Summary
In Arthur, because all of the company's shipments were outbound, that is, all of its income was earned on loads "originating" in Wisconsin, the originating revenue factor equaled the company's gross receipts.
Summary of this case from Consolidated Freightways Corp. of Delaware v. Wisconsin Department of RevenueOpinion
November 1, 1962 —
November 27, 1962.
APPEAL from a judgment of the circuit court for Dane county: RICHARD W. BARDWELL, Circuit Judge. Reversed.
For the appellant the cause was argued by Harold H. Persons and E. Weston Wood, assistant attorneys general, with whom on the briefs was John W. Reynolds, attorney general.
For the respondent there was a brief by Stephens, Bieberstein, Cooper, Bruemmer Gartzke of Madison, attorneys, and Wickhem Consigny of Janesville, and George L. Weisbard of Chicago, Illinois, of counsel, and oral argument by Adolph J. Bieberstein and John C. Wickhem.
The respondent taxpayer is a corporation organized under the laws of Illinois, with its corporate offices and main terminal at Janesville, Wisconsin. A contract carrier, the respondent serves only one customer, the General Motors Corporation. Its principal business activity consists of delivering Chevrolet cars and trucks manufactured at Janesville to Chevrolet dealers located in eleven states, including Wisconsin.
Though taxpayer maintains its main terminal at Janesville, it also has other terminals at Black River Falls, Wisconsin, Manchester, Iowa, and Anoka, Minnesota.
Four passenger cars or three trucks are loaded on a semi-trailer at Janesville and are delivered by taxpayer's drivers to their respective destinations. Some of the loads pass through the terminals mentioned above. At such terminals the tractor or power unit of the taxpayer is unhitched from the loaded trailer and another power unit substituted. The cargo units are also reinspected at the terminals, and the tractor or power unit is serviced before being dispatched.
Taxpayer's gross revenues are derived from four sources: (1) A flat rate per mile per unit transported; (2) a loading and unloading fee for each vehicle handled; (3) an additional fee per cargo unit for each 150 miles after the first 150 miles; and (4) an additional surcharge for loads termed "splits," that is, where part of a load is delivered to one dealer, with the balance of the load delivered to another dealer.
The decision and order of the board of tax appeals affirmed an assessment of additional Wisconsin income taxes for the years 1953 through 1956 against the respondent taxpayer. The additional assessment resulted from an apportionment of the taxpayer's net business income in which a three-factor formula was used. The formula consisted of revenue miles, payroll, and originating revenue.
The taxpayer appealed the decision of the board of tax appeals to the circuit court for Dane county on the grounds that the originating-revenue factor used in the above formula measured and taxed services performed by the taxpayer outside of Wisconsin in violation of sec. 71.07(2), Stats. The circuit court agreed with this contention and reversed the board's decision. In reversing the board, the circuit court deleted the originating-revenue factor from the formula used by the board and inserted in its place a tangible-property factor. The final formula prescribed by said court was made up of a revenue-mile factor, a payroll factor, and a property factor. It is from the use of this formula that the Department of Taxation appeals.
Statutes Involved.
Sec. 71.07, Stats., provides, so far as here material:
"(1) . . .
"(2) Persons engaged in business within and without the state shall be taxed only on such income as is derived from business transacted and property located within the state. The amount of such income attributable to Wisconsin may be determined by an allocation and separate accounting thereof, when the business of such person within the state is not an integral part of a unitary business, . . . In all cases in which allocation and separate accounting is not permissible, the determination shall be made in the following manner: [There follows a provision for the deduction of nonapportionable income.] The remaining net income shall be apportioned to Wisconsin on the basis of the ratio obtained by taking the arithmetical average of the following three ratios:
"(a) The ratio of the tangible property, real, personal, and mixed, owned and used by the taxpayer in Wisconsin in connection with his trade or business during the income year to the total of such property of the taxpayer owned and used by him in connection with his trade or business everywhere. . . .
"(b) In the case of persons engaged in manufacturing or in any form of collecting, assembling, or processing goods and materials, the ratio of the total cost of manufacturing, collecting, assembling, or processing within this state to the total cost of manufacturing, or assembling or processing everywhere. . . .
"(c) In the case of trading, mercantile, or manufacturing concerns the ratio of the total sales made through or by offices, agencies, or branches located in Wisconsin during the income year to the total net sales made everywhere during said income year.
"(3) Where, in the case of any person engaged in business within and without the state of Wisconsin and required to apportion his income as herein provided, it shall be shown to the satisfaction of the department of taxation, that the use of any one of the three ratios above provided for gives an unreasonable or inequitable final average ratio because of the fact that such person does not employ, to any appreciable extent in his trade or business in producing the income taxed, the factors made use of in obtaining such ratio, this ratio may, with the approval of the department of taxation, be omitted in obtaining the final average ratio which is to be applied to the remaining net income.
"(4) . . .
"(5) If the income of any such person properly assignable to the state of Wisconsin cannot be ascertained with reasonable certainty by either of the foregoing methods, then the same shall be apportioned and allocated under such rules and regulations as the department of taxation may prescribe.
"(6) . . .
