Title: EF Johnson Co. v. Commissioner of Taxation

State: minnesota

Issuer: Minnesota Supreme Court

Document:

224 N.W.2d 150 (1974) E. F. JOHNSON COMPANY, Respondent, v. COMMISSIONER OF TAXATION, Appellant. No. 44675. Supreme Court of Minnesota. November 29, 1974. Rehearing Denied January 6, 1975. Warren Spannaus, Atty. Gen., C. H. Luther, Deputy Atty. Gen., Dept. of Revenue, St. Paul, for appellant. Dorsey, Marquart, Windhorst, West & Halladay and Robert J. Johnson, John W. Windhorst, Jr., and Nicky R. Hay, Minneapolis, for respondent. Heard before SHERAN, C. J., and ROGOSHESKE, PETERSON, MacLAUGHLIN *151 and SCOTT, JJ., and considered and decided by the court en banc. SCOTT, Justice. This is an appeal by defendant commissioner of taxation from an order of the Waseca County District Court. Plaintiff, E. F. Johnson Company, is a Minnesota corporation with its only business office and place of manufacture in Waseca, Minnesota. For the period from 1961-1963, plaintiff assigned all of its income to the state of Minnesota. In 1965, it filed claims for refunds for those years on the basis that since it had carried on its business within and without Minnesota, it was entitled to apportion its net income under Minn.St. 290.17(4) and 290.19. The commissioner of taxation denied these refund claims and plaintiff commenced these consolidated actions. The trial court held that plaintiff had carried on its business within and without Minnesota, was entitled to apportion, and ordered judgment for plaintiff. The commissioner of taxation seeks review of that determination. We reverse. The issue is whether or not, under Minn.St. 290.17, this Minnesota corporation is "carrying on" a business within another state for tax purposes. Minn.St. 290.17, provides in part as follows: The facts are not in dispute as appellant has adopted the amended findings of fact of the district court and respondent has adopted the statements of facts made by appellant in his brief, with certain explanatory additions. Therefore, the facts as accepted for this decision are as follows: The controlling case in Minnesota under these facts and circumstances is Tonka Corp. v. Commissioner of Taxation, 284 Minn. 185, 169 N.W.2d 589 (1969). Mr. Justice Frank T. Gallagher, speaking for the court in that case, stated as follows: The basic substantive and procedural facts in Tonka are somewhat similar to those in the case before us, in that the Tonka Corporation filed for a refund after having assigned its entire income to the state. This claim was rejected by the commissioner but subsequently granted by the Tax Court and affirmed by this court. Noticeable throughout this appeal is that respondent and the lower court were able to follow the precise pattern of setting forth the facts as that employed in Tonka. In Tonka, the representatives utilized to procure sales were under the same control and obligations as those assumed by representatives in this case. Yet, there, this court focused on one relationship with Tonka's New York office to support the conclusion that the corporation was carrying on a business partly without the state and was entitled to a refund. While Tonka's New York representative had many of the attributes which characterize an independent contractor, Tonka paid a large portion of his rental expense for office space and used his offices as its New York sales headquarters during the annual toy fair wherein 5 to 7½ percent of Tonka's annual sales were made and approved. The court went on to say: and further: It seems clear that the holding in Tonka focused upon the activities of the New York representative to find the necessary employee or agency relationship and some tangible income attributable to carrying on the business outside the state. In further stating that the evidence was much weaker with respect to Tonka's other sales representatives, we implied that the other representatives could not be categorized as other than independent contractors or representatives. We therefore suggested that, on the basis of its arrangement with sales representatives who were independent contractors, in the tax sense the company would not be "carrying on" business in another state. If in the present case we could combine the duties and sales of the sales representatives, on the one hand, with the control, financing, and relationship between the company and Nelson Berman and RFC Com-Tronics, Inc., on the other, all of the elements of Tonka would be satisfied. However, there appears to be no precedent for such action. Since, in the 1973 amendment the legislature has clarified the meaning of the statute and has changed its basis for future application, we are not willing to expand our holding in Tonka for retrospective purposes only. The district court read adequate case law to conclude that "corporate activities," including research and development coupled with ownership of intangible property outside the state, were significant in the determination of whether the Johnson Company carried on business outside the state. We realize that we have been dealing in a gray area and that our determination in Tonka may not have been considered conclusive by the district court. However, since the evidence here is far less convincing than in the Tonka case, we deem reversal justified. The facts establishing the relationship of Johnson with RFC Com-Tronics, Inc., and the research and development activities of Nelson Berman speak for themselves. The evidence with regard to the former shows activities of a separate corporation carried *155 on within its own organization in New York. In the latter, Berman's development activities cannot be seen as those of an employee working under the exclusive control of Johnson, but rather as those of an independent development firm which offered its services to Johnson. Nor does it seem that the payment of the Washington, D. C., franchise tax would satisfy the requirement of carrying on business in the District of Columbia, were we to adopt the Tennessee rule which requires that a corporation claiming to be carrying on its business in another state must prove that it was subject to income taxes in that state. See, John Ownbey Co. v. Butler, 211 Tenn. 366, 365 S.W.2d 33 (1963); Roane Hosiery, Inc. v. King, 214 Tenn. 441, 381 S.W.2d 265 (1964). We are therefore strictly limiting the Tonka case to its facts and, in light of the 1973 amendment, see no need for expanding that doctrine. Reversed. [1] Amended, to take effect for all taxable years after December 31, 1973, by L.1973, c. 650, Art. VII, § 1, which added the following sentence to Minn.St. 290.17(4): "For the purposes of this clause, a trade or business located in Minnesota is carried on partly within and partly without this state if tangible personal property is sold by such trade or business and delivered or shipped to a purchaser located outside the state of Minnesota." Minn.St. 290.19 provides the methods of computation for the allowance of apportionment of the income to this state by use of the three-factor approach.