Opinion
Nos. 30225, 30226, 30227 and 30228
Decided August 8, 1945.
Taxation — Foreign corporation franchise tax — Accounts receivable may be included in base, when — Bank deposits outside Ohio not to be included in base, when.
1. In computing the franchise tax to be assessed against a corporation organized under the laws of another state but carrying on its principal activities in Ohio, accounts receivable, arising out of business transacted in this state on behalf of such corporation where the avails thereof are applied or intended to be applied in the conduct of its business either within or without this state, should be included in the base for the computation of such tax.
2. Under the provisions of Sections 5498, 5328-1 and 5328-2, General Code, general deposits of a foreign corporation, located in banks outside of Ohio, maintained and used by such corporation for purposes of its business generally, both within and without Ohio, should not be included in the base for the computation of the franchise tax to be assessed against such corporation, even though such deposits may fluctuate in amount and the funds therein are withdrawable by Ohio officers and agents of such corporation. ( C. F. Kettering, Inc., v. Evatt, Tax Commr., 144 Ohio St. 419, approved and followed.)
APPEALS from the Board of Tax Appeals.
These four cases are here as of right, each being an appeal from a decision of the Board of Tax Appeals which modified and as modified affirmed the findings of the Tax Commissioner fixing the amount of the franchise fee due the state of Ohio for the calendar years 1935, 1936, 1937 and 1938, from The National Cash Register Company, a corporation organized under the laws of Maryland. (Tax Report years 1936, 1937, 1938 and 1939.)
By agreement of the parties the appeals from the findings of the Tax Commissioner were heard together before the Board of Tax Appeals, were treated as one cause and were disposed of by one entry.
The facts necessary to a determination of the legal questions presented are accurately set forth in the entry of the Board of Tax Appeals as follows:
"Appellant is a corporation organized under the laws of Maryland with its principal place of business, as designated in the articles of incorporation, at Baltimore. The manufacturing plant and executive and accounting offices are located in Dayton, Ohio. It is engaged in the manufacture and sale of cash registers, accounting machines, files, etc. In the United States it conducted its sales through sales agents, and in 1935 in one branch office in New York and in 1936 and 1937 four branch offices located in New York, Philadelphia, San Francisco and Washington, D.C., and in 1938 it opened six more in Boston, Chicago, Cleveland, Detroit, Pittsburgh, and St. Louis. All agents operate under a standard form of contract. Under this contract orders for products must be taken upon the printed form furnished by appellant. When an order is taken the same is not binding upon the appellant until it is accepted by it. Said contract also provides:
" 'Said sales agent agrees that the company shall have, either before or after the termination of the agency, full control of and discretion as to the collection, adjustment or compromise of any or all accounts for sales made by him of National products, but if the company should request said sales agent to make any collection, or to obtain possession of any National products or other property, whether the same relates to a sale made by said sales agent or any agent that preceded him in said territory, said sales agent agrees to do so promptly. Said sales agent agrees that the company shall determine as to taking or not taking a lien upon National products sold by said sales agent, and that the company shall not be liable to said sales agent for any loss of commission, or other claim, by reason of failure to take such liens, or by reason of any compromise or adjustment of any account or accounts or notes for National products sold by said sales agent, or any failure for any reason to collect all or any part of any such account or notes.
" 'Said sales agent agrees to remit daily to the company, in the manner prescribed by its treasurer, or to deposit daily in a bank designated by its treasurer, all money, checks and drafts received by him for the company, including money received for repair parts and supplies sold, and that in no event will he use any money collected for the company to defray the expenses of his agency, or for any other purpose, or deposit the same in any bank to his own credit. If, inadvertently, a check or draft for an amount owing the company is made payable to said sales agent, he will indorse it to the company, and if said sales agent should neglect to indorse any such check or draft, the company is authorized to make such indorsement for him in his name. The company reserves the right to refuse to accept said sales agent's personal check in payment of any amount due it. Said sales agent agrees that he will not, under any circumstances, sign the company's name to a receipt in full for a customer's account, but instead that he will receipt to the customer for the amount paid only, in his own name as sales agent, and, if desired, the company will forward an official receipt direct to the purchaser for all amounts that may be credited to his account.'
