From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial EFiled: Apr 11 2008 9:llA for other related documents, please email [email protected] Filing ID 19365764 Case Number 109,2008 IN THE SUPREME COURT OF THE STATE OF DELAWARE
DIRECTOR OF REVENUE ) 1 Appellant, 1 Respondent Below 1 1 v. 1 No. 109, 2008 1 THE DIAL CORPORATION, 1 1 Appellee, 1 Petitioner Below 1
ON APPEAL FROM THE SUPERIOR COURT OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY
DIRECTOR OF REVENUE'S OPENZNG BRIEF
John S. McDaniel Deputy Attorney General Del. Bar ID 2477 Department of Justice Carve1 State Office Building, C600 820 N. French Street Wilmington, DE 19801 (302) 577-8842
April 11, 2008 From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
TABLE OF CONTENTS
PAGE
TABLE OF CITATIONS ...... ii
NATURE AND STAGE OF THE PROCEEDINGS ...... 1
SmMARY OF THE ARGUMENT ...... 3 STATEMENT OF FACTS ...... 4
ARGUMENT
I. IMPOSITION OF THE WHOLESALERS' GROSS RECEIPTS TAX ON PROCEEDS OF DIAL'S SALES OF GOODS PHYSICALLY DELIVERED IN DELAWARE BY DIAL, TITLE TO WHICH PASSED OUTSIDE OF THE STATE, SATISFIES THE REQUIREMENTS OF THE COMMERCE CLAUSE ...... 8
CONCLUSION ...... 34 Dial Corporation v Director of Revenue, Del . Super., C .A. No. 06C-05-014, Toliver, J. (January 30, 2008) From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
TABLE OF CITATIONS
COMSTXTUTXOMS PAGE
Constitution of the United States Of America, Art. I, 58 ...... passim
Constitution of the United States Of America, Amend. XIV ...... 16
CASES
Acadia Brandywine Tom Center, LLC v. New Castle County, 879 A. 2d 923 (Del. 2005) ...... 8
Axmco v. Hardesty, 467 U.S. 678 (1984)...... 31
Central Greyhound Lines, Inc. v. Mealey, 334 U. S. 653 (1948) . .22
Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) ...... passim
Container Corporation of America v. Franchise Tax Board, 463 U. S. 159 (1983) ...... 17, 18
Ford Motor Company v. City of Seattle, 156 P.3d 185 (Wash. 2007) cert. denied - U.S. -, 2008 WL 423568 (Feb. 19, 2008) ...... 25, 26
Frank1in Fibre -Lami tex Corporation v. Director of Revenue, 505 A.2d 1296 (Del. Super Ct. 1985) ...... 29, 30, 31
Goldberg v. Sweet, 488 U.S. 252 (1989) ...... 17, 25
Lehman Brothers Bank, FSB v. State Bank Commissioner, 937 A.2d 95 (Del. 2007) ...... 8, 15, 17
McLeod v. J.E. Dilworth Co., 322 U.S. 327 (1944) ...... 22, 26, 31
Moorman Manufacturing Company v. Bair, 437 U.S. 267 (1978) ...... passim
Norton v. Department of Revenue, 340 U.S. 534 (1951)...... 31
Oklahoma Tax Commission v. Jefferson Lines, Inc. 514 U.S. 175 (1995) ...... 17, 22 From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
CASES PAGE
Quill Corporation v . North Dakota. 504 U.S. 298 (1992)...... 16
Saudi Refining. Inc . v . Director of Revenue. 715 A.2d 89 (Del. Super . Ct . 1998) ...... 24, 25
Standard Pressed Steel Co . v . Washington Department of Revenue. 419 U.S. 560 (1975)...... 2 23
Tax Appeal of Baker & Taylor. Inc . v . Kawafuchi. 82 P.3d 804 (Haw. 2004) ...... 26. 27. 28
Trinova Corporati on v . Michigan Department Treasury. 498 U.S. 358 (1991)...... 18. 20
Tyler Pipe Industries. Inc . v . Washington State Department of Revenue. 483 U.S. 232 (1987)...... 22. 23. 26
Tyler Pipe Industries. Inc . v . State of Washington Department of Revenue. 715 P.2d 123 (Wash. (1986)... .22. 23
STATUTES
6 Del . C . 82-106 ...... 30
6 Del . C . 12-319 ...... 12
6 Del . C. 12-401 ...... 2 32
8 Del C.. ch.5 ...... 7
30 Del . C . S333 ...... 1
30 Del . C . 2544 ...... 1
30 Del . C.. ch . 19 ...... 7
30 Del . C . 52901 ...... passim
30 Del . C . 82902 ...... passim
iii From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
STATUTES PAGE
30 Del . C . 82910 ...... 1
64 Del . Laws. c . 374 (July 17. 1984) ...... 30
75 Del . Laws. c . 199 (July 19. 2005) ...... 11
Haw . Rev. Stat . 8237-1 ...... 6
Haw . Rev . Stat . 5237-13(2)...... 27. 28
Wash . Rev. Code S82.04.010 ...... 6
Wash . Rev. Code 582.04.040{1)...... 24
RULES
Delaware Supreme Court Rule 14 ...... 1 From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
NATURE AND STAGE OF THE PROCEEDINGS
This is an appeal by the Director of Revenue (the
"Director") from the Superior Court's grant of a Motion for
Summary Judgment made by The Dial Corporation ("Dial") and the
denial of a Cross Motion for Summary Judgment made by the
Director.
The case began with Dial's claim for refund of the Delaware
Wholesale Merchants' License Tax, 30 Del. C. 882901 - 2910
(hereafter, the "Wholesalers' Gross Receipts Tax"), in the
amount of $41,380.00 paid between January 2004 and September
2005, which the Director denied. Appendix to Director's Opening
Brief (hereafter "App.") A15-23, A25. Dial timely filed a
protest of the denial with the Director in accordance with 30
Del. C. S542, which the Director denied. App. A27-34, A36-40.
