Opinion ID: 1921491
Heading Depth: 1
Heading Rank: 1

Heading: Apportionment of the tax.

Text: National contends that even if the state of Wisconsin can impose a tax on National without violating the due process clause, the present form of the taxing statute is still unconstitutional because it is a gross premium tax which is not fairly apportioned to the activities which National conducts in Wisconsin. In the area of apportionment of taxes the cases again tend to mix the restrictions of the commerce clause and due process clause. The earlier cases on the subject base their decisions almost exclusively on the commerce clause that a state cannot tax purely interstate commerce. In Greyhound Lines v. Mealey [34] the supreme court held that New York could constitutionally tax gross receipts from a common carrier of passengers if the receipts were apportioned as to the mileage within the state. The court said: ... In a case like this nothing is gained, and clarity is lost, by not starting with recognition of the fact that it is interstate commerce which the State is seeking to reach and candidly facing the real question whether what the State is exacting is a constitutionally fair demand by the State for that aspect of the interstate commerce to which the State bears a special relation.... ... By its very nature an unapportioned gross receipts tax makes interstate transportation bear more than `a fair share of the cost of the local government whose protection it enjoys.' The state of Wisconsin has also required an apportionment of taxation on the sales revenue of a common carrier according to the amount of revenue attributable to its activities in Wisconsin. [35] In Northwestern Cement Co. v. Minnesota [36] the United States Supreme Court held that net income from exclusively interstate operations of a foreign corporation may be subjected to state taxation, provided the levy is not discriminatory and is properly apportioned to local activities within the taxing state forming a sufficient nexus to support the same. There was no issue as to the reasonableness of the apportionment formula. The court said: Nor will the argument that the exactions contravene the Due Process Clause bear scrutiny. The taxes imposed are levied only on that portion of the taxpayer's net income which arises from its activities within the taxing State. In General Motors v. Washington [37] General Motors challenged a state tax imposed on gross wholesale sales of motor vehicles, parts and accessories delivered in the state. In discussing earlier cases on gross receipts taxes the United States Supreme Court said: A careful analysis of the cases in this field teaches that the validity of the tax rests upon whether the State is exacting a constitutionally fair demand for that aspect of interstate commerce to which it bears a special relation. For our purposes the decisive issue turns on the operating incidence of the tax. In other words, the question is whether the State has exerted its power in proper proportion to appellant's activities within the State and to appellant's consequent enjoyment of the opportunities and protections which the State has afforded. Where as in the instant case, the taxing State is not the domiciliary State, we look to the taxpayer's business activities within the State, i.e., the local incidents, to determine if the gross receipts from sales therein may be fairly related to those activities. At another point in the case the court indicated that unapportioned gross receipts taxes are suspect. However, the supreme court finally concluded that General Motors which had many dealers in Washington and warehouse facilities, etc., had so mingled its taxable business with that which was not taxable that it was permissible to attribute sales to local activities. The court found a maze of local connections. And in General Motors v. District of Columbia [38] the supreme court was asked to review an administrative regulation implementing an income tax statute which was based on that portion of net income which is `fairly attributable to any trade or business carried on or engaged in within the District....' The court found that a regulation based on a sales factor alone did not implement the statutory objective of apportionment. The court made it clear, however, that if it had to reach the constitutional issue of due process the result would have been the same: ... We of course do not mean to take any position on the constitutionality of a state income tax based on the sales factor alone. For the present purpose, it sufficient to note that the factors alluded to by this Court in justifying apportionment measures constitutionally challenged in the past lend little support to the use of an exclusively sales-oriented approach. [39] The in-state and out-of-state activities of a mail-order insurer are sufficiently separable to require apportionment. With no place of business or agents within the state there would be no maze of local connections which justified a gross receipts tax in the General Motors v. Washington Case. William Patty in his article in The Tax Lawyer [40] had this to say: ... The premium tax is in effect a single factor apportionment formula based solely upon receipts. Although the receipts are the result of a chain of activities beginning in the domiciliary state and ending with the capture of the premium in the risk state, the principal activities are at home. There are located the insurer's only office, all of its tangible properties and all of its employees. There is undertaken all of the study and research that leads to the writing of the policies, their form and content. There all the mortality and accident studies of an actuarial nature are made, and in effect the `manufacture' of the insurance conducted. There the investment of the premiums is made and the reserves are accumulated out of which benefits are paid. The risk state premium tax, therefore, in focusing only upon the receipt of the premium, would seem to ignore by far the bulk of the activity involved. Those cases which have dealt with gross premium taxes have not validated such taxes on the issue of apportionment. In Prudential Ins. Co. v. Benjamin [41] a gross premium tax of three percent for the privilege of doing business within the state was validated against charges that it violated the commerce clause. The case established that the McCarran Act eliminated objection to state regulation and taxation of insurance based on the commerce clause. However, the issues of jurisdiction to tax, or necessity to apportion the tax under the due process clause were not in issue in Benjamin. In Equitable Life Society v. Pennsylvania [42] the court decided the narrow issue of whether a premium tax could be measured on both premiums received within the state and those sent to foreign insurance companies at their offices outside the state. The court found that this did not amount to taxing property beyond its jurisdiction. And in Lincoln Life Ins. Co. v. Read [43] the sole issue was whether the equal protection clause was violated by a higher gross premium tax on foreign insurance companies. The court held that a more onerous tax on a foreign insurer was not a violation of the equal protection clause. These supreme court cases have established the constitutionality of gross premium taxes (if apportioned) as against the contention that they are an unfair burden on interstate commerce. However, if not apportioned the tax may be, as here, unconstitutional, as a violation of the due process clause. Sec. 201.42 (11) (a), Stats., is clearly an unapportioned tax. The statute provides for a three percent tax on gross premiums; it does not provide for a tax on that portion of gross premiums attributable to activities within the state. Thus here it is not a question of approving or disapproving a particular apportionment formula. We cannot order an apportionment to save the constitutionality of the statute as it would amount to rewriting the statute. [44] Other Wisconsin tax statutes, most notably the income tax statutes, provide for apportionment of income directly in the statute. By the Court. Judgment reversed.