Opinion
No. 29773
Decided March 22, 1944.
Taxation — Intangibles — Exemption — Accounts receivable "used in business," when — Ohio corporation operating departments in stores outside Ohio under lease and contract — Balances of unremitted cash sales and unpaid charge accounts "accounts receivable," when — Accounts receivable "used in business" and exempt, when — Avails used partly for expenses of out-of-state business — Balances remitted to and used by Ohio corporation in Ohio or elsewhere — Sections 5325-1, 5328-1 and 5328-2, General Code.
1. Accounts receivable are "used in business," within the meaning of the statutes of Ohio relating to taxation, when they or the avails thereof are being applied or are intended to be applied in the conduct of a business, whether in this state or elsewhere.
2. Where an Ohio corporation is engaged in the operation of departments for the sale of millinery in Ohio and elsewhere, and leases space therefor in so-called department stores under a "lease and contract" which provides that the proceeds of lessee's cash sales be turned over to the lessor department store, to be held by it for lessee as trust funds and remitted at regular intervals or expended as directed by the lessee, and that all charge accounts arising from sales on credit, though payable to the lessor department store, are to remain the property of the lessee millinery stores, such balances of cash sales not remitted and of charge accounts unpaid on tax listing day are "accounts receivable."
3. "Accounts receivable" arising from business transacted in a state other than Ohio are "used in business" within the provisions of Section 5325-1, General Code, and therefore exempt from taxation in this state under the provisions of Sections 5328-1 and 5328-2. General Code, where the avails of such "accounts receivable" are used partly in payment of the expenses of the operation of such out-of-state business, and the balances, if any, remitted to and used by the Ohio corporation in its regular course of business, whether in this state or elsewhere. ( Ransom Randolph Co. v. Evatt, Tax Commr., 142 Ohio St. 398, approved and followed.)
APPEAL from the Board of Tax Appeals.
This case is in this court on appeal from the decision of the Board of Tax Appeals wherein it affirmed assessments made by the Tax Commissioner against the appellant, The Haverfield Company, for the years 1937, 1938 and 1939.
During the period involved in this controversy the appellant, an Ohio corporation, with its principal place of business in Columbus, Ohio, engaged in selling millinery at retail. It operated retail millinery departments in many department stores in Ohio and elsewhere under separate but uniform lease contracts. Pursuant to and in accordance with the terms and provisions of these instruments, each of which was denominated "lease and contract," the millinery departments of the appellant occupied a designated space in each of such stores and were conducted by appellant's own managers and the employees selected by them. Each such manager purchased merchandise subject to the appellant's approval, and he approved and authorized various expenditures such as salaries, wages, etc. Sales of merchandise were made for cash or on credit. All cash, charge and c. o. d. sales were handled through the regular system of the department store which received the cash proceeds, kept records of all sales and approved all charge accounts. The cash proceeds were considered as trust funds and the lessee (appellant) had title to the charge accounts until the lessor (department store) remitted for same, after which the latter was the sole owner of and assumed all risks of collection of such accounts. Current expenses were paid by the lessor (department store) from cash and c. o. d. sale receipts upon vouchers of the department manager. An accounting and settlement was made at the end of designated periods, in most instances monthly, in some bi-monthly, and the department store, after crediting itself with its percentage of gross receipts and the payment of expense vouchers of the lessee's manager theretofore approved, was required to remit to the lessee (appellant) the entire balance of all sales, whether cash, c. o. d. or charge sales.
The appellant's books on January 1, 1937, showed that there was due it from the lessor department stores located outside of Ohio the sum of $80,875; on January 1, 1938, the sum of $83,045; and on January 1, 1939, the sum of $77,723. These accounts were payable to the Columbus office and when paid, the avails thereof were deposited in a Columbus bank, from which they were withdrawable only by the Columbus office and were used in the general operation of appellant's entire business, including the purchasing of merchandise supplies for all its retail stores in Ohio and elsewhere.
In making its returns for the years in question, the appellant did not include in its listing of credits the amount due it from the several out-of-state department stores, but listed the total amount of money and charge accounts in the possession of its lessors outside of Ohio on January 1 of each of those years as credits having a taxable situs outside of Ohio. The Tax Commissioner treated as accounts receivable in this state the amounts due the appellant on January 1 of each from such lessor department stores. The Board of Tax Appeals affirmed the assessments as thus made. The appellant by this appeal seeks a reversal of the finding and decision of the Board of Tax Appeals.
