#### United States Glue Company, Respondent, vs. Town of Oak Creek, Appellant.

*May 6*

June *16, 1915.*

*Taxation: Situs of income: “Derived from business transacted within the state:” Bate of manufactured products outside of state: Interstate commerce: Constitutional law.*

1. The income of a domestic manufacturing corporation derived from the sale of its products, manufactured in this state, to customers in this and other states, whether delivered directly from the factory to such customers or shipped to branch houses in other states and thence delivered to customers residing outside of the state on sales made either by the home office or by the branch houses, was income “derived from business transacted and property located within the state,” within the meaning of sub. 3, sec. 1087m — 2, Stats. 1911.

2. The fact that the business so conducted involved transactions in interstate commerce did not affect the situs of the income; nor did the imposition by the state of a tax upon such income contravene sec. 8, art. I, Const, of U. S., conferring upon Congress the power to regulate commerce between the states.

3. That part of the income of such a corporation which was derived from goods produced and purchased outside of the state and *212shipped, either directly or by way of the home office in this state,, to branch houses in other states and thence sold and delivered to-customers without the state, was not attributable to business transacted within the state and was not taxable under tlie statute.

Appeal from a judgment of tbe circuit court for Milwaukee county: J. C. Ludwig, Circuit Judge.

*Reversed.*

Tbe plaintiff brought tbis action to recover tbe sum of $2,835.88 with interest from January 29, 1913. Plaintiff, under protest, paid tbis sum to defendant as income tax and claims it was in excess of tbe amount lawfully due from it as. income tax on its income for tbe year 1911 and assessed in tbe year 1912.

Tbe plaintiff is a corporation organized, under tbe laws of tbis state and is located and bas its principal place of business at Carrollville in the town of *Oak Greek,*Milwaukee county. Tbe plaintiff conducted tbe business of manufacturing glue, gelatine, grease, and other products and sold these products in tbis and other states of tbe United States and in foreign countries. Its manufacturing was done at its plant in tbe town of *Oak Greek,*tbe defendant in tbis action. It maintained general offices at its plant in Carrollville and conducted all of its business there, except such as was conducted at its established branch business places in tbe cities of Boston, Massachusetts; New York City, New York; Chicago, Illinois; Cincinnati, Ohio; Eichmond, Virginia; and Grand Eapids, Michigan. At these places tbe plaintiff carried stocks of its goods. Each place was in charge of a manager, who employed traveling men to solicit orders for goods.. A part of tbe goods covered by orders obtained by salesmen were shipped to tbe purchasers from tbe stocks at these branches, and tbe rest of such orders were sent by tbe managers to tbe plaintiff’s headquarters at Carrollville and tbe goods called for by them were shipped from tbe factory at Carrollville. Tbe stock of goods at these branches was in part manufactured at tbe factory in Carrollville and sent to *213tbe branch bouses before sale thereof, and the rest of the goods at these branches the plaintiff purchased from manufacturers and dealers outside of this state and were shipped from the places of purchase either directly or by way of plaintiff’s factory to these branches.

The parties agreed upon the material facts of the case and stipulated that in 1911 —

(1) The value of plaintiff’s property within the state was $753,181.61. The value of its property within and without the state was $1,060,900.

(2) Plaintiff’s income from rentals, stocks, bonds, securities, or evidences of indebtedness was $10,390.81.

(3) Plaintiff’s income from its business (exclusive of the above item of $10,390.81) for 1911 was $1,279,850.71, which is designated hereafter as its business income.

(4) The state tax commission computed plaintiff’s net “business income” for 1911 at $1^3,200. After making the deductions provided for .by the law the tax commission computed plaintiff’s taxable income for 1911 to be $66,576, upon which it assessed an income tax at the rate of six per cent., amounting to $3,994.56.

