General Motors Corp. v. Washington

No. 115. Argued February 26, 1964.—Decided June 8, 1964. Appellant, a Delaware corporation, manufactures motor vehicles and parts outside the State of Washington some of which it sells to retail dealers in that State. It operates through substantially independent “Divisions,” here three automotive and one parts, all but the latter maintaining zone offices in Oregon which handle sales and other orders from dealers in Washington. Sales originate through projection of orders of estimated needs, for practical pur- poses “a purchase order,” worked out between the dealers and the corporation’s district managers who conduct business from their homes in Washington and constantly call upon dealers, assisting in sales promotion, training of salesmen, etc.; service contacts are maintained through service representatives. One automotive divi- sion has a small branch office in Washington to expedite delivery of cars for dealers in all but nine counties. During the pertinent period, the automotive and parts divisions had about 40 em- ployees resident or principally employed in the State. In addi- tion, out-of-state zone office personnel visited dealers in the State from time to time. The parts division maintains warehouses in Oregon and Washington from which orders from Washington dealers are filled (though only the tax on Oregon shipments is pro- tested). Appellant claims that its products taxed by Washington are manufactured in St. Louis, which levies a license tax measured by sales before shipment. This litigation arises from application of Washington’s tax on the privilege of doing business in the State measured by the wholesale sales of appellant within the State. Appellant contended that it constituted a tax on unapportioned gross receipts in violation of the Commerce and Due Process Clauses. The lower court upheld this view except for some of the business conducted from appellant’s local branch office. The State Supreme Court reversed, holding that all appellant’s activities in the State were subject to the tax which was measured by its whole- sale sales and was found to bear a reasonable relation to appellant’s in-state activities. Held: 1. Though interstate commerce cannot be subjected to the bur- dens of multiple taxation, a tax measured by gross receipts is constitutionally proper if fairly apportioned. Pp. 439-440.

2. The burden of establishing exemption from a tax rests upon a taxpayer claiming immunity therefrom. Norton Co. v. Depart- ment of Revenue, 340 U. S. 534, followed. P. 441. 3. The bundle of appellant’s corporate activities or “incidents” in Washington afforded the State a proper basis for imposing a tax. Pp. 442-448. 4. The evidence was sufficient to warrant the finding by the state court of a nexus between appellant’s in-state activities and its sales there, especially where its taxable business was so enmeshed with what it claimed was nontaxable. P. 448. 5. This Court does not pass upon appellant’s claim of “multiple taxation” in violation of the Commerce Clause because appellant did not show what definite burden in a constitutional sense the St. Louis tax places on the identical interstate shipments by which Washington measures its tax or that Oregon levies any tax on appellant’s activity bearing on Washington sales. Pp. 448-449. 60 Wash. 2d 862, 376 P. 2d 843, affirmed. Donald K. Barnes argued the cause for appellant. With him on the briefs were Aloysius F. Power, Thomas J. Hughes and Dewitt Williams. John W. Riley, Special Assistant Attorney General of Washington, and Timothy R. Malone, Assistant Attorney General, argued the cause for appellees. With them on the brief were John J. O’Connell, Attorney General of Washington, and James A. Furber and Lloyd W. Peterson, Assistant Attorneys General. Mr . Justice Clark delivered the opinion of the Court. This appeal tests the constitutional validity, under the Commerce and Due Process Clauses, of Washington’s tax imposed upon the privilege of engaging in business activ- ities within the State.1 The tax is measured by the

Bre nn an, J., dissenting. 377 U. S.

such a tax and transactions within a state for which the tax is an exaction.” Northwestern States Portland Ce- ment Co. v. Minnesota, 358 U. S. 450, 464. This ques- tion, which we considered in McLeod v. J. E. Dilworth Co., 322 U. S. 327, and Norton Co. v. Department of Revenue, 340 U. S. 534, is the most fundamental pre- condition on state power to tax. But the strictures of the Constitution on this power do not stop there. For in the case of a gross receipts tax imposed upon an inter- state transaction, even though the taxing State can show “some minimum connection,” Northwestern States Port- land Cement Co., supra, at 465, the Commerce Clause requires that “taxation measured by gross receipts from interstate commerce . . . [be] fairly apportioned to the commerce carried on within the taxing state.” Western Live Stock v. Bureau of Revenue, 303 U. S. 250, 256. See J. D. Adams Mfg. Co. v. Stören, 304 U. S. 307. The Court recognizes that “taxation measured by gross receipts is constitutionally proper if it is fairly appor- tioned,” ante, p. 440. In concluding that the tax in this case includes a fair apportionment, however, the Court relies upon the fact that Washington has sufficient con- tacts with the sale to satisfy the Norton standard, which was formulated to meet the quite different problem of defining the requirements of the Due Process Clause. See Part IV, ante. Our prior decisions clearly indicate that a quite different scheme of apportionment is re- quired. Of course, when a sale may be localized com- pletely in one State, there is no danger of multiple taxation, and, as in the case of a retail sales tax, the State may use as its tax base the total gross receipts arising within its borders. See McGoldrick v. Berwind-White Coal Mining Co., 309 U. S. 33. But far more common in our complex economy is the kind of sale presented in this case, which exhibits significant contacts with more than one State. In such a situation, it is the commercial

