the TIA’s jurisdictional bar is inapplicable, we are now squarely presented with the two dormant Commerce Clause challenges decided by the federal district court before our decision in Brohl I. The parties have submitted supplemental briefs, and we heard oral argument on September 29, 2015.
Our discussion proceeds in three parts. First, we present an overview of the dormant Commerce Clause doctrine. Second, we analyze the bright-line rule recognized in Quill and determine it is limited to tax collection. Third, we review DMA’s dormant Commerce Clause claims and conclude the Colorado Law does not discriminate against
7 In Brohl II, the Supreme Court noted this court’s discussion of the “comity
doctrine” in Brohl I and left “it to the Tenth Circuit to decide on remand whether the comity argument remains available to Colorado.” 135 S. Ct. at 1134. The Department argues “this Court should not dismiss this case based on comity. Consistent with U.S. Supreme Court precedent, the Department has affirmatively waived reliance on the comity doctrine.” Aplt. Supp. Br. at 23. DMA agrees. Aplee. Supp. Br. at 59. On this non-jurisdictional prudential matter, we do not dismiss this case on comity grounds.
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The Constitution does not contain a provision called the dormant Commerce Clause.8 The doctrine derives from Article I, Section 8, Clause 3—the Commerce Clause itself—which provides that “Congress shall have [the] power . . . [t]o regulate commerce . . . among the several States.” As to matters within the scope of the Commerce Clause power, Congress may choose to regulate, thereby preempting the states from doing so, see Gade v. Nat’l Solid Wastes Mgmt. Ass’n, 505 U.S. 88, 96-98 (1992); Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947), or to authorize the states to regulate, see In re Raher, 140 U.S. 545, 555-56 (1891); Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 429- 31 (1946). If Congress is silent—neither preempting nor consenting to state regulation—and a state attempts to regulate in the face of that silence, the Supreme Court, going back to Gibbons v. Ogden, 22 (9 Wheat) U.S. 1, 231-32, 238-39 (1824) (Johnson, J., concurring), and Cooley v. Bd. of Port Wardens, 53 U.S. (12 How.) 299, 318-19 (1851), has interpreted the Commerce Clause to limit state regulation of interstate commerce by applying the negative implications of the Commerce Clause—“these great silences of the Constitution,” H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525, 535 (1949); see White
Commerce Clause is both an express grant of power to Congress and an implicit limit on
8 Nowhere does the Constitution explicitly limit state interference with interstate
commerce except very specific limitations in Article I, Section 10, which prevent states from coining money or imposing duties on exports and imports.
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the power of state and local government. See Comptroller of the Treasury of Md. v. Wynne, 135 S. Ct. 1787, 1794 (2015); Kleinsmith v. Shurtleff, 571 F.3d 1033, 1039 (10th
The focus of a dormant Commerce Clause challenge is whether a state law improperly interferes with interstate commerce. The primary concern is economic
(quotations omitted) (“Th[e] ‘negative’ aspect of the Commerce Clause prohibits economic protectionism—that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.”); City of Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978) (“The crucial inquiry, therefore, must be directed to determining whether [a state law] is basically a protectionist measure, or whether it can fairly be viewed as a law directed to legitimate local concerns, with effects upon interstate commerce that are only incidental.”); Kleinsmith, 571 F.3d at 1039 (“The Supreme Court’s jurisprudence under the dormant Commerce Clause ‘is driven by concern about economic protectionism.’” (quoting Dep’t of Revenue of Ky. v. Davis, 553 U.S. 328, 337-38 (2008)). As to the state regulation at issue in this case, up to now Congress has been silent—it has not preempted or consented to the Colorado Law.9 The question then is
9 As DMA has noted in its supplemental brief, “since the parties first filed their
briefs in this case in 2012, Congress has increased its already active scrutiny of the issue.” Aplee. Supp. Br. at 50.
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whether the Constitution’s affirmative grant of the commerce power to Congress should be interpreted to circumscribe the Colorado Law. The judiciary’s answer to this question need not be final. If we uphold the law, Congress can pass its own law and preempt the Colorado Law. Or if we decide the law is unconstitutional under the dormant Commerce Clause doctrine, Congress can enact legislation authorizing Colorado to do what we have struck down. In that sense, the judicial decision determines which party would need to go to Congress to seek a different result. The Supreme Court has produced an extensive body of dormant Commerce Clause case law.10 As a general matter, state regulation that discriminates against interstate commerce will survive constitutional challenge only if the state shows “it advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.” Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 581 (1997) (quotations omitted). The Court has “required that justifications for discriminatory restrictions on commerce pass the ‘strictest scrutiny.’”
Nondiscriminatory state laws also can be invalidated when they impose an undue burden on interstate commerce. See Bibb v. Navajo Freight Lines, Inc., 359 U.S. 520, 529 (1959). “Where the statute regulates even-handedly to effectuate a legitimate local
10 A WestLawNext search of “Dormant Commerce Clause” on February 9, 2016,
produced a list of 56 United States Supreme Court decisions.
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public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.” Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970). “State laws frequently survive this Pike scrutiny . . . .” Davis, 553 U.S. at 339.11 Finally, the Supreme Court has adapted its dormant Commerce Clause jurisprudence to review state taxes on interstate commerce. In Complete Auto Transit,
activity is constitutional if it “[1] is applied to an activity with a substantial nexus with the taxing State, [2] is fairly apportioned, [3] does not discriminate against interstate commerce, and [4] is fairly related to the services provided by the State.” Id. at 279. As discussed more fully below, Complete Auto does not apply here because this case involves a reporting requirement and not a tax.
The outcome of this case turns largely on the scope of Quill. We conclude it applies narrowly to sales and use tax collection. The following discussion explains how we arrive at this conclusion, which affects both DMA’s claim for discrimination and for undue burden.
11 In Energy & Env’t Legal Inst. v. Epel, 793 F.3d 1169, 1172 (10th Cir. 2015),
dormant Commerce Clause cases: those involving “certain price control and price affirmation laws that control ‘extraterritorial’ conduct.” This category does not apply to this appeal.
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In National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753 (1967), the Supreme Court addressed whether Illinois could require a Delaware-based mail-order business with no physical presence in Illinois to pay use taxes on sales to Illinois
common carrier and U.S. mail. Id. at 754. The Court concluded that such a requirement violated the Commerce Clause. In Quill, the Supreme Court revisited the holding of Bellas Hess. The Court addressed whether North Dakota could “require an out-of-state mail-order house that has neither outlets nor sales representatives in the State to collect and pay a use tax on goods purchased for use within the State.” 504 U.S. at 301. Quill sold office supplies “through catalogs and flyers, advertisements in national periodicals, and telephone calls.” Id. at
constitutional because “the tremendous social, economic, commercial, and legal innovations of the past quarter-century have rendered” the holding of Bellas Hess “obsolete.” Id. (quotations omitted). The Supreme Court disagreed.12 In Quill, the Supreme Court applied the four-part test from Complete Auto Transit, 430 U.S. at 279. The test focuses on a statute’s “practical effect” rather than its “formal
12 The Court did overrule Bellas Hess on a separate issue. Bellas Hess had held
that the Illinois use tax requirement had violated due process principles. The Quill court held that, “to the extent that our decisions have indicated that the Due Process Clause requires physical presence in a State for the imposition of duty to collect a use tax, we
U.S. at 308.
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language,” and, as noted above, sustains a tax under the dormant Commerce Clause when the tax: (1) “is applied to an activity with a substantial nexus with the taxing State,” (2) “is fairly apportioned,” (3) “does not discriminate against interstate commerce,” and (4) “is fairly related to the services provided by the State.” Id. The Court decided Quill based on the first step of the Complete Auto test. 504 U.S. at 311-15.13 It determined the dormant Commerce Clause and Bellas Hess create a safe harbor wherein “vendors whose
States mail . . . are free from state-imposed duties to collect sales and use taxes.” Id. at 315 (quotations and brackets omitted). The Quill Court relied on Bellas Hess to make a stare decisis decision that recognized the physical presence rule as a “bright-line” test. Id. at 314-18. In Brohl II, the Supreme Court characterized Quill as establishing the principle that a state “may not require retailers who lack a physical presence in the State to collect these taxes on behalf of the [state].” 135 S. Ct. at 1127 (emphasis added). Justice Kennedy’s concurrence in Brohl II, 135 S. Ct. at 1135, echoed the numerous commentators who have criticized Quill’s bright-line physical presence test.14 Even
13 The Court did not address whether the North Dakota use tax violated the third
step of the Complete Auto test, which asks whether a state tax discriminates against interstate commerce.
14 See, e.g., H. Beau Baez III, The Rush to the Goblin Market: The Blurring of
Quill’s Two Nexus Tests, 29 Seattle U. L. Rev. 581, 581-82 (2006); Walter Hellerstein, Deconstructing the Debate Over State Taxation of Electronic Commerce, 13 Harv. J.L. &
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though the Supreme Court has not overruled Quill, it has not extended the physical presence rule beyond the realm of sales and use tax collection. This court’s discussion in American Target Advertising, Inc. v. Giani is instructive
Both Bellas Hess and Quill concern the levy of taxes upon out-of-state
preserving Bellas Hess’ bright-line rule ‘in the area of sales and use taxes.’ The Utah Act imposes licensing and registration requirements, not tax
199 F.3d 1241, 1255 (10th Cir. 2000) (quoting Quill, 504 U.S. at 316) (citations
15 Other circuits have recognized that Quill is limited to state taxes. See Sam
Francis Found. v. Christies, Inc., 784 F.3d 1320, 1324 (9th Cir. 2015); Ferndale Labs.,
Moreover, the weight of state authority limits Quill’s physical presence requirement to sales and use taxes, as opposed to other kinds of taxes. See, e.g., Lamtec
“[t]here is also extensive language in Quill that suggests the physical presence requirement should be restricted to sales and use taxes” as opposed to business and
2010) (“[W]e hold that a physical presence is not required under the dormant Commerce Clause of the United States Constitution in order for the Iowa legislature to impose an income tax on revenue earned by an out-of-state corporation arising from the use of its intangibles by franchisees located within the State of Iowa.”); Geoffrey, Inc. v. Comm’r
decision in Quill discussed a ‘physical-presence’ requirement under the commerce clause
MBNA Am. Bank, N.A., 640 S.E.2d 226, 232 (W. Va. 2006) (“[W]e conclude that Quill’s physical-presence requirement for showing a substantial Commerce Clause nexus applies
taxes.”); Lanco, Inc. v. Dir., Div. of Taxation, 908 A.2d 176, 176-77 (N.J. 2006) (concluding Quill does not prohibit a state from imposing a corporation business tax on physically non-present businesses); Geoffrey, Inc. v. S.C. Tax Comm’n, 437 S.E.2d 13, 18 Continued . . .
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DMA argues the Supreme Court has cited Quill in three cases reviewing state laws that did not impose a tax collection obligation, but these decisions merely describe points
Tankers, Inc. v. City of Valdez, 557 U.S. 1, 11 (2009) (invoking Quill’s due process analysis in a Tonnage Clause case to support the assertion that “a nondomiciliary jurisdiction may constitutionally tax property when that property has a substantial nexus with that jurisdiction, and such a nexus is established when the taxpayer avails itself of the substantial privilege of carrying on business in that jurisdiction” (quotations
(invoking Quill to support the proposition that “[t]he Commerce Clause and the Due Process Clause impose distinct but parallel limitations on a State’s power to tax out-of- state activities,” then relying on Quill’s due process holding); Camps Newfound/Owatonna, Inc., 520 U.S. at 572 n.8 (citing Quill in a string-cite for the & n.4 (S.C. 1993) (concluding the physical-presence requirement of Bellas Hess and Quill applies only to sales and use taxes). But see J.C. Penney Nat’l Bank v. Johnson, 19 S.W.3d 831, 839 (Tenn. Ct. App. 1999) (“Any constitutional distinctions between the franchise and excise taxes presented here and the use taxes contemplated in Bellas Hess and Quill are not within the purview of this court to discern.”). These cases generally interpret Quill to apply exclusively to sales and use taxes for two reasons relevant here. First, they emphasize the language in Quill itself, which stated “we have not, in our review of other types of taxes, articulated the same physical- presence requirement that Bellas Hess established for sales and use taxes.” 504 U.S. at
industry’s reliance on Bellas Hess—a reliance interest absent in the context of other
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proposition that Congress may “repudiate or substantially modify” Commerce Clause jurisprudence). None of the foregoing cases actually invokes Quill’s dormant Commerce Clause analysis—only its due process analysis and discussion of congressional authority—and they do not demonstrate that Quill extends beyond the actual collection of taxes by out-
extended beyond that context. In sum, we conclude Quill applies narrowly to and has not been extended beyond tax collection. The district court erred in holding otherwise. In the following section, we address how this conclusion affects DMA’s claims.
The district court granted summary judgment on two grounds: the Colorado Law (1) impermissibly discriminates against and (2) unduly burdens interstate commerce. As to both grounds, we review a district court’s grant of summary judgment de novo, evaluating the evidence “in the light most favorable to the non-moving party.” Sabourin
review challenges to the constitutionality of a statute de novo. Shivwits Band of Paiute Indians v. Utah, 428 F.3d 966, 972 (10th Cir. 2005). When, as here, the target of state regulation alleges discrimination and undue burden, the analysis proceeds as follows: When a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over
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further inquiry. When, however, a statute has only indirect effects on interstate commerce and regulates evenhandedly, we have examined whether the State’s interest is legitimate and whether the burden on interstate commerce clearly exceeds the local benefits. . . . In either situation the critical consideration is the overall effect of the statute on both local and interstate activity. Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573, 579 (1986) (citations omitted).
We turn first to DMA’s discrimination claim. A state law generally violates the dormant Commerce Clause if it discriminates—either on its face or in its practical effects—against interstate commerce. Hughes, 441 U.S. at 336.
The district court determined the Colorado Law discriminates against interstate commerce in violation of the Commerce Clause. It determined that “the Act and the Regulations directly regulate and discriminate against out-of-state retailers and, therefore, interstate commerce.” Huber, 2012 WL 1079175, at *4.16 It noted that under state law,
16 The district court stopped short of saying the law was facially discriminatory,
noting: On their face the Act and the Regulations do not distinguish between in- state retailers (those with a physical presence—a brick and mortar presence—in the state) and out-of-state retailers (those with no physical presence in the state who make sales to customers in the state). Rather, the Act focuses on the distinction between retailers who collect Colorado sales tax and those who do not collect Colorado sales tax. Id.
