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Analytical Methods Inc. v. Washington Department of Revenue

November 1, 1996

ANALYTICAL METHODS, INC., A WASHINGTON CORPORATION; BIOMARINE TECHNOLOGIES, INC., A WASHINGTON CORPORATION; DETECTNOLOGY, INC., A WASHINGTON CORPORATION; ECOVA CORPORATION, A DELAWARE CORPORATION; EDEN BIOSCIENCE CORP., A WASHINGTON CORPORATION; JWA DIVISION OF EMADEL ENTERPRISES, INC., A WASHINGTON CORPORATION; INTERNATIONAL LUBRICANTS, INC., A WASHINGTON CORPORATION; RESEARCH INTERNATIONAL, INC., A WASHINGTON CORPORATION; SILICON DESIGNS, INC., A WASHINGTON CORPORATION; VIDEODISCOVERY, INC., A WASHINGTON CORPORATION; AND XEMET, INC., A WASHINGTON CORPORATION, APPELLANTS,
v.
WASHINGTON DEPARTMENT OF REVENUE, RESPONDENT.



Appeal from Superior Court of Thurston County. Docket No: 94-2-01334-1. Date filed: 03/13/95. Judge signing: Hon. Christine A. Pomeroy.

Released for Publication December 6, 1996.

Authored by David H. Armstrong. Concurring: Karen G. Seinfeld, John E. Turner

The opinion of the court was delivered by: Armstrong

ARMSTRONG, J. -- A federal statute requires some federal agencies to expend a small percentage of their research funds on small businesses that agree to do specified research. The Department of Revenue includes the amounts Washington businesses receive under the program as gross income in calculating Business and Occupation (B & O) taxes. Eleven small businesses that participate in the program challenge the tax on these funds, contending that the amounts received are contributions, donations, or endowments, all of which are exempt by statute from the B & O tax. The businesses also argue that federal legislation preempts the State's tax on the funds. After striking one of the declarations submitted by the businesses, the superior court granted summary judgment in favor of the Department. We hold that the amounts are not contributions, donations or endowments, that the Federal government has not preempted the field, and that the trial court did not err in striking the declaration. We affirm.

FACTS

The Small Business Innovative Research (SBIR) Program was created by the Small Business Innovation Development Act of 1982, and reenacted in 1992. Pub. L. No. 97-219, 96 Stat. 217 (1982), reenacted by Pub. L. No. 102-564, 106 Stat. 4249 (1992) (codified at 15 U.S.C. sec. 638). Under the SBIR Program, participating federal agencies must expend a percentage of their annual R&D budgets on SBIR contracts with qualified small businesses.

15 U.S.C. sec. 638(f). After the federal agency selects a research topic, small businesses can bid on the project. If selected, the small business enters into a contract with the federal agency and then starts the research. The small business is required to make periodic progress reports to the federal agency. The contracts are awarded in several phases:

first, for a feasibility study, then for product development, and finally for commercial marketing. 15 U.S.C. sec. 638(e)(4)(A)-(C).

SBIR contracts are detailed and incorporate by reference clauses contained in the Federal Acquisition Regulations (FAR) System. Title 48 C.F.R. (1995). This system provides numerous standard clauses for government contracts. For example, NASA's contract with Analytical Methods, one of the participating Washington businesses, contains over 50 FAR clauses, including provisions for state taxes and intellectual property. E.g., 48 C.F.R. sec. 52.229-3 (1991) ("Federal State and Local Taxes"); 48 C.F.R. sec. 52.227-11 (1988) (Patent Rights - Retention by the Cntractor (short form)).

The Washington State Department of Revenue, pursuant to chapter 82.04 RCW, assessed B & O taxes on the SBIR awards. One of the businesses, Videodiscovery, Inc., appealed its assessment to the Department. The Department concluded the federal awards were not deductible donations or contributions under RCW 82.04.4282. The companies appealed to the Thurston County Superior Court, seeking refunds of B & O taxes paid on SBIR funds from January 1, 1990, to May 12, 1994.

As part of their case, the businesses submitted a declaration from Kenneth Langran. Langran was a NASA research scientist and SBIR Program manager at the National Space Technology Laboratories. Langran's declaration contained three primary Conclusions. First, he stated Washington is the only state attempting to impose a gross revenue tax on SBIR funds. Second, he claimed the SBIR Program is like an endowment because it provides seed money for innovative concepts. To support this Conclusion, Mr. Langran analyzed a new statutory provision and, presuming congressional intent to differentiate SBIR expenditures from standard research and development contracts. Third, he asserted that SBIR funds and private investments are of equal value to a recipient because the federal government never exercises its rights to a recipient's data and intellectual property.

The Department moved to strike Langran's declaration because it was (1) argumentative in form, (2) irrelevant, and (3) an attempt to play on the court's sympathies. In addition, the Department argued that Mr. Langran was never qualified as an expert or designated as such in discovery requests. The trial court struck the declaration, then granted summary judgment for the Department.

ANALYSIS

On review of a summary judgment, we perform the same inquiry as the trial court. Sherman v. State, 128 Wash. 2d ...


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