Summary
In Tax Commission et al. v. Kelly-Springfield Tire Co. (Ohio App.) 175 N.E. 700, the court held that book accounts of the New York corporation had not acquired a business situs in Ohio, prominence being given to the facts, among others, that although the goods were sold through the Cleveland, Ohio, branch of the corporation, all bookkeeping records were handled in New York, no books or accounts were kept at the Cleveland branch, all invoices carried notice that they were payable at the New York office.
Summary of this case from State v. Atlantic Oil Producing Co.Opinion
Decided January 19, 1931.
Taxation — Credit of foreign corporation on Ohio business not taxable — Only Ohio property of residents of state taxable — Property or person to be within jurisdiction of taxing state — Credits taxable only when property of residents of taxing state — Situs of intangible property is owner's domicile — Creditor's residence determines situs for taxing credits — Business situs created where local agency controls and manages credits — Business situs not established by evidence, when — Taxable excess credits determined, how — Sections 5327, 5328 and 5404, General Code.
1. Generally, property to be taxed or person to be taxed must be within jurisdiction of taxing state (Section 5328, General Code).
2. Credits are taxable only when they are property of persons residing in taxing state (Section 5328, General Code).
3. Generally, in absence of controlling circumstances to contrary, situs of intangible property for purpose of taxation is state of owner's domicile.
4. In determining situs for taxing of credits, residence of creditor only may be considered, and fact that persons from whom debts are due reside in state cannot be considered (Sections 5327, 5328 and 5404, General Code).
5. Creation of "business situs" for purpose of taxing credits in state where debt arises requires control and management of credits to be vested in local agency (Sections 5327, 5328 and 5404, General Code).
6. Evidence held insufficient to show "business situs" in state necessary to tax excess credits of foreign corporation arising out of business in state (Sections 5327, 5328 and 5404, General Code).
7. Only "excess credits" may be taxed as represented by trial balance after deducting total of debts from total of credits due (Sections 5327 and 5328, General Code).
ERROR: Court of Appeals for Cuyahoga county.
Mr. Ray T. Miller, prosecuting attorney, and Mr. Neil W. McGill, for plaintiffs in error.
Messrs. Squire, Sanders Dempsey, for defendants in error.
We shall consider these two cases together, and the decision rendered will be applicable to both. In the case of Tax Commission of Ohio v. Kelly-Springfield Tire Company, the facts presented are much stronger in support of the theory advanced by the county prosecutor. It will be found that in both cases the state sought to tax the credits of foreign corporations, as the Kelly-Springfield Tire Company was organized under the laws of the state of New York, while the Firth-Sterling Steel Company was organized under the laws of the state of Pennsylvania.
Reverting to the Kelly-Springfield Tire Company's case, we find that the auditor of Cuyahoga county made an assessment for the year 1928 of the credits of said company, a foreign corporation, on the theory that the credits of this corporation arising out of business done in Ohio had their situs in Ohio, and that consequently the same constituted property subject to taxation in Ohio. The credits in question were the accounts receivable of the company arising out of merchandise sold to Ohio customers.
Prior to December 31, 1928, the corporation filed a complaint with the Tax Commission of Ohio, maintaining that the credits in question had no situs in Ohio, and were not taxable in Ohio, and that the assessment by the county auditor was illegal, and requesting that the auditor of Cuyahoga county should be required to cancel the assessment of the company's credits placed upon the tax duplicate.
The Tax Commission held that the credits of the company were taxable in Ohio, and therefore sustained the county auditor. Error proceedings were instituted by the company under Sections 5611-1 and 5611-2, General Code, in the common pleas court of Cuyahoga county to reverse the decision of the Tax Commission of Ohio. After a hearing the common pleas court held that the credits of the company had not acquired a situs in Ohio, and were not taxable in Ohio, and therefore reversed the decision of the Tax Commission of Ohio.
Error proceedings were instituted in this court by the county prosecutor in behalf of the taxing authorities, seeking a reversal of the decision of the common pleas court.
