Marshall-Wells Co. v. Commissioner of Taxation
| Decision Date | 10 August 1945 |
| Docket Number | 33928,33929. |
| Citation | 20 N.W.2d 92,220 Minn. 458 |
| Parties | MARSHALL-WELLS CO. v. COMMISSIONER OF TAXATION. |
| Court | Minnesota Supreme Court |
Syllabus by the Court.
1. A state may tax any privilege extended by it and may adopt any reasonable formula for its measurement, provided it does not require measurement thereof by property, or income from property, not within its jurisdiction and not used in connection with or correlated to any business authorized or conducted there.
2. A state may impose a tax on a foreign corporation commercially domiciled within its jurisdiction, based upon or measured by income from intangibles of such corporation which have acquired a business situs in said state, or which are correlated to and form an integral part of the business of said corporation there.
3. A state, however, may not impose a tax on a foreign corporation commercially domiciled within its jurisdiction when such tax is based upon or measured by income from intangibles of such corporation which have not acquired a business situs there and which are unrelated in every respect to the local business of said corporation within said state. Such a tax is invalid under the due process clause of U.S.Const. Amend. XIV.
4. Held that Minn.St.1941, s 290.02, Mason St.1940 Supp. s 2394-2, which imposes a franchise tax on foreign corporations measured by their taxable net income as computed under s 290.17(2) (s 2394-23(b)), does not cover, and the legislature did not contemplate that it would include for such purpose income from intangibles such as are involved here, consisting of common stocks of Canadian corporations owned by relator, a foreign corporation with a commercial domicile in Minnesota which stocks have no business situs here and which are not connected with and are unrelated in every respect to relator's business in Minnesota.
Fowler Youngquist, Furber, Taney & Johnson, of Minneapolis, and Gillette, Nye, Harries & Montague, of Duluth, for relator.
J. A. A. Burnquist, Atty. Gen., and David W. Lewis, Asst. Atty. Gen., for respondent.
On July 9 1942, the commissioner of taxation assessed against relator, Marshall-Wells Company, a New Jersey corporation, additional taxes, under the Minnesota income and franchise tax act, amounting to $16,348.42 for the year 1938 and $15,441.91 for the year 1939. The commissioner's orders were subsequently affirmed by the board of tax appeals on August 15, 1944, and are before us now upon writs of Certiorari issued September 1, 1944.
It is not disputed that relator is subject to the franchise tax specified in Minn.St.1941, s 290.02, Mason St.1940 Supp. s 2394-2, which imposes upon every foreign corporation, for the privilege of transacting or for the actual transaction of business within the state, an annual tax meassured by the taxable net income of such corporations, as computed under s 290.17(2), (s 2394-23(b)) which includes the following provision:
'Items of gross income shall be assigned to this state or other states or countries in accordance with the following principles:
'(2) Income or gains from intangible personal property not employed in the business of the recipient of such income or gains, and from intangible personal property employed in the business of such recipient if such business consists principally of the holding of such property and the collection of the income and gains therefrom, wherever held and whether in trust or otherwise, shall be assigned to this state if the recipient thereof is domiciled within this state; * * *.'
The question presented is whether relator, a foreign corporation with a commercial domicile in Minnesota, is required to include in its taxable income, for the measurement of said franchise tax, dividends from corporate stock of subsidiaries conducting business in Canada and connected in no way with relator's Minnesota business; and, if so, whether such requirements offend the due process clause of U.S.Const. Amend. XIV.
Relator was incorporated under the laws of New Jersey in 1901. It was admitted to do business in Minnesota shortly thereafter. Its statutory office is in New Jersey, and the stockholders meetings are held there as required by its laws.
The directors of the corporation are located as follows: Four in Duluth, one in Winnipeg, one in Chicago, and one in Washington, D.C. The meetings of the board of directors are held in Duluth, where the president, secretary, and treasurer live.
Relator conducts a wholesale hardware business and has four branches, one in Duluth, with a sub-branch in Minneapolis; one in Billings, Montana; one in Spokane, Washington; and one in Portland, Oregon, with a sub-branch in Seattle, Washington. The business is supervised and directed from Duluth, where the executive office is located. The Duluth office directs and supervises the buying policies, credits, and accounting procedure of the corporation. Payments for purchases are made from Duluth. Proceeds of sales are deposited in banks in the various branch cities and are withdrawn by check from Duluth. Payrolls are checked in Duluth and money for their payment deposited in banks at the location of the branches.
