STANDARD STEEL CO. v. WASH. REVENUE DEPT.
Legal provision: Article 1, Section 8, Paragraph 3: Interstate Commerce Clause
Argument of Kenneth L. Cornell
Chief Justice Warren E. Burger: We’ll arguments next in 73-1697, Standard Pressed Steel against State of Washington.
Mr. Cornell, you may proceed whenever you’re ready.
Mr. Kenneth L. Cornell: Mr. Chief Justice and may it please the Court.
This is an appeal by appellant, Standard Pressed Steel Co. from a final decision of the Washington Court of Appeals sustaining the assessment of the Washington Business and Occupations Acts on appellant for the privilege of engaging in wholesaling activity within the State of Washington.
The Washington State Supreme Court declined review in this case.
The tax is measured by unapportioned gross receipts resulting from sales or products manufactured outside of the state and sold to Washington customers.
The basic questions in this cause are very simply stated to, are appellant’s activities within the State of Washington sufficient to justify the imposition of the subject tax?
And two, is the tax constitutionally defective as applied to appellant and that it is measured by gross receipts derived largely from activities occurring outside of the State of Washington?
Appellant is a Pennsylvania corporation with facilities located in Pennsylvania and California.
The in-state activity conducted in Washington was conducted solely by appellant’s resident employee in the State of Washington who received a salary for his services, a flat fee and worked out of a portion of one room of his home and I think since the general principles in this tax scenario are rather easy to state but I believe rather difficult to apply to particular fact situations.
It might be well to review the facts briefly.
Mr. Martinson’s activity in the State of Washington as far as the customer is concerned brought him into context solely with Boeing qualification engineers.
His primary function, was to, through this contact become aware of Boeing’s possible needs for appellant’s products and to forward this information together with Boeing specifications on that product to the out-of-state offices where if the decision were made to attempt to qualify as an approved Boeing source in this product, sample pieces would be manufactured and submitted to the Boeing qualification engineers who would conduct tests and evaluate the product and if it met Boeing’s minimum specifications, appellant would be approved as a qualified source for the product and sales negotiations and sales promotion would then ensue which could possibly lead to a sale.
As reflected by the record, competing companies would also have qualified in many cases on particular parts and they would also be attempting to negotiate sales as well.
Appellant’s resident employee is not involved in the sales negotiation or sales promotion at any time, rather he’s bypassed completely.
All of these activities take place and occur with appellant’s employees located outside of the state in Pennsylvania and California.
Mr. Martinson’s activities also and this is approximately 10% of his time, the duties I just mentioned consumed approximately 90% of his time.
The remaining portion of his time was spent in what the state has characterized as a problem-solving process.
In this regard, if Boeing experienced a problem in the use of one of appellant’s products, Mr. Martinson would be contacted and he in turn would forward this information to the out-of-state employees of appellant who would resolve the problem and Martinson would present the solution to the Boeing engineers.
Two cases, I believe which are probably the most closely in point on this issue involve General Motors Corporation versus Washington where this Court considered the same text in Washington on different facts and Norton Company versus Department of Revenue.
The decision below, the court below and the state have placed heavy reliance on the General Motors decision and I believe it represents the furthest extension of the ability of a state to tax which has been sustained by this Court as regards to an unapportioned gross receipts tax and the state has characterized the basic issue before this Court as whether or not the General Motors decision can be factually distinguished on a constitutional basis from the present case.
In this regard, the General Motors decision can be distinguished in several significant respects.
First and I think the most critical distinguishing factor was that General Motors maintained in Washington a very large and substantial intrastate business making sales to Washington customers on which he had voluntarily paid the Washington business and occupation tax.
Additionally, General Motors made sales on interstate commerce which the Court indicated would not be subject to the tax were it not for the presence of this intrastate business.
When the court held that because of the existence of the intrastate business, and because the General Motors had mingled its interstate sales with the intrastate business that the burden was on the taxpayer to show that the activities of the intrastate business were not associated with the sales on interstate commerce.
And further to show that such activities were not decisive factors in establishing and maintaining the market for the interstate sales.
On the case at bar, it’s an undisputed fact and it’s clear from the record that there’s no question, there is no intrastate business per se in the same terms as General Motors making sales to Washington customers in the case at bar.
The General Motors decision is further distinguishable in that General Motors in channeling its interstate sales through the local outlet gained the advantages of a local business and the court held that interstate sales cannot be channeled through a local business so that the advantages of local commerce are obtained and still maintained immunity as to the sales on interstate commerce.
In this regard, I think it should be apparent that there would be delivery in communication problems for example which a Washington customer would face in dealing with appellant that would not be present were a local business present within the State of Washington.
Justice Potter Stewart: Mr. Cornell, incidentally, did either California or Pennsylvania tax these gross receipts?
Mr. Kenneth L. Cornell: No they did not.
Now I think that the kind of taxes is imposed by the State of Washington here because of its, I think it’s an unwise economic policy, it’s a very tough tax, very few states imposed this kind of a tax and therefore Pennsylvania and California do not impose a tax measured by gross receipts.
Justice William J. Brennan: What is it, based on the tax on the gross receipts of your client from its sales to Boeing?
Mr. Kenneth L. Cornell: Yes and other Washington customers although we are contacted solely with Boeing.
Justice Harry A. Blackmun: You’re not urging an apportionment here if you should lose on the basic issue?
Mr. Kenneth L. Cornell: Oh, yes, I am.
Apportionment comes up in several different ways in the Court’s language.
Is the state taxing activities which occur outside of the state?
Is the tax such that the state is exacting more than a fair return and my brief does raise the apportionment question but I think many of the principles really come down to -- can be said in many different ways.
It comes down to one point, is it fair in this case and is it in violation of both due process and the Commerce Clause to impose an unapportioned gross receipts tax on a business whose -- where the gross receipts are derived largely from activities occurring outside of the state?