This narrative statement detailing the various steps which led the Kelly-Springfield Tire Company case to the Court of Appeals may be applied without repetition to the case of Tax Commission of Ohio v. Firth-Sterling Steel Company, because exactly the same steps were taken in that case, and we are here also asked to reverse the decision of the common pleas court, which exempted the credits of the Firth-Sterling Steel Company from taxation.
It will be necessary to gather from the record a detailed statement of facts in the Kelly-Springfield Tire case. An examination of the record leads us to the conclusion that the statement of facts contained in the brief of counsel for defendant in error is supported by the record, and we shall, therefore, quote from said brief the following:
"The Kelly-Springfield Tire Company is a foreign corporation (R-18).
"It conducts a branch at Cleveland, Ohio, which acts as a distributing point for Northern Ohio for the Company's products (R-9). Eighteen persons are employed by the local branch (R-19).
"The Company does not operate a factory in Cuyahoga County or any place in the State of Ohio. Its goods are manufactured at Cumberland, Maryland (R-15).
"The company maintains a warehouse in connection with its Cleveland branch (R-15).
"A part of the goods sold through the Cleveland branch is delivered from the Cleveland warehouse and part of them direct from the factory at Cumberland (R-16).
"Invoices covering sales made through the Cleveland branch are rendered from Cleveland, two copies of the invoice being sent to New York City, where the sales are posted on the books to the respective accounts (R-9, 10).
"All bookkeeping records of the company are handled in New York City, and the accounts arising from sales made through the branch at Cleveland are reflected on the ledgers kept in New York (R-9).
"No books of account reflecting current accounts receivable outstanding by reason of sales made through the Cleveland branch are kept at the Cleveland branch (R-14).
"All invoices carry a notice that they are payable at New York office of the company (R-10).
"Some of the payments are made in Cleveland and some of them are made direct, to New York (R-10).
"In the case of payments made to the branch in Cleveland, the payments if in check form are transmitted intact, immediately to the New York office, and if in cash, the cash is deposited and a check immediately drawn for the amount of the remittance and forwarded to the New York office (R-10).
"Cash collections made at the Cleveland branch are few in number, averaging about once a week (R-11). No receipts are given customers by the Cleveland branch for collections made by that office (R-25).
"About two-thirds of the accounts (in amount) are paid by the customers direct to the New York office of the Company. When a customer fails to pay his invoice, statements are sent to him from the New York office of the company (R-12). Delinquent accounts are followed up by the General Credit Department located in New York City, but if that department fails to collect the account, the local office is called on to assist and the salesmen of the local office do in such cases, make an effort to collect (R-12).
"When both the New York office and the Cleveland office has been unable to collect the account, it is placed in the hands of an attorney by the New York Office (R-13).
"The Cleveland branch has no authority to use any funds received in payment of invoices for goods sold (R-10 and 11).
"A working expense fund, which is replenished each week, is furnished the Cleveland branch by the New York office. This fund amounts to $2,500.00 and is the only fund over which the Cleveland office has any dominion (R-11).
"The working fund is to pay operating expenses of the branch such as telephone, light, heat and the salaries of the office help other than the sales force, and for reimbursing the salesmen on their expense accounts (R-16).
"The expenses paid from the working fund run from four to eight hundred dollars a week (R-26).
"Any item of expense of any size is paid from New York (R-27).
"The salaries of the salesmen are paid direct from New York City (R-16).
"All merchandise handled at the Cleveland branch is sold at prices fixed by the General Sales Department of the New York office, and the Cleveland branch has no authority to quote prices except such as are received and authorized from the New York Office (R-13).
"The Cleveland office cannot sell on credit, except in amount of less than $500.00, unless the credit has been approved by the New York office (R-13).
"The Cleveland branch maintains a credit information file to determine whether they are within the credit limits upon which they are permitted to operate with respect to their customers. The information for this file is furnished by the New York office (R-17).
