Oklahoma Tax Commission v. Southwestern Bell Tel. Co.
| Decision Date | 18 August 1964 |
| Docket Number | No. 40056,40056 |
| Citation | 396 P.2d 500 |
| Parties | OKLAHOMA TAX COMMISSION, Plaintiff in Error, v. SOUTHWESTERN BELL TELEPHONE COMPANY, a Corporation, Defendant In Error. |
| Court | Oklahoma Supreme Court |
Syllabus by the Court
1. Under the provisions of 68 O.S.1961, § 878, subs. (f) the intrastate net income of a multi-state foreign corporation may be separately allocated to this State if the business activity which produces such income is of substantial separateness and completeness such as might be maintained as an independent business and capable of producing a profit in and of itself.
2. When, absent the conditions of syllabus paragraph one, a portion of the net income of a unitary business conducted partly within and partly without this State, and which income is produced in interstate commerce, is earned within this State, the net income so earned within this State is authorized by 68 O.S.1961, § 878, subs. (g) to be allocated to Oklahoma under the formula provided and upon the factors enumerated in subs. (g), and the levy and collection of a net income tax thereon is not violative of the commerce and due process provisions of the Constitution of the United States.
3. The due process clause of the United States Constitution is not violated by a state net income tax on that portion of a foreign corporation's net income earned from and fairly apportioned to business activities within the taxing state, where the taxpayer engages in substantial income producing activity in the taxing state.
4. In an action at law, there a jury is waived, the determination of a the trial court has the same force and effect as the verdict of a properly instructed jury, and its judgment will not be disturbed on appeal, if there is any competent evidence to support it.
Appeal from the District Court of Oklahoma County; Fred Daugherty, Trial Judge.
Action by Southwestern Bell Telephone Company against Oklahoma Tax Commission to recover additional income taxes assessed and paid under protest for the years 1955 and 1956. The issues involve a determination as to which subsection of 68 O.S.1961 § 878 should apply to the intrastate and which subsection to the interstate portion of the multi-state business of taxpayer. From the trial court's holding that subsection (a) applies to the taxpayer's intrastate net income the Oklahoma Tax Commission has appealed. From the trial court's holding that the taxpayer's interstate long distance business is a unitary interstate business and the portion thereof attribution to Oklahoma should be computed by resort to the formula prescribed by 68 O.S.1961 § 878, subsection (g), Southwestern Bell Telephone Company has cross-appealed. Affirmed.
Albert D. Lynn, E. J. Armstrong, Ralph H. Schaller, Oklahoma City, R. O. Ingle, Sallisaw, for plaintiff in error.
Melvin R. Quinlan, Oklahoma City, James A. DeBois, St. Louis, Mo., for defendant in error.
Wayne E. Babler, John Hugh Roff, Jr., St. Louis, Mo., C. D. Cund, Duncan, of counsel.
Appellant, Oklahoma Tax Commission, will hereinafter be referred to as Commission, and plaintiff below cross-appellant here, Southwestern Bell Telephone Company, will be referred to as SW Bell.
SW Bell, a Missouri corporation, is engaged in the business of a telephone public utility. It furnishes intrastate and interstate telephone service to the public in the States of Oklahoma, Texas, Arkansas, Kansas and Missouri, and a portion of Illinois. It is one of the several corporation owned wholly or in part by the American Telephone & Telegraph Company and, except for qualifying shares held by SW Bell directors, all of its capital stock is owned by the parent corporation. The Oklahoma area of SW Bell is not separately incorporated, but in a general way, operates as a separate activity.
SW Bell reported its 1955 and 1956 Oklahoma Income Tax in accordance with the direct or separate accounting method authorized by 68 O.S.1961 § 878, subsection (f) under which it showed income allocated to Oklahoma to be as follows:
1955: Intrastate income subject to tax $6,402,896.00
Intrastate income subject to tax 1,341,490.00
------------------------
Total, $7,744,386.00
1956: Intrastate income subject to tax $7,450,528.00
Intrastate income subject to tax 1,519,998.00
------------------------
Total, $8,970,526.00
The Commission rejected the tax return because it determined that the whole business of taxpayer is a single business enterprise conducted in more than one state, commonly called a 'unitary business,' to which the formula provided by 68 O.S.1961, § 878 subd. (g) is applicable, and attributing to SW Bell's Oklahoma business additional income of $1,729,000.00 for 1955, and $1,720,000.00 for 1956, additionally assessed the taxpayer $69,172.87 for the year 1955, and $68,829.20 for the year 1956, with interest on both sums.
