John Ownbey Co. v. Butler

• Decision Date: 07 February 1963
• Parties: , 211 Tenn. 366 JOHN OWNBEY CO., Inc. v. G. Hilton BUTLER, Commissioner. JOHN H. DANIEL CO., Inc. v. G. Hilton BUTLER, Commissioner. SOUTHERN CENTRAL CO., Inc. v. Alfred T. MacFARLAND, Commissioner. GRAY & DUDLEY CO., Inc. v. G. Hilton BUTLER, Commissioner.
• Court: Tennessee Supreme Court

Page 33

365 S.W.2d 33

15 McCanless 366, 211 Tenn. 366

JOHN OWNBEY CO., Inc. v. G. Hilton BUTLER, Commissioner.

JOHN H. DANIEL CO., Inc. v. G. Hilton BUTLER, Commissioner.

SOUTHERN CENTRAL CO., Inc. v. Alfred T. MacFARLAND, Commissioner.

GRAY & DUDLEY CO., Inc. v. G. Hilton BUTLER, Commissioner.

Supreme Court of Tennessee.

Feb. 7, 1963.

W. L. Ambrose, Jr., of Ambrose, Wilson & Saulpaw, Knoxville, for appellants Ownbey & Daniel.

Clarence Clifton, of Clifton, Mack & Kirkpatrick, Mephias, for appellant Southern Central Co.

Kenneth L. Roberts of Waller, Davis & Lansden, Nashville, for appellant Gray & Dudley.

George F. McCanless, Atty. Gen., Nashville, Milton P. Rice, Walker T. Tipton, Asst. Attys. Gen., Nashville, for appellee Commissioner.

PER CURIAM.

All of these suits seek to recover excise taxes (§ 67-2701 et seq., T.C.A.) paid by the taxpayer under protest. The Chancellors decided against the taxpayers. Appeals were seasonably perfected, briefed and argued. We must at the outset commend all counsel for the exceptionally fine presentation of their respective theories.

The legal solution of these four lawsuits is the same. The factual situation is different in each case, but this factual difference does not affect the outcome. They present two major questions, which are: (1) Can the Commissioner, after allowing the taxpayer to use and apply the apportionment formula of the statute (§ 67-2707, T.C.A.) in excise tax cases for years, suddenly hold that such apportionment formula does not apply? (2) Under the factual situation of these cases are the taxpayers 'doing business in Tennessee' under the meaning of the statute (§ 67-2701, T.C.A.)? An affirmative answer to both questions is necessary to hold the taxpayer liable for the tax.

All of the appellants are Tennessee corporations and none of them is chartered or qualified to do business as a corporation in any state other than Tennessee. Ownbey manufactures garments. Daniel is in the business of selling custom tailored men's clothing. Southern Central is in the business of manufacturing school supplies and Gray & Dudley is in the business of manufacturing and marketing appliances. All appellants have principal offices in this State. None of the appellants has been called upon to pay or has paid to any other state a tax upon, or measured by, its net income.

The out-of-state activities carried on by these appellant corporations are, as follows: (1) Gray & Dudley Company aggregates approximately five (5%) per cent of its annual sales to customers within the State, while approximately ninety-five (95%) per cent of its sales are to customers in all other states. Approximately ninety (90%) per cent are made in the same manner as to customers within Tennessee, that is, through solicitation of orders of manufacturers' representatives with shipment through channels of interstate commerce from Gray & Dudley to the out-of-state purchaser. Approximately eight (8%) per cent of these sales are to customers outside of Tennessee in such states as Massachusetts, Connecticut, New York, Louisiana and California, and are made through independent warehouses located therein. Gray & Dudley ships this approximately eight (8%) per cent of its goods to such out-of-state warehouses where manufacturers' representatives operating within such states make sales and deliveries direct to the customers from such warehouses. Such out-of-state purchasers are billed from Gray & Dudley's Tennessee office and payment is remitted thereto. Gray & Dudley likewise does about two (2%) per cent of its out-of-state sales to Louisiana and New York through agents of Gray & Dudley located there. This two (2%) per cent of goods is shipped to such agents and upon receipt is stored in the agent's warehouse. The sales and deliveries are made by the agents from their warehouse inventory. These agents receive all payments for such sales and maintain books and records, billings, etc., and a monthly inventory is submitted by these out-of-state agents to Gray & Dudley's Tennessee office, accompanied by a check in payment for the goods, and the agents in return are paid a commission.

