47 percent. There is, consequently, nothing in this record to show that the method of apportionment adopted by the State was inherently arbitrary, or that its application to this corporation produced an unreasonable result." 11 By this decision, multiple state taxation of net income derived from interstate commerce was assured, with the Court bestowing its blessing upon a statutory formula method of apportionment. During the next decade, the Court decided two additional cases which involved the validity of a tax upon apportioned net income of a foreign manufacturing corporation where the apportionment was made upon the basis of a single factor property formula. In Bass, Ratcliff & Gretton v. State Tax Commission,12 decided in 1924, the Court sustained a formula for allocating net income which included not only real and tangible personal property but also accounts and bills receivable and investments in the capital stock of other corporations. The taxpayer, a British corporation, was engaged in manufacturing ale in England which was sold both in England and in the United States. Sales in the United States were made through branches located in New York and Chicago. The Court sustained the validity of the apportionment relying principally upon its prior decision in Underwood Typewriter Co. In its opinion the Court observed that the "company carried on the unitary business of manufacturing and selling ale, in which . profits were earned by a series of transactions beginning with the manufacture in England and ending in sales in New York and other places. . . [and] the State was justified in attributing to New York a just proportion of the profits earned by the Company from such unitary business." 13 From the record, it was concluded that the method of apportionment was not "inherently arbitrary or a mere effort to reach profits earned elsewhere." There are two aspects of the decision in Bass, Ratcliff & Gretton which are of some significance with respect to the matter of taxation of the income of national banks. The first is the inclusion of intangible property in the allocation formula. The second is the fact that the Court specifically referred to the unit rule concept relating to the allocation of interstate property values as "directly applicable to the carrying on of a unitary business of manufacture and sale partly within and partly without the State." 14 Thus, the stage was set for subsequent articulation of the unitary concept with respect to the allocation of net income from interstate business. The last case during this period of development of constitutional doctrine was decided in 1931. In Hans Rees' Sons v. North Carolina,15 a New York corporation was engaged in the business of tanning, manufacturing and selling belting and other heavy leathers. Its manufacturing operations were conducted exclusively in North Carolina. The company maintained its sales office and a warehouse in New York and sold its products both at wholesale and retail. Sales of the company products were made throughout the United States, Canada and Western Europe. Approximately 40% of the output of 11 Id. at 121-22, 41 S. Ct. at 47. 12 266 U.S. 271, 45 S. Ct. 82 (1924). 13 Id. at 282, 45 S. Ct. at 84. It is of interest to note that the corporation reported no net income for the year from its operations in the United States for purposes of the federal income tax. Thus, the income apportioned to New York was based upon the world-wide income of the corporation. 14 266 U.S. at 282, 45 S. Ct. at 84. 15 283 U.S. 123, 51 S. Ct. 385 (1931). its manufacturing plant in North Carolina was shipped to the New York warehouse and the balance was shipped direct to customes upon order from the New York sales office. Under the statidary property forma, approximately 80% of the corporate income was allocated to North Carolina. In the trial court, the taxpayer offered evidence to show that its net income was comprised of buying profi, manufacturing profit, and selling profit and ibat income having is source in the manufacturing and tanning operations within North Carolina was 17 percent. This evidence was stricken by the trad court. The state supreme court sustained the ruling of the trial court but proceeded to hold that even if the evidence were deemed to be competent it would not change the result. On the basis of this record, the United States Supreme Court viewed the case as if the evidence had been received by the state court as true and accurate but as having no bearing on the validity of the statute in the particular circumstances. The taxpayer's objection was premised upon both due process and the commerce clause. In reaching its decision, the Supreme Court observed that with respect to an interstate business where different states each have jurisdiction to impose an income tax on the basis of what is done within its own borders, the question becomes one of apportionment. In these circumstances, "evidence may always be received which tends to show that a state has applied a method, which albeit fair on its face, operates so as to reach profits which are in no just sense attributable to transactions within its jurisdiction." In reliance upon the assumption made by the state court with respect to the facts shown, it was concluded that the taxpayer had sustained the burden of proving that the statutory method as applied to it "operated unreasonably