"Such contract does not apply to the branch offices, which are operated by branch managers. The agents are paid solely on a commission basis and the office managers are credited for commission on sales at the same rate as agents. Both the agencies and branch offices attempt to carry a full inventory of machines of standard types, the title to which machines remains in the appellant until sold, being shipped on consignment to the agency or branch. The method of selling may be described as follows: The salesman or agent contacts the customer and demonstrates the machines, takes the order, which is subject to acceptance by the appellant. If the sale is made by a salesman the order is turned over to the agency where he is employed. If the agency has that type of machine so ordered in its consignment stock the machine is immediately delivered to the customer. The installment sales are payable from twelve to thirty-six months. If there is no machine of the type desired in stock the agent sends the order to Dayton where the order is filled and the machine is shipped to the agent, who delivers and installs it. If it is to be a specially built machine the order is sent to Dayton, and if the machine can be built the appellant quotes the price to the agent, who quotes it to the customer. The same procedure is followed with respect to the branches. Appellant accepts all orders without investigation of the credit of the customer. The Dayton office prepares the installment due notices and sends them to the agents or branches, who deliver them to the customers. The installments are payable at the agencies or branches. If the sale is a cash sale the agent collects the amount thereof. Moneys collected by agents and branches are deposited in local banks and a duplicate deposit slip is sent to the Dayton office. The agents and branches have no authority to make any withdrawals from such deposits. The agents may repossess machines without the approval of the appellant."
The four appeals were submitted to this court upon a joint record and will be disposed of in one opinion.
Messrs. Graydon, Head Ritchey, for appellant.
Mr. Hugh S. Jenkins, attorney general, and Mr. Daronne R. Tate, for appellee.
The first claim of error is stated by appellant as follows:
"1. The Board of Tax Appeals erred in holding that certain amounts owing to appellant by its customers (designated by said board as 'accounts receivable'), and arising from sales made by agencies or branch offices of appellant located outside of the state of Ohio, had a situs in Ohio for purposes of taxation."
The Board of Tax Appeals found that the value of the accounts receivable owned and used by appellant in Ohio for the respective years was: 1936 — $7,883,886.19; 1937 — $9,484,197.02; 1938 — $10,047,058.85; and 1939 — $8,736,181.77.
These amounts were arrived at as follows:
For the year 1936. Ohio sales $ 753,863.19 Sales outside Ohio 10,849,422.40 ------------- Total 11,603,285.59 Deducted by Board of Tax Appeals 3,719,399.40 ------------- $ 7,883,886.19
For the year 1937. Ohio Sales $ 907,851.60 Sales outside Ohio 13,350,066.77 ------------- Total 14,257,918.37 Deducted by Board of Tax Appeals 4,773,721.35 ------------- $ 9,484,197.02
For the year 1938. Ohio sales $ 1,031,733.21 Sales outside Ohio 13,613,044.95 -------------- Total 14,644,778.16 Deducted by Board of Tax Appeals 4,597,719.31 -------------- $10,047,058.85
For the year 1939. Ohio sales $ 928,699.84 Sales outside Ohio 12,347,665.59 ------------- Total 13,276,365.43 Deducted by Board of Tax Appeals 4,540,183.66 ------------- $ 8,736,181.77
The respective deductions made by the Board of Tax Appeals represent the sum total of sales outside of Ohio which were filled from stocks of goods located outside Ohio.
The appellant held non-interest-bearing promissory notes for the amounts of the accounts receivable. Some of such notes matured within one year and the remainder in one year or longer from the dates of their inception. Appellant's claim as to the accounts receivable is two fold: First, that, except those growing out of sales within Ohio, they do not have an Ohio situs for purposes of taxation; and, second, that the amounts represented by notes which matured one year or more from the dates of their inception are not accounts receivable but are either investments or other intangible property.
We direct our attention first to the question whether the accounts receivable, arising from sales outside Ohio and filled from a stock of goods in Ohio, have an Ohio situs for purpose of taxation.
Section 5498, General Code, provides in part as follows:
" * * * In determining the amount or value of intangible property, including capital investments, owned or used in this state by either a domestic or foreign corporation the commission [commissioner] shall be guided by the provisions of Sections 5328-1 and 5328-2 of the General Code * * *."
Appellant lays great stress upon Section 5328-2, General Code, and the reciprocal provision thereof.
Sections 5328-1 and 5328-2, General Code, are in pari materia and must be construed together.
Section 5328-1, General Code, insofar as applicable here, provides:
" * * * 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 by, for or on behalf of a non-resident person * * * shall be subject to taxation * * *."
It should be emphasized that that section provides for taxation of property of a non-resident (foreign corporation). Accounts receivable used in and arising out of business transacted in Ohio on behalf of a foreign corporation are subject to taxation in this state.
Section 5328-2, General Code, in part provides:
"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.* * *" (Emphasis supplied.)
Applying that section to the facts in the instant case, it means that accounts receivable belonging to a Maryland corporation, when resulting from sales of property by an agent having an office in Ohio or from a stock of goods maintained in Ohio, shall be considered to arise out of business transacted in Ohio.
