State Tax Commission v. John H. Breck, Inc.
| Decision Date | 03 July 1957 |
| Parties | STATE TAX COM. v. JOHN H. BRECK, Inc. |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
Joseph H. Elcock, Jr., Asst. Atty. Gen. (John Dane, Jr., Boston, Nicolas L. Metaxas, Greenfield, with him), for State Tax Com.
Bennett Sanderson, Boston, for taxpayer.
Before WILKINS, C. J., RONAN, WILLIAMS, WHITTEMORE & CUTTER, JJ.
John H. Breck, Inc. (hereinafter called Breck), a Massachusetts corporation, has its principal office and factory in Springfield, where it manufactures chemical products 'for sale and purchases other * * * merchandise for sale' and sells such products. Breck 'from time to time ships merchandise for sale in other States from its Springfield office' and also ships goods from warehouses outside Massachusetts to points outside the Commonwealth.
Breck filed a 1953 Massachusetts corporate excise return based (so far as concerns income) on that of 1952. Thereafter it sought abatement of $7,532.93 of its 1953 excise imposed under G.L. (Ter.Ed.) c. 63, § 32, as amended (see, infra, note 4). The application alleged that too large a part of its net income was apportioned to Massachusetts, as the measure of the portion of its 1953 excise based upon net income, because in applying the formula by which income is to be allocated as between Massachusetts and areas outside Massachusetts the 'gross receipts assignable to Massachusetts * * * have been overstated by' the amount of interstate sales shipped from Massachusetts to out-of-state customers.
This application was denied by the State tax commission (hereinafter called the commission) and Breck appealed to the Appellate Tax Board, contending that if 'any part of the net income [of the corporation] is allocated for taxation in Massachusetts by a formula which measures such part by gross receipts from sales in interstate commerce, the tax on net income as measured by sales in interstate commerce would be in violation of the commerce clause * * * [art. 1, § 8, cl. 3] of the Constitution of the United States and a taking of property without due process of law, 1 and in excess of the powers of the state under said Constitution.' The Appellate Tax Board granted the abatement requested and made findings and a report, from which the facts herein stated have been summarized. The commission has appealed pursuant to G.L. (Ter.Ed.) c. 58A, § 13, as appearing in St. 1933, c. 321, § 7, as amended. 2 The record includes the evidence before the board, as well as the formal documents referred to in § 13, as amended.
The excises now 3 imposed by Massachusetts on corporations are found in G.L. (Ter.Ed.) c. 63, as amended, § 32, St.1939, c. 363, § 1, 4 all Massachusetts business corporations of the class to which Breck belongs are subject to an excise measured in part by 'corporate excess' 5 and in part by 'its net income determined to be taxable in accordance with * * * this chapter.' 'Net income' is defined by § 30, par. 5, as appearing in St. 1933, c. 327, § 3, as 'the gross income from all sources, without exclusion, for the taxable year [here 1952], less the deductions [with certain minor exceptions not here relevant] * * * allowable by the federal revenue act applicable for said taxable year.' Section 37 provides that the commissioner of corporations and taxation shall determine, in the manner provided in that section and § 38, 'the part of the net income of a domestic business corporation derived from business carried on within the commonwealth.' Under § 37, certain items of income, for example, interest, dividends, and capital gains (except on tangible property situated outside Massachusetts), are to be allocated to Massachusetts. The remainder of the net income is by § 38, pars. 2 and 3, to be allocated to Massachusetts (if the corporation carries on any business at all outside Massachusetts) by a formula 6 which makes use of three fractional or percentage indices, (a) tangible property in Massachusetts related to total property wherever situated; (b) wages and compensation paid by the corporation and assignable to Massachusetts related to total wages and compensation; and (c) gross receipts (mostly sales) assignable to Massachusetts related to total gross receipts. Equal weight is given to each index by dividing the net income into thirds and allocating one third in accordance with each index. No tax is imposed on, or directly measured by, property, wages, or gross receipts. These items are merely used 'in combination' as component parts of a single formula for the allocation of net income. See discussion by Rugg, C. J., in Alpha Portland Cement Co. v. Commonwealth, 244 Mass. 530, 554-555, 139 N.E. 158. Paragraph 6 of § 38 provides in part that a 'corporation's gross receipts from business assignable to this commonwealth shall be * * * its gross receipts for the taxable year from * * * sales, except those negotiated * * * in behalf of the corporation by agents * * * chiefly situated at, connected with or sent out from premises for the transaction of business owned or rented by the corporation outside the commonwealth.' 7
Breck does not question the allocation of the two third parts of its 1952 net income which were allocated in proportion to tangible property and wages. It complains only of the allocation of that one third part of net income assigned under § 38, pars. 2(c) and 6, in accordance with gross receipts.