Justice Potter Stewart: Do you know of any fair way to apportion here if we get to that?
Mr. Kenneth L. Cornell: That’s a difficult question.
For example this Court in the General Motors versus District of Columbia case, while it hesitated to get into the apportionment, I believe did mention that there are instances where payroll for example is measured.
The payroll by Washington employees would be prorated or compared with the payroll of employees outside of the state also involved in these sales and I believe there are other factors as well.
Property located within the state, although in this case, there is no property located within the state and there never was.
Justice William H. Rehnquist: But isn’t that when you’re talking about you’re starting to tax the gross income and then you have to divide it up by these percentages rather than just the gross receipts of sales which concededly occur in the state?
Mr. Kenneth L. Cornell: I don’t believe I follow your question.
Justice William H. Rehnquist: Well, you were citing some cases where you say that you have to show what percentage is the payroll in the taxing jurisdiction is to the payroll elsewhere, and that sort of thing.
And I was asking you if that kind of analysis hasn’t been more commonly applied to the situation where the taxing jurisdiction seeks to tax gross income period, not simply gross sales which concededly occur within the state.
Mr. Kenneth L. Cornell: Yes, I think that’s correct, I believe in the General Motors District of Columbia case, however, that all of the income they’re being taxed was resulted from sales to individuals within the District of Columbia and the Court urged apportionment in that case as well and that was the basis of the Court’s decision striking down the tax.
I believe that the General Motors decision is further distinguishable in arriving at whether or not appellant’s activities in Washington are sufficient local incident in which they justify the tax and that the General Motors personnel, without going into detail engaged in substantial sales promotion and other kinds of activity in the State of Washington which are in sharp contrast to the activities of appellant in Washington and I believe it strains the imagination to equate the activities of our one employee with a bundle of corporate activities and maze of local connections which the Court felt were present in the General Motors decision.
Justice Potter Stewart: This employee worked out of his own home, did he?
Mr. Kenneth L. Cornell: Yes, he did a portion of one room.
Justice Potter Stewart: Was he full time?
Mr. Kenneth L. Cornell: Yes, he was full time.
Justice Potter Stewart: He just used a portion of one room in his house to perform this full-time work for it?
Mr. Kenneth L. Cornell: Yes.
Justice Potter Stewart: And which you say was engineering work although the fact is his degree was in animal husbandry.
And it was the -- how about the telephone book was --
Mr. Kenneth L. Cornell: I believe if I recall the facts correctly that there was an answering service for -- the Standard Pressed Steel telephone number was listed in the telephone book.
Justice Potter Stewart: And was that -- what number was that, was it this man’s home?
Mr. Kenneth L. Cornell: No, it was an answering service and the answering service would contact this man.
That is how he got his telephone messages.
Justice Potter Stewart: Did he have any secretarial help or any --
Mr. Kenneth L. Cornell: Not in the State of Washington, no.
Justice Potter Stewart: What did he do when he wanted to communicate with?
Mr. Kenneth L. Cornell: He would either -- many of the exhibits are handwritten and at least my copies are somewhat illegible.
He would either handwrite them or on occasion, he would apparently telephone a secretary located in Pennsylvania or California who would type the message.
Chief Justice Warren E. Burger: You referred to General Motors against District of Columbia at one point, what’s the citation in that case?
I don’t find it --
Mr. Kenneth L. Cornell: It’s not cited in the briefs.
Justice Potter Stewart: Where I wrote opinion and I can’t --
Mr. Kenneth L. Cornell: It’s 380 U.S.
Chief Justice Warren E. Burger: Well don’t assume --
Mr. Kenneth L. Cornell: It’s 380 U.S.
Chief Justice Warren E. Burger: 380?
Mr. Kenneth L. Cornell: Yes.
Justice Potter Stewart: That would about right.
Chief Justice Warren E. Burger: Don’t stop your argument now for it.
I’ll find it.
Mr. Kenneth L. Cornell: I believe also that the nature of the activities conducted by appellant in Washington have to be considered.
For example, the General Motors personnel.
They were involved very heavily and the Court made repeated reference to the intimate relationship between General Motors personnel in Washington in the Washington General Motors decision in connection with the dealer organizations within the State of Washington and pointed out that the promotional activities in that case were the nature of fostering or creating a consumer need or demand for the product and the further promotion of General Motors parts, products or services as being superior to those of competitors and best able to meet the needs of the consumer.
There is no similar activity which takes places in the State of Washington in this case.
Rather the activity if its promotional nature, you might say that Mr. Martinson’s activities do assist in seeing that minimum standards for Boeing are met so that the possibility of sales negotiations taking place is present.
The Norton decision I believe is closer in point on the facts and appellant relies, I think very heavily on this case because of the similarity in the facts.
The Norton company again just like the General Motors operation in Washington had present within the State of Illinois a large intrastate outlet making sales directly to Illinois consumers and on which it voluntarily paid the Illinois privilege tax measured by gross receipts.
In addition, there were sales and interstate commerce which the Court indicated would not be subject to the tax were it not for the presence of the local intrastate business and again held that the taxpayer had to meet the burdens of showing that the activities of the intrastate business were not associated with the sales and interstate commerce and that such activities were not decisive factors in establishing and maintaining the market for interstate sales.
And again, since we don’t have an intrastate business here, at least the appellant does not have to meet this same kind of burden in this case, there was one class of sales and interstate commerce, however, which this Court held was exempt and these were a direct order type of situation and the Court held there that it was beyond the realm of permissible judgment to attribute the activities of the intrastate business to this type of sale and therefore these sales were so clearly in interstate commerce as to be exempt from this kind of a tax.
Similarly in the present clause, all orders are the direct order type and I believe on the authority of Norton, are exempt from this kind of a tax.
