Court Opinion

ID: 9527732
Source: CourtListenerOpinion
Date Created: 2023-08-07 03:33:30.94111+00
Date Added: 2024-06-11T13:26:06.718131
License: Public Domain

CALLISTER, Chief Justice
(dissenting) :
I respectfully dissent. The justification for the Commission to depart from the statutory formula was premised primarily on the alleged distortion caused by the sales factor, which by legislative determination did not attribute to this jurisdiction any sale of tangible personal property shipped or delivered to a purchaser out of state, 59-13-92, 93, U.C.A.1953, as amended 1967. The Commission thus proceeded to repeal or amend the entire statutory scheme under the relief provisions of 59-*12613-95 on the ground that the apportionment provisions did not “fairly represent the extent of the taxpayer’s business activity in this state.” This phrase cannot he interpreted in a vacuum; although there are certain constitutional limitations, the legislature may, otherwise, deem what it •considers business activity in this state. We thus reach the anomalous situation reflected in the administrative decision that the legislative policy that the sales are not a business activity in this state fails to reflect the taxpayer’s business activities in this state. A more rational approach in •evaluating the apportionment formula would be to construe together all the provisions of the Uniform Division of Income for Tax Purposes Act, Secs. 59-13-78 through 97, U.C.A.1953, as amended 1967; if a matter be deemed not a business activity with this state in any provision of the act, it should not be so designated in the evaluation process under the relief provisions of Section 95.
A similar issue was before this court in Kennecott Copper Corporation v. State Tax Commission1 wherein this court stated:
... we reverse those portions of the Commission’s findings and conclusions which attribute sales to Utah where no taxable event occurs within this State under the definition of business situs of sales adopted by the Legislature.
In a comprehensive review of the uniform act as recently enacted in California, Keesling and Warren 2 explained:
A few states even apportioned sales to the state or country in which the property sold was manufactured or produced. This method completely ignores the fact that the primary reason for including the sales factor is to give weight to the obtaining of markets, thereby balancing to some extent the property and payroll factors which are apt to be heavily concentrated in the state or country where the production or manufacturing operations are located.
In the instant action the Tax Commission, in defiance of express legislative policy and in disregard of the balancing purpose of the sales factor in a production jurisdiction, in effect apportioned the sales of Utah Copper Division to this state. Precisely, the Commission took the figures provided by Kennecott for its depletion allowance to prove the impropriety of the formula. The depletion allowance is determined by taking the gross income from the property and after deducting certain post-mining expenses and federal taxes, the remainder is net income from the property *127from which' the amount of depletion is calculated. The Tax Commission determined that this net income from the property minus depletion constituted the actual sales and thus concluded that the sales factor in the formula did not fairly reflect actual business activity in the area of sales. The Commission has thus asserted in its brief that all indicia of business activity and the uncontroverted evidence indicate that the income attributable to the State of Utah by Kennecott on its consolidated franchise tax returns is out of all appropriate proportion to the business transacted by the taxpayer in this state.
Based on the determination that these legislatively-designated out-of-state sales were in fact business transacted in Utah, the Tax Commission preceded to deviate from the formula; was this action justified ?
The purpose of the three-factor formula is to provide a rough but equitable method of making a proper allocation, and if one factor tends to allocate a disproportionate amount of net income, the other factors tend to compensate for this matter. To rebut the presumption of the fairness of the formula, there must be clear and cogent evidence directed to each element of the equation to prove that the assumed relation among the various factors produced ah erroneous result.3
In addition to the foregoing principles which were declared under the statutory formida in effect prior to the enactment of the uniform law, there is the legislative expression in mandatory terms in the present act, wherein it is stated in Sec. 59-13-86:
All business income shall he apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three. [Emphasis added.]
Section 59-13-96 provides:
This act shall be so construed as to effectuate its general purpose to make uniform the law of those states which enact it.
The Uniform Act was drafted to promote uniformity in allocation practices among the 38 states which impose taxes on or measured by income of corporations and to relieve the pressure for congressional legislation in this field.4
There are completely compelling reasons for giving the relief provisions a narrow construction. Under a broad construction the purposes of obtaining *128uniformity through the adoption of the Uniform Act would be deféated. If a choice of methods is permitted, different administrators in different states inevitably will choose different methods. As a result, even if all the states imposing taxes on or measured by income should adopt the Uniform Act, the chaotic condition heretofore existing would continue to exist.
Professor Pierce, the draftsman of the Uniform Act, clearly was of the opinion that the relief provisions should be interpreted narrowly and were designed to permit the use of methods different than those prescribed in the Act only in unusual cases and in cases where the application of the specifically prescribed methods might be held unconstitutional. Shortly after the act was drafted he published an article discussing these provisions. He states that “[t]he Uniform Act, if adopted in every state having a net income tax or a tax measured by net income, would assure that 100 percent of income, and no more and no less, would be taxed.” Obviously this statement would not be true if the relief provisions were interpreted to give the administrators in the different states broad discretion in the selection of alternative methods.5
Although the Tax Commission asserts that the property and payroll factors are grossly disproportionate to the business reported by the taxpayer, there is no eviden-tiary basis to sustain this contention. The entire distortion is a direct result of the Commission’s adamant refusal to accept the legislative attributive policy concerning sales. The presumption of fairness of the formula has not been rebutted by clear and cogent evidence directed to each element of the equation. Furthermore, to achieve uniformity and to prevent the taxation of extraterritorial income the relief provisions of the act should be narrowly construed. Under the facts of the instant case, the taxpayer ,should have been permitted to utilize the statutory formula. I further believe the Tax Commission abused its discretion when it refused to waive interest. The taxpayer complied with the statutory requirements; the administrator then deemed it appropriate to alter the formula under the relief provisions. The taxpayer had no notice that a new law was to be created and applied exclusively for its taxation ; under such circumstances the charge of interest was arbitrary, capricious and unreasonable.
ERICKSON, District Judge, concurs in the dissenting opinion of CALLISTER, C. J.

. 5 Utah 2d 306, 317, 301 P.2d 562, 569 (1956).

. Keesling and Warren, California’s Uniform Division of Income For Tax Purposes Act, Part II, 15 U.C.L.A.L.R. 655, 670.

. Western Contracting Corp. v. State Tax Comm., 18 Utah 2d 23, 34, 414 P.2d 579 (1966).

. Keesling and Warren, California’s Uniform Division of Income For Tax Purposes Act, Part I, 15 U.C.L.A. L.R. 156.

. Id. at 171.