FILED
IOUOT OF APPEALS
2013 DEC 31 All 9: 15
STATE OF WAS1-1111CTOM
Y— ___.
PIJTY
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION II
SPACE AGE FUELS, INC., No. 44195 -1 - I1
Appellant,
V.
STATE OF WASHINGTON, PUBLISHED OPINION
WORSWICK, C. J. — Space Age Fuels, Inc., an Oregon corporation, appeals summary
judgment dismissing its claim for a refund of business and occupation tax payments. Space Age
argues that the dormant commerce prohibits Washington from taxing its activities
because they lack a substantial nexus with Washington. We disagree and affirm.
s The " dormant" commerce clause is implied by article I, section 8, clause 3 of the United States
Constitution. Quill Corp. v. North Dakota, 504 U.S. 298, 309, 112 S. Ct. 1904, 119 L. Ed. 2d 91
1992).
No. 44195 -1 - II
FACTS
Space Age Fuels, Inc. is a retail and wholesale seller of fuel. Space Age is incorporated
in Oregon and maintains its principal place of business in Clackamas, Oregon. Although all of
its retail fuel stations are in Oregon, approximately 40 of its wholesale customers are in
Washington.
Upon a wholesale customer' s request, Space Age quotes fuel prices via telephone, fax, or
email. Once it receives an order, Space Age delivers fuel to wholesale customers using vehicles
2
it owns and operates.
Because delivery is " another profit center," Space Age marks up its fuel prices to account
for delivery costs. Clerk' s Papers ( CP) at 297. Thus, Space Age charges more for deliveries
made at longer distances. Before transferring fuel from its delivery vehicle into a customer' s
storage tank, a Space Age employee will " stick the tank," i.e., measure its contents to ensure the
tank can hold the fuel. When Space Age uses specialized vehicles to pump fuel into
aboveground storage tanks for some customers, it charges more for this extra pumping service.
But Space Age' s activities in Washington are limited. Space Age makes " no effort to
secure new customers for its fuel in Washington" because it believes its wholesale customers
base their purchases solely on price. CP at 54. Thus, no Space Age employees have visited
Washington to solicit sales or assess a customer' s needs. Further, Space Age does not own or
lease any real property in Washington, and it has no Washington - ased employees or assets.
b
Instead, Washington customers contact Space Age.
2
Rarely, Space Age delivers fuel by common carrier.
2
No. 44195 -1 - II
The Washington State Department of Revenue audited Space Age' s books and records
for the period between January 1, 2004, and June 30, 2007. During that time, Space Age grossed
3
over $ 48 million from 1, 675 recorded sales to wholesale customers in Washington. Between
July 1, 2005, and the end of the audit period, Space Age' s vehicles drove 141, 491 miles on
Washington roadways.
The Department determined that Space Age owed $ 235, 834 in unpaid business and
4
occupation ( B & O) taxes for its wholesaling activities in Washington during the audit period.
5
The Department also assessed interest and penalties.
Space Age paid the tax assessment and then filed a claim for a refund in superior court,
arguing that (1) there was no substantial nexus between Space Age and the State of Washington;
and ( 2) without such a nexus, imposition of the B & O tax violated the dormant commerce clause.
On cross motions for summary judgment, the trial court granted the Department' s motion, denied
Space Age' s motion, and dismissed its refund claim.
Space Age sought direct review in our Supreme Court. But our Supreme Court
transferred the case to us. Order, Space Age Fuels, Inc. v. State, No. 86972 -3 ( Wash. Oct. 30,
2012).
3 The number of actual deliveries " would likely be much higher" than the number of recorded
sales because Space Age' s books used. a single sales entry to record all deliveries to a single
customer in a given month. CP at 81.
