Cal-Roof Wholesale, Inc. v. State Tax Commission

• Citation: 242 Or. 435,410 P.2d 233
• Decision Date: 26 January 1966
• Docket Number: CAL-ROOF
• Parties: WHOLESALE, INC., an Oregon corporation, Respondent, v. STATE TAX COMMISSION, Appellant.
• Court: Supreme Court of Oregon

Page 233

410 P.2d 233

242 Or. 435

CAL-ROOF WHOLESALE, INC., an Oregon corporation, Respondent, v. STATE TAX COMMISSION, Appellant.

Supreme Court of Oregon, In Banc.

Argued and Submitted Oct. 6, 1965.

Decided Jan. 26, 1966.

Theodore W. deLooze, Asst. Atty. Gen., Salem, argued the cause for appellant. With him on the briefs were Robert Y. Thornton, Atty. Gen., and Gerald F. Bartz, Asst. Atty. Gen., Salem.

Thomas S. Moore, Portland, argued the cause for respondent. With him on the brief were Maguire, Shields, Morrison, Bailey & Kester, Portland.

Before McALLISTER, C. J., and PERRY, SLOAN, GOODWIN, DENECKE, HOLMAN and SCHWAB, JJ.

SCHWAB, J. pro tem.

The Oregon State Tax Commission appeals from a decree of the Oregon Tax Court, 2 OTR Adv. Sh. 55, setting aside assessments of additional corporation excise taxes made by the State Tax Commission Cal-Roof Wholesale, Inc., an Oregon corporation, for the tax years 1959, 1960 and 1961.

The question may be stated: Does the taxpayer, an Oregon corporation engaged in certain limited activities in the state of Washington, qualify to exclude from its net income subject to Oregon excise tax that portion of its income attributable to its activities in the state of Washington?

The plaintiff, Cal-Roof Wholesale, Inc., an Oregon corporation, is a distributor of building materials with warehouses in Oregon. The record does not show its gross income for the years in question, 1959, 1960 and 1961. However, in 1963 its total sales were about $2,800,000--approximately $250,000 of its sales being in Washington and the remainder in Oregon. The plaintiff's Washington operations were carried on by a salesman living in Washington. His chief activity was the solicitation of orders which were approved in the Oregon home office. Most deliveries of goods were made from Oregon in trucks leased by the plaintiff in Oregon. The plaintiff's Washington salesman operated entirely within the state of Washington and lived there but maintained no office except for his home. Plaintiff customarily entered into cooperative advertising agreements in Washington with its Washington customers. In addition to his principal activity, soliciting orders, the Washington salesman on numerous occasions collected delinquent accounts, made pick-ups of merchandise which customers desired to return, and customarily carried with him a supply of small items which he sold and delivered within the state of Washington. Also, he was authorized to and did on some occasions give spot credit and accept orders rather than submit them to the home office in Oregon for approval.

By virtue of ORS chapter 317 (corporate excise tax law) and ORS chapter 318 (corporate income tax law) Oregon levies a six per cent tax on corporate income attributable to Oregon activities if the Oregon activities of the corporation are sufficient to establish nexus. This is so whether the activities are intra-state or inter-state.

The position of the taxpayer, Cal-Roof Wholesale, Inc., is that under the provisions of ORS 314.280 (the apportionment statute pertaining to corporate excise tax, corporate income tax, and personal income tax), in determining the net income on which it must pay tax to Oregon, it may deduct the amount attributable to its Washington activities whether its Washington activities were 'intra-state' or 'inter-state.'

The position of the tax commission is that ORS 314.280 must be construed to mean that the taxpayer can not deduct from the net income on which it pays a tax to Oregon that portion attributable to its Washington activities unless those activities were 'intra-state' as distinguished from 'inter-state.'

An examination of statutory and case law leads us to conclude that the taxpayer's position is correct. The growth of an economic system in the United States which transcends and largely ignores state boundaries and yet is superimposed upon a political system of sovereign states has created many as yet unresolved problems. In no area have these conflicting concepts created greater chaos than in the field of taxation. Many of the vast array of federal decisions in this field make subtle distinctions without readily apparent differences, as vigorous and pungent dissents which appear to be more the rule than the exception seek to demonstrate.