The state however, and the court below focused on Martinson, his presence within the state and his activities but in this regard, as I read the Norton decision, the same kinds of activities were conducted by Norton engineers in the State of Illinois and those activities were not a sufficient local incident to justify the imposition of the gross receipts tax on the direct order type of sales.
We’re told for example that the Norton engineers consulted with the prospective customers as to their needs and offered technical and engineering assistance and advice in the use of the Norton products and I believe these activities closely parallel the activities of Martinson in connection with the qualification duties and problem solving kinds of duties in the State of Washington.
Unknown Speaker: Except Martinson was an engineer?
Mr. Kenneth L. Cornell: Martinson was not an engineer as such and -- but his activities were geared toward engineering kinds of activities.
Before he started performing his duties, appellant did give him training.
This is a very specialized kind of business involving the part which is used for aerospace fasteners and they’re highly machine nuts, bolts, and rivets used in the aerospace industry so it involves a very narrow area of engineering
.Martinson did receive training initially. Martinson also received ongoing training.
He cons -- he -- his dealings with Boeing were solely with Boeing engineers, the kinds of information he forwarded onto Boeing -- or onto appellant concerned engineering kinds of things, what are the specifications of the Boeing company as to a particular product, what are they looking for here and I think would require some engineering knowledge.
I believe that the court below and the state perhaps have confused in-state activity with an in-state business and the two are not synonymous as pointed out by this Court in Nippert versus Richmond.
Interstate commerce of necessity always involves activities in more than one taxing state and you can always point to any activity as some sort of a local incident but the question is, is that local incident sufficient to justify the imposition of the tax.
And I believe in this case here, well, for example the solicitor case is involved activities within a state attempting to impose a tax but that activity is not a sufficient local incident on which to justify the imposition of the tax.
I believe the circumstances in the case at bar here present an even clearer case for exemption then would exists in the Norton decision because there is no local intrastate business present here and I think it makes the Court work somewhat easier in deciding this case than faced in the Norton decision.
Appellant would also submit that the solicitor cases support appellant’s position in this cause and in this regard, I would submit that the activities of traveling salesmen in Washington would be a far more substantial activity, far more instrumental in bringing about sales to Washington customers than the activities of Martinson in Washington.
Justice William H. Rehnquist: Your typical solicitor or drummer case that was a man who didn’t reside in the state, wasn’t he, he was just a transient?
Mr. Kenneth L. Cornell: Well, he may and in this regard, I believe Justice Douglas complained in his dissent to the Nippert versus Richmond case that the decision would apply equally to resident or nonresident traveling salesmen and I don’t believe that the fact of residency also would be a significant factor because that doesn’t pertain to their activities.
The same activities could take place in a taxing state whether or not they are a resident of that state that would be a mere coincidence.
Justice William H. Rehnquist: Do you think if Mart -- If Martinson had just flown in one day a week and done everything that he did from a place in California that the state’s case would be just as strong as it is here?
Mr. Kenneth L. Cornell: I think it might as strong or as weak depending on how you look at it. I think basically, it would be the same case because the contact would be -- and this is a distinguishing point I believe from the solicitor cases as to a particular customer here, the context are I believe, systematic and continuous and I think we would have to concede on that point and I believe if you flew in every week to meet with the customer that that would be a systematic and continuous contact but the nature of the activities I think in the case of a traveling salesman in terms of exploiting the entire Washington market and making sales to Washington customers would be a far more significant kind of activity than the activity of Martinson.
While there’s a systematic and continuous contact, we have to look at the nature of his activities and what is he doing, what does he have to offer Boeing here.
Chief Justice Warren E. Burger: Well, even interstate commerce requires some servicing by the vendors in the interstate commerce, doesn’t it?
Mr. Kenneth L. Cornell: Yes, in many of the cases in which a tax has not been sustained by this Court have involved what you might call continuous and systematic kinds of activities within a state but again, it’s the type of activity and it’s perhaps the extent of the activity within the taxing state that is the governing factor in all of these cases.
Cases where this kind of a tax has been sustained involve clearly localized activity such as manufacturing where you have a sales office through which sales are channeled.
Martinson here does not have any participation in sales.
He does not promote the product and sales are not being channeled through his office.
If you wish to contact the consumer, the customer or I’m sorry, the manufacturer or the seller, you have to call them generally in Pennsylvania and there are time factors which make that communication somewhat difficult.
It’s not face to face and appellant has chosen to operate on this basis, an interstate commerce and to accept the competitive disadvantages which flow from them because they are operating in interstate commerce.
Justice Potter Stewart: Mr. Cornell, I suppose it’s of no consequence, are we talking about much money here?
Mr. Kenneth L. Cornell: Well, the money involved is a stipulated amount before this Court. It’s about $34,000.00 roughly.
The state has --
Justice Potter Stewart: Over how long a period?
Mr. Kenneth L. Cornell: January 1 of 1965 through June 30 of 1969.
In addition, there is another assessment.
This is not in the record which was assessed up to the time that Standard Pressed Steel decided to avoid further hassle at least until this case is decided they pulled their man out and so there’s an assessment up to the point he is terminated which was about the time his deposition was taken and there’s no further assessment so there is a greater dollar amount involved that would --
Justice Potter Stewart: But it’s of great consequence to the state of course because there must be other taxpayers in similar positions?
Mr. Kenneth L. Cornell: I can presume that there probably are who would be operating in some sort of a similar capacity and of course, appellant would like to operate in this way in the future as well so it does have an impact on them that would go beyond the amount of the dollars involved in this case.
Appellant in this case would concede of course as has been stated by this Court in many different occasions that the state can exact a fair return for benefits provided and according to the level of activity occurring within the state and the same rule of course, should be applied here but in this regard, I would point out two things.
