                                                                               FILED
                                                                          IOUOT OF APPEALS


                                                                       2013 DEC 31      All 9: 15

                                                                       STATE OF WAS1-1111CTOM

                                                                         Y— ___.
                                                                                   PIJTY




    IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

                                         DIVISION II

SPACE AGE FUELS, INC.,                                              No. 44195 -1 - I1


                                Appellant,


          V.



STATE OF WASHINGTON,                                            PUBLISHED OPINION




          WORSWICK, C. J. —   Space Age Fuels, Inc.,   an Oregon corporation, appeals summary

judgment dismissing its claim for a refund of business and occupation tax payments. Space Age

argues   that the dormant   commerce         prohibits Washington from taxing its activities

because they lack a substantial nexus with Washington. We disagree and affirm.




s The " dormant" commerce clause is implied by article I, section 8, clause 3 of the United States
Constitution. Quill Corp. v. North Dakota, 504 U.S. 298, 309, 112 S. Ct. 1904, 119 L. Ed. 2d 91
 1992).
No. 44195 -1 - II


                                                          FACTS


          Space Age Fuels, Inc. is a retail and wholesale seller of fuel. Space Age is incorporated

in Oregon and maintains its principal place of business in Clackamas, Oregon. Although all of

its retail fuel stations are in Oregon, approximately 40 of its wholesale customers are in

Washington.


          Upon a wholesale customer' s request, Space Age quotes fuel prices via telephone, fax, or

email. Once it receives an order, Space Age delivers fuel to wholesale customers using vehicles
                           2
it   owns and operates.



          Because      delivery   is "   another profit center,"   Space Age marks up its fuel prices to account

for delivery costs. Clerk' s Papers ( CP) at 297. Thus, Space Age charges more for deliveries

made at longer distances. Before transferring fuel from its delivery vehicle into a customer' s

storage   tank,   a   Space Age    employee will " stick     the tank,"   i.e., measure its contents to ensure the


tank can hold the fuel. When Space Age uses specialized vehicles to pump fuel into

aboveground storage tanks for some customers, it charges more for this extra pumping service.

          But Space Age' s activities in Washington are limited. Space Age makes " no effort to


secure new customers for its fuel in Washington" because it believes its wholesale customers


base their purchases solely on price. CP at 54. Thus, no Space Age employees have visited

Washington to solicit sales or assess a customer' s needs. Further, Space Age does not own or

lease any real property in Washington, and it has no Washington - ased employees or assets.
                                                                b

Instead, Washington customers contact Space Age.




2
     Rarely, Space Age delivers fuel by common carrier.



                                                              2
No. 44195 -1 - II


          The Washington State Department of Revenue audited Space Age' s books and records

for the period between January 1, 2004, and June 30, 2007. During that time, Space Age grossed
                                                                                                                 3
over $ 48 million      from 1, 675     recorded sales      to   wholesale customers        in Washington.            Between



July 1, 2005, and the end of the audit period, Space Age' s vehicles drove 141, 491 miles on
Washington roadways.


           The Department determined that Space Age owed $ 235, 834 in unpaid business and
                                                                                                                               4
occupation (      B & O) taxes for its wholesaling            activities   in Washington     during   the   audit period.



                                                                       5
The Department        also assessed      interest     and penalties.




           Space Age paid the tax assessment and then filed a claim for a refund in superior court,

arguing that (1) there was no substantial nexus between Space Age and the State of Washington;
and ( 2) without such a nexus,           imposition      of   the B & O    tax violated the dormant commerce clause.


On cross motions for summary judgment, the trial court granted the Department' s motion, denied

Space Age' s motion, and dismissed its refund claim.

           Space Age sought direct review in our Supreme Court. But our Supreme Court

transferred the case to us.           Order, Space Age Fuels, Inc. v. State, No. 86972 -3 ( Wash. Oct. 30,

2012).



3 The number of actual deliveries " would likely be much higher" than the number of recorded
 sales because Space Age' s books used. a single sales entry to record all deliveries to a single
 customer in a given month. CP at 81.

