Public Utility District No. 2 v. State

Finley, J.

(dissenting) — The opinion of the majority incorporates the appropriate judicial tests for determining whether the method of tax assessment utilized by the State of Washington, concerning interstate sales of electrical power to out-of-state utilities buying for resale, violates the commerce clause of the United States Constitution. Even so, the majority, in my judgment, then errs greatly (a) in failing to apply these tests to determine constitutionality, (b) by addressing hypothetical facts and issues not before the court in this appeal, and (c) in reasoning from irrelevant and inapplicable authority. Therefore, I must dissent.

To reach its conclusion, the majority purports to examine the “whole scheme of taxation” involved. With this as a point of reference, the majority then reasons that the favored non-taxed status of intrastate sales is balanced out or voided as against the taxing burden borne by interstate commerce because the resale of electricity intrastate by a second Washington utility to its consumers is taxed. However, this approach does not address the issue which is before this court; i.e., whether interstate commerce is unduly burdened by a tax only on income received from interstate sales to utilities for resale. Rather, the majority *243opinion seems to be concerned with the right and power of the state to tax all units of electrical energy produced within its borders. While this point of view evinces admirable local emphasis and exclusive state interest and concern, it nonetheless collides abruptly with constitutional restrictions on the power of the state to unduly burden interstate commerce. Ours is a system of dual sovereignty, and although our state interests are not necessarily subservient to federal interests, they are necessarily subject to the decision of many courts: that the sovereignty of any one state cannot impose such an unduly restrictive burden on interstate commerce.

The real issue is whether the State of Washington may, consistent with the commerce clause, levy a tax upon gross income received from interstate sales and exempt an identical intrastate sale from this tax. This issue may be determined by a test which the majority proposes, yet fails to apply:

(1) Whether the tax places an extra burden on interstate commerce not borne by intrastate commerce, or erects barriers, placing out-of-state businesses at a disadvantage when competing locally; the discrimination test.

(Italics mine.) Washington-Oregon Shippers Cooperative Ass’n v. Schumacher, 59 Wn.2d 159, 167, 367 P.2d 112 (1961). Having once stated the test, the majority ignores it, implying instead that sales to the out-of-state utilities — assuming a nonphysical “delivery” in Washington — occur entirely within the state of Washington and, because the plaintiffs before the court in this appeal are “in-state” public utilities, these transactions do not involve interstate commerce. The error of this conclusion is evidenced by Panhandle E. Pipe Line Co. v. Public Serv. Comm’n, 332 U.S. 507, 513, 92 L. Ed. 128, 68 S. Ct. 190 (1947), where the United States Supreme Court held that gas which is transferred across state lines to be “furnished to local utilities for resale is supplied unquestionably, both as to transportation and as to sale, in interstate commerce.” (Italics mine.) See Public Util. Comm’n v. Attleboro Steam & Elec. Co., 273 U.S. 83, *24471 L. Ed. 549, 47 S. Ct. 294 (1927). It is difficult, indeed, to conceive of a distinction in the nature of the transaction here based solely upon the physical characteristics of gas and electricity; both constitute a continuous flow of energy across state lines. In view of the holding in Panhandle, the majority’s suggestion that the sale of electricity to out-of-state utilities does not involve interstate commerce is in error. Because we are dealing in fact with interstate commerce, the question for this court is whether such interstate commerce must, as a result of the tax scheme under consideration, bear an extra burden which is not borne by intrastate commerce. In my judgment, this tax of RCW 82.16.020 upon gross income received from interstate sales is just such a burden. To clarify the nature of this extra burden, consideration should be given to Public Util. Comm’n v. Attleboro Steam & Elec. Co., supra at 89, 90, wherein the United States Supreme Court held the following:

[I]n the sale of gas in wholesale quantities, not to consumers, but to distributing companies for resale to consumers, where the transportation, sale and delivery constitutes an unbroken chain, fundamentally interstate from beginning to end, “the paramount interest is not local but national, admitting of and requiring uniformity of regulation,” which, “. . '. may be highly necessary to preserve equality of opportunity and treatment among the various communities and States concerned.”
. . . The forwarding state obviously has no more authority than the receiving State to place a direct burden upon interstate commerce. Pennsylvania v. West Virginia, 262 U. S. 553, 596.