Dial next filed a petition for review of this denial in
accordance with 30 Del. C. 5544 with the Tax Appeal Board (the
"Board"). That proceeding was removed to the Superior dourt
pursuant to 30 Del. C. 8333 by order of the Board. App. A42.
The Superior Court decided the case on cross motions for
summary judgment, based on the parties' Stipulation of Facts
(the "Stipulation" or "Stip.") and after oral argument, in an
opinion and order originally dated January 29, 2008 and amended
on January 30 2008 (the "Opinion" or "Opin) attached hereto in accordance with the Court's Rule 14(b) (vii) . In the Opinion, From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
the court granted Dial's motion for summary judgment and denied
the Director's cross motion, holding that the Wholesalers' Gross
Receipts Tax, as applied to Dial on the stipulated facts,
violated the Commerce Clause of the Constitution of the United
States. The Director appeals from the grant of the Dial's
motion for summary judgment and the denial of the Director's
motion for summary judgment.
The Director filed a Notice of Appeal with this Court on
February 27, 2008. The Court ordered that the Director's
Opening Brief was due on or before April 14, 2008. This is the
Director's Opening Brief. From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
SUMMARY OF THE ARGTJbIENT
1.The Wholesalers' Gross Receipts Tax is a tax on the \ activity of wholesaling, not a sales or transactional tax. 2. Dial conducted part of its national wholesaling activity in
Delaware both before and after title to the goods at issue
passed upon delivery to Dial's common carrier outside of
the state.
3. Fair apportionment under Complete Auto Transit and its
progeny is the sole issue in the case, and both the U.S.
Supreme Court and state supreme courts have found
Delaware's method of dividing the tax base by taxing gross
receipts from sales of goods physically delivered in this
State to be fairly apportioned. From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
STATEMENT OF FACTS
Dial is a Delaware corporation headquartered in Arizona
that manufactures and sells consumer products such as soap.
Opin. p.2; App. A5, A7 (Stip. 1 12-13). All of its
manufacturing activity takes place outside of Delaware. Opin.
p.3; App. A7 (Stip. 612, 16).
Dial generally ships products to its customers from
distribution center warehouses located outside of Delaware, or,
in some cases, directly from its or its contract
manufacturersr ("co-packersJu) plants outside of Delaware. Opin.
p. 4; App. A7-8 (Stip. 14- 18). Under its general sale terms, Dial ships to its customers F.O.B. shipping point, and
title to and risk of loss for the goods shipped pass to the
purchaser upon delivery to a common carrier. Opin. p. 4; App.
A8, A44 (Stip. 119 & Exhibit ("Stip. Exh.") F to Stip.
("DELIVERY-FREIGHT PREPAIDU)). Prices include the cost of
shipment to the customer, and Dial chooses and pays the common
carrier for delivery of the goods to the purchaser. Opin. p. 5,
6; App. A8, A44 (Stip, 1121 & 22 & Stip. Exh. F ("PRICING")).'
1 Dial's customers sometimes "pick up" goods at a distribution center, Dial manufacturing plant or co-packer plant using their own trucks or those of an affiliate. Opin. p 6, n.8; App. A7, A8, A10 (Stip. 9114, 20, 32). In such cases, Dial lowers its price for a 'pickup allowance." Opin. p. 5; App. A8, A44 (Stip. 724 & Stip. Exh. F ( "DELIVERY-PICKUP")) . Receipts from the sale of such goods are not in issue in this case, and Delaware does not seek From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
If goods are returned by the purchaser, Dial chooses the carrier
as well. App. A44 (Stip. Exh. F ("DELIVERY-RETURN GOODS")).
Dial, not its customers, enters into the contract with the
common carrier for shipment of the goods sold into Delaware.
Opin. p. 5, 6; App. A8, A47 (Stip. 721 & Stip Exh. G). Dial
specifies the shipment destinations based on the customer's
requirements. App. A47 (Stip. Exh. GI §I). The contract
requires the carrier to maintain cargo insurance insuring
against loss of or damage to shipped goods, naming Dial, not its
customers, as an additional insured. App. A49 (Stip. Exh. GI 5
VI(b) & (c)) . It also requires the carrier to indemnify Dial, not its customers against claims for damage to the goods
carried. App. A49 (Stip. Exh. G, 5 VII) . The contract requires the carrier to accomplish transportation within allotted amounts
of time and to communicate delays to Dial so that Dial can make
arrangements to reschedule delivery. App. A50-51 (Stip. Exh. GI
§XI . Dial's major customers are retail chain stores, such as
Walmart, Target, and Kmart, although it also makes significant
sales to smaller customers. Opin. p. 5; App. A9, A10-11 (Stip
1127, 34-37) . Dial's sales force that services its larger customers is generally located near the customers' headquarters.
to tax these gross receipts, because the goods are not physically delivered in Delaware by Dial. App. A8, A10 (Stip. 1120, 32). From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
Opin. p 5; App. A10 (Stip. 635) . Dial also has general sales
offices in Massachusetts, North Carolina and Arizona to service
other customers. App. A10-11 (Stip. q36). Other than the large
chains with stores in Delaware, Dial handles Delaware customers
through its Massachusetts sales office. App. All (Stip. 137).
At oral argument, Dial's counsel also stated that "there are some salespeople who may come into Delaware .... App. A58 (Transcript of Oral Argument ("Tr.") p. 9) . Dial invoices its sales at its Arizona headquarters and customers either wire
funds in payment to Dial, or, if paying by check, send the check
to a Dial lock box, or one of its facilities in Arizona,
Illinois or Georgia. Opin. p 4-5; App. A9 (Stip. 8825 & 26).
Dial promotes and advertises its products nationally to
consumers, which increases sales of its products in Delaware,
and a portion of the national advertising budget is attributable
to Delaware consumers. App. All (Stip. 1138-40).