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“all retailers doing business in Colorado and selling to Colorado purchasers must obtain a sales tax license and must collect and remit the sales tax applicable to each sale,” id. (citing Colo. Rev. Stat. §§ 39-26-103, -104, -106, -204), and face civil and criminal penalties for non-compliance, id. (citing Colo. Rev. Stat. §§ 39-21-118(2), 39-26- 103(1)(a), (4)). It further noted that Quill precludes the state from imposing these requirements and penalties on out-of-state retailers without a physical presence in
The district court recognized that, although the Colorado Law refers only to “any retailer that does not collect Colorado sales tax,” Colo. Rev. Stat. § 39-21-112, the combination of state law and Quill guarantees that this provision applies only to out-of- state retailers. Huber, 2012 WL 1079175, at *4-5. The court concluded, “the veil provided by the words of the Act and the Regulations is too thin to support the conclusion that the Act and the Regulations regulate in-state and out-of-state retailers even- handedly.” Id. at *4. Although the Department pointed out that some out-of-state retailers voluntarily collect and remit Colorado sales tax and therefore are not subject to the Colorado Law, the district court determined the Department “may not condition an out-of-state retailer’s reliance on its rights on a requirement that the retailer accept a different burden, particularly when that burden is unique to out-of-state retailers.” Id. (citing Bendix Autolite Corp. v. Midwesco Enters., Inc., 486 U.S. 888, 893 (1988)). The district court therefore subjected the law to strict scrutiny, at which stage “the burden falls on the State to justify [the statute] both in terms of the local benefits flowing
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from the statute and the unavailability of nondiscriminatory alternatives adequate to preserve the local interests at stake.” Id. at *6 (quoting Hughes, 441 U.S. at 336). The court briefly canvassed the interests identified by the Department and the proposed non- discriminatory alternatives identified by DMA, and ultimately concluded “[t]he record contains essentially no evidence to show that the legitimate interests advanced by the defendant cannot be served adequately by reasonable nondiscriminatory alternatives.” Id. The court concluded the Department failed to carry its burden on the discrimination analysis and granted summary judgment to DMA. Id. at *7.
A statute may discriminate against interstate commerce on its face or in practical effect. See C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383, 402 (1994). “The burden to show discrimination rests on the party challenging the validity of the statute . . . .” Hughes, 441 U.S. at 336. If the party challenging the state law meets its burden to show that the statute is discriminatory, the law “is virtually per se invalid.” Or. Waste, 511 U.S. at 99. When the Colorado Law is properly viewed in its factual and legal context, DMA has not carried its burden of showing discrimination against interstate commerce. We consider: (1) whether the Colorado Law facially discriminates against interstate commerce, and (2) whether the Colorado Law’s direct effect is to favor in-state economic interests over out-of-state interests.
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Commerce The Colorado Law is not facially discriminatory. It applies to certain retailers that sell goods to Colorado purchasers but do not collect Colorado sales or use taxes. Colo.
its face, the law does not distinguish between in-state and out-of-state economic interests. It instead imposes differential treatment based on whether the retailer collects Colorado sales or use taxes. Some out-of-state retailers are collecting retailers, some are not. Although the title of the statute—An Act Concerning the Collection of Sales and Use Taxes on Sales Made by Out-Of-State Retailers—mentions out-of-state retailers, the Supreme Court has cautioned that “[t]he title of a statute cannot limit the plain meaning
ambiguous word or phrase.” Pa. Dep’t of Corr. v. Yeskey, 524 U.S. 206, 212 (1998) (quotations and alterations omitted). Here, the words of the statute are not ambiguous. The text refers to “[e]ach retailer that does not collect Colorado sales tax,” which distinguishes between those entities that collect Colorado sales tax and those that do not. See Colo. Rev. Stat. §§ 39-21-112(c)(I), (d)(I)(A), (II)(A). We will not rely on the statute’s title to limit the plain meaning of the text. Moreover, when the Supreme Court has concluded a law facially discriminates against interstate commerce, it has done so based on statutory language explicitly identifying geographical distinctions. See, e.g., General Motors Corp. v. Tracy, 519 U.S. 278, 307 n.15 (1997) (“[I]f a State discriminates against out-of-state interests by drawing
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geographical distinctions between entities that are otherwise similarly situated, such facial discrimination will be subject to a high level of judicial scrutiny even if it is directed toward a legitimate health and safety goal.”). For example, the Court said the statute at issue in Oregon Waste was facially discriminatory because it imposed a higher surcharge on disposal of solid waste “generated out-of-state” than solid waste generated in-state. 511 U.S. at 96, 99-100. The Colorado Law makes no such geographic
a statute did not facially discriminate by prohibiting producers or refiners of petroleum products from operating retail service stations in Maryland, even though no producers or refiners were located in the state); Hunt v. Wash. State Apple Advert. Comm’n, 432 U.S. 333, 352 (1977) (finding facially neutral a law requiring “all closed containers of apples sold, offered for sale, or shipped into the State bear no grade other than the applicable U.S. grade or standard” (quotations omitted)). As explained above, the Colorado Law distinguishes between those retailers that collect Colorado sales and use tax and those that do not.17
17 DMA contends the Colorado Law fails the internal consistency test. The test
“looks to the structure of the tax at issue to see whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate.” Comptroller of Treasury of Md. v. Wynne, 135 S. Ct. 1787, 1802 (2015) (quotations omitted). The test has been confined to dormant Commerce Clause review of state taxes. It is therefore inapplicable here because, again, the Colorado Law imposes a reporting requirement, not a tax.
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In the absence of facial discrimination, a state law may nonetheless discriminate against interstate commerce in its direct effects. See Kleinsmith, 571 F.3d at 1040 (noting a law “may be neutral in its terms and still discriminate against interstate commerce”); Hunt, 432 U.S. at 350-52. We therefore next consider the direct effects of the Colorado Law.
A state law may violate the dormant Commerce Clause “when its effect is to favor in-state economic interests over out-of-state interests.” Brown-Forman, 476 U.S. at 579. In this inquiry, “the critical consideration is the overall effect of the statute on both local and interstate activity.” Id. We conclude the Colorado Law does not favor in-state economic interests and is not discriminatory in its effects. We have previously said, “‘The Supreme Court has not directly spoken to the question of what showing is required to prove discriminatory effect where, as here, a statute is evenhanded on its face,” Kleinsmith, 571 F.3d at 1040 (quoting Cherry Hill Vineyard, LLC v. Baldacci, 505 F.3d 28, 36 (1st Cir. 2007)). But we have held “the party claiming discrimination has the burden to put on evidence of a discriminatory effect on commerce that is ‘significantly probative, not merely colorable.’” Id. at 1040-41 (quoting All. of Auto Mfrs. v. Gwadosky, 430 F.3d 30, 40 (1st Cir. 2005)). The party claiming discrimination must show that the state law benefits local actors and burdens
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and out-of-state firms.” Id. at 1041 (quotations omitted).18 1) DMA’s arguments on differential treatment As a preliminary matter, DMA is incorrect that (a) “any differential treatment” between in-state and out-of-state entities establishes a violation of the dormant Commerce Clause, and (b) the Colorado Law should be viewed in isolation. Three principles are instructive. First, the Supreme Court has repeatedly indicated that differential treatment must adversely affect interstate commerce to the benefit of intrastate commerce to trigger dormant Commerce Clause concerns. In that regard, “‘discrimination’ simply means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.” Or. Waste, 511 U.S. at 99; Kleinsmith, 571 F.3d at 1040 (“Discriminatory laws are those that ‘mandate differential treatment of in-state and out-
Granholm v. Heald, 544 U.S. 460, 472 (2005)). For that reason, differential treatment that benefits or does not affect out-of-state interests is not a violation of the dormant Commerce Clause. North Dakota v. United States, 495 U.S. 423, 439 (1990) (“A
18 In Kleinsmith, we determined the plaintiff had not presented evidence sufficient
to establish a discriminatory effect because he had failed to show how the state law at issue “alters the competitive balance between resident and nonresident attorneys.” Id. at
work he had performed was now being done by attorneys who are residents of Utah.” Id. at 1043. DMA bears a similar burden here.
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regulatory regime which so favors the Federal Government cannot be considered to discriminate against it.”). In light of the Colorado consumers’ preexisting obligations to pay sales or use taxes whether they purchase goods from a collecting or non-collecting retailer, the reporting obligation itself does not give in-state retailers a competitive advantage. We further note the Supreme Court has upheld differential tax reporting obligations and apportionment formulas for non-resident corporations, see, e.g., Underwood Typewriter
Tax Bd., 463 U.S. 159, 169-70 (1983), and administrative mechanisms to facilitate tax collection, see, e.g., Travis v. Yale & Towne Mfg. Co., 252 U.S. 60 (1920).19 Second, equal treatment requires that those similarly situated be treated alike. See City of Cleburne v. Cleburne Living Ctr., 473 U.S. 432, 439 (1985) (stating that under the Equal Protection Clause, “all persons similarly situated should be treated alike”). Conversely, disparate treatment is not unequal treatment or discrimination if the subjects
applies to whether a state law discriminates against out-of-state actors relative to in-state
upheld an Ohio statute that exempted local natural gas distribution companies (“LDCs”)
19 Although Travis involved a claim under the Privileges and Immunities Clause,
the Supreme Court in Wynne recently relied on Travis to resolve a claim under the Commerce Clause. See Wynne, 135 S. Ct. at 1799-1800 (citing Travis, 252 U.S. at 75, 79-80).
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from sales and use tax while out-of-state producers and marketers had to collect it. Id. at 281-82. The Court said the in-state and out-of-state companies were not similarly situated and did not have to be treated the same. Id. at 298-99, 310. Here, the non- collecting out-of-state retailers are not similarly situated to the in-state retailers, who must comply with tax collection and reporting requirements that are not imposed on the
Third, despite DMA’s myopic view to the contrary, the Supreme Court has repeatedly stressed that laws are not to be understood in isolation, but in their broader
parts of an integrated regulation,” and said it is “the entire program . . . that simultaneously burdens interstate commerce and discriminates in favor of local producers.” 512 U.S. at 201; see also Ala. Dep’t of Revenue v. CSX Transp., Inc. (“CSX II”), 135 S. Ct. 1136, 1143 (2015) (“It is undoubtedly correct that the ‘tax’ (singular) must discriminate—but it does not discriminate unless it treats railroads differently from
U.S. at 435 (“[T]he question whether a state regulation discriminates against the Federal Government cannot be viewed in isolation. Rather, the entire regulatory system should be analyzed to determine whether it is discriminatory with regard to the economic
20 CSX II was not a dormant Commerce Clause case, but in analyzing the 4-R Act,
the Court borrowed from dormant Commerce Clause precedent to explain a law should be assessed in context to determine whether it discriminates. Id. at 1143 (citing Gregg Dyeing Co. v. Query, 286 U.S. 472, 479-80 (1932)).
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burdens that result.” (quotations omitted)); Gregg Dyeing Co. v. Query, 286 U.S. 472, 479-80 (1932) (“What is required is that state action, whether through one agency or another, or through one enactment or more than one, shall be consistent with the restrictions of the Federal Constitution. There is no demand in that Constitution that the state shall put its requirements in any one statute. It may distribute them as it sees fit, if the result, taken in its totality, is within the state’s constitutional power.”). The broader context helps determine whether a law “alters the competitive balance between in-state and out-of-state firms.” Kleinsmith, 571 F.3d at 1041 (quotations
preexisting tax obligations, and apply only to retailers that are not otherwise required to comply with the greater burden of tax collection and reporting. DMA has not shown the Colorado Law imposes a discriminatory economic burden on out-of-state vendors when viewed against the backdrop of the collecting retailers’ tax collection and reporting
analysis to the notice and reporting obligations imposed on collecting and non-collecting vendors, DMA has failed to show the Colorado Law unconstitutionally discriminates against interstate commerce. 2) Quill and discriminatory effect Whether the Colorado Law works a discriminatory effect on interstate commerce turns on the reach of Quill. The Department contends the law is not discriminatory because out-of-state retailers can either (a) comply with the notice and reporting requirements or (b) collect and remit taxes like in-state retailers. DMA contends this
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argument fails because Quill protects out-of-state retailers from having to collect and remit taxes, making the Colorado Law’s only function to impose new notice and reporting responsibilities on out-of-state retailers that in-state retailers need not perform. As an initial matter, we disagree with the Department that out-of-state retailers’ having the option to collect and remit sales taxes makes the Colorado Law non-
presence in the state need not collect sales tax. See Quill, 504 U.S. at 301-02. Quill privileges out-of-state retailers in that regard, and the possibility that they might choose to give up that privilege rather than comply with the challenged Colorado Law does not make the Colorado Law constitutional. Bendix, 486 U.S. at 893. But Quill applies only to the collection of sales and use taxes, and the Colorado Law does not require the collection or remittance of sales and use taxes. Instead, it imposes notice and reporting obligations. Those notice and reporting obligations are discriminatory only if they constitute “differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter,” Or. Waste, 511 U.S. at 99, and thereby “alter[] the competitive balance between in-state and out-of-state firms,” Kleinsmith, 571 F.3d at 1041 (quotations omitted). DMA has not produced significant probative evidence establishing such discriminatory treatment.
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3) Comparative regulation and DMA’s burden Even if we limit our comparative analysis to the regulatory requirements imposed
Law unconstitutionally discriminates against interstate commerce. In addition to collecting sales taxes, holding them in trust, and remaining liable for any sales and use tax due on a transaction, see Colo. Rev. Stat. §§ 39-26-105, -118(1), in- state retailers must comply with numerous requirements, including obtaining a license; calculating the state and local tax due while accounting for any tax exemptions; filing a return; remitting the tax to the State; and maintaining various records. See Colo. Rev.
Of these notice and reporting requirements, in-state retailers can be compelled to collect and remit sales taxes while non-collecting out-of-state retailers cannot. Quill, 504 U.S. at 301-02. But Quill does not establish that out-of-state retailers are free from all regulatory requirements—only tax collection and liability. See id. at 315 (“Under Bellas Hess, . . . vendors [without a physical presence in the state] are free from state-imposed duties to collect sales and use taxes.” (emphasis added)). As the Supreme Court recently explained in CSX II: It does not accord with ordinary English usage to say that a tax discriminates against a rail carrier if a rival who is exempt from that tax must pay another comparable tax from which the rail carrier is exempt. If that were true, both competitors could claim to be disfavored— discriminated against—relative to each other. Our negative Commerce Clause cases endorse the proposition that an additional tax on third parties may justify an otherwise discriminatory tax. We think that an alternative, roughly equivalent tax is one possible justification that renders a tax disparity nondiscriminatory.
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135 S. Ct. at 1143 (citations omitted)); see also Travis, 252 U.S. at 76 (“The contention that an unconstitutional discrimination against noncitizens arises out of the provision of section 366 confining the withholding at source to the income of nonresidents is
nonresidents, but merely recognizes the fact that as to them the state imposes no personal liability, and hence adopts a convenient substitute for it.”). DMA does not point to any evidence establishing that the notice and reporting requirements for non-collecting out-of-state retailers are more burdensome than the regulatory requirements in-state retailers already face. Because DMA has not carried its burden and identified significant probative evidence of discrimination, see Kleinsmith, 571 F.3d at 1040, it has not established that the Colorado Law discriminates in its direct effects. * * * Because we conclude the Colorado Law is not discriminatory, “it is [not] virtually per se invalid,” and it need not survive strict scrutiny. Or. Waste, 511 U.S. at 99. State laws that are not discriminatory must nevertheless not unduly burden interstate
Whether a state law unduly burdens interstate commerce is a separate inquiry from whether a state law discriminates against interstate commerce. In Quill, the Supreme Court explained that the first step of the Complete Auto test—whether a tax “is applied to
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an activity with a substantial nexus with the taxing State”—the step on which the Quill decision was based, “limit[s] the reach of state taxing authority so as to ensure that state taxation does not unduly burden interstate commerce.” 504 U.S. at 311, 313. The district court decided the undue burden issue on the basis that Quill’s bright- line rule applied. DMA limits its undue burden argument to Quill and also states that “[b]ecause the Act is discriminatory, the test generally applied to even-handed regulations plainly does not apply in this case,” Aplee. Supp. Br. at 23 n.8 (citing Pike, 397 U.S. at 142).21 We therefore address undue burden based on Quill and do not reach a balancing analysis under Pike, 397 U.S. at 142.
