Tyler Pipe Industries, Inc. v. Washington State Department of Revenue

PETITIONER:Tyler Pipe Industries, Inc.
RESPONDENT:Washington State Department of Revenue
LOCATION:Bentonville, Arkansas

DOCKET NO.: 85-1963
DECIDED BY: Rehnquist Court (1986-1987)
LOWER COURT: Washington Supreme Court

CITATION: 483 US 232 (1987)
ARGUED: Mar 02, 1987
DECIDED: Jun 23, 1987

D. Michael Young – on behalf of Appellants in No. 85-2006
Neil J. O’Brien – on behalf of Appellant in No. 85-1963
William B. Collins – on behalf of Appellants

Facts of the case


Audio Transcription for Oral Argument – March 02, 1987 in Tyler Pipe Industries, Inc. v. Washington State Department of Revenue

William H. Rehnquist:

You may proceed whenever you’re ready, Mr. Young.

D. Michael Young:

Mr. Chief Justice and may it please the Court:

These appeals come to the Court from two decisions of the State Supreme Court of Washington.

They involve 72 Appellants, all of whom have paid certain taxes to the state of Washington and are trying to get them back because they believe that the Washington tax statutes are unconstitutional.

71 of the taxpayers were consolidated in the state courts in a case styled National Can Corporation.

These 71 Appellants challenge the Washington taxes as violating the commerce clause on two independent bases: one, that they discriminate against interstate commerce; and two, that they’re not fairly apportioned.

Either one of these defects would be a sufficient basis to invalidate the taxes.

I’ll address the discrimination problem, and if by any chance my limited time permits I’ll also touch on the apportionment problem.

Having granted divided argument, Tyler’s counsel will address the issues that are peculiar to that case, which include two commerce clause issues similar to those raised by the National Can Appellants and several other issues that aren’t involved in the National Can appeal at all.

The guts or perhaps I should say heart of this case are the taxpayers’ activities, the way the Washington taxes are imposed on those activities, and the constitutional problems that they create.

A very graphic picture of the hard facts are provided in the chart that was prepared by the state of Washington, the Appellee here.

And to make the most efficient use of the limited time, I’m going to ask the Court’s indulgence in referring with me to the chart that the state prepared.

You’ll find it in the jurisdictional statement submitted by National Can Corporation, and in particular it’s appendix K to the jurisdictional statement.

So that’s on the very last page of the National Can jurisdictional statement, appendix K.

Now, I want to emphasize, this was prepared by the state and not by us.

It was prepared in a context very much like the one that we’re in here.

As you may know, the state participated as an amicus in the Armco versus Hardesty case that was before the Court a couple of years ago.

The state of Washington was trying to help the state of West Virginia defend its taxes, much like these here, against a challenge of unconstitutionality.

But this Court held, after listening to the arguments that the states raised, that the West Virginia taxes were unconstitutional.

And so then the Department of Revenue of Washington had the task of coming back and explaining to the executives of the state and the legislature of the state why this Court reached that conclusion with respect to West Virginia’s taxes and why Washington’s taxes had the same kinds of problems.

Now, the state in this chart put itself, put the state of Washington, at the top in the large rectangle at the top, and it put the state of West Virginia at the bottom.

I would like to start in the other order because I think it makes sense to start with your decision in the Armco case.

Okay, how does it depict the taxpayers here?

All of the taxpayers in National Can’s appeal, like Armco, are manufacturers.

They’re producing something.

Almost all of them are manufacturing, a few of them are doing some extracting.

The second thing is that they, like Armco, are selling across state lines.

Now, in each case we’re talking about a manufacturer selling.

In this chart the state has chosen to illustrate each activity by one of these small boxes.

So you can see Armco down at the very bottom of the West Virginia chart, manufacturing and wholesaling.

D. Michael Young:

And they’re connected with an arrow to indicate that both boxes go together, they’re one taxpayer doing these two different activities.

Now, you’ll notice running down the center of that chart is kind of a dashed line.

That represents the boundary of the state of West Virginia.

And in Armco’s case there, looking at the very bottom set of boxes, you can see that the manufacturing was going on out of state, the wholesaling was going on in West Virginia, and that arrow is crossing the state line.

This Court looked at the fact that Armco was paying West Virginia’s wholesaling tax and it compared that situation with a like company doing business entirely within West Virginia.

And that like company in the state’s chart here is the top set of boxes in the West Virginia part of the chart there.

You can see that both the manufacturing and wholesaling was going on in West Virginia.

No state boundary is crossed.

The important thing you can see there is that box for wholesaling, if you’re an in-state taxpayer, is not cross-hatched, and the fact that it’s not cross-hatched, according to the state’s symbolism, means it doesn’t get taxed.

So the Court looked at a tax on the interstate company wholesaling, no tax on the local company wholesaling, and concluded that there was facial discrimination there.

I’d like to move now to the top of the chart, because that’s what really tells us about Washington’s taxes.

Up there you’ll see a striking similarity.

That shouldn’t be very surprising.

In Washington’s amicus brief to the Court in Armco, the state representated that its taxes were very similar to those of West Virginia.

You’ll see at the very top pair of boxes there local commerce in Washington; again two activities, the same company is manufacturing and it’s selling.

But again, only one of those two activities is taxed.

The only difference, really, between the top of the chart and the bottom of the chart is that Washington has reversed its exemption, so in Washington it’s the selling that gets taxed, the manufacturing is exempt.

In West Virginia it was the opposite.

Now, I’d invite the Court to compare the situation for that local company with our taxpayers who are before you today.

About a third of those taxpayers are like Kalama Chemical Company, and it’s represented by the middle set of boxes there.

It’s manufacturing in Washington, it ships what it manufactures across state lines and sells it in other states.

As you can see, Washington imposes on that interstate company the manufacturing tax because it has chosen, instead of refraining from interstate commerce, to sell across state lines.

Another group of our clients are represented by the bottom set of boxes there.

