William Wrigley, Jr. Co. v. Wisconsin Dept. of Revenue

Decision Date19 February 1991
Docket NumberNo. 88-2265,88-2265
Citation465 N.W.2d 800,160 Wis.2d 53
PartiesWILLIAM WRIGLEY, JR. CO., Petitioner-Respondent-Petitioner, v. WISCONSIN DEPARTMENT OF REVENUE, Appellant. WISCONSIN DEPARTMENT OF REVENUE, Petitioner-Appellant, v. WILLIAM WRIGLEY, JR. CO., Respondent-Petitioner.
CourtWisconsin Supreme Court

Barbara J. Janaszek, argued, Richard J. Sankovitz and Whyte & Hirschboeck, S.C., on briefs, Milwaukee, and H. Randolph Williams and Baker & McKenzie, of counsel, Chicago, Ill., for petitioner-respondent-petitioner, William Wrigley.

F. Thomas Creeron, III, Asst. Atty. Gen., argued, Donald J. Hanaway, Atty. Gen., on brief, for appellant, Wisconsin Dept. of Revenue.

DAY, Justice.

This is a review of a court of appeals decision, which reversed an order of the circuit court for Dane County, the Honorable Martha J. Bablitch, Reserve Judge, presiding. The circuit court, reversing an order of the Wisconsin Tax Appeals Commission, held that under 15 U.S.C. sec. 381, the Wisconsin Department of Revenue (DOR) does not have the power to tax the net income of the William Wrigley, Jr. Company (Wrigley) for the years 1973 to 1978. The circuit court found that Wrigley's activities in Wisconsin were "inextricably connected to 'solicitation,' " as that term is used in 15 U.S.C. sec. 381. 15 U.S.C. sec. 381 provides in part as follows:

(a) No State, or political subdivision thereof, shall have power to impose, for any taxable year ending after September 14, 1959, a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during such taxable year are either, or both, of the following:

(1) the solicitation of orders by such person, or his representative in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and if approved, are filled by shipment or delivery from a point outside the State; (Emphasis added)....

Because the circuit court held that the DOR is prohibited from assessing a tax on Wrigley, it did not decide the interest rate to be applied to the tax.

The DOR appealed, and the court of appeals reversed the order. William Wrigley, Jr. Co., v. DOR, 153 Wis.2d 559, 579, 451 N.W.2d 444 (Ct.App.1989) (Dykman, J., dissenting). The court of appeals determined that the solicitation of orders does not encompass post-sale activities which are not " 'inextricably related' " to the solicitation of orders. Id. at 569, 451 N.W.2d 444. It held that since Wrigley engaged in such activities, Wisconsin is not prohibited from taxing Wrigley. Id. at 577, 451 N.W.2d 444. In addition, the court of appeals held that the franchise tax was "delinquent," and therefore subject to an eighteen percent penalty interest under secs. 71.13(1)(a) 1 and 71.10(9)(a), Stats. 1985-86. 2 Id. at 579, 451 N.W.2d 444. Wrigley petitioned the court for review which was granted.

This case presents two issues for review: (1) Did Wrigley's activities in Wisconsin go beyond the "solicitation of orders" as that term is used in 15 U.S.C. sec. 381, so that Wisconsin may assess and collect a tax on Wrigley's net income for the years 1973 to 1978, and (2) if Wrigley's activities are taxable, are the assessed taxes "delinquent" and therefore subject to an eighteen percent penalty interest rate pursuant to sec. 71.13(1)(a), Stats.? We conclude that Wrigley's activities in Wisconsin did not go beyond the "solicitation of orders" as that term is used in 15 U.S.C. sec. 381. Therefore the DOR may not assess and collect a tax on Wrigley's net income for the years 1973 to 1978. Because we hold that the DOR is prohibited from taxing Wrigley's net income, we do not reach the second issue.

On October 6, 1980, the DOR issued Wrigley a "Notice of Franchise Tax Assessment." The notice stated that the DOR was assessing Wrigley $246,614.04 in franchise taxes for the years 1973 through 1978 because Wrigley had been engaging in corporate business activities in Wisconsin during those years. In addition, since Wrigley had not filed Wisconsin franchise tax returns, the DOR assessed Wrigley penalties, including an eighteen percent delinquent penalty interest.

Wrigley objected to the assessment, claiming that it did not engage in business in Wisconsin in a manner sufficient to subject it to Wisconsin's taxing jurisdiction. The DOR denied Wrigley's petition for a redetermination of taxes, and assessed Wrigley a total of $271,707.63 in taxes and penalties.