First of all, an unapportioned gross receipts tax does not make any allowance for activities occurring outside of the state and in this case, where there is a significant amount of activity occurring outside of the state from which these gross receipts are derived.
In this case, I think by the very nature and incidence of the tax, the same tax is payable whether or not all these activities take place within the state.
There are taxes if they do take place within the state.
The state here is exacting more than a fair return.
There are also always benefits provided to any business including a business operating in interstate commerce and I would submit here that the benefits given by the state are no more substantial in this case than would be supplied in the solicitor cases, perhaps General Motors versus District of Columbia, other cases involving the taxes being struck down because of a failure to properly apportion.
Evco versus Jones are very recent case decided by this Court 1972.
It’s recent in the context of this kind of a situation.
Where the Court there in citing from J.D. Adams Manufacturing Company versus Storen presenting a quote and I believe the quote is of some benefit to this case said that, “The vice of a statute as applied to receipts from interstate sales is that the tax includes in its measure, without apportionment, receipts derived from activities in interstate commence; and that the exaction is of such a character that if lawful it may be in substance laid to the fullest extent by states in which those goods are sold” here that would be Washington “as well as those in which they are manufactured” which would be Pennsylvania or California.
“Interstate commerce would thus be subjected to the risk of a double tax burden to which intrastate commerce is not exposed, and which the commerce clause forbids.”
I would like to reserve some time for rebuttal, so I’ll end my remarks now if there are no further questions.
Chief Justice Warren E. Burger: Very well.
Mr. Attorney General.
Argument of Slade Gorton
Mr. Slade Gorton: Mr. Chief Justice and may it please the Court.
This case on the surface, at least, appears to involve primarily a question as to the required nexus or jurisdictional threshold necessary to sustain the Washington gross receipts tax. But a closer look shows that it involves much more.
The nexus or jurisdictional threshold question cannot realistically be looked at in isolation.
We must also examine the assertion that the tax here imposed discriminates against interstate commerce or exposes the taxpayers’ interstate business to multiple burdens.
I pose to discuss each of these problems and the relationship between them.
Putting it in terms of your decision in General Motor, I intend to establish two propositions. First, that the imposition of our gross receipts tax in this case is consistent with the criteria established by the majority in General Motors.
Indeed, that it is even more soundly based than is the decision in that case.
Second, I propose to show that our tax here is imposed in a manner which will satisfy the basic concerns expressed in the two dissenting opinions in the General Motors case and that the answer to those concerns is to be found in decisions of this Court dating back more than 40 years.
Standard Pressed Steel is a manufacturer and wholesaler of highly technical and specialize aerospace fasteners with plants in Pennsylvania and California.
One of its major customers was the Boeing Company in Seattle.
The State of Washington levied a gross receipts tax on Standard’s wholesale sales to Boeing which Standard here seeks to recover.
During the early part of the period for which the taxes were levied, Standard had an office in Seattle.
That office was closed early in 1966 at which time Standard assigned one full-time employee, one Martinson to its Boeing account.
Martinson was a Washington resident with an office in his home.
Standard denominated him as sales engineer and he reported to the company’s sales manager.
Martinson spent 100% of his time representing Standard in its relationship with Boeing.
Most of his time, he spent in qualifying Standard’s products for purchase by Boeing.
That qualification procedure was an absolute prerequisite to Boeing’s purchase or use of any of Standard’s products.
Martinson also worked with Boeing’s engineers in solving problems arising out of Boeing’s use of Standards products after they were qualified calling on outside technical assistants which came into the state when necessary.
He kept Standard informed as to who is who in Boeing’s constantly changing purchasing hierarchy, suggested sales campaigns, and did some promotional hosting.
Martinson’s activities were clearly more decisive factors in establishing and holding Standard’s market with Boeing than were those of the Washington employees of General Motors in holding its local market considered in your last case involving our gross receipts tax.
General Motors is our largest national corporation selling perhaps our most widely advertised all national products.
Standard on the other hand, sold specially products to a single customer which imposed rigid standards on its suppliers.
There can be no question as to the overwhelmingly more decisive nature of Martinson’s activities in establishing and maintaining Standard’s market in Washington State than was the case with the service of General Motors’ local employees in your decision involving that corporation.
Justice William O. Douglas: Does the record show what percentage of Standard’s gross income was derived from its sales to Boeing?
Mr. Slade Gorton: Of its total --
Justice William O. Douglas: Total gross income.
Mr. Slade Gorton: Gross income, no, the record makes no such showing.
It obviously -- this was obviously a relatively small portion of it.
Moreover, it can be calculated from the records of the two cases that Martinson’s activities resulted in a greater dollar volume of sales in Washington than the volume at least of the Chevrolet division of General Motors divided by the number of its employees in the state.
Next, let’s compare Martinson’s activities with the facts in the Norton case.
In Norton, our gross receipts tax based on that firm’s sales volume in Illinois was upheld to the extent that it was based on sales to which Norton’s in-state office was connected only by reason of having taken orders for items not in stock or for special equipment or in order to reduce freight charges by accumulating and reconsigning shipments originating out-of-state.
These services were found to be in the Court’s own word, helpful to Norton in competing for business in Illinois, thus subjecting those sales to taxation.
Only sales to Illinois customers in which Norton’s Illinois office played no part at all except for making available engineering and technical advice were exempt from taxation.
Martinson’s role in Standard’s sales to Boeing was more vital to those sales than that of the Illinois office of the Norton Company in its contested sales which were held taxable.
If the only concern of the Court in this case were the degree to which Martinson’s activities were decisive factors in creating Standard’s market with Boeing, the answer is so obviously in the affirmative as to render the controversy insufficiently important to have been brought before this Court at all but nevertheless, both Norton and General Motors and for that matter, the vast majority of other significant cases involving state taxation of what was asserted to be interstate commerce were decided by this Court by less than unanimous decisions, the expressed concern of the dissenters in General Motors and I suspect of members of the majority as well was the threat of multiple taxation or discrimination against interstate commerce and the consequent advisability or necessity of apportionment of a gross receipts tax.
