J. C. Penney Co. v. Haradesty , 164 W. Va. 525 ( 1979 )

Neely, Justice:

These four tax cases raise once more the perennial problem of the extent to which a state may impose a tax upon activities in interstate commerce. “The history of this problem is spread over hundreds of volumes of [the U. SJ Reports. To attempt to harmonize all that has been said in the past would neither clarify what has gone before nor guide the future.” Freeman v. Hewit, 329 U.S. 249, 252, 67 S.Ct. 274, 276, 91 L.Ed. 265 (1946). “It would be a Herculean, if not impossible task, to review and harmonize the myriad decisions of the Supreme Court of the United States on the subject of interstate commerce and exactly what incidents thereof may be constitutionally taxed by the States. The dissenting opinions in many of those cases make clear that the task of reconciling all the decisions is more difficult than was the task of Theseus as he threaded his way through the famous Cretan Labyrinth in search of the Minotaur.” Roy Stone Transfer Corp. v. Messner, 377 Pa. 234, 243-44, 103 A.2d 700, 705 (1954). “The U.S. Supreme Court’s effort to establish a free trade zone within the United States dates from Gibbons v. Ogden, 22 U.S. 1, 6 L.Ed. 23 (1824), and an important part of this effort has been constant federal vigilance to insure that state taxation does not discriminate against interstate commerce.” Chesapeake & Potomac Co. v. State Tax Dept., _ W.Va. _, 239 S.E.2d 918, 926-27 (1977).

The Court has consolidated these four cases for decision because there is a framework of legal principles which apply in common to all four. In this one opinion we shall attempt to outline all of the current rules which apply to state taxation of activities in interstate commerce.

There are four United States Supreme Court cases since 1975 which form the corners of a perimeter which circumscribes the permissible area in which the states may tax activities in interstate commerce. The first of these cases is Standard Pressed Steel Co. v. State of Washington Dept. of Revenue, 419 U.S. 560, 95 S.Ct. 706, 42 L.Ed.2d 719 (1975) which articulated two principles: first, that the state must give something for which it can ask return; second, where the taxpayer alleges that a given tax discriminates against interstate commerce, the burden is on the taxpayer factually to demonstrate the discrimination. We applied this second criterion in Virginia Foods v. Dailey, _ W.Va. _, 239 S.E.2d 770 (1977). In Standard Pressed Steel, a manufacturer of aerospace fasteners, with a home office and manufacturing plant in Pennsylvania, challenged Washington’s Business and Occupation Tax on the grounds that the manufacturer’s business activities in Washington were insufficient to sustain the tax. The manufacturer had one employee in Washington who was paid a salary and who operated from his home near Seattle. His primary duty was to consult with the customer, Boeing Aircraft, regarding its anticipated and current requirements for aerospace fasteners and to follow up any problems in the use of appellant’s product after delivery. In addition there was a group of engineers paid by the manufacturer who visited Boeing about three days out of every six weeks. While the manufacturer’s resident employee did not take orders from Boeing, the Supreme Court dismissed as frivolous the argument that there were insufficient contacts to support a direct tax when there existed one employee with a full time job within the State of Washington facilitating a valuable contractual relationship between the manufacturer and Boeing. The Court recognized that taxes of this nature create the possibility of double taxation which would discriminate against interstate commerce but reiterated its holding in General Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1964) that the burden is on the taxpayer to demonstrate any alleged discrimination.

The second corner of our perimeter is established by Boston Stock Exchange v. State Tax Comm’n, 429 U.S. 318, 97 S.Ct. 599, 50 L.Ed.2d 514 (1977) which held that no state may tax local transactions involving products manufactured or business operations performed in any other state at a higher rate than similar local activities with no out-of-state components. In Boston the State of New York attempted to provide relief from the competitive disadvantage thought to be created by the transfer tax for New York stock exchanges in competition with out-of-state exchanges. A New York statute imposing a transfer tax on securities transactions, if part of the transaction occurs in New York, was amended so that transactions involving an out-of-state sale were taxed more heavily than most transactions involving an entirely in-state sale. The court found that the statute imposed a greater tax liability on out-of-state sales than on in state sales and, therefore, lacked even-handed treatment demanded by the Commerce Clause. While the focus of the court in Boston was upon an intentional discrimination against interstate commerce in favor of local commerce, a fair reading of the case discloses that any taxing scheme which discriminates in fact, regardless of intent, against interstate commerce is unconstitutional.

