Section 8 Transactions Occurring Before January 1, 1980, and Transactions After December 31, 1979, Not Involving Sales of Tangible Personal Property

LibraryTax Law 2009

Missouri’s single-factor formula has been construed by a number of cases decided over a 70-year period, and it cannot be understood or applied except in its historical context.

The earliest case to address the single-factor formula was Artophone Corp. v. Coale, 133 S.W.2d 343 (Mo. 1939). The taxpayer was in the business of distributing electrical appliances, which it purchased from an out-of-state manufacturer and resold to customers within and outside Missouri. Its only offices were in Missouri, and its business was managed and controlled by executives located in Missouri. It owned no real property, and all of its personal property was located in Missouri. It employed salesmen who traveled to other states to secure orders. These orders were approved in Missouri and were filled by shipment from the manufacturer. The taxpayer treated sales to customers outside Missouri as partly within and partly outside Missouri. But the state auditor, then charged with enforcement of the state income tax, ruled that a domestic corporation that had no branch office outside Missouri is taxable in Missouri on its entire net income without apportionment and, on that basis, assessed additional Missouri income tax against the taxpayer.

The Court agreed with the taxpayer. The Court observed that the statute taxes only net income from Missouri sources:

[The statute] taxes the net income of corporations “from all sources in this state,” which income is to include gains, etc., from the doing in this state of such portion of each transaction of the corporation’s business that is done partly in this state and partly in another state. It . . . provides for allocation . . . where income—obviously the taxable income which is the subject of that tax imposing section—results from “transactions” partly within and partly without this state . . . .

Id. at 348. The Court concluded that the right to apportion income depended on whether some portion of a series of logically connected occurrences constituting a transaction occurred outside Missouri, and it does not turn on either the existence of a branch office outside Missouri or the place where the sale was consummated:

If by “sale” the Legislature meant the ultimate act by which the contract or agreement between seller and buyer was consummated and that the situs of such act should make the corporation subject to taxation for the entire net income resulting from such sale, why the provision for allocation in the case of “sales” which are transactions partly within this state and partly without this state?

Id.

In F. Burkhart Mfg. Co. v. Coale, 139 S.W.2d 502 (Mo. 1940), the Supreme Court addressed the converse question: How much of a Missouri “connection” is required before a transaction can be treated as partly within Missouri? The taxpayer was a Missouri corporation headquartered in Missouri; it operated several factories outside Missouri that made sales to customers outside Missouri. Each plant operated autonomously; each was supervised by a plant manager, employed salesmen, and accepted and filled orders. The only Missouri connection to the income produced by the sales was that “the general business was directed by the executive officers of the company located in Missouri.” Id. at 503. The Court held that this Missouri connection was insufficient to cause sales by plants outside Missouri to customers outside Missouri to be classified as transactions partly within Missouri; rather, these transactions were wholly outside Missouri:

If there can be an event or occurrence described as a transaction partly done within this state and partly done without this state, then the legislature must have had in mind that there could be a transaction done wholly without this state. If not, the legislature employed a lot of useless phraseology in the act. It simply could have said that a domestic corporation shall be taxed on all income derived from transactions wholly in Missouri, and all other income derived from any other source shall be allocated.

Id. at 504.

In a case decided a few months after Burkhart, 139 S.W.2d 502, the Court refined the transactional analysis of the single-factor formula first articulated in Artophone, 133 S.W.2d 343, and established the basic rules, which are still applicable today. The taxpayer in In re Kansas City Star Co., 142 S.W.2d 1029 (Mo. banc 1940), was in the business of newspaper publishing and radio broadcasting; its income was derived principally from advertising and newspaper sales. The taxpayer’s business involved substantial activity outside Missouri in connection with:

  • gathering and writing news
  • soliciting and preparing advertising
  • soliciting subscribers; and
  • distributing papers

Its advertising rates depended on the volume, quality, and locale of circulation. Circulation depended on reader interest, which, in turn, depended on the news, information, and entertainment value of the newspapers and on prompt circulation. Id. at 1032. The taxpayer allocated to Missouri the proportion of its net income represented by the percentage of newspaper circulation in Missouri. The state auditor, stressing the fact that ultimate control and management, including supervision of news gathering, advertising, and circulation, rested in the taxpayer’s officers and department heads in Missouri, took the position that the taxpayer’s income resulted from the conduct of its business at its principal office in Missouri and was derived wholly from Missouri sources.

The Court overturned the assessment. Net income is apportioned on the basis of “transactions” partly done in the state and partly done in another state. The Court endorsed the Artophone, 133 S.W.2d 343, definition of transaction: “The word ‘transaction’ . . . is practically all inclusive, and signifies any business activity productive of income. ‘[I]t may comprehend a series of many occurrences, depending not so much upon the immediateness of their connection as upon their logical relationship.’” Kansas City Star, 142 S.W.2d at 1037. The Court found it hard to discern “any colorable basis” for the auditor’s position. Id. at 1038. “How could there be income without news to print, circulation built on that news coverage, advertising attracted by circulation, and finally distribution of the newspapers and collection of the subscriptions and advertising bills. All these and the labor and capital employed therein enter into the production of income . . . .” Id. (emphasis added). The Court formulated a general rule from this premise:

[T]he source of income is the place where it was earned or produced—if by labor, the place where the labor was performed; if by capital, the place where the capital was employed. From this it follows that unless labor or capital is utilized outside this state in business transactions, the income therefrom must be regarded as...

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