California Packing Corp. v. State Tax Commission

Certiorari to review a decision of the State Tax Commission, hereinafter called the Commission, determining and assessing a deficiency against the plaintiff, hereinafter called the Company, as franchise taxes for the fiscal year ending February 29, 1936. The questions presented involve the construction of subdivision (e) of subsection 6, and of subsection 8 of Section 23 of the Franchise Tax Act, being particularly Section 80-13-21, R.S. Utah 1933. The section reads as follows:

"The portion of net income assignable to business done within this state, and which shall be the basis and measure of the tax imposed by this chapter, may be determined by an allocation upon the basis of the following rules:

"(1) Rents, interest and dividends derived from business done outside this state less related expenses shall not be allocated to this state.

"(2) Gains from the sale or exchange of capital assets consisting of real or tangible personal property situated outside this state less losses from the sale or exchange of such assets situated outside this state shall not be allocated to this state.

"(3) Rents, interest and dividends derived from business done in this state less related expenses shall be allocated to this state.

"(4) Gains from the sale or exchange of capital assets consisting of real or tangible personal property situated within this state less losses from the sale or exchange of such assets situated in this state shall be allocated to this state.

"(5) If the bank or other corporation carries on no business outside this state, the whole of the remainder of net income may be allocated to this state.

"(6) If the bank or other corporation carries on any business outside this state, the said remainder may be divided into three equal parts:

"(a) Of one third, such portion shall be attributed to business carried on within this state as shall be found by multiplying said third by a fraction whose numerator is the value of the corporation's tangible property situated within this state and whose denominator is the value of all the corporation's tangible property wherever situated.

"(b) Of another third, such portion shall be attributed to business carried on within this state as shall be found by multiplying said third by a fraction whose numerator is the total amount expended by the corporation for wages, salaries, commissions or other compensation to its employees and assignable to this state and whose denominator is the total expenditures of the corporation for wages, salaries, commissions or other compensation to all of its employees.

"(c) Of the remaining third, such portion shall be attributed to business carried on within this state as shall be found by multiplying said third by a fraction whose numerator is the amount of the corporation's gross receipts from business assignable to this state, and whose denominator is the amount of the corporation's gross receipts from all its business.

"(d) The amount assignable to this state of expenditures of the corporation for wages, salaries, commissions or other compensation to its employees shall be such expenditure for the taxable year as represents the compensation of employees not chiefly situated at, connected with or sent out from, premises for the transaction of business owned or rented by the corporation outside this state.

"(e) The amount of the corporation's gross receipts from business assignable to this state shall be the amount of its gross receipts for the taxable year from

"(1st) Sales, except those negotiated or effected in behalf of the corporation by agents or agencies chiefly situated at, connected with or sent out from premises for the transaction of business owned or rented by the corporation outside this state, and sales otherwise determined by the tax commission to be attributable to the business conducted on such premises,

"(2nd) Rentals or royalties from property situated, or from the use of patents, within this state.

"(f) The value of the corporation's tangible property for the purpose of this section shall be the average value of such property during the taxable year.

"(7) In the allocation of net income, gain or loss shall be recognized and shall be computed on the same basis and in the same manner as is provided in this chapter for the determination of net income.

"(8) If in the judgment of the tax commission the application of the foregoing rules does not allocate to this state the proportion of net income fairly and equitably attributable to this state, it may with such information as it may be able to obtain make such allocation as is fairly calculated to assign to this state the portion of net income reasonably attributable to the business done within this state and to avoid subjecting the taxpayer to double taxation."

It is thus provided that a foreign corporation doing business both within and without the state pays a franchise tax for the privilege of doing business in the state, determined by three factors, namely: (1) Rents, interest, and dividends from business done in the state less related expenses; (2) gains from sale or exchanges of capital assets, situated in the state, less losses from such sales and exchanges; and (3) a figure determined by taking (a) the proportion of its tangible property in the state to its total tangible assets; (b) the ratio between its payroll assignable to this state and its total payroll; and (c) the ratio between the gross receipts assignable to business done within the state and the gross receipts from its total business. These last three fractions were to be added together and divided by three to get the allocation fraction, to determine the third figure assigning the income attributable to business done in the state of Utah. In providing for the determination of the amount of the net income to be used as a basis for computation of the franchise tax the legislature carefully distinguished between business done within the state and business done outside the state, so as to confine the operation of thetax to business done within the state.

