Narragansett Wire Co. v. Norberg, 75-196-M

• Decision Date: 14 July 1977
• Docket Number: No. 75-196-M,75-196-M
• Citation: 376 A.2d 1,118 R.I. 596
• Parties: NARRAGANSETT WIRE CO. v. John H. NORBERG, Tax Administrator. P.
• Court: Rhode Island Supreme Court

Page 1

376 A.2d 1

118 R.I. 596

NARRAGANSETT WIRE CO. v. John H. NORBERG, Tax Administrator.

No. 75-196-M.P.

Supreme Court of Rhode Island.

July 14, 1977.

[118 R.I. 608] Alan P. Cusick, Providence, for petitioner.

Julius C. Michaelson, Atty. Gen., Allen P. Rubine, Sp. Asst. Atty. Gen., Perry Shatkin, Chief Legal Officer, Providence, for respondent.

OPINION

BEVILACQUA, Chief Justice.

This is a petition for certiorari instituted under the appropriate provision of the Administrative Procedures Act, G.L.1956 (1969 Reenactment) § 42-35-16, to review a judgment of the Superior Court which reversed the decision of the tax administrator.

The respondent herein, Narragansett Wire Co. (Narragansett), is a manufacturer of 600 volt building wire which is used in the wiring of residential homes, apartments, hotels and other buildings. The wire is manufactured by Narragansett at its plant in Pawtucket, Rhode Island, and within the state is sold primarily through wholesalers and electrical distributors. Sales to customers outside of Rhode Island are effected through independent manufacturer's representatives. Typically, a representative maintains a warehouse which is staffed by employees of the representative, consisting of a sales force, warehouse personnel to handle the storage and reshipment of the physical inventory, and clerical personnel who process orders and shipments. Representatives are compensated on a percentage of the sales made, ranging from 3 percent to 3 1/4 percent, and if the representative maintains a warehouse there is an additional 1 1/4 percent compensation rate. Representatives are not prohibited from carrying products which do not conflict with those of Narragansett.

On April 1, 1971, Narragansett was notified of business corporation taxes which were owed to the State of Rhode Island for deficiencies assessed during the period of time from 1964 to 1970. Narragansett protested these assessments, amounting to almost $520,000, and a hearing was held. Narragansett's major contention was that it was entitled to compute its tax liability by allocating its income as provided in G.L.1956 (1970 Reenactment) § 44-11-14. The hearing officer determined that that section was inapplicable since Narragansett did not have a regular place of business outside of Rhode Island. Relying on § 44-11-13 he concluded that its entire net income should be apportioned to this state. The decision of the hearing officer was upheld by the tax administrator. On review the Superior Court reversed the tax administrator's decision, set aside the assessments, and granted the appropriate refunds. After reviewing the pertinent facts the trial justice concluded that the warehouses in which Narragansett's product was stored until retail distribution constituted regular places of business as that term is defined in § 44-11-1(e) and, thus, Narragansett was entitled to have its income allocated pursuant to the provisions of § 44-11-14.

Incidental to determining whether Narragansett may allocate its income pursuant to § 44-11-14 and the relation of that section to the preceding section, § 44-11-13, is an appreciation of some of the problems raised by state taxation of interstate commerce.

It has long been recognized that the commerce clause of the Federal Constitution is a restriction on state regulation of interstate commerce. Philadelphia & Reading R.R. v. Pennsylvania, 15 Wall. 232, 82 U.S. 232, 21 L.Ed. 146 (1873). Accordingly, a state may not impose a tax which discriminates against interstate commerce in favor of local business, Memphis Steam Laundry Cleaner, Inc. v. Stone, 342 U.S. 389, 72 S.Ct. 424, 96 L.Ed. 436 (1952), or which subjects interstate commerce to the burden of "multiple taxation," Michigan-Wisconsin Pipeline Co. v. Calvert, 347 U.S. 157, 74 S.Ct. 396, 98 L.Ed. 583 (1954). Nevertheless, not all state taxation of interstate commerce is inimical to the commerce clause. While the Supreme Court has never squarely addressed the issue, it appears that the entire net income of a domestic corporation is not immune from taxation by the domiciliary state even though a portion of that income was generated from business activity arising out of interstate commerce. United States Glue Co. v. Town of Oak Creek, 247 U.S. 321, 38 S.Ct. 499, 62 L.Ed. 1135 (1918); see New York ex rel. Cohn v. Graves, 300 U.S. 308, 57 S.Ct. 466, 81 L.Ed. 667 (1937); Lawrence v. State Tax Comm'n, 286 U.S. 276, 52 S.Ct. 556, 76 L.Ed. 1102 (1932). Coextensively, a state has the right to tax a portion of the net income derived from the interstate operation of a foreign corporation provided the levy is reasonably apportioned to the income producing activity within the state and is not discriminatory. Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 79 S.Ct. 357, 3 L.Ed.2d 421 (1959).