It is perhaps sufficient to respond that appellant has utterly failed to show the existence of multiple taxation in fact in this case.
Indeed, it could not do so.
Standard’s interest in this case is not the avoidance of multiple taxation but the avoidance of all taxation on its Washington business.
If Pennsylvania or California were to attempt to levy a tax on Standard’s sales transactions with Boeing and Washington State, Standard’s challenged to that attempt would be completely successful under the doctrine of Evco versus Jones, Gwin, White & Prince, Freeman versus Hewitt and Adams Manufacturing versus Storen.
In fact, as far as we can ascertain, this Court has never permitted the originating state to tax the receipts from sales to customers beyond their borders. Sales Standard here seeks to avoid paying its own way, its fair share of the state tax burden by escaping taxation measured by the proceeds of those sales in either the originating or the destination state.
It’s appropriate, however, to go beyond the fact of the absence of multiple tax burdens and to examine the question of whether such burdens are possible in theory given as a result of the pattern of Washington gross receipts taxation.
They are not.
As I have just pointed out, this Court has never permitted the state of origin to impose either a gross receipts tax or a sales tax on the proceeds of a sale to a customer beyond its borders.
Thus, there is no need for requiring apportionment on the part of the destination state.
You consistently have preferred the destination state in your decisions.
The concept of apportionment has never arisen in connection with sales or use taxes for example.
It should not by the same reason apply in connection with gross receipts taxes on sales of tangible, personal property.
In concept, such taxes are identical to sales taxes.
Each is measured by the proceeds from or the price of a transaction or transactions.
Justice Byron R. White: Well on that basis, if Washington could charge a gross receipts tax on any sales made to local residents whether there are any employees of the seller in the state or not?
Mr. Slade Gorton: From the point of view of the Commerce Clause, Mr. Justice White --
Justice Byron R. White: Well, isn’t that right?
I mean your argument would be just as good in that --
Mr. Slade Gorton: The argument would be just as good from a conceptual point of view.
Justice Byron R. White: Or just it would not?
Mr. Slade Gorton: It would not from a point of view of the history of your decisions as they relate to due process.
We’ve already established the due process jurisdiction of the state.
Once we’ve established that, we’re saying that a sales tax and a gross receipts tax is identical.
We are admitting that we must establish that jurisdictional nexus to impose any tax at all in the first instance.
Justice Potter Stewart: How about the National Bellas Hess case, --
Mr. Slade Gorton: The National Bellas case --
Justice Potter Stewart: -- didn’t that involve both the commerce claim and the due process claim?
Mr. Slade Gorton: Yes, in that case, there was however, no real jurisdiction.
It was a mail order catalogue seller.
Justice Potter Stewart: Yes.
Mr. Slade Gorton: It had no employee, it did nothing in the State of Illinois other than to send catalogues into the state and send by common carrier its goods into the state.
Justice Potter Stewart: But then didn’t it -- that was the due process claim?
And then what about the -- it also involved the commerce claim, didn’t it?
Mr. Slade Gorton: There was a -- they made a commerce claim in it.
Theoretically at least, the Court never needed to reach that because Illinois had no jurisdiction to --
Justice Potter Stewart: The Court did it reach it, didn’t it?
Mr. Slade Gorton: And the Court said under those circumstances that perhaps apportionment would solve the problem.
What I’m saying, the point I’m making Mr. Justice Stewart is that apportionment doesn’t solve the problem of -- or apportionment solves the problem of multiple tax burdens while creating a greater problem of the escape from any taxation at all of much, of many transfer in interstate commerce.
We believe that the actual results of your case are consistent with the proposition that a preference for the destination state which you have invariably granted solves both problems.
Both the problem of multiple taxation and the problem of the escape from their fair share of taxes.
Justice Potter Stewart: In National Bellas Hess, Illinois was the destination state?
Mr. Slade Gorton: Illinois was the destination state.
Justice Potter Stewart: And we held that Illinois did not have power to impose that tax?
Mr. Slade Gorton: Yes, at least in part -- I think in controlling part because there was no presence whatsoever of National Bellas Hess --
Justice Potter Stewart: But that was the due process part?
Mr. Slade Gorton: Yes.
Justice Potter Stewart: The economic effect of this tax is the same as a use tax, isn’t it?
Mr. Slade Gorton: It’s identical to a use tax.
It’s identical to a sales tax.
Justice Byron R. White: The only thing is you’re not trying to collect it from the buyer?
Mr. Slade Gorton: We’re not trying to --
Justice Byron R. White: You’re collecting it from a local citizen or--
Mr. Slade Gorton: Yes, though --
Justice Byron R. White: Using some property that was bought out -- bought somewhere else.
Mr. Slade Gorton: Though you have gone a long way in use taxes and permitting its collection from the seller, if he fails to make collection from the buyer and to forward it to the state.
The only difference between a sales tax and a gross receipts tax really is that the sales tax is separately stated.
It’s really the only economic --
Justice Byron R. White: And you ultimately -- and its ultimate burden if the seller doesn’t pay is on the buyer?
Mr. Slade Gorton: That’s right but both taxes go into the cost of the goods sold.
The only difference is in the sales tax, in the invoice, it’s separately stated, in the business and occupation tax and the gross receipts tax, it’s just simply included in the price.
Justice Byron R. White: It doesn’t literally purport to be on an interstate sale?
Mr. Slade Gorton: No, it purports to the --
Justice Byron R. White: This purports to be specifically on interstate sale?
Mr. Slade Gorton: No, this purports to be on the privilege or act of wholesaling in the State of Washington.