4
The B & O tax is imposed on " the act or privilege of engaging in business activities." Former
RCW 82. 04. 220 ( 1961). After the audit period, the legislature amended RCW 82. 04. 220 to, inter
alia, incorporate the constitutional requirement of a " substantial nexus with this state." LAWS of
2010, 1 st Spec. Sess., ch. 23, § 102; see also LAWS of 2011, 1 st Spec. Sess., ch. 20, § 101.
5 taxes, retail B &O
The Department further assessed nominal amounts of unpaid retail sales
taxes, and hazardous substance taxes. Space Age has not sought refunds of these amounts.
No. 44195 -1 - II
ANALYSIS
Space Age argues that the trial court erroneously granted the Department' s motion for
summary judgment because the dormant commerce clause prohibits the Department from taxing
Space Age. We disagree.
We review an order granting summary judgment de novo and engage in the same inquiry
as the trial court. TracFone Wireless, Inc. v. Dep' t ofRevenue, 170 Wn.2d 273, 280 -81, 242
P. 3d 810 ( 2010). Summary judgment is appropriate when there is no genuine issue of material
fact and the moving party is entitled to judgment as a matter of law. CR 56( c). We consider the
evidence and draw all reasonable inferences in the light most favorable to the nonmoving party.
Schaafv. Highfield, 127 Wn.2d 17, 21, 896 P. 2d 665 ( 1995).
Two clauses of the United States Constitution limit a state' s power to tax interstate
commerce: ( 1) the Fourteenth Amendment due process clause and ( 2) the " dormant" commerce
clause implied by article I, section 8, clause 3. Quill Corp. v. North Dakota, 504 U.S. 298, 301,
305, 112 S. Ct. 1904, 119 L. Ed. 2d 91 ( 1992). Under the due process clause, an out - - tate
of s
taxpayer must have sufficient minimum contacts with the taxing state such that taxation " does -
not offend traditional notions of fair play and substantial justice." Int' l Shoe Co. v. Washington,
326 U. S. 310, 316, 66 S. Ct. 154, 90 L. Ed. 95 ( 1945) ( internal quotation marks omitted). Space
Age does not challenge its tax liability on due process grounds.
Next, the dormant commerce clause prohibits a state from discriminating against or
unduly burdening interstate commerce. Quill, 504 U. S. at 312. Yet a state may tax interstate
commerce if the tax ( 1) applies to an activity having a substantial nexus with the taxing state, ( 2)
is fairly apportioned, ( 3) does not discriminate against interstate commerce, and ( 4) is fairly
M
No. 44195 -1 - I1
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). Space Age contests only the first element: it
6
denies having a substantial nexus with Washington.
Whether an out -of state company has a substantial nexus with Washington is a question
-
of law reviewed de novo. See Lamtec Corp. v. Dep' t ofRevenue, 170 Wn.2d 838, 842, 246 P. 3d
788, cent. denied, 132 S. Ct. 95 ( 2011). Taxes are presumed valid, and the company bears the
burden of showing that a substantial nexus does not exist. Lamtec, 170 Wn.2d at 843.
A substantial nexus exists when a company' s activities in Washington are both
substantial and significantly associated with its ability to establish and maintain a market in
Washington for its sales. Tyler Pipe Indus., Inc. v. Wash. Dep' t ofRevenue, 483 U.S. 232, 250,
107 S. Ct. 2810, 97 L. Ed. 2d 199 ( 1987); Lamtec, 170 Wn.2d at 851. A company' s physical
presence in Washington can establish a substantial nexus. Lamtec, 170 Wn.2d at 845; see Nat' l
Geographic Soc' y v. Cal. Bd. ofEqualization, 430 U. S. 551, 562, 97 S. Ct. 1386, 51 L. Ed. 2d
631 ( 1977). Further, periodic visits can create a physical presence in Washington. Lamtec, 170
Wn.2d at 846. Thus, a company may have a physical presence in Washington even though it
lacks a " brick and mortar address within the state." Lamtec, 170 Wn.2d at 851; see Standard
6
Citing Quill, 504 U. S. at 313 & n.7, Space Age asserts that the dormant commerce clause' s
requirement of a substantial nexus is more stringent than the due process clause' s minimum
contacts requirement. Space Age then calls our attention to Miller Brothers Co. v. Maryland,
347 U. S. 340, 74 S. Ct. 535, 98 L. Ed. 744 ( 1954), a case in which taxation of an out - - tate
of s
company violated due process. In Miller Brothers, a Delaware company' s occasional delivery of
products to Maryland customers via its own vehicles did not establish minimum contacts with
Maryland. 347 U. S. at 345. But given more recent developments in the law of minimum
contacts, " the continued authority of Miller Brothers is in considerable doubt." Brown' s
Furniture, Inc. v. Wagner, 171111. 2d 410, 426, 665 N.E. 2d 795, cent. denied, 519 U. S. 866
1996); see Quill, 504 U. S. at 307 -08 ( quoting Burger King Corp. v. Rudaewicz, 471 U.S. 462,
476, 105 S. Ct. 2174, 85 L. Ed. 2d 528 ( 1985)).