Dial pays a business and occupation to the state of
Washington based on gross receipts (Wash. Rev. Code 1182.04.010
et seq.) and a business excise tax to Hawaii (Haw. Rev. Stat.
§§237-1 et seq.), based on gross receipts from products
delivered to purchasers in Hawaii. App. All-12 (Stip. q41) .
These taxes are measured by sales other than those in issue in
this case. Id. Dial does not pay a transaction based or sales
tax to any other state on the sales of its products shipped to From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
Delaware and for the tax on which a refund is sought in this
litigation. Id. Dial pays the Delaware Corporation Franchise
Tax, 8 Del. C., ch. 5; it does not pay the Delaware Corporation
Income tax, 30 Del. C., ch. 19.' App. A5 (Stip. 112).
2 At page 2 of the Opinion, the Superior Court seems to suggest that Dial does not pay the Delaware Corporation Income Tax because it pays the Delaware Corporation Franchise Tax. Payment of the franchise tax does not exempt a corporation from paying corporation income tax. The parties simply stipulated that Dial pays the former, but not the latter. There is no stipulation as to the correctness of Dial's Corporation Income Tax filing and payment status. From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
I. IMPOSITION OF THE WHOLESALERS' GROSS RECEIPTS TAX ON PROCEEDS OF DIAL'S SALES OF GOODS PHYSICALLY DELIVERED IN DELAWARE BY DIAL, TITLE TO WHICH PASSED OUTSIDE OF THE STATE' SATISFIES THE REQUIREMENTS OF THE COWMERCE CLAUSE.
Question Presented
Whether imposition of the Wholesalers' Gross Receipts Tax
on gross receipts from Dial's sales of goods that were
physically delivered in Delaware by Dial, title to which passed
outside of the state, satisfies the requirements of the Commerce
Clause?
Standard and Scope of Review
The Court reviews a trial court's grant of summary judgment
based on a judicial construction of a statute de novo. Acadia
Brandywine Town Center, LLC v. New Castle County, 879 A.2d 923,
925 (Del. 2005) (cross motions for summary judgment) ; see a190
Lehman Brothers Bank, FSB v. State Bank Commissioner, 937 A.2d
95, 102 (Del. 2007) (review of administrative agency's
determination that Delaware Bank Franchise Tax did not violate
Commerce Clause).
Merits Argument
This case concerns whether the Wholesalers' Gross Receipts
Tax, as applied to the proceeds of Dial's sales of goods that
are physically delivered in Delaware to customers, complies with
the requirements of the Commerce Clause of the Constitution of From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
the United States, if title to the goods passes outside
Delaware. U. S. Const. art. I, 88 (the "Commerce Clause" . The question turns on whether the tax is "fairly apportioned" under
Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), and
its progeny. Dial raised no other issue before the Superior
Court. In Complete Auto Transit, the Court held that a state
tax will not offend the "dormant" Commerce Clause if it ' [il is
applied to an activity with a substantial nexus with the taxing
State, [iil is fairly apportioned, [iii] does not discriminate
against interstate commerce, and [iv] is fairly related to the
services provided by the State." 430 U.S. 274, 279 & 287
(1977).
Three of the four "prongs" of the Complete Auto Transit:
test are not in issue in this case. The parties agreed that
substantial nexus exists, because Dial engaged in sufficient
wholesaling activity in Delaware. App. 85, A58, A59, A68 (Stip.
81; Tr. p. 8-10, 14, 50). The Superior Court found that (i)
substantial nexus existed, (ii) the Wholesalers' Gross Receipts
Tax did not discriminate against interstate commerce, and (iii
that it was fairly related to services provided by Delaware.
Opin. pp. 19-20. The record and relevant U.S. Supreme court
authority show that the Wholesalers' Gross Receipts tax is
fairly apportioned, and therefore, the Superior Court erred in
concluding that the tax violated the Commerce Clause. From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
Dial sought to analyze the Wholesalers' Gross Receipts Tax
like a sales, or transactional, tax, but the tax is imposed on
the activity of engaging in wholesaling. This activity occurred
both within and without Delaware, and the State sought only to
tax a part of the wholesaling activity concerned with sales of
goods physically delivered by the wholesaler into this State.
It did not seek to tax gross receipts from sales of goods
delivered anywhere outside of Delaware. See n.1, supra. Both
the U.S. Supreme Court and state courts have approved this
method of dividing the tax base when applying Commerce Clause
principles.
The Superior Court was clearly concerned by the quantity of
activity in Delaware and especially by the fact that title to
the goods sold by Dial to its Delaware customers passed by
contractual agreement outside of Delaware. On this basis, the
Superior Court held that the Wholesalers' Gross Receipts Tax was
not fairly apportioned under the Commerce Clause, using an
analysis that courts would normally use to determine whether
substantial nexus was present. As mentioned above, however, the
parties agreed that substantial nexus to Delaware existed under
Complete Auto Transit, and the Superior Court erred in its fair
apportionment ruling.
The Wholesalers1 Gross Receipts Tax applies to "[alny
person desiring to engage in business in this State as a From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
wholesaler. . . . " 30 Del. C. 52902 (b) '. Thus, it is not a tax on specific sales or transactions, but on the activity of
wholesaling in Delaware. The statute defines "wholesaler" in , relevant part as:
Every person engaged, as owner or agent, in the business of selling to or exchanging with another person goods for cash or barter or any consideration for the purpose of resale by the person acquiring the goods sold or exchanged, and includes without limitation.goods sold or exchanged through outlets, warehouses and distribution depots of persons whose principal place of business is located inside or outside of this State .... Id. §2901(11)a.1. By inclusion of the reference to the location
of warehouses, distribution depots and principal places of
business, the statute implicitly acknowledges that wholesaling
often will be an interstate activity. Dial has stipulated that
it fits the definition of "wholesaler". App. A5 (Stip. 111).
