This case is before us on a petition for review by the Wisconsin Department of Revenue of a published decision of the court of appeals. 1 The Department of Revenue assessed a tax against Consolidated Freightways, an interstate motor carrier, using the formula provided in Wis. Admin. Code sec. Tax 2.47 to ascertain the amount of income Consolidated Freight-ways earned in Wisconsin. The Tax Appeals Commission upheld the tax assessment. The Dane County Cir *768 cuit Court upheld the tax assessment. The court of appeals reversed the circuit court. We reverse the court of appeals.
There are three issues in this case:' (1) as applied to Consolidated Freightways, does the formula violate sec. 71.07(2)(e), Stats., 1985-86, which limits the taxable income to income derived from business transacted within this state; (2) as applied to Consolidated Freight-ways, does the formula violate the Commerce Clause of the United States Constitution; and (3) as applied to Consolidated Freightways, does the formula violate the Due Process Clause of the United States Constitution?
We hold that the formula provided in Wis. Admin. Code sec. Tax 2.47 (1989), as applied to Consolidated Freightways, taxes only income "derived from business transacted . . . within the state," and does not violate sec. 71.07(2)(e), Stats., the Commerce Clause, or the Due Process Clause.
The. facts are not in dispute. Consolidated Freight-ways (Consolidated) is incorporated in Delaware with its main offices in California. Consolidated is a general commodity common motor carrier operating in interstate commerce typically hauling small shipments — less than truckload size. It consolidates numerous small loads into fewer large loads and transports the consolidated loads through a system of terminals and established routes. Consolidated owns 14,000 trailers and 2,400 tractors. It maintains 410 terminals nationwide with thirteen terminals in Wisconsin including one regional consolidation center.
In 1966, the Wisconsin Department of Revenue (Department) adopted Wis. Admin. Code sec. Tax 2.47 (Tax 2.47) 2 which provides a formula for apportioning *769 franchise taxes assessed against motor carriers doing business in Wisconsin. The two factor formula adds (a) the ratio of gross receipts from carriage of goods first acquired in Wisconsin — the "originating" or "outbound" revenues — to gross receipts from carriage of property everywhere, and (b) the ratio of ton miles of carriage in Wisconsin to ton miles of carriage everywhere, and then (c) divides the total by two to average the results. The final figure is the percentage of the company's income subject to the Wisconsin franchise tax.
During the years 1974 through 1977, Consolidated apportioned its Wisconsin income using a different formula than the two factor formula in Tax 2.47.
*770 In 1979, the Department audited Consolidated and assessed an additional franchise tax and interest against Consolidated for calendar years 1974 through 1977 in the amount of $115,002.98, of which $110,333.75 of tax plus interest remains in dispute. The Department used the formula provided in Tax 2.47 to arrive at the assessment.
Consolidated argues that the Tax 2.47 formula, as applied to Consolidated, taxes income earned by Consolidated outside of Wisconsin and therefore violates sec. 71.07(2)(e) Stats., 1985-86 3 which limits Wisconsin's taxing jurisdiction to "income derived from business transacted and property located within the state." Consolidated further argues that the Tax 2.47 formula, as applied, violates the Commerce Clause, 4 which limits a state's power to tax interstate commerce, and the fourteenth amendment. 5
*771 Specifically, Consolidated argues that the formula's first factor, the "originating revenue" factor, taxes income derived from Consolidated's activities in other states. Consolidated earns income through various activities: sales, transportation (pickup and delivery, terminal activity, consolidation center activity, line haul movement), and management. Consolidated argues that the "originating revenue" factor does not measure Wisconsin activity alone but rather activity in other states as well since income is earned by activities for the length of the journey, not just the activities taking place in the originating state.
The court of appeals held that the Tax 2.47 formula, as applied to Consolidated, violated sec. 71.07(2)(e), Stats., as it taxed "extraterritorial income" and therefore did not reach the Commerce Clause issue raised by Consolidated.
Consolidated,
We conclude the formula, as applied to Consolidated, must be scrutinized under sec. 71.07(2)(e) Stats., the Commerce Clause, and the Due Process Clause. We hold the formula, as applied to Consolidated, does not violate the statute nor the Commerce or Due Process Clauses.