They’re in a situation like Xerox Corporation.

They do their manufacturing in some other state, ship the goods across state lines into Washington, and sell them there.

Now, when we looked at the local company, when that local company… when any company manufactures in Washington, it incurs a liability for the tax on manufacturing.

But if it refrains from engaging in interstate commerce, if it will sell the goods in Washington and pay that Washington tax on the selling activity, that company will get a significant tax benefit, an exemption.

It gets a forgiveness of the liability it had already incurred for doing the manufacturing in the state.

Sandra Day O’Connor:

Mr. Young–

D. Michael Young:

Yes, Justice O’Connor.

Sandra Day O’Connor:

–the companies like Xerox argue that the Washington tax discriminates against them under this scheme.

D. Michael Young:

Yes, Your Honor.

Sandra Day O’Connor:

And discourages… or encourages, rather, their manufacturing within the state of Washington and discourages them from manufacturing outside the state of Washington.

D. Michael Young:

Yes, Your Honor.

Sandra Day O’Connor:

Well, what if Washington simply repealed its manufacturing tax.

I mean, presumably that would be an incentive to move to Washington, too, wouldn’t it?

D. Michael Young:

Yes, Your Honor, I think if Washington–

Sandra Day O’Connor:

Isn’t that perfectly all right, though?

D. Michael Young:

–Under the discrimination prong of the commerce clause, I think that would be perfectly all right for the future, Justice O’Connor.

It wouldn’t–

Sandra Day O’Connor:

It would have the same effect, and you argue–

D. Michael Young:

–Excuse me?

Sandra Day O’Connor:

–It would have exactly the same effect.

D. Michael Young:

Well, it wouldn’t have the same effect, Your Honor, because there would no longer be a benefit to the in-state manufacturers that wasn’t given to out of state people.

It would put them on a level playing field.

The in-state people there would only be paying a selling tax, but they wouldn’t be getting to carry on an additional–

Sandra Day O’Connor:

Well, companies like the Xerox company want as to make out their claim to treat the wholesale tax and the manufacturing tax together and look at how it operates as a unit, right?

D. Michael Young:

–The companies really don’t care which way it’s treated as long as it’s treated consistently.

Sandra Day O’Connor:

Well, it seems to me that’s the theory, and yet the Appellants like Kalama Appellants want us to look at the taxes as separate activities and consider them separately.

And I have trouble seeing which way we ought to approach it.

D. Michael Young:

Your Honor, I think from all of these Appellants’ standpoint the Court could go which… approach it either way, as long as it does so consistently.

The situation of Xerox is just like the situation in Maryland versus Louisiana.

You there had local people who paid one local tax… excuse me, who paid one tax that was common to interstate commerce and thereby got a credit against local commerce.

The giving of that credit that was not available to interstate commerce precisely because they weren’t doing business there was–

Sandra Day O’Connor:

Let me try to explain my dilemma a different way.

If we look at these as two separate taxes, a tax on manufacturing and a tax on wholesaling, then the tax on the wholesale activity considered as a separate activity entirely doesn’t appear to either discriminate against or burden interstate commerce.

It is simply imposed whenever something is sold in the state of Washington.

The one on manufacturing, however, if you look at that as a separate activity and a separate tax, applies to manufacturers who export, in effect.

Otherwise it doesn’t apply.

So you might say that that one was discriminatory.

Sandra Day O’Connor:

But it’s hard for me to see how, if you treat the taxes as separate entirely, that you would say the wholesaling tax is discriminatory.

D. Michael Young:

–Your Honor, I guess the way I’d put it is that, without regard to the exact nature of the benefit, whether it’s the forgiveness of a liability for something entirely different from taxes or whatever, if the state gives a benefit of any kind to local commerce that it’s not giving to interstate commerce and that’s based on some interstate element, it is discrimination.

And we really needn’t look at what the kind of manufacturing tax is or that kind of thing.

It’s the fact that there isn’t a benefit.

Antonin Scalia:

I presume at least some of your clients wouldn’t mind the approach that Justice O’Connor just expressed.

You have some clients who are manufacturing in the state and are subject to the state manufacturing tax, don’t you?

D. Michael Young:

Justice Scalia, actually none of our clients would mind having all of the taxes viewed together, because if they’re viewed together the apportionment problem is so blatant that I think that some kind of relief would be required for everybody.

Antonin Scalia:

How does this case differ from the Boston Stock Exchange case?

Why can’t you say that the state here is simply placing a tax on one of… either one of two activities in the state, either manufacturing or sale, or wholesale, either one?

We’ll tax one or the other.

Now, why is that any different from what New York in the Boston Stock Exchange case?

D. Michael Young:

The New York tax, that the state of Washington has urged is similar to this, was a tax that wasn’t before the Court.

It was a prior tax that ostensibly or nominally had several different possible subjects or incidents of the tax.

The Court was focusing on the current tax, that had a clear rate differential, and in the context of that focus it didn’t see any problem with neutrality.

And it may be in fact that if you knew lots more about the old tax and how it was imposed that there wouldn’t have been a problem.

But the case itself just doesn’t give us enough information to know that.

Antonin Scalia:

But you would say then that, as a general rule, if a state wants to tax one of several incidents, that that’s unlawful?

D. Michael Young:

It does expose interstate commerce to multiple burdens that local commerce isn’t exposed to, and if that happens in fact it would be unlawful, yes, Your Honor.

Antonin Scalia:

Then why wasn’t Armco decided the other way, because couldn’t you view Armco as that, as essentially the same thing, taxing either the manufacture or the sale?

We’re only going to impose one tax.

D. Michael Young:

I suspect the reason that Armco wasn’t decided that way was that the Court focused on the two activities that were claimed to be essentially the same and looked at them and realized that they weren’t quite the same, whereas in Boston Stock Exchange you were looking at all things that were part and parcel of a transfer of stock and they were quite closely related, would typically occur in one state.