The district court determined the Colorado Law unduly burdens interstate commerce in violation of the dormant Commerce Clause. It noted Quill counsels looking beyond the formal language of a statute and considering its practical effect. See Quill, 504 U.S. at 310. Although Quill itself narrowly focused on sales and use taxes, the
21 In the same footnote, DMA argues Colorado’s expert testimony shows the
burdens imposed on non-collecting retailers—“an estimated $25 million to $60 million in the first year, and $10 million annually thereafter”—are “grossly excessive” compared to the initial annual revenue of $12.5 million estimated to result from the Colorado Law.
Pike balancing test, and DMA’s single sentence is inadequate to present a Pike balancing argument on appeal. DMA also “refers the Court” to DMA’s argument section of its brief filed in 2012, id. at 2 n.1, but when we granted DMA’s motion to file supplemental briefs after the case was remanded by the Supreme Court, we “direct[ed] the parties to provide full briefing on the Commerce Clause claims . . . and any other issues the parties consider pertinent to this appeal on remand.” Direct Mktg. Ass’n v. Brohl, No. 12-1173, at *1 (10th Cir. Apr. 13, 2015) (unpublished) (emphasis added).
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district court noted that the Colorado Law “require[s] out-of-state retailers to gather, maintain, and report information, and to provide notices to their Colorado customers and to the [Department],” and “[t]he sole purpose of these requirements is to enhance the collection of use taxes by the State of Colorado.” Huber, 2012 WL 1079175, at *8. As a result, the district court concluded “that the burdens imposed by the Act and the Regulations are inextricably related in kind and purpose to the burdens condemned in Quill.” Id. On that basis, the court determined the Colorado Law imposed an undue burden on interstate commerce. Id. at *9.
DMA relies solely on Quill for its undue burden claim, and the district court limited its analysis of undue burden to Quill. We conclude that the Colorado Law does not impose an undue burden on interstate commerce.22 Quill is not binding in light of Supreme Court and Tenth Circuit decisions construing it narrowly to apply only to the duty to collect and remit taxes. As explained earlier, Quill is limited to the narrow context of tax collection. In Brohl II, the Supreme Court not only characterized Quill as establishing the principle that a state “may not require retailers who lack a physical presence in the State to collect these taxes on behalf of the Department,” 135 S. Ct. at 1127 (emphasis added), it also
22 We note that the Colorado state district court that addressed whether the
Colorado Law imposes an undue burden under Quill came to the same conclusion. Direct Mktg. Ass’n, No. 13CV34855, at 28-30.
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concluded that the notice and reporting requirements of the Colorado Law do not constitute a form of tax collection, id. at 1130-31. As the Court repeatedly stated in its TIA analysis, the Colorado Law does not require out-of-state retailers to assess, levy, or collect use tax on behalf of Colorado. Id. at 1131 (“The TIA is keyed to the acts of assessment, levy, and collection themselves, and enforcement of the notice and reporting requirements is none of these.”). The Court determined “the notice and reporting requirements precede the steps of ‘assessment’ and ‘collection,’” in part because “[a]fter each of these notices or reports is filed, the State still needs to take further action to assess the taxpayer’s use-tax liability and to collect payment from him.” Id.23 As a result, Quill—confined to the sphere of sales and use tax collection—is not
It reversed the panel’s TIA determination precisely because it determined the relief sought in this litigation—invalidating the Colorado Law—would not “enjoin, suspend or restrain the assessment, levy or collection of any tax under State law.” Id. at 1127 (quoting 28 U.S.C. § 1341). The holding in Brohl II cannot be squared with the district court’s determination that the Colorado Law functionally compels the collection of taxes, see Huber, 2012 WL 1079175, at *8. The Court’s conclusion in Brohl II controls. DMA’s success in Brohl II leads to the demise of its undue burden argument here.
23 The Department did not “seriously contend” the notice and reporting
requirements constituted a levy. Id.
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Having determined Quill is not controlling in the instant case, we cannot identify any good reason to sua sponte extend the bright-line rule of Quill to the notice and reporting requirements of the Colorado Law. Because the Colorado Law’s notice and reporting requirements are regulatory and are not subject to the bright-line rule of Quill, this ends the undue burden inquiry.24 IV. CONCLUSION Applying the law to the record, we hold the Colorado Law does not violate the dormant Commerce Clause because it does not discriminate against or unduly burden interstate commerce. We therefore reverse the district court’s order granting summary judgment and remand for further proceedings consistent with this opinion. We conclude by noting the Supreme Court’s observation in Quill that Congress holds the “ultimate power” and is “better qualified to resolve” the issue of “whether, when, and to what extent the States may burden interstate [retailers] with a duty to collect [sales and] use taxes.” 504 U.S. at 318.25
24 At this point, the regulatory requirements must only satisfy due process
requirements, and DMA has not made a due process challenge in its motion for summary judgment or its arguments on appeal.
25 We grant the motions for leave to file amici briefs and the motion for leave tofile a joint reply in support of the motions for leave to file amici briefs.
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GORSUCH, Circuit Judge, concurring. I agree with everything the court has said and write only to acknowledge a few additional points that have influenced my thinking in this case. In our legal order past decisions often control the outcome of present
judicial precedent invests dead judges with too much authority over living
themselves and to succumb instead in “judicial somnambulism.” Jerome Frank, Law and the Modern Mind 171 (1930). But in our legal order judges distinguish themselves from politicians by the oath they take to apply the law as it is, not to reshape the law as they wish it to be. And in taking the judicial oath judges do not necessarily profess a conviction that every precedent is rightly decided, but they must and do profess a conviction that a justice system that failed to attach power to precedent, one that surrendered similarly situated persons to wildly different fates at the hands of unconstrained judges, would hardly be worthy of the name. At the center of this appeal is a claim about the power of precedent. In fact, the whole field in which we are asked to operate today — dormant commerce clause doctrine — might be said to be an artifact of judicial precedent. After all, the Commerce Clause is found in Article I of the Constitution and it grants Congress the authority to adopt laws regulating interstate commerce.
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Meanwhile, in dormant commerce clause cases Article III courts have claimed the (anything but dormant) power to strike down some state laws even in the absence
135 S. Ct. 1787, 1808 (2015) (Scalia, J., dissenting); Camps Newfound/Owatonna,
And the plaintiffs’ attempt in this case to topple Colorado’s statutory scheme depends almost entirely on a claim about the power of a single dormant commerce clause decision: Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Everyone before us acknowledges that Quill is among the most contentious
been the target of criticism over many years from many quarters, including from many members of the Supreme Court. See Maj. Op. at 15 n.14 (citing scholarly literature); Quill, 504 U.S. at 319-20 (Scalia, J., concurring in part and concurring in the judgment); id. at 321-33 (White, J., concurring in part and dissenting in part); Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124, 1134-35 (2015) (Kennedy, J., concurring). But, the plaintiffs remind us, Quill remains on the books and we are duty-bound to follow it. And about that much the plaintiffs are surely right: we are obliged to follow Quill out of fidelity to our system of precedent whether or not we profess confidence in the decision itself. For while a court may in rare
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circumstances overrule a decision of its own devise, this court may of course never usurp the power to overrule a decision of the Supreme Court. With that much plain enough, the question remains what exactly Quill requires of us. Later (reading) courts faced with guidance from earlier (writing) courts sometimes face questions how best to interpret that guidance. And the parties before us today offer wildly different accounts of Quill. Most narrowly, everyone agrees that Quill’s holding forbids states from imposing sales and use tax collection duties on firms that lack a physical presence in-state. And everyone agrees that Colorado’s law doesn’t quite go that far. While Colorado requires in-state brick-and-mortar firms to collect sales and use taxes, it asks out-
the state itself to collect the taxes in question. Indeed, Colorado suggests that its statutory scheme carefully and consciously stops (just) short of doing what Quill’s holding forbids. But as the plaintiffs note, that is hardly the end of it. Our obligation to precedent obliges us to abide not only a prior case’s holding but also to afford careful consideration to the reasoning (the “ratio decidendi”) on which it rests. And surely our respect for a prior decision’s reasoning must be at its zenith when the decision emanates from the Supreme Court. Indeed, our court has said that it will usually defer even to the dicta (not just the ratio) found in Supreme Court
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2014). And building on this insight the plaintiffs argue that respect for Quill’s ratio, if not its holding, requires us to strike down Colorado’s law. After all, the plaintiffs note, Colorado’s regulatory scheme seeks to facilitate the collection of sales and use taxes by requiring out-of-state firms to satisfy various notice and reporting obligations — burdens comparable in their severity to those associated with collecting the underlying taxes themselves. It’s a reasonable argument, but like my colleagues I believe there’s a reason it’s wrong. The reason lies in the exceptional narrowness of Quill’s ratio. If the Court in Quill had suggested that state laws commanding out-of-state firms to collect sales and use taxes violated dormant commerce clause doctrine because they are too burdensome, then I would agree that we would be obliged to ask whether Colorado’s law imposes a comparable burden. But Quill’s ratio doesn’t sound in the comparability of burdens — it is instead and itself all about the respect due precedent, about the doctrine of stare decisis and the respect due a still earlier decision. See Quill, 504 U.S. at 317; id. at 320 (Scalia, J., concurring in part and concurring in the judgment); Brohl, 135 S. Ct. at 1134 (Kennedy, J., concurring). This distinction proves decisive. Some years before Quill, in National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), the Supreme Court held that states could not impose use tax collection duties on out-
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ultimately chose to retain its rule — but did so only to protect the reliance interests that had grown up around it. Indeed, the Court expressly acknowledged that Bellas Hess very well might have been decided differently under “contemporary Commerce Clause jurisprudence” and cases like Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). Quill, 504 U.S. at 311; cf. Billy Hamilton, Remembrance of Things Not So Past: The Story Behind the Quill Decision, 59 St. Tax Notes Mag. 807 (2011). The Court also expressly acknowledged that states can constitutionally impose tax and regulatory burdens
collection duties. See Quill, 504 U.S. at 311-12, 314-15. And the Court expressly acknowledged that this dichotomy — between (impermissible) sales and use tax collection obligations and (permissible) comparable tax and regulatory burdens — is pretty “artificial” and “formalistic.” Id. Given all this, respect for Quill’s reasoning surely means we must respect the Bellas Hess rule it retained. But just as surely it means we are under no obligation to extend that rule to comparable tax and regulatory obligations. In fact, this much is itself a matter of precedent for this court and many
regulatory and tax duties of comparable severity to sales and use tax collection
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Revenue, 792 N.W.2d 308, 324-28 (Iowa 2010), cert. denied, 132 S. Ct. 97 (2011) (mem.); Capital One Bank v. Comm’r of Revenue, 899 N.E.2d 76, 84-86 (Mass. 2009), cert. denied, 557 U.S. 919 (2009); Tax Comm’r v. MBNA Am. Bank, N.A., 640 S.E.2d 226, 232-34 (W. Va. 2006), cert. denied sub nom FIA Card Servs., N.A. v. Tax Comm’r, 551 U.S. 1141 (2007). It may be rare for Supreme Court precedents to suffer as highly a “distinguished” fate as Bellas Hess — but it isn’t unprecedented. Take baseball. Years ago and speaking through Justice Holmes, the Supreme Court held baseball effectively immune from the federal antitrust laws and did so reasoning that the “exhibition[] of base ball” by professional teams crossing state lines didn’t involve “commerce among the States.” Federal Baseball Club of Balt., Inc. v. Nat’l League of Prof’l Baseball Clubs, 259 U.S. 200, 208-09 (1922). Since then the Supreme Court has recognized that other organizations offering “exhibitions” in various states do engage in interstate commerce and are subject to antitrust
though it has long since rejected the reasoning of Federal Baseball, the Supreme Court has still chosen to retain the holding itself — continuing to rule baseball effectively immune from the antitrust laws, if now only out of respect for the reliance interests the Federal Baseball decision engendered in that particular
And, of course, Congress has since codified baseball’s special exemption. See 15
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U.S.C. § 26b. So it is that the baseball rule now applies only to baseball itself, having lost every away game it has played. Accepting at this point that Quill doesn’t require us to declare Colorado’s law unconstitutional, the question remains whether some other principle in dormant commerce clause doctrine might. For their part the plaintiffs identify (only) one other potential candidate, suggesting that Colorado’s law runs afoul of the principle that states may not discriminate against out-of-state firms, a principle often associated with West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994). And to the extent that there’s anything that’s uncontroversial about dormant commerce clause jurisprudence it may be this anti-discrimination principle, for even critics of dormant commerce clause doctrine often endorse it even as they suggest it might find a more textually comfortable home in other constitutional provisions. E.g., Camps Newfound, 520 U.S. at 610 (Thomas, J., dissenting). But any claim of discrimination in this case is easily rejected. The plaintiffs haven’t come close to showing that the notice and reporting burdens Colorado places on out-of-state mail order and internet retailers compare unfavorably to the administrative burdens the state imposes on in-state brick-and- mortar retailers who must collect sales and use taxes. If anything, by asking us to strike down Colorado’s law, out-of-state mail order and internet retailers don’t seek comparable treatment to their in-state brick-and-mortar rivals, they seek
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more favorable treatment, a competitive advantage, a sort of judicially sponsored arbitrage opportunity or “tax shelter.” Quill, 504 U.S. at 329 (White, J., concurring in part and dissenting in part). Of course, the mail order and internet retailer plaintiffs might respond that, whatever its propriety, they are entitled to a competitive advantage over their brick-and-mortar competitors thanks to Bellas Hess and Quill. And about that much (again) I cannot disagree. It is a fact — if an analytical oddity — that the Bellas Hess branch of dormant commerce clause jurisprudence guarantees a competitive benefit to certain firms simply because of the organizational form they choose to assume while the mainstream of dormant commerce clause jurisprudence associated with West Lynn Creamery is all about preventing discrimination between firms.1 And the plaintiffs might well complain that the competitive advantage they enjoy will be diluted by our decision in this case. Indeed, if my colleagues and I are correct that states may impose notice and reporting burdens on mail order and internet retailers comparable to the sales and
1 An oddity that, if anything, seems to grow by the day, for if it were ever
thought that mail-order retailers were small businesses meriting (constitutionalized, no less) protection from behemoth brick-and-mortar enterprises, that thought must have evaporated long ago. Anecdotal evidence to be sure but consider: today’s e-commerce retail leader, Amazon, recorded nearly ninety billion dollars in sales in 2014 while the vast majority of small businesses recorded no online sales at all. See Amazon.com, Inc., Annual Report on SEC Form 10-K at 17 (2014); Ryan Lunka, Retail Data: 100 Stats About Retail, eCommerce & Digital Marketing (July 9, 2015), https://www.nchannel.com/blog/retail-data-ecommerce-statistics/.
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use tax collection obligations they impose on brick-and-mortar firms, many (all?) states can be expected to follow Colorado’s lead and enact statutes like the one now before us. But this result too seems to me, as it does to my colleagues, entirely consistent with the demands of precedent. After all, by reinforcing an admittedly “formalistic” and “artificial” distinction between sales and use tax collection
impose comparable duties. In this way, Quill might be said to have attached a sort of expiration date for mail order and internet vendors’ reliance interests on Bellas Hess’s rule by perpetuating its rule for the time being while also encouraging states over time to find ways of achieving comparable results through different means. In this way too Quill is perhaps unusual but hardly unprecedented, for while some precedential islands manage to survive indefinitely even when surrounded by a sea of contrary law (e.g., Federal Baseball), a good many others disappear when reliance interests never form around them or erode
very reasoning — its ratio decidendi — seems deliberately designed to ensure that Bellas Hess’s precedential island would never expand but would, if anything, wash away with the tides of time. I respectfully concur.
