W.J. Dickey & Sons, Inc. v. State Tax Commission

• Decision Date: 08 April 1957
• Docket Number: No. 101,101
• Citation: 212 Md. 607,131 A.2d 277
• Parties: W. J. DICKEY & SONS, Inc., a body corporate, v. STATE TAX COMMISSION of Maryland.
• Court: Maryland Court of Appeals

Page 607

212 Md. 607

131 A.2d 277

W. J. DICKEY & SONS, Inc., a body corporate, v. STATE TAX COMMISSION of Maryland.

No. 101.

Court of Appeals of Maryland.

April 8, 1957.

F. Fulton Bramble, C. Oliver Goldsmith, Baltimore (Nicholas G. Penniman, III, and Barton, Wilmer, Bramble & Penniman, Baltimore, on the brief), for appellant.

Frank T. Gray, Asst. Atty. Gen. (C. Ferdinand Sybert, Atty. Gen., on the brief), for appellee.

Before BRUNE, C. J., and COLLINS, HENDERSON and PRESCOTT, JJ. BRUNE, Chief Judge.

This is an appeal from an order of the Circuit Court for Baltimore County affirming the action of the State Tax Commission in upholding assessments, made by the Comptroller, of corporate income taxes owed by the appellant for six different years, viz.: 1946, 1949, 1950, 1951, 1952 and 1953.

The appellant, W. J. Dickey & Sons, Inc. (referred to below as 'Dickey') is a Delaware corporation with its manufacturing business being carried on completely within the State of Maryland. Its entire sales, with the exception of a few sales direct to its Maryland employees, are handled by H. R. Leeds Woolen Sales Corporation (referred to below as 'Leeds') with its principal place of business in New York City. Leeds, as direct selling agent of Dickey solicits sales subject to the approval of Meinhard, Greeff & Co., Inc. (referred to below as 'Meinhard'), Dickey's financial factor in New York.

The mechanics of selling may briefly be described as follows: Leeds solicits sales in various states and makes arrangements with the customer as to quantity of merchandise, time and method of delivery which is set out on a 'Purchase Agreement and Order' form. This form is forwarded to Meinhard for credit approval. Upon approval by Meinhard, the 'Purchase Agreement and Order' becomes binding upon the customer and Dickey. A copy with the approval is returned to Leeds who in turn informs the customer. A copy is sent to Dickey who manufacturers the goods to order and ships them 'f. o. b. Oella, Maryland.'

Meinhard upon accepting the 'Purchase Agreement and Order' becomes liable to Dickey for the purchase price less the usual trade discount and its commission. Meinhard collects from the customer and remits to Dickey who pays a sales commission to Leeds.

Dickey's name appears on the door of Leeds' office, in the New York telephone directory and on the forms used by Leeds and Meinhard.

The sole legal question presented here is whether or not Dickey is deriving income from business carried on without this State so as to be entitled to a tax exemption for such income.

For the years 1946, 1949 and 1950, the applicable statute is Code 1939, Article 81, Section 263, as amended, and for the years 1951, 1952 and 1953 the applicable statute is Code 1951, Article 81, Section 312. The differences in the statutes have no bearing on the present issue and we need only examine Code 1951, Article 81, Section 312, which provides:

'The net income of a corporation (domestic or foreign) shall be allocated in the following manner: * * *

'(b) The remaining net income, hereinafter referred to as business income, shall be allocated to this State if the trade or business of the corporation is carried on wholly within this State, but if the trade or business of the corporation is carried on partly within and partly without this State so much of the business income of the corporation as is derived from or reasonably attributable to the trade or business of the corporation carried on within this State, shall be allocated to this State and any balance of the business income shall be allocated outside this State. * * *'

There have been no cases before this Court construing the words of this statute, and more in particular the words 'trade or business carried on.' If the activities of Leeds and Meinhard can be considered as those of Dickey, then clearly under the statute set out above the appellant must prevail.

The lower court examined the undisputed facts (a stipulation having been filed) in order to determine if Leeds or Meinhard have a master-servant relationship with Dickey. Both Leeds and Meinhard are distinct and separate corporate entities. They operate completely on their own, except that Dickey sets the sale prices, refers customers to Leeds, and has the power to order Leeds not to accept or solicit sales orders from particular customers. On the other hand, Leeds is entirely independent in such matters as the hiring and firing of salesmen, the manner in which the salesmen operate, their supervision, location of branch offices and all other details with regard to the sales for Dickey. Meinhard is equally as independent in its capacity as financial factor.

