Tyler Pipe Industries, Inc. v. Washington State Department of Revenue
1987 U.S. LEXIS 2872, 97 L. Ed. 2d 199, 483 U.S. 232 (1987)
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Rule of Law:
A state tax scheme that exempts local businesses from one tax (e.g., manufacturing) on the condition that they are subject to another tax (e.g., wholesaling on in-state sales) facially discriminates against interstate commerce in violation of the Commerce Clause if it does not provide a similar exemption or credit for interstate transactions.
Facts:
- For over 50 years, the state of Washington has imposed a business and occupation (B&O) tax on activities such as manufacturing and wholesale selling within the state.
- Initially, the law exempted local manufacturers from the wholesale tax, but the Washington Supreme Court invalidated this scheme in 1948 as discriminatory.
- In 1950, Washington's legislature revised the law, replacing the old exemption with a new one: it exempted businesses from the manufacturing tax on products for which they paid the state's wholesale tax.
- This new scheme meant a company that manufactured and sold goods entirely within Washington paid only the wholesale tax.
- However, a company that manufactured goods in Washington and sold them out-of-state paid the manufacturing tax.
- Conversely, a company like Tyler Pipe Industries, Inc., which manufactured products outside of Washington and sold them wholesale within the state, paid the wholesale tax.
- Tyler Pipe had no office or property in Washington but utilized an independent sales representative in the state to solicit orders and maintain customer relationships.
Procedural Posture:
- Seventy-one commercial enterprises, in one consolidated action, and Tyler Pipe Industries, Inc., in a separate action, sued the Washington State Department of Revenue in state trial court (Thurston County Superior Court) seeking tax refunds.
- The trial court granted summary judgment in favor of the Department of Revenue in the first action and upheld the tax against Tyler Pipe in the second.
- The taxpayers in both cases appealed to the Washington Supreme Court, the state's highest appellate court.
- The Washington Supreme Court affirmed the trial courts' decisions, finding the B&O tax constitutional.
- The taxpayers (appellants) in the consolidated cases sought and were granted a writ of certiorari from the U.S. Supreme Court.
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Issue:
Does Washington's business and occupation tax scheme, which exempts in-state manufacturers from the manufacturing tax on goods sold locally but not on goods sold out-of-state, discriminate against interstate commerce in violation of the Commerce Clause?
Opinions:
Majority - Justice Stevens
Yes. Washington's B&O tax scheme facially discriminates against interstate commerce. The statutory exemption for manufacturers that sell their products within the State has the same discriminatory consequences as the tax we invalidated in Armco. It taxes a transaction more heavily when it crosses state lines than when it occurs entirely within the state. The Court overrules its prior decision in General Motors Corp. v. Washington, holding that a taxpayer no longer needs to prove that specific interstate transactions were subjected to actual multiple taxation; the risk of such taxation, as revealed by the 'internal consistency' test, is sufficient to show discrimination. The tax cannot be justified as a 'compensating tax' because manufacturing and wholesaling are not 'substantially equivalent events.' However, the Court rejected Tyler Pipe's separate claims, finding that its in-state sales representative's activities created a sufficient nexus for the state to tax its wholesale sales, and that the unapportioned wholesale tax was valid because wholesaling is a discrete local activity.
Concurring - Justice O’Connor
The opinion of the Court is correct. I write separately to emphasize that the 'internal consistency' test should be applied only to taxes that are facially discriminatory. It should not be extended as a universal requirement for all state taxes, regardless of their nature.
Concurring-in-part-and-dissenting-in-part - Justice Scalia
No. While I agree with the majority that Washington has nexus to tax Tyler Pipe (Part IV), I dissent from the holding that the B&O tax is discriminatory. The 'internal consistency' test applied by the majority has no basis in the Constitution and is a recent judicial invention that overturns decades of precedent. This test was historically limited to apportionment cases, not taxes on discrete events like manufacturing or selling. Washington’s tax is not facially discriminatory; it simply relieves local businesses from double taxation. The majority's holding is based on a hypothetical assumption about what other states might do, which is not a sound basis for invalidating a state's law. This decision further expands the Court's 'negative' Commerce Clause jurisprudence, an area where the Court has created a 'quagmire' of confusing and textually unsupported rules that should be left to Congress to regulate.
Analysis:
This decision solidifies the 'internal consistency' test as a critical tool for dormant Commerce Clause analysis of state taxes. By explicitly overruling General Motors, the Court lowers the bar for taxpayers challenging a tax, shifting the focus from proving actual multiple taxation to demonstrating that a tax's structure inherently creates a risk of it. This ruling makes it significantly harder for states to craft tax schemes with exemptions that favor purely local economic activity, even if they appear neutral. The decision signals a preference for a more formalistic analysis of a tax statute's structure over a fact-intensive inquiry into its real-world economic effects on a particular taxpayer.
