Source: https://supreme.justia.com/cases/federal/us/283/123/
Timestamp: 2019-04-26 16:03:07+00:00

Document:
the case may be viewed as though the evidence had been received and held to have no bearing on the validity of the taxing statute. P. 283 U. S. 126.
2. The method of allocating, for taxation, to a state that part of the net income of a foreign corporation which bears the same ratio to its entire net income as the value of its tangible property within that state bears to the value of all its tangible property works an unconstitutional result if, in the particular case, the part of the income thus attributed to the state is out of all appropriate proportion to the business there transacted by the corporation. Pp. 283 U. S. 129, 283 U. S. 135.
So held in the case of a North Carolina tax on income of a New York corporation which bought leather, manufactured it in North Carolina, and sold its products at wholesale and retail in New York. Underwood Typewriter Co. v. Chamberlin, 254 U. S. 113; Bass, Ratclilf & Gretton v. Tax Commission, 266 U. S. 271, and National Leather Co. v. Massachusetts, 277 U. S. 413, distinguished.
3. The fact that a corporate enterprise is a unitary one, in the sense that the ultimate gain is derived from the entire business, does not mean that, for the purpose of taxation, the activities which are conducted in different jurisdictions are to be regarded as "component parts of a single unit" so that the entire net income may be taxed in one state regardless of the extent to which it may be derived from the conduct of the enterprise in another state. P. 283 U. S. 133.
4. When there are different taxing jurisdictions, each competent to lay a tax with respect to what lies within, and is done within, its own borders, and the question is necessarily one of apportionment, 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 sense attributable to transactions within its jurisdiction. P. 283 U. S. 134.
199 N.C. 42, 153 S.E. 850, reversed.
Appeal from a judgment sustaining the dismissal of proceedings for readjustment of a state income tax assessment.
"(a) in assessing the tax, the Commissioner of Revenue followed the statutory method; . . . (b) that the valuation of the real estate and tangible property of the taxpayer 'both within and without the state' is correct; (c) that the total net income used as a basis for the calculation of the tax is correct; (d) that the allocation of the net income for purposes of taxation was in full accord with the statute."
and unreasonable, and was repugnant to the commerce clause and to § 1 of the Fourteenth Amendment of the Federal Constitution. The superior court struck out the testimony offered by the appellant as being immaterial, and held that the statute, as applied, did not violate constitutional rights. The judgment dismissing the action was affirmed by the supreme court of the state. 199 N.C. 42, 153 S.E. 850, 853. The case comes here on appeal.
As to the portions of the taxes for the years in question, which had been paid by the appellant voluntarily and as to which recovery was denied upon that ground, no question is raised here.
and selling it in less than carload lots. In order to facilitate sales a warehouse is maintained in New York from which shipments are made of stock on hand to various customers. The tannery at Asheville is used as the manufacturing plant and a supply house, and, when the quantity or quality of merchandise required by a customer is not on hand in the New York warehouse, a requisition is sent to the plant at Asheville to ship to the New York warehouse or direct to the customer. The sales office is located in New York, and the salesmen report to that office. Sales are made throughout this country and in Canada and Continental Europe. Some sales are also made in North Carolina. Certain finishing work is done in New York. The evidence further tended to show that"
"between forty and fifty percent of the output of the plant in Asheville is shipped from the Asheville tannery to New York. The other sixty percent is shipped direct on orders from New York. . . . Shipment is made direct from Asheville to the customer."
"The petitioner also offered evidence to the effect that the income from the business was derived from three sources, to-wit: (1) buying profit; (2) manufacturing profit; (3) selling profit. It contends that buying profit resulted from unusual skill and efficiency in taking advantage of fluctuations of the hide market; that manufacturing profit was based upon the difference between the cost of tanning done by contract and the actual cost thereof when done by the petitioner at its own plant in Asheville, and that selling profit resulted from the method of cutting the leather into small parts so as to meet the needs of a given customer."
"Without burdening this opinion with detailed compilations set out in the record, the evidence offered by the petitioner tends to show that, for the years 1923, 1924, 1925, and 1926, the average income having its source in the manufacturing and tanning operations within the State of North Carolina was 17 percent "
"Every corporation organized under the laws of this state shall pay annually an income tax, equivalent to four percent of the entire net income as herein defined, received by such corporation during the income year, and every foreign corporation doing business in this state shall pay annually an income tax equivalent to four percent of a proportion of its entire income to be determined according to the following rules:"
"(a) In case of a company other than companies mentioned in the next succeeding section, deriving profits principally from the ownership, sale or rental of real estate or from the manufacture, purchase, sale of, trading in, or use of tangible property, such proportion of its entire net income as the fair cash value of its real estate and tangible personal property in this state on the date of the close of the fiscal year of such company in the income year is to the fair cash value of its entire real estate and tangible personal property then owned by it, with no deductions on account of encumbrances thereon."
"(b) In case of a corporation deriving profits principally from the holding or sale of intangible property, such proportion as its gross receipts in this state for the year ended on the date of the close of its fiscal year next preceding is to its gross receipts for such year within and without the state."
tools, implements, goods, wares, and merchandise, and shall not be taken to mean money deposits in bank, shares of stock, bonds, notes, credits, or evidence of an interest in property and evidences of debt."
beginning with manufacture in Connecticut and ending with sale in other states. In this, it was typical of a large part of the manufacturing business conducted in the state. The legislature, in attempting to put upon this business its fair share of the burden of taxation, was faced with the impossibility of allocating specifically the profits earned by the processes conducted within its borders. It therefore adopted a method of apportionment which, for all that appears in this record, reached, and was meant to reach, only the profits earned within the state. 'The plaintiff's argument on this branch of the case,' as stated by the supreme court of errors,"
"carries the burden of showing that 47 percent of its net income is not reasonably attributable, for purposes of taxation, to the manufacture of products from the sale of which 80 percent of its gross earnings was derived after paying manufacturing costs."
