Coca Cola Co. v. Department of Revenue

• Decision Date: 01 April 1975
• Citation: 533 P.2d 788,271 Or. 517
• Parties: The COCA COLA COMPANY, Appellant, v. DEPARTMENT OF REVENUE, Respondent.
• Court: Oregon Supreme Court

Page 788

533 P.2d 788

271 Or. 517

The COCA COLA COMPANY, Appellant, v. DEPARTMENT OF REVENUE, Respondent.

Supreme Court of Oregon.

Argued and Submitted Dec. 3, 1974.

Decided April 1, 1975.

Joel Kuntz, Portland, and John R. Hay, Portland, argued the cause for appellant. With Mr. Hay on the briefs were Davies, Biggs, Strayer, Stoel & Boley, Portland.

Theodore W. deLooze, Chief Tax Counsel, Salem, argued the cause for respondent. With him on the brief were Lee Johnson, Atty. Gen., and Walter J. Apley and James D. Manary, Asst. Attys. Gen., Salem.

Before O'CONNELL, C.J., and HOLMAN, TONGUE, HOWELL, BRYSON and SLOPER, JJ.

HOWELL, Justice.

This is a tax case involving the determination of the Oregon corporate excise tax liability of the Coca Cola Company doing business throughout the United States, and its wholly owned subsidiary, Pacific Coca Cola Bottling Company, doing business in Oregon and Washington. Specifically, plaintiff seeks to reverse the decision of the Department of Revenue to assess additional taxes for the years 1963, 1964, 1965, and 1966. The Oregon Tax Court affirmed the action of the Department of Revenue, 5 OTR Adv.Sh. 405 (1974).

The facts have been stipulated and appear in the opinion of the Tax Court:

Taxpayer, a Delaware corporation with its principal office in Atlanta, Georgia, manufactures soft drink syrups for fountain and bottled use. The syrups are sold to wholesale druggists, to other independent wholesale dealers, and to approximately 900 bottling plants throughout the United States. Plaintiff owns all the shares of approximately 40 of the 900 bottling plants, including Pacific Coca Cola Bottling Company (hereinafter Pacific), located in Portland, Oregon. Pacific is a separate corporate entity as are the other bottling plants owned by Coca Cola. Approximately 10 percent of the syrup manufactured by the plaintiff is sold to its subsidiary bottling companies and approximately 5 percent of the plaintiff's total sales are to wholly owned bottling companies. Plaintiff owns and operates a Portland syrup plant which supplies Pacific with its syrup. It is one of 12 in the United States preparing Coca Cola syrup, using a secret formula, as well as syrups for Fresca, Sprite, and other beverages. Sales of bottled syrup to so-called 'independent bottlers' and wholly owned bottling companies are made at the same prices, which have been established by long-standing contracts. Pacific has operations in both Oregon and Washington. Its contractual agreement with plaintiff precludes it from buying syrups and bottling beverages in substantial competition with the products of the Coca Cola Company. All the bottling subsidiaries are wholly dependent upon the parent company for Coca Cola and most other syrups used by them.

Although given some degree of independence in the day-to-day management of bottling operations, all the bottling companies which are wholly owned subsidiaries, including Pacific, are subject to extensive control by the parent corporation as to the nature and quality of the product, the quality and nature of advertising, the methods of marketing, the research and development of new products, the maintenance and audit of books and records, and the geographical area to be served. The parent company maintains a specific department or division for the sole purpose of supervising the operation of the bottling subsidiaries through placement of its employees on the corporate boards of the subsidiaries and by sending specialists to aid management. Pacific's tax returns are prepared at the parent's Atlanta office. 5 OTR Adv.Sh. at 406--07.

The Coca Cola Company filed returns for the years in question by using the three-factor apportionment formula to determine its Oregon Tax liability. This three-factor apportionment formula was explained in John I. Haas, Inc. v. Tax Com., 227 Or. 170, 174, 361 P.2d 820, 822 (1961):

'The method adopted by the Commission to apportion income of a foreign corporation so as to accurately reflect income from business within Oregon consisted of determining the average proportion the corporation's Oregon property, wages and sales bore to the corporation's total property, wages and sales; and then to use this proportion as the percentage of the corporation's total net income which resulted from business done within Oregon. * * *'

Likewise, Pacific determined its Oregon tax by determining the corporation its Oregon property, sales and wages bore to its overall property, sales and wages.