The National Can situation is seen if we look at the last two sets of boxes on the chart there, and I think it kind of pulls all of this together, in that you can see someone who is both manufacturing and selling out of the state and manufacturing outside the state and selling in.

And you see there that we’ve got a taxpayer now–

William H. Rehnquist:

Mr. Young, your time has expired.

We’ll hear next from you, Mr. O’Brien.

Neil J. O’Brien:

Mr. Chief Justice, may it please the Court:

The state of Washington is using the same set of facts to impose a tax both on Tyler Pipe, who is before the Court, and on its independent representative, Ashe & Jones, who is not before the Court, and I want to show you how.

Tyler Pipe manufactures pipe in Texas.

It ships pipe throughout the United States, to all the states.

It advertises nationally and uses regional shows to do the advertising.

Neil J. O’Brien:

It sells through the use of catalogues.

Catalogues are distributed to all its customers.

Its customers are plumbing suppliers.

That’s like a lumber yard except it’s for the plumbing business instead of the lumber business.

In the state of Washington, Tyler has an independent representative.

All of the orders that Tyler Pipe receives and that are processed in the state of Texas come either from its plumbing supply customers… 45 percent of them come directly from the customers… or through Ashe & Jones, the manufacturer’s representative.

55 percent of them come through Ashe & Jones.

Ashe & Jones has no inventory.

It simply has employees who represent out of state manufacturers.

Tyler Pipe is one of six or seven such out of state manufacturers.

Ashe & Jones has three and a half employees.

That’s what the record shows.

Tyler Pipe’s share would be about a half of a person, except that Ashe & Jones also represents Tyler Pipe in Idaho, Montana, the western provinces of Canada, and Alaska.

So as a practical matter, Ashe & Jones has less than a half a person available to represent Tyler Pipe in the state of Washington.

Byron R. White:

Is this a due process argument?

Neil J. O’Brien:

Both, due process and commerce clause.

Antonin Scalia:

All the other companies that Ashe & Jones represents it only represents in Washington and not elsewhere as well?

Neil J. O’Brien:

I can’t say about the others.

Antonin Scalia:

Well, then you can’t say that it’s any less than half a person, really, if you don’t really know.

Neil J. O’Brien:

Okay, I agree, Your Honor.

In any event, it’s not very much.

Ashe & Jones is paid a commission on all sales by Tyler Pipe into the state of Washington.

The testimony in the case is that Tyler Pipe operated through an independent representative because it did not believe it had sufficient business in Washington to justify having an employee in that state.

The state of Washington taxes the gross receipts of all sales that go into the state of Washington.

It also taxes the commissions that are paid to Ashe & Jones.

Now, it just doesn’t tax them; it taxes them under the same statute, the B&O tax.

The state of Washington makes a distinction between independent contractors like Ashe & Jones and employees.

The state of Washington is using the same set of facts to establish nexus for Ashe & Jones to tax the commissions it receives on the Tyler Pipe sales in Washington as it uses to establish nexus for Tyler Pipe in the state of Washington.

Indeed, the state of Washington concedes that, absent the Ashe & Jones activities there would be no Tyler Pipe nexus in the state of Washington.

Now, let me turn for a minute to apportionment.

Neil J. O’Brien:

Substantially all of the activities that are incurred… a large percentage, more than half of the activities that are incurred in the wholesaling activities of Tyler Pipe that are being taxed by the state of Washington occur outside of the state.

I have listed on pages 2 to 4 of the reply brief the activities that occur, and only two, one and only part of the second, occur in Washington, and most of the others occur in Texas.

Yet, the state of Washington would tax the wholesaling activities of Tyler Pipe 100 percent, without any apportionment for the activities, commercial activities that take place out of the state.

William H. Rehnquist:

Well, Mr. O’Brien, in a couple of past cases, particularly I think one of the last ones from Washington, the Standard Steel case, we have said that the burden of proof is on the taxpayer to show multiple taxation.

The possibility of it in some abstract way isn’t enough.

Neil J. O’Brien:

Your Honor, the state of Texas uses gross receipts in its formula for taxing the franchise tax, but the state does not have an independent gross receipts tax, although it is in the process right now… one has been proposed for this congressional enactment.

If it’s enacted, I presume we no longer will have to pay the state of Washington tax.

In any event, most of the activities take place out of the state.

William H. Rehnquist:

Well, is one of your grounds here the danger of multiple taxation?

Neil J. O’Brien:

Yes, Your Honor, because–

William H. Rehnquist:

Well, where else are you being taxed on these activities besides Washington, and in what manner?

Neil J. O’Brien:

–We are being taxed in the state of Texas on these activities, because the receipts from… well, we are not… in the state of Texas, the franchise tax is determined by a ratio between the gross receipts in Texas and the gross receipts outside the state of Texas.

In fact, Your Honor, I don’t believe… and I will concede that we were not during the taxing period taxed on these sales, simply because the comptroller at that time did not examine these facts.

William H. Rehnquist:

So there was no multiple taxation in fact in your case?

Neil J. O’Brien:

There was none in fact during the period, that’s correct, Your Honor.

One of the elements of the commerce clause is that the Court will look at the services rendered by the state to determine whether the tax is fairly applied to the taxpayer.

In this instance, the state says that it is providing four services.

The state says that it is providing police protection, but Tyler Pipe has no employees in the state.

The state of Washington says that it is providing fire protection, but Tyler Pipe has no property within the state of Washington.

The state of Washington says that it is providing other services of a civilized society, but Tyler Pipe has nobody there to benefit from them.

The one benefit which the state of Washington has provided to Tyler Pipe is access to the court, and Tyler Pipe has used the court on one occasion and that is to bring this case to avoid an oppressive tax.

And have paid for it.

Neil J. O’Brien:

Yes, Your Honor, have paid for it dearly.

Thank you.

Tyler Pipe’s products… Your Honor, I’d like to reserve the rest of my time for rebuttal if I may.

