A. C. Dutton Lumber Corp. v. Ellis

• Decision Date: 25 October 1961
• Citation: 228 Or. 525,365 P.2d 867
• Parties: A. C. DUTTON LUMBER CORPORATION, a New York corporation, Respondent, v. Dean ELLIS, Charles H. Mack and F. H. W. Hoefke, members of and constituting the State Tax Commission of the State of Oregon, Appellants. *
• Court: Oregon Supreme Court

Page 867

365 P.2d 867

228 Or. 525

A. C. DUTTON LUMBER CORPORATION, a New York corporation, Respondent, v. Dean ELLIS, Charles H. Mack and F. H. W. Hoefke, members of and constituting the State Tax Commission of the State of Oregon, Appellants.^*

Supreme Court of Oregon, In Banc.

Argued and Submitted Sept. 7, 1961.

Decided Oct. 25, 1961.

Richard Rink, Asst. Atty. Gen., argued the cause for appellants. With him on the briefs was Robert Y. Thornton, Atty. Gen.

Maurice O. Georges, Portland, argued the cause for respondent. With him on the brief were King, Miller, Anderson, Nash & Yerke, Portland.

Before McALLISTER, C. J., and ROSSMAN, WARNER, PERRY, SLOAN, O'CONNELL and GOODWYN, JJ.

WARNER, Justice.

The plaintiff, A. C. Dutton Lumber Corporation, appealed to the circuit court for Multnomah county from a determination of the defendant Tax Commission that there was a deficiency in plaintiff's 1958 Oregon corporation excise tax. The appeal was taken pursuant to ORS 314.460 and proceeds as a suit in equity. The Commission's demurrer to the complaint for want of sufficient facts was overruled. Thereafter, the Commission filed its answer which was followed by plaintiff's motion for judgment on the pleadings. From an order granting the motion, the Tax Commission brings this appeal.

Dutton is a New York corporation engaged in the wholesale lumber business conducted in several states. During the tax year 1958 and prior thereto its activities were confined to the purchase of considerable quantities of lumber in this state with some resale of the same in Oregon.

When the income of a corporation is derived from business done both within and without the state, the determination of its net taxable income based upon its business done within the state may be made under rules and regulations adopted by the Commission, which 'fairly and accurately * * * reflect the net income of the business done within the state' (ORS 314.280(1)) ¹. As stated in subsection (2) of that statute: 'The provisions of subsection (1) * * * dealing with the apportionment of income earned from sources both within and without the State of Oregon are designed to allocate to the State of Oregon on a fair and equitable basis a proportion of such income earned from sources both within and without the state. * * *'

Acting under the authority conferred upon it, the Commission adopted its Regulation 4.280(1)-(A). This regulation first recognizes that: 'The method to be used in determining the portion of the total income that is properly allocable to this state depends upon the circumstances in each case, and no rule of universal application can be stated.' This is followed by a provision (4.280(1)-(B)) to the effect that if detailed and complete evidence substantiating the fact that the application of the regulations reaches an unreasonable result, the method for the allocation of a particular taxpayer's income will be revised. This part of the regulation reflects the provision of subsection (2) of ORS 314.280, supra, reading:

'* * * Any taxpayer may submit an alternative basis of apportionment with respect to his own income and explain that basis in full in his return. If approved by the commission that method will be accepted as the basis of allocation.'

Regulation 4.280(1)-(B), which is quite long and detailed, then sets up the formula for apportionment generally known as a three-factor formula. It takes into consideration a property, a wage and a sales factor, each of which factor contains provisions for its modification.

In usual application, there is first found the percentage which the taxpayer's Oregon property bears to its total property. The same is done with respect to wages paid and sales made in Oregon. The three percentages obtained for Oregon are then totaled and divided by three. The result of this division is the percentage of the taxpayer's net income which is apportioned to this state.

That part of Regulation 4.280(1)-(B) relating to the use of the 'sales factor' also makes the following provision for its modification, by substituting for 'sales' amounts reflecting its 'purchases.' It reads:

'If a taxpayer carrying on a business both within and without the state is engaged, either exclusively or primarily, in a purchasing activity within this state, then purchases are substituted in the formula for sales.'

In computing the corporation's 1958 excise tax, Dutton allocated a portion of its income to Oregon by use of the formula giving weight to the factors of property, wages and sales within and without the state of Oregon. Upon this basis it was determined that the net income of the lumber company allocable to this state in 1958 was $3,779.88, an amount equal [228 Or. 530] to 1.6315 per cent of its total net income of $231,681.20, and producing a tax of $226.79 for that year.

