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Morpho Detection, Inc. v. State

Court of Appeals of Washington, Division 1

April 29, 2019

MORPHO DETECTION, INC., Appellant,
v.
STATE OF WASHINGTON, DEPARTMENT OF REVENUE, Respondent.

          ANDRUS, J.

         Morpho Detection, Inc. (MDI) seeks reversal of summary judgment in which the trial court held, based on this court's ruling in Morpho Detection, Inc. v. Department of Revenue, 194 Wn.App. 17, 371 P.3d 101, review denied, 186 Wn.2d 1010, 380 P.3d 502 (2016), that MDI is liable for use tax under RCW 82.04.190(6). Because this court's published decision clearly erred in reaching a factual issue not briefed to the court, we conclude our prior decision should be modified to narrow its holding to the issue properly presented to it. We thus reverse summary judgment.

         FACTS

         The Washington State Department of Revenue (DOR) assessed use tax on MDI's sale of explosive detection machines (EDMs) to the United States -Transportation Security Administration (TSA) that were deployed in the Seattle-Tacoma (Sea-Tac) and Spokane airports. MDI paid the assessment and sought a $5.3 million refund under RCW 82.32.180, claiming it was not a "consumer" subject to the use tax under RCW 82.12.020(1)(a).[1] The term "consumer" is defined in relevant part in RCW 82.04.190(6):

Any person engaged in the business of constructing, repairing, decorating, or improving new or existing buildings or other structures under, upon, or above real property of or for the United States, any instrumentality thereof, . . . including the installing or attaching of any article of tangible personal property therein or thereto, whether or not such personal property becomes a part of the realty by virtue of installation ....

         MDI alleged two separate legal bases for its refund request. First, it alleged the airports in which its EDMs were used were not the "real property of or for the United States." Second, MDI claimed it did not construct, repair, decorate, or improve any new or existing buildings or structures, and did not incorporate, install, or attach the EDMs to any building or structure in Washington.

         MDI's 2014 Summary Judgment Motion

         In June 2014, MDI filed a motion for summary judgment. MDI first argued it was not engaged in the business of "constructing, repairing, decorating, or improving new or existing buildings or other structures." It anticipated DOR would argue that MDI installed the EDMs at the airports and that this installation work made MDI a company in the business of "constructing, repairing, decorating or improving any building."

         MDI indicated in footnotes to its summary judgment motion that the parties disputed the meaning of the word "installing" as used in RCW 82.04.190(6) and "whether MDI's activities amount to 'installing.'" But it recognized that "[f]or purposes of this motion, all disputed facts must be assumed in [DOR's] favor." It informed the trial court that, for purposes of its motion, the court must assume MDI installed the EDMs at the airports even though MDI and DOR disputed this fact. But it argued "the mere installation of EDMs alone does not make MDI a person in the business of constructing, repairing, decorating or improving any building," even if the EDMs "improved" the airport buildings where they were deployed.

         In support of its motion, MDI presented evidence that its EDMs were manufactured and sold to TSA in California and shipped to TSA in Texas. TSA then deployed some of the equipment to airports in states other than Washington before TSA brought 41 EDMs to the Sea-Tac airport and another 5 to the Spokane airport. Because each EDM is large and needs to be partially disassembled before shipment, MDI agreed to reassemble each machine at any airport in the United States at which TSA deployed them and to assist with testing after reassembly to certify the machines were operational. MDI also provided evidence that when TSA chose to purchase rigging services from MDI, MDI subcontracted that work to unaffiliated third parties. These third parties, and not MDI, anchored the machines to the buildings in which they were installed. MDI's Contracts Administrator testified that in the sales contracts for the EDMs deployed in Washington, "the only activities MDI performed in Washington involved assembly, disassembly, moving, uncrating, crating, and testing of machines." Additionally,

6. MDI did not install any EDMs in Washington as the term is typically understood.
7. MDI is not in the business of constructing, repairing, decorating, or improving new or existing buildings or other structures as those terms are normally understood. Moreover, MDI did not construct, decorate, repair or improve any building in Washington during the audit period.
8. MDI is in the business of manufacturing, marketing and supporting the EDM[s] it sells. All of MDI's work in Washington is consistent with this business.

         As MDI anticipated, DOR argued MDI was in the business of improving buildings. It presented evidence MDI earned millions of dollars for work at airports after selling the EDMs. It submitted copies of MDI prospectus filings, work proposals, delivery orders, installation checklists, and invoices, all of which it contended evidenced MDI's provision of a significant amount of installation services. It argued "even if the court were to agree with [MDI] that a company must engage in some threshold amount of improvement activity to trigger the use tax, a question of fact would exist as to whether [MDI] meets that threshold."

         MDI's second argument on summary judgment was that RCW 82.04.190(6) only applies if the construction work occurs on property belonging to the United States government. It presented evidence from the General Counsel to the Spokane Airport and a Project Manager for the Port of Seattle who both testified that the United States government had no property interest in the airports. But DOR argued the tax statute applied to any work on real property when that work is done for the United States, regardless of whether the real property on which the work is performed belongs to the United States government. Because the federal government paid for MDI's work, DOR argued, the work was "for" the United States within the meaning of RCW 82.04.190(6). DOR asked the trial court to deny MDI's motion and "grant partial summary judgment to [DOR], as the nonmoving party, on the legal issues that [MDI] raises."

         The trial court granted summary judgment to MDI on this second issue only. It ruled:

1. Regarding the issue of whether [MDI] was "engaged in the business of constructing, decorating, or improving new or existing buildings or other structures," a genuine issue of material fact exists that precludes summary judgment.
2. Regarding the issue of whether any such work occurred "under, upon, or above real property of or for the United States," no genuine issue of material fact exists and [MDI] is ...

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