1. In the application of a state statute imposing on
corporations doing business within and without the State a
franchise tax measured by a percentage of the net income derived
from business within the State, a formula which is "fairly
calculated" to allocate to the State that portion of the net income
"reasonably attributable" to the business done there satisfies the
requirements of the Fourteenth Amendment. P.
315 U. S.
506.
2. One who attacks a formula for determining, under a taxing
statute, the amount of net income allocable to the State has the
burden of showing by clear and cogent evidence that it results in
extraterritorial values' being taxed. P.
315 U. S.
507.
3. A wholesale merchandise corporation operated, as a unitary
business, stores in several States, including one in California. It
maintained a central buying division which served all the
stores.
Page 315 U. S. 502
In 1935, it had a substantial profit, although the California
store, on a separate accounting basis, showed a loss. The tax
commissioner of California allocated to that State a percentage of
the net income, and based thereon a tax under the state Bank and
Corporation Franchise Tax Act. That percentage was determined by
averaging the percentages which (a) value of real and tangible
personal property, (b) wages, salaries, commissions and other
compensation of employees, and (c) gross sales, less returns and
allowances, attributable to the California store bore to the
corresponding items of all the stores.
Held:
(1) That the formula of apportionment did not violate the
Fourteenth Amendment. P.
315 U. S.
506.
(2) The fact that the accounting system of the California branch
attributed no net income to that State did not prove that the tax
was on extraterritorial values, since accounting practices for
income statements may vary considerably according to the problem at
hand, and a particular accounting system, though useful or
necessary as a business aid, may not fit the different requirements
when a State seeks to tax values created by business within its
borders. P.
315 U. S.
507.
4. The ruling in
Saunders v. Shaw, 244 U.
S. 317, relative to lack of due process where a state
supreme court finally disposed of a case on a new point against
which the defeated party had had no opportunity or occasion to make
defense
held inapplicable to the situation in the case at
bar, in which it was claimed that the appellate court departed from
provisions of the stipulation of fact upon which the case was
tried. P.
315 U. S. 510.
17 Cal. 2d
664, 111 P.2d 334, affirmed.
Appeal from the affirmance of a judgment against the appellant
in a suit to recover the amount of a state tax.
Page 315 U. S. 503
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
This is an appeal (Judicial Code § 237(a), 28 U.S.C. § 344(a))
from a final judgment of the Supreme Court of California sustaining
the validity of a statute of California against the claim that, as
construed and applied to appellant, it violated the Fourteenth
Amendment.
17 Cal. 2d
664, 111 P.2d 334. The statute in question is the Bank and
Corporation Franchise Tax Act. 2 Gen.Laws 1937, Act 8488, p. 3851;
Stat. 1929, p. 19, amended, Stat. 1931, p. 2226, Stat. 1935, p.
965, St.1937, p. 2324. Sec. 4(3) of that Act provides for an annual
corporate franchise tax payable by a corporation doing business
within the State. The tax is measured by the corporation's net
income, and is at the rate of four percent "upon the basis of its
net income" for the preceding year. The minimum annual tax is $25.
Sec. 10 prescribes the method for computing the net income on which
the tax is laid. It provides in part:
"If the entire business of the bank or corporation is done
within this State, the tax shall be according to or measured by its
entire net income, and if the entire business of such bank or
corporation is not done within this State, the tax shall be
according to or measured by that portion thereof which is derived
from business done within this State. The portion of net income
derived from business done within this State shall be determined by
an allocation upon the basis of sales, purchases, expenses of
manufacturer, payroll, value and situs of tangible property, or by
reference to these or other factors, or by such other method of
allocation as is fairly calculated to assign to the State the
portion of net income reasonably attributable to the business done
within this State and to avoid subjecting the taxpayer to double
taxation."
The tax in dispute is for the calendar year 1936. Appellant paid
the minimum tax of $25, asserting that it operated
Page 315 U. S. 504
in California during 1935 at a loss of $82,851. The tax
commissioner made an additional assessment of $3,798.43, which
appellant paid, together with interest, under protest. This suit
was brought to recover back the amount so paid on the theory that
the method of allocation employed by the tax commissioner
attributed to California income derived wholly from business done
without that State.
The facts are stipulated, and show the following. Appellant is
an Illinois corporation qualified to do business in California. Its
home office is in Chicago, Illinois. It is engaged in the wholesale
dry goods and general merchandise business, purchasing from
manufacturers and others and selling to retailers only. It has
wholesale distributing houses in seven states, including one at San
Francisco, California. Each of its houses in the seven states
maintains stocks of goods, serves a separate territory, has its own
sales force, handles its own sales and all solicitation, credit and
collection arrangements in connection therewith, and keeps its own
books of account. For the period in question, all receipts from
sales in California were credited to the San Francisco house.
