Summary
holding that a customer list is an intangible asset which a company can keep from its competitors
Summary of this case from Provac Plant Ser. v. GlassOpinion
No. 90-2484
Submitted September 24, 1991 —
Decided December 11, 1991.
APPEAL from the Board of Tax Appeals, No. 86-G-690.
Consumer Direct, Inc., appellee, sells merchandise by direct mail solicitation. It records the purchasers' names, ages, addresses, and prices paid for the products. Consumer Direct then contracts with list brokers, also known as list managers, for the brokers to market this customer information to other direct-mail vendors.
Under such a contract, Consumer Direct transfers the information, usually by magnetic tape, to the list broker for a stated period of time. The broker sorts the information and arranges it demographically. The broker places the information on a medium, usually magnetic tape, and provides the lists to other direct-mail vendors. Sometimes the broker supplies the names and addresses on printed labels. The broker agrees to restrict the vendor's use of the tapes and to not provide the list to Consumer Direct's competitors. The broker receives a fee from the vendor and pays a percentage of it to Consumer Direct. During the pertinent years, all list brokers resided outside Ohio.
In its 1980 and 1981 franchise tax returns, Consumer Direct treated the fees it received from the list brokers as net rentals of tangible personal property. It allocated all the fees outside Ohio under former R.C. 5733.051(A)(2) (now R.C. 5733.051[B]). Allocating income in 1980 resulted in a net operating loss carryover, which Consumer Direct deducted from its 1981 income.
However, the Tax Commissioner, appellant, reviewed both returns, treated the fees as income from sales of tangible personal property, and apportioned the fees under former R.C. 5733.051(A)(8) (now R.C. 5733.051[H]), according to the three-factor fraction of R.C. 5733.05(B)(2). This resulted in treating part of the income as taxable in Ohio. Furthermore, the commissioner did not assess tax against the 1980 return because she was barred by the three-year statute of limitations in R.C. 5733.11. Instead, after apportioning 1980 income, she eliminated the net loss carryover taken by Consumer Direct. For the 1981 return, however, the commissioner disallowed the deduction of the loss carried over from 1980, increasing 1981 income, and then apportioned 1981 income. Her actions resulted in an additional franchise tax assessment of $10,268.73.
Upon appeal, the Board of Tax Appeals ("BTA") reversed the commissioner's order. First, the BTA agreed with Consumer Direct that the income was allocable rental income because of the specified time period the tape was to be transferred to the vendor. The BTA also rejected the commissioner's argument that the transactions were licenses of intangible personal property. Finally, the BTA ruled that, under McLean Trucking Co. v. Lindley (1982), 70 Ohio St.2d 106, 24 O.O.3d 187, 435 N.E.2d 414, R.C. 5733.11 absolutely bars an assessment which involves prior years unless the taxpayer failed to file the reports subject to assessment. Consequently, the BTA reversed the commissioner's decision to eliminate the net operating loss carryover from the 1980 return and allowed Consumer Direct to deduct the loss carryover from 1981 income.
The cause is now before this court upon an appeal as of right.
Thompson, Hine Flory, William R. Stewart, John A. Biek and H. Gene Shackle, for appellee.
Lee I. Fisher, Attorney General, and David G. Lambert, for appellant.
We agree with the commissioner on both issues under appeal and reverse the decision of the BTA.
Former R.C. 5733.051(A)(2) and (8), for the pertinent years, provided:
"Net income of a corporation subject to the tax imposed by this chapter shall be allocated and apportioned to this state as follows:
"* * *
"(2) Net rents and royalties from tangible personal property, to the extent such property is utilized in this state, are allocable to this state, if the taxpayer is otherwise subject to the tax provided by this chapter;
"* * *
"(8) Any other net income, from sources other than those enumerated in subdivisions (1) to (7), inclusive, of this division, shall be allocated to this state on the basis of the apportionment mechanism provided in division (B) of section 5733.05 of the Revised Code." (134 Ohio Laws, Part II, 1564-1565.)
Thus, this statute allocates net rentals from tangible personal property and apportions, according to the three-factor fraction, net rentals from other than, inter alia, tangible personal property. Goodyear Tire Rubber Co. v. Limbach (1991), 61 Ohio St.3d 381, 575 N.E.2d 146.
The commissioner argues that the income in the instant case is from the licensing of an intangible asset and apportionable. Consumer Direct responds that the income is net rental income from the temporary transfer of magnetic tapes and allocable outside Ohio.
