Opinion ID: 1325000
Heading Depth: 1
Heading Rank: 1

Heading: j. c. penney co., inc.

Text: J. C. Penney Company, Inc. [Penney], disputes taxation imposed on two of its business transactions. Penney does not dispute that it does business in this State through a number of retail outlets and has qualified to do business in this State. It objects, however, to the business and occupation tax imposed on mail order sales, which are those made to West Virginia customers through orders to an out-of-State catalog center which fills the order and sends it directly to the customer. Penney also disputes the business and occupation tax (W.Va.Code, 11-13-2h), on income it receives from finance charges on its West Virginia sales. The majority opinion at 609 appears to view this tax as being limited to finance charges received solely from Penney's out-of-State mail order sales, but the Tax Commissioner's brief at 15 makes it clear that the tax is not limited to out-of-State sales, which is not denied by Penney. As is often the case in state tax controversies involving interstate commerce, each party cites the same decisions as supporting its particular position. The heart of the controversy is whether Norton Co. v. Department of Revenue, 340 U.S. 534, 71 S.Ct. 377, 95 L.Ed. 517 (1951), applies to invalidate these two particular taxes. Norton involved an Illinois tax imposed on the business of selling tangible property at retail, and measured by the gross receipts from such sales. The taxpayer was a Massachusetts company which manufactured and sold abrasive machinery and supplies. It maintained a branch office and warehouse in Chicago from which it made sales throughout Illinois. The state levied its tax on all of the company's sales to Illinois customers. The sales were divided into three categories: (1) direct purchases at the Chicago office; (2) mail orders filled in Massachusetts and sent to the Chicago office for pick-up by the customer, or shipped via the Chicago office to its Illinois customers; (3) mail orders sent directly to Massachusetts and filled by direct shipment to Illinois customers. It was this third category that Norton held to be purely interstate commerce, on the basis that no local service was connected to these sales. Norton is, of course, persuasive to the position of the taxpayer here, but it was followed by General Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430, (1964), which involved a Washington business and occupation tax imposed on the gross wholesale price of motor vehicles, parts and accessories shipped by General Motors into the state. At issue were four divisions of General Motors which maintained sales representatives and other personnel in the state. It was admitted that the automobiles, their parts and accessories were shipped direct to the dealers, who were independent merchants and who directly ordered the items from out-of-state manufacturing plants. General Motors had conceded that it was liable for sales made from its Washington warehouse, but contested the tax on automobiles, parts and accessories shipped from out of state to its dealers on their direct orders. The Supreme Court, without lengthy discussion, sustained the tax, holding: [W]e 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. [377 U.S. at 441, 84 S.Ct. at 1568, 12 L.Ed.2d at 435]. General Motors was followed by Standard Pressed Steel Co. v. Washington Department of Revenue, 419 U.S. 560, 95 S.Ct. 706, 42 L.Ed.2d 719 (1975). Standard Pressed Steel had one employee in Washington who, operating out of his home, made periodic contacts with the Boeing Company in Washington to determine its needs regarding Standard products. The employee did not make the sales, but advised his home office of Boeing's prospective product requirements. He also arranged for Standard engineers to make periodic consultation visits to Boeing. Boeing directly ordered all products either from Standard's principal office and manufacturing facility in Pennsylvania or its plant in California, which then direct shipped the items. The State of Washington sought to tax all such sales under its gross receipts tax, which is similar to our business and occupation tax. The Washington courts affirmed the tax and the United States Supreme Court, placing substantial reliance on General Motors, unanimously agreed. It can be readily seen that Norton's test, whether there is some local service to support the state tax on a particular transaction, has been transformed by General Motors and Standard Pressed Steel into an inquiry as to the extent of the local business of the taxpayer, which is another way of determining the amount of local services the state extends to the taxpayer. Once a substantial local connection is found, then a tax will be upheld if it bears some reasonable apportionment to the local activity. The taxpayer cannot escape taxation by attempting to isolate his local activities into compartments and by contending that each compartment must be viewed separately without regard to the taxpayer's entire activities within the state. In both General Motors and Standard Pressed Steel, the taxpayer's in-state activities were thought to be sufficient to uphold the tax even though these activities did not have a substantial direct relationship to the activity taxed. Penney, through its argument that its direct catalog sales have no local connection, attempts to isolate a small area of its overall activity in the State and asks that we merely look at this local nexus. We cannot, however, ignore Penney's substantial business activity through its numerous retail outlets in this State. Moreover, the record demonstrates that its out-of-State direct catalog sales are so closely entwined with its local presence that any attempt to isolate these sales would do violence to customary retailing concepts. The interrelationship is apparent for several reasons. Penney concedes that three categories of catalog sales, where the local store is directly involved in some phase of either the initial order or the receipt of the merchandise, are subject to tax. Even in the disputed category, it appears that a direct mail customer can return the merchandise to a local Penney store, although Penney does not