Moorman Mfg. Co. v. Bair

• Decision Date: 25 May 1977
• Docket Number: No. 60220,60220
• Citation: 254 N.W.2d 737
• Parties: MOORMAN MANUFACTURING COMPANY, Appellee, v. G. D. BAIR, Director of Revenue, State of Iowa, Appellant.
• Court: Iowa Supreme Court

Page 737

254 N.W.2d 737

MOORMAN MANUFACTURING COMPANY, Appellee, v. G. D. BAIR, Director of Revenue, State of Iowa, Appellant.

No. 60220.

Supreme Court of Iowa.

May 25, 1977.

Rehearing Denied June 27, 1977.

Richard C. Turner, Atty. Gen., George W. Murray, Sp. Asst. Atty. Gen., Harry M. Griger, Asst. Atty. Gen., for appellant.

Walter R. Brown, and John V. Donnelly of Swift, Brown & Winick, Des Moines, for appellee.

James L. Rogers and Russell L. Samson of Rogers & Phillips, Des Moines, and Philip B. Kurland, Walter V. Schaefer and Walter Hellerstein of Rothschild, Barry & Myers, Chicago, Ill., on brief for amicus curiae.

En banc.

MASON, Justice.

The fundamental issue on this appeal concerns the constitutionality, facially and as applied to the circumstances present herein, of certain provisions of the Iowa corporate income tax scheme. The issue stems from the district court's ruling that the Iowa single-sales-factor formula was facially unconstitutional in violation of due process clauses of the federal and Iowa Constitutions and commerce clause of the federal constitution. The Director of Revenue (Director) appeals from this adverse ruling and plaintiff cross-appeals from rulings adverse to it. The facts were stipulated in the proceedings had in the district court and show the following.

Plaintiff, Moorman Manufacturing Company (hereinafter Moorman), is an Illinois corporation which was doing business in Iowa and elsewhere. Its principal source of income during the fiscal years in question, March 31, 1968 through March 31, 1972, was derived from the manufacture and sale of some 80 different products for feeding livestock and poultry. It is what is commonly referred to as a "unitary" business, that is its income arises from sources and activities carried on in several states.

During the years involved Moorman had five manufacturing plants located in Illinois, Texas and Nebraska. Its products were sold by more than 2500 salesmen, employees of Moorman, in more than 30 states during the years in question.

It carries on substantial activities in the state of Iowa. With a force of over 500 employees in this state Moorman engages in continuous solicitation of Iowa customers. After sales are negotiated delivery to Iowa customers is typically made from one of the six warehouses that Moorman operates in the state. These warehouses located at Stanwood, Plainfield, Goldfield, Marcus, Atlantic and Knoxville are maintained by Moorman's employees. It did no manufacturing in Iowa. The products that Moorman sells in Iowa are all manufactured in Illinois.

Iowa imposes a tax upon the net income of domestic corporations and foreign corporations doing business in the state. Section 422.33, The Code, 1975. A corporation's "net income" is based upon its "taxable income" as computed for federal tax purposes with an allowance for certain adjustments. Section 422.35. When the trade or business of a corporation is carried on entirely within the state, the corporation is subject to Iowa taxation on the entire amount of its net income. Section 422.33(1). However, when a corporation's trade or business is carried on partly within and partly without the state, it is subject to taxation only on that portion of its net income "reasonably attributable to" the trade or business within the state. Section 442.33(1).

Two computational steps are prescribed by section 442.33(1) for determining that portion of a corporation's net income which is reasonably attributable to its Iowa activities. First, certain income, the geographical source of which is easily identifiable, is allocated to the appropriate state. Section 422.33(1)(a). The second step allocates the remaining net income in one of two ways, depending upon the nature of the corporation's activities. Where, as here, the corporation's income is derived from the manufacture or sale of tangible personal property, the portion of its net income attributable to its Iowa activities "shall be in that proportion which the gross sales made within the state bear to the total gross sales." Section 422.33(1)(b). The statute defines "gross sales of the corporation within the state" as the "gross sales from goods sold and delivered within the state, excluding deliveries for transportation out of the state." If a taxpayer believes this apportionment formula operates so as to subject him to taxation on a greater portion of his net income than is reasonably attributable to his Iowa activities, provision is made for an application for an alternative method of allocation. Section 422.33(2).