 4
     The B & O tax is imposed         on "   the   act or privilege of   engaging in business activities." Former
 RCW 82. 04. 220 ( 1961).            After the     audit period,   the legislature amended RCW 82. 04. 220   to, inter
 alia,   incorporate the   constitutional requirement of a " substantial nexus with                     this state."    LAWS of

 2010, 1   st   Spec. Sess.,   ch.   23, § 102;     see also    LAWS   of   2011, 1 st   Spec. Sess.,    ch.   20, § 101.


 5                                                                                                 taxes,      retail   B &O
     The Department further          assessed nominal amounts of unpaid retail sales

 taxes,   and   hazardous      substance     taxes.    Space Age has        not sought refunds of       these   amounts.
No. 44195 -1 - II



                                                            ANALYSIS


          Space Age argues that the trial court erroneously granted the Department' s motion for

summary judgment because the dormant commerce clause prohibits the Department from taxing

Space Age. We disagree.


          We review an order granting summary judgment de novo and engage in the same inquiry

as the trial court. TracFone Wireless, Inc. v. Dep' t ofRevenue, 170 Wn.2d 273, 280 -81, 242

P. 3d 810 ( 2010).       Summary judgment is appropriate when there is no genuine issue of material

fact   and    the moving party is        entitled      to judgment      as a matter of   law. CR 56( c). We consider the


evidence and draw all reasonable inferences in the light most favorable to the nonmoving party.

Schaafv. Highfield, 127 Wn.2d 17, 21, 896 P. 2d 665 ( 1995).

          Two clauses of the United States Constitution limit a state' s power to tax interstate

commerce: (       1) the Fourteenth Amendment due process clause and ( 2) the " dormant" commerce

clause   implied    by   article   I,   section   8,   clause   3.    Quill Corp. v. North Dakota, 504 U.S. 298, 301,

305, 112 S. Ct. 1904, 119 L. Ed. 2d 91 ( 1992). Under the due process clause, an out - - tate
                                                                                     of s


taxpayer must have sufficient minimum contacts with the taxing state such that taxation " does -

not offend      traditional   notions of     fair play      and substantial      justice." Int' l Shoe Co. v. Washington,


326 U. S. 310, 316, 66 S. Ct. 154, 90 L. Ed. 95 ( 1945) ( internal                       quotation marks omitted).         Space


Age does not challenge its tax liability on due process grounds.

          Next, the dormant commerce clause prohibits a state from discriminating against or

unduly burdening interstate commerce. Quill, 504 U. S. at 312. Yet a state may tax interstate

commerce        if the tax ( 1)    applies   to   an    activity     having   a substantial nexus with   the   taxing   state, (   2)


is   fairly   apportioned, (   3) does not discriminate against interstate commerce, and ( 4) is fairly




                                                                       M
No. 44195 -1 - I1



related to the services provided by the state. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274,

279, 97 S. Ct. 1076, 51 L. Ed. 2d 326 ( 1977).                 Space Age contests only the first element: it
                                                                       6
denies   having       a substantial nexus with         Washington.


             Whether an out -of state company has a substantial nexus with Washington is a question
                                -

of law reviewed de novo. See Lamtec Corp. v. Dep' t ofRevenue, 170 Wn.2d 838, 842, 246 P. 3d

788,   cent.   denied, 132 S. Ct. 95 ( 2011).           Taxes are presumed valid, and the company bears the

burden of showing that a substantial nexus does not exist. Lamtec, 170 Wn.2d at 843.

             A substantial nexus exists when a company' s activities in Washington are both

substantial and significantly associated with its ability to establish and maintain a market in

Washington for its         sales.        Tyler Pipe Indus., Inc. v. Wash. Dep' t ofRevenue, 483 U.S. 232, 250,

107 S. Ct. 2810, 97 L. Ed. 2d 199 ( 1987); Lamtec, 170 Wn.2d                        at   851.   A company' s physical

presence in Washington can establish a substantial nexus. Lamtec, 170 Wn.2d at 845; see Nat' l

Geographic Soc' y v. Cal. Bd. ofEqualization, 430 U. S. 551, 562, 97 S. Ct. 1386, 51 L. Ed. 2d

631 ( 1977).      Further, periodic visits can create a physical presence in Washington. Lamtec, 170

Wn.2d at 846. Thus, a company may have a physical presence in Washington even though it

lacks   a "   brick   and mortar address within          the state."       Lamtec, 170 Wn.2d at 851; see Standard