(5) In 1913 the tax commission made a reassessment of plaintiff’s 1911 income to correct alleged errors in their assessment thereof in 1912, and upon their computation for reassessment found that $13,344 of plaintiff’s net taxable income for 1911 had been omitted from the tax of 1912 and made an assessment thereon at the rate of six per cent., amounting to $700.64, which the plaintiff paid under protest and included in its demand of recovery in this action.

(6) It is also stipulated that the plaintiff’s net “business income” for 1911 arising from the conduct of its business, was derived as follows:

(a) The sum of $15,999.47 was realized from the manufacture, sale, and delivery of goods from .its factory to cus' tomers residing in the state of Wisconsin.

(b) The sum of $65,103.26 Avas realized from the manu*214facture, sale, and delivery of goods from its factory to customers residing outside of tbe state of Wisconsin.

(c) Tbe sum of $31,336.86 was realized from tbe manufacture of goods at tbe factory, sent to branch bouses outside ■of Wisconsin, and tbe sale and delivery of sucb goods from tbe branch bouses to customers residing outside of tbe state of Wisconsin.

(d) Tbe sum of $11,444.75 was realized from tbe purchase of goods in tbe market outside of tbe state of Wisconsin and shipped from tbe place of purchase either directly or by way of plaintiff’s plant at Carrollville to its branch bouses, and tbe sale and delivery of sucb goods to customers, residing outside of tbe state of Wisconsin.

Tbe trial court adopted tbe facts as stipulated by tbe parties as its findings of fact in tbe case, and as conclusions of law held that plaintiff’s taxable income for tbe year 1911 under tbe provisions of secs. 1087m — 1 to 1087m — 30, ■Stats. 1911, inclusive, was $10,390.81 income derived from rentals, stocks, bonds, securities, and evidences of indebtedness, and $15,999.47 of tbe income derived from conducting tbe business specified and described in tbe foregoing ■classes (a), (b), (c), and (d) as “business income,” and that tbe income tax lawfully due thereon was tbe sum ■ of $1,055.61, which tax was paid by plaintiff on tbe 29th day of •January, 1913; that plaintiff was unlawfully required to pay tbe sum of $2,835.38 in excess of tbe lawful amount due as income tax; and tbe court awarded plaintiff judgment for tbe recovery of $2,835.38 with interest thereon from January 29, 1913. From sucb judgment this appeal is taken.

Eor tbe appellant there were briefs by *H. J. Killilea,*attorney, and tbe *Attorney General*and *Walter Drew,*deputy attorney general, of counsel, and oral argument by *Mr. Killilea.*

Eor tbe respondent there was a brief by *Lines, Spooner, Ellis & Quarles,*and oral argument by *George Lines.*

*215Siebeckee, J.

Tbe Income Tax Law of 1911 provides:

> “There shall be assessed, levied, collected and paid a tax. upon incomes received during the year ending December 31, 1911. . . .” Sec. 1087m — 1, Stats. 1911.

> “The tax shall be assessed, levied and collected upon all-income, not hereinafter exempted, received by every person residing within the state, and by every nonresident nf the state upon such income as is derived from sources within the state . . . ; provided, that any person engaged in business, within and without the state shall, with respect to income other than that derived from rentals, stocks, bonds, securities, or evidences of indebtedness, be taxed only upon that proportion of such income as is derived from business transacted and property located within the state, which shall be determined in the manner specified in subdivision (e) [of subsection Y] of section 1770b, as far as applicable.” Sub. 3, sec. 1087m — 2, Stats. 1911.

The taxability of the income derived from rentals, bonds, etc., is not in controversy. All parties agree that the tax commission properly taxed this item of $10,390.81.

