Commissioner of Revenue v. Associated Dry Goods, Inc., C6-83-227

• Decision Date: 23 March 1984
• Docket Number: No. C6-83-227,C6-83-227
• Citation: 347 N.W.2d 36
• Parties: The COMMISSIONER OF REVENUE, Respondent, v. ASSOCIATED DRY GOODS, INC., Relator.
• Court: Minnesota Supreme Court

Page 36

347 N.W.2d 36

The COMMISSIONER OF REVENUE, Respondent, v. ASSOCIATED DRY GOODS, INC., Relator.

No. C6-83-227.

Supreme Court of Minnesota.

March 23, 1984.

Syllabus by the Court

1. The Tax Court's determination that relator's multistate business is a "unitary" business for purposes of assessing state income taxes is reasonably supported by the evidence and has a reasonable basis in law.

2. Since relator was properly found to be a unitary business, the state was free to use its three-factor apportionment formula for tax purposes.

Ralph W. Peterson, Daniel T. Blomquist, Minneapolis, for relator.

Hubert H. Humphrey, III, Atty. Gen., Paul R. Kempainen, Sp. Asst. Atty. Gen., Dept. of Rev., St. Paul, for respondent.

Heard, considered and decided by the court en banc.

SIMONETT, Justice.

The relator taxpayer, with headquarters in New York City, has retailing divisions located throughout the United States, including the Powers Dry Goods Company division in Minnesota. The Tax Court held that the taxpayer was a "unitary" business conducted within and without Minnesota, so that the taxpayer's aggregate income from all its divisions was to be apportioned under the three-factor formula of Minn.Stat. Sec. 290.19 (1982) to determine the Minnesota state income taxes due. We affirm.

In 1916, Associated Dry Goods was incorporated as a Virginia corporation with corporate headquarters in New York City and with eight retail stores, including Powers Dry Goods Company in Minneapolis, as subsidiaries. In subsequent years, more stores were added. In 1951, Associated Dry Goods reorganized, eliminating the subsidiaries and becoming one corporate entity with a number of separate retailing divisions operating in this country. Powers Dry Goods Company is one of the divisions, operating seven stores in Minnesota.

For the tax years February 1, 1967, through January 31, 1976, the taxpayer filed Minnesota state income tax returns, reporting on a separate accounting basis only income from the Powers Dry Goods division. On May 17, 1977, the Commissioner of Revenue assessed additional state income taxes for these years in the aggregate amount of $280,085.06. The assessment was appealed by Associated Dry Goods to the Tax Court, which, on November 2, 1982, affirmed the Commissioner's order, finding that the taxpayer was a "unitary business" for the years in question and that its income was properly apportioned by the three-factor formula of Minn.Stat Sec. 290.19, subd. 1(2) (1971 & 1974). This writ of certiorari followed.

The issues on appeal are best phrased as follows: (1) Did the Tax Court err in finding that Associated Dry Goods was a "unitary" business? (2) If Associated Dry Goods was conducting a "unitary" business in this state, could Minnesota base its state income tax on an apportionment of the taxpayer's net income to this state by the three-factor formula? The first issue is basically factual and the second is more a question of law, but both questions implicate the constitutional limitation of due process under the Federal and Minnesota constitutions.

If a business is carried on partly within and partly without this state, then Minn.Stat. Sec. 290.19 (1982) provides that the entire income derived from the business shall be considered in determining the business' state income tax under a three-factor apportionment formula. This formula apportions income on the basis of a percentage representing the arithmetic average of the ratios of sales, property, and payroll within Minnesota to the sales, property, and payroll of the business as a whole. See Minn.Stat. Sec. 290.19, subd. 1(2)(a) (1976). The Commissioner applied this formula to arrive at his additional assessment.

In making an assessment, "a State may not tax value earned outside its borders." ASARCO Inc. v. Idaho State Tax Commission, 458 U.S. 307, 102 S.Ct. 3103, 3109, 73 L.Ed.2d 787 (1982). On the other hand, recognizing that it is not always easy to determine what income of a multistate business is earned within a state and what without, it has long been the law that, if the business is "unitary," an apportionment formula which considers the local business as part of the whole may be used. We have said:

A multistate business is a unitary business when the operations conducted in one state benefit and are in turn benefited by the operations conducted in another state or states. The test to be applied in determining whether a business is a unitary one is based upon the following inquiry: Is the operation of the business within the state "dependent upon or contributory to the operation of the business outside the state"?

