Reliance Mfg. Co. v. Barr

• Decision Date: 05 November 1962
• Docket Number: No. 42455,42455
• Citation: 245 Miss. 86,146 So.2d 569
• Parties: RELIANCE MANUFACTURING COMPANY v. Dexter BARR, Chairman, State Tax Commission.
• Court: Mississippi Supreme Court

Page 569

146 So.2d 569

245 Miss. 86

RELIANCE MANUFACTURING COMPANY v. Dexter BARR, Chairman, State Tax Commission.

No. 42455.

Supreme Court of Mississippi.

Nov. 5, 1962.

Tighe & Tighe, Jackson, for appellant.

John E. Stone, Jackson, for appellee.

RODGERS, Justice.

This is an appeal by Reliance Manufacturing Company, a foreign corporation, (taxpayer), doing business in the State of Mississippi, from a final decree of the Chancery Court of the First Judicial District of Hinds County, Mississippi, wherein the chancellor sustained a motion of the appellee to suppress the evidence of appellant, and entered a final decree in favor of defendant, Chairman of the State Tax Commission.

Appellant filed a petition in the chancery court complaining of the action of the Chairman of the State Tax Commission in assessing additional income franchise taxes against appellant, and asked that the additional assessment be set aside and cancelled. Appellant, Reliance Manufacturing Company, is engaged in the manufacture of boys' and men's clothing, in several states, and has now in operation nine plants in Mississippi. Appellant alleged in its petition that it had filed income tax returns for the years 1957 through 1960; that petitioner had also filed franchise tax returns for the years 1958 through 1961, and had paid all taxes due thereon. It is further alleged that appellant had computed its income and franchise tax returns by the use of 'the manufacturer's formula' as prescribed by Art. 247 of the Income Tax Regulations, 11 and 12, for the years above-detailed. It is charged that the formula used required appellant to compute its income in the State of Mississippi by obtaining an arithmetical average for each of the three factors in the formula, namely, 'property', 'payroll' and 'sales.' Each of these factors was used as a ratio of the total income earned in Mississippi as compared to the total income earned in appellant's entire operation. The arithmetical average is then applied to appellant's unitary net income to obtain that portion of such income as is properly attributable to the State of Mississippi for income and franchise tax purposes. It is alleged that the appellee has caused assessments totaling $12,298.62, plus interest to be made against appellant; that the method of making the reports filed by appellant was correct and the assessments against appellant are void, unreasonable and arbitrary, and are based on a wholly incorrect interpretation of the income tax regulations. It is charged that the only issue with reference to the franchise tax assessment is presented by an interpretation of the income formula which it had employed; and that the additional franchise tax claimed is based solely upon the increase in the income of appellant after assessment by appellee, so that a determination of appellant's net income will determine the franchise tax due.

After appellee had filed its answer to the interrogatories propounded to it and its answer to the petition, appellant filed an amendment to the original petition. It charged that if appellee were correct in its interpretation of Art. 247, Regulations 11 and 12, that appellant was being denied due process and equal protection of the law; because such interpretation and resulting assessment would, in effect, be tantamount to extra-territorial taxation.

Appellee, State Tax Commission, filed its answer admitting that it had assessed taxes alleged by appellant for the years set out in the petition, but denied that (1) such assessment was void, unreasonable or arbitrary, (2) the prior actions of appellee, officials of the State Tax Commission, and acts of prior tax commissioners operated as a waiver and estoppel so as to prevent collection of taxes assessed; and (3) that the making of the assessment was an unconstitutional act on the part of appellee, or, in the alternative, the provisions of the income tax regulation, here involved, are unconstitutional.

One of the provisions of the Income Tax Law of Mississippi--Sec. 9220-12, (1), (c), Miss.Code of 1942--deals with 'gross income derived from sources partly within and partly without the state' and in determining the portion of such taxable income attributable to sources within the State, the tax may be determined by process of a formula of general apportionment prescribed by the Commissioner, with the approval of the Governor. In accordance with the Act of the Legislature, as expressed in the foregoing Code section, the Chairman of the State Tax Commission adopted, with the approval of the Governor, Art. 247. That language of Art. 247 has remained the same in all regulations promulgated by the Commissioner since its adoption. The regulations adopted by Commissioners since the initial Art. 247 are Nos. 8, 9, 10, 11 and 12, the latter two regulations being applicable to the income tax returns of appellant for the years 1957 through 1960. These two regulations are the subject of the litigation in this case.