The Superior Court so found. Opin. p.3.
The statutory provisions defining the taxable gross
receipts are crucially important. For the period in issue and
at present, Delaware uses a "destination test." Thus, taxable
gross receipts are defined as "total consideration received from
sales of tangible personal property physically delivered within
3 During the January 2004 to September 2005 period at issue in this case, the tax consisted of a flat annual license fee and a tax of 0.384% of aggregate gross receipts, minus $50,000 per month. 30 Del. C. 12902 (b) & (c) (1). For taxable periods beginning on or after January 1, 2006, the rate is 0.307% and the monthly deduction is $80,000. See 75 Del. Laws, c. 199, §§6, 16 & 41 (July 19,2005) From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
this State to the purchaser or purchaser's agent. . . . " Id.
§2901(4)b. " [TI he term 'physically delivered within this State'
includes delivery to the United States mail or to a common or
contract carrier for shipment to a place within this State
irrespective of F.o.B.* or other terns of payment for delivery. "
Id. 12901 (7)(emphasis supplied) . In contrast, gross receipts from goods delivered in Delaware to the mail or a common or
contract carrier for shipment outside of Delaware are not
taxable. Id. §2901(4)b. (1). ~hus,the statute focuses not on the contractually agreed location of title passage, but on the
delivery destination of the goods, either inside or outside of
Delaware, as determinative of the taxability of gross receipts.
The activity of wholesaling is the activity of "selling to
or exchanging with another person goods for cash or barter or
any consideration for the purpose of resale by the person
acquiring the goods." 30 Del. C. 52901 (11)a. 1. That activity
4 Unless otherwise agreed, "F.O.B." means 'free on boardn and is a delivery term meaning, when goods are 'F.O.B. place of shipment" that the seller must ship the goods and bear the expense and risk of putting them into possession of the carrier. 6'Del.C. 52-319(1)(a). When goods are "F.O.B. the place of destination," unless otherwise agreed, the seller bears the risk and expense of transporting the goods to the destination. Id. 92-319(1) (b). In this case, the parties varied the standard terms; ~ialpaid the shipment costs. Title to goods may pass in any manner and on any conditions explicitly agreed by the parties. Id. 52- 401 (1). Absent such explicit agreement, when the sales contract requires delivery at the buyer's destination, title passes on tender at the deetination. Id. S2- 401 (2)(b) . From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
begins before and continues after delivery of the goods sold to
the common carrier with an agreement that title passes at that
point. It includes the advertising and marketing, billing and
collection for sales, delivery to customers and the exploitation
generally of a market for the goods sold. Dial engaged in
national advertising that increased the sales of its products in
Delaware. App. All (Stip. aq38, 39). Although sales activity
took place outside Delaware, sales representatives also
apparently entered the State. App. A58 (Tr. p. 9) . The parties agree that Dial conducted enough of its wholesaling activities
in Delaware to constitute substantial nexus to this State under
Complete Auto Transit, and that agreement justifies Delaware in
taxing a portion of the gross receipts from its activities,
namely those from the sales of goods delivered to its Delaware
customers.
Without actually delivering the goods to the purchaser, the
activity of wholesaling is incomplete, and its delivery
activities constituted a crucial part of Dial's wholesaling
activity. Dial's terms for the sales in issue in this case were
that Dial, not its customers, would bear the cost of delivering
its products to the customer as part of the price charged.
Opin. 5, 6; App. A44 (Stip. Exh. F). Although under the
technical terms of the sales contract, title and risk of loss
passed to the customer when Dial delivered the goods to the From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
carrier, Dial still exercised control over the delivery, and
Dial, not the customer, stood in the contractual relationship
with the carrier. Opin. 4, 5 & 6; App. A47-54 (Stip. Exh. G;) . Nothing in the record indicates that Dial's customers ever
instructed the carrier in any regard.
The carrier acted as Dial's agent. Customers agreed that
Dial selected the carrier of the goods to be delivered into
Delaware. App A44 (Stip. Exh. F) . Dial scheduled deliveries. App. A5O-51 (Stip. Exh. G, fix). Dial required the carrier's cargo insurance to cover Dial, not Dial's customers, and for the
carrier to indemnify Dial, not Dial1s customers, for damages to
the cargo. App. A49 (Stip. Exh. GI §§VI & VII). These
assurances from the carrier were becauae Dial retained the
contractual obligation to its customers to make delivery to them &V (f at their Delaware location. Similarly, if goods were to be b+ returned to Dial by the customer, Dial selected the carrier. t'. App. A44 (Stip. Exh. F). The Superior Court questioned the distinction between this
type of transaction and the transactions not sought to be taxed
in which the customer picked up the goods sold by Dial with its
own trucks. Opin. p 24. The difference is that, Dial .. controlled the delivery of the goods under its 1.rorrna1 form of
transaction. There is no evidence that customers in Delaware
even knew the identity of the carrier selected by Dial, much From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
less that they exercised any control over these carriers. When
Walmart picked up product at Dial's distribution facility, it
exercised complete control over the goods prior to their entry
into Delaware. Such was not the case when Dial delivered
through its own common carriers.
This activity clearly demonstrates that crucially important
parts of the wholesaling activity were conducted by Dial,
through its agents, the carriers, in this State. Dial s
customers were contracting not just to purchase goods, but to
purchase them and have them delivered into Delaware. Thus,
Dial's work was not done before it crossed our border and the
Wholesalers' Gross Receipts Tax properly applies.
The Commerce Clause provides, 'The Congress shall have power ...to regulate commerce. ..among the several states. ..."
U.S. Const. art. I, S8. Although the Commerce Clause expresses
an affirmative grant of power, it also prohibits certain state
actions that interfere with interstate commerce. See, e.g.,
Oklahoma Tax Commission v. Jefferson Lines, Inc., 514 U.S. 175,
179-180 (1995); see also Lehman Brothers Bank, 937 A.2d at 107.