and arbitrarily in attributing to North Carolina a percentage of income out of all appropriate proportion to the business transacted by the appellant in that state." * 17 With the triumvirate of Underwood Typewriter Co., Bass, Rateliff & Gretton, and Hans Rees' Sons, the rule was firmly established that a non-domiciliary state could tax upon an apportioned basis the net income of a corporation engaged in manufacturing and selling in interstate commerce. These cases in general validated the single factor property formula but the taxpayer's success in Hans Rees' Sons, though attributable to a procedural aspect of the case, clearly indicated that such a formula was highly vulnerable. At this point, the Court not only had established the validity of the formula method of apportioning net income from interstate business, but also had provided an impetus for the development of a multiple-factor formula for such apportionment.18 In-state business activity sufficient to support apportionment of income from interstate business By 1931, the Court, in its decisions relating to apportionment of income from interstate commerce, had dealt only with cases where the 16 Id. at 134, 51 S. Ct. at 389. 17 Id. at 135, 51 S. Ct. at 389. 18 It should be noted that in 1919, Massachusetts, under its corporate franchise tax, initiated the threefactor formula for allocation of income based upon property, payroll and sales, Mass, Gon, Acts, 1919, ch. 335, § 19. This tax was held invalid as applied to a corporation deemed to be engaged exclusively in interstate commerce. Alpha Portland Cement Co. v. Massachusetts, 268 U.S. 203, 45 S. Ct. 477 (1925). În a recent des cision the Court indicated that a single-factor formula based solely upon sales would be an inappropriate method of allocating net income from interstate business. See General Motors Corp. v. District of Columbia, 380 U.S. 553, 85 S. Ct. 1156 (1965). taxpayer-corporation could be considered as having a significant presence in the non-domiciliary state through the ownership of property in the state coupled with the activities of full-time employees. Fifteen years were to pass before the Court considered the question as to whether a lesser degree of business activity within the taxing state consisting only of the solicitation of sales was sufficient to support an apportionment of net income. In 1946, in a per curiam decision in West Publishing Co. v. McColgan,19 the Court sustained the allocation of net income where the principal and only significant activity or presence within the taxing state consisted of the solicitation of orders for law books published out-of-state and shipped to customers from out-of-state locations. The taxpayer, a Minnesota corporation, employed four full-time salesmen to sell law books in California. These salesmen solicited orders, received payments thereon, collected delinquent accounts, and handled customer complaints. The taxpayer did not rent offices in California, but its salesmen obtained space in the offices of certain attorneys by making available the use of the publisher's sample books which were kept on hand in connection with their sales activities. In legal newspapers and periodicals circulated in California, the taxpayer advertised as its local offices these offices which had been obtained by its employees. Under the California statutes, a tax was imposed upon the net income "of every corporation derived from sources within [the] State." Income from sources within the state was defined to include "income from tangible and intangible property located or having a situs in this State and income from any activities carried on in this State, regardless of whether carried on in intrastate, interstate or foreign commerce." The taxpayer challenged imposition of the tax upon any of its income principally upon the ground that California could not impose a tax on any part of the net income of a foreign corporation which was engaged exclusively in interstate commerce. The taxpayer also contended that the tax violated the due process clause of the fourteenth amendment, asserting that the state was without jurisdiction to tax. The Supreme Court of California in a comprehensive opinion had sustained the tax principally in reliance upon United States Glue Co., emphasizing the well established principle that a tax upon net income derived from interstate commerce is not barred by the commerce clause. In refuting the taxpayer's due process argument, the California court made the following observation: "The record shows without conflict that plaintiff engages in substantial income-producing activities in California. It has local offices here as well as employees who devote their entire time to soliciting orders, receiving payments, adjusting complaints, collecting delinquent accounts, and performing other services for plaintiff. This state provides a market in which plaintiff operates in competition with local law-book publishers. Plaintiff's agents receive the same protection and other benefits from the state as agents carrying on business activities for a principal engaged in intrastate business. The state protects plaintiff's business transactions within its borders and maintains courts in which plaintiff enforces payment for the sale of its publica 19 328 U.S. 823, 66 S. Ct. 1378 (1946), affirming per curiam, 27 Cal. 2d 705, 166 P. 2d 861 (1946). |