The defendant, the town of *Oak Greek,*contends that the-court erred in holding that the part of the plaintiff’s net “business income,” denominated class (a) in the foregoing-statement, which is derived from the manufacture, sale, and delivery of its products at its plant in Carrollville to customers in the state of Wisconsin, only, is subject to be taxed as income under the foregoing provisions of the Income Tax. Law. On the part of the plaintiff it is claimed that the judgment of the trial court is correct, upon the ground that the net “business income” derived by plaintiff from the manufacture, sale, and delivery of its goods to customers in this-state constitutes the net income derived from business transacted and located within this state in the sense of this law, and that the “business income” derived from goods sold h> customers outside of the state, whether manufactured at and shipped from its factory at Carrollville or purchased outside-of this state 'and then delivered from its branch houses, was. *216derived from transactions in interstate commerce and therefore not taxable, because it is a burden on such commerce and is repugnant to sec. 8 of art. I of the constitution of the United States, whereby is conferred on Congress the power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes.”

The question naturally arises, first, what portion of plaintiff’s net “business income” is income “derived from business transacted and property located within the state,” and subject to the tax upon incomes? We are of the opinion that this provision of the statute includes all of plaintiff’s net “business income” derived from the manufacture, sale, and delivery of such of its products as were manufactured at, sold, and delivered from the factory to customers in Wisconsin and other states, and the net “business income” of its products which were manufactured at its factory at Carroll-ville and shipped from there to its branch houses out of the state and delivered from there to customers residing outside of the state, on sales made either at Carrollville or at the branch houses. The trial court held that the net “business income” of the sales of the latter class (embraced in classes (b) and (c) of the foregoing statement) was not subject to an income tax, because such portion of plaintiff’s income is not “derived from business transacted and property located within the state.” This court in *State ex rel. Arpin v. Eberhardt,*158 Wis. 20, 147 N. W. 1016, had under consideration the provisions of these statutes involving this question and interpreted them to the effect that the income of a person residing in the state, other than' that derived from rentals, stocks, bonds, securities, and evidences of indebtedness, is taxable if derived from sources within the state, and income derived from sources without the state is not taxable under the statutes. The plaintiff’s business enterprise, in the light of the income statutes, must be considered in a twofold character as respects income producing. 'In its cor*217porate existence it is a unit, with, its principal business and headquarters located at Carrollville. In its business aspects it is divided into two parts, one located and conducted at its headquarters at Carrollville and the other located and conducted at its branches in the designated cities of other states. It is well understood that many elements of business other than the use of capital or the service of employees to perform the necessary labor enter into the production of an income in the sense involved in taxation, and that the sources of such income are not absolutely separable one from the other. The observations of the court in *Wilcox v. County Comm’rs,*103 Mass. 544, are enlightening and helpful. Income in the sense of tax laws is not the capital or stocks of goods in which the capital may be expended:

> “It is the net result of many combined influences: the use of the capital invested; the personal labor and services of the members of the firm; the skill and ability with which they lay in, or from time to time renew, their stock; the carefulness and good judgment with which they sell and give credit; and the foresight and address with which they hold themselves prepared for the fluctuations and contingencies affecting the general commerce and business of the country.”

The statute is to receive a practical interpretation. This court recently said on the subject:

> “Philosophical and logical distinctions must yield to the clearly expressed intent of the written law and to the possibility of a practical administration thereof.” *State ex rel. Manitowoc Gas Co. v. Wis. Tax Comm., ante,*p. 111, 152 N. W. 848. “If an income be taxed the recipient thereof must have a domicile within the state, or the property or business out of which the income issues must be situated within the state so that the income may be said to have a situs therein. . . . The Income Tax Law does not seek to reach property or an interest in property as such, but to reach incomes having a situs in the state, or growing out of a privilege exercised or occupation conducted within the state.” *Ibid.*

