California Packing Corp. v. State Tax Commission

• Decision Date: 03 August 1939
• Docket Number: 6049
• Court: Utah Supreme Court
• Parties: CALIFORNIA PACKING CORPORATION v. STATE TAX COMMISSION

93 P.2d 463

97 Utah 367

CALIFORNIA PACKING CORPORATION v. STATE TAX COMMISSION

No. 6049

Supreme Court of Utah

August 3, 1939

Rehearing denied October 11, 1939.

Original proceeding by the California Packing Corporation for a writ of certiorari to review an order of the State Tax Commission of Utah determining and assessing a deficiency in franchise taxes against plaintiff.

ORDER ANNULLED, and cause remanded to the Commission.

DeVine Howell & Stine, of Ogden, and Ned Warnock, of Salt Lake City for plaintiff.

Alfred Klein, Grant A. Brown, and Alvin I. Smith, all of Salt Lake City, for defendant.

LARSON Justice. MOFFAT, C. J., and PRATT, J., concur. WOLFE, Justice, McDoNOUGH, Justice, concurring in part, dissenting in part.

OPINION

LARSON, Justice.

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 the tax 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 (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...