In 1977, the Court clarified and distilled its jurisprudence on
the "dormant" Commerce. In Complete Auto Transit, the Court
overruled earlier cases turning on formalistic differences and
focused instead on the practical effects of the tax. 430 U.S. From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
at 279; see also Jefferson Lines, 514 U.S. at 180 - 183
(historical summary of cases before Complete Auto Trans1 t) .
The sole issue under Complete Auto ~ransit in this case is
the "fair apportionment" prong of the test, which the Superior
Court recognized. Opin. p. 19-20. It must be noted \ preliminarily, however that, at one point in its opinion, after
it had found that substantial nexus existed and as part of its
analysis of fair apportionment, the Superior Court stated that
Dial had insufficient contacts for purposes of the Due Process
Clause of the 14~~Amendment to the Constitution of the United
States, U.S. Const. Amend XIV, with Delaware to justify the
assertion of in personam jurisdiction over Dial. Opin. p. 22-23
& n.32. This conclusion is inconsistent with li) the court's
earlier conclusion that substantial nexus existed under Complete
Auto Transit (Opin. p. 20), (ii) the parties' agreement that
substantial nexus existed (Stip. q1; Tr. p.9-lo), iii) the
failure of Dial to assert this theory before the Superior Court,
and (iv) the U.S. Supreme Court's decision in Quill Corporation
v. North Dakota that "substantial nexus" under the Commerce
Clause and Complete Auto Transit requires a greater contact to
the state than the minimum contacts necessary to support in
personam jurisdiction under the Due Process Clause. Quill, 504
U.S. 298, 313 (1992). Thus, the Superior Court erred on this From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
point. If substantial nexus existed, a fortiori nexus, or
minimum contact, for purpose of the Due Process Clause existed.
The purpose of the fair apportionment requirement is to
ensure that a state taxes only its fair share of interstate
activity. See, e.g., Jefferson Lines, 514 U.S. 175, 184 (1995);
Goldberg v. Sweet, 488 U.S. 252,260-261 (1989). Nevertheless,
states enjoy wide latitude in dividing the tax base, and the
U.S. Supreme Court has declined to require a single method of
doing so. Moorman Manufacturing Company V. Bair, 437 U.S. 267,
274 (1978); accord Jefferson Lines, 514 U.S. at 195; Goldberg,
488 U.S. at 261; Container Corporation of America v. Franchise
Tax Board, 463 U.S. 159, 164 (1983). The Court will not
invalidate a fairly apportioned tax simply because its method of
dividing the tax base varies from a prevailing approach adopted
by other states. Container Corporation, 463 U.S. at 171
(discussing Moorman, 437 U.S. at 278-280); Lehman Brothers Bank,
937 A.2d at 112. A taxpayer challenging an apportionment
formula must show by clear and cogent evidence that the state
tax results in extraterritorial value being taxed out of all
appropriate proportion to business transacted in the state.
Container Corporation, 463 U.S. at 164, 170, 180-181 (citing
Moorman, 437 U.S. at 274). All that is required is that the
system chosen be reasonable. Lehman Brothers Bank, 937 A. 2d at
112. From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
The Superior Court also recognized that the U.S. Supreme
Court tests fair apportionment by examining whether the tax in
issue is both "internally consistentn and "externally
consistent," as set forth in Container Corporation, 463 U.S. at
169-170. Opin. p. 21. A tax is internally consistent when, if
every state adopted the identical tax, no more than 100% of the
relevant tax base would be taxed. Container Corporation, 463
U.S. at 169. The Superior Court correctly found that the
Wholesalers' Gross Receipts Tax is internally consistent. Opin.
p. 21. It erred, however, when it concluded that the tax was not
"externally ~onsistent.~
The more subjective "external consistency" test examines
whether the method used to divide the tax base actually reflects
a reasonable sense of how income is generated. Container
Corporation, 463 U.S. at 169. In applying the test, the Court
has recognized that different permissible methods of dividing
the tax base may result in some permissible risk of multiple
taxation. Container Corporation, 463 U.S. at 169-170; see also
Moorman, 437 U.S. at 277-278. In an external consistency
challenge, the taxpayer must show that there is no rational
relationship between the tax measure attributed to the state and
the contribution of local business activity to the entire value.
Trinova Corporation v. Michigan Department of Treasury, 498 U.S.
358, 380 (1991). From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
There has been no such showing in this case, and facts do
not exist in the record to justify a conclusion that there is no
rational relationship between the Wholesalers' Gross Receipts
Tax and Dial's activity of wholesaling. Rather, the parties
have agreed that Dial has the requisite substantial nexus to
Delaware and, therefore, that it conducts some of its
wholesaling activities here. The parties also agree that part
of Dial's advertising helps in Dial's efforts to increase its
Delaware market and that Dial ships goods sold via common
carriers under contract to Dial to its customers in Delaware.
The Wholesalersr Gross Receipts Tax purports to reach only these
sales-sales for which Delaware provides a market and as to which
it is permitted to impose a tax.
The Supreme Court has approved both income taxes using a
single sales factor, destination-based apportionment formula and
gross receipts taxes using a sales destination test to measure
gross receipts. In Moorman, Iowa ,apportioned income for its
state income tax by the ratio o
sales. 437 U.S. at 270. Illinois used a three-factor formula
based on the ratios of property, payroll and sales. The
taxpayer argued that the Commerce Clause required use of the
three-factor formula to avoid multiple taxation. Id. at 278.