6
    Citing    Quill, 504 U. S.      at   313 & n.7, Space Age asserts that the dormant commerce clause' s
requirement of a substantial nexus is more stringent than the due process clause' s minimum
contacts requirement. Space Age then calls our attention to Miller Brothers Co. v. Maryland,
347 U. S. 340, 74 S. Ct. 535, 98 L. Ed. 744 ( 1954), a case in which taxation of an out - - tate
                                                                                        of s

company violated due process. In Miller Brothers, a Delaware company' s occasional delivery of
products to Maryland customers via its own vehicles did not establish minimum contacts with
Maryland. 347 U. S. at 345. But given more recent developments in the law of minimum
contacts, "     the   continued     authority    of   Miller Brothers is in     considerable    doubt." Brown' s
Furniture, Inc. v. Wagner, 171111. 2d 410, 426, 665 N.E. 2d 795, cent. denied, 519 U. S. 866
    1996);    see Quill, 504 U. S. at 307 -08 ( quoting Burger King Corp. v. Rudaewicz, 471 U.S. 462,
476, 105 S. Ct. 2174, 85 L. Ed. 2d 528 ( 1985)).
No. 44195 -1 - II



Pressed Steel Co. v. Wash. Dep' t ofRevenue, 419 U.S. 560, 562, 95 S. Ct. 706, 42 L. Ed. 2d 719

 1975).


          Space Age' s regular deliveries establish its physical presence in Washington. See

Lamtec, 170 Wn.2d at 845 -46. These deliveries are substantial because Space Age' s recorded

sales to Washington customers occurred, on average, more than once per day during the audit

period. In addition, Space Age' s vehicles drove extensively on Washington roads while

delivering over $48 million of fuel to Washington customers.

          Further, Space Age conducts substantial activities in Washington because, as a wholesale

fuel distributor, Space Age sells both the commodity of fuel and the service of delivery to

customers in Washington. The commodity sales occur in Washington when Space Age

employees stick the tank and transfer fuel into its Washington customers' storage tanks. See

RCW 82. 04. 040( 1).       Space Age charges more to make deliveries at longer distances, and it also

charges more to pump fuel into aboveground tanks when necessary.

          Both Space Age' s physical presence in Washington and its delivery activities are

significantly associated with its ability to establish and maintain a market in Washington for its
sales.    Tyler Pipe, 483 U. S.    at   250. Because   a substantial nexus exists,   the Department' s B & O



tax   assessment    did   not violate   the dormant   commerce clause.   7 Complete Auto, 430 U.S. at 279.

          Arguing to the contrary, Space Age contends that delivery alone cannot establish a

substantial nexus. In support of this contention, Space Age relies on ( 1) the example given in an


7 We reject Space Age' s assertion that this analysis " fails to acknowledge the difference between
Due Process Clause analysis and Commerce Clause analysis." Reply Br. of Appellant at 17. We
do not base our decision on whether Space Age has purposefully directed its activities at
Washington residents so as to establish minimum contacts with this state. See Quill, 504 U.S. at
 308.




                                                           on
No. 44195 -1 - II



interpretive     rule published   by the   Department, ( 2) Space Age' s own assertion that nexus -creating


activities are activities designed to generate sales, and ( 3) the reasoning supporting the bright-

line test applied in Quill, 504 U.S. 298.


A.         The Department' s Interpretive Rule


           Arguing that delivery alone cannot establish a substantial nexus, Space Age asserts that

the Department took the same view when promulgating an interpretive rule, WAC 458 -20-

193( 11). 8 But this assertion lacks relevance to the issue before us for three reasons.

           First, an interpretive rule such as WAC 458 -20- 193( 11) is " not binding on the courts at

     9 Ass' n of Wash: Bus. v. Dep' t ofRevenue, 155 Wn.2d 430, 447, 120 P. 3d 46 ( 2005).
all. "




Second, we give no deference to an agency' s interpretative rule unless it reasonably interprets an

ambiguous statute that the legislature has charged the agency with administering and enforcing.

Edelman v. State ex rel. Pub. Disclosure Comm' n, 152 Wn.2d 584, 590, 99 P. 3d 386 ( 2004).

