Marshall-Wells Co. v. Commissioner of Taxation

Thomas Gallagher, Justice. On July 9, 1942, the commissioner of taxation assessed against relator, Marshall-Wells Company, a New Jersey corporation, additional taxes, under the Minnesota income and franchise tax act, amounting to $16,348.42 for the year 1938 and $15,441.91 for the year 1939. The commissioner’s orders were subsequently affirmed by the board of tax appeals on August 15, 1944, and are before us now upon writs of certiorari issued September 1, 1944. *460 It is not disputed that relator is subject to the franchise tax specified in Minn. St. 1941, § 290.02 (Mason St. 1940 Supp. § 2394-2), which imposes upon every foreign corporation, for the privilege of transacting or for the actual transaction of business within the state, an annual tax measured by the taxable net income of such corporations, as computed under § 290.17(2), (§ 2394-23 [b]), which includes the following provision: “Items of gross income shall be assigned to this state or other states or countries in accordance with the following principles: * * * -X* * “(2) * * * Income or gains from intangible personal property not employed in the business of the recipient of such income or gains, and from intangible personal property employed in the business of such recipient if such business consists principally of the holding of such property and the collection of the income and gains therefrom, wherever held and whether in trust or otherwise, shall be assigned to this state if the recipient thereof is domiciled within this state; * * The question presented is whether relator, a foreign corporation with a commercial domicile in Minnesota, is required to include in its taxable income, for the measurement of said franchise tax, dividends from corporate stock of subsidiaries conducting business in Canada and connected in no way with relator’s Minnesota business; and, if so, whether such requirements offend the due process clause of U. S. Const. Amend. XIV. Eelator was incorporated under the laws of New Jersey in 1901. It was admitted to do business in Minnesota shortly thereafter. Its statutory office is in New Jersey, and the stockholders meetings are held there as required by its laws. The directors of the corporation are located as follows: Four in Duluth, one in Winnipeg, one in Chicago, and one in Washington, D. C. The meetings of the board of directors are held in Duluth, where the president, secretary, and treasurer live. Eelator conducts a wholesale hardware business and has four branches: One in Duluth, with a subbranch in Minneapolis; one in *461 Billings, Montana; one in Spokane, Washington; and one in Portland, Oregon, with a snbbranch in Seattle, Washington. The business is supervised and directed from Duluth, where the executive office is located. The Duluth office directs and supervises the buying policies, credits, and accounting procedure of the corporation. Payments for purchases are made from Duluth. Proceeds of sales are deposited in banks in the various branch cities and are withdrawn by check from Duluth. Payrolls are checked in Duluth and money for their payment deposited in banks at the location of the branches. The board of tax appeals found that relator had established a commercial domicile in Minnesota, and such finding is not challenged. The tax in question does not involve income arising from the hardware business of the corporation. The taxpayer owns all the stock of three Canadian corporations which operate a separate hardware business in the Dominion of Canada. They have a central office in Winnipeg, which supervises and directs the Canadian business. T. L. Waldon is president and general manager of the Canadian corporations and has his office in Winnipeg. Bank credits are arranged for the Canadian corporations with the Dominion Bank of Canada. All details for the operation of the Canadian corporations are centered in the office of the president at Winnipeg, or are handled at other offices of the corporations at Edmonton and Vancouver. All such activities are conducted separately from the business in the United States. All goods handled in Canada are purchased in Canada or in Europe and paid for from the Canadian offices. The majority of the directors of each of the Canadian corporations are Canadians, and directors meetings are held in Canada. The secretary and treasurer of relator corporation are also respectively secretary and treasurer of each of the Canadian corporations, and reside in Duluth. In 1938, the three Canadian corporations declared dividends totaling $300,000 upon its stock, all of which stock was owned by relator. In 1939, they declared dividends totaling $270,270.27. *462 Drafts for the payment of such dividends were deposited by relator in Duluth, and thereafter such funds were intermingled with its general funds, no attempt being made to keep track of their subsequent distribution. The board of tax appeals found that the stocks of the three Canadian corporations were not employed in relator’s Minnesota business; and that such business did not consist in holding such stock and collecting the income therefrom; but that, nevertheless, by virtue of relator’s commercial domicile