*218Tbe plaintiff, as recipient of its corporate income, whatever its source, has a domicile in tbis state, and tbe principal part of its property and its business wbicb is employed in tbe transactions out of wbicb tbe income issues is located in tbis state. Tbe statute seeks to tas tbe part of tbis income which has its source in tbis state. Tbe fact that tbe business so conducted may involve transactions in interstate commerce cannot affect tbe situs of tbe income. Nor does tbe fact that goods manufactured at Carrollville are sold without the state affect tbe source of tbe income. Tbe income so derived is tbe result of tbe business carried on at Carrollville in tbis state. Tbe place of sale of such products does not change tbe place of business from tbis to tbe state where tbe goods are sold. Tbe statute does not contemplate such a result and clearly intends that tbe source of tbe income is at tbe place where tbe business is carried on. Tbe transactions involved in producing tbe products at tbe plant at Carroll-ville and disposing of them through intrastate or interstate transactions are in substance and effect transacting business in tbis state, and tbe shipping and delivery of such goods on sales made at borne or abroad, from either tbe factory or branch bouses to wbicb they bad been shipped before sale, ■are no more than incidents in transacting tbe business of supplying. tbe articles to customers in their finished state. We •cannot, in tbe light of tbe nature of tbe general conduct of tbe business, assent to tbe claim that the shipping and delivery of goods, manufactured at tbe plant, from branch bouses are tbe controlling elements of such transactions and that they give such business a situs without tbe state. Tbe manufacture, tbe management, and tbe conduct of tbe business at tbe borne office are tbe controlling features in tbe process of disposing of tbe article produced at tbe factory and constitute tbe source out of wbicb tbe income issues and give it a situs within tbe state under tbe Income Tax Law.

Tbe income derived from goods wbicb were produced and *219purchased outside of tbe state and shipped, either directly or by way of plaintiffs factory at Carrollville, to plaintiff’s branch houses and thence sold and delivered to customers without the state, is clearly a separable class of plaintiff’s business. Such business is transacted and located without the state, excepting incidental management from and accounting for the result thereof to plaintiff’s principal office at Carroll-ville. The carrying bn of this part of the trade, according to the findings of fact, produced an income which issued out of the business and property located without the state. Under the facts and circumstances showing the manner of conducting this part of the plaintiff’s business, it must be held that the income derived therefrom is attributable to the business conducted without the state and hence not taxable under the law.

The plaintiff contends that the judgment of the trial court, must stand, because all income of the plaintiff derived from business conducted in this state, except that portion derived from goods sold to customers in this state, is derived from transactions in interstate commerce, and the imposition of a. tax on such income is repugnant to plaintiff’s rights under see. 8 of art. I of the constitution of the United States, providing that: “The Congress shall have power: To regulate commerce with foreign nations, and among the several states, and with the Indian tribes.” The defendant urges that there is no such conflict between the powers thus granted to Congress and the powers exerted by the legislature under the state Income Tax Law. The power of a state to tax its people and their property in all the recognized ways of levying and collecting taxes is an acknowledged attribute of its sovereignty, which it may exert to the fullest extent for the purpose of providing revenue to defray the expenses of conducting the government. In exerting this- governmental function it is not permitted to levy and collect taxes on any in-strumentalities or property employed by the federal govern*220ment to carry its powers into execution. *McCulloch v. Maryland,*4 Wheat. 316, and subsequent cases.

> “ ... No state bas tbe right to lay a tax on interstate commerce in any form, whether by way of duties laid on the transportation of the subjects of that commerce, or on the receipts derived from that transportation, or on the occupation or business of carrying it on, and the reason is that such taxation is a burden on that commerce, and amounts to a regulation of it, which belongs solely to Congress.” *Leloup v. Port of Mobile,*127 U. S. 640, 648, 8 Sup. Ct. 1380.

