Exxon Corp. v. Wyoming State Board of Equalization , 1989 Wyo. LEXIS 238 ( 1989 )

CARDINE, Chief Justice.

Petitioner, Exxon Corporation, challenges the State’s imposition of a use tax on pipe purchased out of the state and installed in a pipeline operating in Wyoming and the failure of the State to grant Exxon a credit against that tax for taxes already paid to the state of Colorado. The State Board of Equalization found that the tax was properly assessed, that it did not violate the commerce clause of the United States Constitution, and that the denial of the offsetting credit was proper.

We affirm.

Petitioner states the issues as:

“I. Did the Board err in upholding a Wyoming use tax assessment against Exxon’s use of certain line pipe in Wyoming, when the first use of that pipe, as the term ‘use’ is defined under Wyoming law, occurred in Colorado?

“II. Did the Board err in refusing to grant a credit against the Wyoming use tax assessment for taxes paid by Exxon to the State of Colorado with respect to the pipe, where such taxes were legally imposed under Colorado law?

“HI. Did the Board’s imposition of the Wyoming use tax against Exxon’s use of the pipe in Wyoming, without providing a credit for the Colorado tax paid by Exxon, violate the commerce clause of the United States Constitution?”

Respondent phrases the issues:

“I. Is the decision of the appellee [respondent] State Board of Equalization holding appellant [petitioner] liable for Wyoming use taxes despite initial delivery of the underlying property to the State of Colorado is not [sic] arbitrary,capricious, an abuse of discretion, contrary to law, or unsupported by substantial evidence?

“II. Does the decision of the appellee [respondent] below violate the Commerce Clause of the United States Constitution?”

The essential facts of this case are not disputed and are as follows. Between February and May of 1985, Exxon Corporation (Exxon), a New Jersey corporation, purchased 258,000 feet of 24-inch pipe from Marubeni American Corporation (Marube-ni), a Texas vendor. The pipe, costing a total of $13,179,894.83, was to be installed as part of the Shute Creek to Rock Springs C02 pipeline in Wyoming. After purchase, the pipe was shipped from Kasaoka, Japan, through Portland, Oregon, to Fort Collins, Colorado. There it was inspected, sand blasted, and coated with a thin-film epoxy, processes necessary for the ultimate use of the pipe. After these processes were completed, which took approximately 90 to 120 days, the pipe was shipped to Wyoming and installed in the pipeline.

Exxon later discovered through an internal audit that Marubeni had not collected any tax with respect to the pipe. Exxon determined that a 3 percent tax was due the state of Colorado and voluntarily filed an amended return covering the months of March and May, 1985, and paid a tax in the amount of $395,396.84 plus interest.

Later, the Wyoming Department of Revenue and Taxation (Department) conducted a sales and use tax audit of Exxon, for the period of March 1, 1983, through February 28, 1986; the Department determined that Exxon was liable for a 4 percent use tax to the state of Wyoming on the pipe, pursuant to W.S. 39-6-504, 39-6-412, and 39-6-518.¹ In a final administrative decision, the Department concluded that the first use of the pipe² had occurred in Wyoming and assessed a use tax against Exxon in the amount of $527,195.79 plus interest. In assessing the tax, the Department further denied Exxon a credit against the use tax for the amount of tax previously paid to Colorado because the tax paid to Colorado was a use tax for which no credit was permitted under the governing statutes.

Exxon timely appealed the Department’s assessment to the State Board of Equalization (Board). At an evidentiary hearing, Exxon contended that its use of the pipe in Wyoming was not subject to the use tax because the “first use” of the pipe, as that phrase is contemplated in the tax commission’s rules and regulations and as the term “use” is defined by Wyoming law, occurred in Colorado. Alternatively, Exxon argued that if a use tax were indeed owed, such a tax should be offset by the amount of tax paid to the state of Colorado as a result of the activities with respect to the pipe in that state. Finally, Exxon contended that the imposition of the use tax by Wyoming, without the offsetting credit for the tax already paid to Colorado, constituted a violation of the commerce clause by creating an undue burden on and discrimination against interstate commerce. The Board rejected each of Exxon’s arguments and affirmed the use tax assessment against Exxon and the denial of the offsetting credit.

Exxon paid the assessment and interest under protest and filed a timely petition for review of the Board’s order in the First Judicial District Court. Pursuant to Rule 12.09, W.R.A.P., the case was certified to this court.

