Goldberg v. State Tax Com'n

• Decision Date: 23 August 1982
• Docket Number: No. 62821,62821
• Citation: 639 S.W.2d 796
• Parties: Gerald H. GOLDBERG, Director of Revenue, State of Missouri, Petitioner-Respondent, v. STATE TAX COMMISSION, Respondent-Appellant.
• Court: Missouri Supreme Court

Page 796

639 S.W.2d 796

Gerald H. GOLDBERG, Director of Revenue, State of Missouri Petitioner-Respondent, v. STATE TAX COMMISSION, Respondent-Appellant.

No. 62821.

Supreme Court of Missouri.

Aug. 23, 1982.

Rehearing Denied Oct. 12, 1982.

Jack S. Curtis, Springfield, for respondent-appellant.

John Ashcroft, Atty. Gen., Richard L. Wieler, Asst. Atty. Gen., Jefferson City, for petitioner-respondent.

William D. Crampton, Thomas C. Walsh, Juan D. Keller, St. Louis, for Associated Industries of Missouri.

Lawrence H. Weltman, John P. Barrie, Lea A. Bailis, St. Louis, for Checker Food Products Co. and Swing-A-Way Mfg.

Ernest M. Fleischer, J. Scott Merritt, Jr., Steven J. Beilke, Kansas City, for Continental Disc Corp., et al.

WELLIVER, Judge.

The State Tax Commission appeals a circuit court judgment reversing its decision in favor of Paul Mueller Company, the real party in interest, and reinstating an assessment by the director of revenue of additional income tax against Mueller for the years 1972 through 1975. The issue is whether Mueller may, for purposes of determining its Missouri income tax liability, apportion the income it derived from the sale of goods to out-of-state customers. The director of revenue determined, and the trial court held, that it may not. We reverse and remand.

I

Paul Mueller Company is a Missouri corporation located in Springfield, Missouri, that manufactures stainless steel products for sale throughout the United States and in a number of foreign countries. Many of its products are specially manufactured to meet customer specifications. Mueller is not domesticated in any other state, and it neither owns property nor maintains branch offices outside Missouri. It employs sales representatives who live outside the state, and the salesmen based at the Springfield office also travel extensively throughout the United States. All of the sales representatives are under the control of the Springfield office, which must approve all purchase orders and receive all payments. Negotiations with potential purchasers are often necessary after solicitation of orders when terms appearing in purchase orders are not in accord with terms proposed by Mueller. All of Mueller's products are manufactured in Springfield, and most are shipped F.O.B. Springfield. Personnel are sent from the Springfield office whenever Mueller's products require service or repair.

Although Mueller paid no income tax to any other state during the years in question, for 1972 it apportioned its income pursuant to the single factor formula set forth in § 143.040(2), RSMo 1969, and for 1973 through 1975 it did the same under the formula prescribed in § 143.451(2)(2)(b), RSMo 1978. ¹ Mueller included half its income derived from sales to purchasers outside Missouri in the numerator of the single factor formula on the ground that those sales resulted from transactions that occurred partially within and partially without the state. The director of revenue, however, disallowed that calculation, ruling that the transactions occurred solely within Missouri and that all of the income derived therefrom should have been included in the computation. The State Tax Commission reversed the director's decision, holding that a portion of the transactions occurred outside the state. The director appealed to the circuit court, which reversed the Commission's ruling as unsupported by substantial evidence upon the whole record and reinstated the director's determination. This appeal followed.

II

This case presents an issue of far-reaching significance to Missouri businesses engaged in interstate commerce. ² The central inquiry is the method by which the determination is to be made whether a taxpayer may for Missouri income tax purposes allocate income earned from the transaction of business in interstate commerce. In M.V. Marine Co. v. State Tax Commission, 606 S.W.2d 644, 649 (Mo. banc 1980), we said that the advent of the Multistate Tax Compact, § 32.200, "has simplified the process of determining entitlement to apportion taxes by changing the focus of the inquiry from a search for the 'source' of income to a simple showing of jurisdictional 'tax liability' in another state." We are asked on rehearing in this case and those argued with it ³ to reexamine that statement, which the prior opinion herein followed.