The Company in filing its franchise tax return, and in determining the allocation fraction, to assign income attributable to business done in the State of Utah, used as the three factors those set out in the statute:

In Utah           Total          Fraction
1. Tangible Property ...... $1,121,746.55     $32,672,848.51    .034333
2. Salaries and Wages .....    284,014.19      10,936,056.31    .025970
3. Sales ..................          None      55,511,789.30    .000000
_______
Total ..............................................    .060303
_______
Allocation Fraction (1/3 of above) .................    .020101

It will be observed that the Company in determining the apportionment fraction did not allocate to Utah any sales since none of their goods were sold by salesmen or agents sent out from premises within the State of Utah. The Tax Commission audited the return and charged the Company with total gross receipts in the State of Utah of $2,122,110.26, thus allocating to this state the sales of goods which were stored in Utah at the time of sale although such sales were made by agents sent out from the California offices of the Company, and also $878,347.32 received by the Company in rents, interest and dividends from property outside the State, termed "financial income." Under the decision of the Commission the allocation fraction is as follows:

In and
In Utah          Outside Utah    Fraction
1. Total tangible property  $1,121,746.55      $32,672,848.61   .034333
2. Total wages, etc. ......    284,014.19       10,936,056.31   .025970
3. Total gross receipts ...  2,122,110.26       55,511,789.30   .038228
_______
4. Total 1, 2, and 3 ........................................   .098531
_______
5. Apportionment fraction — 1/3 of 4 ........................   .032844

The amount shown as No. 3, total gross receipts in Utah, includes sales of goods which were stored in Utah at the time of sale regardless of whether the sales were made to Utah concerns or to concerns in other states.

Should the income from sales of produce manufactured or stored within this state be allocated to income attributable to business carried on within this state when such sales are made for the Company by an agent sent out from the California office? The answer to this question is found in subhead 1 (1st) of subdivision (e) of subsection 6 of Section 80-13-21, R.S. Utah 1933, which we again set out in haec verba:

"(1st) Sales, except those negotiated or effected in behalf of the corporation by agents or agencies chiefly situated at, connected with or sent out from premises for the transaction of business owned or rented by the corporation outside this state, and sales otherwise determined by the tax commission to be attributable to the business conducted on such premises."

Words could not well be more jumbled, and the section requires some transpositions to be fairly intelligible. The Company construes the subsection as though it read:

"Sales, except those negotiated or effected in behalf of the corporation by agents chiefly situated at, connected with, or sent out for the transaction of business from premises, owned or rented by the corporation outside of this state, and sales otherwise determined by the tax commission to be attributable to the business conducted on such premises." (Italics added.)

We have transposed the italicized phrase, "from premises" so as to make the same follow the phrase "for the transaction of business" rather than precede it. This results in excepting from gross income attributable to Utah all sales made in the State from goods manufactured and/or stored in the State if the agent of the Company negotiating the sales is sent into the State to make them. It is hard to conceive that the legislature in enacting a franchise tax law on foreign corporations doing business in this State would provide them such a simple way of avoiding the tax. Goods are manufactured in the State, stored here; sold here to merchants or jobbers in the State, the money received therefor, but is not included in the income attributable to business done within the State because the salesman of the Company comes in from or is connected with an office outside of this State. Such meaning renders senseless the concluding clause of the section reading: "and sales otherwise determined by the Tax Commission to be attributable to the business conducted on such premises." (Italics added.) What premises? Under the construction by the Company it must refer to premises outside the State. Why should the Tax Commission determine anything about such sales? They are not business done within the state, and the receipts thereof are not to be included in the income from which the franchise tax is computed. Strange to say, the Tax Commission has not indicated any agreement or disagreement with such construction of the statute but seeks to avoid the statute by powers claimed under subsection (8) of the section. We think the Company is reading the statute with a wrong transposition. To give the section the meaning it must have to be consistent with the purpose and general provisions of the whole act the section must be read with the transpositions now to be indicated.

"(1st) Sales except those negotiated or effected in behalf of the corporation by agents or agencies chiefly situated at, connected with or sent out from premises owned or rented by the corporation, for the transaction of business outside of this state, and sales otherwise determined by the Tax Commission to be attributable to the business conducted on such premises."

We have transposed the phrase "for the transaction of business" (in italics) so as to follow the words "by the corporation" which leaves the words "owned or rented" following the word "premises" to which it clearly refers. It certainly cannot refer to "the transaction of business" because such would not be rented by the corporation. This transposition is the only change made in the reading. Hart v. Livermore Foundry Machine Co., 72 Miss. 809, 17 So. 769; Advance Lumber Co. v. Moore, 126 Tenn. 313,148 S.W. 212. For clarity in the consistency of thought and to aid in some observations to be made later, we again quote the statute with some bracketed interpolations:

"(1st) Sales [within the State], except those negotiated or effected in behalf of the corporation by agents or agencies chiefly situated at, connected with or sent out from premises [within the state] for the transaction of business owned or rented by the corporation outside this state, and sales [wherever made] otherwise determined by the tax commission to be attributable to the business conducted on such premises [owned or rented by the corporation within this state for the transaction of business outside of this state]."