(2) Southern Central Company solicits orders for its products mainly through its own officers traveling in foreign states for the purpose of soliciting these orders or through nonresident salaried traveling salesmen. A small percentage of their sales comes through commissioned brokers or salesmen. All orders are transmitted to the home office of Southern Central in Memphis for acceptance or rejection. Where orders are accepted sales are made upon a delivered basis.

(3) The John Ownbey Company negotiates contracts with the United States government to sell manufactured clothing which is subsequently delivered to designated governmental installations. The bulk of the component materials for the clothing is acquired by the Ownbey Company outside of Tennessee.

(4) The Daniel Company, through salesmen, solicits orders for made-to-measure men's clothing, which orders are transmitted to Daniel's Tennessee office for acceptance or rejection. When such orders are accepted, they are filled by having the clothing manufactured by others under contract with the Daniel Company and then shipped c. o. d. to the purchaser. Additionally, it purchases cloth or piece goods outside of Tennessee.

In all four cases the controversy arose out of recomputation by the Commissioner of the respective corporations' excise tax liability for a year or years ending in 1959 or later. In each case the appellant had filed its return in due time and had paid the tax shown as the appellant had computed its return. In computing its tax each corporation had undertaken to apportion its net earnings to Tennessee as a corporation 'doing business in Tennessee and elsewhere' within the meaning of § 67-2706, T.C.A., using the allocation formula appropriate to the character of its business, which was either manufacturing (§ 67-2707, T.C.A.), or merchandising (§ 67-2708, T.C.A.), as it had always done theretofore.

After the respective returns were received the Commissioner duly informed the corporations that they were not allowed to use the apportionment formula and enclosed with the letter so informing the company certain information as to why this was done. In other words generally the reason it was done, the Commissioner through advice of the Attorney General had reached the conclusion that since Congress had passed Public Law 86-272, 73 Stat. 555, that these sales to states outside of Tennessee and the way in which they were conducted, as heretofore set forth, could not be taxed in interstate commerce, and thus it became the duty of the Commissioner to tax all of said sales because they were really business done within Tennessee in view of the recent holding in this State that by similar transactions of these corporations in other states they were not doing business in the state so that service of process might be had on the corporation there. As we see this record this is the reason for the change and for no longer allowing these appellants to use the apportionment formula.

In other words, the Commissioner on advice from the Attorney General reached the conclusion that the defendant corporations were not engaged in corporate business elsewhere than in Tennessee within the meaning of the excise tax statute (§ 67-2701 et seq.) and thus accordingly certain deficiencies were found against each corporation and these suits were brought to recover the various amounts paid under protest.

The manufacturers' allocation formula (§ 67-2707, T.C.A.) specifies three factors, each of which compares Tennessee value to total value in the categories of (1) tangible property, (2) manufacturing cost, and (3) sales. The merchandising formula (§ 67-2708, T.C.A.) does likewise with respect to the factors of (1) property, (2) sales as to origin, and (3) sales as to destination. The average of the three factors in each case is the proportion of net earnings allocable to Tennessee.

All of these corporations, as said above, had shown a Tennessee factor of a hundred (100%) per cent with respect to the first two factors. As to the third factor, that is, the sales, the Ownbey Company showed a Tennessee ratio of no per cent; the Daniel Company showed a Tennessee ratio of 20.91 per cent; Southern Central showed a Tennessee ratio of fifteen (15%) per cent; and Gray & Dudley a Tennessee ratio of 5.13 per cent.

In other words each of these corporations acted upon the theory that its income for the years for which returns were made was derived both from intrastate and interstate business within the meaning of the excise tax statute, and they proceeded accordingly to follow the formula for allocation, above referred to, and to allocate for taxation in Tennessee only the portion thereof attributable by them to business transacted wholly within Tennessee and thus on this theory they submitted their returns.

The Commissioner, as above said, disagreed with this theory and proceeded to make an additional assessment to each corporation to include the net income from that portion of the business which is claimed by the corporations to be interstate commerce.

All corporations organized for profit under the laws of Tennessee and doing business in Tennessee shall annually pay an excise tax of a certain amount on their net earnings 'from business done within the state'. (§ 67-2701, T.C.A.). Where the corporation does business in Tennessee and elsewhere the net earnings are apportioned in accordance with the statutes above referred to (§ 67-2707 to § 67-2712, T.C.A.) and the net earnings as thus apportioned to Tennessee shall be deemed the earnings arising from business done within the State. § 67-2706, T.C.A.

This excise tax law originated in 1923. It was amended as it now stands by the Legislature in 1937 by Chapter 99 and by Chapter 176. After this amendment this Court in a well considered...