NCR Corp. v. Commissioner of Revenue

• Decision Date: 24 February 1989
• Docket Number: No. C2-88-762,C2-88-762
• Citation: NCR Corp. v. Commissioner of Revenue, 438 N.W.2d 86 (Minn. 1989)
• Parties: NCR CORPORATION, Relator, v. COMMISSIONER OF REVENUE, Respondent.
• Court: Minnesota Supreme Court

Page 86

438 N.W.2d 86

NCR CORPORATION, Relator, v. COMMISSIONER OF REVENUE, Respondent.

No. C2-88-762.

Supreme Court of Minnesota.

Feb. 24, 1989.

Rehearing Denied April 14, 1989.

Syllabus by the Court

1. Minnesota's corporate income apportionment statute (Minn.Stat. Sec. 290.19 (1980)), based on a separate entity reporting concept, does not require inclusion of factors of property used, sales made, and payroll paid of foreign solely owned subsidiaries of a corporate taxpayer in the apportionment formula.

2. Although a nonresident corporate taxpayer, which must file a corporate income tax return in this state, is required to include as income in the denominator of an apportionment statutory formula dividends, interest, and royalties received by it from subsidiaries and licensees, exclusion from the denominator of the formula property owned, sales made, and payroll paid factors of the subsidiaries does not offend the Due Process Clause of the United States Constitution.

3. Excluding foreign subsidiaries' factors of property used, sales made, and payroll paid does not result in violation of the Commerce Clause of the United States Constitution.

James W. Littlefield, Minneapolis (William L. Goldman, James A. Reedy, of counsel), Washington, D.C., for relator.

Hubert H. Humphrey, III, Atty. Gen., Thomas R. Muck, Deputy Atty. Gen., Dept. of Revenue, St. Paul, for respondent.

Heard, considered and decided by the court en banc.

KELLEY, Justice.

Relator, NCR Corporation, (NCR) appeals from an order of the Tax Court upholding the Respondent Commissioner of Revenue's (Commissioner) order which assessed additional corporate taxes against the relator for the years 1977-1981, and dismissed the relator's constitutional challenges to the statute under which the tax was assessed, Minn.Stat. Sec. 290.19 (1980). We affirm the Tax Court's order which sustained the Commissioner's additional assessment, and find the apportionment formula constitutional.

Relator NCR Corporation is a Maryland corporation with its principal place of business in Dayton, Ohio. NCR conducts some of its business within the State of Minnesota. It likewise transacts business in other states, and, additionally transacts business in foreign countries through its foreign branches and subsidiaries. None of the foreign subsidiaries transact business in the State of Minnesota, nor do any pay taxes in the State of Minnesota. NCR, its branches and its subsidiaries form a "unitary business" within the meaning of Minnesota's corporate income tax laws.

Relator's business involves the manufacture and sale of business machines and equipment. By means of licensing agreements, it has granted the subsidiaries the right to manufacture and sell machines and equipment patented by it. In return, NCR receives royalty payments from the foreign subsidiaries. NCR's gross income also includes dividend payments made to it by its foreign subsidiaries. ¹

Relator filed its corporate tax returns for the tax years in question with the State of Minnesota, as required by Minn.Stat. Sec. 290.37, subd. 1 (1980). Only that portion of NCR's income attributable to its activities in Minnesota was taxable by Minnesota. In its returns for the tax years in question, NCR calculated that portion attributable to Minnesota pursuant to a formula found in Minn.Stat. Sec. 290.19 (1980). That statute provides a method which uses a percentage of the taxpayer's gross income, less enumerated allowed deductions, to reach apportionable income. The gross income percentage is obtained by making three calculations: the sales made, property used, and payroll paid in Minnesota being the numerator, compared to the total sales made, property used and payroll paid elsewhere, the denominator. In its 1977-1981 Minnesota income tax returns, NCR had excluded income from royalties paid by licensees as well as dividends and interest it had received from its foreign subsidiaries. On audit, the Commissioner included that income in NCR's apportionable income. It is that inclusion that originally gave rise to this appeal.