Wrigley appealed to the Tax Appeals Commission (Commission). On August 26 and 27, 1985, a hearing was held before Commissioner William Bradford Smith, acting as a hearing examiner. Before the Commission could issue a decision, Mr. Smith left the Commission because of a legislative reorganization. On November 18, 1986, the Commission rendered its decision without consulting Mr. Smith. It concluded that Wrigley's activities in Wisconsin went beyond the "solicitation of orders" protected by 15 U.S.C. sec. 381, and it upheld the DOR's assessment. The Commission also concluded that Wrigley was not subject to the delinquent penalty interest rate because the taxes had not yet become due, and could therefore not be considered "delinquent." Instead, the taxes were subject to the legal rate of interest, found in sec. 71.09(5)(a), Stats.1985-86. 3

Both Wrigley and the DOR appealed. On August 20, 1987, the Dane County Circuit Court, Judge Michael Nowakowski, presiding, reversed the Commission's decision. The court found that since several of the Commission's findings might have been affected by the weight and credibility of the testimony at the hearing, due process required that the Commission consult Mr. Smith before deciding the case. The court also questioned some of the Commission's findings of fact, and stated that an analysis of Wrigley's activities was to be done on an annual basis, not in the aggregate. We note that 15 U.S.C. sec. 381 prohibits a state from imposing a net income tax "for any taxable year" if a person's business activities "during such taxable year" are limited to those described in the statute. See also Ringgold Coal Mining Co. v. Taxation Division Director, 4 N.J.Tax 321 (Apr. 29, 1982) (court analyzed company's activities on an annual basis). The court did not reach the issue of the penalty interest rate assessment. The case was remanded to the Commission for further proceedings consistent with the court's ruling.

On remand, the Commission met with Mr. Smith and heard his views on the credibility of the witnesses and the weight to be accorded their testimony. Mr. Smith also filed a written statement with the Commission, stating that he found the Wrigley witnesses' testimony to be "extremely credible," and that he would have issued proposed findings of fact, conclusions of law, and an order in Wrigley's favor. A three-member majority of the Commission, with one member dissenting and one not participating, reinstated the original decision and order. The Commission clarified its original findings and specifically stated that it never questioned the credibility of the witnesses: their testimony was "completely accepted and accorded substantial weight."

Both Wrigley and the DOR appealed, and the circuit court consolidated their appeals. In examining the record, the circuit court found that some of the Commission's findings of fact were not supported by the evidence in the record. In addition, the Commission "did not purport to examine the rationale of the statute itself (15 U.S.C. sec. 381), its legislative history, or the cases from other states which have construed it in a variety of circumstances." Instead, the Commission relied on the DOR's nexus regulations promulgated in 1979. It also relied on guidelines set forth in a resolution of the Multistate Tax Commission, a group of state revenue agents. See State Tax Guide, Multistate Taxation, sec. 351, (CCH 1980). In analyzing Wrigley's activities, the Commission applied these guidelines, which were not cited by either party, and did not refer to case law, cited by both parties.

The circuit court, in interpreting 15 U.S.C. sec. 381, analyzed the approaches other state courts have taken and the statute's legislative history. The circuit court concluded that the activities of Wrigley's salespeople were "solicitation" or so "inextricably connected to solicitation" as to amount to the same thing. Finally, the court stated that even if some of Wrigley's activities were viewed as sales, they were "infrequent exceptions to Wrigley's practice and of de minimis value compared to its total revenues." Finding Wrigley not liable for the franchise tax, the court did not reach the penalty interest issue.

The DOR appealed. In a split decision, the court of appeals reversed. Wrigley, 153 Wis.2d at 579, 451 N.W.2d 444. Although it acknowledged that the circuit court's opinion was "thoughtful, thorough and well-reasoned," the majority of the court of appeals concluded there was substantial evidence to support the Commission's order. Id. at 571, 451 N.W.2d 444. Additionally, in determining which activities of a company go beyond "solicitation," the court employed a pre-sale/post-sale test. Id. at 577, 451 N.W.2d 444. It held that solicitation included "acts which, according to custom and practice in the particular industry, are those that lead to the placing of orders by customers." Id. at 569, 451 N.W.2d 444. The court of appeals also held that "solicitation of orders" should not encompass "post-sale activities that are not closely or 'inextricably related' to the solicitation of orders." Id. The court concluded that Wrigley engaged in such post-sale activities, lending evidentiary support to the Commission's order. Id. at 571, 451 N.W.2d 444. The court of appeals also held that Wrigley was liable for the eighteen percent delinquent penalty interest on the tax....

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