Appellant maintains a central buying division through which goods
for resale are ordered, the goods being shipped by manufacturers to
the houses for which they are ordered. All purchases made by
appellant for sale at its various houses are made through that
central buying division. The cost of the goods and the
transportation charges are entered on the books of the house which
receives the goods. No charges are made against any house for the
benefit of appellant or any of its other houses by reason of the
centralized purchasing. But the actual cost of operating the
centralized buying division is allocated among the houses. The
greater part of appellant's other operating expenses is incurred
directly and exclusively at the respective houses. Certain items of
expense are incurred and paid by appellant
Page 315 U. S. 505
for the benefit of all the houses and allocated to them. No
question exists as to the accuracy of the amounts of such expense
or the method of allocation. The latter admittedly followed
recognized accounting principles. For the year 1935, the amount of
such allocated expense charged to the San Francisco house was
$100,091. For purposes of this suit, it was agreed that
approximately 75% of that amount would have been incurred even
though the San Francisco house was not operated. The accuracy and
propriety of the basis of allocation of those common expenses for
1935 were admitted. Included in such expenses were executive
salaries, certain accounting expenses, the cost of operating a
central buying division, and a central advertising division. Except
for such common expenses, each house is operated independently of
each other house. Appellant computed its income from the San
Francisco house for the period in question by deducting from the
gross receipts from sales in California the cost of such
merchandise, the direct expense of the San Francisco house, and the
indirect expense allocated to it. By that computation, a loss of
$82,851 was determined. In the year 1935, the operations of all
houses of appellant produced a profit of $1,149,677. The tax
commissioner allocated to California 8.1372 percent. of that
amount. That percentage was determined by averaging the percentages
which (a) value of real and tangible personal property, (b) wages,
salaries, commissions, and other compensation of employees, and (c)
gross sales, less returns and allowances, attributable to the San
Francisco house bore to the corresponding items of all houses of
appellant. No other factor or method of allocation was considered.
The propriety of the use of that formula is not questioned if, by
reason of the stipulated facts, a formula for allocation to
California of a portion of appellant's income from all sources is
proper.
Page 315 U. S. 506
The stipulation also states that, in the year 1935, the total
sales made by appellant at all its houses amounted to $66,326,000,
of which $5,206,000 were made by the San Francisco house. The
purchases made for the account of that house were substantially in
the same proportion to total purchases. By reason of the volume of
purchases made by appellant, "more favorable prices are obtained
than would be obtainable in respect of purchases for the account of
any individual house." The addition of purchases
"in an amount equal to the purchases made for the account of the
San Francisco house results in no more favorable prices than could
be obtainable in respect of purchases in an amount equal to the
purchases which would be made"
by appellant for its other houses if the San Francisco house was
not in existence, and
"a reduction in the volume of purchases in an amount equal to
the purchases made for the San Francisco house would result in no
less favorable prices being obtainable in respect of the purchases
which would be made for the remaining houses"
of appellant.
Hans Rees' Sons, Inc. v. North Carolina, 283 U.
S. 123, constitutes appellant's chief support in its
attack on the formula employed and the tax imposed by California.
Appellant maintains that the use of the formula in question
resulted in converting a loss of $82,851 into a profit of over
$93,500, and that the difference of some $175,000 has either been
created out of nothing or has been appropriated by California from
other states.
We take a different view. 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. State Tax
Commission, 266 U. S. 271;
Ford Motor Co. v.
Beauchamp,
Page 315 U. S. 507
308 U. S. 331.
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 carriers a distinct
burden of showing by "clear and cogent evidence" that it results in
extraterritorial values being taxed.
See Norfolk & Western
Ry. Co. v. North Carolina, 297 U. S. 682,
297 U. S. 688.
This Court held in
Hans Rees' Sons, Inc. v. North Carolina,
supra, p.
283 U. S. 135,
that that burden had been maintained on a showing by the taxpayer
that, "in any aspect of the evidence," its income attributable to
North Carolina was "out of all appropriate proportion to the
business" transacted by the taxpayer in that State. No such showing
has been made here.