The incident in the State of Washington are two in nature really --
Justice Byron R. White: It’s measured by the gross receipts --
Mr. Slade Gorton: It’s measured by the gross receipts of the transaction as exactly and precisely as the sales tax is.
Justice Byron R. White: Isn’t this concededly an interstate -- aren’t these sales concededly interstate sales?
Mr. Slade Gorton: Of course, they’re interstate sales.
There’s no question about that.
Justice Potter Stewart: So my brother White was quite correct isn’t he in saying that the tax is imposed directly upon interstate activity?
Mr. Slade Gorton: The taxes --
Justice Potter Stewart: I don’t want you to lose your case --
Mr. Slade Gorton: That depends on your technical definition of the incidents.
It is a tax which is going to cost a dealer in interstate commerce money.
There’s no question about that.
It affects interstate commerce.
Justice Potter Stewart: It is a tax on his sales in the interstate commerce?
Mr. Slade Gorton: It is Mr. Justice Stewart.
Chief Justice Warren E. Burger: Virtually every time this question comes up, it’s on something involving interstate transportation --
Mr. Slade Gorton: It will not come up unless it is Mr. Chief Justice.
In International Harvester versus Department of Treasury at the 322 U.S. 340 some 30 years ago, this Court dealing with an Indiana gross receipts tax conceptually indistinguishable from Washington tax involved here said and I am quoting now, “In this case, as in sales tax cases, the taxable transaction is at the final stage of an interstate movement” which I think answers your question Mr. Justice Stewart “and the taxes on the gross receipts from an interstate transaction in form, the use tax is different but we recognize that the sales tax and the use tax had no different effect upon interstate commerce.”
There is the same practical equivalence whether the tax is on the selling or the buying phase of the transaction.
Each in substance is an imposition of a tax on the transfer of property.
In light of our recent decisions, it could hardly be held that Indiana lacked constitutional authority to impose a sales tax or a use tax on these transactions but if that is true, a constitutional difference is not apparent when a gross receipts tax is utilized instead.
In every case in this Court involving a gross receipts tax based on sales transactions for more than 40 years, the result has been totally consistent with your contemporary sales tax decisions.
Both, when the gross receipts tax was upheld and when it was struck down.
Perhaps it is time to recognize that the concepts behind the two taxes are identical and that for the ease of both judicial and tax administration, it is appropriate to treat them identically reaffirming International Harvester.
Once the destination state has demonstrated a sufficient presence of the seller within its borders and a sufficient connection between that presence and the transaction it seeks to tax to meet the jurisdictional requirements of due process, it is as fair to permit it to base its tax on the entire gross receipts of the sale as it is to levy -- to permit it to levy a sales or use tax on that same measure the entire proceeds of the sale.
It is as completely free from the possibility of multiple taxation by reason of your consistent prohibition of a similar tax on the part of the state of origin.
A sales transaction, after all can only be consummated by delivery to the buyer and that can occur in only one state, the destination state.
Justice William H. Rehnquist: Well, then your answer to the commerce aspect of the thing as opposed to the due process aspect is not apportionment but to limit the levy to the state of destination.
Mr. Slade Gorton: Precisely Mr. Justice Rehnquist and I don’t think I’m making a new proposal.
It’s totally consistent with what this Court has always held in fact whatever its theoretical discussions of apportionment.
The problem of multiple taxation which leads to the consideration of apportionment is not solved by a higher jurisdictional threshold.
No matter how high you set that threshold, some of the activities causing consideration of apportionment will have taken place in the state of origin.
The solution is not apportionment nor a high jurisdictional threshold but a preference in all cases for the destination state.
One final point on the subject of multiple taxation.
In his dissent in General Motors, Mr. Justice Goldberg expressed concern that at the state of origin, had a tax pattern like that or identical to that of the State of Washington.
The state of origin would levy a gross receipts tax on the manufacturing process while Washington would levy a gross receipts tax on the wholesaling function both taxes measured by the sales price.
In contrast where both of the functions confined to Washington State, only one of the two taxes would be imposed because Washington exempts from the manufacturing tax those goods which are subject to the wholesaling tax.
The vice of the system described by Mr. Justice Goldberg is best understood in terms of discrimination against interstate commerce rather than multiple taxation.
The system treats the manufacturing and wholesaling processes as a single activity with the imposition of a single tax if both processes are confined to one state.
But the system does not treat both processes as a single taxable activity if they are split between two states.
The state statutory policy of otherwise, permissible pyramiding of the tax is not extended evenhandedly to both local and interstate business.
But this system does not exist in fact in Washington State.
Our gross receipts tax statute exempts transactions.
The taxation of which would violate constitutional standards.
It is the position of my office to which the Department of Revenue exceeds that the system described by Mr. Justice Goldberg would be unconstitutional were it applied to any actual case.
Our statute would thus eliminate from the tax base wholesaling transactions consummated in Washington if the seller’s manufacturing process had been subjected to a valid gross receipts tax in another state.
Justice Byron R. White: Do you have a net income tax rate?
Mr. Slade Gorton: We do not have a net income tax.
But Standard here has not established either the risk or actuality of multiple taxation.
Not because of the negligence of its officers or attorneys but because there was no such risk or actuality.
Under your decisions, neither Pennsylvania nor California could have levied a tax on the wholesaling transactions.
Neither of the states has attempted to do so on the manufacturing process.
Standard seeks here purely and simply and exemption from all taxation on its Washington business transactions.
Such an exemption would be unsound in policy as it would grant Standard’s commerce a free ride, freedom from its fair share of the burden of Government; thus, either limiting the ability of the Government of the State of Washington to provide the blessings of civilized Government to everyone utilizing the facilities of the state including Standard and including its resident sales engineer or casting an undue burden on other taxpayers.
Chief Justice Warren E. Burger: We’ll resume there at 1 o’clock.[Lunch Recess]
Mr. Gorton, you have about nine minutes left altogether.