Whether the Tax 2.47 formula, as applied to Consolidated, violates sec. 71.07(2)(e), Stats., the Commerce Clause, or the Due Process Clause, are questions of law. On review, this court decides questions of law independently without deference to the decisions of the trial court and court of appeals.
Ball v. District No. 4 Area Bd.,
Referring to
Moorman Mfg. Co. v. Bair,
We disagree. The Commerce Clause is necessarily relevant to sec. 71.07(2)(e), Stats., analysis since the Commerce Clause imposes limits upon Wisconsin's tax jurisdiction over "business transacted" within this state by interstate motor carriers.
*773
This court has traditionally looked to the Commerce Clause to ascertain the limits upon Wisconsin's tax jurisdiction over interstate businesses. In
United States Glue Co. v. Oak Creek,
The
U.S. Glue
case first decided the "statutory" question; namely, what portion of the glue company's total net business income is income ” 'derived from business transacted and property located within this state,' and [is] subject to the tax upon incomes?"
U.S. Glue,
*774 We are of the opinion that this provision of the statute includes all of plaintiffs net "business income" derived from the manufacture, sale, and delivery of such of its products as were manufactured at, sold, and delivered from the factory to customers in Wisconsin and other states . . ..
U.S. Glue,
The court then considered whether the taxation of income derived from those activities violated the Commerce Clause by taxing interstate commerce and held that it did not.
The
U.S. Glue
case recognized that the jurisdictional limitations under the Commerce Clause are relevant to the tax statute. Such relevance was again recognized in
Standard Oil Co. v. Wisconsin Tax Comm.,
In prescribing these methods of allocating income of persons doing business within and without this state, it is apparent that it was the legislative intent that the method prescribed should be so applied as to subject the income earned within the state to taxation and no more, the legislature quite evidently having in mind that it had no jurisdiction to tax income earned in other states. U.S. Glue Co. v. Oak Creek,161 Wis. 211 ,153 N.W. 241 [1915].
*775
Standard Oil,
In
Moore Motor Freight Lines v. Dept. of Taxation,
The Department of Taxation applied an apportionment formula to ascertain the amount of income earned by Moore Freight Lines in Wisconsin. The court inquired: (1) whether Moore Freight Line's operations fell under ch. 71, Stats., (2) whether the imposition of the net tax violated the Commerce Clause, and (3) whether the imposition of the net tax violated the Due Process Clause of the Fourteenth Amendment.
Moore,
The court determined that a business transporting goods to, from, and through Wisconsin earns income
*776
"derived from business transacted and property located within this state," and thus Moore Freight Line's activities were subject to taxation under ch. 71, Stats. The court then held that the imposition of the tax upon such income did not violate the Commerce Clause or the Due Process Clause.
Moore,
In
W.R. Arthur & Co. v. Department of Taxation,
We share the view expressed by the United States supreme court in Butler Brothers v. McColgan (1942),315 U.S. 501 , 507, 62 Sup. Ct. 701,86 L. Ed. 991 : "One who attacks a formula of apportionment carries a distinct burden of showing by 'clear and cogent evidence' that it results in extraterritorial values being taxed."
Arthur,
From the above cases it is clear that several steps are involved when analyzing interstate motor carrier tax cases. The first question is: were the operations of the interstate motor carrier such as to subject it to taxation under sec. 71.07(2)(e), Stats.? That is answered by inquiring whether the interstate motor carrier is being taxed on its income for transacting business within this state. If so, the statute applies and the question becomes: *777 does Wisconsin's tax upon such income violate either the Commerce or Due Process Clauses?
The statute applies. The income taxed by the Tax 2.47 formula is income "derived from" Consolidated's business transactions within Wisconsin and thus is subject to taxation under sec. 71.07(2) (e) Stats. Consolidated's activities in Wisconsin consist of transporting goods to, from, and through Wisconsin's thirteen terminals and the management and consolidation activities engaged in at the terminals. These activities produce income for Consolidated which is derived from its business transactions in this state.