"The credit information file is used by the Cleveland branch for the sole purpose of advising it as to whether or not additional credit may be extended to a particular customer, under the restrictions imposed upon it by the New York office (R-15).
"The merchandise is returned to the Cleveland branch by a customer, the Cleveland branch writes up a bill of credit which is sent to the New York office, and is handled the same as an outgoing shipment, except in the reverse order. It appears on the customer's statement and ledger in New York as a credit instead of a charge (R-31)."
The sections of the General Code applicable to taxation of credits are the following:
Section 5328: "All real or personal property in this state, belonging to individuals or corporations, and all moneys, credits, investments in bonds, stocks, or otherwise, of persons residing in this state, shall be subject to taxation, except only such property as may be expressly exempted therefrom. Such property, moneys, credits, and investments shall be entered on the list of taxable property as prescribed in this title."
Section 5404. "The president, secretary, and principal accounting officer of every incorporated company, except banking or other corporations whose taxation is specifically provided for, for whatever purpose they may have been created, whether incorporated by a law of this state or not, shall list for taxation, verified by the oath of the person so listing, all the personal property thereof, and all real estate necessary to the daily operations of the company, moneys and credits of such company or corporation within the state, at the true value in money."
The word "credit" is defined in Section 5327, General Code, as follows:
"The term `credits' as so used, means the excess of the sum of all legal claims and demands, whether for money or other valuable thing, or for labor or service due or to become due to the person to pay taxes thereon, including deposits in banks or with persons in or out of the state, other than such as are held to be money, as hereinbefore defined, when added together estimating every such claim or demand at its true value in money, over and above the sum of legal bona fide debts owing by such person."
The legal question before us is whether or not the excess credits of the Kelly-Springfield Tire Company, a foreign corporation, arising out of business transacted in the state of Ohio through its local agency, are under the particular facts in this case taxable in the state of Ohio.
A careful perusal of Section 5328, General Code, above quoted, discloses that in order that property be taxed it must appear either (1) that the property taxed shall be property in this state, or (2) that it shall be the property of persons residing in the state. This is in conformity with the general rule that the property to be taxed, or the person to be taxed, must be within the jurisdiction of the taxing state. It will be noticed from a perusal of the above section of the General Code that credits are taxable only when they are the property of persons residing in this state.
"As between different states, the situs of the property of corporations for purposes of taxation is determined by the rules which determine the situs of the property of individuals. As between the different states a corporation is considered a resident of the state in which it was incorporated, and is prima facie taxable upon its personal property in such state. A corporation may be taxed in its home state upon its tangible personal property notwithstanding the physical absence of such property in another state, if the property itself has acquired no situs outside the state and is not subject to taxation in the place where it is situated; but it cannot be taxed on its personal property permanently located in another state. A state may tax the tangible personal property of a foreign corporation kept within its limits which is part of the general permanent body of property within its jurisdiction and is not merely in transit through the state or temporarily staying therein. Intangible property of a corporation is taxable only in the state in which the corporation was organized unless it has acquired a business situs elsewhere." 26 Ruling Case Law, 179, Section 151.
It is the general rule, in the absence of controlling circumstances to the contrary, that the situs of intangible property for the purpose of taxation is the state of the owner's domicile.
"There are decisions establishing the principle that there may be a `business situs' of debts as distinct from the domicile of the creditor. Thus, where an agent within the state, representing a non-resident principal, is clothed with power and authority to and does create credits or loan money for his principal within the state, the agent holding an actual and effective control over the business, retaining in his own possession within the state the evidences of such debts, or procuring their return to him when due for collection and return or reinvestment, the course of business being general and amounting more or less to a permanent business, then the state may by legislation separate the situs of such property for taxation from the domicile of the owner, and give it a situs within the state for purposes of taxation." 26 Ruling Case Law, 284, Section 250.
