Rylander v. Fisher Controls International
| Decision Date | 26 April 2001 |
| Docket Number | No. 03-00-00183-CV,03-00-00183-CV |
| Parties | (Tex.App.-Austin 2001) Carole Keeton Rylander, Successor-in-Interest to John Sharp, Comptroller of Public Accounts of the State of Texas; and John Cornyn, Successor-in-Interest to Dan Morales, Attorney General of the State of Texas, Appellants v. Fisher Controls International, Incorporated, Appellee |
| Court | Texas Court of Appeals |
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 201ST JUDICIAL DISTRICT NO. 98-08893, HONORABLE CHARLES F. CAMPBELL, JR., JUDGE PRESIDING
[Copyrighted Material Omitted] Before Justices Patterson, Powers* and Jones; Justice Jones Not Participating
Carole Keeton Rylander, Comptroller of Public Accounts, and John Cornyn, Attorney General (collectively the "Comptroller") appeal from a judgment awarded Fisher Controls International, Inc. ("Fisher") in its suit to recover franchise taxes paid under protest for the years 1992 and 1993.1 We will affirm the judgment.
Fisher, a corporation organized and existing under the laws of Delaware, manufactured in Texas certain valves and related instruments that Fisher sold to buyers in other states during calendar years 1991 and 1992. The sales resulted from the efforts of Fisher's representatives and independent contractors who solicited sales orders in the other states orders that Fisher approved in Texas before shipping the items from Texas to the buyers in the other states. The present litigation arose from a dispute between Fisher and the Comptroller regarding the proper franchise-tax treatment of the sums received by Fisher from these sales.
The franchise tax is imposed upon corporations for the privilege of transacting business in Texas and is said to be justified by the benefits conferred upon corporations by the state, including the opportunity to realize income and the protection afforded by Texas law. See Bullock v. Nat'l Bancshares Corp., 584 S.W.2d 268, 270 (Tex. 1979). The tax is due and payable annually.
Before January 1, 1992, a corporation's net taxable capital was the sole basis for computing the amount of franchise-tax liability. After that date and until the present, the tax has been computed by applying specified statutory rates to a corporation's annual net taxable capital and its annual net taxable earned surplus. See Tex. Tax Code Ann. §§ 171.001(a)(1), .002 (West Supp. 2001).
Net taxable capital consists of a corporation's stated capital (as defined in the Texas Business Corporation Act) and its surplus (net corporate assets less stated capital), apportioned to Texas as provided in section 171.106(a) of the Texas Tax Code, from which certain allowable deductions are taken. Id. §§ 171.101(a), .106(a) (West 1992 & Supp. 2001).
A corporation's net taxable earned surplus consists of its reportable taxable income (for federal income-tax purposes) plus certain sums and less other amounts. The net sum, for present purposes, must be apportioned to Texas as set out in tax-code section 177.106(b) to arrive at the corporation's apportioned taxable earned surplus, from which any allowable deductions and business losses are subtracted to produce the corporation's net taxable earned surplus.2 Id. § 177.106(b) (West Supp. 2001).
As indicated in the two preceding paragraphs, the tax code requires an apportionment in the case of corporations doing an interstate business, both as to a corporation's taxable capital and its net taxable earned surplus. See, e.g., Gen. Dynamics Corp. v. Sharp, 919 S.W.2d 861, 863-64 (Tex. App. Austin 1996, writ denied).
The apportionment of taxable capital and taxable earned surplus is governed by section 171.106 of the tax code. With certain exceptions not material here, the apportionment results from multiplying taxable capital and taxable earned surplus by a fraction, the numerator of which is the corporation's gross receipts from business done in Texas and the denominator of which is the corporation's total gross receipts. See Tex. Tax Code Ann. § 171.106(a), (b) (West Supp. 2001).
The calculation of gross receipts is governed in turn by other tax-code provisions, one applicable to taxable capital and another applicable to taxable earned surplus. Because these two tax-code provisions lie at the heart of the present controversy, we will set them out at length.