Section 5325-1, General Code, defines the term used in business, as used in both Sections 5328-1 and 5328-2, General Code, as follows:
"Within the meaning of the term 'used in business,' occurring in this title, personal property shall be considered to be 'used' when employed or utilized in connection with ordinary or special operations, when acquired or held as means or instruments for carrying on the business, when kept and maintained as a part of a plant capable of operation, whether actually in operation or not, or when stored or kept on hand as material, parts, products or merchandise; but merchandise or agricultural products belonging to a non-resident of this state shall not be considered to be used in business in this state if held in a storage warehouse therein for storage only. Moneys, deposits, investments, 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. 'Business' includes all enterprises of whatsoever character conducted for gain, profit or income and extends to personal service occupations." (Emphasis supplied.)
There can be no dispute that in the instant case the avails of the accounts receivable were being applied or were intended to be applied in the conduct of appellant's business.
The Board of Tax Appeals found that the amount of the accounts receivable which should be included in the base for computing the tax was the sum total of the amount of Ohio sales plus the amount of outside Ohio sales where the goods were shipped from a stock of goods maintained in Ohio.
Its decision upon this branch of the cases may be summarized as follows:
Accounts receivable which resulted from sales made by agents outside Ohio, where the product was delivered from a stock of goods maintained outside Ohio (for convenience called consignment sales), did not have an Ohio situs for purposes of taxation. Accounts receivable resulting from sales made within Ohio and sales made outside of Ohio, where the product was delivered from a stock of goods maintained in Ohio (for convenience called shipment sales) and the avails thereof were used or intended to be used in the business, did have an Ohio situs for purposes of taxation.
That brings us to a consideration of the claim that the amounts represented by notes maturing one year or more from the date of their inception were not "accounts receivable," but were either investments or other intangible property.
The record discloses that, for the four years in question, the appellant held non-interest-bearing notes, which matured in one year or more from the date of their inception, in the sum of $17,714,233.07.
These notes, appellant claims, should not be included in the base for computation.
Where one sells property in the ordinary course of business, other than for cash, the amount of the purcase price due the seller is an "account receivable" and this is true even though such amount is evidenced by one or a series of notes. Such note or notes are merely written evidence of the debt, which fix the time or times and the amount or amounts of payment.
The notes here involved do not come within the term investment as defined by Section 5323, General Code, which reads in part:
" * * * Interest bearing obligations for the payment of money, such as bonds, certificates of indebtedness, debentures and notes." (Emphasis supplied.)
Clearly under that section, to be classified as an investment, the obligation must bear interest; admittedly these notes did not.
The conclusion reached by the Board of Tax Appeals upon the question of the accounts receivable is both reasonable and lawful.
The appellant cites and to some extent relies upon the cases of Ransom Randolph Co. v. Evatt, Tax Commr., 142 Ohio St. 398, 52 N.E.2d 738, and Haverfield Co. v. Evatt, Tax Commr., 143 Ohio St. 58, 54 N.E.2d 149. In each of those cases the court was dealing with the liability of an Ohio corporation, under a state of facts dissimilar to the facts in the instant cases. The conclusions there reached are not inconsistent with our present conclusions.
The second error complained of by appellant is stated as follows:
"2. The Board of Tax Appeals erred in holding that certain deposits maintained by appellant in banks outside of the state of Ohio had a situs in Ohio for purposes of taxation."
The appellant did not include in its present returns balances in banks located outside of Ohio. The amounts of the deposits for the years in question in banks outside of Ohio were as follows:
Year Deposits outside Ohio 1936 $1,346,291.46 1937 1,030,618.04 1938 949,061.35 1939 1,769,365.55 -------------- Total $5,095,336.40
The Board of Tax Appeals disposed of this feature of the cases upon the basis of its decision in the proceedings of C. F. Kettering, Inc., v. Evatt, Tax Commr., Board of Tax Appeals Docket No. 5798. However, upon appeal this court reversed that part of the decision of the Board of Tax Appeals as it applied to bank deposits. C. F. Kettering, Inc., v. Evatt, Tax Commr., 144 Ohio St. 419, 425, 59 N.E.2d 370.
The undisputed evidence, in the instant cases, leads directly to the conclusion that these bank deposits represented general reserves or balances belonging to this Maryland corporation, maintained in several different banks outside of Ohio for the purpose of its entire business wherever transacted and, therefore, under the provisions of Section 5328-2, General. Code, must be considered as located in the state of Maryland and not subject to taxation in Ohio. Upon this branch of the cases the decision of the Board of Tax Appeals is unlawful and must be reversed.
Decision affirmed in part and reversed in part.
WEYGANDT, C.J., ZIMMERMAN, WILLIAMS, MATTHIAS and HART, JJ., concur.
TURNER, J., concurs in the judgment insofar as it affirms the decision but dissents from the judgment insofar as it reverses the decision.