Gol db er g, J., dissenting. 377 U. S.

sent an important departure from a fundamental purpose of the Commerce Clause and from an established principle which had heretofore provided guidance in an area other- wise fraught with complexities and inconsistencies. The relevant facts, which are undisputed, merit brief restatement. General Motors manufactures in Califor- nia, Missouri and Michigan motor vehicles, parts and accessories which are sold at wholesale to independent dealers. The corporation manufactures none of these products within the State of Washington but does sell them to local Washington retail dealers. General Motors conducts business through “Divisions” which although not separately incorporated are operated as substantially in- dependent entities. This case involves wholesale sales by the Chevrolet, Pontiac, Oldsmobile and General Mo- tors Parts Divisions to independent dealers in Washing- ton. As a general matter the sales and orders involved in this case were handled and approved by zone offices in Portland, Oregon. General Motors has a limited num- ber of sales representatives (“district managers”) who reside in Washington and who maintain contacts with the local dealers in order to facilitate the sales of General Motors products, but these sales representatives con- ducted no business in Washington other than the pro- motion of their wholesale interstate sales. The orders for automobiles were sent directly to the Portland zone offices where they were accepted for shipment, f. o. b., from points outside of Washington. For the purposes of this case, however, it is useful to divide the transactions—the taxability of which is in dispute—into three categories: (1) Pontiac and Oldsmobile Divisions Sales: These Divisions had no office, establishment or intrastate business in Washington; they operated entirely through Portland zone offices and the Washington sales representatives.

On these facts the Court holds that the activities of the sales representatives constitute “an in-state activity” forming “a sufficient local incident upon which a tax may be based.” Ante, at 447. This decision departs from Norton Co. v. Department of Revenue, 340 U. S. 534, and adopts a test there rejected. Norton involved a Massachusetts corporation which operated “a branch office and warehouse” in Chicago, Illinois, from which it made “local sales at retail.” Id., at 535. The Massa- chusetts corporation was admittedly engaging in intra- state business within Illinois and was making local sales concededly subject to taxation by the State. In addition to “over-the-counter” Chicago sales, the Massachusetts firm made two other types of sales to Illinois inhabitants: (1) Sales based on orders or shipments which at some point were routed through or utilized the Chicago outlet and (2) sales based on orders from Illinois inhabitants sent directly to Massachusetts and filled by direct ship- ment to the purchasers. The Illinois tax was imposed upon all receipts obtained by Norton from sales to Illinois residents regardless of whether those sales were associated or connected with the local office and warehouse which was conducting intrastate business. The Court stated that when, “as here, the corporation has gone into the State to do local business,” the firm could be exempted from taxation on sales “only by” sustaining the burden of “showing that the particular transactions are dissociated from the local business and interstate in nature.” Id., at 537. The Court held in part that “the judgment attributing to the Chicago branch income from all sales that utilized it either in receiving the orders or distrib- uting the goods was within the realm of permissible judg- I ment.” Id., at 538. (Emphasis added.) But in spite I of the burden of persuasion resting on a firm having an I office doing intrastate business, the Court concluded that I the tax on all sales by Norton to Illinois customers was I

those in “Class B,” which by definition lacked any con- nection with an in-state office, would seem to be pre- cisely like those in Norton which had no connection with an in-state establishment and which accordingly were exempted. And, as to the “Class A” sales which were connected with the one-man Seattle office, it is important to note that this in-state “office,” unlike the “office and warehouse” involved in Norton, made no intrastate or retail sales, stocked no products and had no authority to accept sales orders. In fact the Seattle “office” simply operated to facilitate the interstate sales directed by the zone office in Portland, Oregon. Although the opinion of the Court seems to imply that there still is some threshold requirement of in-state activ- ity which must be found to exist before a “fairly appor- tioned” tax may be imposed on interstate sales, it is diffi- cult to conceive of a state gross receipts tax on interstate commerce which could not be sustained under the ra- tionale adopted today. Every interstate sale invariably involves some local incidents—some “in-state” activity. It is difficult, for example, to distinguish between the in-state activities of the representatives here involved and the in-state activities of solicitors or traveling salesmen— activities which this Court has held are insufficient to constitute a basis for imposing a tax on interstate sales. McLeod v. J. E. Dilworth Co., 322 U. S. 327; cf. Real Silk Hosiery Mills v. City of Portland, 268 U. S. 325; Robbins v. Shelby County Taxing District, 120 U. S. 489. Surely the distinction cannot rest on the fact that the solicitors or salesmen make hotels or motels their “offices” whereas in the present case the sales representatives made their homes their “offices.” In this regard, the Norton decision rested solidly on the fact that the taxpayer had a branch office and warehouse making intrastate retail sales. The opinion of the Court goes beyond a consideration of whether there has been in-state activity of appropriate