here, the entire income from the Canadian stocks should be included in the measurement of the franchise tax. Generally speaking, a state may tax any privilege extended by it and may adopt any reasonable rule for the measurement of such tax, provided it is not measured by property, or income from property, not loithin its jurisdiction and not used in connection with .or correlated to any business authorised or conducted in the state. An attempt by the state to exercise its taxing authority upon property located and used beyond its jurisdiction constitutes a taking without due process of law. International Paper Co. v. Massachusetts, 246 U. S. 135, 38 S. Ct. 292, 62 L. ed. 624, Ann. Cas. 1918C, 617; Air-Way Elec. Appliance Corp. v. Day, 266 U. S. 71, 45 S. Ct. 12, 69 L. ed. 169; Hans Rees’ Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U. S. 123, 51 S. Ct. 385, 75 L. ed. 879; James v. Dravo Contracting Co. 302 U. S. 134, 58 S. Ct. 208, 82 L. ed. 155, 114 A. L. R. 318; Connecticut General L. Ins. Co. v. Johnson, 303 U. S. 77, 58 S. Ct. 436, 82 L. ed. 673. It is well established that a franchise tax on a foreign corporation may be imposed upon or measured by its business within the taxing state, where there is some reasonable formula prescribed for determining the business done within such state. See, 51 Am. Jur., Taxation, § 863. Such formula may be based upon the ratio of total assets to assets employed within the state, or may provide for an allocation based upon an apportionment of sales, purchases, expenses of manufacture, payroll, or value of tangible property. See, Underwood Typewriter Co. v. Chamberlain, 254 U. S. 113, 41 S. Ct. 45, 65 L. ed. 165. *463 Or the other hand, a statutory formula for taxation of foreign corporations must not operate as an effort by the state to assert its taxing power beyond its territorial limits. See, Annotation, 75 L. ed. 897. With reference to intangibles, the courts have usually upheld the propriety of the inclusion by the taxing state of intangibles of a foreign corporation which have acquired a business situs in the taxing jurisdiction. See, Annotation, 131 A. L. R. 943. The specific question here is whether a corporation organized in one state with a nominal place of business there, but maintaining its principal place of business and commercial domicile in another state, may be taxed by the latter, upon intangibles with no actual or business situs there and which may be subject to taxation elsewhere. In other words, does the fact that a foreign corporation has acquired a commercial domicile in a particular state in itself confer upon such state the power or jurisdiction to tax intangibles with an actual and business situs elsewhere? The power of states to tax intangibles of foreign corporations has been passed upon by the United States Supreme Court a number of times, but it is to be noted that such decisions have upheld the tax upon the theory that the evidence established not only that the corporation was commercially domiciled in the taxing state, but also that the intangibles involved had acquired a business situs or were a part of or correlated with a unitary enterprise of said corporation there. Thus, in Wheeling Steel Corp. (a Delaware corporation) v. Fox, 298 U. S. 193, 56 S. Ct. 773, 80 L. ed. 1143, a West Virginia taxing statute was upheld where the intangibles taxed consisted of accounts receivable and bank deposits due from debtors outside of West Virginia. Although outside the state, the intangibles had become closely connected and correlated with the business of the taxpayer in West Virginia, where its principal business office was located. There, the Supreme Court stated (298 U. S. 215, 56 S. Ct. 779, 80 L. ed. 1150) : “* .* * we find no ground for appellant’s contention that the statutes of West Virginia, under which the tax is laid, are invalid in the view that they require the taxation of all the intangibles of *464 a foreign corporation doing business within the’State, regardless of the place where such intangibles may properly be the subject of taxation. We think the argument is sufficiently met by the construction placed upon these statutes by the state court. It held that the legislature intended to limit the assessment to property which was liable to taxation according to the facts and *the applicable principles of law. * * * “Our conclusion is that appellant has failed to show that West Virginia in laymg the tax has transcended the limits of its jurisdiction and thus deprived appellant of its property without due process of law.” (Italics supplied.) From the statements contained in the opinion, it is clear that the court recognized the rule that choses in action may acquire a situs for taxation other than at the domicile of their owner (298 U. S. 210, 56 S. Ct. 777, 80 L. ed. 1148) “if they have become integral parts of some local business.” It was the localization of the accounts at Wheeling, in addition to the fact • that the business domicile of the corporation was there, that determined the tax-ability of the accounts in West Virginia. Moreover, the West Virginia supreme court of appeals had held that the legislature of that state had not expressed an intention