City of Racine v. Morgan

• Decision Date: 04 June 1968
• Citation: 159 N.W.2d 129,39 Wis.2d 268
• Parties: CITY OF RACINE, a municipal corp., Appellant, v. James R. MORGAN, Comm'r of Taxation, et al., Respondents.
• Court: Wisconsin Supreme Court

Page 129

159 N.W.2d 129

39 Wis.2d 268

CITY OF RACINE, a municipal corp., Appellant, v. James R. MORGAN, Comm'r of Taxation, et al., Respondents.

Supreme Court of Wisconsin.

June 4, 1968.

Michael, Best & Friedrich, Milwaukee, John S. Best and Frank J. Pelisek, Milwaukee, of counsel, for appellant.

Bronson C. La Follette, Atty. Gen., David G. McMillan, Asst. Atty. Gen., Madison, for respondents Morgan and Kaiser.

Quarles, Herriott, Clemons, Teschner & Noelke, Milwaukee, Benson, Butchart & Haley, Racine, James Urdan and Laurence C. Hammond, Jr., Milwaukee, of counsel, and Emery Benson, Racine, of counsel, for respondent Tn. of Mt. Pleasant.

BEILFUSS, Justice.

Five issues are presented:

(1) Is the method to be followed in apportioning the distributable tax receipts under sec. 71.14, Stats., the 'arithmetical' average method, or the 'weighted' average method?

(2) Does the fact that the department has applied the arithmetical method in prior years constitute an administrative rule of long standing that is binding on the department?

(3) Should the department be allowed to apply the arithmetical method in some situations and the weighted average in others?

(4) Is the department correctly apportioning the tax receipts from the income on the sec. 71.07(1), Stats., property of the Johnson Company?

(5) Does the court have jurisdiction of the subject matter of the instant case?

The following are the statutory provisions which are the subject of the dispute:

'71.07 Situs of income; allocation and apportionment. (1) For the purposes of taxation income or loss from business, not requiring apportionment under sub. (2)(3) or (5), shall follow the situs of the business from which derived. Income or loss derived from rentals and royalties from real estate or tangible personal property, or from the operation of any farm, mine or quarry, or from the sale of real property or tangible personal property shall follow the situs of the property from which derive. Corporation income from personal services performed by employes of corporations shall be deemed business income and shall follow the situs of the business. * * * All other income or loss, including royalties from patents, income or loss derived from land contracts, mortgages, stocks, bonds and securities or from the sale of similar intangible personal property, shall follow the residence of the recipient, except as provided in s. 71.07(7). For the purposes of taxation, interest received on state and federal tax refunds when the tax refunded was on business income or property shall be deemed income from business and shall follow the situs of the business from which derived.

'(2) Persons engaged in business within and without the state shall be taxed only on such income as is derived from business transacted and property located within the state. The amount of such income attributable to Wisconsin may be determined by an allocation and separate accounting thereof, when the business of such person within the state is not an integral part of a unitary business, provided, however, that the department of taxation may permit an allocation and separate accounting in any case in which it is satisfied that the use of such method will properly reflect the income taxable by this state. In all cases in which allocation and separate accounting is not permissible, the determination shall be made in the following manner: There shall first be deducted from the total net income of the taxpayer such part thereof (less related expenses if any) as follows the situs of the property or the residence of the recipient; provided, that in the case of income which follows the residence of the recipient, the amount of interest and dividends deductible under this provision shall be limited to the total interest and dividends received which are in excess of the total interest (or related expenses, if any) paid and allowable as a deduction under section 71.04 during the income year. The remaining net income shall be apportioned to Wisconsin on the basis of the ratio obtained by taking the arithmetical average of the following 3 ratios:

'(a) The ratio of the tangible property, real, personal and mixed, owned and used by the taxpayer in Wisconsin in connection with his trade or business during the income year to the total of such property of the taxpayer owned and used by him in connection with his trade or business everywhere. * * *

'(b) In the case of persons engaged in manufacturing or in any form of collecting, assembling or processing goods and materials, the ratio of the total cost of manufacturing, collecting, assembling or processing within this state to the total cost of manufacturing, or assembling or processing everywhere. * * *

'(c) In the case of trading, mercantile or manufacturing concerns the ratio of the total sales made through or by offices, agencies or branches located in Wisconsin during the income year to the total net sales made everywhere during said income year.'