encourage the practice. Further, it has a local repair service available for catalog sale items. There is little doubt that Penney's local presence provides a substantial impetus to catalog sales. The customer receives advertising through all forms of local media and the local store is a showcase for the catalog merchandise, and provides to its customers the catalog itself. Thus, to contend that out-of-State catalog sales have no local connection is to ignore business reality. Penney's finance charges on credit sales in West Virginia are taxable under the same analysis that applies to its out-of-State catalog sales. From a legal standpoint, once its substantial local presence is established, Penney is subject to a fairly apportioned tax on all of its activities within the State, regardless of whether a particular aspect, in isolation, may have fewer local connections. The business and occupation tax imposed on income from finance charges is found in W.Va.Code, 11-13-2h, and is levied upon a service business not otherwise specifically taxed. Here, the factual focus is on the activities surrounding Penney's extension of credit and collection of credit finance charges from State customers who do not elect to pay their account in full within thirty days from the date of the sale. It does not appear to be disputed that applications for a Penney's credit card, which forms the basis for a credit sale, can be obtained at the local stores. Although Penney's main West Virginia credit office is located in Greentree, Pennsylvania, it relies on credit investigations by West Virginia agencies. Credit sales are made at local stores, which can also receive credit payments, although most payments are made directly to the Greentree office, which sends the bills. The local store does make adjustment for the return of merchandise received on credit. West Virginia collection agencies and its court system are employed by Penney in its collection of delinquent accounts. Finally, the credit sales are subject to West Virginia usury and consumer protection laws. These factors constitute substantial contacts sufficient to justify the imposition of the tax. I find unpersuasive the taxpayer's argument that the tax discriminates against interstate commerce. The type of discrimination that must be shown is one where the out-of-state taxpayer is engaged in interstate commerce and is confronted with a state tax which the local taxpayer, involved in the same type of transaction, does not have to pay or pays at a lower rate. Boston Stock Exchange v. State Tax Commission, 429 U.S. 318, 97 S.Ct. 599, 50 L.Ed.2d 514 (1977); Maltz, The Burger Court, The Commerce Clause, and the Problem of Differential Treatment, 54 Ind.L.J. 165 (1979). Factually, nothing in the record remotely demonstrates this type of discriminatory pattern, and the statute itself carries no such suggestion. The taxpayer's claim that the tax is not fairly apportioned must fail in light of General Motors, supra, and Standard Pressed Steel, supra, which teach that the test for apportionment is whether the taxpayer's local business activity bears a reasonable relation to the tax. In General Motors, the Supreme Court discussed the fair apportionment question: [T]he 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. . . . [377 U.S. at 441, 84 S.Ct. at 1568, 12 L.Ed.2d at 435]. In Standard Pressed Steel, even though the taxpayer's activity within the state was far more meager than that of Penney and the tax at issue was a business and occupation tax, the proportionality issue was accorded a cursory discussion: In the instant case, as in Ficklen v. Shelby County Taxing District, 145 U.S. 1, 12 S.Ct. 810, 36 L.Ed. 601 (1892), the tax is on the gross receipts from sales made to a local consumer, which may have some impact on commerce. . . [419 U.S. at 564, 95 S.Ct. at 709, 42 L.Ed. at 724]. While it has been stated that local taxes measured by gross receipts from interstate commerce are to be viewed with suspicion, General Motors, 377 U.S. at 440, 84 S.Ct. at 1567-68, 12 L.Ed.2d at 434-35, I think the statement is overly broad. A business and occupation tax levied on substantial activities of the taxpayer within the taxing state is a fairly apportioned tax, because the local activities or transactions provide not only the tax nexus, but also form the boundary of the tax incident. This State's business and occupation tax is composed of a number of separate taxes on specific business activities occurring within the State. [5] The business and occupation tax does not give rise to the problems surrounding a state income tax, where some type of apportionment standard must be built into the tax statute to segregate local income from that derived from out-of-state sources. See, e. g., Moorman Manufacturing Co. v. Bair, 437 U.S. 267, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978). Here, the business and occupation tax has its roots in the local transaction, and by its very nature carries its own proportionality. Penney argues that by upholding the business and occupation tax in the two involved categories, it will be subject to multiple taxation. In recent years, the United States Supreme Court has placed the burden on the taxpayer to demonstrate the identicality of the multiple tax. Standard Pressed Steel Co. v. Washington Department of Revenue, supra ; General Motors Corp. v. Washington, supra . Penney has not met this burden. I would, therefore, hold Penney subject to the tax. I would, however, grant its claim for relief from the penalties of W.Va. Code, 11-13-11. We have recognized, along with other states, that the tax commissioner may waive penalties in a tax case involving complex legal questions of a first impression, and if he elects not to do so, the court may set aside such penalties. United Fuel Gas Company v. Battle, 153 W.Va. 222, 167 S.E.2d 890 (1969), cert. denied, 396 U.S. 116, 90 S.Ct. 398, 24 L.Ed.2d 309. I would not penalize Penney for what perhaps amounts to a failure to recognize a recent and growing trend on the part of the United States Supreme Court to uphold state taxes in the area here involved, as the tax years in question here were prior to many of the recent United States Supreme Court decisions.