Even if WAC 458 -20- 193( 11) interpreted the dormant           commerce clause —   and it does not do


so —     we would not defer to its interpretation because the Department does not administer or

enforce the commerce clause of the United States Constitution.



8 WAC 458- 20- 193( 11)( a) provides:

           Company A is located in California. It sells machine parts at retail and wholesale.
            Company B is located in Washington and it purchases machine parts for its own
           use from Company A. Company A uses its own vehicles to deliver the machine
           parts to its customers in Washington for receipt in this state. The sale is subject to
           the retail sales and B & O tax if the seller has nexus, or use tax if nexus is not
           present.




 9 WAC 458 -20- 193( 11) is an interpretive rule because ( 1) its violation does not subject a person
to a penalty and ( 2) it merely " sets forth the agency' s interpretation of statutory provisions it
 administers."      RCW 34. 05. 328( 5)( c)( ii).




                                                          7
No. 44195 -1 - II



          Third, WAC 458 -20- 193( 11) illustrates only what taxes apply and who must pay them in

interstate transactions. In the             example of   WAC 458- 20- 193( 11)(        a),   an out - - tate seller uses its
                                                                                                    of s


own vehicles to deliver products to an in -
                                          state buyer. The seller pays Washington sales and
                                                                                                                               10
B & O taxes " if the        seller   has   nexus "; otherwise,   the in -state     buyer   pays   Washington    use   taxes.



WAC 458- 20- 193( 11)(           a).   Thus WAC 458- 20- 193( 11)(          a) shows merely that a substantial nexus

is necessary to tax an out -of state seller; it does not attempt to show whether a substantial nexus
                               -

exists given a particular set of facts. We do not consider this provision further.

B.        Activity Designed To Generate Sales

           Space Age next contends that a substantial nexus can exist only by virtue of an activity

that   is " designed to      generate sales."      Br. of Appellant at 22. Space Age then attempts to


distinguish its activities from the nexus -creating activities in Tyler Pipe, Standard Pressed Steel,

and Lamtec. We disagree because generating sales is not the touchstone of all nexus -creating

activity. As stated above, a substantial nexus exists when a company' s activities in Washington

 are significantly associated with [its] ability to establish and maintain a market in this state for
the    sales."     Tyler Pipe, 483 U. S. at 250 ( internal quotation marks omitted).


           In Lamtec, an out -of - tate company sent agents to Washington about two or three times
                                 s

per year      to   meet with major customers.          170 Wn.2d       at   841.   The agents shared information about


the company'         s   insulation    and vapor   barrier   products,   but they did      not solicit sales   directly.   170


 Wn.2d     at    840 -41.   Nonetheless, our Supreme Court held that the agents' visits created a


 substantial nexus because the visits were significantly associated with the company' s ability to


 io
      Sales   and   B &O
                    taxes are paid to the Department by the seller. See RCW 82. 04.220; RCW
 82. 08. 050. In contrast, use taxes are paid by the buyer. See RCW 82. 12. 020.



                                                                  N.
No. 44195 -1 - II


establish and maintain a market            for its   products   in Washington. 170 Wn. 2d         at   851. Whether the


agents' visits generated sales was not determinative.

          Likewise in Standard Pressed Steel, a Pennsylvania company sold nuts and bolts to

Washington       customers,    principally       Boeing.   419 U. S.   at   561.   The company had a single

Washington       employee, and     the   employee operated out of            his home. 419 U.S.        at   561. The


employee, along with a group of engineers who periodically traveled to Washington, consulted

with Boeing about its needs and addressed any difficulties with the company' s nuts and bolts.
419 U. S.   at   561.   However, the employee did not take Boeing' s orders, accept its payments, or

deliver   nuts and      bolts. 419 U. S.    at   561.   Yet the Court held that      a   B & O tax assessment did not


violate the dormant commerce clause because the company' s Washington employee " made

possible the realization and continuance of valuable contractual relations" between the company

and its Washington customers. 419 U.S. at 562.