to tax intangibles which were primarily subject to taxation in another jurisdiction. The accounts in question were controlled from the main office at Wheeling and consequently were held to be localized in the taxing state. This was the situation to which Mr. Chief Justice Hughes addressed his remarks about a “legal fiction” dominating “realities,” and all that can be inferred from such remarks is that the domicile of the corporation in Delaware, because of its organization there, could not prevail on the right to tax as against the localization of these accounts in connection with and in furtherance of the business of the corporation at Wheeling, West Virginia. In First Bank Stock Corp. v. Minnesota, 301 U. S. 234, 57 S. Ct. 677, 81 L. ed. 1061, 113 A. L. R. 228, the United States Supreme Court sustained this court’s holding that stocks of banks in other states were taxable in Minnesota, because they had been made a *465 part of a localized business conducted in Minnesota. The court there stated (301 U. S. 237, 57 S. Ct. 678, 81 L. ed. 1063, 113 A. L. R. 228): “Appellant is to be regarded as legally domiciled in Delaware, the place of its organization, and as taxable there upon its intangibles [cases cited], at least in the absence of activities identifying them with some other place as their ‘business situs.’ But it is plain that the business which appellant carries on in Minnesota, or directs from its offices maintained there, is sufficiently identified with Minnesota to establish a ‘commercial domicil’ there, and to give a business situs there, for purposes of taxation, to intangibles which are used in the business or are incidental to it, and have thus ‘become integral parts of some local business.’ ” (Italics supplied.) In Connecticut General L. Ins. Co. v. Johnson, 303 U. S. 77, 58 S. Ct. 436, 82 L. ed. 673, the court held invalid a California statute which attempted to levy a tax upon certain reinsurance of the Connecticut General Life Insurance Company effected outside the state of California. In holding the tax invalid, the Supreme Court stated (303 U. S. 82, 58 S. Ct. 439, 82 L. ed. 678) : “ * * * All that appellant did in effecting the reinsurance was done without the state and for its transaction no privilege or license by California was needful. ■ The tax cannot be sustained either as laid on property, business done, or transactions carried on within the state, or as a tax on a privilege granted by the state.” In Butler Brothers v. McColgan, 315 U. S. 501, 62 S. Ct. 701, 86 L. ed. 991, the court upheld a California statute which provided that if the entire business of a foreign corporation was not done within the state the tax should be measured by that portion of the business done within the state, based upon, or by such method of allocation as would fairly assign to the state, the portion of net income reasonably attributable to the business done within this state, and should avoid subjecting the taxpayer to double taxation. A reference thereto clearly indicates that it cannot be cited as authority for holding that a state may tax the intangibles of a *466 foreign corporation commercially domiciled there, even though such intangibles have no business situs, or relationship to the business of the corporation there. In upholding the validity of a California statute (2 Gen. Laws, Act 8488, p. 3851; Stat. 1929, p. 19; amended, Stat. 1931, p. 2226; Stat. 1935, p. 965) as construed and applied to the taxpayer, the United States Supreme Court stated (315 U. S. 506, 509, 62 S. Ct. 704, 705, 86 L. ed. 995, 997) : * * We read the statute as calling for a method of allocation which is ‘fairly calculated’ to assign to California that portion of the net income ‘reasonably attributable’ to the business done there. The test, not here challenged, which has been reflected in prior decisions of this Court, is certainly not more exacting. Bass, Ratcliff & Gretton, Ltd. v. Tax Commission, 266 U. S. 271, 45 S. Ct. 82, 69 L. ed. 282; Ford Motor Co. v. Beauchamp, 308 U. S. 331, 60 S. Ct. 273, 84 L. ed. 304. Hence, if the formula which was employed meets those standards, any constitutional question arising under the Fourteenth Amendment is at an end. “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. * * * # * * * * “We cannot say that property, pay roll, and sales are inappropriate ingredients of an apportionment formula. We agree with the Supreme Court of California that these factors may properly be deemed to reflect ‘the relative contribution of the activities in the various states to the production of the total unitary income,’ so as to allocate to California its just proportion of the profits earned by appellant from this unitary business. * * *” (Italics supplied.) In Memphis Natural Gas Co. v. Beeler, 315 U. S. 649, 62 S. Ct. 857, 86 L. ed. 1090, there is again presented a situation where the corporation was found to have a commercial domicile in the taxing state and where, in addition, the intangibles involved related to or formed a part of the local business of said corporation. The state *467 law (§§ 1316-1318 of the Tennessee Code of 1932) imposed on foreign and domestic corporations doing business for profit in the state