In 1958 the U. S. Supreme Court, in Northwestern States Portland Cement Co. v. State of Minn., 358 U.S. 450, 457, 79 S.Ct. 357, 362, 3 L.Ed.2d 421, 67 A.L.R.2d 1292, said:

'* * * Commerce between the States having grown up like Topsy, the Congress meanwhile not having undertaken to regulate taxation of it, and the States having understandably persisted in their efforts to get some return for the substantial benefits they have afforded it, there is little wonder that there has been no end of cases testing out state tax levies. The resulting juricial application of constitutional principles to specific state statutes leaves much room for controversy and confusion and little in the way of precise guides to the States in the exercise of their indispensable power of taxation. * * *' ¹

Since that time Congress, in an effort to cut through the tangled undergrowth of state taxation, has enacted a statute providing that Senate and House committees should proceed to make a complete study of taxation of income derived from inter-state commerce. One of these Congressional committees has recently concluded a four-year study with a 2,000-page report which recommends 'the enactment of a Federal statute to bring uniformity and order into the chaos.' Benjamin B. Taylor, Jr., Willis Report on Interstate Taxation: New Laws to Make Sweeping Changes, 23 (No. 6), Journal of Taxation 374 (Dec. 1965).

In 1929 Oregon enacted its corporate excise tax law, ORS chapter 317. The imposition provision, ORS 317.070, reads:

'(1) * * * [E]very mercantile, manufacturing and business corporation doing or authorized to do business within this state * * * shall annually pay to this state, for the privilege of carrying on or doing business by it within this state, an excise tax according to or measured by its net income, * * * at the rate of six percent.'

In 1939 this court, in Welch Holding Co. v. Galloway, 161 Or. 515, 527, 89 P.2d 559, 564, interpreted the legislative definition of 'doing business' in the common and usual meaning of the phrase, 'the engaging in activities in the pursuit of gain.' The opinion made no distinction between intrastate activities and inter-state activities in pursuit of gain.

In 1951 the U. S. Supreme Court, in Spector Motor Service v. O'Connor, 340

U.S. 602, 71 S.Ct. 508, 95 L.Ed. 573, held that an excise or privilege tax measured by income upon the franchise of a foreign corporation for the privilege of doing business is invalid if that business is not engaged in intra-state commerce as distinguished from inter-state commerce. Oregon's excise tax, if not previously limited by the long line of 'drummer' cases beginning with Robbins v. Shelby Taxing District, 120 U.S. 489, 7 S.Ct. 592, 30 L.Ed. 694 (1887), was clearly limited by the Spector decision to intra-state business. ² The Spector decision has been criticized for its emphasis on the importance of labels in determining the validity of a state tax. Ore.-Nev.-Calif. Fast Freight v. State Tax Comm., 223 Or. 314, at 322, 353 P.2d 541. It is pointed out by numerous authorities, including Justice Clark's dissent in the Spector case, that if the same tax had been labeled as an income tax based on income rather than an excise tax measured by income, it would not have been held unconstitutional as imposing an undue burden on inter-state commerce. Nevertheless, the majority opinion governs and from the date of that decision, if not before, Oregon could not constitutionally impose its excise tax on the activities of foreign corporations within its boundaries, if such activities were purely inter-state.

In 1955 Oregon 'plugged the loophole' which the Spector case emphasized by enacting a corporation income tax, ORS chapter 318, as a supplement to the excise tax, ORS chapter 317. The imposition statute, ORS 318.020, reads in pertinent part:

'(1) There hereby is imposed upon every corporation for each taxable year a tax * * * upon its net income * * * other than income for which the corporation is subject to the tax imposed by the Corporation Excise Tax Law of 1929 (ORS chapter 317) * * *, the tax rate shall be six percent.'

In 1957 the legislature repealed ORS 317.080, the apportionment section of the excise tax law, ³ and also ORS 316.205, which was the apportionment section of the personal income tax law. The repealer was Section 1, Chapter 632, Oregon Laws 1957. Section 2 thereof provided, 'Sections 3 to 38 of this Act are applicable to all lwas of this state imposing taxes upon or measured by net income.' Section 4 of Chapter 632 became the new apportionment law applicable to all forms of tax on income, personal and corporate. Codified as ORS 314.280, it reads:

'(1) If the gross income of a corporation or a nonresident individual is derived from business done both within and without the state, the determination of net income shall be based upon the business done within the state, and the commission shall have power to permit or require either the segregated method of reporting or the apportionment method of reporting, under rules and regulations adopted by the commission, so as fairly and accurately to reflect the net income of the business done within the state.

'(2) The provisions and subsection (1) of this section 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. * * *'

The principal thrust of the tax commission's argument is that the corporate excise tax and the corporate income tax must be considered as...