Consolidated Freightways Corp. of Delaware v. Wisconsin Dept. of Revenue, 89-1720

• Decision Date: 14 November 1991
• Docket Number: No. 89-1720,89-1720
• Parties: , 60 USLW 2355 CONSOLIDATED FREIGHTWAYS CORPORATION OF DELAWARE, Petitioner-Appellant, v. WISCONSIN DEPARTMENT OF REVENUE, Respondent-Petitioner.
• Court: Wisconsin Supreme Court

Page 44

477 N.W.2d 44

164 Wis.2d 764, 60 USLW 2355

CONSOLIDATED FREIGHTWAYS CORPORATION OF DELAWARE, Petitioner-Appellant, v. WISCONSIN DEPARTMENT OF REVENUE, Respondent-Petitioner.

No. 89-1720.

Supreme Court of Wisconsin.

Argued Sept. 4, 1991.

Decided Nov. 14, 1991.

Alan Lee, Asst. Atty. Gen., with whom on the briefs was Donald J. Hanaway, Past Atty. Gen. and James E. Doyle, Jr., Present Atty. Gen., for respondent-petitioner.

John Duncan Varda (argued), John H. Lederer and DeWitt, Porter, Huggett, Schumacher & Morgan, S.C., Madison, for petitioner-appellant.

DAY, Justice.

This case is before us on a petition for review by the Wisconsin Department of Revenue of a published decision of the court of appeals. ¹ The Department of Revenue assessed a tax against Consolidated Freightways, an interstate motor carrier, using the formula provided in Wis.Admin.Code sec. Tax 2.47 to ascertain the amount of income Consolidated Freightways earned in Wisconsin. The Tax Appeals Commission upheld the tax assessment. The Dane County Circuit Court upheld the tax assessment. The court of appeals reversed the circuit court. We reverse the court of appeals.

There are three issues in this case: (1) as applied to Consolidated Freightways, does the formula violate sec. 71.07(2)(e), Stats., 1985-86, which limits the taxable income to income derived from business transacted within this state; (2) as applied to Consolidated Freightways, does the formula violate the Commerce Clause of the United States Constitution; and (3) as applied to Consolidated Freightways, does the formula violate the Due Process Clause of the United States Constitution?

We hold that the formula provided in Wis.Admin.Code sec. Tax 2.47 (1989), as applied to Consolidated Freightways, taxes only income "derived from business transacted ... within the state," and does not violate sec. 71.07(2)(e), Stats., the Commerce Clause, or the Due Process Clause.

The facts are not in dispute. Consolidated Freightways (Consolidated) is incorporated in Delaware with its main offices in California. Consolidated is a general commodity common motor carrier operating in interstate commerce typically hauling small shipments--less than truckload size. It consolidates numerous small loads into fewer large loads and transports the consolidated loads through a system of terminals and established routes. Consolidated owns 14,000 trailers and 2,400 tractors. It maintains 410 terminals nationwide with thirteen terminals in Wisconsin including one regional consolidation center.

In 1966, the Wisconsin Department of Revenue (Department) adopted Wis.Admin.Code sec. Tax 2.47 (Tax 2.47) ² which provides a formula for apportioning franchise taxes assessed against motor carriers doing business in Wisconsin. The two factor formula adds (a) the ratio of gross receipts from carriage of goods first acquired in Wisconsin--the "originating" or "outbound" revenues--to gross receipts from carriage of property everywhere, and (b) the ratio of ton miles of carriage in Wisconsin to ton miles of carriage everywhere, and then (c) divides the total by two to average the results. The final figure is the percentage of the company's income subject to the Wisconsin franchise tax.

During the years 1974 through 1977, Consolidated apportioned its Wisconsin income using a different formula than the two factor formula in Tax 2.47.

In 1979, the Department audited Consolidated and assessed an additional franchise tax and interest against Consolidated for calendar years 1974 through 1977 in the amount of $115,002.98, of which $110,333.75 of tax plus interest remains in dispute. The Department used the formula provided in Tax 2.47 to arrive at the assessment.

Consolidated argues that the Tax 2.47 formula, as applied to Consolidated, taxes income earned by Consolidated outside of Wisconsin and therefore violates sec. 71.07(2)(e) Stats., 1985-86 ³ which limits Wisconsin's taxing jurisdiction to "income derived from business transacted and property located within the state." Consolidated further argues that the Tax 2.47 formula, as applied, violates the Commerce Clause, ⁴ which limits a state's power to tax interstate commerce, and the fourteenth amendment. ⁵

Specifically, Consolidated argues that the formula's first factor, the "originating revenue" factor, taxes income derived from Consolidated's activities in other states. Consolidated earns income through various activities: sales, transportation (pickup and delivery, terminal activity, consolidation center activity, line haul movement), and management. Consolidated argues that the "originating revenue" factor does not measure Wisconsin activity alone but rather activity in other states as well since income is earned by activities for the length of the journey, not just the activities taking place in the originating state.