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This opinion was filed for record at
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IN THE SUPREME COURT OF THE STATE OF WASHINGTON A VNET, INC., Petitioner, v. WASHINGTON DEPARTMENT OF REVENUE, Respondent. ) ) ) ) ) ) ) ) ) )
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MADSEN, C.J.-Avnet Inc. is a New York corporation, headquartered in Arizona, and is a major distributor of electronic components and computer technology
vnet sells products through its headquarters in Arizona and through its many regional sales offices, including one in Redmond, Washington. Following an audit, the Washington State Department of Revenue (Department) determined that from 2003 to 2005, Avnet underreported its business and operations (B&O) tax liabilities by failing to include its national and drop-shipped sales in its tax filings. "National sales" are delivered to a Washington facility owned by Avnet's customer, even though the customer placed the order from an office outside Washington. "Drop-shipped sales" are slightly
different in that they are delivered to a third party in Washington at the request of Avnet' s customer-usually Avnet's buyer's customer. This case requires us to evaluate whether national and drop-shipped sales are subject to Washington's B&O tax under the dormant commerce clause and the Department former "Rule 193" (i.e., former WAC 458-20-193 (1992)). U.S. CONST. art. I,§ 8, cl. 3. We hold that neither the dormant commerce clause nor Rule 193 bar the imposition of a B&O tax to Avnet's national and drop- shipped sales delivered in Washington. FACTS Avnet is "one of the largest distributors of electronic components, computer products and embedded technology serving customers globally." Clerk's Papers (CP) at 424; see also CP at 194-95. From 2003 through 2005, Avnet earned more than $200 million in revenue from its wholesale of goods shipped into Washington from an out-of- state warehouse. Approximately $80 million of its gross receipts came from national and drop-shipped sales. In a "national sale," Avnet makes a wholesale sale to a customer with branch offices in multiple states. The products are delivered to the customer at its Washington branch, but the goods are billed to the customer's out-of-state office. For example, a corporation purchases products for delivery to its offices in Seattle, Washington, but directs Avnet to send the bill to its corporate headquarters in Delaware. In a "third-party drop shipment" or "drop shipment," an out-of-state customer places a wholesale order and directs Avnet to deliver the product to its customer in Washington. For example, a Montana corporation places an order with Avnet and-instead of having
2
it shipped to Montana and then reshipping it to Spokane-directs that it be delivered to its customer in Spokane. Avnet has 35 offices in the United States, including an office in Redmond,
Avnet's products ship from distribution centers outside Washington, there is no difference between the products ordered through the Arizona branch or the Washington branch, and the staff in the Redmond office are able to serve its Washington customers whose orders are placed elsewhere. During the relevant period, Avnet employed over 40 employees at its branch office in Redmond, Washington. Although the Redmond office was not involved in the specific national and drop-shipped sales at issue, its presence and business activities in Washington was extensive. Of the
portfolios that were each estimated to generate $4 million in annual sales revenue. The Redmond branch also employed sales and marketing representatives, engineers, and technology consultants. Avnet's Washington employees were instrumental in marketing and selling products, establishing and improving customer relations, providing design services to help with the development of new products, and offering technical and engineering support to its Washington customers. The Department audited Avnet's taxes and concluded that from 2003 to 2005, Avnet underreported its B&O tax liabilities. In particular, the Department found Avnet failed to include national and drop-shipped sales in its tax filings. The Department auditor assessed Avnet $556,037 in taxes and interest. Avnet appealed to the
3
administrative appeals division of the Department. The appeals division affirmed the Department's tax assessment. Avnet paid the tax assessment under protest and filed a refund action in Thurston County Superior Court. The superior court ruled that the national sales, but not the drop-shipped sales, were subject to the B&O tax. Both Avnet and the Department cross appealed the superior court's ruling. The Court of Appeals held that Avnet's B&O tax liability included both national and drop-shipped sales. Avnet, Inc. v. Dep'tofRevenue, 187 Wn. App. 427,448-49,348 P.3d 1273 (2015). Avnet petitioned this court for review, which we granted. Avnet, Inc. v. Dep 't of Revenue, 184 Wn.2d 1026, 364 P.3d 120 (2016). Avnet argues that the dormant commerce clause bars the imposition of a B&O tax on its national and drop-shipped sales into Washington, which do not utilize the Redmond office in the placing or completion of the sale. Alternatively, even if the taxes are constitutionally permissible, Avnet maintains that under these facts, Rule 193 prevented the Department from assessing the taxes. At issue is whether Avnet carried its burden of proving that its national and drop-shipped sales are sufficiently dissociated from its in-state activities to avoid B&O tax liability by showing that its Redmond office played no part in the sales. Additionally, we must determine whether Rule 193 barred the B&O taxes and, if so, whether the Department was bound to follow an interpretive rule. We hold that merely showing that an in-state office was not involved in the placing or completion of a national or drop-shipped sale is insufficient to dissociate from the bundle of in-state activities that are essential to establishing and holding the market 4
for its products. We also hold that under the plain language of Rule 193, imposition of the B&O taxes to Avnet's national and drop-shipped sales was proper, and therefore decline to address whether an agency is bound by its interpretive rules. STANDARD OF REVIEW Questions of law on appeal from summary judgment are reviewed de novo. Dreiling v. Jain, 151 Wn.2d 900,908, 93 P.3d 861 (2004) (citing Rivett v. City of Tacoma, 123 Wn.2d 573, 578, 870 P.2d 299 (1994)). We interpret statutes so as to implement the legislature's intent. Dep 't of Ecology v. Campbell & Gwinn, LLC, 146 Wn.2d 1, 9, 43 P.3d 4 (2002). "When its meaning is in doubt, a tax statute 'must be construed most strongly against the taxing power and in favor of the taxpayer."' Lamtec
Revenue, 170 Wn.2d 83 8, 842-43, 246 P.3d 788 (2011) (quoting Ski Acres, Inc. v. Kittitas County, 118 Wn.2d 852, 857, 827 P.2d 1000 (1992)). However, courts presume taxes are valid. !d. at 843. Avnet therefore bears the burden of proving an exemption applies. !d.; RCW 82.32.180 ("the burden shall rest upon the taxpayer to prove that the tax as paid by the taxpayer is incorrect"); Gen. Motors Corp. v. Washington, 377 U.S. 436,441, 84 S. Ct. 1564, 12 L. Ed. 2d 430 (1964) ('"a taxpayer claiming immunity from a tax has the burden of establishing his exemption."' (quoting Norton Co. v. Dep 't of Revenue, 340 U.S. 534, 537, 71 S. Ct. 377, 95 L. Ed. 517 (1951 ))),
Revenue, 483 U.S. 232, 107 S. Ct. 2810, 97 L. Ed. 2d 199 (1987). Ifthere is ambiguity in a provision providing an exemption or deduction, the court must strictly construe the
5
provision against the taxpayer. Simpson Inv. Co. v. Dep't of Revenue, 141 Wn.2d 139, 149-50, 3 P.3d 741 (2000). ANALYSIS Washington's B&O Tax Structure Washington imposes a gross receipts, or B&O, tax on wholesalers "for the act or privilege of engaging in business activities." Former RCW 82.04.220 (1961); 1 see also Ford Motor Co. v. City of Seattle, 160 Wn.2d 32, 39, 156 P.3d 185 (2007). Every person who conducts business activities in Washington "with the object of gain, benefit, or advantage to the taxpayer or to another person or class, directly or indirectly" and who "has a substantial nexus with this state" must pay a percentage of its gross receipts of any resulting proceeds. Former RCW 82.04.140 (1961); former RCW 82.04.220; Lamtec, 170 Wn.2d at 843. This court has held that "it is obvious that the legislature intended to impose the business and occupation tax upon virtually all business activities carried on within the state." Time Oil Co. v. State, 79 Wn.2d 143, 146, 483 P.2d 628 (1971). The B&O tax is to be imposed as broadly as constitutionally allowed. See Coast Pac. Trading, Inc. v. Dep 't of Revenue, 105 Wn.2d 912, 917-18, 719 P.2d 541 (1986) ("This court has ruled repeatedly that when the Legislature enacted the business and occupation tax the Legislature intended 'to tax all business activities not expressly excluded'."
1 In 2010, the legislature rewrote this provision to read:
There is levied and collected from every person that has a substantial nexus with this state a tax for the act or privilege of engaging in business activities. The tax is measured by the application of rates against value of products, gross proceeds
sales, or gross income of the business, as the case may be.
LAWS OF 2010, 1st Spec. Sess., ch. 23, § 102. We do not consider the impact, if
any, of the revision of the statute. 6
(quoting Rena-Ware Distribs., Inc. v. State, 77 Wn.2d 514, 517, 463 P.2d 622 (1970))); RCW 82.04.4286 ("In computing tax there may be deducted from the measure of tax amotmts derived from business which the state is prohibited from taxing under the Constitution of this state or the Constitution or laws of the United States."); see also Steven Klein, Inc. v. Dep 't of Revenue, 183 Wn.2d 889, 896, 357 P.3d 59 (2015). For wholesale sales, the statute imposes a B&O tax "equal to the gross proceeds of the sales of such business multiplied by the rate of0.484 percent." RCW 82.04.270. The statute defmes "sale" as "any transfer of the ownership of, title to, or possession of property for a valuable consideration." RCW 82.04.040(1). The Department's administrative rule, WAC 458-20-103, also defines when a sale takes place: For the purpose of determining [B&O] tax liability of persons selling tangible personal property, a sale talces place in this state when the goods sold are delivered to the buyer in this state, irrespective of whether title to the goods passes to the buyer at a point within or without this state. "A tax on an out
the due process clause of the Fourteenth Amendment and the commerce clause." Lamtec, 170 Wn.2d at 843 (citing Quill Corp. v. North Dakota, 504 U.S. 298, 305, 112 S. Ct. 1904, 119 L. Ed. 2d 91 (1992)). Avnet challenges the imposition of the tax under only the dormant commerce clause. The dormant commerce clause "prevents state regulation of interstate commercial activity even when Congress has not acted ... to regulate that activity" but does not "relieve those engaged in interstate commerce from their just share of state tax burden." BLACK'S LAW DICTIONARY 325 (I
Oth ed. 20 14) (see subentry for "commerce clause"); 7
Revenue, 303 U.S. 250, 254, 58 S. Ct. 546, 82 L. Ed. 823 (1938). Under modern dormant commerce clause jurisprudence, a state tax on an out-of- state corporation must (1) be "applied to an activity with a substantial nexus with the taxing State," (2) be "fairly apportioned," (3) "not discriminate against interstate commerce," and ( 4) be "fairly related to the services provided by the State." Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S. Ct. 1076, 51 L. Ed. 2d 326 (1977); see also Ford, 160 Wn.2d at 48-49. "If a local taxing scheme fails any one of these four requirements, it is invalid." Ford, 160 Wn.2d at 48. The parties disagree as to whether the first requirement-a "substantial nexus" between Avnet's national and drop-shipped sales and the activities of its Redmond office-has been satisfied? In addition to the dormant commerce clause requirements, the Department has promulgated administrative rules interpreting the B&O tax statute. Relevant here is Rule 193, former WAC 458-20-193, which was applicable atthe time ofthe events at issue. Rule 193 explains Washington's B&O tax and its application to inbound and outbound
B&O tax on sales of goods which originate outside this state unless the goods are received by the purchaser in this state and the seller has nexus." Further,
2 The dissent draws a distinction between "business nexus" and "transactional nexus" as two
separate but interrelated tests. Dissent at 8 (citing Gen. Motors Corp. v. Washington, 377 U.S. 436,441, 84 S. Ct. 1564, 12 L. Ed. 2d 430 (1964)). General Motors, however, draws no such distinction, and in our review of the case law, no other cases use the terms "business" and "transactional" when evaluating the nexus necessary in a dormant commerce clause analysis. The dissent also asserts that our reliance on Tyler Pipe and Lamtec is misplaced because both of those cases are about business nexus, not transactional nexus. Dissent at 11-12. But again, neither Tyler Pipe nor Lamtec distinguish between a "business" and a "transactional" nexus.
8
[i]f a seller carries on significant activity in this state and conducts no other business in the state except the business of making sales, this person has the distinct burden of establishing that the instate activities are not significantly associated in any way with the sales into this state. Once nexus has been established, it will continue throughout the statutory period of RCW 82.32.050 (up to five years), notwithstanding that the instate activity which created the nexus ceased. Rule 193(7)( c). Rule 193(7)( c) goes on to provide a nonexhaustive list of circumstances that would establish that the B&O tax applies to certain sales. Among those, Rule 193(7)(c)(v) states that [t]he out-of-state seller, either directly or by an agent or other representative, performs significant services in relation to establishment or maintenance of sales into the state, even though the seller may not have formal sales offices in Washington or the agent or representative may not be formally characterized as a "salesperson". Rule 193(2)(d) specifies that '"[r]eceipt' or 'received' means the purchaser or its agent first either taking physical possession of the goods or having dominion or control
to inspect and accept or reject them," Rule 193(2)(e), and "nexus" is defined as "the activity carried on by the seller in Washington which is significantly associated with the seller's ability to establish or maintain a market for its products in Washington." Rule 193(2)(f). Avnet contends that it has established that its national sales are exempt from taxation under Rule 193(7)(c) because none of its in-state activities were significantly associated in any way with the sales at issue. Avnet further argues that its drop-shipped sales are exempt under Rule 193(7) because Avnet's customer, the wholesale buyer, did not take physical possession of
9
Washington, and that only Avnet's buyer's customer received the goods within the meaning of the rule. Dormant Commerce Clause We turn first to A vnet' s constitutional argument. A vnet asserts that it is entitled to "dissociate" the contested inbound sales from the tax base because the Redmond office was not involved in any way in those sales, i.e., the orders were placed directly with the company's headquarters in Arizona and the Redmond office was not involved in fulfilling those sales. Avnet's commerce clause challenge rests entirely on the Supreme Court's 1951 decision in Norton Co. v. Department of Revenue, 340 U.S. 534, 538-39,71
similar facts-that Washington cannot impose a B&O tax on such national and drop- shipped sales. The question in Norton was whether the dormant commerce clause prohibited Illinois from imposing a B&O tax on certain out-of-state sales. Norton, 340 U.S. at 535-
employed engineers in Illinois to consult with prospective customers. Norton Co. v. Dep 't of Revenue, 405 Ill. 314, 315, 90 N.E.2d 737 (1950). These engineers did not solicit or take any sales orders. !d. Nor did Norton employ any salespeople in Illinois. !d. Norton did, however, operate a local retail branch office and warehouse there. Norton, 340 U.S. at 535. Norton did not dispute Illinois's ability to tax sales it made at its Illinois branch. But not all sales to Illinois customers were completed at the Illinois 10
Massachusetts office and shipped from Massachusetts without involvement of the Illinois branch or warehouse. I d. Norton challenged Illinois's B&O tax on those sales accepted and shipped from its Massachusetts office. The Court concluded that Illinois could impose a B&O tax on all sales that utilized the Illinois branch or warehouse, either in receiving the order or distributing the goods.
the customer and shipped directly to the customer from Massachusetts were "so clearly interstate in character" that Illinois could not reasonably attribute their proceeds to the local business. ld. at 539 ("Income from those [sales] we think was not subject to this tax.").3 According to the Court, "when, as here, the corporation has gone into the State to do local business by state permission and has submitted itself to the taxing power of the State, it can avoid taxation on some Illinois sales only by showing that particular
3 That same year we decided B.F. Goodrich Co. v. State, 38 Wn.2d 663,231 P.2d 325 (1951).
We applied Norton and ruled that two classes of sales fell outside the reach of
state office for products sold exclusively through its out-of-state salespeople and stored in its out-
pursuant to a contract negotiated with a national corporation outside Washington. !d. Because neither class of sales involved orders sent to or fulfilled by a local office or salesperson, this court felt "compelled" to hold that a B&O tax on either class of sales would offend the dormant commerce clause as interpreted by Norton. Id. at 674. We concluded that "such a tax may not be levied upon the proceeds from sales with which the local outlet had nothing to do." Id. at 675 (emphasis added). We have since clarified the meaning of
relevant "local outlet" should not be construed narrowly. Chi. Bridge & Iron Co. v. Dep 't of
Revenue, 98 Wn.2d 814, 833, 659 P.2d 463 (1983).