The foregoing is the conclusion as stated by Bradley, J., who delivered the opinion for the court, and he cites thereto a large number of cases. This established doctrine is followed in many subsequent cases. The question had received extensive examination and elaboration in *Philadelphia & S. S. Co. v. Pennsylvania,*122 U. S. 326, 7 Sup. Ct. 1118, involving a tax imposed by the state of Pennsylvania on gross receipts of a steamship company conducting an interstate traffic, which was held a burden on interstate commerce and hence repugnant to the exclusive power of Congress to regulate such commerce. Beadley, J., delivered the opinion of the court in this case also, in which he discussed at length the reasons and grounds of the conclusion reached, namely, that the tax on the gross receipts of such business, as such, is a tax on such business, because “ . . . they were received io£ transportation. No doubt a shipowner, like any other citizen, may be personally taxed for the amount of his property or estate, without regard to the source from which it was derived, whether from commerce, or banking, or any other employment. But that is an entirely different thing from laying a special tax upon his receipts in a particular employment.” In a part of the opinion this learned jurist answers for the court the claim made that the tax in question was in the nature of an income tax, and declares that:

> “It is not a general tax upon the incomes of all the inhabitants of the state; but a special tax on transportation com-*221parties. ... As a tax on transportation ... it cannot be supported where that transportation is an ingredient of interstate or foreign commerce, even though the law imposing the tax be expressed in such general terms as to include receipts from transportation which are properly taxable.”

The result of the court’s consideration of the question led. it to declare that:

> “The corporate franchises, the property, the business, the income of corporations created by a state may undoubtedly be taxed by the state; but in imposing such taxes care should be taken not to interfere with or hamper, directly or by indirection, interstate or foreign commerce, or any other matter exclusively within the jurisdiction of the federal government.”

The laying and collecting of an income tax by a state imposes a burden on its citizens wholly unlike a tax upon their business or commerce. The tax in question does not refer to nor is it in the nature of a tax burden laid on the business, the gross receipts, or the property employed in interstate •commerce. In fact the tax deals only with that part of the fruits of such commerce which remains as the net proceeds .after all the immediate burdens of the commerce have been discharged and such net profits are merged in the assets of the corporation. The income tax is in effect not unlike the tax which was imposed on corporations under the act of Congress in the Tariff Act of 1909 and known as the “Corpora;tion Tax.” This law imposed a tax on incomes of corporations from *all sources.*In the case of *Flint v. Stone Tracy Co.*220 U. S. 107, 31 Sup. Ct. 342, it was urged upon the court that this tax was invalid because the income taxed was in part derived from business of corporations engaged in interstate commerce. The court held that the burden imposed was “ . . . a tax upon the doing of business with the advantages which inhere in the peculiarities of corporate or joint-stock organizations of the character described.” The act involved incomes derived from business transactions involving *222interstate commerce under tbe exclusive control of tbe federal government and from sources wbicb were nontaxable-under tbe constitution and laws of tbe federal government, and tbe claim was pressed upon tbe court that these features-of tbe act invalidated tbe tax on income derived from sucb sources. But tbe court rejected tbe contention, declaring:

> “It is therefore well settled by tbe decisions of this court that when tbe sovereign authority has exercised tbe right to tax a legitimate subject of taxation, as an exercise of a franchise or privilege, it is no objection that tbe measure of taxation is found in tbe income produced in part from property wbicb of itself considered is nontaxable. Applying that doctrine to this case, the measure of taxation being tbe income-of tbe corporation from all sources, as that is but tbe measure-of a privilege tax within tbe lawful authority of Congress to-impose, it is no valid objection that this measure includes, in part at least, property wbicb as sucb could not be directly taxed.” Page 165.

We are of tbe opinion that tbe tax imposed by tbe Income-Tax Law of this state does not impose a burden on tbe business or property of plaintiff in any sense repugnant to its-rights under tbe provision of tbe federal constitution conferring on Congress tbe right to regulate commerce between tbe states, and that tbe trial court erred in bolding that the-income tax imposed by tbe tax commission was excessive and in awarding recovery for tbe amount of sucb alleged excess-with interest.

*By the Gourt.*— Tbe judgment appealed from is reversed, and tbe cause remanded to tbe circuit court with direction to-award judgment dismissing plaintiff’s complaint.

BaRNes, I., dissents.