Missouri enacted the Compact in 1967. S.B. 3, 74th Gen.Assem., Reg.Sess., 1967 Mo.Laws 102. Article III, § 1 of the Compact provides in part that a taxpayer may elect to apportion his income pursuant to either Article IV of the Compact or state law existing independently of the Compact if that income "is subject to apportionment and allocation for tax purposes pursuant to the laws of a party state or pursuant to the laws of subdivisions in two or more party states." Article IV, § 2 of the Compact provides in part that "[a]ny taxpayer having income from business activity which is taxable both within and without this state" shall apportion his net income as therein provided. Relying upon M.V. Marine, the director of revenue argues that the trial court's decision should be affirmed because Paul Mueller Company paid no income tax in any other state during the years in question and has made no showing that it was subject to tax liability in any other state. The sole issue before this Court, therefore, is whether M.V. Marine's statement of the law is correct. Upon this reexamination we conclude that it is not.

M.V. Marine involved income from the lease of barges. Those transactions were fully consummated within Missouri, and the income therefrom was properly taxable by Missouri under the applicable statutes, now § 143.451. The result in M.V. Marine was eminently correct. The question whether the lessee's income from the use of the barges in interstate commerce was taxable in Missouri was never an issue in the case and had no bearing on whether or not consideration given for the leases was taxable as income earned solely in Missouri. The discussion of the Compact was unnecessary to the decision. In our preoccupation with a result so obviously correct, we unanimously failed to foresee the possible ramifications of the dictum in its application to subsequent cases.

III

The flaw in the M.V. Marine dictum rests upon a fundamental misinterpretation of the purpose underlying the adoption of the Compact. The Compact was never intended by anyone to be a substantive taxation statute. Instead, it was the product of a fear among the states that Congress would act to wrest from the states the authority to tax the income of businesses operating in interstate commerce. It was conceived as merely a procedural vehicle by which the states could resolve conflicts among themselves and aggrieved taxpayers concerning the proper scope of taxation authority that affected states could exercise with regard to a taxpayer subject to taxation in more than one state.

The United States Supreme Court held in Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 79 S.Ct. 357, 3 L.Ed.2d 421 (1959), that states could tax the net income from the interstate operations of foreign corporations if the tax were nondiscriminatory and were fairly apportioned to local activities that constituted a sufficient nexus to support the exercise of the taxing power. Following Portland Cement, Congress acted to establish minimum standards for the exercise of that power by providing, among other things, that a state may not tax a foreign corporation on income derived from the transaction of business in interstate commerce if the corporation's only contact with that state is the solicitation of orders for the sale of tangible personal property. Act of Sept. 14, 1959, § 101(a), Pub.L. No. 86-272, 73 Stat. 555, 555 (codified at 15 U.S.C. § 381(a) (1976)). The Compact was drafted in 1966 as a response to this and other judicial and legislative activity. See generally United States Steel Corp. v. Multistate Tax Commission, 434 U.S. 452, 454-57, 98 S.Ct. 799, 803-04, 54 L.Ed.2d 682 (1978). As the drafters of the Compact themselves explained,

the basic justification for the Multistate Tax Compact is that the States themselves are the most appropriate instruments for the determination of their own tax laws and policies. The Compact is a means by which the States can cooperatively work out any problems which may exist, or which may arise in the future, because businesses function in more than one State. Further, the record of activity in Congress over the past few years appears to make it likely that if the States do not take cooperative action to deal with the problems alleged to exist, Federal legislation restricting the jurisdiction of the States and their local governments to tax will ensue. This may be true whether or not allegations that serious problems and inequities exist are actually covered.

In 1959, the United States Supreme Court decided the Northwest Portland Cement and Stockham Valve cases. The net effect of these decisions, and of that in the Scripto case of 1961, was to make it absolutely clear that State and local jurisdiction to tax could rest on sales activity of the taxpayer within the jurisdiction, even if the taxpayer had no physical property or fulltime employees within the jurisdiction.... [T]he final judicial determination that such was the case led some elements of the multistate business community to press for Federal legislation that would establish a contrary result. Within months of the Northwest and Stockham decisions, this pressure succeeded in securing enactment of Public Law 86-272, a statute which removed many sales activities of out-of-state firms from State and local taxing jurisdiction....

Also authorized by Public Law 86-272 and amendments to it was a study of State and local taxation of multistate businesses. On the last day of the first session of the 89th Congress, the Willis Subcommittee presented its bill, H.R. 11798. Briefly stated, ...