11
transactions are dissociated from the local business and interstate in nature." !d. at 53 7. The Court then announced the test for dissociation that it has continued to apply: whether the taxpayer's in-state activities helped establish and maintain a market for the taxpayer's goods. In the over 60 years since Norton, the Supreme Court has addressed the issue of dissociation under Norton several times. See, e.g., Tyler Pipe Indus., Inc. v. Wash. State Dep 't of Revenue, 483 U.S. 232, 249, 107 S. Ct. 2810, 97 L. Ed. 2d 199 (1987); Standard Pressed Steel Co. v. Dep 't of Revenue, 419 U.S. 560, 562-63, 95 S. Ct. 706, 42 L. Ed. 2d 719 (1975); Gen. Motors, 377 U.S. at 447-48.4 The parties and amici dispute whether the legal rule set forth in Norton has changed or the facts of the cases have changed. General Motors, like Norton, involved a challenge to Washington's authority to impose a B&O tax on sales sent directly to General Motors' (GM) Portland office where they were accepted and delivered directly to dealers in Washington. Gen. Motors, 377 U.S. at 443. Like Norton, GM also hired local employees and had a branch office in Seattle, and neither the employees nor the branch office were involved in the disputed
nexus between GM's "bundle of corporate activity" in Washington to satisfy imposition of its B&O tax to these sales. !d. at 447-48. The Court reasoned: Altl1ough mere entry into a State does not take from a corporation the right to continue to do an interstate business with tax immunity, it does not
40verruled on different grounds by Tyler Pipe, 483 U.S. at 242-48 (holding Washington's tax
exemption for "multiple activities" discriminates against interstate commerce). 12
follow that the corporation can channel its operations through such a maze
its gain
Standard Pressed Steel also involved a challenge to Washington's B&O tax. There, the Department levied the tax on sales made to an in-state customer (Boeing) directly from Standard Press Steel (SPS), an out-of-state manufacturer, where SPS accepted and filled the sales, and shipped the products directly to the Washington
engineer to consult with customers, but that engineer was not involved in the subject
Steel and the sales in Norton, the Court unanimously found that Washington's B&O tax
specifically rejected SPS's contentions (much like Avnet's contentions here) that Norton
Standard Pressed Steel to those in General Motors and affirmed application of Washington's B&O tax. Despite their different outcomes, neither Standard Pressed Steel nor General Motors explicitly overruled Norton. To the contrary, each decision suggested that its analysis of whether the taxpayer had sufficiently dissociated its sales from its efforts to establish and maintain a market for sales in the taxing state was consistent with Norton. See Standard Pressed Steel, 419 U.S. at 562-63; Gen. Motors, 377 U.S. at 440-48.
13
Finally, in Tyler Pipe, the Supreme Court found Washington could impose a B&O tax on Tyler Pipe's sales in Washington even though it had no office, no property, and no employees in Washington. 483 U.S. at 249-51. The Court found application of a B&O tax to these sales did not offend the commerce clause because Tyler Pipe had hired an in- state contractor to call on customers and solicit orders, and that it was through these sales contacts that Tyler Pipe maintained and improved its '"name recognition, market share, goodwill, and individual customer relations."' !d. (quoting Tyler Pipe Indus., Inc. v. Dep't of Revenue, 105 Wn.2d 318, 325, 715 P.2d 123 (1986), vacated, 483 U.S. 232). According to the Court, these local activities were necessary for the maintenance of Tyler Pipe's market in Washington and protection of its interests there. Id. at 250-51. In so holding, the Supreme Court adopted this court's formulation of the nexus test: "'[T]he crucial factor governing nexus is whether the activities performed in this state on behalf
the taxpayer are significantly associated with the taxpayer's ability to establish and maintain a market in this state for the sales."' Id. at 250 (quoting Tyler Pipe, 105 Wn.2d at 323). This court's B&O cases are consistent with the Supreme Court's interpretation of
Revenue, Chicago Bridge, an Illinois corporation, was in the business of designing and installing custom steel containers in Washington. 98 Wn.2d 814,816-17,659 P.2d 463 (1983). At issue was whether Washington could impose its B&O tax on sales orders that Washington customers placed with Chicago Bridge's Illinois office. I
14
negotiation and formalization of these contracts occurred outside Washington, Chicago Bridge argued that they were not taxable sales activities within Washington. /d. We
in-state activities, especially when Chicago Bridge custom designed and manufactured each product for installation in Washington, opened a local office in Seattle from which it would send employees and project managers to survey project sites during the design and installation process, and maintained a warehouse in Tacoma for storage and access to equipment that would be used in the installation and maintenance of these sales. /d. at 818-19. From these facts, we held that Chicago Bridge had failed to carry its burden of proving dissociation of its out-of-state sales from its in-state activities, as they helped it maintain a market for its products in Washington. /d. at 828-29. We reasoned that "although the Seattle sales office was not involved in the contract procurement, it was involved in the passive sense of being present, aware of the transaction, and available to assist if
difficulties with the product and maintain the goodwill of the customer." /d. at 828. In so holding, we interpreted Norton to require that a company show a complete absence of any connection between the local office and the underlying sales in order to meet its burden. /d. at 821, 833. Thus, where there is general contact between the taxpayer's in-state employees and its customers related to the taxpayer's products, a claim that such sales are dissociated will fail. /d. at 821-22 (citing Standard Pressed Steel and General Motors). This is because the presence and activities of these
15
employees help the taxpayer build rapport and retain goodwill with its customers and are therefore too "inexorably entwined with the establishing and holding of the local market" to be "dissociated." !d. at 833-34, 837. Most recently, we confirmed our interpretation of Norton's nexus requirement in Lamtec, 170 Wn.2d 838. In Lamtec, a New Jersey manufacturer sold products to customers in Washington wholesale by telephone. Lamtec's only presence in Washington was through three sales representatives, who visited with its major Washington customers two to three times per year. Without deciding whether a physical presence in the taxing state was necessary, rather than sufficient, to establish nexus, we held that even if a physical presence was required, it was satisfied by the three sales representatives' occasional visits to Washington. Even though the sales representatives did not solicit the sales in question, we reasoned that "[t]he contacts by Lamtec's sales representatives were designed to maintain its relationships with its customers and to maintain its market within Washington State. Nor were the activities slight or incidental to some other purpose or activity." !d. at 851. We went on to hold that "Lamtec's practice of sending sales representatives to meet with its customers within Washington was significantly associated with its ability to establish and maintain its market." !d. Additionally, our construction of Norton is consistent with decisions from other
Revenue v. Sears, Roebuck & Co., Sears challenged the imposition of a gross receipts tax on direct mail order sales-delivered to Alaska-that did not utilize the local Sears retail outlets. 660 P .2d 1188, 1189 (Alaska
16
1983 ). The Alaska Supreme Court held that Norton and the dormant commerce clause did not bar the imposition of the tax, even if the direct mail orders in no way involved a local outlet, because the local outlets "provided Alaska patrons with customer service on catalog items, such as returns for repair, credit, or exchange. In addition, they supplied application forms and accepted direct applications for Sears credit card accounts." !d. at
presence" that had "a significant nexus to Sears' direct mail order business." !d. In J.C. Penney Co. v. Hardesty, the Supreme Court of West Virginia held a B&O tax on J.C. Penney's out-of-state catalog sales valid, even though the sales were neither made nor shipped through its local retail outlets. 264 S.E.2d 604, 610 (W.Va. 1979). In a concurring opinion, Justice Miller stated that "to contend that out-of-State catalog sales have no local connection is to ignore business reality." !d. at 617. The parties spend a portion of their briefing arguing over whether General Motors, Standard Pressed Steel, and Tyler Pipe overruled Norton. However, resolution of that question is not dispositive of the issue. While the United States Supreme Court "does not normally overturn, or so dramatically limit, earlier authority sub silentio," we need not resolve this question today. Shalala v. Ill. Council on Long Term Care, Inc., 529 U.S. 1, 18, 120 S. Ct. 1084, 146 L. Ed. 2d 1 (2000). Norton unquestionably remains good law as pertains to the principle that the taxpayer has the burden to show that the bundle of its in- state corporate activities are "dissociated from the local business and interstate in nature. The general rule, applicable here, is that a taxpayer claiming immunity from a tax has the
17
burden of establishing [its] exemption." Norton, 340 U.S. at 537. What has changed in the 60 years since Norton is the Supreme Court's interpretation of how a company must demonstrate dissociation. In that, General Motors, Standard Pressed Steel, and Tyler Pipe control. Here, Avnet admits that its "Redmond office performs a variety of functions for Avnet's Washington customers, including soliciting orders, responding to requests for quotes, receiving orders, responding to questions and otherwise meeting the needs of Avnet's Washington customers." Avnet, Inc.'s Suppl. Br. at 2. Although Avnet contends that its Redmond office did not provide any postshipment services related to the drop-shipped or national sales, it does not indicate that it would not do so if
Chicago Bridge, we indicated that it was enough that the local office was involved in the "passive sense of being present, aware of the transaction, and available to assist if necessary." 98 Wn.2d at 828-29. In addition, Avnet's employees in the Redmond office also provided its corporate office with "market intelligence" regarding Washington markets, met with Avnet's sales teams and suppliers to strategize on how to create a greater demand for Avnet's products and services, and worked with customers in improving existing products and designing new prototypes. CP at 353-55. Avnet has failed to offer any evidence that those local activities in Washington are not significantly associated with its ability to establish and maintain a Washington market even when its local office or employees are not directly involved with the inbound sales. Avnet's in- state activities therefore were at least minimally associated with its ability to establish
18
and maintain a market in Washington for the sale of its products. Avnet's presence creates a climate for Washington residents to want to order from the company. We hold that under Tyler Pipe and Chicago Bridge, there is a sufficient nexus between Avnet's in-state activities and the State to support Washington's imposition of its B&O tax on the gross receipts derived from all of Avnet' s inbound sales. Rule 193 We now turn to A vnet' s argument that Rule 193 bars the imposition of a B&O tax
"Washington does not assert B&O tax on sales of goods which originate outside this state unless the goods are received by the purchaser in this state and the seller has nexus," exempts its drop-shipped sales. A vnet contends that even if there is a nexus, its buyer never received possession or exercised control or dominion over the goods. Avnet further argues that a B&O tax on its national and drop-shipped sales are barred by Rule 193(7)(c), claiming that none of the nonexclusive examples of nexus set forth in Rule 193(7)(c)(i)-(vi) are applicable. Avnet next asserts that the Department has disavowed its
it has not disavowed anything, but that Avnet misconstrues Rule 193. We agree with the Department. The plain language of Rule 193(7) does not provide Avnet with an exemption. First, the rule defines "received" as the "purchaser or its agent ... taking physical possession of the goods or having dominion and control over them." Rule 193(2)(d)
19
(emphasis added). "Agent" is then defined as "a person authorized to receive goods with the power to inspect and accept or reject them." Rule 193(2)(e). As the Department argues, the only person "authorized to receive [the] goods with the power to inspect and accept or reject them" would be the person Avnet's buyer designates-Avnet's buyer's customer-bringing them squarely within the rule's definition of"agent." Rule 193(2)(e). For each sale at issue, Avnet's customer contracted to pay for the goods and provided A vnet with the name and address of the person or company authorized to receive the goods. Furthermore, as the Court of Appeals below correctly pointed out, "the only transfer of possession of property to any buyer occurred within the state of Washington." Avnet, 187 Wn. App. at 436. The person designated by Avnet's customer to receive the goods was the customer's "agent" as defined in Rule 193. However, even if the company that places the order and requests it be drop- shipped to Washington is not the purchaser-that would make the ultimate recipient the purchaser and Avnet's customer the purchaser's agent. A commonsense breakdown of a drop-shipped sale demonstrates that the "purchaser" is the ultimate recipient in
company placing an order with A
placing the order with Avnet only because it first received an order from its customer in
equipment from a company located in Colorado. The Colorado company then places an
vnet and requests it be delivered to its customer in Washington. The
20
payment for Avnet's product originates in Washington, and the product is delivered in
the Colorado company is not the purchaser, then it must be acting as an agent of the Washington customer. The result is that the ultimate recipient in Washington is, for all intents and purposes, the purchaser of Avnet's goods. Depending where we place the focus, the Washington customer is either the commonsense purchaser
the purchaser. Regardless, Rule 193 is satisfied. The common law also supports our interpretation that the Washington customer is Avnet's de facto purchaser. "[I]t is a well-established rule that delivery to a person appointed by the buyer to receive the goods or to any third person at the buyer's request
403, 45 P.2d 570 (1935); Weiner v. Am. Credit-Indem. Co. ofN
Y, 222 N.W. 699, 701
(Mich. 1929) ("It is not unusual in business for orders to direct delivery to be made to a party other than the one giving the order, and a delivery so made is in legal effect a delivery to the party ordering the shipment. "i
5 See also Williamsburgh Stopper Co. v. Bickart, I 04 Conn. 674, 134 A. 233 (1926) (delivery to the buyer's customers in accordance with his instructions is delivery to the buyer); Francis v. Merkley, 59 Cal. App. 196, 198,210 P. 437,438 (1922) (delivery to purchaser's designee deemed delivery to purchaser for purpose of consummating contract of sale); Fergus Cnty. Hardware Co. v. Crowley, 57 Mont. 340,343, 188 P. 374 (1920) ("[I]t is too well-settled to be
goods to one designated by the buyer to receive them is delivery to the buyer himself."); Roy v. Griffin, 26 Wash. 106, 66 P. 120 (1901) (delivery to shipper designated by purchaser constituted delivery to purchaser for purposes of consummating a sale
delivery of an article sold, to a person appointed by the vendee to receive it, is a delivery to the vendee.").
21
Finally, it is worth noting that Avnet's interpretation of Rule 193 creates a class of "nowhere sales" that because the goods are not physically received by the purchaser cannot be classified as inbound or outbound sales. Avnet's interpretation results in no sale occurring, and is inconsistent with the language of the B&O statutes and the legislature's intent that the B&O tax apply to virtually every business activity and to the extent permitted by the constitution.6 The legislature did not intend the applicability of the B&O tax to turn on whether the purchaser designates a third party to take possession
the goods at the shipping destination. This is especially true when that designation is completely within the control of the parties and could lead to substantial tax avoidance.