SW Bell paid under protest the additional sums so assessed, and pursuant to the provisions of 68 O.S.1961, § 1475, instituted this action.
The trial judge, trying the case with a jury waived, found that SW Bell's method of operation and books of account were conducted and maintained in such manner that income from furnishing of intrastate service was distinguishable from income from interstate service, and that the sale of intrastate service was an activity of such separateness and completeness as might be maintained as an independent business and capable of producing a profit in and of itself. The finding and judgment thereon are assigned as error by Commission. As to SW Bell's interstate operation, however, the trial court found the three-factor formula for computation of Oklahoma Income Taxes set forth in Sec. 878 subd. (g) applicable, deeming such operation to be a unitary interstate business as defined therein. SW Bell cites such finding and judgment thereon as error by the district court.
The issue involved, therefore, is whether the formula set forth in 68 O.S.1961, § 878 subd. (g) for use in determining the net income of a single business enterprise conducted in more than one state, commonly called a unitary business, should be determined to be applicable under the facts of the case, or whether SW Bell is engaged in an intrastate telephone business activity to substantially separate and complete from its interstate telephone business activity that it might be maintained as an independent business and capable of producing a profit in and of itself, the net income being separately determinable so as to make subsection (f) of said Sec. 878 the applicable method for computing SW Bell's income tax.
SW Bell's method of bookkeeping conforms to the telephone system's 'Separations Manual' which, for rate making purposes of Federal and State regulatory commissions, embodies separation of intrastate and interstate investment in equipment and property, expenditures for employees wages or compensation, maintenance of headquarters office in St. Louis, Missouri, and other facilities, as well as allocation in its accounts of the income it receives.
The Commission takes the position that separation and allocation of income and overhead expenses in conformity to the 'Separations Manual' may not be substituted for the legislatively prescribed averaging method of arriving at net income of a unitary business as is set forth in Sec. 878 subd. (g); that SW Bell's intrastate and interstate activities are comminged in a single business enterprise too closely connected and necessary to each other to justify division or separate allocation and that the three-factor formula for computation of net income within Oklahoma as set forth in Sec. 878 subd. (g) applies, as other computation methods may not produce the amount of income tax to which Oklahoma is entitled.
Contending that Oklahoma income is all that the Commission may tax and that its books and records reflect, by usual and acceptable accounting practices, its Oklahoma income obtained by business activities of substantial separateness and completeness as if its intrastate and interstate activities were maintained by two independent businesses each capable of producing a profit in and of itself, SW Bell says its income tax should be computed under Sec. 878 subd. (f) which would directly tax its net income in Oklahoma.
Our State Income Tax Law, enacted in 1935, as last amended prior to the years herein concerned, provides (68 O.S.1961, § 876) for the imposition of an income tax upon that income derived from all properly owned partly within and partly without the state, and/or business done partly within and partly without the state to be determined under formulae provided in Sec. 878, among which subsection (f) relates to business activities 'of substantial separateness and completeness, such as might be maintained as an independant business (however convenient and profitable it might be if operated conjointly with a related activity) and capable of producing a profit in and of itself, [which] shall be separately allocated to the State in which such activity is conducted.'
Said formulae also include, in subsection (g), a method for determination of a business' net income for income taxing purposes by an averaging of the ratios of its investments, expenditures, and receipts of revenue within the state to those everywhere where the taxpayer is a single enterprise conducting a 'unitary business' in more than one state and the component parts of its business are essential to the realization of ultimate gain from the enterprise as a whole and are too closely connected to justify separate allocation as in subsection (f).
The method of allocation of net income to be taxed by Oklahoma authorized by subse...
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