Opinion
No. CV98 0492472S
August 8, 2001
This action is an appeal by the plaintiff, Millward Brown, Inc. (Millward), from a decision by the defendant, Commissioner of Revenue Services (Commissioner), denying the plaintiffs petition for reassessment of corporation business tax for the periods ending February 28, 1990. May 31, 1990. May 31, 1991, and December 31, 1991. The Commissioner determined that Millward should have computed its corporation business tax by using a single-factor apportionment formula under General Statutes (Rev. to 1991) § 12-218 (a), rather than by using the three-factor formula set out in § 12-218 (b). The Commissioner's determination resulted in a deficiency assessment against Millward of $116,666.15, plus interest and penalty.
The one-factor formula is now provided in General Statutes (Rev, to 2001) § 12-218 (b), and the three-factor formula is now provided in General Statutes (Rev. to 2001) § 12-218 (c).
The Connecticut corporation business tax, General Statutes § 12-213 et seq., is an excise tax levied against both domestic and foreign corporations doing business in a corporate capacity in Connecticut. Foodways National, Inc. v. Crystal, 232 Conn. 325, 330, 654 A.2d 1228 (1995). "Section 12-214 (a), which imposes the corporation business tax, provides that the tax is to be measured by the entire net income . . . from business transacted within the state during the income year, while § 12-218 provides a measure to determine the taxable net income of multistate corporations to be apportioned to this state." (Citations omitted; internal quotation marks omitted.) Id., 330. Since the corporation business tax involves the imposition of a tax, any ambiguity in "the application of § 12-218 "must be resolved in favor of the taxpayer and against the commissioner." Id., 331. See also Altray Co. v. Groppo, 224 Conn. 426, 435, 619 A.2d 443 (1993).
During the tax periods at issue, the single-factor formula was expressed in § 12-218 (a): "The net income of the taxpayer shall be apportioned as follows: (a) Such income, when derived from business other than the manufacture, sale or use of tangible personal or real property, shall be apportioned within and without the state by means of an apportionment fraction, the numerator of which shall represent the gross receipts from business carried on within Connecticut and the denominator shall represent the gross receipts from business carried on everywhere." The three-factor formula was expressed in § 12-218 (b): "when derived from the manufacture, sale or use of tangible personal or real property, the portion thereof attributable to business within the state shall be determined by means of an apportionment fraction to be computed as the sum of the property factor, the payroll factor and twice the receipts factor, divided by four."
Millward is a Delaware corporation with offices located throughout this country as well as in 27 other countries. Millward is a major market research company performing marketing research for major corporations such as Kraft Foods, Cadbury, United Distilleries, and Hershey Chocolates. The primary activity of Millward is to measure the effects of advertising and brand development. This is done by collecting and analyzing data concerning many consumer and market related issues such as consumer product recognition, market share, advertising and other matters that are important to advertisers and consumer product marketers. Millward basically conducts telephone surveys through a very controlled and sophisticated process to find out what is on consumers' minds, then analyzes this information by downloading it into computers. The process used by the interviewers is known as the Computer Assisted Telephone Interview (CATI). Millward's process of collecting data is labor and capital intensive because Millward uses computers, telephones and other equipment to gather and analyze the market data. In 1990 and 1991, Millward maintained five data collection centers in this country. Each data collection center operated from 3:00 p.m. to 10:00 p.m., using hundreds of telephone interviewers at each data collection center. 85% of the data collection is done through telephone surveys. 15% of the data collection is conducted through mall surveys. The telephone surveyors used by Millward work solely for Millward, and are trained and supervised by Millward employees. Each telephone interviewer has his or her own station to make calls. The interviewer dials the telephone from a number provided by a computer. The interviewer's computer has a screen containing a scripted program from which the interviewer reads and then enters the responses into the computer. All of the interviewers have the same computer questions to provide consistency and maintain the integrity of the surveys. The telephone surveyors use telephones and high speed computers to call approximately 35 million households per year. Approximately 40,000 phone hours per month are used to gather data. After the raw data is collected by the interviewers, powerful computers are used to analyze the information. In formulating and analyzing the responses to the surveys, Millward generally goes through a four-step process by: (1) designing a sampling plan, (2) collecting respondent data, (3) tabulating the results, and (4) formulating its analysis. Millward's staff is then able to present its final analysis and conclusions to its clientele. Millward delivers a personal presentation and written report to a client reviewing the results of its analysis, with computer generated charts and graphs depicting and displaying the data compiled by Millward.
Millward's capital costs consist of the purchase of computers, screen, telephone systems and software licences. In 1989, Millward spent $174,000, or 28% of its total expenditures, for its information system. Apart from the expenditure of $174,000 for its information system, Millward spent approximately $400,000 in 1989 for equipment not related directly to the production of income, such as office furniture, office telephones, cubicles and work stations. In 1990, Millward spent $374,000 for its information system, which was directly related to the production of income.
Millward contends that its revenue is generated by the use of computers, telephones and telephone interviewers, and is therefore related to the use of personal property as that term is used in § 12-218 (b), requiring Millward to use the three-factor formula of § 12-218 (b).
The Commissioner, on the other hand, contends that the main business of Millward is to provide a service to its clients by use of surveys, and that the use of computers and telephones by the interviewers is not essential for the collection of public opinion data, but rather incidental to the collection and analysis of information. The Commissioner contends that since Millward's business was to provide a service, Millward must use the single-factor formula in § 12-218(a) to account for its apportionment of income from its business.