It is true that appellant's separate accounting system for its
San Francisco branch attributed no net income to California. But we
need not impeach the integrity of that accounting system to say
that it does not prove appellant's assertion that extraterritorial
values are being taxed. Accounting practices for income statements
may vary considerably according to the problem at hand. Sanders,
Hatfield & Moore, A Statement of Accounting Principles (1938),
p. 26. A particular accounting system, though useful or necessary
as a business aid, may not fit the different requirements when a
State seeks to tax values created by business within its borders.
Cf. Hamilton, Cost as a Standard for Price, 4 Law &
Contemporary Problems 321. That may be due to the fact, as stated
by Mr. Justice Brandeis in
Underwood Typewriter Co. v.
Chamberlain, 254 U. S. 113,
254 U. S. 121,
that a State, in attempting to place upon a business extending into
several States "its fair share of the burden of taxation," is
"faced with the impossibility of allocating specifically the
profits earned by the process conducted within its borders."
Furthermore, the particular system
Page 315 U. S. 508
used may not reveal the facts basic to the State's
determination.
Bass, Ratcliff & Gretton, Ltd. v. State Tax
Commission, supra, p.
266 U. S. 283. In either aspect of the matter, the
results of the accounting system employed by appellant do not
impeach the validity of propriety of the formula which California
has applied here.
At least since
Adams Express Co. v. Ohio State Auditor,
165 U. S. 194,
this Court has recognized that unity of use and management of a
business which is scattered through several States may be
considered when a State attempts to impose a tax on an
apportionment basis. As stated in
Hans Rees' Sons, Inc. v.
North Carolina, supra, p.
283 U. S.
133,
". . . the enterprise of a corporation which manufactures and
sells its manufactured product is ordinarily a unitary business,
and all the factors in that enterprise are essential to the
realization of profits."
And see Bass, Ratcliff & Gretton, Ltd. v. State Tax
Commission, supra, p.
266 U. S. 282. By the same token, California may
properly treat appellant's business as a unitary one.
Cf. Great
Atlantic & Pacific Tea Co. v. Grosjean, 301 U.
S. 412. There is unity of ownership and management. And
the operation of the central buying division alone demonstrates
that functionally the various branches are closely integrated.
Admittedly, centralized purchasing results in more favorable
prices' being obtained than if the purchases were separately made
for the account of any one branch. What the savings were and what
portion is fairly attributable to the volume contributed by the San
Francisco branch do not appear. But the concession that a reduction
or addition of purchases "in an amount equal to the purchases made
for the San Francisco house" would not result in higher or lower
purchase prices respectively does not aid appellant's case. There
is no justification on this record for singling out the San
Francisco branch, rather than another, and concluding that it made
no contribution to those savings. As aptly stated by the Supreme
Court of California,
"If the omission of the California sales would
Page 315 U. S. 509
have no effect on the purchasing power, the omission of sales in
an equal amount wherever made would likewise have no effect on the
company's ability to purchase at a saving. Thus, by proceeding in
turn from state to state, it could be shown that none of the sales
in any of the states should be credited with the income resulting
from the purchasing of goods in large quantities."
Nor are there any facts shown which permit the conclusion that
the other advantages of centralized management (
Great Atlantic
& Pacific Tea Co. v. Grosjean, supra) are attributable to
other branches, but not to the one in California. The fact of the
matter is that appellant has not shown the precise sources of its
net income of $1,149,677. If factors which are responsible for that
net income are present in other States but not present in
California, they have not been revealed. At least in absence of
that proof, California was justified in assuming that the San
Francisco branch contributed its aliquot share to the advantages of
centralized management of this unitary enterprise and to the net
income earned.
We cannot say that property, payroll, 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. And no showing has been made that income unconnected with
the unitary business has been used in the formula.
The stipulation of facts states that, if
"the Court deems that it is bound by any inference or
presumption respecting the assessment made by the Commissioner, or
that this stipulation fails to establish any fact necessary to a
decision, the case shall be reopened for the taking of further
proofs in respect thereof."
Appellant, in its petition for
Page 315 U. S. 510
rehearing before the Supreme Court of California, relied on that
part of the stipulation in urging that the cause be remanded for a
further hearing since that Court concluded that
"appellant has not furnished any explanation of why its
California business differs so from the average that the formula
produced an erroneous result."
The petition for rehearing was denied. Appellant now asserts
that it has been denied procedural due process under the rule of
Saunders v. Shaw, 244 U. S. 317. We
do not agree. The Supreme Court of California created no innovation
and sprung no surprise when it placed on appellant the burden of
establishing that the formula taxed extraterritorial values. As we
have noted, that is settled doctrine. Appellant had a full
opportunity to be heard on the issues which it tendered.
Affirmed.