Opinion ID: 1861696
Heading Depth: 1
Heading Rank: 3

Heading: question #3: in applying the statutory apportionment formula of sec. 71.07 (2), stats. (1967), did the department properly weight the cost of manufacturing factor by employing a divisor of 2.6 instead of 3?

Text: Sec. 71.07 (2), Stats., provides that after nonapportionable income is subtracted, The remaining net income shall be apportioned to Wisconsin on the basis of the ratio obtained by taking the arithmetical average of the following 3 ratios: (a) The ratio of the tangible property, real, personal and mixed, owned and used by the taxpayer in Wisconsin in connection with his trade or business during the income year to the total of such property of the taxpayer owned and used by him in connection with his trade or business everywhere. Cash on hand or in the bank, shares of stock, notes, bonds, accounts receivable, or other evidence of indebtedness, special privileges, franchises, good will, or property the income of which is not taxable or is separately allocated, shall not be considered tangible property nor included in the apportionment. In determining apportionable net income with respect to the calendar year 1964 and corresponding fiscal years and thereafter, in any case in which the property factor is distorted by the taxpayer depreciating property in Wisconsin by a method different from that used to depreciate property outside Wisconsin, the department may determine the property factor by depreciating all property by the same method, or using original cost of any other means as will achieve an equitable result. (b) In the case of persons engaged in manufacturing or in any form of collecting, assembling or processing goods and materials, the ratio of the total cost of manufacturing, collecting, assembling or processing within this state to the total cost of manufacturing, or assembling or processing everywhere. The term `cost of manufacturing, collecting, assembling, or processing,' as used herein, shall be interpreted in a manner to conform as nearly as may be to the best accounting practice in the trade or business. Unless in the opinion of the department of taxation the peculiar circumstances in any case justify a different treatment, this term shall be generally interpreted to include as elements of cost the following: 1. The total cost of all goods, materials and supplies used in manufacturing, assembling or processing regardless of where purchased. 2. The total wages and salaries paid or incurred during the income year in such manufacturing, assembling or processing activities. 3. The total overhead or manufacturing burden properly assignable according to good accounting practice to such manufacturing, assembling or processing activities. (c) In the case of trading, mercantile or manufacturing concerns the ratio of the total sales made through or by offices, agencies or branches located in Wisconsin during the income year to the total net sales made everywhere during said income year. Three factors are to be used in computing the apportionable income  sales, property and manufacturing costs. The Department weighted down the cost of manufacturing because not all of the products sold through Humble's marketing system in Wisconsin were manufactured by Humble. Sec. 71.07 (2) (b) provides that Unless in the opinion of the department of taxation the peculiar circumstances in any case justify a different treatment, this term [cost of manufacturing] shall be generally interpreted to include as elements of cost the following. . . . [16] The Department has employed weighting since 1932. Long-standing administrative construction of a statute is accorded great weight in the determination of legislative intent because the legislature is presumed to have acquiesced in that construction if it has not amended the statute. Layton School of Art & Design v. WERC, 82 Wis.2d 324, 340, 262 N.W.2d 218 (1978). The practice has also been approved by the Tax Appeals Commission and its predecessor, the Board of Tax Appeals, in Kroger Company v. Wisconsin Dept. of Taxation, 4 WBTA 319 (1956), and Cooper's Inc. v. Wisconsin Dept. of Revenue, 9 WTAC 342 (1973). The subdivisions of the statute set forth statutory ratios for the apportionment method but give the department considerable latitude in adopting a formula which will most accurately reflect a reasonable and equitable tax on the income earned in Wisconsin. Interstate Finance Corp., supra, 28 Wis.2d at 271-72. Exxon argues that the department lacked authority to adjust the apportionment ratios, because sec. 71.07 (5) provides: (5) If the income of any such person properly assignable to the state of Wisconsin cannot be ascertained with reasonable certainty by either of the foregoing methods, then the same shall be apportioned and allocated under such rules and regulations as the department of taxation may prescribe. and the department had no published rules and regulations on the subject. However, the department had sufficient authority to make such adjustments under sec. 71.07(2) (b), without relying on sec. 71.07 (5). The department, however, is not free to entirely disregard the statute. In Department of Taxation v. Blatz Brewing Co., 12 Wis.2d 615, 108 N.W.2d 319 (1961), the department determined the location of returnable containers owned by Blatz for purposes of the property ratio by using the sales ratio. The court found this impermissible saying: The action of the board of tax appeals, in holding that in the absence of definite proof, the property factor should be based on sales, was arbitrary and capricious. It follows that the allocation of these containers on sales alone, as was done in the modified additional assessment and approved by the board, or on the basis of 50 per cent to sales and 50 per cent to manufacturing, as now contended by the department, cannot be sustained, because those contentions are based on an erroneous theory and ignore the weight of the property factor in the formula. Such contentions reduce the three-factor formula to a two-factor formula in this case. The department is bound to use the statutory method even though another method may appear convenient or expedient to it. Id. at 627. [17, 18] In the instant case, it is concluded that Humble had no manufacturing in the state, so the numerator of the cost of manufacturing ratio is zero. For purposes of calculating the denominator of the ratio, the department attempted to recognize only the cost of products manufactured by Humble and not those purchased from other vendors. To do this, the department used the ratio of net sales producing apportionable income to total manufactured products sold. This was improper under Blatz. We agree with the trial court that this question should be remanded to the Commission to determine whether the weighting method used by the Department was justified under the circumstances, and whether the formula as weighted unfairly apportioned the taxpayer's income for the years at issue. We also note that the burden of proving that the formula adopted unfairly apportioned Humble's income is on Exxon. W. R. Arthur & Co. v. Dept. of Revenue, 18 Wis.2d 225, 232, 118 N.W. 2d 168 (1962). By the Court.  Judgment affirmed in part, reversed in part, and remanded for further proceedings consistent with this opinion.