Ameritech Publ'g INC. V. Wis. Dep't Of Revenue

• Decision Date: 24 June 2010
• Docket Number: No. 2009AP445,2009AP445
• Parties: Ameritech Publishing, inc., Petitioner-Appellant, v. Wisconsin Department of revenue, respondent-respondent.
• Court: Wisconsin Court of Appeals

Ameritech Publishing, inc., Petitioner-Appellant,

v.Wisconsin Department of revenue, respondent-respondent.

No. 2009AP445

Court Of Appeals District Iv

FILED June 24, 2010

NOTICE

This opinion is subject to further editing.If published, the official version will appear in the bound volume of the Official Reports.

A party may file with the Supreme Court a petition to review an adverse decision by the Court of Appeals.SeeWis. Stat. § 808.10andRule 809.62.

APPEAL from an order of the circuit court for Dane County: DIANE M. NICKS, Judge.Affirmed.

Before Dykman, P.J., Lundsten and Higginbotham, JJ.

DIANE M. NICKS, Judge.

¶1HIGGINBOTHAM, J.At issue in this case is the amount of franchise tax owed by Ameritech Publishing, Inc.(API) on income from local telephone directory advertising for tax years 1994 to 1997.API appeals a circuit court order affirming a decision of the Tax Appeals Commission, which concludedthat all income generated during these years from API's sales of its Wisconsin local phone directory advertising was allocable to Wisconsin for purposes of determining API's franchise tax assessment.API argues that, because a significant portion of its income-producing advertising services were performed outside of Wisconsin, and thus should not have been attributed to Wisconsin in allocating its state tax under Wis. Stat. § 71.25(9)(d)(1993-97)¹, the Commission's interpretation of § 71.25(9)(d) as applied to the facts of this case was unreasonable.We disagree and affirm the circuit court's order affirming the Commission's decision.

BACKGROUND

¶2 API timely filed a Wisconsin Corporation Franchise/Income Tax Return for tax years 1994-1996, using an apportionment method that sourced sales income based on the geographic distribution of phone directories.In December 1998, API filed an amended Franchise/Income Tax Return for tax years 1994-1996 in which API claimed its tax liability to be lower than the amount originally paid.The amended return calculated API's tax owed for the period based on the cost of performing the advertising services ("cost of performance"), instead of thegeographic distribution of phone directories.Using the cost of performance method, API determined its income subject to taxation in Wisconsin by sourcing receipts from the sale of advertising services based on the cost of performing those services.API also filed a Franchise/Income Tax Return for tax year 1997 using the cost of performance method.

¶3 In December 2000, the Wisconsin Department of Revenue(DOR) issued a Notice of Field Audit Action informing API of the denial of its claims for refund of franchise taxes, and rejecting API's use of the cost of performance method of calculating the tax.API filed a petition for a redetermination of the Field Audit Action, which was denied by DOR.API sought review of DOR's decision with the Tax Appeals Commission.

¶4 The matter came to the Commission on a Stipulation of Facts filed by the parties.The Commission bifurcated the issues to be decided in the case, declaring that the issue to be decided in Phase I of the proceeding was whether API was allowed to use the cost of performance method in determining its sales factor for apportionment purposes.²API moved for partial summary judgment on this issue.After a conference with the parties, the Commission narrowed the scope of this first issue to whether API's sale of phone directory advertising was the sale of a service under WIS. STAT. § 71.25(9)(d) and not the sale of tangible personal property.API contended that its sale of phone directory advertising wasthe sale of a service under § 71.25(9)(d).The Commission agreed, granting API partial summary judgment in Phase I.

¶5 In Phase II, the Commission then directed the parties to brief the issue of whether the performance of API's directory advertising services for advertisements placed in Wisconsin telephone directories was the performance of income-producing activities in Wisconsin under Wis. Stat. § 71.25(9)(d)andWis. Admin. Code § Tax2.39(6)(c)5.API contended that, because many of the tasks associated with the provision of its advertising services were rendered by employees working in offices outside of Wisconsin, its performance of directory advertising services was the performance of income-producing activities in not only Wisconsin but in multiple states, and moved for partial summary judgment.The Commission rejected API's motion, and granted the Department partial summary judgment in Phase II, concluding that all income from the performance of API's directory advertising services constituted income-producing activities in Wisconsin under the statute and the rule.API sought certiorari review of the Phase II decision in the circuit court, which affirmed the decision of the Commission.API appeals the circuit court's order affirming the Commission's decision in Phase II.