Relator challenged the Commissioner's action of including the foreign income by appealing to the Tax Court. There, as here, it asserts that the inclusion of the foreign income (dividends and royalties) is not required by the statute, and that the Commissioner's inclusion of it was unconstitutional. Alternatively, it argues that if the foreign payments were to be included in its gross income, then the payroll paid, property used and sales made figures for the subsidiaries must likewise be included in the denominator of the fraction used in computing NCR's apportionable income. ²

The Tax Court rejected both of NCR's contentions. It held the statutory scheme did require inclusion of subsidiary and licensee payments as part of NCR's gross income, but that no adjustment in the apportionment formula was required so as to take into account the subsidiaries' payroll paid, property used and sales made figures. Additionally, the Tax Court concluded the apportionment formula was not so disproportionate as to be unconstitutional under the Due Process and Commerce Clauses of the United States Constitution.

1. We first address relator's challenge to the apportionment formula as applied by the Commissioner. Our review of questions of fact is limited to ascertaining whether sufficient evidence exists to support the Tax Court's findings of fact, but we have plenary review of legal questions. Nagaraja v. Comm'r of Revenue, 352 N.W.2d 373, 376 (Minn.1984).

In order to tax the income of corporations engaged in more than one state, the taxing state must determine what portion of the corporation's income is attributable to the corporation's business activities within its own jurisdiction. To do so, all states employ some type of mathematical formula to apportion the corporation's income. One approach, the "formula apportionate" method, takes the total income of the corporation, the tax base, and apportions it to the taxing jurisdiction through the use of up to three objective factors: the property used, payroll paid and sales made factors. These factors are thought to be objective measures of the corporation's activities within and without the taxing jurisdiction. See Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, 165, 103 S.Ct. 2933, 2940, 77 L.Ed.2d 545 (1983). The property used, payroll paid and sales made activities of the corporation within the state, the numerator, are compared to the activities outside the state, the denominator, to arrive at a percentage of the tax base attributable to the corporation's activities within the taxing jurisdiction.

During the tax years at issue (1977-1981), Minnesota's formula taxed corporations on a separate entity basis--taxing each on its own income, which included income such as dividends paid by subsidiaries or royalties paid to it by licensees. This procedure entailed comparing the corporate taxpayer's total property used, payroll paid and sales made factors in Minnesota with the total of the same items elsewhere. Combined reporting, that is, reporting of a parent corporation's income with that of its subsidiaries, was generally not permitted, although the Commissioner had certain discretion to allow combined reporting only if the separate entity formula proved to be "unfair." See Westinghouse Elec. Corp. v. Comm'r of Revenue, 398 N.W.2d 530, 536-37 (Minn.1986). ³

In support of its argument that the apportionment statute required the inclusion of at least a part of its foreign subsidiaries' expenses in the denominator of the apportionment formula fraction, NCR relies on statutory language such as "total sales" and "wherever located" and "wherever made." ⁴

The Commissioner responds to that contention by pointing out that under the taxing statutes the state may not and does not tax the income of a corporation's foreign subsidiaries which do no business in the state. Therefore, their factors of property used, payroll paid and sales made should not be included in the denominator of the formula fraction. In order to determine which of these positions is correct, we are required to construe the apportionment statute, keeping in mind that our task when construing a statute is to ascertain and give effect to the legislative intent. Minn.Stat. Sec. 645.16 (1988). See Mankato Citizens Tel. Co. v. Comm'r. of Taxation, 275 Minn 107, 111, 145 N.W.2d 313, 317 (1966).

At the outset, we note that to construe the statute as NCR urges would be tantamount to our holding that when the legislature uses such terms as "gross income" in describing the tax base, and language such as "total" and "wherever located" in the apportionment statute, it intended that a corporation's foreign source income as well as its subsidiaries' activities both be included in the fraction when undertaking to apportion income. Such a result would be inconsistent with the nature of a single-entity apportionment formula.

NCR supports its position by relying on the Nebraska case Kellogg Co. v. Herrington, 216 Neb. 138, 343 N.W.2d 326 (1984), one of the two appellate decisions which have come closest to addressing the specific question presented by this case. Nebraska's statute utilized a three-factor apportionment formula similar to Minn.Stat. Sec. 290.19 (1980). Nebraska's statute identified the factors going into the formula as "all" the property used, payroll paid "everywhere," and the sales made "everywhere." Neb.Rev.Stat. Sec. 77-2744. The Nebraska court, relying on its rules of statutory construction, held that the language employed clearly and without ambiguity included designated foreign subsidiaries' activities in the denominator of the apportionment formula fraction. Id. 343 N.W.2d at 332. Thus, in effect, the Nebraska court concluded that its apportionment formula contemplated combined reporting by a corporate taxpayer and its affiliated companies.

On the other hand, the...