Home Interiors & Gifts, Inc. v. Strayhorn
| Decision Date | 28 July 2005 |
| Docket Number | No. 03-04-00660-CV.,03-04-00660-CV. |
| Citation | 175 S.W.3d 856 |
| Parties | HOME INTERIORS & GIFTS, INC., Appellant, v. Carole Keeton STRAYHORN, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas, Appellees. |
| Court | Texas Court of Appeals |
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B. Jason Forshee, Daniel L. Butcher, Farley P. Katz, Strasburger & Price, LLP, Dallas, Walter Hellerstein, Sutherland, Asbill & Brennan, LLP, Washington, DC, for appellant.
Christine Monzingo, Jeffrey L. Mullins, Austin, for appellees.
Before Chief Justice LAW, Justices B.A. SMITH and PEMBERTON.
On August 9, 2005, appellant, Home Interiors & Gifts, Inc., filed an unopposed motion for rehearing seeking a modification of our opinion and judgment issued on July 28, 2005. Additionally, on August 15, 2005, the appellees, the Comptroller and the Attorney General, filed a motion for rehearing. We grant the appellant's unopposed motion and overrule the appellees' motion. Accordingly, our opinion and judgment issued on July 28, 2005, are withdrawn, and the following opinion is substituted.
In this case, we determine whether the earned surplus throwback provision of the Texas franchise tax as applied to appellant, Home Interiors & Gifts, Inc. (Home Interiors), unconstitutionally burdens interstate commerce. Home Interiors is seeking a refund of franchise taxes timely paid to appellee, Carole Keeton Strayhorn (the Comptroller). Both parties filed motions for summary judgment. The district court denied Home Interiors' motion and granted the Comptroller's motion. On appeal, Home Interiors argues that the application of the earned surplus throwback provision causes the franchise tax to (1) be unfairly apportioned, (2) discriminate against interstate commerce, and (3) be unfairly related to services provided by Texas. Because we hold that the franchise tax as applied to Home Interiors lacks internal consistency and, consequently, is unfairly apportioned, we reverse the district court's grant of summary judgment in favor of the Comptroller and render judgment that the tax is unconstitutional as applied to Home Interiors.
Home Interiors is a Texas corporation that employs approximately 350 employees in Texas. Virtually all its operations occur in Texas—it has no manufacturing, warehousing, or administrative facilities outside of this state. It is in the business of purchasing home decor products, accessories, and gifts and wholesaling them to independent contractors, known as "Displayers." Additionally, Home Interiors sells a variety of marketing materials to the Displayers to aid in the retail sale of the products. All of Home Interiors' profits are generated from the initial sale of the products to the Displayers. During the period of time relevant to this appeal, Home Interiors sold products to Displayers located in all fifty states, Washington D.C., and Puerto Rico.
The Displayers generate sales by hosting promotional parties where they provide samples and demonstrate various products. They also distribute catalogs and recruit new salesmen. Essentially, the Displayers function as a retail outlet for Home Interiors' wares. However, the Displayers are not employed by Home Interiors. Home Interiors does not compensate the Displayers and does not provide them benefits of any kind. It does, however, pay the Displayers a commission on sales generated by a newly recruited salesperson. Additionally, Home Interiors has no contact with any of the Displayers' retail customers and does not install or repair products outside of Texas.
Between 1994 and 1999, Home Interiors timely paid its Texas franchise taxes. It now seeks a refund of those taxes, contending that the statutory method for apportioning the earned surplus component of the franchise tax is unconstitutional. After refund hearings were held, the Comptroller issued a decision in July 2003 stating that she did not have the authority to rule on the constitutionality of the statutory provisions. Consequently, Home Interiors brought suit in district court, which upheld the constitutionality of the earned surplus throwback provision.
The franchise tax is imposed on corporations in Texas for the privilege of doing business here. See Tex. Tax Code Ann. § 171.001(a)(1) (West Supp.2004-05); Anderson-Clayton Bros. Funeral Home, Inc. v. Strayhorn, 149 S.W.3d 166, 169 (Tex.App.-Austin 2004, pet. filed); Rylander v. Fisher Controls Int'l Inc., 45 S.W.3d 291, 293 (Tex.App.-Austin 2001, no pet.). Before January 1, 1992, the franchise tax was assessed solely on a corporation's taxable capital. Anderson-Clayton Bros., 149 S.W.3d at 169. The result was that capital-intensive industries bore the brunt of the tax. Id. In an effort to broaden the franchise tax base, the legislature added an alternative assessment on a corporation's "net taxable earned surplus." Id. Presently, the tax is calculated by adding the tax on net taxable capital to the difference between the tax on net taxable earned surplus and the tax on net taxable capital. See Tex. Tax Code Ann. § 171.002(b) (West 2002); INOVA Diagnostics, Inc. v. Strayhorn, 166 S.W.3d 394, 398 (Tex.App.-Austin, pet.filed). Despite this awkward formula, the practical effect is to assess the greater of a 4.5 percent tax on net taxable earned surplus or a .25 percent tax on net taxable capital. See INOVA, 166 S.W.3d at 398.