The statute thus read becomes definite and readily understandable, in harmony with the object and purpose of the legislation, and confines itself to income from business done within the state, which alone forms the basis upon which the tax is computed. To secure this result, and to avoid objection on constitutional grounds of double taxation, it excepts from sales the income of which is used in computing the tax those which may be handled from offices or premises within the state to a purchaser without the state for shipment out of the state, if made by an agent of the company chiefly engaged in out-of-state sales and business. Sales otherwise made of goods within the state for shipment out of the state are deemed to be sales made and business done within the state, and enter into the income from which the tax is computed. This construction makes the question of the exception of proceeds of a sale of goods within the state depend upon where the sale is made rather than upon the home office of the salesman. This more directly covers business done within the state. This construction also puts into the income of business done within the state the proceeds of sales of goods manufactured or stored within the state but sold for shipment out of the state, where the sale is made through a broker or jobber within the state rather than through an out-of-state agent or employee of the company. We repeat, the exception goes only to sales to an out-of-state party when the agent of the company making the sale is chiefly connected with out-of-state business and such others made from premises maintained for out-of-state business as the Tax Commission may determine to be attributable to business done out of the state. This was probably done to prevent the avoidance of franchise tax by foreign corporations doing business in the state by simple manipulations in its personnel, and to enable the Tax Commission to make adjustment where there may be question as to whether particular sales are attributable to this state or to out-of-state business.

This reading of the statute gives meaning, purpose, and consistency to subsection (8) of the section, which provides inter alia that in addition to the receipts from the sales noted above, income for tax computation purposes shall also include other sales which the Tax Commission may determine are attributable to the business done within this state although not actually made or consummated here. For example, a merchant at St. George, Utah, orders one dozen refrigerators from B Company, a foreign corporation, through an office and warehouse at Salt Lake City. Instead of shipping the refrigerators from Salt Lake City, a distance of 325 miles, B Company forwards the order to its warehouse at Las Vegas, Nevada, 125 miles from St. George, from which point the refrigerators are delivered, and the Company books the sale as made from Las Vegas, without this state. The Tax Commission, upon investigation, may determine that such sale is attributable to the business conducted by B. Company at its Salt Lake warehouse, and include the receipts thereof in income from a sale made in fact though not in bookkeeping within the State of Utah. The section thus provides that the receipts from business assignable to the state shall be determined from three factors: (a) Sales of goods manufactured or stored within the state, less the exception noted above; (b) sales of goods manufactured or stored without the state to a purchaser within the state, when the Tax Commission determines such sale is attributable to the business done within the state; (c) rentals, etc., from property within the state. This affords an apparently fair appraisal or determination of the income the corporation derives from its business within the State of Utah. Hans Rees' Sons, Inc., v. State of North Carolina,283 U.S. 123, 51 S. Ct. 385, 75 L. Ed. 879; Underwood TypewriterCo. v. Chamberlain, 254 U.S. 113, 41 S. Ct. 45, 65 L. Ed. 165;S.S. Kresge Co. v. Bennett, D.C., 51 F.2d 353; UnitedAdvertising Corp. v. Lynch, D.C., 1 F. Supp. 302.

In computing its net income against which the allocation fraction was to be applied to determine the amount of the tax to be paid, the Company deducted, inter alia, all sums received as interest from any source whatever on obligations due the Company, and all dividends received from stocks held in other corporations upon the theory that the muniments evidencing these intangible sources or revenue were held without the State of Utah, the Company being a New York corporation and its principal office of business being in California. In redetermining the amount of tax, the Commission disallowed these deductions and included within net income, as it computed the same, the total amount received from these intangibles regardless of the source from which received, where paid, or where the muniments of title were held, upon the theory that such investments were probably made from profits resulting from the general operations of the Company, and so the income therefrom should be allocated in the same proportion in which the Company did its business, thus placing a portion of this income in the net amount used in computing the sum payable to the state as franchise tax. Whether the Commission erred in including in the computation of the tax the interest and dividends received by the Company from investments and stocks in other corporations is the second question for our consideration.

The tax established in the act is "in the nature of an excise tax levied against domestic and foreign corporations alike for the privilege of doing business in a corporate capacity within this state." Underwood Typewriter Co. v. Chamberlain,94 Conn. 47, 108 A. 154, 157; Bass, Ratcliff Gretton v.State Tax Commission, 266 U.S. 271, 45 S. Ct. 82,69 L. Ed. 282; Stanley Works v. Hackett, 122 Conn. 547, 2, 3190 A. 743. The language of the statute throughout evidences an intent only to determine the franchise tax from income from business done under the franchise from the state, that is business done within the state. The various methods of allocation are designed to restrict the tax to business done within the state and to assign to the state for taxation that portion of the business reasonably attributable to the state. There is also apparent a purpose to avoid double taxation. The statute itself provides:

"* * * (1) Rents, interest and dividends derived from business done outside this state less related expenses shall not be allocated to this state. * * *

"(3) Rents, interest and dividends derived from business done in this state less related expenses shall be allocated to this state."