William H. Rehnquist:

Thank you, Mr. O’Brien.

We’ll hear now from you, Mr. Collins.

William B. Collins:

Mr. Chief Justice and may it please the Court:

I want to begin by discussing the issues common to both National Can and Tyler Pipe, discrimination and apportionment, and then I will turn to the issue of nexus, which concerns Tyler Pipe alone.

With regard to discrimination, the commerce clause provides that a state cannot provide through its taxes a direct commercial advantage to local business.

William B. Collins:

On the other hand, the commerce clause does not prohibit a state from encouraging intrastate commerce, for competing for interstate commerce, so long as it does not discriminatorily tax the products or services of other states.

And the key is, how do you tell discrimination from fair encouragement?

This Court, beginning in Boston Stock Exchange, laid down a bright line test to distinguish discrimination from fair encouragement, and that test is simply this: A tax discriminates if it affects the direction of commerce, either by erecting a barrier against interstate commerce or by telling an interstate business that’s already present in the state that it can reduce its level of taxes in the state if it increases its business activity in that state.

On the other hand, a tax does not discriminate if it treats intrastate commerce and local business equally, allowing for tax neutral decisionmaking.

And the Boston Stock Exchange case, Westinghouse, Maryland v. Louisiana that came after it, all adhere to this principle.

And Justice Scalia, with regard to your question, I think Boston Stock Exchange is really a key point.

My opponent Mr. Young said that the pre-1968 case was not before the Court, which is of course true.

On the other hand, the Court went out of its way to contrast the two tax systems: one discriminatory, the later system; and the other, neutral system, as being not discriminatory.

And we think that that’s highly significant.

In addressing the rest of my remarks on discrimination, I want to just briefly talk about the tax system and then in turn discuss the selling tax and the manufacturing tax.

Washington imposes its tax on the privilege of selling in Washington and on the privilege of manufacturing in Washington, and the rate and measure of these taxes are essentially identical.

Sandra Day O’Connor:

Are the taxes, though, imposed on different activities?

Are they separately taxable activities?

William B. Collins:

Yes, Justice O’Connor, they are separately taxable activities.

But the same business does not pay both taxes on the same product.

That’s because of the so-called multiple activities exemption, which basically says if you pay a selling tax with regard to a product you are not liable to pay manufacturing tax on making that product.

So in other words, in Washington you’ll always pay one tax on the product, but you won’t pay two.

Sandra Day O’Connor:

Well, if they are on separate activities, a manufacturer within the state of Washington who then exports the product for sale in another state is taxed?

William B. Collins:

That’s correct.

Sandra Day O’Connor:

On the manufacture?

William B. Collins:

That’s correct.

Sandra Day O’Connor:

But a manufacturer in Washington who also sells the product in Washington is excused from paying the manufacturing tax?

William B. Collins:

If he has paid the selling tax, that’s correct, Your Honor.

Sandra Day O’Connor:

Why doesn’t that amount in effect to a tax on exports?

William B. Collins:

The reason it doesn’t–

Sandra Day O’Connor:

Just if you view them as taxes on separate activities, it looks pretty clear.

William B. Collins:

–Well, I don’t think that… that’s not correct, Justice O’Connor, and the reason is because the manufacturing tax is a compensating tax, just like the use tax is a compensating tax.

The example which you gave me would also apply exactly to a general use tax primarily imposed on interstate commerce.

Sandra Day O’Connor:

But you have a decision in the state of Washington in the Fibreboard case that makes it look very much like those two taxes are not compensating taxes.

William B. Collins:

Well, Your Honor, the Fibreboard case is a situation, of course, which isn’t before this Court, because in that case a manufacturer partially manufactured in Washington, partially finished the manufacturing out of the state, and then sold the product back in Washington, and paid two taxes, both a selling tax and a manufacturing tax.

William B. Collins:

That system would fail our bright line test, and if any of the taxpayers here were doing business in that way we would lose.

But the reason that it’s discriminatory is because the multiple activities exemption did not operate.

The normal rule in Washington is you only pay one tax with regard to the same product, just as in a sales and use tax situation you only pay one tax with regard to the same product.

If the multiple activities exemption had operated, then you would have had that single tax and it would have been neutral.

I mean, it’s a completely different situation.

Antonin Scalia:

What does it take to make something a compensating tax?

I mean, suppose you get an exemption from the state income tax if you ship it out of state… or, I’m sorry.

Which way does it go?

If you sell it in-state?

William B. Collins:

Justice Scalia–

Antonin Scalia:

Would that be a compensating tax?

All of my income comes only from this product, so if I’m paying income tax I’m ultimately paying it because of the sale of this product.

Could the state just say, if you sell the product in-state you’re exempt from the state income–

William B. Collins:


Antonin Scalia:

Why not?

William B. Collins:

One of the fights between the parties in this case is over compensating tax criteria, and the criteria that we have urged and is supported by this Court’s decisions is kind of a two-pronged criteria.

You’ve got to look at the two taxes you’re comparing, an income tax and some other tax or in this particular case a selling tax and a manufacturing tax.

Antonin Scalia:


William B. Collins:

And ask two questions: Are the taxes designed to achieve equality, and do they actually result in equal treatment of in-state and out of state taxpayers similarly situated?

Now, with your example, an income tax has been found to be a compensating type tax with a corporate franchise tax.

Let me give you a citation, Justice Scalia.

West Publishing Company versus McGoldman.

It’s 166 Pacific 2nd 551, and it was affirmed in a per curiam decision by this Court in 328 U.S. 823.

In that case, California had a corporate franchise tax imposed only on local business and it had an income tax that was imposed on interstate commerce, and there was a multiple activities exemption that basically said if you pay the corporate franchise tax you don’t have to pay the income tax.

And the California court and this Court had no difficulty in saying that that was not discriminatory because the burdens were equal in those two taxes.