'71.14 Distribution of revenue. * * *

'(2a) (b) 3. * * * The portion of such taxes attributable to each town, village and city shall be determined on the basis of situs of the income producing such taxes, as set forth in s. 71.07. * * *'

The appellant's position essentially is that the method initially applied in the allocation of revenues is the correct method and the only method which may be used pursuant to the above quoted statutes. The method pays no regard to the out-of-state operations of the company when considering the apportionment. It gives equal weight to each of the three factors (property, cost of manufacturing and sales) without proportioning these items according to their relative importance in the total company operation both in-state and out-of-state. Since the tax paid by the Johnson Company is computed on the basis of the proportion of its Wisconsin involvement compared to its total involvement everywhere, the apportionment method advocated by the appellant disregards the relative significance of each factor in producing the tax revenues.

The alternative 'weighted average' method advocated by the defendants and the trial court does apportion the receipts on what might be said to be a more 'equitable' basis in that it returns the revenues to the municipality in a far more accurate proportion to how and where they were earned.

The appellant's argument fails to take into account the words of sec. 71.14 (2a) (b) 3, Stats. The phrase, 'the situs of the income producing such taxes' must be given some meaning. The only meaning which can be ascribed to these words is that the department is to return the distributable portion of the tax receipts to the municipality from which it came. To execute this directive, the weighted average method is the better method to be used when distributing receipts from entities doing business both within and without this state.

It is our conclusion the legislature did not intend apportionment on the arithmetical basis. The confusion stems from the fact that in calculating the tax an arithmetical formula is used. That formula, however, is intended to present a practical method for Wisconsin to receive its fair share of the income of businesses doing business both in an out of the state. There is no attempt to weigh the factors in calculating the tax because such a calculation would not give a meaningful result. Attempting to determine what portion of each company's income was attributable to its property, what percent attributable to its manufacturing operations, and what percent attributable to its sales would not only be a horrendous task, but would also ignore the concept of a business as a going concern. The three-factor formula represents a legislative decision and a legislative finding of fact that each of the items is equally significant in producing a company's income. When considering apportioning tax receipts, however giving equal weight to each of the three factors does not recognize that the tax received is dependent on the overall operation of the company, both in-state and out-of-state. The volume of Wisconsin sales of a large national concern which has its factories in Wisconsin should not be determinative of the apportionment of one-third of the tax revenues from the company. Such a construction entirely ignores the legislature's policy decision that the three factors are of equal weight. (Johnson's Wisconsin sales were only four percent of the total sales.) If the three factors are of equal weight in calculating the tax, they must, to be consistent, be weighted when the tax is apportioned among the municipalities.

Appellant cites the case of Department of Taxation v. Blatz Brewing Co. (1961), 12 Wis.2d 615, 108 N.W.2d 319. The case is in no way helpful to the appellant in the instant situation. As the trial court in this case pointed out, the Blatz Brewing Case involved the apportionment of income between the state and other states for purposes of taxation. It was not involved with the allocation of tax revenues within the state of Wisconsin. As already noted, the same considerations do not prevail when considering taxation as do when determining allocation of the revenues received from the tax.

Neither does the case of State ex rel. Town of Greenfield v. Conway (1936), 221 Wis. 369, 266 N.W. 907, aid the appellant's position. In that case the Sivyer Company had property located in two different municipalities. The company failed to report the necessary information and consequently the revenues from the company were not correctly apportioned between the two municipalities involved. In reapportioning the revenues, the department used the arithmetical average method of calculation. The statutory directive was:

"* * * The income so computed * * * shall be apportioned * * * to the several towns, cities and villages in proportion to the respective amounts of income derived from each, * * *." State ex rel. Greenfield v. Conway, supra, at p. 371...