Opinion
No. 37567
Decided March 6, 1963.
Taxation — Financial institutions — Dealer-in-intangibles tax — Section 5725.13 et seq., Revised Code — Allocation of capital between states permitted, when — "Seperate business offices" not maintained within and without Ohio, when — Tax imposed on all capital of corporate dealer — Constitutional provisions not violated.
1. A corporate dealer in intangibles is not entitled to allocate its capital between Ohio and other states for the purpose of the dealer-in-intangibles tax imposed under Section 5725.13 et seq., Revised Code, unless it maintains separate business offices within and without the state.
2. A corporate dealer in intangibles who finances out-of-state franchise dealers of refrigeration equipment manufactured out of state, by discounting their commercial paper or by a "floor-plan financing" arrangement, which business is transacted in this state in the only office which such dealer maintains, does not thereby have or maintain "separate business offices" within and without Ohio as required by Sections 5725.14 and 5725.15, Revised Code, for the allocation of capital employed within and without this state.
3. A corporate dealer in intangibles who is found not to maintain separate business offices within and without the state and therefore subject to the tax imposed by Section 5725.13 et seq., Revised Code, on all of its capital is not thereby deprived of its property without due process or the equal protection of law, nor is such a tax an unreasonable burden on interstate commerce within the purview of the Constitution of the United States.
APPEAL from the Board of Tax Appeals.
On December 31, 1957, the appellant here, an Ohio corporation, was engaged principally in the business of financing refrigeration equipment manufactured by Uniflow Manufacturing Company of Erie, Pennsylvania. The financing was predominately of sales of such refrigeration equipment to tavern owners by franchised dealers of Uniflow. This type of financing accounted for approximately 75 per cent of appellant's business. The remaining 25 per cent of its business consisted of financing the inventories of such refrigeration equipment for the same franchised Uniflow dealers.
The eight franchised Uniflow dealers were located in Columbus, Ohio; Chicago, Illinois; St. Louis, Missouri; Harrisburg, Pennsylvania; Indianapolis, Indiana; and Covington, Kentucky.
Appellant was a party to an agreement with each of the Uniflow franchised dealers, which in pertinent part provided:
(1) The dealer would submit to appellant for acceptance at Akron, Ohio, all conditional sales contracts, leases and notes, representing the balance due upon sales and leases made in the state of the dealer's domicile and covering Uniflow products, together with a current credit report on each purchaser or lessee of such equipment who would be designated as buyer upon "said paper which is being submitted to Akron for discount". The dealer also would submit to appellant its regular quarterly profit and loss statement and its balance sheet.
(2) Appellant would make "floor-plan finanacing" loans upon refrigeration equipment up to specified amounts ($5,000 to $10,000 approximately). The equipment so floor planned was to be listed in a chattel mortgage to appellant from the dealer. Upon receipt in Akron of the mortgage and note appellant would make the loan.
(3) The dealer agreed to collect payments on account from purchasers of Uniflow equipment and to deposit same to the appellant's account. Should the dealer find it necessary to repossess the equipment, it was to notify appellant of the fact and at that time pay off the balance remaining due upon the account or contract.
The refrigeration equipment was shipped direct to the dealer. All invoices for equipment financed under the "floor-plan financing" were paid in Akron. Appellant maintained no sales force to sell equipment nor did it ever receive any of the refrigeration equipment. Although the evidence is not clear whether the dealer contracts were entered into at Akron or in the various cities where the dealers were located, the commercial paper involved was discounted at Akron. All commercial paper discounted was with recourse to the franchised dealer.
In its dealer-in-intangibles return for 1958, appellant listed the book value of its total shares or invested capital at $270,236.64 but allocated only 6.8 per cent of this amount, or $18,376.09, for taxation by Ohio. The Tax Commissioner, upon audit of the return, determined that all of appellant's capital, or $270,236.64, was taxable by Ohio because "all of applicant's [appellant's] business originated and took place at its main and only office located in Akron, Ohio."
The appellant appealed to the Board of Tax Appeals, which found that the proof as to the business dealings that appellant carried on with the out-of-state franchised dealers at out-of-state locations and the relationship between the appellant and such dealers was no proof that appellant maintained "separate business offices" at the business locations of the out-of-state dealers, and therefore affirmed the Tax Commissioner's assessment.
Messrs. Jacobs, Koplow, Vance Paller and Messrs. Jappe Neuger, for appellant.
Mr. Mark McElroy, attorney general, and Mr. John J. Lokos, for appellee.
It being conceded that appellant on December 31, 1957, was a dealer in intangibles as defined in Section 5725.01 (B), Revised Code, and therefore must pay the tax imposed by Section 5725.13 et seq., Revised Code, the first issue for determination here is whether the provisions of the law with respect to the allocation of Ohio and out-of-Ohio capital are applicable.
The statutory provisions for the allocation of Ohio and out-of-Ohio capital for the purpose of the dealer-in-intangibles tax are found in Sections 5725.15 and 5725.14, Revised Code, which read in pertinent part:
Section 5725.15. "* * * If a dealer has separate offices, whether within this state only or within and without this state, the [tax] commissioner shall find the amount of capital employed in each office in this state, which shall bear the same ratio to the entire capital of such dealer, wherever employed, as the gross receipts of such office bears to the entire gross receipts of such dealer, wherever arising. * * *" (Emphasis supplied.)
Section 5725.14. "* * * If a dealer in intangibles maintains separate business offices, whether within this state only or within and without this state, said report [tax return] shall also show the gross receipts from business done at each such office during the year ending on the thirty-first day of December next preceding.