Western Auto Supply v. Commissioner of Taxation, 245 Minn. 346, 355-56, 71 N.W.2d 797, 804 (1955). This definition appears as well in our statutes. ¹ See also, e.g., Great Lakes Pipe Line Co. v. Commissioner of Taxation, 272 Minn. 403, 138 N.W.2d 612 (1965); Maurice L. Rothschild & Co. v. Commissioner of Taxation, 270 Minn. 245, 133 N.W.2d 524 (1965).

Associated Dry Goods strenuously contends it is not a "unitary" business, at least not insofar as Minnesota is concerned, ² if the Western Auto test is properly applied. Associated Dry Goods has brought this same claim to us before, for the years 1954 through January 1967. On that occasion, we affirmed a Tax Court ruling that the taxpayer was a unitary business without opinion because this court was evenly divided. See Associated Dry Goods Corp. v. Commissioner of Taxation, 306 Minn. 532, 235 N.W.2d 821 (1975), cert. denied, 425 U.S. 999, 96 S.Ct. 2216, 48 L.Ed.2d 824 (1976). The taxpayer now returns, pointing out that recently the United States Supreme Court has issued five decisions on the unitary enterprise concept in state taxation of multijurisdictional businesses, ³ and that these decisions clarify the concept favorably to its cause. These decisions are not unhelpful, but the facts of each case are varied and many, and each case--as does ours here--turns largely on its own situation. There are no "bright lines"--but some principles and matters of emphasis do emerge.

For a unitary business, there must be "some sharing or exchange of value not capable of precise identification or measurement--beyond the mere flow of funds arising out of a passive investment or a distinct business operation--which renders formula apportionment a reasonable method of taxation." Container Corporation of America v. Franchise Tax Board, --- U.S. ----, 103 S.Ct. 2933, 2940, 77 L.Ed.2d 545 (1983). Or put another way, a multistate enterprise may be characterized as a unitary business where there are "contributions to income resulting from functional integration, centralization of management, and economies of scale." Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425, 438, 100 S.Ct. 1223, 1232, 63 L.Ed.2d 510 (1980). ⁴ Where these characteristics exist, use of a separate geographic accounting system may fail to account for these contributions to income, and an apportionment formula may then be used.

There must be "some bond of ownership or control" uniting the business enterprise. Container Corp., 103 S.Ct. at 2940. Also, "[o]ne must look principally at the underlying activity, not at the form of investment," and it must be remembered that "the form of business organization may have nothing to do with the underlying unity or diversity of business enterprise." Mobil, 445 U.S. at 440, 100 S.Ct. at 1233. A unitary business may be either vertically or horizontally structured. Container Corp., 103 S.Ct. at 2941. On the other hand, ASARCO, Inc. v. Idaho State Tax Commission, 458 U.S. 307, 102 S.Ct. 3103, 73 L.Ed.2d 787 (1982), and F.W. Woolworth Co. v. Taxation and Revenue Department, 458 U.S. 354, 102 S.Ct. 3128, 73 L.Ed.2d 819 (1982), seem to suggest something more is needed than evidence of common ownership, high-level executive oversight and certain centralized nonoperating functions such as accounting, legal and financing services, and something more than just adding to the profit of the parent; rather there must be some "rational relationship" between the outside income attributed to the taxing state and the intrastate values of the enterprise so that the local in-state operation is more than simply a discrete business enterprise. ASARCO, 102 S.Ct. at 3114-15; F.W. Woolworth, 102 S.Ct. at 3135. In the most recent decision, Container Corp., however, it was held that the taxpayer's assistance to the foreign subsidiaries in the form of equipment and personnel needs, loaning funds and guaranteeing loans, giving substantial technical assistance, and the supervisory role played by the corporate officers in providing general guidelines to the subsidiaries was sufficient to tax the enterprise as a single entity.

Against this background, we examine the facts of our case. Associated Dry Goods operates as a "retail ownership group." Its stores are set up as separate divisions; although they are not corporate subsidiaries, neither are they "chain stores." Each of the divisions, of which Powers is one, operates several retail department stores. Each division, however, is operated independently, catering to different sections of society, carrying different merchandise lines, and using different methods of operation. The diversity extends from the relatively small Powers Dry Goods to the elite Lord and Taylor stores.

Formal control of Associated Dry Goods is in a single board of directors, one set of corporate officers and one set of stockholders. The New York office acts as banker, counsellor, and coordinator of activities of the divisions, but almost all day-to-day control over operations and management is delegated to the division officers. Division presidents, such as for Powers, are given nearly total authority over hiring, firing, merchandising, warehousing, pricing, sales advertising, and store layout for their own divisions. The division president and treasurer are appointed as corporate officers...