Mr. Slade Gorton: Thank you Mr. Chief Justice and may it please the Court.
To return very briefly to one of the two principle questions involved in this case, that of the necessary threshold or amount of activities within the state to justify any form of taxation whatsoever, I discussed this morning the proposition that the actual activities of Standard within the State of Washington exceeded in their relationships to its business in the state, those of either General Motors or Norton.
I also pointed out the very close parallel in your previous decisions between cases dealing with sales taxes and those dealing with gross receipts taxes.
In that respect, the most significant case which is not cited in our brief regrettably is McGoldrick v. DuGrenier at 309 U.S. 70 in 1940 in which a sales tax was allowed to be imposed on an out-of-state company which did an exclusively interstate business in New York City through not a resident but a general agent shipping all of its goods on which the taxes were levied in interstate commerce directly to purchaser without the general agents having had anything to do with them.
Secondly, in connection with this threshold matter was the question asked of my brother about the applicability or relativity of the drummer cases such as Nippert versus Richmond and Memphis Steam Laundry.
Whatever may have been the case in the 19th century and the early 20th century, those two cases, the only recent cases on drummers deal in one case with an out-of-state laundry which was subjected in terms to a far greater tax burden, quite specifically simply because it was from out-of-state than was its in-state competition.
In Nippert, the tax was a flat license fee in large part with no relation to the amount of business done which the Court determined would certainly hit sporadic solicitation harder than full-time resident solicitation and in addition was subject to repetition in every community in the state.
Also of course, all of the solicitors in both of those cases were itinerant.
Each of which identifies it from the case we have here.
Finally, Mr. Justice Blackmun asked my brother whether there was an acceptable method of apportionment in this case and I believe the answer was none of which he knew.
I don’t believe that he was giving away anything in connection with that acknowledgement as that was one of the questions which very seriously troubled Mr. Justice Goldberg in his dissent from General Motors where he said that the attempt to determine the fairness of an interstate sales tax of a given percentage imposed on given activities in one state would be almost as unseemly as an attempt to determine whether that same tax was fairly apportioned in light of taxes levied on the same transactions by other states.
The infinite variety of factual configurations would readily frustrate the usual process of clarification through judicial exclusion and inclusion.
Justice Byron R. White: But the McGoldrick case was long before Norton and Norton specifically cited McGoldrick as being quite distinguishable and I’m not sure McGoldrick is much help to you?
Mr. Slade Gorton: McGoldrick is of help to us, the particular McGoldrick case, there were more than one.
There were three cases in which the McGoldrick name appears.
Justice Byron R. White: I’m talking about the one of 309 U.S., are you?
Mr. Slade Gorton: Yes.
There are two there in that report.
Justice Byron R. White: The one that Norton cited?
That’s the one.
Mr. Slade Gorton: No, the Norton -- the cite in Norton is McGoldrick versus Berwind-White Coal Company which also involved a sales tax in which the presence in the state consisted of a in-state office, delivery in-state actually by a carrier which was owned by the out-of-state seller.
Justice Byron R. White: Yes, but it distinguish the sales tax situation, generally?
Mr. Slade Gorton: It did distinguish the sales tax situation.
Justice Byron R. White: And that the Norton tax was on the seller, that’s what point it made.
Mr. Slade Gorton: It did distinguish it on the ground that the sales tax is collected -- excuse me, that the sales tax has collected from the seller. Gross receipt tax at least in theory is collected from the -- excuse me, a gross receipts tax is collected from the seller, a sales tax is collected from the purchaser but that is a theoretical and technical difference which has nothing to do.
Justice Byron R. White: So you are -- you do think that we must then disavow Norton?
Mr. Slade Gorton: Oh, no.
Justice Byron R. White: To that extent?
To that extent?
Mr. Slade Gorton: We fall directly within Norton.
You need not disavow Norton whatsoever.
Our jurisdictional threshold is far greater than Norton.
Norton involved a gross receipts tax.
The gross receipts tax was permitted in Norton on transactions with which the in-state office of Norton had far less connection than the in-state sales of Standard had with its office through Martinson.
The material to which you refer, Mr. Justice White in Norton is dictum -- it was not necessary to the conclusion of that case. In Norton, there were certain sales which were found not to be taxable.
Those sales in which the in-state office played no role whatsoever except theoretically having available certain engineering advice.
Justice Byron R. White: Justice Goldberg cited in Norton as dictating a different result, the Court arrived at in Norton, Norton said not so in those cases in the McGoldrick type case is not controlling here. Now you can call that dictum if you want to.
Mr. Slade Gorton: In any event, our case can be solidly based on either McGoldrick or on the actual findings in Norton.
It doesn’t matter which or whether or not they are distinguishable because both of them are consistent with taxability in the case which we have here before you.
The problem that seems to me that Mr. Justice Goldberg brought up in the General Motors case is that this Court finds it very difficult to state if not impossible in connection with individual controversies to state a rule dealing with apportionment that’s all inclusive, unlike the Congress which perhaps could operate in this area had it chosen to do so.
The solution to Mr. Justice Goldberg’s dilemma is not infinitely to increase the jurisdictional threshold, not to require an apportionment which never seems to meet the actual circumstances of the case but simply to follow the conclusions to which you have previously come that the destination state will be preferred.
That prevents multiple taxation as well as apportionment does but it serves another goal.
Apportionment tends to increase the area which will evade taxation entirely.
A preference for the destination state however wish -- however far you wish to carry it, tends to narrow that and to follow your oft expressed doctrine that interstate commerce should carry its fair share of the load.
One other point which was brought up earlier today only by inference is the proposition that one of these other states might in theory at least have an income tax and whether or not we should not be required to apportion our gross receipts tax by reason of that income tax.
