Lone Star Steel Co. v. Dolan

• Decision Date: 22 August 1983
• Docket Number: No. 81SC382,81SC382
• Citation: 668 P.2d 916
• Parties: LONE STAR STEEL COMPANY, a Texas Corporation, Petitioner, v. Joseph F. DOLAN, Executive Director, Department of Revenue, State of Colorado, Respondents.
• Court: Colorado Supreme Court

Page 916

668 P.2d 916

LONE STAR STEEL COMPANY, a Texas Corporation, Petitioner, v. Joseph F. DOLAN, Executive Director, Department of Revenue State of Colorado, Respondents.

No. 81SC382.

Supreme Court of Colorado En Banc.

Aug. 22, 1983.

Welborn, Dufford & Brown, Beverly J. Quail, Kathryn L. Powers, Mary Ann Steefel, Denver, for petitioner.

J.D. MacFarlane, Atty. Gen., Richard F. Hennessey, Deputy Atty. Gen., Joel W. Cantrick, Sol. Gen., Chris J. Eliopulos, Asst. Atty. Gen., Denver, for respondents.

ROVIRA, Justice.

We granted certiorari to review a decision of the court of appeals holding certain income of petitioner Lone Star Steel Co. (Lone Star) taxable in Colorado. Lone Star Steel Co. v. Dolan, 642 P.2d 29 (Colo.App.1981). We affirm in part and reverse in part.

I.

Lone Star is an integrated steel company that mines its own iron ore; processes it into pig iron and then into steel; rolls the steel into skelp, which in turn is made into pipe; and markets the pipe. The corporation also has its own coal mines in Oklahoma and Arkansas. It has its commercial and legal domicile in Texas, with its executive offices in Dallas. Lone Star is a subsidiary of Philadelphia and Reading Corporation, which in turn is wholly owned by Northwest Industries, Inc., a diversified holding company incorporated in Delaware.

Approximately ninety percent of Lone Star's manufacturing operations are conducted in Lone Star, Texas, and the remainder are conducted at a plant in Fort Collins, Colorado. Manufacturing and selling pipe from skelp manufactured at Lone Star's Texas plant is the only business that petitioner conducts in Colorado. The pipe manufactured in Colorado is line pipe and standard pipe. Line pipe is used primarily underground as transmission or gathering lines for oil and gas, and standard pipe is used in commercial and residential construction. The Texas plant, in addition to manufacturing line pipe and standard pipe, also manufactures casing and tubing for vertical placement in oil and gas wells. Because casing and tubing extends to considerable depths, it must have a very high tensile strength and is therefore made from a higher quality steel than are line pipe and standard pipe.

This case arises from the assessment of tax deficiencies against Lone Star for the years 1970-73. The assessment was protested by Lone Star, but upheld by the Executive Director of the Department of Revenue. After a trial de novo, the district court affirmed the assessment, which was subsequently affirmed by the court of appeals.

II.

Under the Multistate Tax Compact (Compact), to which Colorado is a party, a corporate taxpayer may elect to apportion its income according to the provisions of the Compact or under the regular Colorado corporate income tax apportionment provisions. Section 24-60-1301, Art. III, C.R.S.1973 (1982 Repl.Vol. 10). For the years in question, Lone Star elected to be taxed under the Compact.

According to Article IV of the Compact, certain income is allocated to particular states and not apportioned among states. For example, interest and dividends are allocable to the state of the taxpayer's commercial domicile to the extent that they constitute "nonbusiness income." Section 24-60-1301, Art. IV, p 7. "Nonbusiness income" is defined as "all income other than business income." Art. IV, p 1(e). "Business income" means:

"income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations."

Art. IV, p 1(a).

The amount of income apportioned to a particular state, and therefore taxable by it, is determined by multiplying the business income by a fraction, the numerator of which is the sum of property, payroll, and sales factors, and the denominator of which is three. Art. IV, p 9. Each of the three factors is a fraction representing the proportion of Colorado property, payroll, or sales to the total property, payroll, or sales. Thus, the formula is:

                Colo. Property  k  Colo.  Payroll  k  Colo.  Sales
                --------------     -------------     -----------
                Total Property     Total Payroll     Total Sales
                ------------------------------------------------
                                       3                          =  Apportionment
                                                                        Fraction
                

At issue in this case are three questions: (1) whether certain sales constitute Colorado sales; (2) whether dividends paid by a subsidiary of Lone Star are to be apportioned or are to be allocated to Texas; and (3) whether interest paid by Northwest Industries to Lone Star is to be apportioned or allocated to Texas.