So in this situation, for example, in the case before the Court here, Washington’s selling and manufacturing taxes are compensating taxes.

They’re designed to achieve equality because they have the same rate and measure with regard to the same–

Antonin Scalia:

That’s all it takes?

So long as the burdens are the same, they’re compensating taxes?

William B. Collins:

–That’s right.

William B. Collins:

But you have to… that’s the key to the decision and the key to essentially tax-neutral decisionmaking.

I mean, the reason that a compensating tax works, the engine that drives it, is it passes the bright line test.

That is to say, a compensating tax is neutral with regard to the direction of commerce.

In Washington, if you manufacture a product in this state and sell it here you’ll pay selling tax.

If you manufacture it in this state and sell it someplace else, you’ll pay manufacturing tax, but the amount of those taxes will be the same.

So there’s no incentive for you to say, I’m going to move my manufacturing operation out of the state and sell into Washington or I’m going to move my manufacturing operation into the state and sell in Washington.

Your bottom line taxes will be the same.

Antonin Scalia:

There is an incentive, there is an incentive to you, isn’t there, to sell in Washington rather than sell outside of Washington?

William B. Collins:

No, I don’t think so, Justice Scalia.

On a $1,000… if you manufacture a product worth $1,000 in Washington and sell it in another state, you’ll pay $4.40 in manufacturing tax.

If you manufacture it in Washington and sell it in Washington, you’ll pay $4.40 of selling tax.

Antonin Scalia:

You’re assuming, quite unrealistically, that there’s no sales tax anywhere else, that there’s no tax on your selling activity elsewhere, as there is in Washington.

William B. Collins:

Two things about that–

Antonin Scalia:

Assume the state you’re selling into has the same law that Washington has.

If you sell interstate, you’ll pay both a manufacturing tax and a selling tax.

If you sell within your own state, you’ll pay only the selling tax.

William B. Collins:

–That’s right.

Antonin Scalia:

So doesn’t that discriminate against interstate commerce?

William B. Collins:

I don’t think it does, Justice Scalia, but that’s a question that this Court has yet to resolve.

And it goes back to the Court’s decision in Southern Pacific versus Gallagher.

John Paul Stevens:

Well, it has yet to resolve it unless it resolved it in the Armco case.

William B. Collins:


John Paul Stevens:

And that’s just exactly what that case involved, only it’s the other side of the coin.

William B. Collins:

–Well, I don’t think that’s accurate, Justice Stevens.

And the reason why is because in Armco this Court–

John Paul Stevens:

The taxes were of differing amounts.

William B. Collins:

–This Court ruled that the manufacturing tax and the wholesaling tax weren’t compensating taxes, because they didn’t pass the criteria.

They were not proxies for one another because of differences in the rate and differences in the measure.

And the Court–

John Paul Stevens:

Mr. Collins, isn’t… I don’t know where this Exhibit K came from that your opponent’s entire argument was based on that.

John Paul Stevens:

But if that’s a valid portrayal of what would happen if Oregon had precisely the same scheme as Washington had, and that’s the out of state system here, why isn’t it blatant discrimination?

William B. Collins:

–Well, Your Honor, Exhibit K also perfectly describes the situation in Southern Pacific versus Gallagher, because in that case if you bought a product in another state and sold it… I’m sorry, bought a product in another state, used it in California, you would pay hypothetically two taxes, a selling tax in the other state and a use tax in California.

A local business buying, a local person buying–

John Paul Stevens:

What you’re saying is that if we apply, if we follow these cases, we have to overrule that case.

Is that what you’re saying?

How do you distinguish Armco and this case?

I mean, you distinguish on the amounts, but assuming… do you think West Virginia could cure its problem by, you know, a look at the diagrams and just say, we’ll now impose only a manufacturing tax, impose a manufacturing tax only when they sell out of state and impose a manufacturing tax… excuse them from paying the manufacturing tax when they sell in-state?

William B. Collins:

–It’s not the direction–

John Paul Stevens:

I’m sorry, it’s the other way around.

William B. Collins:


John Paul Stevens:

You get excused from the wholesale tax.

William B. Collins:

It’s not the direction that determines whether it’s constitutional or not.

It’s not that we give our exemption for manufacturers who sell in the state.

That’s not what drives it.

West Virginia could cure their problem if they did two things: One, if the rates of the selling and the manufacturing taxes were the same; and two, if the measures of tax were the same, because it was those things that the Court looked at.

John Paul Stevens:

Well, I suppose that’s the issue, because here we have… but I know you cited a case to me, but why is it not true that if you had, if Oregon had the same scheme that you have and you have just the same tax, both have these taxes, why is it not true that the local commerce is taxed less, I believe, than the interstate commerce?

It’s perfectly clear it is taxed less heavily, isn’t it?

William B. Collins:

This Court has never taken into account the taxes–

John Paul Stevens:

Well, I’m just asking you if.

Maybe we should… I know there’s–

William B. Collins:

–They would pay more taxes.

John Paul Stevens:

–Pardon me?

William B. Collins:

They would pay more taxes.

John Paul Stevens:

And they pay more taxes on the interstate transactions than they would pay on the intrastate transactions?

William B. Collins:

That’s correct.

But, Justice Stevens, that would be true in any event if you have different states that have different taxes.

For example, at the end of the Armco opinion the Court stated that there would be no difficulty if Ohio had a manufacturing tax and West Virginia had a selling tax.

Clearly that would be doubling up, and at the same time an intrastate business that just did one thing would only pay one tax.

And that’s why Southern Pacific versus Gallagher is really a key case, because in Southern Pacific versus Gallagher the Court was faced with exactly the same situation, the possibility of no doubling up in-state, sales and use tax, and a possibility of doubling up out of state if a tax had been paid in the other state.

And the taxpayer said: There’s a possibility that we could be doubled up in this other state; give us some relief.

