Sharp v. House of Lloyd, Inc.

• Decision Date: 12 June 1991
• Docket Number: No. D-0450,D-0450
• Citation: 815 S.W.2d 245
• Parties: John SHARP, Comptroller of Public Accounts of the State of Texas, Petitioner, v. HOUSE OF LLOYD, INC., Respondent.
• Court: Texas Supreme Court

Page 245

815 S.W.2d 245

John SHARP, Comptroller of Public Accounts of the State of

Texas, Petitioner, v. HOUSE OF LLOYD, INC., Respondent.

No. D-0450.

Supreme Court of Texas.

June 12, 1991.

Rehearing Overruled Oct. 16, 1991.

Harriet D. Burke, Dan Morales, Austin, for petitioner.

Randall Buck Wood, Austin, for respondent.

OPINION

MAUZY, Justice.

The question presented in this case is whether the State Comptroller is barred from collecting the Texas Franchise Tax from House of Lloyd, Inc. because of an alleged long-standing construction of the franchise tax statute as not applying to corporations engaged in solicitation sales activities through independent contractors.

House of Lloyd, Inc., a Missouri corporation, sued the State Comptroller to recover certain franchise taxes paid under protest for the period September 5, 1983 through December 31, 1985. The corporation engages in solicitation sales activities in Texas by selling toys and gifts through independent contractors, who display catalogs to potential customers at sales parties, take orders for items in the catalogs, and send the orders to Missouri. After receiving shipments from Missouri, these contractors then deliver the goods to the Texas customers. During the tax periods at issue in this case, House of Lloyd had approximately $22 million in gross sales in Texas. House of Lloyd has never held, nor has it been required to obtain, a certificate of authority to do business in Texas. The trial court held that House of Lloyd was not liable for the tax, and the court of appeals affirmed. We reverse and render judgment for the state, and hold that the tax, as applied to House of Lloyd, is valid.

The Texas Franchise Tax, Tex.Tax Code § 171.001, is imposed on every domestic and foreign corporation chartered or authorized to do business within the state, or doing business within the state, and not specifically exempted by statute from the payment of such tax. The Secretary of State collected and administered the franchise tax from 1941 until the legislature transferred the responsibility to the Comptroller in 1959.

Prior to May 1, 1941, the franchise tax statute provided that only corporations chartered or authorized to do business in Texas were liable for the franchise tax. Act of March 27, 1930, 41st Leg., 5th C.S., ch. 68, 1930 Tex.Gen.Laws 220 (formerly Tex.Rev.Civ.Stat. art. 7084). Effective May 1, 1941, the statute was amended to provide that the tax was to be imposed, not only on every domestic and foreign corporation chartered or authorized to do business in Texas, but also on all corporations that were actually "doing business" in Texas. Act of April 28, 1941, 47th Leg., R.S., ch. 184, 1941 Tex.Gen.Laws 269 (formerly Tex.Tax--Gen. art. 12.01). On January 1, 1982, a nonsubstantive revision of the statute was made to provide for imposition of the tax on "each corporation that does business in Texas." Tex.Tax Code § 171.001.

House of Lloyd does not argue that its solicitation sales activities do not establish a constitutional nexus with Texas sufficient to authorize franchise tax assessment. Instead, House of Lloyd contends that the Comptroller should be barred from collecting the tax, because of nonassessment prior to 1983 for a period of approximately forty-two years after the enactment of the statute which authorized imposition of the tax.

The parties stipulated at trial that there is no evidence that prior to 1983 the franchise tax requirement of "doing business" was ever interpreted by the Comptroller to impose a tax on foreign corporations which effected sales in Texas through independent contractors. The first indication of an affirmative agency construction of "doing business" was a rule promulgated by the Comptroller, effective December 31, 1975, which provided:

A corporation is "transacting" or "doing" business in Texas when it is transacting some substantial part of its ordinary business in Texas. Each case must be decided on its own facts, with determination based on the totality of the corporation's activities within the State. The Texas Business Corporation Act art. 8.01, provides a non-exhaustive list of activities which do not constitute transacting business in the State. This ruling contains a non-exhaustive list of activities which constitute transacting or doing business in Texas.

34 Tex.Admin.Code § 3.406 (1975).

Section 8.01 of the Texas Business Corporation Act specifically provides that "transacting business" for purposes of obtaining a charter or authorization to do business in Texas, does not encompass the activity of soliciting sales through independent contractors. Tex.Bus.Corp.Act § 8.01(B)(6).