The Department of Revenue ruled that Coca Cola and its wholly owned bottling subsidiaries constituted one unitary business for tax purposes. Therefore, it recomputed Coca Cola's tax by determining the proportion that the Oregon property, sales and wages of Coca Cola and its subsidiaries bore to the overall property, sales and wages of Coca Cola and its subsidiaries. It then applied the proportion to the total income of Coca Cola and its subsidiaries. This method of computation increased the tax liability of Coca Cola in that it apportioned more of the net income of Coca Cola and its subsidiaries to Oregon.

The principal issue in this case is whether the income from Coca Cola and its wholly owned subsidiaries may be combined and the apportionment formula applied to the sum to determine the income properly attributable to Oregon. Coca Cola and Pacific have each filed separate tax returns as unitary corporations; that is, as multistate businesses whole Oregon activities are so interconnected with out-of-state activities as to require apportionment by the three-factor formula of property, wages and sales. The Department of Revenue contends that the manufacture of syrup and the other activities of Coca Cola and the bottling activities of its wholly owned subsidiaries constitute one vertically integrated business with the ultimate goal of providing soft drinks to the public. Thus they contend, and the Tax Court agreed, that a combined apportionment accounting method best reflects the income of Coca Cola and its subsidiaries in Oregon.

For the tax years 1963 and 1964 the applicable statute gave the Tax Commission (now the Department of Revenue) the power to permit or require a corporation doing business within and without the state to use either the segregated method ¹ or the apportionment method of reporting. ORS 314.280 (repealed by Or.Law 1965, ch 152, § 22). The law did not favor one method over the other. Utah Const. & Mining v. Tax Com., 255 Or. 228, 465 P.2d 712 (1970). The taxpayer had the burden of showing that the method employed by the Department was arbitrary and unreasonable. Utah Const. & Mining v. Tax Com., supra; Consolidated Freightways v. Tax Com., 230 Or. 522, 370 P.2d 224 (1962).

For the tax years 1965 and 1966 the applicable statute required a taxpayer having business which is taxable both within the without the state to use the apportionment method. ORS 314.615 (Uniform Division of Income for Tax Purposes Act). The only exception existed where the apportionment method did not fairly represent the taxpayer's business activity within the state. ORS 314.670. The use of any method other than the apportionment method was extraordinary and the burden of proof was on the one seeking to invoke the aid of ORS 314.670 and use a nonapportionment formula. Donald M. Drake Co. v. Dept. of Rev., 263 Or. 26, 500 P.2d 1041 (1972).

The Department of Revenue has interpreted both statutes to provide for the combined apportionment method '(w)here two or more corporations are engaged in a unitary business, a part of which is conducted in Oregon by one or more members of the group.' Dept. of Rev.Reg. 314.280(1)--(B); Reg. 314.615(B).

Initially, this court must consider the nature of a unitary business and the applicability of that concept of Coca Cola and its wholly owned subsidiaries. Then we must consider whether the combined apportionment method is allowable under the applicable statutes.

In Butler Brothers v. McColgan, 17 Cal.2d 664, 111 P.2d 334 (1941), aff'd, 315 U.S. 501, 62 S.Ct. 701, 86 L.Ed. 991 (1942), the California Supreme Court stated the factors to be considered in determining whether a business is unitary or separate in character:

'* * * It is only if its business within this state is truly separate and distinct from its business without this state, so that the segregation of income may be made clearly and accurately, that the separate accounting method may properly be used. Where, however, interstate operations are carried on and that portion of the corporation's business done within the state cannot be clearly segregated from that done outside the state, the unit rule of assessment is employed as a device for allocating to the state for taxation its fair share of the taxable values of the taxpayer (citing authorities).' 17 Cal.2d 667--68, 111 P.2d 336.

As stated by Keesling and Warren, The Unitary Concept in the Allocation of Income, 12 Hastings J. 42, 46 (1960):

'When the properties and activities within the jurisdiction are an inseparable portion of a business carried on within and without the jurisdiction, the computation on the income attributable thereto requires a computation of the income of the business as a whole or as a unit and an apportionment or allocation of the total to the various parts. This necessity of dealing with the business as a Unit taking into account income from property and activities without the jurisdiction as well as within, gives rise to the classification of the business as a unitary business. Thus a unitary business may be defined simply as any business which is carried on partly within and partly without the taxing jurisdiction.' (Emphasis in original.)

See John Deere Plow Co. v. Franchise Tax Bd., 38 Cal.2d 214, 238 P.2d 569 (1951). See also Lavelle, What Constitutes a Unitary Business, 25 Major Tax Planning (So.Cal.Tax.Inst.) 239 (1973).

The test for determining whether a multistate business is unitary was...