A corporation's net taxable capital consists of its stated capital and its surplus. Fisher Controls Int'l, 45 S.W.3d at 293. Its net taxable earned surplus is comprised of its reportable taxable income (for federal income-tax purposes) plus certain other sums and less other amounts. Id. at 294. A corporation's net taxable capital or net taxable earned surplus is apportioned to the state by dividing the corporation's gross receipts generated in Texas by the corporation's total world-wide gross receipts.1 See Tex. Tax Code Ann. § 171.106 (West Supp.2004-05); General Dynamics Corp. v. Sharp, 919 S.W.2d 861, 863 (Tex.App.-Austin 1996, writ denied). In addition, a corporation's gross receipts from each sale of tangible personal property shipped from Texas to a purchaser in another state are "thrown back" to Texas and added to the gross receipts from business done in Texas. Tex. Tax Code Ann. §§ 171.103(1) (West 2002),.1032(a)(1) (West Supp.2004-05). Gross receipts used to apportion net taxable capital are only thrown back if the corporation is not subject to taxation in the purchaser's state. Id. § 171.103(1) (). Importantly, gross receipts used to apportion net taxable earned surplus are thrown back if the corporation "is not subject to any tax on, or measured by, net income, without regard to whether the tax is imposed." Id. § 171.1032(a)(1) ().
The purpose of the earned surplus throwback provision is to capture and tax income generated from sales in other states that would otherwise go untaxed as a result of Public Law 86-272. See id.; cf. INOVA, 166 S.W.3d at 397 ( purpose of Public Law 86-272). Congress enacted Public Law 86-272 in 1959 in response to a United States Supreme Court decision that indicated that the federal constitution does not prohibit individual states from imposing an income tax on out-of-state corporations, even when their only business activity in the state is solicitation of purchases. 15 U.S.C. § 381(a) (West 1997); see Wisconsin Dep't of Revenue v. William Wrigley, Jr. Co., 505 U.S. 214, 220-21, 112 S.Ct. 2447, 120 L.Ed.2d 174 (1992) (discussing opinion in Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 452, 79 S.Ct. 357, 3 L.Ed.2d 421 (1959)). Less than a year after the Northwestern States Portland Cement opinion, Public Law 86-272 was passed to create minimum standards for business activity required within a state before that state may impose state income tax on an out-of-state corporation. See William Wrigley, Jr. Co., 505 U.S. at 223, 112 S.Ct. 2447. Specifically, the statute prohibits a state from imposing a net income tax if the foreign taxpayer's only business activity in the state is the solicitation of orders. See 15 U.S.C. § 381(a). A net income tax is "any tax imposed on, or measured by, net income." Id. § 383.
All parties in this case concede that Public Law 86-272 protects Home Interiors from being taxed on income generated from sales of its products to Displayers located in most states.2 Consequently, the gross receipts from sales to Displayers in those states were thrown back to Texas and added to Home Interiors' receipts from business done in Texas. Home Interiors claims that the inclusion of the thrown back receipts is significant because, during the time period at issue here, approximately ninety percent of its revenues were generated from sales outside of Texas. Accordingly, Home Interiors contends that the application of the earned surplus throwback provision results in an unfairly apportioned franchise tax assessment.
We review the trial court's summary judgment de novo. Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 215 (Tex.2003); Texas Dep't of Ins. v. American Home Assurance Co., 998 S.W.2d 344, 347 (Tex.App.-Austin 1999, no pet.). When parties file cross-motions for summary judgment, each party in support of its motion necessarily takes the position that there is no genuine issue of fact in the case and that it is entitled to judgment as a matter of law. City of Pflugerville v. Capital Metro. Transp. Auth., 123 S.W.3d 106, 110 (Tex.App.-Austin 2003, pet. denied). Thus, when both parties file a motion for summary judgment, we determine all questions presented and render such judgment as the trial court should have rendered. See Commissioners Court v....
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DUPLICATIVE TAXATION AMONG THE STATES: A PROBLEM NOT WORTH SOLVING?
...as violative of the dormant Commerce Clause or underlying state tax statutes. See, e.g., Home Interiors & Gifts, Inc. v. Strayhorn, 175 S.W. 3d 856 (Tex. App. 2005, pet. denied) (throwback provision violated Commerce Clause); Ilya A. Lipin, Corporate Taxpayers' Sore Arm: Throw-Out Rule ......