William B. Collins:

And what the Court said is–

John Paul Stevens:

Yes, but the difference in your hypothetical is that if both states adopted the taxing scheme of the other, they would pay double taxes in both states.

William B. Collins:

–That’s true.

John Paul Stevens:

There would be no discrimination between interstate and intrastate taxation.

William B. Collins:

But the Court refused, though, in that case to speculate about what another state would do, and that’s really, I think, a correct decision and one that would be appropriate even if it was a question of first impression.

The reason for that is simply this.

In California in Southern Pacific and in this case, the state of Washington relieves a business from the tax, manufacturing tax, only if the selling tax is paid.

Those are the only circumstances in which we do it, only if the selling tax is paid.

The taxpayers in Southern Pacific versus Gallagher and in this case say: We want to be relieved from Washington’s tax even though we don’t pay a tax to Washington and we don’t pay a tax anyplace else either.

The taxpayers here are not asking for equality.

What they’re really asking for is a preference.

John Paul Stevens:

When you say only if the selling tax is paid, I suppose that’s the equivalent of saying only if the sales are made within the state.

William B. Collins:

If the sales are made within the state.

John Paul Stevens:

They’re the functional equivalent.

William B. Collins:

Sure, that’s right.

And it passes, compensating taxes like that pass the bright line test.

What’s really… the question that’s really open is this.

Compensating taxes are justified because they pass the bright line test, local commerce and interstate commerce within the state are treated equally.

And the question left open in Southern Pacific versus Gallagher is simply whether that equality has got to extend to the interstate taxpayer, in the words of Silas Mason, “the dweller”…

“the stranger from beyond the gates and the dweller within the gates. “

In Southern Pacific versus Gallagher, the question left open is whether your compensating tax has not only got to ensure one tax, equal tax within the state, but whether that’s got, that credit has got to go into the interstate area.

And I think the Court was correct in deciding not to address that question until a taxpayer came in who had actually paid that second tax, because one of two things would happen if you don’t wait: A, you’ll say you need to extend the benefit, but the taxpayer wouldn’t receive any benefit.

For example, these taxpayers don’t pay the manufacturing tax or a selling tax to another state, so essentially it would be doing a useless act.

Or B, they would be getting a preference.

That is, local business would have to pay one selling or manufacturing tax to escape a tax, but interstate commerce would have to pay no selling tax to escape the manufacturing tax.

Sandra Day O’Connor:

There certainly is language in Armco that indicates the Court was making some assumptions and not waiting for actual experience, isn’t that true?

William B. Collins:

Well, I don’t think that that’s what the language in Armco really says, Justice O’Connor.

We’re kind of talking about this internal consistency point, I think is how the taxpayers have discussed it in their brief and kind of what the Court mentioned in Armco.

And really, that point I think, when you read the language, was simply in response to West Virginia’s allegation that, even though interstate commerce pays a selling tax and it’s not a compensating tax, that the taxpayer should somehow be required to prove that they had actually been injured, even though that tax was facially discriminatory.

And the Court said, no, that’s not the test, and talked about the internal consistency concept, but related it to situations where there is facial discrimination.

Sandra Day O’Connor:

Well, if you view the manufacturing tax in Washington as not a compensating tax, it also is facially discriminatory.

William B. Collins:

No question about it, no question about it.

But as I’ve indicated, if you follow the Court’s criteria in I think virtually all of its compensating tax decisions, you will find that the criteria is equality, which was not present in the West Virginia tax in Armco and is present in this case.

The bottom line is there’s a bright line test that this Court has established for discrimination.

The selling tax passes it because everybody pays the selling tax.

Local manufacturers, interstate manufacturers, they pay precisely the same tax.

The manufacturing tax passes the bright line test because it’s a compensating tax, like a use tax.

It passes the test because interstate commerce and intrastate, local commerce, are treated the same and there’s no discrimination.

And the taxpayers in this case have not shown that they pay another tax someplace else.

What they really want is a preference.

I’d like to turn now to the apportionment point.

John Paul Stevens:

May I just ask one question?

William B. Collins:


John Paul Stevens:

Supposing they did prove that Oregon had the same kind of tax statute that you have?

Would it be a different case?

William B. Collins:

Well, it’s a different case because then they wouldn’t then… if the Court said that something was required, they would certainly be entitled to relief.

And if you’re asking me whether I think that the Court would ultimately say you’ve got to extend the credit–

John Paul Stevens:

Or put another way, assuming we agreed with your argument up to that point and say that the statute’s fine today and then tomorrow Oregon passed such a statute, would that make your statute unconstitutional?

William B. Collins:

–Well, I don’t think it would make our statute… just the act of having the tax doesn’t make the statute unconstitutional.

But then the question would be directly put: Must a compensating tax extend equality to interstate commerce that it extends to intrastate commerce?

John Paul Stevens:

What do you think the answer is to that?

William B. Collins:


John Paul Stevens:

I’m just wondering if the fate of your tax depends on what happens in the Oregon legislature.

William B. Collins:

–No, it doesn’t depend on it.

But that would then… the taxpayer would really be in a position to raise that question.

Byron R. White:

Oregon and Washington would be in the same boat, wouldn’t they?

William B. Collins:

Yes, that’s correct.

John Paul Stevens:

I’m just curious which boat it is.


William B. Collins:

With regard to the apportionment question, there’s really no multiple tax.

William B. Collins:

There’s no multiple tax that’s been established in this case, and the Court in a number of decisions has indicated that a tax like Washington’s tax is fairly apportioned.

Remember, our tax is imposed on the privilege of selling within Washington state and it’s also imposed on the privilege of manufacturing within Washington state.

And it’s measured by, the selling tax is measured by, the gross proceeds of sales; and the manufacturing tax is measured by the value of the products.

Sandra Day O’Connor:

The manufacturing tax seems to be a curious one, that’s almost a form of substitute for income tax.

It seems to be imposed at every level of activity during the course of manufacturing.

Every separate part of that process is taxed, is it not?

