Present: All the Justices
CITY OF WINCHESTER
OPINION BY JUSTICE LAWRENCE L. KOONTZ, JR.
v. Record No. 951621 June 7, 1996
AMERICAN WOODMARK CORPORATION
FROM THE CIRCUIT COURT OF THE CITY OF WINCHESTER
John E. Wetsel, Jr., Judge
In this appeal, we consider whether a municipal government's
assessment of a business, professional, and occupational license
("BPOL") tax comported with the requirements of the Commerce
1
Clause of the United States Constitution. Under the specific
facts of this case, we agree with the trial court's judgment that
the assessment was not constitutional.
I.
Factual Background
The case was decided on motion for summary judgment upon the
pleadings and stipulations of fact. American Woodmark
Corporation (American Woodmark), a Virginia corporation,
maintains its corporate headquarters in the City of Winchester
(the City). American Woodmark operates a number of
manufacturing, storage, and distribution facilities throughout
the United States, though none of these facilities is located
2
within the City.
1
U.S. Const. art. I, § 8, cl. 3 ("Congress shall have
Power . . . [t]o regulate Commerce . . . among the several States
. . ."). When construed to limit state taxation where Congress
has not expressly legislated, the provision is generally referred
to as the "dormant" Commerce Clause. See Oklahoma Tax Comm'n v.
Jefferson Lines, Inc., ___ U.S. ___, 115 S.Ct. 1331, 1335 (1995).
Here, for brevity, we will simply refer to the Commerce Clause.
2
We have previously addressed the nature of American
Woodmark's business operations and its relationship with the City
in American Woodmark v. City of Winchester, 250 Va. 451, 464
On April 20, 1993, the Commissioner of Revenue for the City
assessed BPOL taxes against American Woodmark for the years 1990
and 1991 in the amount of $374,636.91 and $343,918.42,
respectively. On April 14, 1994, American Woodmark filed in the
Circuit Court of the City of Winchester an application to correct
these assessments of local taxes. American Woodmark alleged that
these assessments were not fairly apportioned and, thus,
constituted an improper local restraint on interstate commerce in
violation of the Commerce Clause.
On March 17, 1995, American Woodmark filed a motion for
summary judgment with a supporting memorandum. Stipulations of
fact and additional supporting memoranda were filed by the
parties. On May 12, 1995, the trial court filed a written
opinion in which it found that the assessments against American
Woodmark failed to satisfy the requirements of the Commerce
Clause because the City had not fairly apportioned the
assessments to tax only those gross receipts attributable to
American Woodmark's business activities within the City. After
receiving the City's objections to its written opinion, the trial
court entered a final order on June 5, 1995, granting summary
judgment to American Woodmark and declaring the BPOL assessments
made by the City invalid. We awarded the City this appeal.
II.
Constitutional Restrictions on Taxation
of Businesses Conducting Interstate Commerce
The United States Supreme Court has long construed the
S.E.2d 148 (1995).
Commerce Clause as a restraint on state and local taxing power.
See, e.g., Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824). Modern
jurisprudence regarding state and local taxation under the
Commerce Clause emerged in the late 1930s, when the Court began
to eschew formalistic distinctions that lacked substance and
focused more on the practical effect of the tax imposed, or its
effect despite any distinctions in form. See, e.g., Western Live
Stock v. Bureau of Revenue, 303 U.S. 250 (1938). In prior
decisions, the Court had merely held that a state or locality
could regulate "local," but not "national," commerce. Cooley v.
Board of Wardens, 53 U.S. (12 How.) 299, 316-19 (1851).
After 1938, the apportionment of a local tax to cover those
activities rationally related to a taxing authority's power and
interest became the central inquiry. The Court announced that
for a tax to be valid under the Commerce Clause, the tax cannot,
in effect, reach revenue generated by activities lacking this
nexus. See, e.g., Central Greyhound Lines, Inc. v. Mealey, 334
U.S. 653, 663 (1948).
In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274
(1977), the Court spelled out this apportionment rule, announcing
a four-part test to assess the validity of a local tax under the
Commerce Clause. The tax must be (1) applied to an activity with
a substantial nexus with the taxing authority, (2) fairly
apportioned, (3) nondiscriminatory to interstate commerce, and
(4) fairly related to the services provided by the state or
locality. Id. at 279. The Court also restated the realist
approach, noting that the focus is not on the tax statute's
formal language, but rather on its practical effect. Id.; see
also Oklahoma Tax Comm'n v. Jefferson Lines, Inc., ___ U.S. ___,
___, 115 S.Ct. 1331, 1336 (1995).
III.
Application of the Commerce Clause to the Assessment
The dispute in this case is whether the assessments in
question satisfy the "fairly apportioned" prong of the
constitutional test enunciated in Complete Auto. This prong
requires that an assessment be both internally and externally
consistent. Goldberg v. Sweet, 488 U.S. 252, 261 (1989). An
assessment is internally consistent if applying the text of the
taxing statute, and assuming that every other jurisdiction
applied the same statute, the taxpayer would not be subjected to
a risk of double taxation. Id. at 261. An assessment is
externally consistent if the assessment applies only to the
"portion of the revenues from the interstate activity which
reasonably reflects the in-state component of the activity being
taxed." Id. at 262 (citation omitted).