In apportioning taxable capital, the gross receipts of a corporation from its business done in this state is the sum of the corporation's receipts from:
(1)each sale of tangible personal property if the property is delivered or shipped to a buyer in this state regardless of the FOB point or other condition of the sale, and each sale of tangible personal property shipped from this state to a purchaser in another state in which the seller is not subject to taxation;
(2)each service performed in this state;
(3)each rental of property situated in this state;
(4)the use of a patent, copyright, trademark, or license in this state;
(5)each sale of real property located in this state, including royalties from oil, gas, or other mineral interests; and
(6)other business done in this state.
Id. § 171.103 (West Supp. 2001) (emphasis added).
Pursuant to the foregoing, the comptroller promulgated Rule 3.546, which provides as follows:
Rule 3.546. Taxable Capital: Nexus.
(a)A foreign corporation is liable for the franchise tax if it is authorized to do business in this state or if it is actually doing business in this state.
(b)A corporation is doing business in this state, for the taxable capital component of the franchise tax, when it has sufficient contact with this state to be taxed without violating the United States Constitution. A corporation may be subject to the taxable capital component, but not subject to the earned surplus component, because of Public Law 86-272. See § 3.554 of this title (relating to Earned Surplus: Nexus) for the nexus standards for the earned surplus component of the franchise tax.
34 Tex. Admin. Code § 3.546 (2000). The rule sets forth, following the above, numerous actions that constitute "doing business" in Texas, including "having employees, independent contractors, agents, or other representatives in Texas . . . to promote or induce sales of [a] foreign corporation's goods or services." Id. § 3.546(c)(4).
After section 171.103 became effective in 1981, the Comptroller in 1988 promulgated Rule 3.549 in which he assigned meaning to the term "not subject to taxation" as used in section 171.103(1). Rule 3.549 provides as follows:
Rule 3.549. Taxable Capital: Apportionment
(e)Treatment of specific items in computing gross receipts.
* * * *
(41)Tangible personal property. Examples of transactions involving the sale of tangible personal property and which result in Texas receipts include, but are not limited to, the following:
* * * *
(I)sales to which the throwback rule applies. For reports due on or after October 2, 1984, each sale of tangible personal property shipped from this state to a purchaser in another state in which the seller is not subject to taxation (i.e., the throwback rule). This subparagraph will control if it conflicts with any other provision of this rule. Another state means a state of the United States, the District of Columbia, Puerto Rico, or any territory or possession of the United States. Subject to taxation means constitutional nexus. The seller need not pay tax to the other state; it only has to have enough contact with the other state that the other state could tax the seller. If the seller is doing business, has a certificate of authority, or is incorporated in the other state, the seller is subject to taxation in that state. Voluntarily collecting or paying tax to another state, by itself, is not enough contact to make sales to the other state non-Texas receipts. A corporation which performs any of the activities listed in Rule 3.546(c) concerning Taxable Capital: Nexus for taxation of taxable capital in the other state will be considered subject to taxation in the other state. The selling corporation must have nexus in the other state during the accounting year upon which the tax is based. The corporation has the burden of proving it is subject to taxation in the other state. . . .
34 Tex. Admin. Code § 3.549(e)(41)(I) (2000) (emphasis added).
The effect of Rule 3.549(e)(41)(I) is to make the actions set out in Rule 3.546(c)(4) the measure of whether a corporation is doing business in a state other than Texas. It appears to be undisputed that Fisher is doing business in the other states in the requisite sense.
The legislature in 1991, for the first time, made a corporation's earned surplus a basis for computing the Texas franchise tax. The concomitant gross-receipts provision was added to the Tax Code as section 171.1032, to be effective January 1, 1992. The new statute provided as follows:
Sec. 171.1032. Determination of Gross Receipts From Business Done in this State for Taxable Earned Surplus
(a)In apportioning taxable earned surplus, the gross receipts of a corporation from its business done in this state is the sum of the corporation's receipts from:
(1)each sale of tangible personal property if the property is delivered or shipped to a buyer in this state regardless of the FOB point or another condition of the sale, and each sale of tangible personal property shipped from this state to a purchaser in another state in which the seller is not subject to taxation;
(2)each service performed in this state;
(3)each rental of property situated in this state;
(4)each royalty for the use of a patent or copyright in this state; and
(5)other business done in this state.
Tex. Tax Code Ann. § 171.1032 (West 1992) (emphasis added).
Section 171.1032 was itself amended in 1...
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