The Appellate Tax Board found that Breck's 1952 gross sales (after returns and allowances) were in effect divided into four groups:
(d) Sales (admittedly not assignable
to Massachusetts) by Breck's
New York sales office to out-of-
State dealers and customers by
nonresident salesmen, delivery
being made outside Massachusetts
from stock in Massachusetts
($623,298.32) and by an out-
of-state sales office to out-of-
state customers from stock out-
of-state ($3,636,767.07) 4,260,065.39
--------------
Total gross receipts $7,860,314.69
The commission assigned to Massachusetts the receipts listed in items (a), (b), and (c) above and treated as gross receipts from outside Massachusetts the sales listed in item (d). The fraction representing the part assigned to Massachusetts of the one third of net income allocated on the basis of gross receipts was thus equal to about 45% derived as follows:
(a) $343,425.77 plus (b) $155,289.97 plus (c) $3,101,533.66
The Appellate Tax Board found that the disputed items (b) and (c) above represented 'sales in interstate commerce' and ruled that these sales 'could not be used as a basis for a tax on gross receipts.' This determination resulted in an assignment by the board of gross receipts to Massachusetts producing an allocation fraction of $343,425.77/$7,860,314.69 equal to about 4.4% for this third of net income. 8 Except as already stated, there were no express findings by the board with respect to the extent, if any, to which the salesmen, who effected the sales involved in items (b) and (c), were chiefly connected with or sent out from corporate premises of Breck outside Massachusetts. There were board findings that the territory served by Breck involved in items (b) and (c) was outside Massachusetts; that a 'part of the sales was made by salesmen resident in Massachusetts and a part by salesmen resident outside of Massachusetts'; and that the 'merchandise involved in these appeals was shipped from stock in Massachusetts.' There was, however, before the board an oral concession by counsel for Breck made at the hearing 'that the only issue * * * is with reference to [items] * * * (b) and (c) which are the sales billed from the Massachusetts office by salesmen who if connected anywhere are connected with the Massachusetts office, but they are interstate sales' (emphasis supplied).
The commission contends that the Appellate Tax Board erred in its conclusion that the gross receipts from items (b) and (c) 'are not to be included in the computation of the excise' and 'in having considered the assessment * * * as a direct tax on gross receipts rather than an excise measured by applying the statutory formula * * * to a portion of the net income of' Breck. The commission concedes that the sales included in items (b) and (c) 'are sales in interstate commerce.'
We thus have presented these questions: (1) Does the statutory net income allocation formula (§§ 37, 38) require treating the sales included in items (b) and (c) as sales attributable to Breck's corporate existence and activity in Massachusetts by including them in the numerator of the statutory fraction; and (2) if the statutory formula requires such inclusion of these sales in the Massachusetts numerator, is this inclusion in violation of the commerce clause of the Federal Constitution (art. 1, § 8, cl. 3)?
1. The tax involved is 'a single excise measured by the sum of a percentage on its corporate excess added to a percentage on its net income as those terms are defined in the act.' Originally (and until 1933) it was imposed upon 'the carrying on or doing of business.' Springdale Finishing Co. v. Commonwealth, 242 Mass. 37, 40-41, 136 N.E. 250, 251. See Fore River Shipbuilding Corp. v. Commonwealth, 248 Mass. 137, 140-141, 142 N.E. 812; Frothingham Buildings v. Commonwealth, 249 Mass. 290, 292-293, ...
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