Stone v. Stapling Machines Co.

• Citation: 73 So.2d 123,221 Miss. 555
• Decision Date: 14 June 1954
• Docket Number: No. 39218,39218
• Parties: STONE v. STAPLING MACHINES CO.
• Court: United States State Supreme Court of Mississippi

Page 123

73 So.2d 123

221 Miss. 555

STONE v. STAPLING MACHINES CO.

No. 39218.

Supreme Court of Mississippi.

June 14, 1954.

John E. Stone, Jackson, for appellant.

Bernard L. Tighe, Jackson, for appellee.

ARRINGTON, Justice.

This case involves the validity of an assessment for Mississippi income tax against a foreign corporation doing business within the State. In Stone v. Stapling Machines Co., Miss.1954, 71 So.2d 205, 206, this Court upheld the validity of an assessment of a Mississippi sales tax against the same taxpayer. The tax there involved was measured by two percent of the gross receipts from "renting or leasing of tangible personal property." The pertinent facts applicable to appellee-taxpayer are substantially the same as those outlined in the opinion in 71 So.2d 205, and they will not be recited in detail here. The income tax here involved is broader: It taxes the net income from 'rentals or royalties from property or any interest in property within the State.'

Appellee is a Delaware corporation with its principal offices in New Jersey. It leased under a written contract to certain persons in Mississippi certain box-making machines on which it held United States patents. The lessees by this instrument obtained the right to use the patented machines to make boxes, and the right to make patented boxes. Appellee retained title to the machines, and agreed to furnish repair parts, and its agents were granted access to the machines. The Mississippi lessees agreed to pay for the use of the machines a sum equal to four percent of the gross sales from patented boxes made under the agreement, and a sum equal to two percent of the gross sales of all other boxes not patented and made under the agreement. In addition, the Mississippi lessees had to pay as an initial consideration for the lease the cost of production of the machines.

Under this arrangement, the Stapling Machines Company in the year 1950 derived gross income from rents and royalties from Mississippi in the amount of $634,209.78. Applying the ratio between Mississippi gross income and total gross receipts in the nation, to the total net income of appellee, the State Tax Commission allocated to appellee a 1950 net income from this State in the amount of $265,972.32. Appellee had previously reported taxable net income from Mississippi for 1950 of $23,317.50. This was based upon the allocation by appellee of 1950 income only from what it considered to be rent on he machines in Mississippi, and on that return it paid a 1950 state income tax of $182.92.

Thereafter the State Tax Commission held hearings concerning appellee's 1950 taxable income, and on February 6, 1953, entered an order, as outlined above, allocating to appellee a Mississippi net income in the sum of $265,972.32. The Commission's order, therefore, entered a deficiency assessment of income tax against appellee for the year 1950 of $15,165.42.

From that assessment order of February 6, 1953, Stapling Machines Company appealed to the Chancery Court of the First Judicial District of Hinds County. The petition for appeal charged that taxpayer had never qualified to do business in Mississippi, that it had no offices or agents in the State, and was not doing business within the State; that most, if not all, of the money received by taxpayer from Mississippi lessees for 1950 was royalty for the right to make and sell patented boxes; and that such royalty is not derived from property in Mississippi and is not subject to a state income tax. The petition did not attack the method of allocation of net income to Mississippi, but attacked the State's power and jurisdiction to tax any of the money received by taxpayer from the Mississippi lessees, other than certain minimum, asserted rental values of he machines located in this State. On the hearing in the chancery court, much of the same testimony and exhibits in the sales tax case were introduced into the record. On August 22, 1953, the chancery court entered a decree vacating and setting aside the deficiency assessment of the Commission in its order of February 6, 1953. Apparently the trial court's decree was based upon the idea that this State did not have jurisdiction to make the assessment, and on the assumptions that appellee was not doing business in Mississippi, that money received by appellee from Mississippi lessees of its machines was royalty, and that income from royalty on machines located in this State is immune from state income tax.

