Court Opinion

ID: 9854709
Source: CourtListenerOpinion
Date Created: 2023-09-24 06:12:19.139222+00
Date Added: 2024-06-11T09:23:16.518016
License: Public Domain

Quillian, J.,
dissenting. I entertain a different view from that expressed in the majority opinion as to whether the plaintiff in selling personal property within the State and elsewhere, was entitled to use the three-factor formula of Code (Ann. Supp.) § 92-3113 in calculating the proportion of the income realized from the sales taxable in this State.
Ordinarily a taxpayer engaged in the selling of some particular commodity or commodities calculates the amount of his taxable income realized from such sales by the simple process of subtracting from the gross returns of the sales the aggregate of the several items of expense incurred in carrying on the business.
Where a taxpayer is engaged in the business of selling tangible commodities within the State and elsewhere, incurring such operation expenses incident to both the conservation of both classes *620of sales, it is difficult for the taxpayer to segregate the expense chargeable against the gross income derived from the sales to customers within the State from those chargeable against the gross returns of the sales made elsewhere.
The enactment of the three-factor formula of Code (Ann. Supp.) § 92-3113 was to obviate this difficulty by furnishing to the taxpayer so situated a convenient and reasonably accurate method of determining the proportion of his net income upon which this State might impose tax.
The formula, it will be remembered, provides that the gross income derived from sales made within the State and elsewhere be balanced against the two general items or factors of expense, namely the inventory held within the State and elsewhere, and the compensation paid for services in connection with the taxpayer’s business to employees within the State and elsewhere.
Whatever process may be employed in determining any business enterprise’s net income necessarily involves the comparison or balancing of gross profits earned against the expense incurred in earning the profits. In no other way is it possible to ascertain the net earning of any business institute upon which may be imposed income tax.
While the formula provides a way in which the ratio of the taxpayer’s income derived from sales of personal property within the State or elsewhere is taxable by the State, this is not its only function.
The formula also supplies another method of procedure in balancing the gross returns from sales made within the State against the aggregate of the items of expense incident to and incurred in making the sales, so as to reflect the net income realized from the sales to customers within the State.
The “factors” referred to in the Code section to be considered in arriving at the ratio and amount of the taxpayer’s income upon which this State may impose taxes are its gross earned income, and the two categories of expense normally incident to making such sales, those of keeping on hand a stock of goods, referred to by the statute as inventory, and the other general expenditures including salaries, wages, commissions, and compensation of employees.
*621In order to balance the factors of gross income against the factors of expense so as to obtain the result contemplated by the statute, it would as a matter of fact, be necessary that all of the factors of expense that the statute requires considered be included in the compilation.
The formula is, after all, just a means of solving a mathematical problem the equations of which are the gross profits and the items of expense. In the solution of any such problem all of the equations must be considered in arriving at the correct answer.
The formula provides that the sum total of the sales, and the two classes of expense, one the keeping of the inventory, the other expenses necessarily involved in profitably disposing of the inventory, be divided by three, because there are three factors making up that total.
I am constrained to hold that the plaintiff, which kept no inventory, was not entitled to use the formula in arriving at the ratio of its income derived from sales made to customers both within the State and elsewhere taxable by the State, and that the method employed by the plaintiff for that purpose was not permissible.
The statute does not authorize the use of the formula by balancing against the gross income a non-existent element or factor of expense. This is exactly the process by which the plaintiff proceeded when it added to the gross income from the sales and the salaries, wages, and other expenses incurred in conducting its business a zero, repi’esenting, as it contended, the inventory that it did not keep, and then divided the two existent factors by the divisor three.
The plaintiff contends that it was the duty of the commissioner, if the use of the formula was not the correct method of arriving at the ratio and amount of its income taxable by this State, to direct that some other method be employed, and that until he, the commissioner, did give permission to use such other method as he deemed appropriate for the purpose, it had the right to use the formula as was adaptable to its situation. The position is not tenable for the reason that Code (Ann. Supp.) § 92-3113 merely provides that, if a corporation shows that any other method of allocation than the processes or formula prescribed by the revenue laws reflects more clearly its income attributable to business done *622within the State, it may apply to the commissioner to be allowed to use that method, but does not require the commissioner to direct that any method other than that provided by law be used unless and until such application is made.