Considering then the potentially overlapping taxing power which can be exercised by both the domestic and foreign states in which a corporation is operating, it is possible that interstate commerce would be subject to the burden of multiple taxation. Such a result would be unconstitutional. Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434, 59 S.Ct. 325, 83 L.Ed. 272 (1939). To preclude this possibility most states which have enacted statutes taxing corporate income do so only with respect to income which is fairly attributable to business activities or sources within the state. Discussing the concept of "business activities," the Supreme Court in Northwestern States Portland Cement Co. v. Minnesota, supra, stated that the income of a foreign corporation could be taxed on the basis of the activities within the state if the activities form a sufficient " 'nexus between such a tax and transactions within a state for which the tax is an exaction.' " Id., 358 U.S. at 464, 79 S.Ct. at 365-66, 3 L.Ed.2d at 431, quoting from Wisconsin v. J. C. Penney Co., 311 U.S. 435, 445, 61 S.Ct. 246, 250, 85 L.Ed. 267, 271 (1940). In order to prevent a state from taxing income of foreign corporations beyond the limit generally established in Northwestern, Congress enacted Public Law 86-272. ¹ The Act prohibits states from taxing nonresidents on income derived from business activities within the state if the activities consist only of soliciting orders for the sale of tangible personal property and the orders are approved and filled within the state. Solicitations and sales by independent contractors, however, are not to be deemed business activities of the nonresident. See Heublein, Inc. v. South Carolina Tax Comm'n, 409 U.S. 275, 93 S.Ct. 483, 34 L.Ed.2d 472 (1972).

Rhode Island's Business Corporation Tax clearly does not attempt to tax the entire net income of a corporation conducting income producing activities in interstate commerce. Nor does it create a distinction between a domestic and foreign corporation. Rather, it simply imposes an annual tax on every corporation deriving income from within the state or engaging in any activities for the purpose of profit or gains within the State. See § 44-11-1(e). Thus section 44-11-2(1) imposes an annual tax at the prescribed rate on net income " * * * apportioned to this state as provided in §§ 44-11-13 through 44-11-15, inclusive * * *." The relevant provisions of these sections read as follows:

"44-11-13. Entire net income of business wholly within state. In the case of a taxpayer deriving all its income from sources within this state or engaging in activities or transactions wholly within this state for the purpose of profit or gain, or where the taxpayer does not have a regular place of business outside this state other than a statutory office its entire net income shall be apportioned to this state. (Emphasis added.)

"44-11-14. Allocation of income from business partially within state. In the case of a taxpayer deriving its income from sources both within and without this state or engaging in any activities or transactions both within and without this state for the purpose of profit or gain, its net income shall be apportioned to this state by means of an allocation fraction * * *."

Interpreting these sections the tax administrator contends that before a corporation can apportion its income pursuant to § 44-11-14 it must first satisfy the applicable provision of the preceding section, 44-11-13. That is, a corporation must first establish that it had a "regular place of business" other than a statutory office outside of Rhode Island. We agree.

While we recognize that § 44-11-14 refers only to a taxpayer deriving its income from sources, or engaging in any activities, both within and without this state, it is clear that the Legislature intended that it be read in conjunction with the immediately preceding statute, § 44-11-13. See § 44-11-2(1). Read thusly, and giving the effect to the applicable provisions of each statute, see Bristol County Water Co. v. Public Util. Comm'n, R.I., 363 A.2d 444 (1976), it is clear that a corporation's income derived from activities conducted outside of this state will not be excluded from Rhode Island's Business Corporation Tax unless it maintains a regular place of business outside of the state. Our conclusion in this respect is in consonance with the legislative purpose in creating a uniform corporate tax structure: income is fairly apportioned to the state, while avoiding the risks of double taxation, where the taxpayer's business activities provide a sufficient nexus with the state, as generally described in Northwestern and later codified in Public Law 86-272, whereby the taxpayer avails itself of the benefits and protections of the state and, therefore, should contribute to its support.

The tax administrator next contends that Narragansett does not have a "regular place of business" within the meaning of § 44-11-1(e) since the warehouses it used to distribute its product in other states were owned or at least operated solely by Narragansett's representatives. He points...