However, subsequent to the date of that decree and in the sales tax case involving the same taxpayer, 71 So.2d 205, this Court held: (1) Stapling Machines Company is doing business in Mississippi and subject to state taxation; (2) the box-making machines are located in this State, have obtained a business situs here apart from the domicile of their owner, Stapling Machines Company, have become localized within Mississippi, and are not in the stream of interstate commerce. Hence the Court in the sales tax case affirmed the Commission's allocation of gross income arising from "renting or leasing of tangible personal property", and affirmed the Commission's assessment of the sales tax. The sales tax decision in 71 So.2d 205 decided substantially all of the issues in this case, except one.

Appellee contends again that it is not engaged in doing business within Mississippi, but that issue was properly decided against it in the sales tax case. Appellee further says that the licensing of the machines to the Mississippi lessees is wholly interstate commerce, and that to impose the state income tax on the money paid for the leases is violative of the interstate commerce clause. However, in the sales tax case we held that the machines had obtained a business situs in the State apart from the domicile of their owner, and that they had become localized and divorced from the stream of interstate commerce. 71 So.2d 209-210. Appellee also argues that if any part of its income from these machines is rental, then only that part which can be said to be the fair rental value should be taxed. It then refers to the same testimony which was used in the record in the sales tax case, in which a real estate man and an accountant testified as to what they thought was a fair rental value of the machines used in Mississippi by lessees. That contestion also was rejected in the sales tax case. It was there held that the rental which the sales tax statute made the basis of computation of that tax was two percent of gross income from patented and from unpatented boxes.

Appellee argues finally that part of the net income upon which the Commission's assessment is based is derived from royalties paid by Mississippi lessees for the use in this State of patented machines; that the patents have their situs in the State of New Jersey, since their situs follows the domicile of the owner, New Jersey. It is stated that the royalties are not paid to it for the use of any property owned by appellee in Mississippi.

The income tax statute is not limited to income from rentals. Referring to the statutes in effect in 1950, Code of 1942, Section 9222, as amended by Mississippi Laws 1944, Chapter 125, Section 1, levies a State income tax upon the entire net income 'from all property owned and from every business, trade or occupation, carried on in this state by individuals, corporations, partnerships, trusts or estates, not residents of the state of Mississippi.' Code Section 9231 describes items which shall be treated as income: '(1) In the case of foreign corporations or of a nonresident or citizen of a foreign country the following items of gross income shall be treated as income from sources within the State.

'(a) * * * rentals or royalties from property or any interest in property within the State; * * *.'

Hence it will be noted that the statute levies a tax upon the entire net income from all property owned or business carried on in the State by nonresident corporations, and that the statute expressly provides that 'rentals or royalties from property or any interest in property within the State' shall be treated as income from sources within the State. This statute is clear and unambiguous, and manifestly applies to the 1950 net income allocated to Mississippi by the order of the State Tax Commission.

The most substantial part of appellee's net income assessed by the Commission is derived from rent received by appellee for the use of the machines in this state, as was held in the sales tax case, 71 So.2d 205, 207. Some of the assessed income constitutes income from royalties derived from the use in Mississippi of he patented machines. As to the latter, appellee apparently contends that the assessment is invalid because its patents are immune from taxation by any State other than that of the domicile of the taxpayer. This is beside the point. The income tax in question is not a tax on appellee's patents. It is a tax on income earned in Mississippi by the use in this State by appellee of its personal property.

51 Am.Jur., Taxation, Sec. 248, says: 'Over a long period of time the rule prevailed in Federal and state courts that a state had no power to tax patent rights or copyrights since such right were created for Federal purposes under the Constitution and laws of the United States. A copyright or patent was regarded as a franchise granted by the United States, and, as such, not subject to state taxation on property. However, the view that copyrights are immune from state taxation upon the principle that they are Federal instrumentalities was dispelled when a case arose under a state statute imposing a direct charge upon gross recipts from royalties. Fox Film Corp. v. Doyal, 286 U.S. 123, 131, 52 S.Ct. 546, 76 L.Ed. 1010, 1016, definitely overruling Long v. Rockwood, 277 U.S. 142, 48 S.Ct. 463, 72 L.Ed. 824. The United States Supreme Court now takes the view that the...