Cf Wash. Imaging Servs., LLC v. Dep't of
Revenue, 171 Wn.2d 548, 556, 252 P.3d 885
(2011) (independent contractor could not avoid its B&O tax obligation by purporting to disclaim an ownership interest in the amounts owed for services rendered); Ford Motor, 160 Wn.2d at 43-44 (out-of-state seller could not avoid B&O tax by contractually transferring title at the point of shipment); Chi. Bridge, 98 Wn.2d at 824 (construction contractor could not avoid B&O tax by bifurcating the design and manufacturing components of contracts for construction services from the installation of products in Washington); Wasem's, Inc. v. State, 63 Wn.2d 67, 69-70, 385 P.2d 530 (1963) (retailer could not avoid state excise taxes by having a nonresident purchaser sign a bill of lading agreeing to deliver goods to himself at a point outside the state). Properly interpreted,
6 A
vnet' s interpretation would even bar the imposition of a B&O tax on orders placed by a Washington company through the Redmond office and sent to Arizona for fulfillment, so long as the Washington company directed that the goods be delivered to someone else in Washington. 22
Rule 193 ensures that the B&O tax avoids both multiple taxation and no taxation anywhere. Avnet and the dissent rely on one of the specific examples given in Rule 193(11 )(h) to assert that Avnet's buyer does not receive the goods under the meaning of the rule. Rule 193(11)(h) provides: Company X is located in Ohio and has no office, employees, or other agents located in Washington or any other contact which would create
which are to be shipped to a Washington location. Company X purchases the parts from Company Z who is located in Washington and requests that the parts be drop shipped to Company Y. Since Company X has no nexus in Washington, Company X is not subject to B&O tax or required to collect retail sales tax. Company X has not taken possession or dominion or control over the parts in Washington. Company Z may accept a resale certificate from Company X which will bear the registration number issued by the state of
the parts. Avnet maintains that it is "Company Z," its buyer is "Company X," and its buyer's customer is "Company Y." This example is not on point. First, it addresses the tax liability not of Avnet (Company Z), but of Avnet's buyer (Company X), which is not at
possession of the products in Washington is not determinative. Again, "the only buyer who took possession or delivery did so from Avnet and in Washington." Avnet, 187 Wn.
We hold that Rule 193(7) does not exempt Avnet's drop-shipped sales. Likewise, Avnet will find no exemption in the examples listed in Rule 193(7)(c)(i)-(vi). First, regardless of the examples, subsection (7)( c) deals with nexus, and "nexus" is defined as
23
"the activity carried on by the seller in Washington which is significantly associated with the seller's ability to establish or maintain a market for its products in Washington." Rule 193(2)(f). As previously discussed, Avnet's in-state activities meet this standard. Avnet attempts to evade this conclusion by arguing that subsection (2)(f) pertains to "taxpayer nexus," whereas subsection (7)(c) relates to "transactional nexus." Avnet, Inc.'s Suppl.
However, Avnet's distinction between subsections (2)(f) and (7)(c) ignores language from (7)( c) that provides that the nexus will be deemed to exist for taxing purposes for up to five years even when the in-state activity has ceased. This undermines the interpretation that A vnet advances, which would require a transaction-by-transaction nexus determination. Second, one of the examples listed states that there is a sufficient nexus if "[t]he out-of-state seller, either directly or by an agent or other representative, performs significant services in relation to establishment or maintenance of sales into the state, even though the seller may not have formal sales offices in Washington or the agent or representative may not be formally characterized as a 'salesperson'." Rule 193(7)(c)(v) (emphasis added). This example is an iteration ofthe Tyler Pipe standard, and Avnet's activities fall squarely within it. We hold that Rule 193, which interprets Washington's B&O tax statutes, does not bar the imposition of a gross receipts tax on Avnet's national and drop-shipped sales.7
7 The Department's reading of Rule 193, which interprets the B&O taxing statutes, is correct.
Therefore, it is unnecessary to determine whether the Department disavowed an interpretive rule and whether it should be estopped from doing so if a taxpayer relies on it.
24
CONCLUSION Washington's B&O tax is intended to extend as far as permitted by the dormant commerce clause and to reach "virtually all business activities carried on within the state." Time Oil, 79 Wn.2d at 146. The dormant commerce clause would permit Avnet to dissociate its national and drop-shipped sales if it could show that the bundle of its corporate in-state activities were not "'significantly associated with the taxpayer's ability to establish and maintain a market in this state for the sales."' Tyler Pipe, 483 U.S. at 250 (quoting Tyler Pipe, 105 Wn.2d at 323). During the time in question, Avnet had an
account managers, sales and marketing representatives, engineers, and technology consultants. The Redmond office was significantly associated with establishing and holding the market for its products in Washington, and therefore we hold that the dormant commerce clause does not prevent the imposition of a B&O tax. Furthermore, we hold that the plain language of Rule 193 does not bar the B&O tax. The Court of Appeals is affirmed.
25
WE CONCUR:
# {
~huts+.
26
Avnet v. Dep 't of Revenue, No. 92080-0 (Gonz:Uez, J., concurring) GONZALEZ, J. (concurring)-! concur with the lead opinion in result.
Neither the dormant commerce clause nor the Department of Revenue's former "Rule 193" (former WAC 458-20-193 (1992)) preclude imposition of business and
"purchaser" in Rule 193 is the entity that ultimately takes possession of goods in Washington, regardless ofthe fact that there was a broker in the middle who placed the order on behalf of the ultimate purchaser. The Washington Legislature manifested a clear intent to impose the B&O tax on virtually all business activities carried on in the State. Time Oil Co. v. State, 79 Wn.2d 143, 483 P.2d 628 (1971). Washington courts have repeatedly ruled that the B&O tax applies to all business activities not expressly excluded. Id. Construing "purchaser" as narrowly as the dissent advocates would be inconsistent with the relevant regulations, the legislature's expressed intent, and our precedent finding B&O taxation covers virtually every business activity in Washington. Rule
I
Avnet v. Dep 't ofRevenue, No. 92080-0 (Gonzalez, J., concurring)
193(7); RCW 82.04.220; Steven Klein, Inc. v. Dep 't of Revenue, 183 Wn.2d 889, 896, 357 P.3d 59 (2015) ("Washington's B&O tax system is extremely broad."); Simpson Inv. Co. v. Dep 't of Revenue, 141 Wn.2d 139, 149-50, 3 P.3d 741 (2000); Budget Rent-A-Car ofWash.-Or., Inc. v. Dep 't of Revenue, 81 Wn.2d 171, 500 P.2d 764 (1972); Time Oil Co., 79 Wn.2d 143. Washington does not assert B&O tax on sales of goods originating outside the state unless the goods are received by the purchaser in our state and the seller has a sufficient nexus to our state. Rule 193(7). Avnet has a nexus with the state because its in-state activities were not separate and independent from its sales to Washington customers. See Norton Co. v. Dep 't of Revenue, 340 U.S. 534, 71 S.
Indus., Inc., v. Wash. State Dep 't of Revenue, 483 U.S. 232, 107 S. Ct. 2810, 97 L.
Revenue, 419 U.S. 560, 95
Revenue, 98 Wn.2d 814, 816-17, 659 P.2d 463 (1983). The goods at issue in Avnet's drop-shipped sales were received by the purchaser in our state because the entity ultimately taking possession of those goods was a Washington purchaser, regardless of the fact that there was a facilitator elsewhere. Construing "purchaser" to encompass the ultimate Washington purchaser follows our
2
Avnet v. Dep 't of Revenue, No. 92080-0 (Gonzalez, J., concurring)
precedent and follows the legislature's clear intent to impose B&O tax on virtually all business in our state. With these observations, I join the lead opinion in result.
3
Avnet v. Dep 't of Revenue, No. 92080-0 (Gonzalez, J.1concurring)
4
Avnet v. Dep 't of Revenue, No. 92080-0
(Gordon McCloud, J., dissenting)
GORDON McCLOUD,
J.
(clissenting)-Washington's business and
business activities" inside our state. RCW 82.04.220(1). The lead opinion upholds the imposition of this tax on two categories of sales that, in this case, were indisputably made by Avnet outside our state: national sales and third party drop- shipped sales. It rejects Avnet's arguments that the tax on those interstate sales fell
20-193 (1992) (Rule 193), and violated the dormant commerce clause, U.S. CONST.
I disagree with the lead opinion's conclusion on each of those points. There is no statute or regulation that "state[
s] distinctly" that these two categories of
interstate sales are "the object of th[at] [B&O tax law] to which only it shall be applied" as required by article VII, section 5 of our state constitution. In fact, imposing that tax on A vnet' s third party drop-shipped sales violates Rule 193, which bars taxation of such out-of-state sales unless the product is received by the
1
Avnet v. Dep 't of Revenue, No. 92080-0 (Gordon McCloud, J., dissenting)
purchaser in Washington. Such receipt by the purchaser in Washington did not
purchaser's customer, an independent entity, who receives the product in
efforts to impose a similar B&O tax on analogous interstate sales; it held that those sales were sufficiently "dissociated" from the company's in-state activities to bar local state taxation of those sales under the dormant commerce clause. Norton remains binding precedent. I therefore respectfully dissent.
PROCEDURAL HISTORY
The question presented in this case is a difficult one. The courts below reached different conclusions, as summarized below. That's certainly a red flag, given (1) our interpretive rule that ambiguous tax statutes or regulations are construed in the taxpayer's favor and (2) the state constitutional requirement that "every law imposing a tax shall state distinctly the object of the same to which only it shall be applied." WASH. CaNST. art. VII, § 5. I therefore summarize the background of this case in detail.
1 Norton Co. v. Dep 't ofRevenue, 340 U.S. 534, 537, 539, 71 S. Ct. 377, 95 L. Ed.
517 (1951). 2
Avnet v. Dep 't of Revenue, No. 92080-0 (Gordon McCloud, J., dissenting)
Taxes on Both National and Drop-Shipped Sales The Department of Revenue (Department) audited Avnet's taxes and concluded that from January 1, 2003, to December 31, 2005, Avnet underreported its B&O tax liabilities. In particular, the Department found that Avnet failed to include national and drop-shipped sales in its tax filings. A vnet agrees that it did not report these as taxable events, but it argues that it had no duty to report them. Avnet explained that they were considered nontaxable incidents under the Department's Rule 193 and the dormant commerce clause. According to A vnet, national and drop- shipped sales are excluded from state B&O tax liability because they were "dissociated" (i.e., lacked transactional nexus) from its Redmond office. Clerk's Papers (CP) at 6. Avnet claims it engaged in no activity in Washington associated with these sales-no soliciting, no taking or receiving of
shipping, no billing, no customer service, and no technical calls. The Department auditor accepted A vnet' s factual assertions but disagreed with its legal conclusion. It assessed Avnet $556,037 in taxes and interest ($509,256 in back taxes plus $46,781 in interest).
3
Avnet v. Dep 't of Revenue, No. 92080-0
(Gordon McCloud, J., dissenting)
Department's Tax Assessment A vnet raised the same arguments m its administrative appeal. The administrative law judge rejected them. The administrative law judge denied Avnet's claims under Rule 193(7) and its claims of dissociation under the dormant commerce clause because A vnet had failed to show that its national and drop- shipped sales were not attributable to its in-state activities in any way. According to the judge, "[i]t is not just a question of segregating the activities of specific sales
any way associated with the taxpayer's collective in-state activities that maintain a
market for that product." CP at 100 (emphasis added). The judge upheld the Department's tax assessment. That judge then granted Avnet's motion for reconsideration. During the rehearing, A vnet produced additional evidence detailing the amount of each disputed sale, the branch that wrote the sale, the buyer and state of location, and the receiver. After reviewing this evidence, the judge once again affirmed the Department's tax assessment. Avnet paid the accrued tax assessment of $660,999.54 ($556,037.00 plus $104,962.54 in additional interest) under protest and filed a refund action in Thurston County Superior Court based on the same challenges.
4
Avnet v. Dep 't of Revenue, No. 92080-0
(Gordon McCloud, J., dissenting)
Shipped Sales, but Not National Sales The superior court agreed with Avnet that drop-shipped sales were not subject to Washington's B&O tax under Rule 193(7) and ordered the Department to refund Avnet $371,042 plus any interest Avnet paid on it. But it disagreed with Avnet's contention that Rule 193(7)(c) or the dormant commerce clause barred taxes on the national sales. As to those sales, the court ruled that there was a sufficient local nexus to impose tax liability.
Appeals Held That Both National Sales and Drop-Shipped Sales Were Subject to B&O Taxation A vnet appealed its continued tax liability for national sales, and the Department cross appealed the dismissal of its tax assessments on the drop-shipped
vnet' s B&O tax liability included national and drop-shipped sales. Avnet, Inc. v. Dep 't of Revenue, 187 Wn.
120 (2016). Regarding Avnet's tax liability for national and drop-shipped sales, the appellate court acknowledged that older decisions from this court and the United States Supreme Court had held that similar sales were sufficiently dissociated from a defendant's in-state activities to avoid state B&O tax liability. Id. at 444-45
5
Avnet v. Dep "t of Revenue, No. 92080-0 (Gordon McCloud, J., dissenting) (discussing Norton, 340 U.S. at 539; B.F. Goodrich Co. v. State, 38 Wn.2d 663,673- 76, 231 P.2d 325 (1951)). But it concluded that those cases' precedential authority had been eroded by subsequent Supreme Court decisions directing courts to consider more than just the involvement of the local office in procuring the sale, but also the taxpayer's other in-state activities that supported an in-state market for its out-of- state sales. Id. at 445-47 (discussing Tyler Pipe Indus., Inc. v. Wash. State Dep 't of Revenue, 483 U.S. 232, 250-51, 107 S. Ct. 2810, 97 L. Ed. 2d 199 (1987); Standard Pressed Steel Co. v. Dep 't of Revenue, 419 U.S. 560, 95 S. Ct. 706,42 L. Ed. 2d 719 (1975); Gen. Motors Corp. v. Washington, 377 U.S. 436,447-48, 84 S. Ct. 1564, 12
48)). The appellate court also rejected Avnet's contention that Rule 193 barred B&O taxation of its drop-shipped and national sales. It concluded that Rule 193 was not binding on the court. Id. at 439 (discussing Ass 'n of
Revenue, 155 Wn.2d 430, 446-47, 120 P.3d 46 (2005)). Avnet petitioned this court for review, which we granted. 184 Wn.2d 1026. ANALYSIS Washington imposes a tax on businesses, called a B&O tax, "for the act or privilege of engaging in business activities" in Washington. RCW 82.04.220(1). It 6
Avnet v. Dep 't of Revenue, No. 92080-0
(Gordon McCloud, J., dissenting) is measured by the business' gross receipts. Former RCW 82.04.220 (1961). That tax is distinct from, and in addition to, any retail sales tax or use tax. The B&O tax applies to sales that originate within the state and some sales that originate outside- depending on where the goods are received by the purchaser. Rule 193(7) (tax applies to inbound sales), (3) (tax does not apply to outbound sales even though they
the recipient is a business entity linked to the customer (national sales) and sales where the recipient is a completely separate third party, such as the beneficiary of a gift or the purchaser's customer (third party drop-shipped sales). Controlling Supreme Court precedent compels the conclusion that the dormant commerce clause bars states from taxing both out-of-state sales.
