Opinion
September 28, 1964 —
October 27, 1964.
APPEAL from a judgment of the circuit court for Dane county: EDWIN M. WILKIE, Circuit Judge. Affirmed.
For the appellant the cause was argued by Harold H. Persons, assistant attorney general, with whom on the briefs was George Thompson, attorney general.
For the respondent there was a brief by Whyte, Hirschboeck, Minahan, Harding Harland, and A. William Asmuth, Jr., all of Milwaukee, and oral argument by Mr. Asmuth.
Action to review a decision of the board of tax appeals.
Respondent, Applied Power Industries, Inc. (formerly Blackhawk Manufacturing Company), is a Wisconsin corporation with its main offices in West Allis. It is engaged in the manufacture and sale to distributors of hydraulic jacks and other equipment. All its products are manufactured in Wisconsin at its plants in West Allis and Sheboygan.
The taxpayer's business is nationwide. It employs sales representatives in various sections of the country. It is the function of these representatives to contact distributors of products of the type the taxpayer manufactures, persuade them to carry the taxpayer's line, and encourage them to maintain an adequate inventory of the taxpayer's products to meet demand. They also keep the home office advised of the financial status of the various distributors. The representatives do not maintain offices but operate from their homes. They do not carry order books and it is not their function to solicit individual orders. Occasionally, as a favor to the customer, the representative will personally accept orders. Any orders which they do take are subject to the approval of the home office.
Prior to 1955 all orders were processed through the taxpayer's main office in West Allis, and all goods were shipped from Wisconsin. At all times herein pertinent the determination of whether or not to accept orders from distributors and the amount of credit to be extended to each distributor was made at the home office.
In 1955 and 1956 the taxpayer entered into contracts with warehousing corporations located in California and New York. The contracts each contain substantially the same provisions. The agreements were entered into in order to provide the taxpayer's customers with faster service. The warehousemen agreed to provide a stated amount of floor and office space in their warehouses (one in Los Angeles and one in New York), for the storage and processing of the taxpayer's goods. This space was to be enclosed and labeled with signs bearing the taxpayer's name. The warehousemen were to furnish heat, light, and janitorial service and such manpower as was necessary to perform services "customarily performed by a sales warehouse to maintain satisfactory customer relationship." The warehousemen received for their services a percentage of the "net billed price of goods shipped" from the warehouses.
The taxpayer maintained a stock of goods at each warehouse to supply distributors. The taxpayer provided the warehousemen with lists of its distributors and the amount of credit which could be allowed to each. The warehousemen filled orders of distributors on the lists to the extent of the credit allowed thereon. The prices were uniformly set by the main office. If an order was received from a distributor not on the list, or in excess of the maximum credit listed, the warehousemen obtained clearance from the taxpayer's main office before making delivery.
A distributor could send an order for goods to either the taxpayer's home office in Wisconsin or to the warehouse in the distributor's territory. If the order was placed with the warehouse the shipping charge was paid by the distributor; freight charges on shipments of 200 pounds or more on orders placed with the home office were paid by the taxpayer. Orders placed with the home office were filled in Wisconsin with goods shipped from Wisconsin. The bulk of the orders from the districts in which these warehouses were located was placed directly with the home office. The representatives could arrange to have orders given directly to them filled by either the warehousemen or the home office.
The stock of goods maintained in the warehouses was owned by the taxpayer and deliveries were made by the warehousemen to the taxpayer's account. The taxpayer supplied the warehousemen with stationery bearing its name; this stationery was used in invoicing the deliveries from the warehouses to the taxpayer's customers. A copy of the invoice was given to the customer. The taxpayer maintained a telephone listing in the Los Angeles and New York directories.
The original of the invoice of each warehouse delivery was sent to the taxpayer's home office. Billing was made from the home office where the taxpayer's data-processing machines were located. Payments were expected to be made at the home office but on occasion were accepted by the warehousemen for transmittal to West Allis. Responsibility for collection of accounts with respect to orders filled in Wisconsin and by the warehousemen rested with the home office.
The warehousing agreements provided that the warehousemen acted as independent contractors and were not the agents of the taxpayer. The personnel supplied by the warehousemen in performance of the contracts were to be under their exclusive direction and control "and shall not for any purpose be regarded as employees" of the taxpayer.
Shortly before establishing each warehouse the taxpayer obtained a license to do business in the state in which the warehouse was located. In 1955 and 1956 the taxpayer filed corporation franchise-tax returns in California and in 1956 filed such return in New York. Its reported income was based on sales to distributors in the state, both of goods delivered from the warehouse and of goods sent from Wisconsin. The filing of these returns was not compelled by litigation, but was done by the taxpayer by reason of its interpretation of the law of that state as requiring such action.
The taxpayer reported on a fiscal year ending August 31st. Prior to 1955 it reported its entire income as Wisconsin income, and paid Wisconsin income taxes thereon. In the fiscal years ending in August of 1955 and 1956 the taxpayer apportioned its income, treating average warehouse inventories as property outside Wisconsin and treating all sales to California and New York customers as sales outside Wisconsin.
The Department of Taxation, after a field audit, disallowed the apportionment and assessed the taxpayer on its entire income. The board of tax appeals affirmed the department's determination. On the taxpayer's petition for review the circuit court reversed the order. The court held that taxpayer was doing business within and without Wisconsin and that the sales made out of the stock of goods maintained in the warehouses pursuant to orders placed with the warehouses were not sales by or through an office, agency, or branch located in Wisconsin. By judgment entered February 4, 1964, it remanded the matter to the board for further proceedings. The department has appealed from this judgment.