No. 44195 -1 - II
Pressed Steel Co. v. Wash. Dep' t ofRevenue, 419 U.S. 560, 562, 95 S. Ct. 706, 42 L. Ed. 2d 719
1975).
Space Age' s regular deliveries establish its physical presence in Washington. See
Lamtec, 170 Wn.2d at 845 -46. These deliveries are substantial because Space Age' s recorded
sales to Washington customers occurred, on average, more than once per day during the audit
period. In addition, Space Age' s vehicles drove extensively on Washington roads while
delivering over $48 million of fuel to Washington customers.
Further, Space Age conducts substantial activities in Washington because, as a wholesale
fuel distributor, Space Age sells both the commodity of fuel and the service of delivery to
customers in Washington. The commodity sales occur in Washington when Space Age
employees stick the tank and transfer fuel into its Washington customers' storage tanks. See
RCW 82. 04. 040( 1). Space Age charges more to make deliveries at longer distances, and it also
charges more to pump fuel into aboveground tanks when necessary.
Both Space Age' s physical presence in Washington and its delivery activities are
significantly associated with its ability to establish and maintain a market in Washington for its
sales. Tyler Pipe, 483 U. S. at 250. Because a substantial nexus exists, the Department' s B & O
tax assessment did not violate the dormant commerce clause. 7 Complete Auto, 430 U.S. at 279.
Arguing to the contrary, Space Age contends that delivery alone cannot establish a
substantial nexus. In support of this contention, Space Age relies on ( 1) the example given in an
7 We reject Space Age' s assertion that this analysis " fails to acknowledge the difference between
Due Process Clause analysis and Commerce Clause analysis." Reply Br. of Appellant at 17. We
do not base our decision on whether Space Age has purposefully directed its activities at
Washington residents so as to establish minimum contacts with this state. See Quill, 504 U.S. at
308.
on
No. 44195 -1 - II
interpretive rule published by the Department, ( 2) Space Age' s own assertion that nexus -creating
activities are activities designed to generate sales, and ( 3) the reasoning supporting the bright-
line test applied in Quill, 504 U.S. 298.
A. The Department' s Interpretive Rule
Arguing that delivery alone cannot establish a substantial nexus, Space Age asserts that
the Department took the same view when promulgating an interpretive rule, WAC 458 -20-
193( 11). 8 But this assertion lacks relevance to the issue before us for three reasons.
First, an interpretive rule such as WAC 458 -20- 193( 11) is " not binding on the courts at
9 Ass' n of Wash: Bus. v. Dep' t ofRevenue, 155 Wn.2d 430, 447, 120 P. 3d 46 ( 2005).
all. "
Second, we give no deference to an agency' s interpretative rule unless it reasonably interprets an
ambiguous statute that the legislature has charged the agency with administering and enforcing.
Edelman v. State ex rel. Pub. Disclosure Comm' n, 152 Wn.2d 584, 590, 99 P. 3d 386 ( 2004).