The third corner of our perimeter is formed by Complete Auto Transit, Inc. v. Brady, 430 U.S. 976, 97 S.Ct. 1669, 52 L.Ed.2d 371 (1977) which rejected any determination about the legitimacy of a tax based upon what the tax is called in favor of three functional criteria: (1) nexus with the taxing state in terms of the tax bearing a fair relation to services provided by the state; (2) fair apportionment; and, (3) nondiscrimination against interstate commerce. In Complete Auto Mississippi attempted to tax a motor carrier which transported to Mississippi dealers motor vehicles manufactured outside the state. The Supreme Court upheld the tax since the activity taxed was sufficiently connected to the State of Mississippi to justify the tax, the tax was fairly related to the benefits provided the carrier, the tax did not discriminate against interstate commerce, and the tax was fairly apportioned.

Finally the case of National Geographic Society v. California Board of Equalization, 430 U.S. 551, 97 S.Ct. 1386, 51 L.Ed.2d 631 (1977) recognized that there is a difference between a direct tax which is borne by the commercial taxpayer itself and a use tax which is borne by the taxpayer’s customers. The National Geographic Society sold magazines by direct mail to residents of California without an intermediary in that state although the magazine had two offices in California which solicited advertising copy but performed no activities related to the seller’s operation of its mail order business. The magazine challenged California’s right to impose a use tax, which is the mirror image of a sales tax. A use tax is collected when a good is sold from an out-of-state supplier for use within a state, and the Supreme Court upheld the California tax on the grounds that there was sufficient contact between the magazine and the State of California for California to impose the administrative burden on the magazine of collecting the use tax from California residents who subscribed. The Court distinguished between a use tax and a direct tax in terms of the level of contacts necessary to sustain each, and concluded that a nondiscriminatory use tax could be imposed where there were sufficient contacts to satisfy due process standards while a higher Commerce Clause standard would be required to support the imposition of a direct tax.

We shall now proceed seriatim to the four individual cases which are the subject of this opinion.

J. C. PENNEY CO., INC. v. DAVID C. HARDESTY, COMM’R

NO. 14389

This is an appeal from a decision of the Circuit Court of Kanawha County holding that the taxpayer, J. C. Penney is exempt from taxation on direct mail order sales serviced outside of the State of West Virginia. The circuit court held in favor of the taxpayer after an adverse decision by the State Tax Commissioner who now contends that the taxpayer’s activity within West Virginia constitutes a sufficient tax nexus to allow the State to impose business and occupation tax upon the company’s mail order business.

The appellee, J. C. Penney Co., is a retail dry goods company which operates sixteen hundred stores throughout the United States, of which fifteen are located in West Virginia. In addition to selling over the counter at its retail stores, Penney sells through three annual catalogues and a number of special flyers. Cata-logues are distributed from the following: credit lists; catalogue request cards mailed in from catalogues or picked up in stores; letters from former customers; lists of customers purchasing a specified volume of merchandise; and, the stores themselves. The catalogues contain order blanks and will give information on approximate cost of items where the mail or shipping cost cannot be precalculated. The taxpayer contends that in most instances where information is sought by the customer in one of its local stores, the resulting sale is completed by the store and the state tax is paid.

Catalogue sales are made in two ways — by direct mail and through catalogue desks in Penney’s stores. All cat-alogue sales fall into four categories: customer orders at local catalogue desks where the merchandise is delivered to the local store for delivery to the customer; customer orders at the local store where the merchandise is delivered from out-of-state by mail or interstate carrier directly to the customer; customer orders through the mail direct to the local catalogue center where the customer then picks up the merchandise; and, customer orders by mail direct to the out-of-state catalogue center where the merchandise is delivered back to the customer by mail or interstate carrier. It is only the last category of sales which is in controversy in this appeal.

As part of taxpayer’s mail order business the Tax Commissioner is also seeking to tax the finance charges levied by J. C. Penney on its direct mail credit sales. All records pertaining to credit sales made to West Virginia are forwarded to the regional credit office in Pittsburgh, Pennsylvania. Collection of delinquent accounts is the sole responsibility of J. C. Penney through its credit outlet in Pittsburgh. However, there are the following contacts with West Virginia: credit applicants can obtain application forms from local stores; credit information and employment is verified by local West Virginia credit bureaus; direct mail orders are occasionally serviced by local stores; payments for direct mail sales may be made to local West Virginia stores; and, the taxpayer uses local West Virginia collection agencies and the West Virginia court system to collect delinquent accounts. Furthermore, West Virginia provides consumer protection laws, usury laws, and credit laws which are enforced by West Virginia legal process.