In Hubbard, Treas., v. Brush, 61 Ohio St. 252, 55 N.E. 829, the court recognized the above principle of law.
There can be no doubt that the general principle is recognized in Ohio that in determining the situs for the taxing of credits the residence of the creditor only may be considered, and the fact that the persons from whom the debts are due reside in Ohio cannot be considered. Thus, in Myers v. Seaberger, 45 Ohio State, at page 234, 12 N.E. 796, 797, in discussing this question, the court quotes the following from the opinion of Judge Welch, in Worthington v. Sebastian, Treas., 25 Ohio St. 8:
"Our system of ad valorem taxation has uniformly proceeded upon the theory, that tangible property is to be taxed according to the law of the place where it is situated, irrespective of the residence of its owner; while, with equal uniformity, it has proceeded upon the theory that `credits,' `investments in bonds,' `stocks,' etc., are taxable according to the laws of the place where their owners or holders reside."
The court in the Seaberger case then concludes, page 235 of 45 Ohio State, 12 N.E. 796, 797:
"So that it seems clear that the credits of persons not residing in this state are not the subjects of taxation by its authorities, though the debtor may reside here. Such has been the uniform policy of this state. To use the language of Welch, J., in the case above cited: `Intangible property has no actual situs. If, for purposes of taxation, we assign it a legal situs, surely that situs should be the place where it is owned, and not the place where it is owed. It is incapable of a separate situs, and must follow the situs either of the creditor or the debtor. To make it follow the residence of the latter, is to tax the debtor and not the creditor.'
"Such has been the uniform view taken of the question in this state."
From the oral argument and brief of counsel for plaintiff in error we gather that he recognizes the general principle, but contends that, under the particular facts of the case, the Kelly-Springfield Tire Company acquired a business situs in Ohio. Counsel for both sides quote from an opinion of the Attorney General (Annual Report of Attorney General [1912] volume 1, page 547), wherein it was stated:
"Credits of a non-resident corporation may be taxed in Ohio, only when they are `localized' by being committed to the charge and management of an agent or other representative who is more than a mere custodian or collector and who has power to deal in a managerial capacity with the fund represented by the credit."
This statement of the Attorney General is in harmony with a number of decisions in various states which recognize the exception to the general rule and hold that a foreign corporation may acquire a "business situs for purposes of taxation of its credits." This was applied only where the owner residing in a foreign state has divorced the credits owned by him from his use, control, and management, and vested it in another residing in a different state, where it is used by such other person in the conduct of his business.
It remains for us merely to consider whether the particular facts in this case establish a business situs for the purpose of taxing the credits of a foreign corporation.
The facts relied upon by plaintiff in error to establish a business situs are that the Kelly-Springfield Tire Company maintains a warehouse in the city of Cleveland; employs a manager, a lady cashier, and a credit manager in Cleveland, and eighteen other employees; that a large stock of merchandise is carried in Cuyahoga county; that eight salesmen are employed under the supervision of the Cuyahoga county manager; that the orders procured by the salesmen are filled largely from the stock of goods in Cuyahoga county; that the local manager can extend credit up to $500 to any one individual or company; and that under this right to extend credit there are some seven or eight hundred accounts.
It is also pointed out by the county prosecutor that while the money collected is forwarded to New York, a working fund is kept in Cleveland in the sum of $2,500, which fund is replenished from New York each week, and that the employees are paid weekly from the working fund in Cleveland.
It appears to us that it is perfectly clear from the record that the moment a debt is created by the act of the local manager in extending credit, the control and disposition of the debt is exercised exclusively by the home office of the corporation and not by the branch agency in Cuyahoga county. The local agency has no interest in the accounts receivable, nor is it permitted by the home office to utilize any of the proceeds in the conduct of the local branch. It is quite apparent from the record that these credits due from debtors residing in Ohio, and contracted with the parent company through its local branch, are not employed by the company in its business in Ohio, nor are those credits in any wise subject to the management or control of the local agency.