III.

Many of Lone Star's customers who purchase line pipe use it underground to carry oil and gas and they want the pipe coated and wrapped with tar and paper to prevent rust. For this work Lone Star recommends the Gaido-Lingle Company, an unaffiliated company that is located near the Fort Collins plant. Lone Star employees deliver the pipe to Gaido-Lingle using Lone Star equipment; and if it is damaged through the fault of Gaido-Lingle, Lone Star has a practice of replacing the pipe, although it is under no obligation to do so. At the time of delivery to Gaido-Lingle, Lone Star bills the customer for the price of the pipe sold. Gaido-Lingle or the customer arranges for delivery to the customer and Gaido-Lingle bills the customer for its services.

Lone Star considers sales of pipe to out-of-state customers to be non-Colorado sales if the pipe is shipped by carrier out of state directly from the Fort Collins plant, or if the pipe is taken to Gaido-Lingle for wrapping and then shipped by carrier to the out-of-state purchaser. If the out-of-state purchaser picks up the pipe in its own trucks, either from the Lone Star plant or from Gaido-Lingle, Lone Star treats the transaction as a Colorado sale.

In dispute here is whether sales to out-of-state purchasers are Colorado sales if the pipe is first taken to Gaido-Lingle for wrapping and then shipped out of state by common carrier.

Art. IV, p 16(a) of the Compact defines a sale of tangible personal property as a Colorado sale if "the property is delivered or shipped to a purchaser, other than the United States Government, within this State regardless of the f.o.b. point or other conditions of the sale."

The Department of Revenue (Department) contends that once the pipe is delivered to Gaido-Lingle Lone Star's obligations are satisfied. It claims that delivery is "where the seller completes his performance and a buyer may logically use and consume the purchased product in the state of delivery without first shipping the same product to the state in which the buyer is located." The Department further argues that this case is governed by the same principle that requires sales to out-of-state customers be treated as Colorado sales when customers take delivery at Lone Star's Fort Collins plant for transport out of state by their own trucks. ¹

Lone Star argues that its continuing involvement with the pipe after delivery to Gaido-Lingle by replacing damaged pipe and by occasionally aiding the customer in seeking compensation for pipe damaged in shipment after the wrapping demonstrated that there is no delivery in Colorado. Lone Star also argues that the rationale of the court of appeals that delivery takes place in Colorado because all of Lone Star's obligations are satisfied when it turns the pipe over to Gaido-Lingle is erroneous. It points out that the same rationale would apply to the delivery of pipe to a common carrier for shipment. Under such reasoning, Lone Star argues, it would have no out-of-state sales.

We agree with Lone Star that these sales should not be considered Colorado sales. The principal draftsman of the Uniform Division of Income for Tax Purposes Act (UDITPA) has described the purpose behind paragraph 16 as follows:

"Sections 15 through 17 of the act provide for the computation of the sales factor. Two major problems are encountered in respect to these provisions. The first problem arises because, with two exceptions, sales are attributed to the consumer state rather than to the state of sales activity or the place where goods are appropriated to the orders. If the taxpayer is not taxable in the state to which the goods are shipped or if the purchaser is the United States Government, the sales are attributed to the state from which the goods are shipped. Manufacturing states probably would prefer a system attributing sales to the place from which goods are shipped in every case. However, the national conference was of the opinion that such a system would merely duplicate the property and payroll factors which emphasize the activity of the manufacturing state, so that there would tend to be a duplication by such a sales factor. Moreover, it is believed that the contribution of the consumer states toward the production of the income should be recognized by attributing the sales to those states. The exception in the case of the United States Government was included because consumption of such sales cannot be said to occur in a specific state, particularly in the case of shipments to overseas points of embarkation. In the manufacturing states, some opposition to the method of apportioning sales is to be expected, although once again it is believed that the over-all benefits of uniformity and the equities of the situation will mitigate this facet of the act becoming a major enactment hurdle."

Pierce, The Uniform Division of Income for State Tax Purposes, 35 Taxes 747, 780 (1957). ²

The language of paragraph 16(a) necessitates our conclusion that these sales are out-of-state sales for income tax purposes. It speaks of property "delivered or shipped to a purchaser ... within this state." The pipe is delivered to Gaido-Lingle,...