Since the State of West Virginia is attempting to impose a gross receipts tax on direct mail order sales and gross receipts from finance charges to West Virginia residents we must apply a Commerce Clause test to determine whether the tax is valid. There is no offer of proof by the taxpayer that West Virginia’s Business and Occupation Tax discriminates in fact against interstate commerce by duplicating any other tax levied in another jurisdiction. Like the manufacturer in Standard Pressed Steel, supra the activities of the taxpayer are greatly facilitated by its overall operations in West Virginia; there are sufficient contacts with the State to support a tax nexus; and, all of the criteria of Complete Auto, supra in terms of fair apportionment, nondiscrimination, and reasonable relationship to the services provided by the State have been met. Accordingly, the judgment of the Circuit Court of Kanawha County is reversed.

PITTSBURGH-DES MOINES STEEL CO. v. THOMAS R. GOODWIN, COMM’R

NO. 14408

This is an appeal by the taxpayer of a Circuit Court of Kanawha County ruling that the taxpayer, a Pennsylvania corporation with principal offices in Pittsburgh, is liable for tax on the fabrication and erection of certain structures in West Virginia. The taxpayer is engaged in the design, engineering, fabrication and installation of large steel structures, including elevated water storage tanks and flat bottom storage tanks. In most instances the steel structures are fabricated in Pennsylvania and delivered by the taxpayer to West Virginia where they are erected on foundations built by taxpayer through its selected sub-contractors. In those instances where the steel structures were fabricated and erected on foundations built by others, taxpayer believed no Business and Occupation Tax was due. In the many instances where the structures were built by the sub-contractors, taxpayer paid Business and Occupation Tax only as a split contract. The lower court agreed with the Commissioner that there was sufficient nexus to tax the entire transaction. The primary issue on this appeal is whether the State of West Virginia can tax gross receipts on the entire contract price for designing, fabricating, and erecting storage tanks for West Virginia customers when the actual manufacture of the prefabricated parts of the tanks is carried on outside of West Virginia and the structure is shipped in pieces for the purpose of being erected in this State. We hold that it can.

The taxpayer has been qualified for a number of years as a foreign corporation authorized to do business in West Virginia; however, it has no offices, headquarters, warehouses, or plants in West Virginia nor does it have any permanent employees in the State. All the engineering, drafting, accounting, and related activities are conducted outside the State of West Virginia and the contracts for its sales are executed at the home office outside West Virginia. The installation of the taxpayer’s structures, however, is performed in West Virginia by welders, many of whom are hired outside the State. After a project is completed the taxpayer performs tests on the tank and makes additional inspections to insure that the tank is functioning properly. Furthermore, the taxpayer is involved in both the selection of the erection site and the design of the proper foundation, both of which involve several visits to the construction site in West Virginia.

Any West Virginia contractor who employs subcontractors must pay a Business and Occupation Tax on the amount of the entire contract. Furthermore, all construction in West Virginia involves the assembling of parts manufactured outside of the State of West Virginia. While the prefabrication of a storage tank out-of-state to be assembled in West Virginia is a spectacular example of out-of-state parts being assembled by a contractor, nonetheless, most of the toilets, hardware, kitchen equipment, carpet, windows, and heating systems installed in buildings constructed in West Virginia have been manufactured elsewhere. The taxpayer does not allege that there is any duplication of a tax in this State with a tax imposed by any other state and since there is no factual showing of actual discrimination the facts of this case are within the guidelines established by Complete Auto and Boston Stock Exchange, supra. The roads of West Virginia are used for delivery; the courts of West Virginia are used for the enforcement of claims; the constabulary of West Virginia are used to protect the parts while they are on the construction site; and, all of the social services of the State of West Virginia support the activities of taxpayer’s employees while they are working here. Certainly the volume of contacts is far more significant than the contacts found sufficient in Standard Pressed Steel to establish a tax nexus. Accordingly, the judgment of the Circuit Court of Kanawha County is affirmed.

