Narragansett Wire Co. v. Norberg, No. 75-196-M

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

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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.

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[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

[118 R.I. 598] 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 [118 R.I. 599] 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

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$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[118 R.I. 600] 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 [118 R.I. 601] 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

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Public Law 86-272. ¹ The Act prohibits states from taxing nonresidents on income derived from business...