Even if WAC 458 -20- 193( 11) interpreted the dormant commerce clause — and it does not do
so — we would not defer to its interpretation because the Department does not administer or
enforce the commerce clause of the United States Constitution.
8 WAC 458- 20- 193( 11)( a) provides:
Company A is located in California. It sells machine parts at retail and wholesale.
Company B is located in Washington and it purchases machine parts for its own
use from Company A. Company A uses its own vehicles to deliver the machine
parts to its customers in Washington for receipt in this state. The sale is subject to
the retail sales and B & O tax if the seller has nexus, or use tax if nexus is not
present.
9 WAC 458 -20- 193( 11) is an interpretive rule because ( 1) its violation does not subject a person
to a penalty and ( 2) it merely " sets forth the agency' s interpretation of statutory provisions it
administers." RCW 34. 05. 328( 5)( c)( ii).
7
No. 44195 -1 - II
Third, WAC 458 -20- 193( 11) illustrates only what taxes apply and who must pay them in
interstate transactions. In the example of WAC 458- 20- 193( 11)( a), an out - - tate seller uses its
of s
own vehicles to deliver products to an in -
state buyer. The seller pays Washington sales and
10
B & O taxes " if the seller has nexus "; otherwise, the in -state buyer pays Washington use taxes.
WAC 458- 20- 193( 11)( a). Thus WAC 458- 20- 193( 11)( a) shows merely that a substantial nexus
is necessary to tax an out -of state seller; it does not attempt to show whether a substantial nexus
-
exists given a particular set of facts. We do not consider this provision further.
B. Activity Designed To Generate Sales
Space Age next contends that a substantial nexus can exist only by virtue of an activity
that is " designed to generate sales." Br. of Appellant at 22. Space Age then attempts to
distinguish its activities from the nexus -creating activities in Tyler Pipe, Standard Pressed Steel,
and Lamtec. We disagree because generating sales is not the touchstone of all nexus -creating
activity. As stated above, a substantial nexus exists when a company' s activities in Washington
are significantly associated with [its] ability to establish and maintain a market in this state for
the sales." Tyler Pipe, 483 U. S. at 250 ( internal quotation marks omitted).
In Lamtec, an out -of - tate company sent agents to Washington about two or three times
s
per year to meet with major customers. 170 Wn.2d at 841. The agents shared information about
the company' s insulation and vapor barrier products, but they did not solicit sales directly. 170
Wn.2d at 840 -41. Nonetheless, our Supreme Court held that the agents' visits created a
substantial nexus because the visits were significantly associated with the company' s ability to
io
Sales and B &O
taxes are paid to the Department by the seller. See RCW 82. 04.220; RCW
82. 08. 050. In contrast, use taxes are paid by the buyer. See RCW 82. 12. 020.
N.
No. 44195 -1 - II
establish and maintain a market for its products in Washington. 170 Wn. 2d at 851. Whether the
agents' visits generated sales was not determinative.
Likewise in Standard Pressed Steel, a Pennsylvania company sold nuts and bolts to
Washington customers, principally Boeing. 419 U. S. at 561. The company had a single
Washington employee, and the employee operated out of his home. 419 U.S. at 561. The
employee, along with a group of engineers who periodically traveled to Washington, consulted
with Boeing about its needs and addressed any difficulties with the company' s nuts and bolts.
419 U. S. at 561. However, the employee did not take Boeing' s orders, accept its payments, or
deliver nuts and bolts. 419 U. S. at 561. Yet the Court held that a B & O tax assessment did not
violate the dormant commerce clause because the company' s Washington employee " made
possible the realization and continuance of valuable contractual relations" between the company
and its Washington customers. 419 U.S. at 562.