The Commission, however, in its computation invoked the foregoing modification provision of the regulation and substituted the purchase factor for the sales factor employed by the plaintiff, thus giving weight to plaintiff's property, wages and purchases, both within and without the state. Under the formula as used by the Commission, plaintiff's net income allocable to Oregon for 1958 becomes $26,299.75, an amount equaling 11.3517 per cent of its total net income of $231,681.20. This, in turn, results in a claimed tax of $1,577.99, as against the tax of $226.79, as figured by plaintiff.

In the formula followed by plaintiff the figures for its gross sales appear as $25,168,445.75, of which $528,076.34 or 2.0982 per cent were in Oregon. In the Tax Commission calculations, $22,175,527 represents plaintiff's total purchases. Of this total amount $6,931,806 or 31.2588 per cent were made in this state.

The parties do not dispute the correctness of their respective mathematical calculations of taxes due. Except for the use of the 'sales' factor by one, and the 'purchase' factor by the other, their figures are identical. The only issues presented by the appeal are whether the formula employed for the determination of allocable income should have included the factor of sales, as used by plaintiff, or the factor of purchases, as applied by the Commission.

Dutton represents that the use of the 'purchase' factor is not authorized by ORS 314.280, supra, and if authorized and applied the statute is rendered unconstitutional. We find no merit in any of these contentions.

ORS 314.280, supra, requires a method of allocation under regulations which will 'fairly and accurately * * * reflect the net income of the business done within the state,' or, as said in Butler Bros. v. McColgan, 315 U.S. 501, 62 S.Ct. 701, 704, 86 L.Ed. 991, 995, the amount "reasonably attributable' to the business done there.' Such is the test of an allocation formula approved by the United States Supreme Court. Butler Bros. v. McColgan, supra; Bass, Ratcliff & Gretton v. State Tax Commission, 266 U.S. 271, 45 S.Ct. 82, 69 L.Ed. 282; Ford Motor Co. v. Beauchamp, 308 U.S. 331, 60 S.Ct. 273, 84 L.Ed. 304. Hence, if the formula survives that test, any constitutional questions are at an end. Butler Bros. v. McColgan, supra; International Harvester Co. v. Evatt, 329 U.S. 416, 67 S.Ct. 444, 91 L.Ed. 390, 395.

To rebut the presumption that the formula employed produced a fair result, the burden is on the taxpayer to make its oppression manifest 'by clear and cogent evidence.' Norfolk & W. R. Co. v. State of North Carolina, 297 U.S. 682, 56 S.Ct. 625, 628, 80 L.Ed. 977, 982, and that 'more taxes have been exacted than in equity and good conscience should have been paid.' Pacific Fruit Express Co. v. McColgan, 67 Cal.App.2d 93, 153 P.2d 607, 609; El Dorado Oil Works v. McColgan, 34 Cal.2d 731, 215 P.2d 4, 13, appeal dismissed 340 U.S. 801, 71 S.Ct. 52, 95 L.Ed. 589; Norton Co. v. Dept. of Rev., 340 U.S. 534, 71 S.Ct. 377, 95 L.Ed. 517. But here we labor without any evidence and no factual matter except that which may be gleaned from the pleadings.

Existing methods for allocating income for state excise or privilege taxes, measured by net income, are exceedingly diverse. Seemingly, there is no one complete and right rule of apportionment satisfying the needs of all states. Notwithstanding the number of different rules, all upon analysis may work substantial justice.

Plaintiff, as well as the trial court, sought to clinch their respective contentions by resorting to hypothetical situations to demonstrate what might happen in another state as possible tax duplications. We find our answer to these endeavors in Northwestern States Portland Cement Co. v. State of Minnesota, 358 U.S. 450, 79 S.Ct. 357, 364, 3 L.Ed.2d 421, 67 A.L.R.2d 1292, 1303, where the court said:

'While the economic wisdom of state net income taxes is one of state policy not for our decision, one of the 'realities' raised by the parties is the possibility of a multiple burden resulting from the exactions in question. The answer is that none is shown to exist here. This is not an unapportioned tax which by its very nature makes interstate commerce bear more than its fair share. * * * There is nothing to show that multiple taxation is present. We cannot deal in abstractions. In this type of case the taxpayers must show that the formula places a burden upon interstate commerce in a constitutional sense. This they have failed to do.' (Emphasis supplied.)

Nor is there anything in the pleadings to warrant the conclusion found in the trial court's opinion that in '1954, all states except North Dakota used sales or gross receipts as at least one factor in their apportionment formula.' California by statute authorizes but does not require the use of five factors, including 'purchases.' See El Dorado Oil Works v. McColgan, supra, 215 P.2d at page 7.

Our own research leads us back to a citation supplied by the Commission. It is an article by Arthur D. Lynn, Jr., in 18 Ohio State Law Jrnl., p. 84 (1957), entitled 'Formula Apportionment of...