Messrs. Dargusch, Caren, Greek King, for appellant.
Mr. Thomas J. Herbert, attorney general, and Mr. Aubrey A. Wendt, for appellee.
The controversy in this case arises from a disagreement as to the construction and effect of the contract between the parties, particularly the following provisions:
"* * * the lessor shall, when charges have been approved, immediately credit the amounts thereof to the account of the lessee, but until said charges have been remitted for by lessor, said charge accounts shall be and remain the property of the lessee. After remittance on the same, the lessor shall assume ownership of said accounts and all risk of collection. The lessor shall have the sole right to determine the manner of extending credit. * * * All funds in the bank account of lessor or in lessor's store or otherwise, up to the balance due to the lessee' herein at that time, shall be the property of the lessee and held by the lessor in trust to the lessee's use, it being agreed that in the event said funds are commingled with funds of the lessor and withdrawals have been made from such commingled funds that lessor expended lessor's own portion of said funds first, and if any of said funds belonging to lessee have been invested in merchandise, said merchandise is impressed with a trust in favor of said lessee. Nothing herein shall be construed as giving the lessor the right to invest or use the said funds of the lessee or to check against the same, other than to the order of the lessee."
The Board of Tax Appeals, in its entry, announced its finding of facts and decision as follows:
"The board further finds that the appellant operates millinery departments in various stores within and without Ohio; that in each case said department is operated under a written agreement denominated 'lease and contract' under which agreement the appellant pays a certain percentage of its gross sales to the store as rental for the space occupied and services used; that said agreement also provides that both cash and credit sales are handled through the regular system of the store; that all credit sales are submitted to the credit department of the store for approval and when approvd are credited to the account of the appellant; that the store pays appellant's clerks and employees who operate the department and all other incidental expenses thereof; that an accounting or settlement is made monthly or bi-monthly at which time the store deducts from appellant's gross sales the rental and all other charges paid by the store and remits the balance to the appellant. Said agreement further provides that the cash proceeds from the sales shall be considered trust funds and that appellant shall retain title to the charge accounts until they have been remitted for by the store at which time the store shall assume sole ownership of said accounts. The evidence shows that the department manager orders the goods for the department directly from wholesale houses or the appellant's warehouse at Columbus, Ohio; that these orders are confirmed by the Columbus office and are all paid from the Columbus office; that the moneys remitted by the stores are deposited in appellant's bank account at Columbus, Ohio; that neither the department manager nor the Columbus office collected any of these individual accounts; that they were all collected through the stores.
"On consideration whereof the board finds that if the appellant retains any title to the cash proceeds from sales or to the individual charge sales it is for the purposes of security only; that for all other purposes both become the property of the store; that the accounts receivable here in question are accounts owing by the various stores to the appellant; that they arise out of business transacted outside of this state but are not used in business transacted outside of this state within the provisions of Section 5328-1, General Code, and are therefore taxable in Ohio."
The appellant contends that this decision is not lawful for the contract between the parties establishes ownership of money and of the charge accounts to be in the lessee, The Haverfield Company. To establish the effect of this contract, they cite the cases of In re Steele-Smith Dry Goods Co. (D.C.), 298 F., 812; In re Kline (D.C.), 7 F. Supp., 850, which was affirmed by the Circuit Court of Appeals, Third District, in the case of United States National Bank in Johnstown, Pa., v. Blauner's Affiliated Stores, Inc., 75 F.2d 826, decided February 1, 1935.
The primary contention of the appellant seems to be that since Haverfield owns the moneys and the charge accounts, there are no accounts receivable due them from the lessor stores. At first impression this seems to be true but, considering, first the charge accounts, it is difficult to see how these can fail to be accounts receivable. The purchasers of millinery have not yet paid, as of tax listing day, for the goods secured by retail purchase from The Haverfield Company. Appellant's contract provides such purchasers do not owe the lessor department store, but owe the money to appellant, even though the charge accounts appear to the purchaser to be owned by the lessor department store. Even if the contract be given full effect, it only means the money due on these retail charge sales is due directly to The Haverfield Company, and not indirectly through an interposed liability of the lessor department store to the lessee.