The issue in this case is whether Millward derived its income during the relevant tax years from the use of tangible personal property pursuant to General Statutes § 12-218 (b).
In deciding the issue in this case, we are guided by the analysis and holding of the Supreme Court in Schlumberger Technology Corporation v. Dubno, 202 Conn. 412, 521 A.2d 569 (1987). In Schlumberger, about 70% of the plaintiffs business consisted of providing wireline services to the oil and gas industry, and about 30% of its gross receipts were derived from the manufacture and sale of equipment and supplies to its subsidiaries. Schlumberger's business in Connecticut consisted of operating a facility that conducted basic research for the development of wireline services technology. The Supreme Court described this technology as follows: "Wireline services are performed by plaintiffs engineers lowering a specially designed sensoring instrument on an armored electrical cable, called a wireline, down a hole, drilled in a location where oil or gas is suspected, to various depths to measure geological characteristics, such as density, and fluid, mineral and chemical contents of rock formations. The measurements are transmitted. via the wireline, to a mobile laboratory, located at the well site, where they are recorded on a magnetic tape and on a graph. The data has little significance, except as it is analyzed by plaintiffs engineers, who apply to it mathematical formulae and ultimately determine whether or not the location contains oil or gas in amounts feasible to produce. Plaintiffs customers pay plaintiff for this advice about their sites." Id., 424.
Schlumberger sought to have 70% of its business apportioned under the single-factor formula in § 12-218 (a) since it claimed that 70% of its income was not derived from the manufacture, sale or use of tangible personal or real property, and have 30% of its business attributed to the manufacture and sale of personal property apportioned under the three-factor formula in § 12-218 (b). The Commissioner, in Schlumberger, determined that Schlumberger's income was derived from the use of tangible personal property, and therefore, the three-factor formula under § 12-218 (b) should apply. In this case, as Millward points out, the Commissioner contends that the one-factor formula applies in this case because Millward is providing a service rather than deriving income from the use of tangible personal property.
The test to be applied in determining whether the single-factor formula or the three-factor formula applies is to look to "the particular characteristics of an individual taxpayer [to see if it] more appropriately captures the intent of § 12-218 than [a test] that generalizes about the usual characteristics of mercantile, manufacturing or service enterprises." Schlumberger Technology Corporation v. Dubno, supra, 202 Conn. 426. As the court in Schlumberger notes, "few modern businesses today operate without relying on the use of tangible property as an essential part of their businesses, and . . . it is for the legislature, and not for the courts, to decide whether the reach of the three-factor formula of § 12-218 (b) has become too all inclusive." Id.
In analyzing the business of Millward in comparison to schlumberger, we find it difficult to distinguish Millward's data collection process with the subsequent analysis of the data resulting in a report of its findings to its client, and the collection of data in oil and gas wells by Schlumberger with the subsequent analysis of the data and the report of its findings to its client. Both businesses rely on the collection of data, regardless of how that data is collected. Both businesses rely on the use of computers to analyze the data collected and this analysis permits the specialists to draw conclusions for the benefit of the clients of both parties. Whereas Schlumberger used "sophisticated and specially designed equipment not only at its on-site mobile laboratory, where wireline measurements are recorded and analyzed. but also in the very process of collecting the underlying data on which the analyses depend"; Schlumberger Technology Corporation v. Dubno, supra, 202 Conn. 428; Millward used interviewers, with the aid of telephones, sitting in front of computer monitors with the text of the interviews. inputting the answers into the computer via a keyboard.
Using this analysis of comparable functions, we find that Millward's use of telephones by hundreds of telephone interviewers to gather data, and its use of computers to analyze and store the collected data for future use is not an inconsequential use of tangible personal property. We have moved into a high tech society where manual computations have given way to fast computers that collect, store and analyze data almost instantaneously. For the Commissioner to say that the use of computers by Millward is not essential to its business belies the fact that we are in the computer age.
We conclude that Millward has established that its operation of its data collection process involves tangible personal property as an essential part of its business. The relevant evidence is that Millward relies on its own creative, sophisticated and specially designed surveys to sample consumer opinion about its client's products. These surveys are the result of the use of telephones and computers as tangible personal property. Because Millward's net income is "derived from the . . . use of tangible . . . property, that income is properly to be apportioned to this state in accordance with the three-factor formula of 12-218 (b)." Schlumberger Technology Corporation v. Dubno, supra, 202 Conn. 428-29. As we have previously stated, in a tax imposition case, where there is a question that a statute is ambiguous, the taxpayer is entitled to a favorable construction of that statute. Id., 423. The legislature. in providing two methods for apportioning income attributed to Connecticut under § 12-414. has failed to recognize the problem pointed out by the court in Schlumberger that the use of tangible personal property is essential to most businesses. Id., 426. Our legislature has failed so far to determine the extent of the use of tangible personal property in determining the use of the single-factor formula or the three-factor formula. Until the legislature determines the reach of the three-factor formula under § 12-218 (b), we cannot fault the taxpayer in selecting the tax formula which most clearly fits its business characteristics.
Accordingly, we sustain Millward's appeal. Judgment may enter in favor of the plaintiff without cost to either party.
At trial, the Commissioner again raised the issue of the timeliness of the plaintiff's appeal, which it first raised in a motion to dismiss filed August 28, 1998. 24 Conn. L. Rptr. 63. The parties thoroughly briefed and argued the timeliness issue, and this court filed a written memorandum of decision denying the commissioner's motion on February 2. 1999. In that the issue has already been briefed, argued and decided, we decline to review the issue in this decision.