The court of appeals held that the Tax 2.47 formula, as applied to Consolidated, violated sec. 71.07(2)(e), Stats., as it taxed "extraterritorial income" and therefore did not reach the Commerce Clause issue raised by Consolidated. Consolidated, 157 Wis.2d at 67, 76, 458 N.W.2d 550.

We conclude the formula, as applied to Consolidated, must be scrutinized under sec. 71.07(2)(e) Stats., the Commerce Clause, and the Due Process Clause. We hold the formula, as applied to Consolidated, does not violate the statute nor the Commerce or Due Process Clauses.

Whether the Tax 2.47 formula, as applied to Consolidated, violates sec. 71.07(2)(e), Stats., the Commerce Clause, or the Due Process Clause, are questions of law. On review, this court decides questions of law independently without deference to the decisions of the trial court and court of appeals. Ball v. District No. 4 Area Bd., 117 Wis.2d 529, 537, 345 N.W.2d 389, 394 (1984). Special deference is to be afforded to an agency where there has been a uniform interpretation over a period of time. Local No. 695 v. LIRC, 154 Wis.2d 75, 84 452 N.W.2d 368, 372 (1990). However, when a legal question is presented and there is no evidence of any special expertise or experience, no weight at all is given to the agency interpretation. Local No. 695, 154 Wis.2d at 84, 452 N.W.2d 368. Though the Department has experience in applying the Tax 2.47 formula to motor carriers, we agree with the court of appeals that the issue of whether Tax 2.47 as applied to Consolidated violates sec. 71.07(2)(e), Stats., is a question of law in which neither the Department nor the Tax Appeals Commission has evidenced any special expertise or experience. The Department's use of the Tax 2.47 formula does not by itself establish the Department has pursued a "course of uniform interpretation over a period of time." Local No. 695, 154 Wis.2d at 84, 452 N.W.2d 368. Routine and mechanical application of a formula does not equate with interpretation of its underlying legality. Thus, this court will afford no deference to the Department's or the Tax Appeals Commission's interpretation in this case.

Referring to Moorman Mfg. Co. v. Bair, 437 U.S. 267, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978), which analyzed a tax formula under the Due Process and Commerce Clauses, the court of appeals in this case stated, "[w]hatever impact Moorman might have on a federal constitutional issue, we do not believe it controls our interpretation of a state statute prohibiting extraterritorial taxation." Consolidated, 157 Wis.2d at 72 n. 2, 458 N.W.2d 550.

We disagree. The Commerce Clause is necessarily relevant to sec. 71.07(2)(e), Stats., analysis since the Commerce Clause imposes limits upon Wisconsin's tax jurisdiction over "business transacted" within this state by interstate motor carriers.

This court has traditionally looked to the Commerce Clause to ascertain the limits upon Wisconsin's tax jurisdiction over interstate businesses. In United States Glue Co. v. Oak Creek, 161 Wis. 211, 153 N.W. 241 (1915),aff'd, 247 U.S. 321, 38 S.Ct. 499, 62 L.Ed. 1135 (1918), ⁶ plaintiff challenged a tax assessment, alleging it taxed income derived outside this state in violation of the Income Tax Laws of 1911 which stated: "[A]ny person engaged in business within and without this state shall ... be taxed only upon that proportion of such income as is derived from business transacted and property located within the state." Section 1087m-2, ch. 48a sub. 3, Laws of 1911 (Emphasis added).

The U.S. Glue case first decided the "statutory" question; namely, what portion of the glue company's total net business income is income " 'derived from business transacted and property located within this state,' and [is] subject to the tax upon incomes?" U.S. Glue, 161 Wis. at 216, 153 N.W. 241. The company argued that only the income derived from the manufacture, sale, and delivery of the glue products at its factory in Wisconsin to other points in Wisconsin yielded income derived from business transacted in Wisconsin. This court disagreed, concluding that all income derived from the manufacture, sale, and delivery of the products to points both within and outside of Wisconsin was income derived from business transacted within this state. The court stated:

We are of the opinion that this provision of the statute includes all of plaintiff's net "business income" derived from the manufacture, sale, and delivery of such of its products as were manufactured at, sold, and delivered from the factory to customers in Wisconsin and other states....

U.S. Glue, 161 Wis. at 216, 153 N.W. 241.

The court then considered whether the taxation of income derived from those activities violated the Commerce Clause by taxing interstate commerce and held that it did not.

The U.S. Glue case recognized that the jurisdictional limitations under the Commerce Clause are relevant to the tax statute. Such relevance was again recognized in Standard Oil Co. v. Wisconsin Tax Comm., 197 Wis. 630, 633, 223 N.W. 85 (1929). Interpreting a portion of sec. 71.01 Stats., 1925, providing: "Persons engaged...