As to the money from cash sales turned over by the lessee to the lessor department stores, the contract is less clear, but certainly the department store had a duty to apply this money according to The Haverfield Company's instruction and a duty to pay the money at regular times. The arrangement may have been a deposit of moneys instead of accounts receivable with the incidental debtor and creditor relationship, but for the purposes of taxation the difference is unimportant, for both accounts receivable and deposits are taxable under Sections 5328-1 and 5328-2, General Code. As we view the record these were accounts receivable on tax listing day.
We have left, then, the question whether these accounts receivable had a taxable situs in Ohio. Similar questions were before this court in the cases of Procter Gamble Co. v. Evatt, Tax Commr., 142 Ohio St. 369, and Ransom Randolph Co. v. Evatt, Tax Commr., 142 Ohio St. 398. The appellant contends that the decision of this court in the Ransom Randolph case is dispositive of this case. In the Ransom Randolph case it was conceded by the parties that the intangibles there under consideration arose out of business done outside the state. Here the Board of Tax Appeals made a similar finding and the appellant, of course, does not contest that, for the reason that such a finding is essential to his position. Likewise, the appellee limited his inquiry to determining "whether the credits were actually used in business outside of Ohio."
This limited question involves the construction of Section 5328-1, General Code, and certain parts of Section, 5328-2, General Code, and also of Section 5325-1, General Code.
Section 5328-1, General Code, provides in part that "Property of the kinds and classes mentioned in Section 5328-2 of the General Code, used in and arising out of business transacted in this state * * * shall be subject to taxation; and all such property of persons residing in this state used in and arising out of business transacted outside of this state by, for or on behalf of such persons, * * * shall not be subject to taxation."
Section 5328-2, General Code, provides in part that "Property of the kinds and classes herein mentioned, when used in business, shall be considered to arise out of business transacted in a state other than that in which the owner thereof resides in the cases and under the circumstances following:
"In the case of accounts receivable, when resulting from the sale of property sold by an agent having an office in such other state or from a stock of goods maintained therein, or from services performed by an officer, agent or employee connected with, sent from, or reporting to any officer or at any office located in such other state."
Clearly these two sections are in pari materia, for Section 5328-2, General Code, is incorporated by reference into Section 5328-1, General Code. These sections determine the situs of taxable property, Section 5328-1 in general terms and Section 5328-2 in more specific terms. Neither section, however, defines the term "used in business," the meaning of which in fact presents the sole question before us, for, as previously stated, it is conceded that the accounts receivable arose out of business, as defined in Section 5328-2, General Code.
The term "used in business," as applied to this case, is defined by Section 5325-1, General Code. Following the general definition of the term therein, it provides that "accounts receivable and prepaid items, and other taxable intangibles shall be considered to be 'used' when they or the avails thereof are being applied, or are intended to be applied in the conduct of the business, whether in this state or elsewhere."
Quoting Section 5325-1, General Code, further: The term " `business' includes all enterprises of whatsoever character conducted for gain, profit or income and extends to personal service occupations."
The question of the meaning of the term "used in business" was before the court in the case of Ransom Randolph Co. v. Evatt, Tax Commr., supra. The facts in that case are somewhat similar to the facts before us in this case.
The evidence herein shows that questioned accounts receivable were payable to the corporation at its Columbus office, never to the local store managers; and that the avails of such accounts receivable were deposited in a Columbus bank, from whence they were withdrawable only by the Columbus office, and that such avails were used in conducting the entire business of the appellant corporation, whether it was Ohio or out-of-state business.
The similarity of this case and the Ransom Randolph case is apparent from a comparison of the facts as found in this case and those incorporated in paragraph five of the syllabus in the Ransom Randolph case, which reads as follows:
"The fact that a resident of Ohio withdraws the avails of accounts receivable, otherwise exempt from taxation, from banks in which out-of-state branches of his business have deposited them, and uses such avails in his business generally, including the payment of the expenses of such out-of-state branches, does not effect a change of the business situs of such accounts receivable for the purpose of taxation. Such accounts receivable are to be considered as having a business situs in the state where created, if they meet the test laid down in Section 5328-2, General Code."
The term "used in business," as defined by Section 5325-1, General Code, includes all the ordinary customs and practices of business within its terms, and requires primarily that the avails of the accounts receivable be applied or be intended to be applied in the conduct of the business of the company, whether in this state or elsewhere. These provisions are specific and clear and, applied to the facts in this case, require that the decision of the Board of Tax Appeals be reversed.
Decision reversed.
WEYGANDT, C.J., HART, ZIMMERMAN, BELL, WILLIAMS and TURNER, JJ., concur.