any tax on appellant’s activity bearing on Washington sales.” 2 Ante, at 449. These problems are engendered by the rule applied here and cannot be evaded. For if it is “fair” to subject the interstate sales to the Washington wholesale sales tax because of the activities of the sales representatives in Washington, then it would seem equally “fair” for Oregon, which is the site of the office directing and consummating these sales, to tax the same gross sales receipts. Moreover, it would seem “fairer” for Cali- fornia, Michigan or Missouri—States in which automo- biles are manufactured, assembled or delivered—to im- pose a tax measured by, and effectively bearing upon, the same gross sales receipts. See Note, 38 Wash. L. Rev. 277, 281 (1963). Presumably, if there is to be a limitation on the taxing power of each of these States, that limitation surely cannot be on a first-come-first-tax basis. Alterna- tively, if diverse local incidents can afford bases for multi- state taxation of the same interstate sale, then the Court is left to determine, out of some hypothetical maximum taxable amount, which proportion is “fair” for each of

jected to the wholesale tax and then, to the extent that he is taxed thereunder, exempted from the manufacturing tax. Rev. Code Wash. 82.04.440; Wash. Laws 1950 (spe- cial session), c. 5, § 2. See McDonnell & McDonnell v. State, 62 Wash. 2d 553, 557, 383 P. 2d 905, 908. This amended provision would seem to have essentially the same economic effect on interstate sales but has the advantage of appearing nondiscriminatory. Even under the amended “multiple activities” exemp- tion, however, an out-of-state firm manufacturing goods in a State having the same taxation provisions as does Washington would be subjected to two taxes on interstate sales to Washington customers. The firm would pay the producing State a local manufacturing tax measured by sales receipts and would also pay Washington a tax on wholesale sales to Washington residents. Under such taxation programs, if an out-of-state manufacturer com- petes with a Washington manufacturer, the out-of-state manufacturer may be seriously disadvantaged by the duplicative taxation. Even if the out-of-state firm has no Washington competitors, the imposition of interstate sales taxes, which add to the cost of producing, may dimin- ish the demand for the product in Washington and thus affect the allocation of resources in the national economy. Moreover, the threat of duplicative taxation, even where there is no competitor manufacturing in the consuming State, may compel the out-of-state producer to relocate his manufacturing operations to avoid multiple taxation. Thus taxes such as the one upheld today may discourage the development of multistate business operations and the most advantageous distribution of our national re- sources; the economic effect inhibits the realization of a free and open economy unencumbered by local tariffs and protective devices. As the Court said in McLeod v. J.

In my view the rules set forth in Norton Co. v. Depart- ment of Revenue, supra, reflect an attempt to adhere to the basic purposes of the Commerce Clause. Therefore, in dealing with unapportioned taxes on interstate sales, I would adhere to the Norton rules instead of departing from them by adopting a standard of “fairness.” I would hold that a manufacturer or wholesaler making interstate sales is not subject to a state gross receipts tax merely because those sales were solicited or processed by agents living or traveling in the taxing State. As Norton recog- nized, a different rule may be applied to the taxation of sales substantially connected with an office or warehouse making intrastate sales. The test adopted by the Court today, if followed logically in future cases, would seem to mean that States will be permitted to tax wholly inter- state sales by any company selling through local agents or traveling salesmen. Such a rule may leave only mail- order houses free from state taxes on interstate sales. With full sympathy for the revenue needs of States, I believe there are other legitimate means of raising state revenues without undermining the common national market created by the Commerce Clause. I therefore respectfully dissent. a speedy end of our national solidarity. The Constitution was framed under the dominion of a political philosophy less parochial in range. It was framed upon the theory that the peoples of the several states must sink or swim together, and that in the long run prosperity and salvation are in union and not division.” See H. P. Hood & Sons, Inc., v. Du Mond, 336 U. S. 525, 532-539.