Lamtec and Standard Pressed Steel take a broader view of establishing and maintaining a
market than Space Age' s narrow emphasis on generating sales would allow. Attempting to
distinguish these cases as well as Tyler Pipe, Space Age appears to argue that ( 1) business -
relationships are essential to generating sales and ( 2) Space Age has no business relationship
with any of its 40 Washington customers, each of whom buys fuel on the exclusive basis of its
1
No. 44195 -1 - II
price. 11 But Space Age fails to account for Lamtec' s statement that a company' s physical
presence can establish a substantial nexus. 170 Wn.2d at 845. Moreover, Space Age ignores the
extent to which its deliveries make possible " the realization and continuance" of sales to its
customers. Standard Pressed Steel, 419 U. S. at 562. Space Age' s argument is unpersuasive.
C. The Quill Bright - ine Test
L
Lastly, Space Age argues that its deliveries did not create a nexus under the reasoning of
Quill, 504 U. S. 298. We disagree.
In Quill, the United States Supreme Court reaffirmed its prior holding that " a vendor
whose only contacts with the taxing State are by mail or common carrier lacks the ` substantial
nexus' required by the Commerce Clause." 504 U. S. at 311, 317 ( citing Nat' l Bellas Hess, Inc.
505 ( 1967),
of Ill., 386 U. S. 753, 87 S. Ct. 1389, 18 L. Ed. 2d
overruled on
v. Dep' t of Revenue
other grounds by Quill, 504 U. S. at 308). Thus Quill preserved the " safe harbor" protecting the
mail -order industry from state sales taxes since Bellas Hess. 504 U. S. at 315 -16.
Space Age asserts that it would fall within this safe harbor if it had made its deliveries by
common carrier. It then argues, " Given the Commerce Clause' s structural concerns about the
effects of state regulation on the national economy, there is no reason for the constitutionality of
the fuel is delivered." Br. of Appellant at 25. But this
the tax to turn on the method by which
11
Unlike the companies selling specialized products in Tyler Pipe, Standard Pressed Steel, and
Lamtec, Space Age sells a commodity: a commercial good (namely fuel) for which the quality
does not vary from one source to another. Thus it is plausible that business relationships,
advertising, and branding do not generate Space Age' s sales. But Space Age' s president stated
that delivery is " another profit center," i.e., a service for which Space Age charges its customers.
CP at 297. That statement belies Space Age' s factual assertion that its customers make
purchases based solely on price. In other words, Space Age' s wholesale customers buy its fuel
partly because Space Age delivers it to them.
10
No. 44195 -1 - II
argument contradicts Quill. Quill fully considered the commerce clause' s structural concerns
12
and maintained a line
bright - rule. 504 U.S. at 312, 315. That rule is unavailing to Space Age
13
because it delivered fuel in its own vehicles, not by common carrier.
Similarly unavailing is the Board of Tax Appeals' s recent decision finding no substantial
nexus in Sage V Foods, LLC v. Dep' t ofRevenue, No. 11 -704, 2012 WL 4794242 ( Wash. Bd. of
Tax Appeals Aug. 31, 2012). In Sage, an out -of - tate company engaged a common carrier to
s
deliver its food product to Washington customers, using rail cars leased by the out -of state
-
company. Sage, 2012 WL 4794242 at * 7 -8. But unlike the company in Sage, Space Age did not
deliver its fuel by common carrier.
Each of Space Age' s arguments fails. Because Space Age has a substantial nexus with
Washington, the Department' s B & O tax assessment did not violate the dormant commerce
clause.
Affirmed.
Worswick, C. J.
We c,1ncur:
J.
1"2
Quill recognized, " Like other bright -line tests, the Bellas Hess rule appears artificial at its
edges .... This artificiality, however, is more than offset by the benefits of a clear rule." 504
U.S. at 315.
13 Because Space Age does not come within the safe harbor of Quill and Bellas Hess, we do not
address the Department' s assertion that the safe harbor protects a company only from sales and
use taxes, and not from all taxes including the B & O tax. See Lamtec, 170 Wn.2d at 848 -49.
11