The Comptroller amended the above-referenced rule, effective September 1983, to provide:

A corporation is doing business in Texas, for purposes of Chapter 171 of the Texas Tax Code, when it is transacting some part of its ordinary business in Texas.

34 Tex.Admin.Code § 3.406(b) (1983).

The Comptroller imposed the tax on House of Lloyd subsequent to the 1983 rule change. ¹

Although neither the Secretary of State nor the Comptroller attempted to collect the tax prior to 1983, the only evidence of an affirmative administrative policy that such corporations were not subject to the tax is Comptroller Rule 3.406, in effect from 1975 until 1983, which inexplicably tied the definition of "doing business" for franchise tax purposes to the definition of "transacting business" in the Texas Business Corporation Act. The 1975 rule was in direct contravention to the evident purpose of the Legislature in enacting the 1941 amendment to the statute, which provided that not only those corporations authorized or chartered to do business in the state (pursuant to the Texas Business Corporation Act) were required to pay franchise tax, but also those corporations actually "doing business" in the state. The logical interpretation to be placed on the addition of the language "doing business" is that the Legislature was imposing the tax against foreign corporations which were conducting business activities in Texas, but did not have a certificate of authority or were not authorized to do business in Texas. ² The Comptroller was without authority to promulgate Rule 3.406, as enacted in 1975, since it was contrary to the plain language of the statute. See Brown Express, Inc. v. Railroad Commission, 415 S.W.2d 394, 397 (Tex.1967); Eddins-Walcher Butane Co. v. Calvert, 156 Tex. 587, 298 S.W.2d 93 (1957).

In support of its argument, House of Lloyd relies upon the language in Humble Oil & Refining Co. v. Calvert, 414 S.W.2d 172, 180 (Tex.1967), that "[a] statute of doubtful meaning that has been construed by the proper administrative officers, when re-enacted without any substantial change in verbiage, will ordinarily receive the same construction." This rule is only applicable where there has been an affirmative long-standing administrative policy. See University of Texas at Austin v. Joki, 735 S.W.2d 505, 509 (Tex.App.--Austin 1987, writ denied); Guarantee Mutual Life Insurance Co. v. Harrison, 358 S.W.2d 404, 408 (Tex.Civ.App.--Austin 1962, writ ref'd n.r.e.). A mere failure to enforce a statute, absent showing of an affirmative policy that the statute is construed by the agency to be inapplicable under the circumstances, does not establish an affirmative agency policy as to the agency's interpretation of the statute. There is no evidence of any affirmative administrative construction of this statute prior to 1975.

Even if the failure of the Comptroller to collect the tax could be construed as an affirmative construction that the statute is inapplicable to businesses such as House of Lloyd, the doctrine of legislative acceptance applies only when the statute to be construed is ambiguous or of doubtful meaning. Here, although the terms "doing business" and "business done in Texas" may have been ambiguous under the facts of this case prior to 1969, the statute was amended at that time to specify that "business done in Texas" includes the sales of tangible personal property when the property is delivered or shipped to a purchaser within this state.

The phrase "does business" is not defined in § 171.001, however, § 171.103 of the Tax Code sets forth activities which constitute "business done" in Texas for purposes of calculating the amount of franchise tax to be assessed against a corporation. In 1969, the legislature amended the statute, effective May 1, 1970, to provide:

The gross receipts of a corporation from its business done in this state is the sum of the corporation's receipts from:

(i) Sales of tangible personal property when the property is delivered or shipped to a purchaser within this State, regardless of the F.O.B. point or other condition of sale....

Act of September 9, 1969, 61st Leg., 2d C.S., ch. 1, 1969 Tex.Gen.Laws 61 (formerly Tex.Tax.--Gen. art. 12.02(1)(b)(i), now codified as Tex.Tax Code § 171.103). ³

For purposes of calculation of the amount of the franchise tax, whether business is "business done" in Texas is determined, inter alia, by whether such property, when sold, is delivered or shipped to a purchaser within Texas. All of House of Lloyd's business transactions with Texas involve the delivery of goods to Texas purchasers. Section 171.103 clarifies the meaning of the statute as to the activities that constitute "doing business" for purposes of imposition of the franchise tax. In determining the meaning of a statute, a court must consider the entire act, its nature and object, and the consequences that would follow from each construction. Sayre v. Mullins, 681 S.W.2d 25 (...