Rule Involved.
" Tax 2.45 APPORTIONMENT IN SPECIAL CASES. (Section 71.07(5), Wis. Stats.) When the business of any person within Wisconsin is an integral part of a unitary business conducted within and without Wisconsin, but because of unusual or unique circumstances the portion of the income of such person derived from business transacted in Wisconsin cannot be ascertained with reasonable certainty by use of the apportionment formula provided in sec. 71.07(2) of the statutes (or by separate accounting in view of the unitary nature of the business), the department will substitute in the place of some or all of the statutory apportionment factors such other factor or factors as will reasonably apportion to Wisconsin the business income properly assignable to Wisconsin. In any case in which an apportionment of business income is made pursuant to this regulation, the taxpayer, at the time of the assessment, will be apprised of the factors used in the formula adopted. The business income of interstate air carriers shall be apportioned as provided in section Tax 2.46." 6 Wis. Adm. Code, sec. Tax 2.45.
The legislature recognized that there would be difficulties in apportioning the taxes of a unitary business which operates partly in Wisconsin and partly outside this state. A "unitary" business is one which functions as a single unit; that is, it is not divided into a separate entity for each of the states in which it operates. The legislature also recognized that no fixed formula would fairly fit all the multitudinous types of business. Accordingly, it gave a broad mandate to the Department of Taxation in sec. 71.07(5), Stats., to prescribe rules to fit those cases which do not fall within the other provisions of sec. 71.07.
W. R. Arthur Company, Inc., is a unitary company engaged in a multistate trucking business. It is clear that the statutory formula contained in sec. 71.07(2) is inappropriate for purposes of apportioning the income of this taxpayer; the statutory formula is designed for manufacturing and mercantile enterprises.
As reflected in sec. Tax 2.45 of 6 Wisconsin Administrative Code, the Department of Taxation has adopted a rule to govern those cases which do not fall within the statutory formula. In such special cases the department "will substitute in the place of some or all of the statutory apportionment factors such other factor or factors as will reasonably apportion to Wisconsin the business income properly assignable to Wisconsin." The problem before us is whether the factors and the formula used in the instant case fairly accomplish that purpose.
The taxpayer's principal argument is that the "originating revenue" factor is arbitrary and improper. In this case the originating-revenue factor equals the gross receipts. The two other factors which are employed in the formula adopted by the board of tax appeals (revenue miles and payroll) are not challenged by the taxpayer. In using 100 percent of the taxpayer's gross revenue in its formula, has the appellant improperly weighted its formula so that it seeks to tax income derived from business transacted outside of Wisconsin?
We reach the conclusion that the originating-revenue or gross-receipts factor is not an arbitrary one, nor does it taint the ultimate formula adopted by the board of tax appeals. As applied to this particular taxpayer, the inclusion of 100 percent of gross receipts as one factor in a three-factor formula constitutes a reasonable means of reflecting the company's income attributable to business done in Wisconsin. The formula takes into consideration the peculiar nature of its business activity; it also takes into consideration the fact that the respondent's one and only customer is in Wisconsin and that the taxpayer is headquartered in this state.
If used as a single factor, gross receipts would result in all of the taxpayer's income being taxed here, and this would obviously constitute an unfair tax. However, when it is used in conjunction with the two other factors, it cannot be said to be arbitrary or to result in an unfair apportionment of the income of the respondent under sec. 71.07(5), Stats. The case of Department of Taxation v. Blatz Brewing Co. (1961), 12 Wis.2d 615, 108 N.W.2d 319, did not purport to interpret sec. 71.07(5), and is therefore not controlling.
If one of several factors is challenged, it must be evaluated by the court not only upon its own merits but also in relation to the other factors, as well as in relation to the total composite result. Thus, the court must look not only at the individual factors but also at the final formula. We believe that in context with each of the other factors included in the formula adopted by the board of tax appeals in the instant case, the factors are all reasonable.
When a multifactor formula is used, each factor must bear a reasonable relationship to the taxpayer's business and to the other factors of the formula; it must also produce a fair apportionment when set in combination with other germane factors. The test is not whether, standing alone, a given factor produces a fair apportionment.
In our opinion, the taxpayer did not meet its burden of proving that the formula adopted by the board of tax appeals unfairly apportioned its income in Wisconsin. This court has placed the burden of proof upon the taxpayer in such cases as Department of Taxation v. O. H. Kindt Mfg. Co. (1961), 13 Wis.2d 258, 268, 108 N.W.2d 535, and Laabs v. Tax Comm. (1935), 218 Wis. 414, 424, 261 N.W. 404. However, we have not heretofore resolved the question of the burden of proof regarding an allegedly arbitrary formula as applied to an interstate taxpayer. We share the view expressed by the United States supreme court in Butler Brothers v. McColgan (1942), 315 U.S. 501, 507, 62 Sup. Ct. 701, 86 L.Ed. 991:
"One who attacks a formula of apportionment carries a distinct burden of showing by `clear and cogent evidence' that it results in extraterritorial values being taxed."
By the Court. — Judgment reversed, with directions to enter judgment affirming the order of the Wisconsin board of tax appeals.