The pertinent part of Art. 247, Regulations 11 and 12, is in the following language:

'Manufacturers--Manufacturers shall apportion a part of their unitary net income to this State by the use of a ratio which shall be the arithmetical average of the following three ratios: (1) Manufacturing assets owned or used in Mississippi to total manufacturing assets. (2) Mississippi manufacturing labor to total manufacturing labor. (3) Mississippi sales to total sales.

'Property--The first factor of the formula includes land, buildings, machinery, equipment, and other tangible personal property actually used, whether owned or rented, in manufacturing or producing the articles or commodities manufactured.'

The issue to be determined by this Court is whether or not the taxpayer, under the regulations, supra, could properly use its total capital assets in determination of its income tax liability to the State of Mississippi, or whether or not the taxpayer was restricted to 'property actually used--in manufacturing or producing articles or commodities manufactured.'

Appellant contends that it had a right to use the value of all of its property in determining its taxable income because all of its property is said to have been used in producing the income. It presented evidence in the trial court to establish this thesis. Testimony showed that the manufacturing function of the garment business is set up on the basis of what appellant's president called 'M.P.S.', or merchandising, production and sales. Appellant considered 'production' a separate function in the business of manufacturing garments. Testimony further reveals that since appellant had begun operation within Mississippi, the ownership of the company had changed hands, and appellant had absorbed Rice-Stix, Inc., a competitive garment manufacturing company, together with its plants located within and without Mississippi. It further appears that appellant now owns manufacturing plants which are not in operation, warehouses, automobiles and personal property which are not 'actually used in the manufacturing or producing the articles or commodities manufactured.'

The contention of appellant is to the effect that since it owns idle plants and warehouses where its products are stored, together with automobiles used by its personnel, it is necessary to recoup the cost, insurance, and maintenance on this property from the proceeds of the sale of its product, and therefore these assets should be used in determining the manufacturing assets under the property factor of the formula. The fallacy of this argument is readily observed when we consider that manufacturing companies could easily become holding companies and claim idle property as part of the manufacturing assets for the purpose of determining taxable income.

I

Many definitions of 'manufacturing' may be found in Words & Phrases, Vol. 26, p. 679, which are similar to the definition this Court used in the case of State v. J. J. Newman Lbr. Co., 102 Miss. 802, 59 So. 923, 45 L.R.A.,N.S., 851, in which the Court said: 'It will be seen, therefore, that appellee's enterprise included both manufacturing and repairing in its work. A reasonable definition may be given to 'manufacturing' (Century Dictionary) as the system of industry which produces manufactured articles, and to 'manufacture' as the production of articles for use from raw or prepared materials, by giving to these materials new forms, qualities, and properties, or combinations, whether by hand labor or machinery, used more especially of production in a large way by machinery, or many hands working co-operatively.' Cf. East Texas, etc. Lines v. Frozen Foods Express, et al., 351 U.S. 49, 100 L.Ed. 917, 923, 76 S.Ct. 574; Commonwealth v. McCrady-Rodgers Co., 316 Pa. 155, 174 A. 395. See also Commissioner of Corporations and Taxation et al. v. Assessors of Boston, 321 Mass. 90, 71 N.E.2d 874, in which the Court differentiated between manufacturing and sale of articles in the same business.

Cases cited by appellant on the definition of 'manufacture' have to do with statutes or ordinances exempting machinery used in manufacturing of products, or articles exempt from taxation, or articles manufactured and sold within the city as expressly exempt from taxation in each particular ordinance or statute. Each case is based upon the wording and meaning of the local ordinance or statute on which tax exemption is claimed.

It will be observed that Art. 247 here involved deals with 'taxable net income of foreign corporation and non-residents', 'computation of unitary net income' and 'apportionment of unitary net income.' It separates the various elements of what otherwise is an operation with only one purpose, that of making and marketing that particular product.

We have come to the conclusion that the first factor under the formula set out in Art. 247, Regulations 11 and 12, of the Income Tax Division of the State Tax Commission, namely: '(1) Manufacturing Assets...