Now, that should be required only to the extent that every sales and gross receipts tax case which you have sustained since Berwind-White, in the McGoldrick versus Berwind-White should require similar apportionment.
The gross receipts tax on retail sales from the local store in Norton for example which everyone including the taxpayer assumed was valid included in its measure incidence of value attributable to activities in the state of origin.
The Sears, Roebuck store in Seattle, Washington collects a sales tax on every retail sale based on its entire sales price even though much of that price was created by a manufacturing process in another state which subjects Sears to a net income tax in that state.
You have never purported to require apportionment of a sales tax since these taxes under Internal Harvester are conceptually and as a matter of fact, factually the same.
There should be no requirement here when the problem can so easily be solved by simply following your prior decisions preferring the destination state.
Chief Justice Warren E. Burger: Thank you, Mr. Attorney General.
Mr. Cornell, you have a few minutes left.
Rebuttal of Kenneth L. Cornell
Mr. Kenneth L. Cornell: Thank you.
Concerning the Attorney General’s approach that favoring the destination state and not allowing the market state to tax or to avoid multiple taxation to me is incredible.
He talks about a state being able to exact their fair share.
The State of Washington here wants their share plus Pennsylvania’s and California’s.
Sales activity occurs there.
What he is saying is that in those states, Standard Pressed Steel should not have to pay its fair share. The gross receipts tax cannot apply.
To me, this flies in the face of the doctrine that interstate commerce must pay its own way.
Chief Justice Warren E. Burger: You lost me there a little bit with the multiple taxation.
Mr. Kenneth L. Cornell: Well, the Attorney General’s position is that to avoid the risk of multiple taxation in case of such as this where you have activities occurring in two states from which the gross receipts are derived, that the easy solution is to give the destination state the ability to tax and deny the market state --
Chief Justice Warren E. Burger: you don’t claim that there’s a tax in any other state on this same transaction, do you?
Mr. Kenneth L. Cornell: No, I do not.
I’m talking now about the ability to tax.
I believe that Pennsylvania or California wanted to impose such a tax that they could.
Chief Justice Warren E. Burger: In addition to the one imposed now by Washington?
Mr. Kenneth L. Cornell: Yes.
Chief Justice Warren E. Burger: And you don’t think there’s any barrier to that in the decided cases?
Mr. Kenneth L. Cornell: No, I do not.
The cases cited for that proposition are -- the taxes struck down there are struck down because of the failure to properly apportion between the destination state and the market state.
Justice Potter Stewart: Surely, neither Pennsylvania nor California could tax as such the gross receipts on wholesale sales made by your client in the State of Washington.
They might be able to impose general income taxes or --
Mr. Kenneth L. Cornell: Well, --
Justice Potter Stewart: -- excise taxes or other taxes but they couldn’t tax as such and exclusively could they the gross receipts of wholesale sales made by Standard Process Steel Company in the State of Washington?
Mr. Kenneth L. Cornell: I believe they can Your Honor and I hesitate to differ but on the other hand, the Evco versus Jones cases where I pointed out the quote from Adams Manufacturing Company versus Storen.
That quote pointed out that the problem was an unapportioned gross receipts tax and the reason that tax was struck down is not something to do with destination state versus market state but rather the tax was not fairly apportioned between those states.
There does seem to be a coincidence in several of the cases that the market state has not been allowed to impose an unapportioned gross receipts tax but I believe that’s a mere coincidence on the basis of those decisions, I think that it clearly pointing out the apportionment and both states do have the right.
Justice Byron R. White: Has your client maintained the warehouse or the sales of the warehouse or --
Mr. Kenneth L. Cornell: No.
Justice Byron R. White: Well, in know but would you object to this particular --
Mr. Kenneth L. Cornell: That would be a much different case.
I think that would involve --
Justice Byron R. White: Well, but I know but your apportionment argument ought to be much the same.
Mr. Kenneth L. Cornell: The apportionment argument would be much the same.
Justice Byron R. White: You would be able to make it would you?
Mr. Kenneth L. Cornell: It would depend on how, I think how much activity occurs outside of the taxing state in relation to the activity occurring within the taxing state.
Justice William H. Rehnquist: Mr. Cornell, do you think Washington could have levied a use tax on Boeing on the screws and fasteners that they bought from your client?
Mr. Kenneth L. Cornell: Well, the use does take place within the state and I believe that is a -- for example the sales tax cases make it very clear that there could be no burden of multiple taxation because the sale takes place in a particular state and I believe it was Nippert versus Richmond where that was a very key fact, where did the sale take place.
That’s the state that can impose the sales tax and in the use tax case, the same inquiry would be made of the same governing factor would have to be present.
Where is the use?
Justice William H. Rehnquist: So what do you think in this case?
Mr. Kenneth L. Cornell: I think since the use takes place in the State of Washington, the State of Washington could impose a use tax.
Chief Justice Warren E. Burger: Well, Justice Brennan has a question for you Mr. Attorney General.
Justice William J. Brennan: Mr. Attorney General, I noticed at pages 18 and 19 of your brief, you cited Postal Telegraph, Western Livestock, Wisconsin -- is there a page missing at the -- page 4, after page 4 of your brief, I don’t have a page which lists those cites.
Rebuttal of Slade Gorton
Mr. Slade Gorton: Here in your index.
Justice William J. Brennan: In your index.
Mr. Slade Gorton: I’m informed that there is.
Justice William J. Brennan: You’re not having much --
Mr. Slade Gorton: Our state printer has many gremlins in his office evidently Mr. Justice Brennan.
Justice William J. Brennan: (Voice Overlap). Well, can you adjust the pages?
Mr. Slade Gorton: We can.
Justice William J. Brennan: This entirely.
Mr. Slade Gorton: We will do so.
Chief Justice Warren E. Burger: Thank you gentlemen.
The case is submitted.