The corporation has not even attempted to show this, and, for aught that appears, the percentage of net profits earned in Connecticut may have been much larger than 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.
In this view, the validity of the Connecticut statute was sustained.
"So, in the present case, we are of opinion that, as the company carried on the unitary business of manufacturing and selling ale, in which its profits were earned by a series of transactions beginning with the manufacture in England and ending in sales in New York and other places -- the process of manufacturing resulting in no profits until it ends in sales -- the state was justified in attributing to New York a just proportion of the profits earned by the Company from such unitary business. . . . Nor do we find that the method of apportioning the net income on the basis of the ratio of the segregated assets located in New York and elsewhere was inherently arbitrary, or a mere effort to reach profits earned elsewhere under the guise of legitimate taxation. . . . It is not shown in the present case, any more than in the Underwood case, that this application of the statutory method of apportionment has produced an unreasonable result."
repugnant to the Federal Constitution] lies in the fact that the petitioner undertakes to split into independent sources income which the record discloses was created and produced by a single business enterprise. Hides were bought for the purpose of being tanned and manufactured into leather at Asheville, North Carolina, and this product was to be shipped from the plant and sold and distributed from New York to the customer. The petitioner was not exclusively a hide dealer or a mere tanner or a leather salesman. It was a manufacturer and seller of leather goods, involving the purchase of raw material and the working up of that raw material into acceptable commercial forms, for the ultimate purpose of selling the finished product for a profit. Therefore, the buying, manufacturing, and selling were component parts of a single unit. The property in North Carolina is the hub from which the spokes of the entire wheel radiate to the outer rim."
"not permissible to lop off certain elements of the business constituting a single unit, in order to place the income beyond the taxing jurisdiction of this state."
that the entire net profits were to be allocated to New York because that was the place where sales were made. In both instances, a method of apportionment was involved which, as was said in the Underwood case, "for all that appears in this record, reached, and was meant to reach, only the profits earned within the state." The difficulty with the evidence offered in the Underwood case was that it failed to establish that the amount of net income with which the corporation was charged in Connecticut under the method adopted was not reasonably attributable to the processes conducted within the borders of that state, and, in the Bass case, the Court found a similar defect in proof with respect to the transactions in New York.
Undoubtedly 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. The difficulty of making an exact apportionment is apparent, and hence, when the state has adopted a method not intrinsically arbitrary, it will be sustained until proof is offered of an unreasonable and arbitrary application in particular cases. But the fact that the corporate enterprise is a unitary one, in the sense that the ultimate gain is derived from the entire business, does not mean that, for the purpose of taxation, the activities which are conducted in different jurisdictions are to be regarded as "component parts of a single unit," so that the entire net income may be taxed in one state regardless of the extent to which it may be derived from the conduct of the enterprise in another state. As was said in the Bass case with regard to "the unitary business of manufacturing and selling ale" which began with manufacturing in England and ended in sales in New York, that state "was justified in attributing to New York a just proportion of the profits earned by the company from such unitary business."
And the principle that was recognized in National Leather Co. v. Massachusetts, supra, was that a tax could lawfully be imposed upon a foreign corporation with respect to "the proportionate part of its total net income which is attributable to the business carried on within the state." When, as in this case, there are different taxing jurisdictions, each competent to lay a tax with respect to what lies within, and is done within, its own borders, and the question is necessarily one of apportionment, 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.
"tends to show that, for the years 1923, 1924, 1925, and 1926, the average income having its source in the manufacturing and tanning operations within the North Carolina was seventeen percent,"
while, under the assessments in question, there was allocated to the State of North Carolina approximately 80 percent of the appellant's income.
but that the appellant's accountants made no attempt to separate this, and that the entire wholesale profit was credited to manufacturing and allocated to North Carolina. Similarly, it is said that no attempt was made to separate profits from manufacturing in New York from profits derived from manufacturing in Asheville, and that all manufacturing profits were allocated to North Carolina. It is insisted that, in the retail part of the business, the leather is cut into small pieces and finished in particular ways and supplied in small lots to meet the particular needs of individual customers, and that this part of the business is essential to the retail merchandising business conducted from the New York office. The so-called "buying profit" is said to result from the skill with which hides are bought, and the contention is that these buying operations were not conducted in North Carolina. If, as to the last, it be said that the buying of raw material for the manufacturing plant should be regarded as incident to the manufacturing business, and as reflected in the value at wholesale of the manufactured product as turned out at the factory, still it is apparent that the amount of the asserted buying profit is not enough to affect the result so far as the constitutional question is concerned.
the taxes as laid were beyond the state's authority. Shaffer v. Carter, 252 U. S. 37, 252 U. S. 52-53, 252 U. S. 57.
For this reason, the judgment must be reversed, and the cause remanded for further proceedings not inconsistent with this opinion.
* Laws of 1923, c. 4, § 201; 1925, c. 101, § 201; 1927, c. 80, § 311.

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