Tyler Pipe Industries, Inc. v. Washington State Department of Revenue

1987-06-23

Headline: Ruling invalidates Washington’s exemption that let local manufacturers avoid multiple taxes, striking the state’s manufacturing/wholesale tax scheme while upholding a wholesale tax on remote sellers.

Holding: The Court held that Washington's multiple-activities exemption discriminates against interstate commerce and invalidated that exemption while upholding the State's wholesale tax as properly applied to a remote seller with local sales representatives.

Real World Impact:

Invalidates tax exemption that favored in-state manufacturer-wholesalers
Protects out-of-state sellers from discriminatory multiple taxation
Leaves refund and remedy issues to the Washington Supreme Court to resolve

Topics: state taxation, interstate commerce, manufacturing tax, sales and wholesale tax

Summary

Background

Washington taxed several business activities including manufacturing and wholesaling through a business-and-occupation (B&O) tax. The State exempted the manufacturing tax when the same products were taxed as wholesales, so local manufacturer-wholesalers typically paid one tax applied to wholesaling. A group of companies and Tyler Pipe sought refunds, arguing the exemption disadvantaged out-of-state sellers. Tyler also claimed it lacked sufficient connection to Washington to be taxed because its products were made outside the State and it had no office or employees there.

Reasoning

The Court examined whether the multiple-activities exemption discriminated against interstate commerce. Relying on prior decisions, the majority concluded the exemption was facially discriminatory and could not be justified by comparing other States’ tax systems. The Court invalidated Washington’s exemption for local manufacturer-wholesalers as creating an unfair advantage for in-state commerce. At the same time the Court upheld Washington’s wholesale tax as applied to Tyler, finding Tyler’s local sales representatives created a sufficient connection (nexus) to justify taxation.

Real world impact

The decision requires Washington to change its tax scheme or provide credits so out-of-state manufacturers are not disadvantaged, and it sends refunds and remedy questions back to the Washington Supreme Court to decide. Businesses that sell across state lines and states that use similar multiple-activity exemptions will need to reassess tax designs. The ruling leaves in place a State’s ability to tax remote sellers when those sellers have substantial local sales activities.

Dissents or concurrances

Justice O’Connor agreed the exemption is facially discriminatory but warned against broadly applying the internal-consistency test to nondiscriminatory taxes. Justice Scalia joined the part upholding the wholesale tax but dissented from invalidating the manufacturing tax, rejecting the majority’s broader test for discrimination.