Moorman filed its first income tax return with the state of Iowa for its fiscal year ended March 31, 1949. Pursuant to approval of the Iowa State Tax Commission, Moorman, after allocating its interest, dividends, rents and royalties (less related expenses) within and without the state of Iowa, apportioned the remainder of its net income to the state of Iowa on the ratio that its payroll, property and sales, as computed by Moorman, within the state of Iowa bore to its payroll, property and sales everywhere in the United States, as computed by Moorman, giving equal weight (.33) to its computed payroll, property and sales factors. This method was used by Moorman in each successive income tax return filed with the state of Iowa up to and including the income tax return filed for its fiscal year ended March 31, 1960.

For its fiscal years ended March 31, 1961, 1962, 1963 and 1964, Moorman determined its income from the sale of tangible personal property in this state pursuant to the single-sales-factor formula provided for in section 422.33(1), The Code, at the direction of the Iowa State Tax Commission.

However, beginning in its fiscal year of 1965 Moorman again applied the three-factor-property-payroll-sales formula in computing its income from the sale of tangible personal property attributable to Iowa and has applied such formula in each succeeding return filed to date, including those filed for the years in issue. The State Tax Commission did not consent to this application of the three-factor formula.

Moorman appealed to the Polk District Court from an order issued by the Director relating to Moorman's corporate income tax returns for its fiscal years ending March 31, 1968, 1969, 1970, 1971 and 1972 which required Moorman to apportion to Iowa for Iowa income tax purposes for those years its net income derived from the manufacture and sale of tangible personal property by use of the single-sales-factor formula provided for in section 422.33(1)(b), The Code.

Moorman's appeal to the district court involved an attack on the Iowa single-sales-factor formula on three basic grounds which were: (1) The Iowa single-sales-factor formula is facially unconstitutional; (2) The Iowa single-sales-factor formula is unconstitutional, as applied to Moorman's net income; and (3) The failure of the Director to allow Moorman the use of an alternative apportionment formula constituted an abuse of the Director's discretion granted him under section 422.33(2), The Code, 1975.

The three-factor formula employed by Moorman in computing its income from the sale of tangible personal property attributable to Iowa for the years 1968 through 1972 is explained by the Director in his brief and argument in this fashion: A unitary multi-state corporation computes its total net business income from all sources according to the laws of the taxing state. The corporation then computes a payroll factor, the numerator of which is the payroll in the taxing state and the denominator of which is the total corporate payroll everywhere. The corporation then computes a property factor, the numerator of which is the value of the property in the taxing state and the denominator of which is the total corporate property value located everywhere. Property rented by the corporation from others is generally included in the property factor under special rules. The corporation then computes a sales or gross receipts factor, the numerator of which is the gross sales or receipts in the taxing state and the denominator of which is the total corporate gross sales or receipts everywhere.

In an effort to afford a better understanding of the results of the application of the single-factor formula and the three-factor approach we refer to the following discussion as set forth in the trial court's findings.

Moorman reported total gross sales from all of its operations in this country for the fiscal year 1968 of $97,719,800. Of that sum $22,102,015 represented sales in Iowa. Application of the single-factor formula results in the fraction of approximately 1/5 as a percentage, 22.6177%. This factor is multiplied against Moorman's net income with the product representing the income to which Iowa applies its rates.

The three-factor approach used by Moorman works in this manner: The Iowa sales percentage (22.6177%) is given one-third weight (.33 X 22.6177%), as are the elements of payroll and property. Moorman's Iowa property holdings for the year represent merely 1/25 of the property it owns everywhere 4.0753%. Moorman's payroll for that year amounted to $23,919,381 of which $3,739,426 was paid to its Iowa salesmen and warehousemen. A fraction between 1/6 and 1/7 of its entire year's payroll went to Iowa wage earners 15.6335%. The property factor and payroll factor are given equal weight with the sales factor so that the weighted percentage applied to Moorman's net income for that year is: (.33 X .226177) plus (.33 X 0.40753) plus (.33 X .156335) or .141088 or 14.1088%. This decimal is thus contrasted to the product gained from the single-sales-factor formula alone; here, .226177.

In ruling on Moorman's various contentions, the district court held, in pertinent part, as follows:

"In view of the factual findings made by this Court throughout this opinion, we conclude:

"(1) * * * "(2) That Iowa Code Section 422.33(1)(b) does not violate the Equal Protection...