Quoting from Board of Commrs. of Johnson County v. Hewitt, 76 Kan. 816, 93 P. 181, 184, 14 L.R.A. (N.S.), 493, wherein the court said:
"Generally, the element of separation from the domicil of the owner and fairly permanent attachment to some foreign locality should appear, together with some business use of them, or some power of managing, controlling or dealing with them in a business way. A merely transitory presence in a foreign state or a naked custody for safekeeping, is not enough."
It is clear from the record in this case that there was no vesting of control and management of these credits in the local agency of the Kelly-Springfield Tire Company, and we hold that under the decisions such is necessary to the creation of a business situs for the purpose of taxing credits in the state where the debts arose.
The case of Westinghouse Electric Mfg. Co. v. County of Los Angeles, 188 Cal. 491, 205 P. 1076, 1077, presents almost the identical question involved in the case at bar. In the decision the court goes into the matter at great length, and, after citing the general rule that choses in action and intangible property attach to the domicile of the owner, the court discusses the contention of the taxing officials that the credits have acquired a "business situs" in California that makes them subject to taxation. The court defines the phrase "business situs" as follows:
"If we may venture to formulate a general statement of this modification of the rule, it would be that this can only result where the possession and control of the property right has been localized in some independent business or investment away from the owner's domicile, so that its substantial use and value primarily attach to and become an asset of the outside business. In other words, while the nonresident may own the business, the business controls and utilizes in its own operation and maintenance the credits and income thereof."
Considering the particular facts of the present case, we conclude that the agency maintained in Cuyahoga county by the Kelly-Springfield Tire Company is not an independent business, nor an independent branch of the principal business of said company, and, while it is true that the local sales agency is doing business on a fairly large scale, it is doing so through the immediate control and management of the company's home office. The Kelly-Springfield Tire Company is conducting this branch of its business through its local agency upon its general corporate capital for the general business of its central factory, and the credits sought to be taxed were at all times part of its general corporate assets.
We are of the opinion that the particular facts of this case do not establish a business situs within the prescribed rules such as to take this case out of the operation of the general rule.
We may add that the Legislature had a clear purpose in confining taxable credits to credits of persons residing in this state. In determining excess credits the law requires that debts and obligations may be deducted from the gross amount of credits due to the person or corporation sought to be taxed.
It will be noticed further that Section 5327, General Code, defining the term "credits," permits the deduction of all claims, demands, and debts whatsoever. If the credits sought to be taxed in this case were allowed to be so taxed, the benefit afforded by the statute which permits the deductions of all legal demands, claims, and debts from the gross sum of credits could not be successfully applied here. When the Kelly-Springfield Tire Company makes a shipment of goods, which are sold in Ohio on credit, it may have contracted definite debts and obligations in acquiring such property shipped by it. The taxing authorities seek in this case to allow a deduction of such debts only as are due from the Kelly-Springfield Tire Company and which were contracted through its local agency in Ohio. When the Legislature sought to tax credits, it did not intend to lose sight of the debts and obligations which may be due from the person or corporation whose credits are sought to be taxed. Excess credits only may be taxed, as represented by the trial balance after deducting the sum total of debts and obligations from the sum total of credits due.
We are therefore of the opinion that the common pleas court was correct in its conclusion, and its judgment will be affirmed.
Without entering into a detailed statement of facts in the case of Tax Commission of Ohio et al. v. Firth-Sterling Steel Company, it is sufficient to say that a similar situation is presented, with the exception that the size of the business of the corporation was much smaller than that of the Kelly-Springfield Company, and that the authority of the local manager was much more limited. The same question of law is involved, and our finding is to the same effect, namely, that the facts of the case presented by the record do not show the establishment of a business situs justifying the taxing of credits arising in Ohio so as to take it out of the operation of the general rule which forbids such practice.
The judgment of the common pleas court in said case is likewise affirmed.
Judgments affirmed.
VICKERY, P.J., and WEYGANDT, J., concur.