In this case, the trial court held that the assessments
were internally consistent because if every taxing jurisdiction
applied the tax as set out in the City's ordinance the taxpayer
would be allowed to deduct amounts paid to other taxing
jurisdictions and therefore would not be subject to multiple
taxation. That holding is not challenged on appeal. 3 Thus, we
3
American Woodmark argues on brief that this holding was
erroneous; however, cross-error was not assigned to the trial
court's holding and we will not consider this argument. Rule
5:18(b).
need consider only whether the assessments comply with the
requirements of external consistency.
To prevail in a claim that a tax assessment fails the
external consistency test, a taxpayer must "'demonstrate that
there is no rational relationship between the income attributable
to the State and the intrastate values of the enterprise.'"
Amerada Hess Corp. v. Director, Division of Taxation, New Jersey
Department of the Treasury, 490 U.S. 66, 75 (1989)(quoting
Container Corp. of America v. Franchise Tax Board, 463 U.S. 159,
180 (1983)). There is no specific formula which must be adopted
by a taxing jurisdiction to satisfy the external consistency
test, but "an objecting taxpayer has the burden to demonstrate by
clear and cogent evidence that the income attributed to the State
is in fact out of all appropriate proportions to the business
transacted . . . in that State, or has led to a grossly distorted
result." Jefferson Lines, ___ U.S. at ___, 115 S.Ct. at 1343
(citations and internal quotation marks omitted).
The City argues that the trial court's determination that
the assessments were not externally consistent was erroneous
because American Woodmark failed to meet its burden of proof.
The City contends that the record shows that American Woodmark is
a highly centralized, unitary business and its corporate
headquarters contributes value to its business. According to the
City, all the taxpayer's gross receipts are in some way
attributable to the headquarters office and presumably could all
be used as the basis for the assessments. Thus, in the absence
of quantified evidence of the specific value of the numerous
functions performed by the headquarters in Winchester, the
taxpayer did not carry its burden of proof and, the City
concludes, the trial court erred in holding that the assessments
were invalid.
We disagree. In the circumstances here, where the City
based its assessments on 100% of the taxpayer's revenues,
American Woodmark was not required to produce evidence of a
specific level of value attributable to its Winchester operation
to prevail in its assertion that the assessments were not
externally consistent and, thus, were in violation of the
Commerce Clause. American Woodmark presented uncontested
evidence that, during the years in question, it operated 24
facilities in 13 different states. These facilities included
manufacturing and distribution centers as well as service and
sales offices. Common sense compels the conclusion that these
operations added value to American Woodmark's business product
and were revenue producing activities. By definition,
assessments based on 100% of American Woodmark's revenues
included revenues realized from value produced in locations other
than in the taxing jurisdiction. Given the number of facilities
and operations outside Winchester, it is equally axiomatic that
the value added to the product by the Winchester operations could
not possibly produce 100% of the revenues. Therefore, we
conclude that American Woodmark has met its burden of proof by
presenting clear and cogent evidence that the income which the
City through its assessments attributed to operations conducted
in Winchester is "out of all appropriate proportions to" and has
"no rational relationship" to the business transacted in
Winchester. Accordingly, the trial court properly held that the
City's assessments of its BPOL tax against American Woodmark for
1990 and 1991 were invalid.
Contrary to the City's assertion, this conclusion is
consistent with our analysis in Short Brothers, Inc. v. Arlington
County, 244 Va. 520, 423 S.E.2d 172 (1992). In that case we
upheld Arlington County's assessment for a business license tax
based on the taxpayer's total gross receipts because the evidence
showed that the taxpayer's sole business facility in the United
States was in Arlington County and that it conducted all of its
revenue-generating operations from that facility. We concluded
that "[i]f there was any legitimate basis on which to allocate
those receipts to another taxing jurisdiction, Short had the
burden to produce such evidence. It has not carried that
burden." Id. at 527, 423 S.E.2d at 176; see also Ryder Truck
Rental, Inc. v. County of Chesterfield, 248 Va. 575, 579-80, 449
S.E.2d 813, 816 (1994). The only difference between the result
in Short Brothers and the instant case is that here the
stipulated facts showed a "legitimate basis on which to allocate
[American Woodmark's] gross receipts to another taxing
jurisdiction."
IV.
Summary Judgment
Finally, we turn to the City's assertion that summary
judgment was improper. The City argues that it should have been
permitted to develop a more complete record in order to
demonstrate that its assessments were proportionate to the
activity conducted by American Woodmark within the City. We
disagree. No material facts were in dispute. The stipulations
of fact fairly and completely outline the nature of American
Woodmark's business operations and the function of the
headquarters unit within those operations. While the City might
have been able to establish with a full evidentiary hearing the
portion of gross receipts attributable to the operations of the
headquarters unit, as we noted above, it is beyond the realm of
conception that it could have established all gross receipts as
attributable to such operations, thus justifying the failure to
make an apportionment in the original assessments.
V.
Conclusion
In short, we hold that under the specific facts of this
case, the City failed to apportion the BPOL tax assessments as
required by the Commerce Clause. Accordingly, the judgment of
the circuit court will be affirmed.
Affirmed.