In Twentieth Century-Fox Film Corp. v. Lindley (1982), 2 Ohio St.3d 54, 2 OBR 596, 442 N.E.2d 766, we considered whether income generated from licensing of film prints constituted net rents or royalties from the lease of tangible personal property or income from the use of an intangible. We viewed the crucial question as "* * * what are the film exhibitors paying for in these agreements with appellee?" Id. at 55, 2 OBR at 597, 442 N.E.2d at 767. We answered that the exhibitors were paying for the right to exhibit the films publicly, an intangible right protected by copyright. We said, "[t]he positive print given to the exhibitors under their licensing agreements with appellee is of no value, unless that print is accompanied by a right to display the film publicly for profit." Id. Thus, we must discern the true object of the disputed transactions.
In protecting trade secrets, R.C. 1333.51(A)(3) defines "trade secret" as:
"* * * [T]he whole or any portion or phase of * * * [the] listing of names, addresses, or telephone numbers, which has not been published or disseminated, or otherwise become a matter of general public knowledge. Such * * * listing of names, addresses, or telephone numbers is presumed to be secret when the owner thereof takes measures designed to prevent it, in the ordinary course of business, from being available to persons other than those selected by the owner to have access thereto for limited purposes."
In Valco Cincinnati, Inc. v. N D Machining Serv., Inc. (1986), 24 Ohio St.3d 41, 45, 24 OBR 83, 86, 492 N.E.2d 814, 817-818, we explained the nature of a trade secret:
"* * * [T]rade secret laws are not those of property but the equitable principles of good faith applicable to confidential relationships. * * *
"Generally, under trade secret statutes, that which is proscribed is the misappropriation of the information obtained from the person holding the trade secret, whether such secret is obtained without the owner's consent, or originally with the owner's consent, and later converted to the use and gain of the one obtaining the secret. * * *"
Furthermore, 1 Milgrim on Trade Secrets (12 Business Organizations) (1991) 1-19, Section 1.02, characterizes trade secrets as intangible forms of property, and, at 2-249, Section 2.09[7], observes that customer relations can be the most valuable asset that an enterprise has and information about that relationship, i.e., customer lists, is a matter it might wish to keep from its competitors. At 6-49, Section 6.04, Milgrim states that trade secrets are property and that, for federal tax purposes, are treated substantially the same as other forms of intangible personal property.
According to the above authority, a customer list is an intangible asset. It contains information of value to the owner which the owner may keep secret or control the release of for profit.
Here, the direct-mail vendor seeks the privilege to send direct-mail solicitations to individuals secured as customers by Consumer Direct. The vendor accomplishes this by purchasing the license to use Consumer Direct's customer list. Hence, in answer to the question posed in Twentieth Century-Fox, supra, the vendor in this case is seeking the information on the tape and not the tangible tape. Consequently, the fees generated from this transfer are apportionable, as the commissioner argues. Accord Goodyear Tire Rubber Co. v. Limbach, supra.
Next, the commissioner contends that the BTA erred when it prevented her from reviewing the 1980 return to adjust the loss carryover deduction taken in the 1981 return.
Former R.C. 5733.11 (now 5733.11[B]) prohibited the commissioner from assessing "* * * a taxpayer more than three years after the final date as of which such report subject to assessment was required to be filed, provided that there shall be no bar or limit to an assessment against a taxpayer that failed to file the report subject to assessment as required by this chapter." (134 Ohio Laws, Part II, 1569.)
Notably, this statute did not prohibit the commissioner from reviewing a tax year closed to assessment, adjusting the calculations contained in the return for that year, and applying those figures to an open year to assess tax for the open year. Moreover, she may use antecedent facts as criteria in the operation of the statute. Cleveland Gear Co. v. Limbach (1988), 35 Ohio St.3d 229, 233, 520 N.E.2d 188, 193. Here, the commissioner is not assessing Consumer Direct for a closed tax year; she is adjusting a loss amount carried over by Consumer Direct from a closed year into the open year to assess Consumer Direct for the open year.
Moreover, McLean Trucking Co. v. Lindley, supra, 70 Ohio St.2d 106, 24 O.O.3d 187, 435 N.E.2d 414, on which the BTA relied, does not address this question. In McLean, the taxpayer neglected to inform the commissioner that the Internal Revenue Service had audited its returns and increased its federal taxable income, which, in turn, increased the taxpayer's Ohio franchise tax liability. When the commissioner learned of this, he assessed tax on the additional income and also assessed tax on income unrelated to the federal changes.
We ruled that R.C. 5733.11 barred reopening of the returns except for the limited purpose of assessing the federal corrections that would have been reflected if the taxpayer had timely filed amended reports. We held that the commissioner could assess taxes only on income related to the federal adjustments. We did not address whether the commissioner could review a closed year to adjust the magnitude of a loss carryover taken in a subsequent, open year.
Accordingly, we reverse the decision of the BTA because it is unreasonable and unlawful.
Decision reversed.
MOYER, C.J., SWEENEY, HOLMES, DOUGLAS, WRIGHT, H. BROWN and RESNICK, JJ., concur.