Same Result Based on the Same Facts The United States Constitution prohibits states from taxing interstate commerce if the tax infringes on Congress' express authority "[t]o regulate commerce ... among the several states." U.S. CaNST., art. I, § 8, cl. 3. This "commerce clause" has historically been viewed as both an express grant of congressional authority to regulate and an implicit restriction on a state's authority to enact legislation that discriminates against or excessively burdens interstate
Revenue, 170 Wn.2d 838, 844, 246 PJd 788 7
Avnet v. Dep 't of Revenue, No. 92080-0 (Gordon McCloud, J., dissenting) (20
11 ). This case implicates the commerce clause's implied restriction, the dormant
commerce clause. A tax on interstate commerce does not violate the dormant commerce clause
if '"[(1)] the tax is applied to an activity with a substantial nexus with the taxing
State, [(2)] is fairly apportioned, [(3)] does not discriminate against interstate commerce, and [(4)] is fairly related to the services provided by the State."' Ford Motor Co. v. City of Seattle, Exec. Serv. Dep 't, 160 Wn.2d 32, 48, 156 P.3d 185 (2007) (quoting Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S. Ct. 1076, 51 L. Ed. 2d 326 (1977)). "If a local taxing scheme fails any one of these four requirements, it is invalid." !d. The parties disagree whether the first requirement, of a "substantial nexus with the taxing state," is satisfied. That "substantial nexus" requirement actually involves two separate, though related, nexus requirements: the first concerns the "taxpayer's [general] business activities within the State," or general business nexus, and the second concerns the specific transaction at issue, or specific transactional
distinct from transactional nexus and its test for dissociation); Norton, 340 U.S. at 537 (where corporation has general presence in state, it "can avoid taxation on [in- 8
Avnet v. Dep 't of Revenue, No. 92080-0
(Gordon McCloud, J., dissenting)
state] sales only by showing that particular transactions are dissociated from the local business and interstate in nature" (emphasis added)). To establish business nexus, the tax must be based on "'the activities performed in [the taxing] state on behalf of the taxpayer [that] are significantly associated with the taxpayer's ability to establish and maintain a market in [that] state for the sales."' Tyler Pipe, 483 U.S at 250-51 (quoting Tyler Pipe v. Dep 't of Revenue, 105 Wn.2d 318, 323, 715 P.2d 123 (1986)). Once sufficient business nexus is shown, '"a taxpayer claiming immunity from a tax has the burden of establishing [an] exemption."' Gen. Motors, 377 U.S. at 441 (quoting Norton, 340 U.S. at 537). A particular transaction can be exempt from B&O taxation even though the business has nexus in Washington if that transaction is "dissociated from the local business and interstate in nature." Norton, 340 U.S. at 537.2 Avnet concedes that it has a business nexus with Washington based on the presence of its Redmond office. Hence, Avnet does not challenge the Department's authority to tax transactions facilitated by that office. Indeed, Avnet has paid B&O
2 Rule 193 incorporates the same constitutional requirements of business and
transactional nexus into its prerequisites to the occurrence of a taxable event. Rule 193(7)( c) ("Washington does not assert B&O tax on sales of goods which originate outside this state unless ... the seller has nexus"; "[i]f a seller carries on significant activity in this state and conducts no other business in the state except the business of making sales, this person has the distinct burden of establishing that the in[-]state activities are not significantly associated in any way with the sales into this state").
9
Avnet v. Dep 't ofRevenue, No. 92080-0
(Gordon McCloud, J., dissenting) taxes on all those transactions. Instead, A vnet argues that two categories of interstate sales--its national and third party drop-shipped sales-are so dissociated from the activities of its Redmond
reason.3 Avnet relies on the United States Supreme Court's decision in Norton for that argument. Norton, like Avnet, was an out-of-state corporation that operated a local retail
to consult with its in-state customers. Norton Co. v. Dep 't of Revenue, 405 Ill. 314, 315, 90 N.E.2d 737 (1950). And Norton, like Avnet, challenged the State's ability to impose a B&O tax on the portion of its Washington sales derived from orders received directly and fulfilled directly by its out-of-state warehouses and without the assistance of its local employees or facilities in any way. Norton, 340 U.S. at 535-
"dissociated" from Norton's in-state activities to be constitutionally exempt from
3 The lead opinion claims that General Motors and its progeny drew no distinction
between these two inquiries. Lead opinion at 8 n.2. This is incorrect. In General Motors itself, General Motors "admitted" that its activities satisfied the first inquiry. Gen. Motors, 377 U.S. at 441. The only disputed question was whether certain specific transactions by four of its divisions could be taxed--i.e., whether the transactions by those divisions showed sufficient nexus. 10
Avnet v. Dep 't of Revenue, No. 92080-0 (Gordon McCloud, J., dissenting) B&O taxation under the dormant commerce clause. I
This case involves the exact same facts. Everyone agrees-A vnet, the Department, and even the lead opinion-that Norton is factually indistinguishable. Avnet, Inc.'s Suppl. Br. at 6-11; Resp't Dep't of Revenue's Suppl. Br. at 11, 13; lead
to B&O taxation for those same sort of
lead opinion reaches this contrary conclusion by interpreting several subsequent United States Supreme Court decisions as raising Norton's standard for proving
Pressed Steel, and Tyler Pipe. None ofthose cases support the lead opinion's conclusion. First, Tyler Pipe is a case about business nexus, not transactional nexus. 483 U.S. at 249 ("Tyler argues that its business does not have a sufficient nexus with the State of Washington to justify the collection of a gross receipts tax" (emphasis added)).4 Nowhere in Tyler Pipe did the Court discuss the concept of dissociation
4 The lead opinion argues that Tyler Pipe drew no distinction between general
business nexus and specific transaction nexus. That's because it didn't have to; the only disputed issue there, unlike the issue in General Motors, Norton, and the instant case, was whether Tyler Pipe had enough general business connections with the State.
11
Avnet v. Dep 't of Revenue, No. 92080-0
(Gordon McCloud, J., dissenting)
Second, contrary to the lead opinion's opinion, both General Motors and Standard Pressed Steel support applying the "dissociation" test as it was articulated in Norton, and not some modified standard of
cited to Norton as the standard for evaluating whether a disputed transaction is sufficiently dissociated. Gen. Motors, 377 U.S. at 441, 447-48; Standard Pressed Steel, 419 U.S. at 562-63. In General Motors, the Court reached a different result from Norton because the facts were different: it found there was a significant relationship between General Motors' (GM) in-state sales activities and the disputed transactions. In General Motors, GM sought to exempt all sales where the orders were placed by Washington dealers directly with its Portland office and fulfilled by an out-of-state facility despite the significant contacts between GM's in-state employees and those dealers. 377 U.S. at 443, 446. GM argued that Norton controlled because in its case, as in Norton, customers ordered directly from out-of-state offices and their orders were
5 The lead opinion's reliance on Lamtec is misplaced for this same reason. Like
Tyler Pipe, Lamtec is a case about business nexus, not transactional nexus. Specifically,
"Lamtec argue[d] that an entity has sufficient nexus with Washington for purposes of the B&O tax only if it has a 'physical presence' here and contends that it does not have such a presence." 170 Wn.2d at 844. Thus, contrary to the lead opinion's assertion, Lamtec did
not address Norton and did not endorse some modified standard for what constitutes
sufficient dissociation. Lead opinion at 16.
12
Avnet v. Dep 't of Revenue, No. 92080-0
(Gordon McCloud, J., dissenting) fulfilled by out-of-state facilities. The Court rejected GM's analogy, explaining that Norton was about more than just where the order was placed and where the product was fulfilled; it was about the absence of any contact between the taxpayer's in-state employees and the particular transaction. !d. at 44
had failed to prove those orders were dissociated from its in-state activities. On the contrary, the facts showed that GM hired a significant number of Washington employees whose only jobs were to facilitate and assist those Washington dealers with determining what products to order and training those dealers' employees on how to use those products. !d. at 443-46. On those facts, the Court could not say the sales were unrelated to GM's in-state activities. So the difference between Norton and GM was the facts, not the legal rule. The Court reached a different result from Norton again in Standard Pressed
relationship between the taxpayer's in-state activities and the customer who placed the order. Standard Pressed Steel challenged Washington's authority to impose a B&O tax on sales orders placed by a Washington customer directly with an out-of- state office and then fulfilled by an out-of-state facility. 419 U.S. at 561. But unlike Norton, Standard Pressed Steel hired an employee whose sole job was to consult with that customer regarding its needs and product requirements. !d. The Court
13
Avnet v. Dep 't of Revenue, No. 92080-0 (Gordon McCloud, J., dissenting) found these facts to be more analogous to the facts of General Motors than to the facts of
the facts, not the legal rule. We have also recognized that Norton stands as controlling authority but reached a different result based on the facts of the particular transaction. Chi. Bridge
& Iron Co. v. Dep't of
Revenue, 98 Wn.2d 814, 659 P.2d 814 (1983). Chicago Bridge manufactured and installed large, custom-built, steel storage containers. Id. at 816. Like Norton, GM, and Standard Pressed Steel, Chicago Bridge challenged Washington's imposition of a B&O tax on orders placed by customers directly with an out-of-state sales office. Id. at 816-17. But unlike in General Motors and Standard Pressed Steel, where the employees had a significant relationship with the in-state customer, none of Chicago Bridge's local employees were involved in commencing or facilitating the in-state sales. I
similar to the facts in Norton than the facts in General Motors and Standard Pressed Steel. We nevertheless upheld Washington's authority to tax these sales, distinguishing these sales from the sale of fungible goods that were at issue in
custom-made structures specifically designed for installation in Washington, the future installation of which would require significant involvement from Chicago
14
Avnet v. Dep 't of Revenue, No. 92080-0
(Gordon McCloud, J., dissenting) Bridge's many in-state employees to complete by way of site surveys, site preparations, and assemblage. Jd. at 818-19,821-22. Unlike in General Motors, Standard Pressed Steel, and Chicago Bridge, there is no way to distinguish the facts in this case from the facts in Norton. The parties agree that the cases are factually indistinguishable. There is no significant relationship between Avnet's Redmond employees and the out-of-state customers or in-state recipients. Further, Avnet sold fungible goods, not long-term construction
the Supreme Court's repeated application of Norton as controlling authority, I conclude that its legal rule remains controlling where similar facts are presented. Following Norton, the disputed national sales and third party dropped-shipped sales are dissociated from Avnet's in-state activities. They are therefore exempt from B&O tax liability under the dormant commerce clause.
Washington for the Sale To Be Taxable Rule 193 compels the same conclusion for a different reason. It requires more than just constitutional nexus for a taxable event. It states that "Washington does not assert B&O tax on sales of goods which originate outside this state unless the goods are received by the purchaser in this state and the seller has nexus." Rule 193(7). In other words, "[t]here must be both the receipt of the goods in Washington by the purchaser and the seller must have nexus for the B&O· tax to apply to a
15
Avnet v. Dep 't of Revenue, No. 92080-0
(Gordon McCloud, J., dissenting) particular sale. The B&O tax will not apply if
these elements is missing." I
d.
Thus, even ifthere is constitutional nexus, the State cannot tax the transaction unless "the purchaser" also took "receipt" ofthe goods in Washington.
It is undisputed that Avnet's national sales were received by an entity of the
purchaser in this state. So Rule 193 would permit the State to tax those sales if the constitution permitted it. But it is also undisputed that Avnet's third party drop-shipped sales were not received by the purchaser in this state. They were received instead by an independent entity in this state: the purchaser's customer or some other third party recipient.6 The question is whether the delivery of goods to such a third party recipient in Washington qualifies as "the receipt of the goods in Washington by the purchaser." Rule 193(7) (emphasis added). The lead opinion concludes that the answer must be yes-there must be some interpretation of "purchaser" that includes the nonpurchasing third party recipient- because the legislature intended to tax all constitutionally taxable events even if it
6 The lead opinion misapprehends Avnet's argument, characterizing it as a claim
that "the company that places the order and requests it be drop-shipped to Washington is not the purchaser." Lead opinion at 20. But Avnet is arguing the exact opposite position. A vnet is claiming that the company that places the order is the purchaser and that as a result, the goods are not received by the purchaser in Washington as required under Rule
16
Avnet v. Dep 't of Revenue, No. 92080-0
(Gordon McCloud, J., dissenting) didn't clearly say so in its statutes or regulations. The lead opinion therefore construes the rule liberally to find a taxable event. But that is inconsistent with our well-established rule that ambiguous tax statutes and regulations must be construed in the taxpayer's favor. Seattle Film Works, Inc. v. Dep 't of
Revenue, l 06 Wn. App.
448,453, 24 P.3d 460 (2001); see also Estate of
Bracken, 175 Wn.2d 549, 563, 290
P.3d 99 (2012) (quoting Lamtec, 170 Wn.2d at 842-43). In fact, that interpretive rule is constitutionally compelled. See Bracken, 175 Wn.2d at 563 (quoting Washington Constitution article I, section 5 in support of narrow construction).
It is only where the statute or regulation grants a tax exemption or deduction
that we construe the language strictly, though fairly, in keeping with the ordinary meaning of its language, against the taxpayer. !d.
7 A
vnet is not claiming a deduction
inapplicable in the first place, per Rule 193. Thus, as the taxpayer burdened by the tax, A vnet should receive the benefit from any ambiguity. But Rule 193 is not ambiguous. It defines "received" as meanmg "the
7 Although this case involves agency interpretations of statutes and regulations, the
parties do not discuss what deference, if any, should be afforded to the Department's interpretation of tax statutes and its regulations. See Chevron, USA, Inc. v. Nat'! Res. Def
Council, Inc., 467 U.S 837, 104 S. Ct. 2778, 81 L. Ed. 2d 694 (1984); United States v. Mead Corp., 533 U.S. 218, 121 S. Ct. 2164, 150 L. Ed. 2d 292 (2001).