The board of tax appeals found that relator had established a commercial domicile in Minnesota, and such finding is not challenged.
The tax in question does not involve income arising from the hardware business of the corporation. The taxpayer owns all the stock of three Canadian corporations which operate a separate hardware business in the Dominion of Canada. They have a central office in Winnipeg, which supervises and directs the Canadian business. T. L. Waldon is president and general manager of the Canadian corporations and has his office in Winnipeg. Bank credits are arranged for the Canadian corporations with the Dominion Bank of Canada. All details for the operation of the Canadian corporations are centered in the office of the president at Winnipeg, or are handled at other offices of the corporations at Edmonton and Vancouver. All such activities are conducted separately from the business in the United States. All goods handled in Canada are purchased in Canada or in Europe and paid for from the Canadian offices. The majority of the directors of each of the Canadian corporations are Canadians, and directors meetings are held in Canada. The secretary and treasurer of relator corporation are also respectively secretary and treasurer of each of the Canadian corporations, and reside in Duluth.
In 1938, the three Canadian corporations declared dividends totaling $300,000 upon its stock, all of which stock was owned by relator. In 1939, they declared dividends totaling $270,270.27. Drafts for the payment of such dividends were deposited by relator in Duluth, and thereafter such funds were intermingled with its general funds, no attempt being made to keep track of their subsequent distribution.
The board of tax appeals found that the stocks of the three Canadian corporations were not employed in relator's Minnesota business; and that such business did not consist in holding such stock and collecting the income therefrom; but that nevertheless, by virtue of relator's Commercial domicile here, the entire income from the Canadian stocks should be included in the measurement of the franchise tax.
1--2. Generally speaking, a state may tax any privilege extended by it and may adopt any reasonable rule for the measurement of such tax, Provided it is not measured by property, or income from property, not within its jurisdiction and not used in connection with or correlated to any business authorized or conducted in the state. An attempt by the state to exercise its taxing authority upon property located and used Beyond its jurisdiction constitutes a taking without due process of law. International Paper Co. v. Massachusetts, 246 U.S. 135, 38 S.Ct. 292, 62 L.Ed. 624, Ann.Cas.1918C, 617; Air-Way Elec. Appliance Corp. v. Day, 266 U.S. 71, 45 S.Ct. 12, 69 L.Ed. 169; Hans Rees' Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U.S. 123, 51 S.Ct. 385, 75 L.Ed. 879; James v. Dravo Contracting Co., 302 U.S. 134, 58 S.Ct. 208, 82 L.Ed. 155, 114 A.L.R. 318; Connecticut General L. Ins. Co. v. Johnson, 303 U.S. 77, 58 S.Ct. 436, 82 L.Ed. 673. It is well established that a franchise tax on a foreign corporation may be imposed upon or measured by its business within the taxing state, where there is some reasonable formula prescribed for determining the business done within such state. See, 51 Am.Jur., Taxation, s 863. Such formula may be based upon the ratio of total assets to assets employed within the state, or may provide for an allocation based upon an apportionment of sales, purchases, expenses of manufacture, payroll, or value of tangible property. See, Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113, 41 S.Ct. 45, 65 L.Ed. 165, On the other hand, a statutory formula for taxation of foreign corporations must not operate as an effort by the state to assert its taxing power beyond its territorial limits. See, Annotation, 75 L.Ed. 897. With reference to intangibles, the courts have usually upheld the propriety of the inclusion by the taxing state of intangibles of a foreign corporation which have acquired a business situs in the taxing jurisdiction. See, Annotation, 131 A.L.R. 943.
3. The specific question here is whether a corporation organized in one state with a nominal place of business there, but maintaining its principal place of business and commercial domicile in another state, may be taxed by the latter, upon intangibles with no actual or business situs there and which may be subject to taxation elsewhere. In other words, does the fact that a foreign corporation has acquired a commercial domicile in a...
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