RICHARDSON, GORDON AND ASSOCIATES v. DAVID C. HARDESTY, TAX COMM’R

NO. 14407

In this case taxpayer appeals an adverse ruling of the Circuit Court of Kanawha County which affirmed the State Tax Commissioner’s assessment of Business and Occupation Taxes against the taxpayer, a partnership of consulting engineers with its principal office located in Pittsburgh, Pennsylvania. During the assessment period, most of the professional fees received by the taxpayer were the result of contracts with the West Virginia State Department of Highways. Gross income received by the appellant during the audit period totaled $1,557,052.43. The primary work-product of the taxpayer is engineering drawings and reports. The taxpayer asserts that its work in West Virginia constituted only 5% of the work performed on any single project. In a typical contract with the Department of Highways the appellants would survey a proposed highway route from aerial photographs and, from the photographs, prepare a location report on the route in their Pittsburgh office. After the department selected the preferred route, final engineering plans would be prepared concerning the subsurface makeup of the proposed route. Taxpayer’s contacts with West Virginia at this stage consisted of: retaining a boring sub-contractor to drill holes in the field; sending a survey corps into West Virginia to locate where the test holes were to be drilled; supervising the boring to insure that it was done at the proper location and to the necessary depth; taking an occasional field view or inspection of the proposed project; sending right of way investigators to determine number and location of property owners along a proposed route; and, attending public meetings designed to inform a community how the project would affect that community. The bulk of all the work, however, was performed in Pittsburgh using the soil samples from the borings.

In addition to the work within the State listed above, during the assessment period the taxpayer attended 57 meetings in Charleston with the Department of Highways. Appellant also established a West Virginia branch office in Wheeling as proposed in the contract with the Department, and one of appellant’s investigators used it while performing his investigation into property rights along the proposed highway. Certainly there are sufficient contacts to meet the requirements of Standard Pressed Steel and National Geographic, supra.

The critical issue in this case, however, is one of apportionment and fair relationship to the services rendered by the State of West Virginia. The taxpayer does not allege that there is any duplication in its tax by the State of Pennsylvania, although it does assert that there is a business and occupation tax levied by the City of Pittsburgh. We do not find the Pittsburgh city tax, regardless of its amount, to be proof of duplication of taxation sufficient to discriminate against interstate commerce under Complete Auto, supra. West Virginia has cities too, and a business which chooses to have its principal office inside a West Virginia city is confronted with a city Business and Occupation Tax in addition to all other State and county taxes. Absent a factual showing that the total taxing scheme of Pennsylvania is such that burdens which are usually borne by states are supported by municipalities so that municipal taxes are disproportionately burdensome and the total taxing scheme of both states amounts, in fact, to double state taxation, we are unable to find that the taxpayer has supported its burden of proving actual discrimination under Standard Pressed Steel, supra.

Absolute nondiscrimination in taxation is impossible to achieve in an intrastate setting much less an interstate setting; therefore, in order to avoid a state tax under the Commerce Clause it is necessary to demonstrate sufficient duplication of taxation that there is an actual discrimination against interstate commerce. Boston Stock Exchange stands for the proposition that it is actual discrimination rather than any exercise in theory or semantics which mobilizes Commerce Clause protection. Consequently it is a fit subject for inquiry whether one state has a taxing scheme which raises the bulk of industry’s share of tax revenue through a Business and Occupation Tax while another state has a scheme which raises industry’s share through an income tax. If there were such a factual showing it would be incumbent upon both states to apportion their taxes in such a way as to avoid actual discrimination: however, there is no development in this record of this particular question other than naked allegations that Pennsylvania also taxes the appellant’s activities. Consequently we have no reason to conclude that the West Virginia tax is either discriminatory or unfairly apportioned to appellant’s West Virginia activities.

The mirror image of discrimination against interstate commerce is discrimination in favor of interstate commerce. Taxes are an integral part of costs and a taxing scheme which relieves interstate concerns of all taxation would discriminate in favor of interstate concerns. The taxpayer raises the issue of fair apportionment, and while taxpayer does not support its allegations factually in this case, apportionment as a general subject is a critical issue. “Of course it would make analytic nonsense to talk about a ‘fairly apportioned’ ‘unapportioned’ tax if the concept of ‘apportionment’ were intended to have any real meaning here. Instead, what seems to have happened in cases like Standard is that the Court, while paying lip service to the apportionment principle, has ignored it in fact and has looked to other factors to determine the constitutionality of taxes imposed on the unapportioned gross receipts from interstate sales activity. Notwithstanding doctrinal variations, and assuming that nexus requirements have been satisfied, over the past four decades gross receipts taxes on interstate sales have generally been sustained when imposed by the state to which the goods were shipped and prohibited when imposed by the state from which the goods were sent.” Hellerstein, “State Taxation of Interstate Business and the Supreme Court,” 62 Va. L.Rev. 149, 171 (1976). The proposition is supported by: Evco v. Jones, 409 U.S. 91, 93 S.Ct. 349, 34 L.Ed.2d 325 (1972); General Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1964); and, Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434, 59 S.Ct. 325, 83 L.Ed. 272 (1939).