The Court held that the Iowa single factor method did not
violate the Commerce Clause, because the Commerce Clause does From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
not forbid all overlap in taxation. Id. To accept the
taxpayer's argument would require the Court to engage in
extensive judicial lawmaking to prescribe a single acceptable
method of apportionment. Id. It recognized the risk of
overlapping taxation whenever states do not follow the same
method of dividing the tax base. Id. It also found that even
if a three factor method were used, differences could arise
resulting in overlapping taxation, for example, because the
sales factor could be differently defined by different states,
using destination, as Iowa did, state of origin, state of sales
office location, state of salesperson's activity or state where
order is accepted. Id. at 278 n.13. The Court found that such
overlap was not constitutionally significant. Of great
significance, however, is that the Court held that the taxpayer
would have had no complaint at all, had Iowa imposed a gross
receipts tax on Iowa destination sales, even though such a tax
would have been more burdensome than the net income tax at
issue. Id. at 280-281 (citing Standard Pressed Steel Co. v.
Washington Revenue Dept., 419 U.S. 560 (1975)) .
The reason underlying the Moorman court's decision was that
Iowa sales were a reasonable factor for dividing the income
earned in Iowa. It found no proof that the other factors argued
for contributed to the generation of income and that sales did
not. 437 U.S. at 272. The Court in Trinova rejected a similar From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
argument that sales added nothing to the taxable value under
Michigan's value added tax. 498 U.S. at 382. As the Court
found in Moorman, analytically, formula based apportionment
based on the ratio of locally destined sales to all sales is
indistinguishable from using gross receipts from goods
physically delivered in a state as the tax base
So also, in this case, Delaware destination sales are a
reasonable measure of Dial's wholesaling activities in this
State and thus are "externally consistent." Dial engages in the j
variety of activities that are comprised in the activity of j
wholesaling in various states, but at the very least, its
national advertising is in part directed toward increasing its
I Delaware market, and it employs common carriers to discharge its i j obligation to its customers to make delivery in Delaware without
additional charge. - Title passage of goods sold outside of the ! -- State does -the scope of activities in Delaware or .------<-- ---<------ition of the tax on the sale of goods physically -m------"--.*>-..-- mw.-- -.*-- --,
~~~.-.-~~~bear~.~-zm,.=t1,9nale elationsa -*- ship to in-state --.--- - -". r-/__ ' - -= "" --*.-*.,?--
Both the U.S. Supreme Court and state courts specifically
examining gross receipts taxes that are analytically
indistinguishable from Delaware's have found that they pass
muster under the Commerce Clause, regardless of where title
passes. As a preliminary matter, however, it is important to From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
distinguish between two lines of cases. As explained above, the
Wholesalers' Gross Receipts Tax is a tax on the activity of
wholesaling, not a sales tax. Sales taxes are imposed on the
purchaser of goods and services, not the seller. States may not
impose a sales tax on a purchaser, if the purchaser acquires
title to goods outside of the taxing state. See McLeod v. J.E.
Dilworth Co., 322 U. S. 327 (1944). More recently, the Court drew the distinction between sales
taxes and other types of taxes again, stating that "[a] sale of
goods is most readily viewed as a discrete event facilitated by
the laws and amenities of the place of sale and the transaction
itself does not readily reveal the extent to which completed or
anticipated interstate activity affects the value on which the
buyer is taxed." Jefferson Lines, 514 U.S. at 186. The Court
in ~efferson Lines drew a distinction between sales taxes and
gross receipts taxes, and it characterized the latter as more
closely akin to income taxes. Id. at 190 (discussing Central
Greyhound Lines, Inc. v. Mealey, 334 U.S. 653 (1948)). As
discussed above, income taxes apportioned based on a single
factor destination sales based ratio have been found to comply
with the requirements of the Commerce Clause. So also have
gross receipts taxes. j
In Tyler Pipe Industries, Inc. v. Washington State
Department of Revenue, 483 U.S. 232 (19871, aff'g 715 P.2d 123 From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
(Wash. 19861, the Court found that a gross receipts tax imposed
on the activity of wholesaling and measured by a percentage of
gross proceeds from sales at wholesale in the State complied
with the requirement of the Commerce Clause. In that case, the
taxpayer was headquartered outside of Washington, had no
officers or employees in Washington, manufactured all products
outside of the state and shipped them to customers from out of
state. 715 P.2d at 124-125.
The Court found that the tax was fairly apportioned because
the portion of the wholesaling activity represented by the gross
receipts on the in-state sales occurred wholly within
Washington. Tyler Pipe, 483 U.S. at 251. In reaching its
conclusion, the Court relied on Moorman, in which it had equated
a constitutionally acceptable single factor apportionment
formula based on a sales destination test with a destination-
based gross receipts tax for purposes of the fair apportionment
test. 483 U.S. at 251. It also relied on Standard Pressed
Steel Co. v Washington Department of Revenue, 419 U.S. 560
(19751, which pre-dated Complete Auto Transit but which held
that a wholesale gross receipts tax on gross receipts from sales
to a local customer was "perfectly apportioned to the activities
taxed." 419 U.S. at 564.
The Superior Court distinguished both Moorman and Tyler
Pipe on the grounds that they did not discuss taxes where From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
taxation was based on a destination test. Opin. p. 23, n33.
This is simply incorrect. In Mooman the court expressly found
that the sales factor apportionment formula at issue was based
on the destination of the goods. 437 U.S. at 278 n. 13. The
court did not even discuss title passage. The Washington tax
defines sales as "any transfer of the ownership of, title to, or
possession of property for a valuable consideration." Wash.
Rev. Code §82.04.040(1). Under this definition, title clearly
could have passed outside of the state and possession
surrendered in the state, yet neither the Washington Supreme
Court nor the U.S. Supreme Court found this significant, and
neither court discussed title passage, because, as here, the
taxpayer was being taxed on its activities in the state. A
gross receipts tax on products sold to customers in the state,
regardless of where title passed, was fairly apportioned.
The Superior Court has also already held that the
Wholesalers' Gross Receipts Tax is fairly apportioned for
Commerce Clause purposes in Saudi ~efining, Inc. v. Director of
Revenue, 715 A.2d 1998 (Del. Super. 1998) . In that case the taxpayer shipped crude oil from out,of state via tankers to the
refinery located in Delaware City. Id. at 91-93. Title,
custody and risk of loss passed to the refinery or an affiliate
at the first flange of the outer intake valve of the refinery.