The early rule adopted by the Supreme Court of the United States was that the situs of intangibles for taxation purposes is the domicile of the owner. Blodgett v. Silberman, 277 U.S. 1,48 S. Ct. 410, 72 L. Ed. 749; Baldwin v. Missouri,281 U.S. 586, 50 S. Ct. 436, 74 L. Ed. 1056, 72 A.L.R. 1303. This rule was modified in the case of Wheeling Steel 4, 5Corporation v. Fox, 298 U.S. 193, 56 S. Ct. 773,80 L. Ed. 1143, holding that intangibles can acquire a business situs apart from the residence of the owner so as to be there taxable. Still later decisions have tended back to the original or domicile theory of taxation of intangibles. For an interesting discussion see Newark Fire Ins. v. State Board of TaxAppeals, 59 S. Ct. 918, 83 L.Ed. ___; and Curry v. McCanless,59 S. Ct. 900, 83 L.Ed. ___. But we have found no case holding that the income from intangibles owned by a nonresident and held by him or it outside the state, which income is paid and received without the state, and derived from a business not operating in the state can for any purpose or by any method be taxed by the state. But our statute, as quoted above, seems to manifest a clear intent on the part of the legislature that so called "financial income" not derived from business done in Utah should not be included in gross receipts for tax computation purposes by the state. It first segregates rents, interest, dividends and gains from sale or exchange of capital assets from that part of the net income attributed to business carried on within the state and subject to the allocation fraction, and provides a specific rule for allocation of such income. Section 80-13-21, subsections (1), (2), (3) and (4). It then provides that the remainder of the net income shall be allocated by certain fractional computations therein prescribed. Subsections (5), (6), and (7). It is clear by every provision of the section that the legislature sought to confine the receipts from which the tax is computed to income derived from business done within the state. The language of the act seems clear and definite and on a record such as this one it must follow that the Commission was in error in including within net income for taxation purposes in Utah the income from interest and dividends derived from properties outside of this state and evidenced by muniments of title held outside the state. It is not necessary for us to determine whether the state can provide that all such income must be included in net income for franchise tax purposes nor whether it should do so. The fact is it has not done so. Neither is it necessary for us to hold that in no event may such income be included. All we hold is that under the facts as they appear in this record and under the statute it may not be done.

One further matter is presented in the issues as framed and argued. This involves the construction and 6, 7 meaning of subsection (8) of Section 80-13-21, reading as follows:

"If in the judgment of the tax commission the application of the foregoing rules does not allocate to this state the proportion of net income fairly and equitably attributable to this state, it may with such information as it may be able to obtain make such allocation as is fairly calculated to assign to this state the portion of netincome reasonably attributable to the business done within thisstate and to avoid subjecting the taxpayer to double taxation." (Italics added.)

We have italicized the clause that gives rise to the argument. The Company contends that the last clause is controlling and the Commission can depart from the statutory formula set forth in the first seven subsections of the section only when such departure is necessary "to avoid subjecting the taxpayer to double taxation." The Commission takes the position that the subsection is a general grant of power to depart from the statutory formula whenever that may be necessary in order to allocate to the state for tax computation purposes the proper proportion of the net income fairly attributable to business done in this state. And upon such construction the Commission justifies its action in redetermining the tax against the Company rather than upon the construction of subdivision (e) discussed and construed above. As far as statutory construction is concerned we think that subsection (8) is a general section authorizing the Tax Commission to depart from the formulas set out in subsection (6) whenever the application of the provisions of that subsection does not allocate to the state the business fairly attributable to the state or whenever such application results in double taxation. But we do not think that the present case has been shown to be one calling for a departure from the statutory formula. Under subdivision (e) of subsection (6), discussed above, the statutory formula applies with particular aptitude to a business such as this, and yields in the main results closely akin to those which the Commission sought to accomplish by departing from the statutory formula. Upon the record before us, the Company is the usual and ordinary manufacturing company and there is shown no reason for departing from the regular method of computation to determine the amount of its franchise tax.

We hold therefore that the Commission was in error in the method used in determining the amount of net income attributable to business done in the State of Utah, and also in including in such income the out-of-state interest and dividends, called in the record "financial income." The order of the Commission redetermining the franchise tax of the Company is annulled and the cause remanded to the Tax Commission for further proceedings in accordance with the views herein expressed.

MOFFAT, C.J., and PRATT, J., concur.