Smith, Kline & French Laboratories v. State Tax Commission

• Decision Date: 16 June 1965
• Citation: 403 P.2d 375,80 Or.Adv.Sh. 785,241 Or. 50
• Parties: SMITH KLINE & FRENCH LABORATORIES, Appellant, v. STATE TAX COMMISSION, Respondent.
• Court: Oregon Supreme Court

Page 375

403 P.2d 375

241 Or. 50

SMITH KLINE & FRENCH LABORATORIES, Appellant, v. STATE TAX COMMISSION, Respondent.

Supreme Court of Oregon, In Banc.

Argued and Submitted March 1, 1965.

Decided June 16, 1965.

James H. Clarke, Portland, argued the cause for appellant. With him on the briefs were Koerner, Young, McColloch & Dezendorf, James C. Dezendorf and Marshall C. Cheney, Jr., Portland.

Theodore W. DeLooze, Asst. Atty. Gen., Salem, argued the cause for respondent. With him on the brief were Robert Y. Thornton, Atty. Gen., Salem, and William M. Ferguson, Atty. Gen., State of Kansas, Topeka, Kan., as amicus curiae in support of respondents, on behalf of the State of Kansas.

William D. Dexter, Asst. Atty. Gen., Lansing, Mich., argued the cause and filed a brief amici curiae. With him on the brief were Attorneys General of Alaska, Arizona, Georgia, Hawaii, Kansas, Michigan, Minnesota, Missouri, South Dakota, Washington, and the Commonwealth of Pennsylvania.

Halfpenny, Hahn & Ryan and Harold T. Halfpenny, Richard F. Hahn, James F. Flanagan and Mary M. Shaw, Chicago, Ill., filed a brief as amicus curiae, representing National Assn. of Wholesalers and Automotive Service Industry Assn Charles H. Schreyer, Bloomfield, Conn., as amicus curiae, filed a brief for 22 state associations.

MacLean, Seaman & Laing, Lansing, Mich., filed a brief amicus curiae on behalf of Michigan Retailers Assn.

Before McALLISTER, C. J., and PERRY, SLOAN, O'CONNELL, GOODWIN, DENECKE and HOLMAN, JJ.

DENECKE, Justice.

We adopt the following portion of the opinion of the Oregon Tax Court (1 OTR Adv.Sh. 491 (1964)):

'This is a suit to set aside defendant's assessment of corporation income tax against plaintiff for the years 1955, 1956, 1957, and 1958 on the ground that Public Law 86-272 prohibits Oregon from imposing such tax on plaintiff.

'Facts

'The parties stipulated that the material facts of the case are substantially as follows:

'Plaintiff, a Pennsylvania corporation, has its principal office in Philadelphia. It manufactures and sells ethical pharmaceutical products in interstate commerce. In Oregon it has no office, no office equipment, no stock of goods, no telephone listing, no telephone answering service, no mailing address, and no automobile. To conduct its only activity in Oregon, plaintiff employs five or six resident professional representatives, so-called 'detail men.' It reimburses these representatives for the use of their own cars and other expenses and provides them with samples and sales materials.

'Under supervision of its Seattle office, plaintiff's detail men visit hospitals, other institutions, doctors, and retail druggists, as well as wholesalers handling plaintiff's products, for the purpose of explaining the use and usefulness of plaintiff's products and encouraging their use and sale. They do not solicit orders (except upon rare occasions) but rather promote the use of plaintiff's products. The detail men report daily to plaintiff concerning the professional reception of its products. No telephone listing of the representatives identifies them as plaintiff's agents, though their business cards carry their home telephone numbers. At their homes the detail men maintain stocks of samples for use in their promotional work.

'Among ultimate users only state institutions deal directly with plaintiff. All other ultimate users purchase from retailers. Retailers, in turn, purchase from wholesalers, whose salesmen solicit orders from druggists, hospitals, and institutions. Oregon wholesalers place orders with plaintiff at its principal office, where they are accepted.

'In 1958, defendant requested that plaintiff pay Oregon's corporation net income tax for the years 1955 through 1958, under the Oregon Corporation Income Tax Act of 1955. In May of that year, plaintiff filed its returns and paid tax for those four years. It computed its tax by the three-factor apportionment formula with zero as its Oregon sales and property factors. In August, 1959, defendant issued proposed deficiency assessments in which it recomputed plaintiff's tax, using the three-factor formula with a zero factor for property only. In September, 1959, Congress passed P.L. 86-272. Defendant made its assessments final in August, 1960. In September, 1960, plaintiff formally appealed to defendant to set aside its assessments and to refund the tax already paid on the ground that P.L. 86-272 exempted plaintiff from Oregon corporate income taxation. After a formal hearing in 1962, defendant, in its Opinion and Order No I-62-14, affirmed its assessments and denied plaintiff's refund claims because plaintiff's activities in Oregon did not bring plaintiff within the exemption provided by P.L. 86-272.