In the recent case of Charles Freeland and Sons, Inc., v. Couplin, 211 Md. 160, 169, 126 A.2d 606, 611, this Court said in part, quoting from Sun Cab Co. v. Powell, 196 Md. 572, 577, 77 A.2d 783: '* * * Actually the decisive test in determining whether the relation of master and servant exists is whether the employer has the right to control and direct the servant in the performance of his work and in the manner in which the work is to be done.' Certainly the facts in this case support the lower court's finding that Leeds and Meinhard are not 'servants' but are independent contractors.

167 A.L.R. 943 et seq., in an annotation entitled 'Taxation-Business Outside State', thoroughly discusses the cases involving whether or not a corporation is carrying on its business wholly within the state in which is located its principal office and manufacturing activities. We refer below to only a few of the cases discussed therein.

Irvine Co. v. McColgan, 26 Cal.2d 160, 157 P.2d 847, 167 A.L.R. 934, recognized that a taxpayer cannot be deemed to be doing business outside the state so as to require an allocation of income where it merely sells its products outside the state through independent brokers or factors, even assuming them to be agents of the taxpayer.

In Village of Westby v. Bekkedal, 172 Wis. 114, 178 N.W. 451, a Wisconsin partnership entered into an agreement with a New York partnership whereby the Wisconsin firm had exclusive control of the purchasing, storing, handling, and shipping of tobacco grown in Wisconsin, and the New York firm handled all the sales which were made outside of Wisconsin. The court rejected the argument that because the sales were made and the proceeds collected entirely without the State of Wisconsin, that all of the income was derived from business transacted without the State of Wisconsin and therefore not taxable.

In the case of Commonwealth v. Minds Coal Mining Corp., 360 Pa. 7, 60 A.2d 14, the Supreme Court of Pennsylvania, in dealing with a statute somewhat similar to ours, said at 60 A.2d 17: 'If sales are negotiated or effected through an agency maintained by the taxpayer outside of this Commonwealth, they are not assignable to Pennsylvania; but if they are negotiated or effected by other means, as for example, by an independent contractor serving as a sales agent in another State, maintaining its own offices there, and having its own salesmen or sub-agents, they are assignable to Pennsylvania.'

A like result was reached in Young v. Bragalini, 3 A.D.2d 50, 158 N.Y.S.2d 466, where the question was whether or not income derived by a New York partnership, engaged in an insurance agency and brokerage business, from one enterprise in Texas and another in Brazil, engaged in like business, was subject to the New York tax on unincorporated businesses. The New York firm sought to avoid taxation of such income on the basis that it was derived from business carried on outside the State of New York. In each instance the enterprise was a legal entity separate from the New York partnership and was established as such for the purpose of complying with the laws of the jurisdiction in which it operated. The Texas enterprise was a partnership, every member of which was also a member of the New York firm, but no member of the New York firm who was not a resident of Texas was a member of the Texas partnership. The Texas firm apparently conceded that the New York firm was entitled to participate in the Texas firm's profits, and no action of major importance was taken by the Texas firm without the approval of the New York firm. The precise nature of the Brazilian enterprise is not clear, but its relationship to the New York firm would appear to have been similar to that of a subsidiary to a parent corporation. The Court held the New York State Tax Commission warranted in concluding that the New York partnership was not carrying on business in either Texas or Brazil, and hence that the income derived by the New York firm from the enterprises there was not to be allocated under the New York tax statute to sources outside of that State.

The result in the Young case seems to be in accord with the converse case of People ex rel. Studebaker Corporation of America v. Gilchrist, 244 N.Y. 114, 155 N.E. 68, in which the Court of Appeals of New York held that New York could not tax a parent corporation because of the presence in that State of its wholly owned subsidiaries.

See also the statement in 84 C.J.S., Taxation, § 188, p. 350, to the effect that a corporation is not carrying on business within a state by the sale of its products through independent contractors in the state.

Though there is an obvious resemblance between all cases involving the concept of doing business or conducting activities within a particular state, the problems are by no means identical in different types of cases.

Thus, in the recent case of Topps Garment Mfg. Co. v. State, 212 Md. 23, 128 A.2d 595, the question was the...