William B. Collins:

Well, it would just be taxed once, on the final finished product that was subject to the tax.

We don’t tax it at all the little steps.

The only reason–

Sandra Day O’Connor:

You only tax the little steps if part of it were done out of state.

William B. Collins:

–Are you talking about the Fibreboard situation?

Sandra Day O’Connor:

I’m talking about your manufacturing tax in the state of Washington.

William B. Collins:

Well, if you manufacture something in the state of Washington and then it goes outside the state, partially manufactured, the tax is imposed on the value of that product.

If it’s completed within the state, it’s imposed on the value of that product.

And the problem in the Fibreboard case was that… our court ruled that when it came back in the state, the multiple activities exemption didn’t operate because the product was not the product so sold.

For apportionment purposes, though, this Court ruled that if you’ve got the… if the incidence of the tax is local and the measure is reasonable, that the tax is fairly apportioned.

In Standard Pressed Steel, the Court ruled that the tax at issue in this case was apportioned exactly to the activities taxed.

And in American Manufacturing versus St. Louis, the Court reached the same conclusion with regard to a manufacturing tax.

Now, the taxpayers have argued in their brief and alluded to here that our tax must be malapportioned because we consider the taxes together for compensating tax purposes, but we separate them for purposes of our apportionment analysis.

And I submit to you that those are two different things.

For example, sales and use taxes are considered together to be compensating taxes, but for apportionment purposes there’s never been any suggestion from this Court or any other court that I’m aware of that has said a retail sales tax must be apportioned on the basis of three factors or any other number of factors.

The point is those decisions of this Court sustaining the manufacturing and selling taxes fairly apportioned are correct, and the taxpayer in this case has done nothing to advance the burden of showing that the taxes aren’t correctly apportioned.

The only thing they’ve done is said, well, there’s a possibility of overlap with some other tax.

And in the Court’s decisions in Moorman, Container, and even Armco, the possibility of some overlap does not render a tax malapportioned.

Let me turn briefly to the nexus question raised by Tyler Pipe.

Tyler Pipe basically argued… National Can agrees that there is enough nexus under the due process and commerce clause to impose our tax upon them.

Tyler Pipe contests the nexus.

Now, Tyler Pipe sells products in Washington through the use of independent contractors who act as their sales representatives.

And there’s really two questions: Do the activities of the sales representatives give rise to nexus without regard to what their status’ is?

And the second question is: If those representatives do enough to give rise to nexus, does it make any difference that they’re independent contractors.

William B. Collins:

The lower court found that the activities were enough, and this Court has ruled in decisions such as Scripto versus Carson that the contractual tagging of a sales representative doesn’t have any constitutional significance.

Now, counsel’s argument with regard to nexus really broke down to this.

He said: Our local sales representatives pay a tax and Tyler Pipe pays a tax, and that somehow means that we can’t tax both of those.

And I want to sort out any confusion in your mind.

Ashe & Jones pays tax under the service classification.

They’re providing a service business of representing Tyler Pipe.

Tyler Pipe pays tax on its activity of making sales in the state of Washington.

The fact that both Ashe & Jones and Tyler Pipe pay tax is irrelevant.

Clearly, this Court would not have a rule that said that we could not impose this tax because of the independent contractor nexus and yet, if we went back to our state and repealed the tax on the independent contractors, that suddenly there would be enough nexus to tax them.

The purpose of the nexus requirement is to get a connection between the taxpayer and the state.

The trial court in this case found that the activities of the representatives were significantly associated with the taxpayer’s ability to establish and maintain the market.

The taxpayer does three kinds of things: first, they solicit sales: secondly, they gather virtually all of the market information from Washington state that’s used by Tyler Pipe: and finally, they engage in various market maintenance kinds of activities.

For example, they make secondary calls on architects and engineers trying to get them to specify Tyler Pipe products in their engineering specifications.

They’re available to help when there are shortages of shipments or there is breakage.

They’re the first line evaluators of credit.

They perform significant activities.

Now, I don’t think there’s really any dispute, perhaps a bit of quibbling, about the fact that these activities are performed.

What Tyler Pipe argues is: We do a lot of stuff in Texas, too.

But that’s not what’s relevant for nexus, the fact that they do some activities in Texas.

What’s relevant is the activities that they do in Washington.

And the trial court found, and it is supported by substantial evidence, that they engage in these three kinds of activities.

Under your decision in Northwest Portland Cement, simply solicitation would be enough to impose the tax.

Under the decision in Standard Pressed Steel, the market maintenance activities and the information gathering activities would be sufficient to support the tax.

In this case we have both.

No question that the activities of these representatives give rise to nexus.

And as I said before, there’s no constitutional significance to the fact that they are independent contractors as opposed to employees.

They penetrate the market in exactly the same way, and what the Court needs to focus on are the activities.

I think that’s the learning of the Scripto case.

There’s one last point I want to make before I take my seat, and that is to rule in favor of the taxpayers in this case it’ll be necessary for this Court to overrule some of its prior decisions, in our judgment.

And if the Court does that, we would urge it to make its decision prospective.

William B. Collins:

In that case, the state would meet the three criteria for prospective application in a civil case set out in the Chevron Oil decision.

And of course, this matter is very significant to the state.

1980 through 1984, the state estimates that it’s worth about $423 million, which is about ten percent of our annual budget.

And of course, three additional years have gone by since then.

However, we hope it will not be necessary to reach a prospective application issue, because the taxes in this case are constitutional under the decisions of this Court.

Manufacturing and selling taxes pass the bright line test.

Everybody pays the selling tax.

The manufacturing tax is a valid compensating tax because it meets the criteria of equality.

In-state and out of state taxpayers are treated in the same fashion.

The tax is fairly apportioned under your decisions and there is sufficient nexus to impose the tax on Tyler Pipe.

Accordingly, we would request that this Court affirm the Washington Supreme Court in both causes.