Id. at 92. Although title passed in Delaware, the Superior From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
Court apparently found this fact to be irrelevant. In holding
that the tax was fairly apportioned, the court stated:
Delaware seeks to tax only sales that are consummated by physical delivery within the state. [citing 30 Del. C. 12902 (c) (I)] This comports with the requirement that a state tax 'only that portion of the revenues from interstate activity which reasonably reflect the in-state component of the activity being taxed.' [citing Goldberg v. Sweet, 488 U.S. 252, 262 (1989).
Saudi Refining, 715 A.2d at 97. Thus, the Superior Court's
attention was focused on the delivery of goods in Delaware, not
where title passed, in ruling on fair apportionment.
More recently, the Supreme Court of Washington determined
that a city's wholesalers' gross receipts tax using a
destination test was fairly apportioned, notwithstanding that
title to the goods sold passed outside of the state. In Ford
Motor Company v City of Seattle, 156 P.3d 185 (Wash. 20071,
cert. denied - U.S. -, 2008 WL 423568 (Feb. 19, 2008), Ford, like Dial in this case, agreed that it was engaged in the
activity of wholesaling which was defined similarly to the
definition in the Wholesalers' Gross Receipts Tax. Id. 156 P.3d
at 190. Like Dial in this case, Ford argued that it made no
sales in the state because title to the cars sold to dealers
passed outside of Washington at the point of manufacture via
F.O.B. shipment point sales contracts and that the tax had to be
apportioned. Id. at 188. From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
The Washington Supreme Court rejected the taxpayer's
challenge. It found that wholesaling encompassed more
activities than merely making sales. Id. at 189. The court
held that contracting to pass title to goods delivered to Ford's
wholesale customers outside of the state would not enable it to
avoid the tax, because the tax, like the Wholesalers' Gross
Receipts Tax, was an activities tax. Id. at 190. It
distinguished sales tax cases such as McLeod because they were
sales taxes, not activities taxes. Id. It found the location
at which title passed irrelevant in analyzing a destination
based wholesalers gross receipts tax. Id.
The court also found that the tax withstood Commerce Clause
challenge on the ground that it was not fairly apportioned. It
found that the tax was internally consistent because it included
only gross receipts of wholesale sales of goods delivered in
Seattle, thus preventing the possibility of multiple taxation
under an identical tax. Id. at 193. It also found that the tax
was externally consistent because there was no evident danger of
multiple taxation and because the wholesaling activities were an
activity occurring only in the purchaser's jurisdiction where
the goods were physically delivered (Id. at 192) and were thus,
in accordance with Tyler Pipe, exactly apportioned to the
activity taxed. Id. at 193. From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
The Supreme Court of Hawaii sustained a gross receipts tax
on the privilege of selling tangible personal property against a
Commerce Clause challenge in Tax Appeal of Baker & Taylor, Inc.
v. Kawafuchi, 82 P.3d 804 (Haw. 2004) . In that case a Delaware corporation with headquarters in North Carolina had no office,
real property or employees in Hawaii. Id. at 806-807. It Sent
employees into the state from time to time to engage in sales
activities. Id. at 807-808. For some of the tax years in
issue, it shipped all goods F.O.B. shipping point on the
mainland; thus, title passed to the Hawaii customers outside of
the state. Id. at 807. The tax was an activities tax for the
privilege of "engaging or continuing to engage in the business
of selling any tangible personal property whatsoever" at a
percentage of "gross proceeds of sales" of tangible personal
property. Id. (quoting Haw. Rev. Stat. 8237-13 (2) . The court found first that the taxpayer was subject to the
tax, despite the passage of title to the goods sold outside of
Hawaii. The taxpayer argued that because title passed outside
of the state, it was not engaged in taxable activity.
Kawafuchi, 82 P.3d at 809 The court recognized that the tax at
issue was on the activity of selling the goods, i.e., a gross
receipts tax on the privilege of doing business, measured by
gross receipts from sales to Hawaii purchasers. Kawafuchi, 82
P.3d at 809-810. The court noted that a Hawai,i administrative From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
regulation expressly adopting a destination test was consistent
with the statute, but was not effective for the years in issue.
Id. at 809. Thus, Hawaii's interpretive posture with respect to
a destination test was identical to the Delaware statute, which
expressly adopts a destination test.
The Hawaii court sustained the tax in its Commerce Clause
analysis of fair apportionment. It held that the tax was
internally consistent, because, if every state adopted the
Hawaii tax, mainland states where title passed on goods being
shipped to a Hawaii destination could not tax gross receipts
from those sales. Id. at 816. The tax was externally
consistent because the tax reached only gross receipts from the
sale of goods to customers located in Hawaii. Id. at 816-817.
The court found that Hawaii limited its taxing power to sales
made to local customers and did not seek to tax sales made to
customers outside of the state; thus, only the local component
was taxed and only that portion of interstate revenues
reasonably reflecting the in-state component of the taxed
activity were reached. Id. at 817.
The Superior Court distinguished Kawafuchi on the grounds
that it was a general excise tax. Opin. p.23, n.34. This is a
distinction without a difference. In that case, the tax was
imposed on persons 'engaging or continuing to engage in the
business of selling any tangible personal property....N Haw. From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
Rev. Stat. 5237-13 (2) . The Wholesalersf Gross Receipts Tax is an excise tax imposed on "any person desiring to engage in
business as a wholesaler," 30 Del. C. 52902 (b), defined as a
"person engaged, as owner or agent, in the business of
selling.. .goods for cash or barter or any consideration for the purpose of resale ...." by the purchaser. Id..at 52901(11)a.l. The two statutes tax nearly identical activities and use a
percentage of gross receipts of sales based on a destination
test. Thus Kawafuchi is highly persuasive authority. The
Wholesalers' Gross Receipts Tax, like the Hawaiian tax, only
taxes the local component of Dial's national wholesaling
activity.