Accord, Southern Pac. Co. v. Arizona, 325 U.S. 761, 89 L. Ed. 1915, 65 S. Ct. 1515 (1945). Thus, key factors for determining whether a discriminatory burden is placed upon interstate commerce are whether the tax uniformly regulates sales to utilities for resale, and affords equal opportunity and treatment among the states involved. With these factors and the discriminatory burden test in mind, I must conclude as follows: (1) when a public utility district sells power to an Oregon utility for resale in the state of Oregon *245it must pay a 3.6 percent tax upon the gross income received therefrom; when it sells power to a Washington utility for resale in the state of Washington it pays no tax; (2) this method of tax assessment does not uniformly tax otherwise identical interstate and intrastate transactions; (3) by placing a tax burden upon interstate transactions which is not borne by intrastate commerce, this unequal taxing structure affords an unconstitutional economic barrier upon out-of-state sales, and therefore violates U.S. Const, art. 1, § 8 — the commerce clause. The truly unfortunate aspect of this taxing scheme is its apparent practical effect of discouraging Washington utilities from selling to Oregon utilities, since the Washington utility must pay a tax if it sells to an out-of-state utility that it is not required to pay if it sells the electrical energy to another Washington utility. This burden upon interstate commerce — as an inhibitory restriction by economic inducement to sell only intrastate — is discriminatory and should not be sustained.

It makes no difference whether the language of RCW 82.16.050(2) specifically exempts from taxation sales to Washington utilities, or explicitly states that a tax shall be levied only upon out-of-state sales; nor does it matter that the Washington utility which sells interstate is the party taxed, for the result is the same in each instance: as between intrastate and interstate sales to other utilities for resale, only interstate sales of electricity to utilities are recognized as taxable income by the State of Washington; there is no similar burden of a tax which the identical intrastate sale must bear. As noted by the majority in its opinion, “it is our duty to determine whether the statute under attack, whatever its name may be, will in its practical operation work discrimination against interstate commerce.” Best & Co. v. Maxwell, 311 U.S. 454, 455-56, 85 L. Ed. 275, 61 S. Ct. 334 (1940); see Nippert v. Richmond, 327 U.S. 416, 90 L. Ed. 760, 66 S. Ct. 586, 162 A.L.R. 844 (1946). With this in mind, it is my best judgment that although the effect of this tax, in preserving the use of our natural resources for Washington residents by encouraging the sale *246of electricity exclusively in Washington is certainly laudable, its practical operation appears to inhibit and thereby discriminate against interstate commerce through this policy of economic isolationism in violation of U.S. Const, art. 1, § 8. As a matter of elementary economics, where one is forced to pay a tax if one sells interstate that one need not pay if one sells intrastate, good business sense suggests avoiding or minimizing interstate sales. Here, faced with this very decision, the respondent Washington utilities may well be discouraged from selling power interstate as a result of RCW 82.16.020. This the commerce clause prohibits. As stated by the Supreme Court in McGoldrick v. Berwind-White Coal Mining Co., 309 U.S. 33, 56, 84 L. Ed. 565, 60 S. Ct. 388, 128 A.L.R. 876 (1940):

While a state, in some circumstances, may by taxation suppress or curtail one type of intrastate business to the advantage of another type of competing business which is left untaxed, see Puget Sound Power & Light Co. v. Seattle, 291 U. S. 619, 625, and cases cited, it does not follow that interstate commerce may be similarly affected by the practical operation of a state taxing statute.

In spite of this warning, it appears to me that the State of Washington has, by taxation, suppressed and curtailed interstate sales of electricity to out-of-state utilities to the advantage of intrastate sales which are left untaxed. In dealing with this issue, the majority reasons that the “out-of-state utility is in no worse position than its in-state competitor. The state is playing no favorite with its resident businesses at the expense of similarly situated out-of-state enterprises.” However, this reasoning is irrelevant at best. The “in-state” .and “out-of-state” utilities are not in competition under the immediate taxing system; what is at stake in this appeal is whether interstate sales by the Washington public utility district which produces the electricity should be inhibited and discouraged by the burden of a tax which need not be paid on identical intrastate sales. It is the duty of this court to remove the “guise” of an indirect burden on interstate commerce where the real ef-*247feots — when distributed through the play of economic forces — suppress interstate commerce to an extent equal to a prohibited tax levied directly upon the commerce itself. Nippert v. Richmond, supra at 426; see Hartman, State Taxation of Interstate Commerce: A Survey and an Appraisal, 46 Va. L. Rev. 1051, 1072 (1960). To sustain the burden of the immediate tax upon the basis of irrelevant reasoning concerning relative disadvantages to hypothetical “in-state” and “out-of-state” competitors, or upon the ground that this method of tax assessment only “indirectly” burdens interstate commerce, is the very “mechanical approach” (Parker v. Brown, 317 U.S. 341, 360, 87 L. Ed. 315, 63 S. Ct. 307 (1943)) which the United States Supreme Court has rejected and which the majority alleges it is avoiding. Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 82 L. Ed. 823, 58 S. Ct. 546, 115 A.L.R. 944 (1938); see also Di Santo v. Pennsylvania., 273 U.S. 34, 44, 71 L. Ed. 524, 47 S. Ct. 267 (1927). As I have attempted to show above, the practical operative effect of RCW 82.16.020 as enforced by the State of Washington is one of directly inhibiting and discriminatorily burdening the interstate sale of electrical power to out-of-state utilities. In my judgment, it therefore violates the commerce clause.