When a case is certified to this court under Rule 12.09, “we must review the decision of the [Board] under the appellate standards applicable to a reviewing court of the first instance.” Application of Campbell County, 731 P.2d 1174, 1175 (Wyo.1987). The scope of review of an agency action is established in W.S. 16-3-114(c):

“To the extent necessary to make a decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action. In making the following determinations, the court shall review the whole record or those parts of it cited by a party and due account shall be taken of the rule of prejudicial error. The reviewing court shall:

“(i) Compel agency action unlawfully withheld or unreasonably delayed; and “(ii) Hold unlawful and set aside agency action, findings and conclusions found to be:

“(A) Arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law;

“(B) Contrary to constitutional right, power, privilege or immunity;

“(C) In excess of statutory jurisdiction, authority or limitations or lacking statutory right;

“(D) Without observance of procedure required by law; or

“(E) Unsupported by substantial evidence in a case reviewed on the record of an agency hearing provided by statute.”

See Safety Medical Services, Inc. v. Employment Security Comm’n, 724 P.2d 468, 471-72 (Wyo.1986); Trout v. Wyoming Oil and Gas Conservation Comm’n, 721 P.2d 1047, 1049 (Wyo.1986); Board of County Comm’rs v. Teton County Youth Services, Inc., 652 P.2d 400, 411 (Wyo.1982). This court must examine the entire record to determine if there is substantial evidence to support the agency’s findings; if an agency’s decision is supported by substantial evidence, this court cannot properly substitute its judgment for that of the agency and must uphold the agency’s findings on appeal. Trout, 721 P.2d at 1050. Substantial evidence is “relevant evidence which a reasonable mind might accept in support of the conclusions of the agency.” Id.

In its brief on appeal, Exxon claims that the Board’s order upholding the use tax assessment is arbitrary and capricious, unsupported by substantial evidence, and lacks statutory right in that it alters or impairs “the statutory definition of ‘use.’ ” The Board made findings of fact and conclusions of law in support of its order. Exxon agrees that the facts are not in dispute but contends that the Board’s application of relevant law to the facts was erroneous.

The Wyoming use tax statutes, W.S. 39-6-501 through -518, impose an excise tax upon “persons storing, using or consuming tangible personal property” in Wyoming. W.S. 39-6-504(b). The legislature intended that the use tax be complementary to the Wyoming sales tax. Morrison-Knudson Co., Inc. v. State Board of Equalization, 58 Wyo. 500, 135 P.2d 927, 932 (1943). See also Chap. IV, § 3, Rules and Regulations of the Wyoming State Tax Commission— Department of Revenue & Taxation. The use tax is applied to property purchased outside the state and brought into the state for storage, use or consumption, so as to put that property on an equal footing with property purchased within the state that is subject to the Wyoming sales tax. Id.

Wyoming has placed a self-imposed limitation on the broad authority to tax property bought outside but used inside this state. Through Chapter IV, §§ 3 and 8 of the Rules and Regulations of the Wyoming State Tax Commission — Department of Revenue and Taxation (hereinafter referred to as Chap. IV, §§ 3 and 8), the State is permitted to apply the use tax to particular tangible personal property bought out of state only if the use of the property in Wyoming constitutes its “first use.”³ “Use” is defined in Wyoming as “the exercise of any right or power over tangible personal property incident to ownership or by any transaction where possession is given by lease or contract.” W.S. 39-6-502(a)(vii). By implication, and as a logical extension, if the first use of the property occurs in another state, Wyoming’s use tax is inapplicable.

Petitioner argues that the use tax imposed by Wyoming was improper because the “first use” of the pipe, as that phrase is contemplated by Chap. IV, § 3 and as the term “use” is statutorily defined, occurred in Colorado through its delivery and the coating process that occurred there. Thus, the question we must determine is whether the activities in Colorado constitute a bona fide first use of the property rendering the Wyoming use tax inapplicable. Exxon characterizes the actions taken in Colorado with respect to the pipe as an exercise of a “right or power over tangible personal property incident to ownership.” W.S. 39-6-502(a)(vii). We disagree with this characterization.

The activities in Colorado were merely processes necessary to prepare the pipe for the use intended, i.e., its installation into and ultimate use as part of the Shute Creek CO2 pipeline in Wyoming. The Board properly concluded that it is a use of the property in the manner for which it was designed, constructed or intended that constitutes a “first use” as that phrase was intended by the Wyoming Tax Commission in Chap. IV, § 3. When making the determination as to whether the first use of the property occurred in Wyoming or another state, the Tax Commission looks to the nature of the property, its intended use, and whether the property was actually used in that manner in the other state. We hold that the Board properly found that the first use in this case was the incorporation of the pipe into the Shute Creek CO2 pipeline.

We next address Exxon’s claim that the Board should have granted Exxon a credit for the tax paid to Colorado. As noted earlier, the general goal of use taxes is to place in-state sellers on the same footing as out-of-state sellers. Annotation, Use Tax — Credit for Out-of-State Taxes, 31 A.L.R.4th 1206 (1984). In furtherance of this goal, many states, including Wyoming, grant credits against their use taxes for sales taxes actually paid to other states on the same property. Testimony at the Board’s hearing from a representative of the Department indicates that it is the routine practice of the Department to grant an offsetting credit for sales taxes legally imposed by another state. In this proceeding, however, the facts supported the Department’s decision to refuse the credit. In its order, the Board found that the tax paid by Exxon to Colorado was a use tax and not a sales tax under Colorado regulation 26.202, Colorado Administrative Code. There is no statute, regulation or applicable principle of law which requires the Board to grant a credit for a use tax paid in another state. Under these circumstances, we are compelled to hold that the Board properly denied Exxon a credit for the use tax paid in Colorado.