Before the Superior Court, Dial relied primarily on a
Superior Court case construing an earlier version of the
Wholesalers1 Gross Receipts Tax, Franklin Fibre-Lami tex
Corporation v. Director of Revenue, 505 A.2d 1296 (Del. Super.
Ct . 1985) . The Superior Court in this case recognized that
Franklin Fibre was "of little use beyond anecdotal" and did not
give it much, if any, weight, other than to fix upon the passage
of title of goods outside of Delaware as the end of Dial's
wholesaling activity. Opin. p.19. The Director's arguments
against that erroneous construction of wholesaling activity are
set forth above. From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
Dial relies on Franklin Fibre for the proposition a gross
receipts tax using a destination test for taxable gross receipts
cannot be fairly apportioned, if title to the goods sold passes
outside of the State. This simply flies in the face of the U.S.
Supreme Court's jurisprudence on gross receipts taxes (as
opposed to sales taxes) discussed above, and, properly
interpreted, Franklin Fibre, does not stand for this
proposition.
In Franklin Fibre, the taxpayer was a Delaware corporation
with its principal place of business in Delaware and was a
wholesaler for purposes of the Wholesalers' Gross Receipts Tax.
It shipped goods by common carrier, F.O.B. a Delaware shipping
point, to out of state customers. It argued that these sales
did not produce taxable gross receipts and that the tax was
unconstitutional under the Commerce Clause, on these facts.
The most important consideration in considering the
Franklin Fibre case is that it interpreted an earlier version of
30 Del . C. 32902 (c) that imposed the tax at the rate of 0.4% of "aggregate gross receipts attributable to all goods sold by the
wholesaler within this State." (prior to amendment by 64 Del.
Laws, c. 374, 82) (emphasis supplied) . The court first construed the statute with the aid of the Delaware UCC definition of
'sale" ("the passing of title from the seller to the buyer for a
price," 6 Del. C. S2-106(1)) to determine that the goods were From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
sold in Delaware and thus subject to tax under the statute as it
then existed.
The court next applied the Complete Auto test to determine
that the tax was fairly apportioned. It stated that "no other state can constitutionally impose the --same tax on the same gross receipts." Franklin Fibre, 505 A.2d at 1299 (emphasis
supplied). The reference to the "same tax" was to a title
passage sourced gross receipts tax. Without using the express
term, the court simply applied the internal consistency test.
In testing for discrimination against interstate commerce,
the court again applied the internal consistency test, citing
Armco v. Hardesty, 467 U.S. 638 (1984), and found that no other
state could impose the "same tax" on gross receipts from sales
made F.O.B. Wilmington. Franklin Fibre, 505 A.2d at 1300. As
additional authority the Superior Court cited Norton v.
Department of Revenue, 340 U.S. 534 (1951), a case relying on
the principle that interstate commerce was wholly immune from
taxation, a view long since superseded by Complete Auto Transit,
and McLeod v. J.E. Dilworth Co., 322 U.S. 327 (19441, a sales
tax case, distinguishable on that basis.
The Franklin Fibre court was aware of the amendment to 30
Del. C. S2902 and limited its decision to the pre-amendment
period. 505 A.2d at 1298, n. 3. Thus, the case may be helpful
in analyzing a gross receipts tax based on title passage, but From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
not in analyzing a destination based statute like the present
Wholesalers' Gross Receipts Tax. It cannot be relied on for the
proposition that only gross receipts from sales the title to
which passed in Delaware are taxable here.
In light of the underlying policies of the Commerce Clause
that states may tax only their fair share of interstate
commerce, a title passage test is an unworkable rule to divide a
gross receipts tax base. Under the UCC, title to goods may pass
in any manner and on any conditions explicitly agreed by the
parties. 6 Del C. 12-401 (1). The constitutional vulnerability of a test requiring title to pass in a state before the state
could impose a gross receipts tax is easily illustrated. Assume
that Dial and its Delaware customer agreed that Dial would ship
goods at no additional cost to the buyer's Delaware warehouse
via Dial's carrier from Dial' s Georgia warehouse, but that title
and risk of loss would pass immediately after the truck crossed
the Maryland border. Dial would apparently argue that neither
Georgia nor Delaware would have the right to impose a gross
receipts tax on the proceeds of this sale and that only
Maryland, the state with the least involvement (as among it,
Georgia and Delaware) could tax all of the gross receipts from
this wholesaling activity.
Maryland's tax could hardly be considered externally
consistent, i-e., that the method used to divide the tax base From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
actually reflects a reasonable sense of how income is generated.
Maryland would have provided neither the warehouse location for
Dial nor the market for the goods sold by Dial. It would have
provided roads and protection to the carrier, but so would have
Georgia, South Carolina, North Carolina and Delaware.
Clearly, Delaware's method of dividing the tax base with
reference to gross receipts from sales to local customers does
reflect a reasonable sense of how the gross receipts are
generated. That is all that the Commerce Clause requires and
the tax is, therefore, externally consistent. This Court should
not sustain the rule chosen by the Superior Court that allows
parties, by mere contractual terms, to prevent Delaware from
taxing a fairly apportioned share of the gross receipts from
Dial's wholesaling activity. From the state tax library of Reed Smith LLP www.reedsmith.com/DEdial for other related documents, please email [email protected]
CONCLUSION
For all of the reasons stated above, this Court should
reverse the grant by the Superior Court of Dial's motion for
summary judgment and grant summary judgment to the Director.
/s/ John S. McDaniel
John S. McDaniel Deputy Attorney General Del. Bar ID 2477 Department of Justice Carve1 State Office Building, C600 820 N. French Street Wilmington, DE 19801 (302) 577-8842 April 11, 2008