We accept for the moment the - arbitrary rule that where there is double taxation as a matter of fact, a gross receipts tax may be levied in the state of delivery if there are sufficient contacts to create a tax nexus but cannot be levied in the state of manufacture. This seems as reasonable as any other method of apportionment since its universal application will avoid the evil of double taxation and it has the further advantage of being easy to administer. Accordingly the jugment of the Circuit Court of Kanawha County is affirmed.

CAROLYN SUE STURGEON v. VIRGINIA L. ROBERTS, COMM’R

NO. 14373

This is an appeal by the Department of Motor Vehicles from an adverse decision by the Circuit Court of Kanawha County that the “use” tax statute, W. Va. Code, 17A-3-4 [1974], violates the Commerce Clause because it does not provide a credit for sales taxes paid by a West Virginia taxpayer purchasing a motor vehicle in another state. The appellee, Carolyn Sue Sturgeon, bought a car in New Jersey in 1974 where she paid a sales tax of $64.75 or 5% of the $1295 purchase price. Approximately one year later, Mrs. Sturgeon applied for a certificate of title and a license plate from the West Virginia Department of Motor Vehicles who informed her that a use tax of $80, or 5% of the $1600 book value of her automobile must be paid. Appellee paid the West Virginia use tax under protest and requested that the Commissioner of Motor Vehicles bring an action for declaratory judgment. When the Commissioner refused, appellee brought an action for declaratory judgment and the circuit court ordered the Department to credit appellee’s account with the $64.75 charged by New Jersey and to refund the appellee that amount.

There is no issue in this case of an intentional discrimination against interstate commerce similar to that found in Boston Stock Exchange since all states appear to provide that an out-of-state purchaser of an automobile may avoid the payment of a sales tax in the state of purchase by using a temporary license plate which will be valid long enough for him to return to his home state.¹ Consequently, this taxing scheme is neither designed to coerce West Virginia residents into purchasing automobiles in the State of West Virginia in preference to foreign states, nor does it have that effect. Furthermore this is a use tax case involving a consumer and not a direct tax involving a manufacturer; consequently, it is the due process standard of National Geographic and not a Commerce Clause standard which we must apply. Absent actual discrimination against out-of-state sellers of motor vehicles, the proper focus is upon whether West Virginia may tax one of its residents in this manner.

It is admitted that Mrs. Sturgeon was a resident of the State of New Jersey and used all of the facilities of the State of New Jersey for approximately a year while she drove her automobile on New Jersey roads. Consequently, there was sufficient contact to establish a tax nexus in New Jersey and the tax bore a reasonable relationship to the services provided by that state. Now, however, Mrs. Sturgeon is a resident of the State of West Virginia and is driving her motor vehicle upon West Virginia roads and availing herself of all the services of West Virginia. The West Virginia tax does, indeed, bear a reasonable relationship to the services which are currently being rendered to Mrs. Sturgeon by the State of West Virginia. The appellee asserts that it is unfair to tax her for the entire value of her car after the State of New Jersey has levied a similar tax, but she confuses unfairness with unconstitutionality. There is no question that this duplication of tax may be, indeed, unfair but it is not unconstitutional under the Commerce Clause because the appellee is not involved in interstate commerce. She was a resident of the State of New Jersey and was taxed as such while now she is a resident of West Virginia and is taxed as such. Since Mrs. Sturgeon is not, herself, engaged in interstate commerce in her capacity as driver of a motor vehicle, Complete Auto’s requirement of fair apportionment does not apply to her. Certainly she would have fared better in terms of total taxation upon her automobile had she either been a resident of West Virginia at an earlier time or remained a resident of New Jersey, but there is no Commerce Clause violation because there is no interstate commerce. When Mrs. Sturgeon drove her car into West Virginia she did nothing commercial, she merely traveled. The West Virginia tax certainly meets the substantive due process standard that the State action is reasonably related to a legitimate governmental purpose and, therefore, is not infirm on that count. State ex rel. Harris v. Calendine, _ W. Va. _, 233 S.E.2d 318 (1977). Accordingly the judgment of the Circuit Court of Kanawha County is reversed.

No. 14389 — Reversed.

No. 14408 — Affirmed.

No. 14407 — Affirmed.

No. 14373 — Reversed.

1 The states contiguous to West Virginia all have such provisions. Ky. Rev. Stat. § 186.074 [1978]; Ohio Rev. Code Ann. § 4503.182 (Page) [1979]; Pa. Stat. Ann. tit. 75, § 1331(c) (Purdon) [1977]; and, Va. Code § 46.1-121 [1966].