Exxon finally contends that the imposition of the Wyoming use tax on the use of the pipe in Wyoming is an unconstitutional burden on interstate commerce in violation of the commerce clause of the United States Constitution and that the application of the tax results in double taxation of the pipe. Section 8 of Art. I of the United States Constitution states that “Congress shall have Power * * * to regulate Commerce * * * among the several States.”

The seminal case regarding the issue of validity of a state use tax vis-a-vis the commerce clause is Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). In that ease, the United States Supreme Court articulated a four-prong test for analyzing whether a particular state tax can be upheld under the commerce clause. According to Complete Auto, a tax will survive a commerce clause challenge “when the tax [1] is applied to an activity with a substantial nexus with the taxing State, [2] is fairly apportioned, [3] does not discriminate against interstate commerce, and [4] is fairly related to the services provided by the State.” Complete Auto, 430 U.S. at 279, 97 S.Ct. at 1079. Here, petitioner argues that the tax in question fails to fulfill the second and third requirements of the test, that it is not fairly apportioned, and that it discriminates against interstate commerce.

The commerce clause does prohibit state regulations that either discriminate against interstate commerce or impose a burden on commerce that clearly outweighs the legitimate local benefits produced by the regulation. Henneford v. Silas Mason Co., 300 U.S. 577, 57 S.Ct. 524, 81 L.Ed. 814 (1937). In Complete Auto, however, the Supreme Court rejected the abstract notion that interstate commerce is immune from state taxation. Complete Auto, 430 U.S. at 288, 97 S.Ct. at 1083. The Court recognized that, with certain exceptions, interstate commerce could be required to pay its fair share of state taxes. Complete Auto, 430 U.S. at 281, 97 S.Ct. at 1080. Moreover, the Constitution does not prohibit uniform nondiscriminatory taxes on property merely because that property was subject to tax elsewhere. Nowak and Rotunda, Sales and Use Tax Credits, Discrimination Against Interstate Commerce, and the Useless Multiple Tax Concept, 20 U.C.Davis L.Rev. 273, 300 (1987).

The taxing scheme employed by Wyoming fulfills each prong of the Complete Auto test: (1) the activity being taxed has a substantial nexus to the taxing state; the pipe was delivered in Wyoming and installed in a pipeline operating solely in this state; (2) it is fairly apportioned, since it taxes only the use of the pipe in Wyoming; (3) it does not discriminate against interstate commerce because the tax is designed to compensate the State for revenue lost on out-of-state purchases of goods used in this state and is equal to the sales tax on the same goods had they been purchased in Wyoming, W.S. 39-6-404(a); and (4) it is fairly related to state-provided services that facilitate Exxon’s use of the pipe in Wyoming, including fire and police protection for the pipeline facilities and state maintenance of roads to the area. See D.H. Holmes Co., Ltd. v. McNamara, 486 U.S. 24, —, 108 S.Ct. 1619, 1624, 100 L.Ed.2d 21 (1988). Because each of the prongs is fulfilled, we hold that the use tax imposed by the Board does not violate Art. I, § 8 of the United States Constitution. We need not speculate whether the tax Exxon voluntarily paid Colorado could survive this same analysis.

In light of the foregoing, we hold that the Board’s decision was not arbitrary or capricious, an abuse of discretion, nor in excess of statutory authority. The Board’s decision was supported by substantial evidence.

Affirmed.

1 . W.S. 39-6-504 provides for a 3 percent excise tax on persons storing, using or consuming tangible personal property in the state. An additional 1 percent tax is imposed pursuant to W.S. 39-6-412 and 39-6-518, which allow a county to impose its own excise tax upon storage, use and consumption of tangible personal property in the county. Sweetwater County, where the pipe was installed, elected to impose the additional tax.

2 . See infra fn. 3, for wording of Chapter IV, § 3 of the Rules and Regulations of the Wyoming State Tax Commission.

3 . Chap. IV, § 3 provides:

"The purchase or lease of all tangible personal property outside this state for first use, storage or consumption within this state, is subject to use tax, providing the same transaction would be subject to sales tax if the transaction had occurred wholly within the State of Wyoming.” (emphasis added)

Chap. IV, § 8 provides:

"When tangible personal property is purchased in another state and is brought into Wyoming for use, the burden is upon the purchaser to show that there was a bona fide first use of the property outside the State of Wyoming.”