"* * *
"As used in this section and Section 5725.15 of the Revised Code business is considered done at an office when it originates at such office, but the receipts from business originating at one office and consummated at another office shall be divided equitably between such offices." (Emphasis supplied.)
Although the word "business" was not consistently used in these statutory provisions, it is clear that the General Assembly meant only that the separate offices maintained by a dealer must be business offices. See Stephens, Trustee, v. Glander, Tax Commr. (1949), 151 Ohio St. 62. It is to the real issue of whether the appellant maintained separate business offices within and without this state that we now turn our attention.
There is no dispute as to the basic facts regarding the relationship of the appellant to the eight franchised dealers of refrigeration equipment manufactured by Uniflow Manufacturing Company of Erie, Pennsylvania. The dispute arises over the legal significance of the assignments and guarantees of such franchise dealers to the appellant and of the agreements between the franchise dealers and the appellant.
Appellant contends that the effect of these agreements was to make each franchise dealer its agent and thus to establish constructively eight separate business offices even though not in its own name. The facts, however, show the fallacy of appellant's contention. The dealers here involved were sellers of refrigeration equipment not financing agents, the paper here involved was taken in the name of the dealer not appellant and was assigned by the dealer to the appellant with recourse to the dealer. The business of the dealer was the selling of refrigeration equipment not the procurement of loans for appellant. As an incident to the refrigeration business the dealer acquired certain paper which appellant discounted; in other words, appellant financed the sales, taking an assignment of the security title. Such conduct certainly did not create an agency relationship between the appellant and the dealers. The mere fact that a finance company has an agreement with a dealer that it will discount the dealer's paper does not constitute the dealer the agent of the finance company. It also should be noted that appellant conceded in oral argument that if in an action on one of the conditional sales contracts against an ultimate purchaser the purchaser would raise a defense based upon conduct of the franchise dealer, the appellant would deny that the franchise dealer was its agent but would claim the status of a holder in due course. Just as a bank does not establish branch offices at each used-car dealer's premises because it discounts the commercial paper of such automobile dealer, so appellant did not establish separate business offices by virtue of the fact that it financed by discounting commercial paper or by "floor plans" the sales and purchases of refrigeration equipment by the franchised dealers of Uniflow.
Appellant contends that the state of Ohio by this statutory scheme has levied a tax on assets located out of the state and thus imposes an unjust burden upon interstate commerce and takes its property without due process of law in contravention of pertinent provisions of the Constitution of the United States. In this connection, the evidence shows that the assets of appellant were the paper it held, not the property to which it held security title. Appellant's business was the making of loans, this was done in Ohio, that was where the capital was employed, and even though such loans were secured by property located in a foreign state this did not constitute the employment of capital in the foreign state.
In Certified Credit Corp. v. Bowers, Tax Commr., 174 Ohio St. 239, decided today, we had the situation where a dealer, who had separate business offices physically located in other states, was protesting the tax assessed, on the basis that the very allocation formula, which the appellant argues should be applied here, was unconstitutional on these same grounds. Since the sustaining of the allocation formula in that case necessarily holds that the maintenance of separate business offices is lawful, we find no merit in these constitutional arguments by appellant in this case.
Appellant argues also that the statutory construction which requires that a dealer in intangibles must maintain an office located physically in another state before the allocation of Ohio and out-of-Ohio capital formula is applicable deprives it of the equal protection of the laws as guaranteed by the Constitution of the United States. Appellant states that there are no general rules applicable in determining when a state statute transcends the boundaries of the equal protection clause, but cites Ohio Oil Co. v. Conway, Supervisor (1930), 281 U.S. 146, as authority for the proposition that with all the freedom of action enjoyed by the states in the exercise of their taxing power there is a point beyond which they can not go without violating the equal protection clause. Appellant then says, without analysis, that in assessing all of its capital as being employed in this state, the Tax Commissioner has gone beyond that point.
Mr. Chief Justice Hughes speaking for the court in Ohio Oil Co. v. Conway, supra, at page 159, made the following revelant comments:
"* * * The states have a wide discretion in the imposition of taxes. * * * The states, in the exercise of their taxing power, as with respect to the exertion of other powers, are subject to the requirements of the due process and the equal protection clauses of the Fourteenth Amendment, but that amendment imposes no iron rule of equality, prohibiting the flexibility and variety that are appropriate to schemes of taxation. * * * In levying such taxes, the state is not required to resort to close distinctions or to maintain a precise, scientific uniformity with reference to composition, use or value. * * *"
Mr. Chief Justice Hughes, at page 160, also said:
"With all this freedom of action, there is a point beyond which the state can not go without violating the equal protection clause. The state may classify broadly the subjects of taxation, but in doing so it must proceed upon a rational basis. The state is not at liberty to resort to a classification that is palpably arbitrary. The rule is generally stated to be that the classification `must rest upon some ground of difference having a fair and substantial relation to the object of the legislation, so that all persons similarly circumstanced shall be treated alike.' Royster Guano Co. v. Virginia, 253 U.S. 412, 415; Louisville Gas Co. v. Coleman, 277 U.S. 32, 37; Air-Way Corp. v. Day, 266 U.S. 71, 85; Schlesinger v. Wisconsin, 270 U.S. 230, 240."
Although the General Assembly might have used some basis other than the maintenance of separate business offices for determining whether the capital of a dealer in intangibles is employed in this state, we believe that the standard used has a fair and substantial relation to the object of the legislation and treats all persons similarly circumstanced alike.
From an examination of the entire record, we are unable to find that the decision of the Board of Tax Appeals is unreasonable or unlawful.
Decision affirmed.
TAFT, C.J., ZIMMERMAN, MATTHIAS, O'NEILL, GRIFFITH and HERBERT, JJ., concur.