1. Is the taxpayer engaged in business without the state? Sec. 71.07 (2), Stats., allowing a taxpayer to apportion his income, applies only to persons "engaged in business within and without the state." The Department of Taxation contends that the taxpayer is not "engaged in business . . . without the state" and therefore is not entitled to apportion its income.
It is clear that the mere presence of promotional people or the engagement in promotional activities in other states is not sufficient to constitute the taxpayer as doing business (under our income tax statute) without Wisconsin. Nor does the mere presence of corporate property in other states constitute a taxpayer as doing business without the state. Here, however, there are additional activities in California and New York.
Department of Taxation v. Blatz Brewing Co. (1961), 12 Wis.2d 615, 108 N.W.2d 319.
The property stored in New York and California is owned by the taxpayer. It is not property merely incidental to the derivation of income, as may be said of the property located outside the state in the Blatz Case. It is rather the very product, the sale of which will produce the income sought to be taxed. The property is delivered to customers of the taxpayer by the warehousemen pursuant to orders placed directly with the warehousemen. However, these sales are not made for the account of the warehousemen; the warehousemen at no time assert ownership of the goods. The warehousemen exercise no discretion as to the price of the goods; that price is set at the main office. The warehousemen exercise no discretion as to the ultimate receivers of the goods; the eligible customers and the maximum amounts which may be delivered to them are set by the taxpayer. The taxpayer thus rents space in New York and California, stores unsold goods which it owns there, has the goods sold and delivered to its customers by the warehousemen there. There is no contract of sale between taxpayer and one of these customers until the order is accepted and filled at the warehouse. The contract is made by the warehousemen on the taxpayer's behalf. We are of the opinion that the warehousemen's activities as agents of the taxpayer in entering into and fulfilling contracts for the taxpayer are sufficient to constitute the taxpayer as engaged in business (under our income tax statute) in New York and California.
The department contends that the taxpayer is not itself engaged in business in those states. It argues that the only business related to the taxpayer in New York and California is being conducted by the warehousemen, and that by the terms of the warehousing agreements the warehousemen are not to be construed to be agents or employees of the taxpayer. But, as the trial court held, a person may be the agent of another for one purpose and not for another. If the independence of the warehousemen from control by the taxpayer be sufficient to insulate taxpayer from liability for torts of the warehousemen in general, the warehousemen are, nevertheless, the taxpayer's agents in effecting sales. The warehousemen did not sell goods for their own account. They delivered goods to the taxpayer's customers upon orders placed with them to a specified limit. In accepting and filling orders, they did so on behalf of the taxpayer and bound the taxpayer thereto. They performed functions which would otherwise have been performed by employees of the taxpayer. They did it as part of the taxpayer's business. They held themselves out as representatives of the taxpayer, used its stationery, and operated in its name. They had the power, and indeed it was their function, to enter into contracts in the name of the taxpayer. We are of the opinion that these activities of the warehousemen constituted the doing of income-producing business by the taxpayer itself in the states in which the warehouses were located.
2. Were the orders filled by the warehousemen sales made through or by offices located in Wisconsin? Sec. 71.07 (2), Stats., provides that persons engaged in multistate business activity are to be taxed "only on such income as is derived from business transacted and property located within the state." It affords ratios for determining the amount of income to be apportioned to Wisconsin. The third ratio is as follows:
"(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."
The department contends that the sales in question were actually made through or by the taxpayer's main office in Wisconsin. It relies on the facts that the warehousemen may fill orders only of customers whose credit has been approved by the main office and only to the extent of such approval, that the sale price is set by the main office, and that the billing and collection work is handled by the main office.
The court recently dealt with the sales ratio of sec. 71.07 (2) (c), Stats., in Globe-Union, Inc., v. Department of Taxation. In the Globe-Union Case the taxpayer delivered its products from its factories located in many states to customers in many states. The sales were made pursuant to long-term, comprehensive, written agreements with its large customers by which the taxpayer agreed to manufacture and sell to the customers a stated percentage of the customers' annual requirements of the types of products manufactured by the taxpayer. The agreements were negotiated by the Wisconsin officers in addition to other activities of the Wisconsin office such as formulating price structure, making cost determinations, and the handling of payments and bookkeeping. We held that the sales were properly treated as being made through the Wisconsin office.
(1963), 20 Wis.2d 213, 121 N.W.2d 894.
The factor distinguishing the Globe-Union Case from the case at bar is the absence here of overriding contracts negotiated in Wisconsin which were merely performed from time to time by deliveries from inventories located outside the state.
In the case at bar, although the main office sets the prices, does the billing, and operates as a credit manager, no sale, no binding contract, no actionable transaction, exists until an order is placed with the warehousemen. The warehousemen fill an order if it comes within the limit set by the taxpayer at the price set by the taxpayer, but do not check with the taxpayer before entering into the contract. They are in effect agents of the taxpayer empowered to make sales in their respective states though limited in their authority.
We are of the opinion that for the purpose of our apportionment statute the sales from the warehouses were not made by or through the Wisconsin office. We agree with the determination reached by the learned trial court.
By the Court. — Judgment affirmed.
WILKIE, J., took no part.