17
Avnet v. Dep 't of Revenue, No. 92080-0 (Gordon McCloud, J., dissenting) purchaser or its agent first either taking physical possession of the goods or having dominion and control over them." Rule 193(2)(d). This means the "receipt" requirement can be satisfied in one of two limited ways: the purchaser or its agent must have either possession over the goods in Washington or dominion and control
explains that a drop-shipment purchaser (Company X) does not take possession in Washington or have dominion or control over the goods in Washington when it requests the goods purchased be delivered to a third party recipient (Company Y) in
Company X is located in Ohio and has no office employees, or other agents located in Washington or any other contact which would create nexus. Company X receives by mail an order from Company Y for parts which are to be shipped to a Washington location. Company X purchases the parts from Company Z who is located in Washington and requests that the parts be drop shipped to Company Y. Since Company X has no nexus in Washington, Company X is not subject to B&O tax or required to collect retail sales tax. Company X has not taken possession or dominion or control
from Company X which will bear the registration number issued by the state
the parts. Rule 193(11)(h) (emphasis added). If the purchaser (Company X) does riot take possession of the goods in Washington when the goods were delivered to a third party designee (Company Y), it necessarily follows that the third party recipient is not an "agent" of the purchaser either because a company can take possession or 18
Avnet v. Dep 't of Revenue, No. 92080-0 (Gordon McCloud, J., dissenting)
have dominion or control over the goods through either its employees or its agents. Rule 193(2)(d). This conclusion is also consistent with the definition of "agent" under Rule 193, which requires, contrary to the lead opinion's opinion, more than just the authority to receive goods; an "agent" is "a person authorized to receive goods with the power to inspect and accept or reject them." Rule 193(2)(e) (emphasis added). In addition, this conclusion is in accord with internal e-mails from department employees acknowledging that they were advised to inform taxpayers that drop- shipped sales were not subject to Washington's B&O tax. It is certainly not fair to characterize A vnet' s challenge as an attempt to circumvent taxation or exploit some tax loophole when the Department is the one who defined the taxable event to exclude sales where the goods are not received by the purchaser in Washington. See lead opinion at 21-22. While it may have been "the legislature's intent that the B&O tax apply to virtually every business activity and to the extent permitted by the constitution," id. at 21-22, we cannot ignore the express language of Rule 193-a rule expressly promulgated by the Department and relied on by Washington businesses in making their business choices. Taxpayers "must be able to rely on the plain meaning of regulations and Department interpretations, without fear that a state agency will later
19
Avnet v. Dep 't of Revenue, No. 92080-0 (Gordon McCloud, J., dissenting) penalize them by adopting a different interpretation." Silverstreak, Inc. v. Dep 't of Labor & Indus., 159 Wn.2d 868, 889-90, 154 P.3d 891 (2007). Not only would it be unfair to ignore the Department's own rules, the legislature requires that the Department follow its own promulgated rules. RCW 34.05.570(3)(h) (authorizing courts to grant relief where an agency order "is inconsistent with a rule of the agency unless the agency explains the inconsistency by stating facts and reasons to demonstrate a rational basis for inconsistency"). Thus, even if the legislature silently intended to exempt third party drop-shipped sales from B&O taxation (the issue the lead opinion addresses), the Department was still required to exempt those sales from taxation under its then-effective Rule 193.8 Finally, to the extent the lead opinion is concerned that application of Rule 193 would result in the exclusion of significant tax revenue, that concern has been addressed by the current version of Rule 193, WAC 458-20-193(301 ). That current version addresses in specific detail the application of the B&O tax to third party drop-shipped sales. Id. The application of this decision is therefore limited to a
8 The question of whether this court is bound by Department rules is a different
question from whether the Department must follow its own rules. The State's citation to Coast Pacific Trading, Inc. v. Dep 't of Revenue, 105 Wn.2d 912, 916-17, 719 P.2d 541 (1986), is therefore unavailing. It relates to the fanner question; this case relates to the latter. 20
Avnet v. Dep 't of Revenue, No. 92080-0
(Gordon McCloud, J., dissenting) business's liability for past taxes based on a certain category of past sales involving third party drop shipments made during the period when Rule 193 applied. CONCLUSION The United States Supreme Court's decision in Norton barred Washington from imposing its B&O tax on the portion of an out-of-state corporation's sales derived from orders placed with the out-of-state business and fulfilled by out-of- state warehouses without the assistance of the business's in-state employees. It held that the dormant commerce clause prohibited the state from taxing such interstate transactions because they were too "dissociated" from the taxpayer's in-state activities to justifY the burden on interstate commerce. Norton, 340 U.S. at 537. Everyone agrees that the national sales and drop-shipped sales at issue in this case are factually indistinguishable from the interstate sales at issue in Norton. Norton therefore controls and bars application of Washington's B&O tax to the disputed
the tax were constitutionally permissible, it also violated Rule 193 to the extent it was applied to Avnet's third party dropped-shipped sales. Rule 193 requires that the goods purchased be received by the purchaser in Washington to constitute a taxable event in our state. By definition, third party drop-shipped sales are not received by the purchaser, but rather the purchaser's customer or some
21
Avnet v. Dep 't of Revenue, No. 92080-0
(Gordon McCloud, J., dissenting) RCW 82.04.220 and Rule 193 extend Washington's B&O tax to the national and drop-shipped sales in this case must be resolved in favor of the taxpayer, not against
I therefore respectfully dissent. 22
Avnet v. Dep 't of Revenue, No. 92080-0
(Gordon McCloud, J., dissenting) 23
[Cite as Andrew Jergens Co. v. Wilkins, 109 Ohio St.3d 396, 2006-Ohio-2708.]
ANDREW JERGENS COMPANY, APPELLANT, v. WILKINS, TAX COMMR., APPELLEE. [Cite as Andrew Jergens Co. v. Wilkins, 109 Ohio St.3d 396, 2006-Ohio-2708.] Personal property taxation — Off-the-shelf computer software taxable as tangible personal property used in business. (Nos. 2005-0501 and 2005-0502 — Submitted February 8, 2006 — Decided June 14, 2006.) APPEALS from the Board of Tax Appeals, Nos. 2002-P-403 and 2002-P-614. __________________ ALICE ROBIE RESNICK, J. {¶ 1} Appellant, the Andrew Jergens Company, contends that its canned application software should not be taxed as tangible personal property used in
{¶ 2} These consolidated cases cover the tax years 1996 through 1998, during which Jergens did not report the value of its so-called canned or off-the- shelf application software on its personal property tax return. After an audit, the Tax Commissioner assessed this software as tangible personal property used in
Jergens’s claim. {¶ 3} Jergens appealed the Tax Commissioner’s final determination to the Board of Tax Appeals (“BTA”). Based on this court’s opinion in Community
affirmed the Tax Commissioner’s final determination. {¶ 4} This cause is now before the court upon an appeal as of right. {¶ 5} R.C. 5711.02 and 5711.13 together provide that each taxpayer is to make a return annually to the county auditor or the Tax Commissioner, listing all
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“taxable property.” The term “taxable property” is defined in R.C. 5711.01(A) to include “all the kinds of property mentioned in division (B) of section 5709.01” of the Revised Code. {¶ 6} R.C. 5709.01(B)(1) provides, “All personal property located and used in business in this state * * * [is] subject to taxation * * *.” {¶ 7} The term “personal property” is defined in R.C. 5701.03: {¶ 8} “As used in Title LVII of the Revised Code: {¶ 9} “(A) ‘Personal property’ includes every tangible thing that is the subject of ownership, whether animate or inanimate, * * * that does not constitute real property * * *.” {¶ 10} Although that definition does not exclude intangible property, Anderson v. Durr (1919), 100 Ohio St. 251, 263, 126 N.E. 57, since 1931, intangible property has been listed and taxed separately, and the tax is now largely phased out. 114 Ohio Laws 714; R.C. 5709.02; R.C. Chapter 5707. {¶ 11} There is no statutory definition for “tangible.” As authority for the contention that its canned software is not tangible and not subject to listing as taxable personal property under R.C. 5709.01, Jergens relies on a decision of the Tenth District Court of Appeals, CompuServe, Inc. v. Lindley (1987), 41 Ohio App.3d 260, 535 N.E.2d 360. {¶ 12} The question in CompuServe was whether customized software was tangible personal property subject to personal property tax (as well as sales and use tax). We use the term “customized software” to mean software that is created especially for a particular customer, as contrasted to canned software. The fact that the software in CompuServe was customized software is evidenced by CompuServe’s statement that its software had “been created by appellant’s staff and some software has been written pursuant to agreements with non- employee computer software authors.” Id. at 263, 535 N.E.2d 360.
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{¶ 13} We decline to look to CompuServe as precedent because the software under consideration here is canned software, not customized. Whether canned software and customized software should be treated the same for tax purposes is not a question before the court at this time. In CompuServe, the court stated, “To determine whether computer software is a tangible or an intangible item, we are guided by the treatment of computer software by other authorities.” 41 Ohio App.3d at 263, 535 N.E.2d 360. {¶ 14} However, several of the authorities relied on by the court of appeals in CompuServe to support that court’s holding that software is intangible have been reversed, overruled, or modified. The first authority cited by the court
States Tax Court, en banc, has declared that computer software is tangible personal property for purposes of the investment tax credit. Norwest Corp. v.
{¶ 15} The second authority cited by the CompuServe court was State v.
by the Alabama Supreme Court in Wal-Mart Stores, Inc. v. Mobile (Ala.1996), 696 So.2d 290, which held that computer software was tangible personal property. {¶ 16} The third authority listed by the CompuServe court was James v. TRES Computer Sys., Inc. (Mo.1982), 642 S.W.2d 347. However, in Internatl. Business Machines Corp. v. Dir. of Revenue (Mo.1989), 765 S.W.2d 611, the Missouri Supreme Court held that canned programs are tangible and subject to sales tax. The court noted that the parties in the James case had stipulated that the software was intangible. Id. at 613. {¶ 17} To counter Jergens’s contention, the Tax Commissioner relies on Community Mut. Ins. Co. v. Tracy (1995), 73 Ohio St.3d 371, 653 N.E.2d 220, a case decided by this court several years after the Tenth District decided
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comment on the Tenth District’s CompuServe decision. Community Mut. Ins. Co. was a sales tax case in which the question was whether software purchased by the taxpayer was tangible personal property or a personal service. Two separate purchases of software were at issue. {¶ 18} For its first purchase, Community Mutual purchased magnetic tapes from Nationwide Insurance Company containing Medicare information concerning Community Mutual’s subscribers. The court found that there was no personal service involved and analogized the transaction to the sale of casebooks reporting its decisions. The court stated, concerning the purchase of the magnetic tapes: {¶ 19} “We also conclude that Community Mutual did not purchase intangible property. Virtually all books and recordings memorialize intangible efforts by the author or artist. Recording and marketing the intellectual effort render that effort more economically available to purchasers. Nevertheless, the medium on which the intellectual effort is transferred is tangible and subject to sales tax.” Community Mut. Ins. Co., 73 Ohio St.3d at 376, 653 N.E.2d 220. {¶ 20} Later on in the opinion, referring to the tapes purchased from Nationwide, the court again stated, “This was the purchase of tangible personal property.” Id. {¶ 21} For its second purchase, Community Mutual purchased a license to use canned application software. The software, which was created by an outside supplier to satisfy the needs of Blue Cross/Blue Shield organizations, was licensed to Community Mutual and delivered on magnetic tape. Community Mutual contended either that it purchased a personal service and the tape was an inconsequential element of the transaction or that the software was intangible
Community Mutual’s purchase of the tape was the purchase of tangible personal
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(1985), 18 Ohio St.3d 309, 18 OBR 356, 480 N.E.2d 1124, the court stated that “encoded magnetic tapes are tangible personal property.” Community Mut. Ins. Co., 73 Ohio St.3d at 378, 653 N.E.2d 220. {¶ 22} The taxpayer in Interactive Information Sys. developed computer programs that it transferred to magnetic tapes for delivery to its customers. The taxpayer contended that the computers it used to develop the programs were exempt from sales and use tax because they were used in manufacturing. See former R.C. 5739.01(E)(2), 137 Ohio Laws, Part I, 1658. This court disagreed, stating: {¶ 23} “While the [taxpayer] produces tangible personal property in the form of encoded magnetic tapes, such production is only in a very narrow sense the result of ‘manufacturing’ or ‘processing’ as those terms were defined by R.C. 5739.01(S). The [taxpayer] does not transform or convert ‘material or things into a different state or form’ until it actually begins to encode the magnetic tape with the program that it has previously developed on its computer.” (Emphasis sic; footnote omitted.) Interactive Information Sys., 18 Ohio St.3d at 311, 18 OBR 356, 480 N.E.2d 1124. {¶ 24} When a business purchases canned software it receives a tape, disc,
are recorded on a medium, often in the form of magnetic fields. To use the purchased software, the purchaser transfers the encoded instructions from the medium to his or her computer. After being transferred to the computer, the instructions are stored on the hard drive of the purchaser’s computer to enable the computer to perform the desired operation. Thus, the encoded instructions are always stored on a tangible medium that has physical existence. The magnetic or
and physically stored in the computer and then read by the computer as
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instructions on how to perform a given application. Jergens’s canned application software is tangible personal property subject to personal property tax for property used in business. {¶ 25} We find the decision of the Board of Tax Appeals to be reasonable and lawful and affirm it. Decision affirmed. MOYER, C.J., O’CONNOR and LANZINGER, JJ., concur. PFEIFER, LUNDBERG STRATTON and O’DONNELL, JJ., dissent. __________________ O’DONNELL, J., dissenting. {¶ 26} Respectfully, I dissent. {¶ 27} While the majority carefully details the viewpoints expressed by the parties and correctly notes that the Tax Commissioner relies upon our decision in Community Mut. Ins. Co. v. Tracy (1995), 73 Ohio St.3d 371, 653 N.E.2d 220, and that the taxpayer, the Andrew Jergens Company, relies upon CompuServe v. Lindley (1987), 41 Ohio App.3d 260, 266, 535 N.E.2d 360, the majority does not address the distinction drawn in CompuServe by the appellate court, i.e., the difference between system software and applications software. In my view, the
{¶ 28} The court in CompuServe explained that system software is essential to the functioning of the computer and that because it affects the value of the equipment on which it is installed, it is subject to the Ohio personal property
incidental costs which enhance the value of tangible business personal property are considered part of the true value of the business personal property for tax purposes.” Id., 41 Ohio App.3d at 266, 535 N.E.2d 360. Thus, the intrinsic nature of the relationship between system software and the hardware on which it
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{¶ 29} On the other hand, applications software, which is at issue here, is not essential to the operation of the equipment, but permits the operator to perform individual functions pertinent to a particular task. Id., 41 Ohio App.3d at 267, 535 N.E.2d 360. Applications software has value independent of the hardware on which it operates. Until today, this distinction had been recognized in the field. Until this case arose, the commissioner has never before classified applications software as tangible personal property. {¶ 30} The majority reaches its decision by emphasizing that “the encoded instructions are always stored on a tangible medium that has physical existence.” With respect to applications software, however, I concur with the statement of the court in Gilreath v. Gen. Elec. Co. (Fla.App.2000), 751 So.2d 705, 708, that “the essence of the property is the software itself, and not the tangible medium on which the software might be stored.” {¶ 31} In this case, Jergens argues that it has a license to use intellectual property that is owned by another. This correctly characterizes a purchase of applications software. Jergens purchased the intangible information for use on its computers, and “ ‘the fact that tangible property is used to store or transmit the software’s binary instructions does not change the character of what is fundamentally a classic form of intellectual property.’ ” Id. at 709, quoting Northeast Datacom, Inc. v. Wallingford (1989), 212 Conn. 639, 644, 563 A.2d
personal property and should not be subject to that tax. {¶ 32} The personal property tax applies to “[a]ll personal property located and used in business in this state.” R.C. 5709.01. The Revised Code defines “personal property” to include “every tangible thing that is the subject of
property.” R.C. 5701.03. We have applied this tax to such items as taximeters and two-way radios installed in motor vehicles, Taxicabs of Cincinnati, Inc. v.
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Peck (1954), 161 Ohio St. 508, 53 O.O. 378, 120 N.E.2d 86, and slot machines, Capitol Novelty Co., Ltd. v. Evatt (1945), 145 Ohio St. 205, 30 O.O. 418, 61 N.E.2d 211. {¶ 33} In contrast, R.C. 5709.02, the intangible personal property tax, provides, “All money, credits, investments, deposits, and other intangible property
Assembly has defined “other intangible property” to include “every valuable right, title, or interest not comprised within or expressly excluded from any of the
R.C. 5701.09. This definition includes, for example, items such as a patent- licensing agreement. Beckett v. Tax Commr. (1965), 7 Ohio App.2d 181, 36 O.O. 2d 314, 219 N.E.2d 305. In Beckett, the parties reduced a patent-licensing agreement to written form, i.e., “a tangible medium that has physical existence.” The physical existence of a written contract, however, did not render the underlying intellectual property tangible for tax purposes. The same reasoning should apply here. {¶ 34} Based on the foregoing, applications software should not be subject to taxation as tangible personal property. PFEIFER and LUNDBERG STRATTON, JJ., concur in the foregoing dissenting
__________________ Jones Day and Charles M. Steines, for appellant. Jim Petro, Attorney General, and Barton A. Hubbard, Assistant Attorney General, for appellee. ______________________
ST 2003-06 - Definition of Tangible Personal Property including Prewritten Computer Software - July 2, 2003
Information Release
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