an annual excise tax of “three per cent, of the net earnings for their preceding fiscal year * * * arising from business done wholly within the state, excluding earnings arising from interstate commerce.” (Italics supplied.) The tax involved was laid on the corporation’s net earnings from the distribution of gas in Tennessee under its contract with the city of Memphis. The Tennessee supreme court upheld the tax on the ground that the distribution of gas under the contract did not constitute interstate commerce and that the net earnings from the enterprise were properly taxable under the foregoing statute. The United States Supreme Court in upholding this view stated (315 U. S. 656, 62 S. Ct. 862, 86 L. ed. 1097) : “* * * Since it was competent for the state to. tax such business done loithin it, it was competent to measure the tax by the net earnings of the business as well as by the capital employed. * * * “* * There is no contention or showing here that the tax assessed is not upon net earnings justly attributable to Tennessee (Italics supplied.) It may be further noted that the principal issue there ivas whether the tax-was prohibited by the commerce clause of the United States Constitution rather than by the due process clause here involved. Numerous state decisions uphold the viewpoint that a state may not tax intangibles of a commercially domiciled foreign corporation which do not have a business situs there. See, Foster-Cherry Comm. Co. v. Caskey, 66 Kan. 600, 72 P. 268; Ayer & Lord Tie Co. v. Keown, 122 Ky. 580, 93 S. W. 588; Commonwealth v. Consolidated Cas. Co. 170 Ky. 103, 185 S. W. 508; American Barge Line Co. v. Board of Sup’rs of Tax, 246 Ky. 573, 55 S. W. (2d) 416; Chestnut Sec. Co. v. Oklahoma Tax Comm. 173 Okl. 369, 48 P. (2d) 817; Newport Co. v. Tax Comm. 219 Wis. 293, 261 N. W. 884, 100 A. L. R. 1204. *468 In State v. First Bank Stock Corp. 197 Minn. 544, 551, 556, 267 N. W. 519, 523, 526, 269 N. W. 37, this court pointed out: “The established local business situs of defendant’s bank stocks and their unitary use here in a new integer of business and property furnish all the basis needed to support the challenged tax, for which we hold defendant liable. * * * “The bank stocks presently considered were not created here, but they are owned here. More important is the fact that they are here an integrated part, and the main one, of a distinctly localized unit of business, property and value. ***** “* * * We conclude only that when owned and used in Minnesota, as defendant owns and uses those now in question, they are subject to taxation by Minnesota.” (Italics supplied.) In Canisteo Corp. v. Spaeth, 211 Minn. 185, 300 N. W. 596, where a tax upon a Delaware corporation licensed to do business in Minnesota was upheld, the securities involved were employed in the principal business of buying, managing, and selling securities, rather than in the business of merely holding and collecting such securities. The principal business referred to gave such securities a business situs in Minnesota. The taxpayer did no business in Delaware, the state of its incorporation, and, while it had an office in New York, it had not been admitted to do business there or in any other state except Minnesota. The New York business was transacted by an agent, and the Minneapolis office of the corporation at all times constituted the business headquarters of the company. Under such circumstances, the situation came within the provisions of § 23(c) of the Minnesota income and franchise tax act, 2 which provides that income derived from carrying on a trade or business shall be assigned to this state if the trade or business is conducted wholly within the state. The taxpayer in that case was doing a local business in securities in Minnesota. *469 Its only business was the buying and selling of securities, and its only income was from such securities and their sale. In the case at bar, the Canadian corporations were not formed or operated in furtherance of any of the functions of the parent corporation, nor did they become parts of its local business. They were as distinct from the functions of the Duluth business as if they had been engaged in an entirely different line of activity. The business of the Canadian corporations is completely separated from the wholesale hardware business of the taxpayer which gave it a commercial domicile in Minnesota. The findings of the board of tax appeals that the stocks of the Canadian corporations “were not employed in taxpayer’s business” and that taxpayer’s business “does not consist of the holding of the stock and collecting the income therefrom” clearly distinguishes this case from the Canisteo ease. Likewise, Cargill, Inc. v. Spaeth, 215 Minn. 540, 10 N. W. (2d) 728, is clearly to be distinguished from the present case. There the taxpayer, a Delaware corporation with a commercial domicile in Minnesota, OAvned all the stock of three subsidiary corporations organized respectively under the laws of Nebraska, Illinois, and Delaware. During the taxable periods involved, the taxpayer reeeivéd dividends from said corporations which transacted no business in Minnesota. The taxpayer’s operations were managed and controlled