Finally, the majority suggests that the taxing scheme of RCW 82.16.020 and 82.16.050(2) prevents a “pyramiding effect” of the public utility tax. Although this court is not directly faced with this issue of multiple burdens on interstate commerce in the instant case, I am convinced that the majority is again in error, and that the likelihood of a double tax liability is substantially increased under the current method of assessment utilized by the State of Washington. In Crown Zellerbach Corp. v. State, 45 Wn.2d 749, 755, 762, 278 P.2d 305 (1954), this court reviewed an attack upon a taxing statute (then RCW 82.04.460) which made “no distinction between sales within the state and sales outside the state”, 'and which provided for fair and equal treatment of interstate and intrastate sales through an “adequate provision for apportionment of income” and therefore tax liabili*248ty — a factor of fairness noticeably lacking in the taxing statutes immediately before this court. Despite the distinct character of the taxing scheme in Crown Zellerbach, the test which we there recognized and which the majority herein briefly refers to is equally applicable to the possibility of a “pyramiding effect” of taxation in the instant case:

The legislative purpose, or tax policy, of the above-quoted statutes is to provide for as equitable an imposition of actual tax liability as possible in so far as our state business and occupation tax is concerned. Implicit in this policy is the avoidance of an imposition of double or triple tax liability as to particular products.

(Italics mine.) Crown Zellerbach Corp. v. State, supra at 753. It is risk or potentiality of cumulative burdens against which interstate commerce is protected by the commerce clause. Western Live Stock v. Bureau of Revenue, supra at 255-56; Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434, 439, 83 L. Ed. 272, 59 S. Ct. 325 (1939); J.D. Adams Mfg. Co. v. Storen, 304 U.S. 307, 82 L. Ed. 1365, 58 S. Ct. 913, 117 A.L.R. 429 (1938). Under the method of tax assessment utilized by the State of Washington in this case, the single product of electricity is subjected not only to the Washington public utility tax of RCW 82.16.020, but may be subjected as well to additional taxation by our sister states upon its subsequent sale by the out-of-state utility to its consumers. This pyramiding tax liability upon interstate sales is the very burden which is prohibited by the commerce clause and the■ very evil which the majority purports to avoid. To remove this burden of potential multiple tax liability, this court need not declare either RCW 82.16.020 or 82.16.050(2) unconstitutional with the result that a Washington utility must pay a tax both when it sells to other Washington utilities and when it sells to out-of-state utilities for resale. Such a requirement would create the undesirable effect of the above-described pyramiding taxation upon both interstate and intrastate commerce. Rather, only the state’s method of tax assessment should be declared unconstitutional, arid this burden of multiple taxa*249tion upon both interstate and intrastate commerce — as well as the discriminatory burden of taxation upon interstate commerce described earlier — can be completely eliminated by giving effect to the exemptive provision of RCW 82.16.050(6) for interstate sales of electricity for resale. This would result in a deduction from the gross income tax levied against the selling Washington utility for both intrastate and interstate sales. Therein, the criteria of uniformity, equality, and fairness in taxation of commerce, required by U.S. Const, art. 1, § 8, would be achieved.

In my best judgment, the interpretation placed upon RCW 82.16.020 and 82.16.050 by the state in assessing this tax does discriminate against interstate commerce by placing the disparate burden of taxation upon interstate transactions — a burden not borne in identical intrastate transactions. The tax, in its practical operation, appears to inhibit and discourage interstate commerce in violation of the commerce clause. Consequently, the public utility districts should not be held liable for the tax assessed and paid under protest in this case, since they are entitled to a deduction from gross income, pursuant to the provision of RCW 82.16.050(6), in the amount of sales of electricity to out-of-state utilities for resale.

For the reasons indicated, I dissent and would affirm the decision of the trial court.

Wright, J., concurs with Finley, J.

Petitions for rehearing denied July 25, 1973.