Lancaster Colony Corp. v. Limbach

• Decision Date: 22 June 1988
• Docket Number: No. 87-305,87-305
• Parties: LANCASTER COLONY CORPORATION et al., Appellants, v. LIMBACH, Tax Commr., Appellee.
• Court: Ohio Supreme Court

Page 198

37 Ohio St.3d 198

524 N.E.2d 1389

LANCASTER COLONY CORPORATION et al., Appellants, v. LIMBACH, Tax Commr., Appellee.

No. 87-305.

Supreme Court of Ohio.

Submitted April 5, 1988.

Decided June 22, 1988.

Appellant, Lancaster Colony Corporation, is a Delaware corporation with headquarters in Columbus, Ohio. It manufactures and distributes various products including automotive items, specialty foods, and glassware. It operates through divisions and subsidiaries.

Appellant filed franchise tax returns for the years 1976 through 1980. In these returns, appellant utilized the net income method in calculating the tax due. In apportioning income representing business activity in Ohio, appellant included in the payroll factor of the three-factor formula set forth in R.C. 5733.05(B)(2) commissions paid to independent contractors who were its selling agents. Appellee, Tax Commissioner, audited these returns and deducted these commissions from the payroll factor. She found that the independent contractors were not "employees" within the meaning of the statute. Since most of the commissions were paid to selling agents who were outside Ohio, deduction of these commissions increased the net income apportioned to Ohio. Accordingly, appellee issued an assessment reflecting an increase in appellant's tax liability.

For the tax years 1979 and 1980, appellant filed requests with its returns to substitute a modified payroll factor that included the commissions for the statutory factor. For these two years, this modification would have reduced appellant's tax liability. These requests were denied.

On appeal, the Board of Tax Appeals ("BTA") found that these independent contractors were not employees and that their commissions should not be included in the statutory payroll factor. It also affirmed appellee's denial of the requested substitution for the tax years 1979 and 1980. The BTA affirmed the assessment.

The cause is now before this court upon an appeal as a matter of right.

Baker & Hostetler and Edward J. Bernert, Columbus, for appellant.

Anthony J. Celebrezze, Jr., Atty. Gen., and Richard C. Farrin, Columbus, for appellee.

PER CURIAM.

I

Independent Contractor as "Employee"

The franchise tax is levied on a corporation's exercise of its franchise privileges in Ohio. R.C. 5733.01(A). The tax is the greater of the amounts calculated under either the net income method or the net worth method. R.C. 5733.06 and 5733.05(A) and (B).

R.C. 5733.05(B) provides for the net income computation. Income that cannot be allocated to Ohio under R.C. 5733.051 is apportioned under R.C 5733.05(B)(2). This is done by applying a three-factor formula designed to represent the extent of a taxpayer's business activity in Ohio. The formula consists of a property factor, a payroll factor, and a sales factor. This case involves only the payroll factor that is described in R.C. 5733.05(B)(2)(b):

"The payroll factor is a fraction the numerator of which is the total amount paid in this state during the taxable year by the corporation for compensation, and the denominator of which is the total compensation paid everywhere by the corporation during such year:

"(i) Compensation means any form of remuneration paid to an employee for personal services.

" * * * "

The BTA found that appellant did not exercise the requisite control over the independent contractors and, thus, determined they were not employees. The contractors' manner of performance was left to them and they received a commission when they sold appellant's products. Appellant urges that the term "employee" is ambiguous and should be construed in its favor to include independent contractors.

Although doubt in construction of taxing statutes is to be resolved in the taxpayer's favor (Gulf Oil Corp. v. Kosydar [1975], 44 Ohio St.2d 208, 73 O.O.2d 507, 339 N.E.2d 820), the first rule of statutory construction is to look at the statute's language to determine its meaning. "If that inquiry reveals that the statute conveys a meaning which is clear, unequivocal and definite, at that point the interpretative effort is at an end, and the statute must be applied accordingly. Sears v. Weimer (1944), 143 Ohio St. 312 ." Provident Bank v. Wood (1973), 36 Ohio St.2d 101, 105-106, 65 O.O.2d 296, 298, 304 N.E.2d 378, 381. We hold that the statute conveys a clear meaning. Only compensation paid to an "employee" is included in the statutory payroll factor.

R.C. 1.42 requires that statutes be read in context and construed according to the rules of grammar and common usage. The term "employee" has acquired a common usage. In Councell v. Douglas (1955), 163 Ohio St. 292, 56 O.O. 262, 126 N.E.2d 597, this court analyzed the distinction between a servant and his employer and an independent contractor and his employer. In paragraphs one and three of the syllabus, we stated:

"1. The relationship of principal and agent or master and servant is distinguished from the relationship of employer and independent contractor by the following test: Did the employer retain control of, or the right to control, the mode and manner of doing the work contracted for? If he did, the relationship is that of principal and agent or master and servant. If he did not but is interested merely in the ultimate result to be accomplished, the relationship is that of employer and independent contractor.

" * * *

"3. Where one employs another to do certain work for him, the mere right reserved by the employer to direct as to the quantity of work to be done, or the condition of the work when completed, is not a right to control the mode or manner of doing the work so as to justify the conclusion that the relationship between the employer and the contractor is either that of principal and agent or master and servant. (Paragraph four of the syllabus in Hughes v. Railway Co., 39 Ohio St., 461, approved and followed.)"

More recently, in Marshall v. Aaron (1984), 15 Ohio St.3d 48, 49, 15 OBR 145, 146, 472 N.E.2d 335, 337, we stated:

"The principal feature which distinguishes the relationship of employer and employee from that of employer and independent contractor is the right to control the means or manner of doing the work. If the employer has the right to control, the worker is his employee. However, if the employer is merely interested in the result and does not retain the right to direct the manner in which the work is completed, the relationship is that of employer and independent contractor. Councell v. Douglas (1955), 163 Ohio St. 292 [56 O.O. 262, 126 N.E.2d 597], paragraph one of the syllabus."

"Employee" has a meaning in common usage which is distinct from the meaning of "independent contractor." Thus, the commission paid an independent contractor should not be included in the statutory payroll factor. The BTA's finding that appellant's sales agents were independent contractors is supported by the evidence, and the commissions paid them were correctly withheld from the statutory payroll factor.

II Request for Alternative Method

Except for one subsidiary whose products were marketed by factory salespersons who had particular knowledge of the products, all of appellant's marketing was performed by independent contractors, whether in Ohio or not. Appellant argues that the statutory formula does not fairly represent its business activity in Ohio and urges the adoption of an alternative formula containing a...