from its. Minneapolis office and its business consisted of the merchandising, warehousing, and handling of grain and other commodities in grain-producing states, including "Nebraska and Illinois. Its business was a unitary business, and the subsidiary corporations above referred to were engaged principally in performing subsidiary functions of that business. As this court there stated (215 Minn. 541, 10 N. W. [2d] 730) : “One of the three foreign corporations * * * organized under the laws of Nebraska, * * * owns an elevator in Omaha which is leased to taxpayer and in which taxpayer * * * conducted its business in Nebraska. The reason assigned for such an arrangement is that a foreign corporation is prohibited by the constitution *470 and laws of Nebraska from acquiring ownership of real property in that state. . “Another is the Cargill Grain Company of Illinois, a corporation organized under the laws of Illinois. Prior to July 1, 1937, taxpayer was unable to operate a public warehouse and elevator business in Illinois, because, under the law of that state, it was unable, as a foreign corporation, to obtain the necessary statutory permit. The Illinois corporation leased part of an elevator in Chicago, in which it transacted substantially the same line of business as that conducted by taxpayer. “The third [corporation] is * * * a Delaware corporation, whose business consists of the transportation of grain and other commodities by vessels on the Great Lakes and on the seas and by barges operating on the Erie Canal. The reason given for organizing this corporation ivas to make available to taxpayer, for use in connection with the financing of its business, forwarders’ receipts of this corporation, as a separate entity, for the purpose of pledging the same as security for money borrowed by taxpayer for financing its business operations.” (Italics supplied.) The above references clearly indicate that the activities of the subsidiary corporations in the Cargill case were closely related to the business of the parent corporation and were exercised in furtherance thereof. The oivnership of the stock of such subsidiaries made available to the parent corporation the facilities owned by the former. The connection with the taxpayer’s business was so close that it is clear that the dividends from the subsidiaries constituted income from actual transaction of the local business. There, the only question presented for determination was Avhether the full amount of the dividend income from the subsidiary corporations should be assignable to Minnesota, the taxpayer conceding that Minnesota had the poAver to impose the tax on all the dividends and interest, but contending that the legislature did not intend, by § 23(d) of the act, to tax income on intangibles where the business of the taxpayer extended over several states, but intended only to tax the portion thereof attributable to Minnesota *471 business. Here, the Canadian corporations involved did not operate a business which in itself was subsidiary to the business of tbe taxpayer or conducted in furtherance of its activities. Eather, the Canadian corporations operated a parallel business wholly independent of the Minnesota domicile. Any appraisal of the facts in the Cargill case as similar to those here is without foundation. Likewise, the court’s broad statement, that, for purposes of taxation, intangibles have a situs at the taxpayer’s commercial domicile was obviously addressed to the situation then before the court and was not intended to include in? tangibles which, owned by a nonresident corporation, had not themselves acquired a business situs by reason of being used in furtherance of the parent corporation’s business. The cases cited in sup? port of the statement negative a purpose to cover all intangibles, regardless of their connection or lack of it with the business of the parent corporation. Our attention has been called to no case that holds that business domicile alone is sufficient to support the application of the taxing power to intangibles wholly disconnected with the furtherance of the nonresident corporation’s business. We are of the opinion that the foregoing authorities clearly establish that before the state in which a foreign corporation is commercially domiciled may tax the intangibles of said corporation it must appear that such intangibles have a business situs or are related to and form an integrated part of the business of said corporation there. In so holding, it is our conclusion that we are in accord with the previous decisions of this court on this question, as well as those of the United States Supreme Court. Accordingly, since the tax here sought to be collected does not relate to intangibles or income therefrom clearly within the state’s taxing jurisdiction, it is our conclusion that it is not covered by or included within the statutes whereunder respondent seeks to collect it. Eeversed with directions to set aside the tax based upon or measured by dividends derived from the corporate stocks of the Canadian corporations. Footnotes [2] L. 1933, c. 405, as amended by Ex. Sess. L. 1937, c. 49 (Minn. St. 1941, § 290.17[3], [Mason St. 1940 Supp. § 2394-23(c)]).