William H. Rehnquist:

Thank you, Mr. Collins.

Mr. O’Brien, you have eight minutes left.

Neil J. O’Brien:

Mr. Justice Rehnquist, you asked about the activities… or whether the Tyler Pipe was taxed on its gross receipts, and I said no and that is correct, they are not.

However, we had viewed and do view the law of this Court that we do not have to establish that the tax is in fact paid in another state, and I refer to the Adams Manufacturing case and then specifically the Gwin, White case, which involved the state of Washington tax, where this Court said unlawfulness of the burden depends upon its nature, measured in terms of its capacity to obstruct interstate commerce and not on the contingency that some other state may first have subjected the commerce to a like burden.

And that was an apportionment case in which this Court held that the tax on Gwin, White, who would have been equivalent to Ashe & Jones in our case, was not permissible on sales going outside the state.

Now, counsel… I thought it was clear, but now I think it may be confused, as to what I was trying to do about showing you that the same activities were used for nexus for two different taxpayers.

We’re using the actions of Ashe & Jones, or at least the state of Washington is, to find nexus for Ashe & Jones and to find nexus for Tyler Pipe.

You’ve never done that before.

William H. Rehnquist:

What is the matter with that if someone is an agent for a principal?

Couldn’t the state levy a tax both on the agent for the activities as an agent and on the principal by reason of the activities of the agent?

Neil J. O’Brien:

I think not.

You’re using… it’s never been done before, and in this instance you’re using the same acts to establish presence for two different people.

William H. Rehnquist:

Well, but certainly if the agent is obviously present in the state of Washington for its own activities, and if it’s in fact the agent of your client, I just don’t see what in our cases prevents that.

Neil J. O’Brien:

Well, it is there for its own activities, but its own activities are Tyler Pipe’s activities.

In fact, it may be using… the state may be using nexus for eight different taxes, because there are six or seven other manufacturers for whom Ashe & Jones also serves.

William H. Rehnquist:

Well, it doesn’t strike me as contrary to any principles of agency law I ever knew about.

Neil J. O’Brien:

No, it’s not contrary to agency law.

I say it’s contrary to nexus law.

William H. Rehnquist:

Well, but why should nexus law be any different than agency law in this respect, when you’re trying to see whether your company had a presence within the state?

William H. Rehnquist:

You can certainly have a presence within the state through agents, can’t you?

Neil J. O’Brien:

Yes, yes, you can have presence.

We are not suggesting that an independent contractor establishes some kind of wall.

Yes, I do not say that.

But you should not be able to count them twice, that’s all I’m saying.

And this Court has never before done that.

Counsel also says that… lines up two or three items that counsel says Tyler Pipe… Ashe & Jones did for Tyler Pipe in the state of Washington.

I refer you to pages 2 to 4 of Tyler Pipe’s reply brief, where I have listed the activities that were done by the state of… by Ashe & Jones in Washington and the activities that occurred outside the state.

That list is there for two or three reasons.

One, to show that what Ashe & Jones is doing is nothing more than selling.

They can call it selling or marketing or whatever else.

They are solicitors, they are sellers, and that’s all they do.

They can use all the facts they want to describe that, but it still comes out selling.

I could probably spend ten minutes this afternoon telling you how I shaved this morning and with all the details, but it’s still just shaving.

And that’s all that Ashe & Jones was doing, selling.

We operated, Tyler Pipe operated, through catalogues.

It was a catalogue operation in the state of Washington.

The list is also there because I think it demonstrates that the tax is improperly apportioned as to the wholesaling activity.

Most of these activities were outside the state and therefore… and the state of Washington taxes the sales in Washington 100 percent, without giving any credit for activities outside the state.

In the Standard Pressed Steel case, the Court was very careful to point out that all of the activities occurred within the state.

It is also there to demonstrate that… well, that isn’t demonstrated, but in addition the fact that the state of Washington provides no services to Tyler Pipe is indicative of the fact that Tyler Pipe has no nexus in Washington.

Now, I did say as to Tyler Pipe that Tyler Pipe did not pay a tax on its gross receipts outside the state of Washington.

71 other taxpayers before you, I believe it is stipulated that they did do manufacturing outside the state or they were taxed on gross receipts or other activities outside the state.

I think that’s a stipulated record.

One reason the records may be a little different is that we, that Tyler Pipe tried its case before the Armco case and the 71 other cases were stipulated following the Armco decision.

Tyler Pipe believes that it does not have nexus, not only because of the double counting.

That’s just one incident.

There are many other reasons.

There’s your case of Norton.

The Norton case is right on point.

Neil J. O’Brien:

In Norton, Norton had a manufacturing facility in the state of Massachusetts near Worcester.

It was selling into the state of Indiana.

Norton had a store, an actual store with inventory.

The customers came to the store and bought inventory.

If some of the items were not there, the customer would then order them.

Some of the customers ordered directly from the manufacturer in Massachusetts.

The Court held that all shipments directly from the state of Massachusetts to the customer in Indiana were not subject to the gross receipts tax in Indiana because there was no nexus as to those sales.

All of Tyler Pipe products were shipped directly from Tyler Pipe to the customer.

Ashe & Jones never saw a piece of pipe.

They were loaded on an interstate commerce, interstate truck in Tyler, Texas, and were shipped at the risk of the buyer.

Therefore, the Tyler Pipe has no connection with the state except for its solicitors.

I don’t think this Court has found or held to date that solicitation alone does justify establishing nexus.

If it has held that, then there is very little left to nexus.

But I do not think there are any cases that hold that.

As far as the 71 other cases are concerned, in those cases there was either manufacturing in the state and wholesaling outside or manufacturing outside the state and wholesaling within.

William H. Rehnquist:

Mr. O’Brien, your time has expired.

Neil J. O’Brien:

Thank you.

William H. Rehnquist:

The case is submitted.

The Honorable Court is now adjourned until tomorrow at 10:00.