DISCUSSION

¶6 The issues presented in this case are whether the Commission reasonably concluded that API's provision of directory advertising services was income-producing activity performed within the state of Wisconsin under Wis. Stat. § 71.25(9)(d), and whether API's competing interpretation of the statute is more reasonable than the Commission's.For reasons provided later, we conclude that the Commission's interpretation of § 71.25(9)(d) is entitled to due weightdeference, and, reviewing the Commission's interpretation under that level of deference, we affirm the circuit court's order affirming the Commission's decision.

¶7 In the discussion that follows, we first set forth the Commission's factual findings.Second, we recite the applicable law, including the language of Wis. Stat. § 71.25(9)(d), and summarize the Commission's legal analysis.Third, we determine the proper standard of review applicable to the Commission's interpretation of § 71.25(9)(d).Fourth, we examine the Commission's decision applying that standard of review.

The Commission's Findings of Fact

¶8The parties stipulated to the following pertinent facts, which were restated in the Commission's Findings of Fact.API is a Delaware corporation with its principal place of business in Troy, Michigan, for the tax years 1994-1997.During this time, API was in the business of selling advertising for placement in telephone directories.API generated advertising income from local accounts and national accounts.Local accounts generally consisted of Wisconsin-based businesses.For the tax years at issue, local advertising was solicited by API sales representatives out of offices in Indiana, Michigan, Ohio and Wisconsin.From 1994-1996, API's only national account sales office was located in Michigan.In 1997, API added a second national account office in Illinois.

¶9 The sales representatives in the Wisconsin locations solicited advertising orders for API, as did the sales representatives at call centers located in other states.The sales representatives from the national sales offices in Michigan and Illinois solicited advertising from organizations with operations throughout the United States, including Wisconsin.API had production support centers in Michigan and Ohio which received orders, administered billing, and verified the accuracy of local advertisements and accounts during the years at issue.API also had a graphics center in Michigan that executed the layout for local advertisements and the pagination of the directories.

¶10 API executed agreements with its customers to provide advertising and listings to be inserted into specific directories.The customers did not purchase space and had no right to select the placement of their advertisement, except that they could purchase space on the cover of the directory.

¶11 The directories for which API solicited advertising included the Yellow Pages, White Pages and Internet Yellow Pages.The familiar Yellow Pages directories are organized by categories, and advertisements are in a variety of formats, including display ads, leader ads and coupons.The Yellow Pages also offer "image" and "reach" advertising in the form of cover, spine and tab ads.White Pages advertisements consist of enhancements to an existing telephone listing, such as bold or feature type or the addition of a company logo.The Internet Yellow Pages provide online advertising in various formats.API estimates that, for the years 1994-97, Yellow Pages advertising accounted for 88-92% of its annual income, White Pages advertising made up a 3-6% share of income, while interest and all other income (including, presumably, Internet advertising) totaled 2-7% of annual income.

¶12 Sales representatives generated API's income by contacting customers for placement of advertising in upcoming directories.The cost of an ad in the Yellow Pages directories was based in part on the circulation of the directory.Directories are distributed free of charge to all Wisconsin Bell, Inc.(WBI) subscribers and other Wisconsin residents and businesses in the directorycoverage area.WBI is a telecommunications company that is required by law to provide a White Pages directory to its subscribers.Substantially all of the directories for the Wisconsin directory coverage area were distributed in the state of Wisconsin.

¶13 During the years at issue, API entered into agreements with WBI in which API agreed to publish the White Pages and Yellow Pages directories on WBI's behalf.Under the agreements, API paid WBI an annual fee for the exclusive right to solicit advertising in Yellow Pages directories.API contracted with R.R. Donnelly & Sons Company to print and bind telephone directories.API contracted with Product Development Corporation(PDC) to distribute and deliver telephone directories.Additional facts stipulated to by the parties are provided in the discussion section.

Applicable Law and the Commission's Analysis

¶14 A state may tax only that portion of a corporation's value that is earned within its borders.Container Corp. v....