          Lamtec and Standard Pressed Steel take a broader view of establishing and maintaining a

market than Space Age' s narrow emphasis on generating sales would allow. Attempting to

distinguish these cases as well as Tyler Pipe, Space Age appears to argue that ( 1) business -

relationships are essential to generating sales and ( 2) Space Age has no business relationship

with any of its 40 Washington customers, each of whom buys fuel on the exclusive basis of its




                                                                 1
No. 44195 -1 - II



price.   11 But Space Age fails to account for Lamtec' s statement that a company' s physical

presence can establish a substantial nexus.                   170 Wn.2d at 845. Moreover, Space Age ignores the


extent to which its deliveries make possible " the realization and continuance" of sales to its

customers.     Standard Pressed Steel, 419 U. S.                at   562. Space Age' s argument is unpersuasive.


C.         The Quill Bright - ine Test
                            L


           Lastly, Space Age argues that its deliveries did not create a nexus under the reasoning of

Quill, 504 U. S. 298. We disagree.


           In Quill, the United States Supreme Court reaffirmed its prior holding that " a vendor

whose only contacts with the taxing State are by mail or common carrier lacks the ` substantial
nexus'    required    by the     Commerce Clause."             504 U. S. at 311, 317 ( citing Nat' l Bellas Hess, Inc.

                                                                                  505 ( 1967),
                             of Ill., 386 U. S. 753, 87 S. Ct. 1389, 18 L. Ed. 2d
                                                                                                          overruled on
v.    Dep' t of Revenue

other grounds       by    Quill, 504 U. S.      at   308).   Thus Quill preserved the " safe harbor" protecting the

mail -order industry from state sales taxes since Bellas Hess. 504 U. S. at 315 -16.

           Space Age asserts that it would fall within this safe harbor if it had made its deliveries by

common carrier.           It then   argues, "   Given the Commerce Clause' s structural concerns about the


effects of state regulation on the national economy, there is no reason for the constitutionality of

                                                        the fuel is delivered."   Br.   of Appellant at   25. But this
the tax to turn     on    the   method   by   which




 11
  Unlike the companies selling specialized products in Tyler Pipe, Standard Pressed Steel, and
Lamtec, Space Age sells a commodity: a commercial good (namely fuel) for which the quality
does not vary from one source to another. Thus it is plausible that business relationships,
advertising, and branding do not generate Space Age' s sales. But Space Age' s president stated
that    delivery   is "   another profit center,"       i.e., a service for which Space Age charges its customers.
 CP at 297. That statement belies Space Age' s factual assertion that its customers make
purchases based solely on price. In other words, Space Age' s wholesale customers buy its fuel
partly because Space Age delivers it to them.



                                                                     10
No. 44195 -1 - II



argument contradicts Quill. Quill fully considered the commerce clause' s structural concerns
                                                 12
and maintained a                 line
                          bright -       rule.        504 U.S.       at   312, 315.       That rule is unavailing to Space Age
                                                                                                     13
because it delivered fuel in its           own vehicles, not              by   common carrier.




          Similarly unavailing is the Board of Tax Appeals' s recent decision finding no substantial

nexus in Sage V Foods, LLC v. Dep' t ofRevenue, No. 11 -704, 2012 WL 4794242 ( Wash. Bd. of

Tax Appeals          Aug.   31, 2012).     In Sage, an out -of - tate company engaged a common carrier to
                                                               s

deliver its food product to Washington customers, using rail cars leased by the out -of state
                                                                                        -

company. Sage, 2012 WL 4794242                        at *   7 -8.   But unlike the company in Sage, Space Age did not

deliver its fuel by common carrier.

          Each of Space Age' s arguments fails. Because Space Age has a substantial nexus with

Washington, the Department'                s   B & O tax assessment did not violate the dormant commerce


clause.



          Affirmed.




                                                                                                   Worswick, C. J.

We c,1ncur:




                J.


1"2
      Quill   recognized, "    Like other bright -line tests, the Bellas Hess rule appears artificial at its
edges ....           This artificiality, however, is           more       than   offset   by the   benefits   of a clear rule."   504

U.S. at 315.


 13 Because Space Age does not come within the safe harbor of Quill and Bellas Hess, we do not
 address the Department' s assertion that the safe harbor protects a company only from sales and
use    taxes,   and not     from   all   taxes   including       the B & O       tax. See Lamtec, 170 Wn.2d at 848 -49.




                                                                          11