'Plaintiff then filed its complaint in this court to set aside the commission's order and assessment. In its answer, defendant raised for the first time the additional issue that P.L. 86-272 is unconstitutional. After plaintiff replied, defendant requested, under ORS 305.425, that this court remand the case to the tax commission for its formal consideration of the constitutional issue. Plaintiff informally acquiesced in the remand. This court remanded the case to the commission but retained jurisdiction to proceed without the filing of new pleadings. Thereafter, by its Opinion and Order No. I-63-19, the commission held P.L. 86-272 unconstitutional.

* * *

* * *

'Issues

'This case presents three issues:

'(1) Did plaintiff's activities in Oregon bring it within the exemption of P.L. 86-272?

'(2) Is P.L. 86-272 constitutional?

* * *

* * *

'P.L. 86-272 prohibits the states from levying and collecting taxes measured by net income from natural and artificial persons engaged in interstate commerce whose only business activity within the taxing state is the solicitation of orders for the sale of tangible personal property by either the soliciting firm or a customer of the soliciting firm, when any orders thereby obtained are accepted and filled outside the taxing state. This prohibition is applicable after the adoption of the act in September, 1959, and to assessments then pending.

* * *

* * *

'First Issue: Construction of P.L. 86-272

'In making its assessments, defendant strictly construed the exemption granted by P.L. 86-272 and found that plaintiff's Oregon activities are not that solicitation of orders which the statute exempts. Defendant contends that P.L. 86-272 creates an 'island of immunity' around the solicitation activities expressly described in the statute; that solicitation of orders requires that an actual order be sought by an individual calling upon a potential customer; and that the activities of plaintiff's employees, which merely encouraged the placing of orders with the wholesale drug firms selling plaintiff's products, do not qualify plaintiff for exemption.

'On the other hand, plaintiff contends that the act is properly construed as a 'minimum activity' statute--that it exempts all corporations the activities of which do not exceed solicitation of orders. Furthermore, plaintiff contends that its Oregon employees do solicit orders for plaintiff's customers within the meaning of P.L. 86-272 and that the statute does not require the receipt of an order by plaintiff's employees so long as they are soliciting and encouraging the purchase of plaintiff's products.

'In this court's opinion, plaintiff's activities in Oregon meet the statutory requirements for exemption. Congressional committee reports support this conclusion. Conference Report No. 1103, 86th Cong., 1st Sess. (1959); Select Committee on Small Business, The Problems Faced by Small Business in Complying With Multi-State Taxation of Income Derived From Interstate Commerce, S. Rep. No. 453, 86th Cong., 1st Sess. (1959) p. 13; Comm. in Complying With Multi-State Taxation Derived From Interstate Commerce, S. Rep. No. 658, 86th Cong., 1st Sess. (1959). These reports show that Congress intended to exempt not only the specifically described phase of interstate sales efforts but also all lesser, included phases.

'Furthermore, the nature of plaintiff's business makes its activities in Oregon the equivalent of solicitation of orders in other, less technical businesses.

Ethical drugs are generally purchased by the public from retail druggists. The drug to be purchased is selected, not by the purchaser, but by his physician. An ethical drug sales effort comparable to direct solicitation of orders for shoes, valves, or cement requires 'selling' the physician on the wisdom of prescribing the particuar product for his patient. By soliciting the stocking of plaintiff's products by druggists and the prescription of those drugs by physicians, plaintiff's detail men perform the same sales function in plaintiff's field that salesmen soliciting actual orders from the ultimate user perform in other businesses. A realistic legal and factual interpretation of P.L. 86-272 requires exemption of plaintiff from Oregon corporation income tax.'

Defendant Commission in its brief and oral argument contends: 'Public Law 86-272 is an unconstitutional attempt by Congress to adopt new rules of 'nexus' or due process under the authority of the Commerce Clause, usurping the power of the judiciary.' The Commission argues that the Supreme Court has held that certain minimum contacts between a business and a state are a sufficient nexus to enable the state to tax a portion of the income of that business without violating the Due Process Clause but that Congress, by P.L. 86-272 has increased the minimum contacts justifying a state tax and, therefore, Congress is attempting to determine what is due process and this is in violation of the court's exclusive domain.

We find the congressional action not to violate the doctrine of separation of powers or the Due Process Clause. The minimum contacts for jurisdictional nexus have not been changed by P.L. 86-272. Congress cannot change the requirements of the...