In
Moore,
The tax assessment upon Consolidated's Wisconsin income does not violate the limits of the Commerce Clause. In
Moore,
*778 Under recent Commerce Clause cases, a state tax does not offend the Commerce Clause if the tax:
(1) is applied to an activity with a substantial nexus with the taxing state,
(2) is fairly apportioned,
(3) does not discriminate against interstate commerce, and
(4) is fairly related to services provided by the state.
Commonwealth Edison Co. v. Montana,
First, both parties agree that there is a sufficient nexus between Consolidated's activities and Wisconsin to meet the nexus factor.
*779 Second, the tax assessment against Consolidated is fairly apportioned. In Arthur, this court held that the formula used by the Department to apportion the Arthur Company's income to Wisconsin did not violate either Wis. Admin. Code sec. Tax 2.45, requiring that the department's formula "reasonably apportion to Wisconsin the business income properly assignable to Wisconsin," or sec. 71.07 Stats.
Though Arthur interpreted both sec. 71.07 Stats, and a Wisconsin Administrative Code section, it is nevertheless instructive as to whether the taxes assessed against Consolidated using the two factor Tax 2.47 formula, are "fairly apportioned" under the Commerce Clause.
W.R. Arthur was an interstate trucking company, organized under Illinois law with its corporate offices in Janesville, Wisconsin. Its principle activity was the delivery of automobiles manufactured in Wisconsin to automobile dealers in eleven states, including Wisconsin. W.R. Arthur challenged the Department's formula, which consisted of the same two factors present in this case, originating revenue and revenue miles, plus a third factor, payroll. As in this case, the only factor challenged was the originating revenue factor.
In Arthur, because all of the company's shipments were outbound, that is, all of its income was earned on loads "originating" in Wisconsin, the originating revenue factor equaled the company's gross receipts. This court held:
If used as a single factor, gross receipts [the "originating revenue factor"] would result in all of the taxpayer's income being taxed here, and this would obviously constitute an unfair tax. However, when it is used in conjunction with the two other factors, it *780 cannot be said to be arbitrary or to result in an unfair apportionment of the income of the respondent under sec. 71.07(5), Stats.
Arthur,
The burden of proof is not on the Department to show that the formula is fair. Rather, as adopted in
Arthur,
States have wide latitude in the selection of apportionment formulas and that a formula-produced assessment will only be disturbed when the taxpayer has proved by "clear and cogent evidence" that the income attributed to the State is in fact "out of all appropriate proportions to the business transacted ... in that State," or has "led to a grossly distorted result."
Moorman,
In the present case, the parties make a comparison between the percentage of Consolidated's income apportioned to Wisconsin by the Department using Tax 2.47 and by Consolidated using its own formula. 9
1974 1975 1976 1977
Consolidated's formula: 2.3215% 2.2179% 2.2757% 2.1626%
Tax 2.47 formula: 3.2730% 3.2149% 3.1860% 3.2433%
*781 The parties agree the Tax 2.47 formula taxes approximately an additional 1.1 percent of Consolidated's income averaged for the years 1974 through 1977.
A 1.1 percent variance during a select time span does not "clearly and cogently" show that the apportionment under Tax 2.47 was "out of all proportions" to business transacted within this state nor that it has led to a "grossly distorted" result. We agree with the observations and reasoning in
Moorman,
Third, the Tax 2.47 formula is not discriminatory. Consolidated argues that the Tax 2.47 formula has the effect of taxing non-Wisconsin transportation companies more heavily than Wisconsin companies. Consolidated asserts that the outbound revenues factor causes the apportionment distortion to steadily increase the longer the haul and the more activity the company has in other states. Consolidated argues that since Wisconsin companies generally have shorter hauls than non-Wisconsin companies, the non-Wisconsin companies, like Consolidated, are effectively taxed at a higher rate.
*782 Consolidated relies on general language in several federal cases finding state taxes discriminatory, to support its claim that the Tax 2.47 formula is discriminatory. Unlike the present case, however, these cases considered taxes which encompasses specific exemption, tax credits, or other provisions which treat in-state and out-of-state businesses differently.
Consolidated quotes
Boston Stock Exchange v. State Tax Comm'n.,
There has been no prior occasion expressly to address the question whether a State may tax in a manner that discriminates between two types of interstate transaction in order to favor local commercial interests over out-of-state businesses, but the clear import of our Commerce Clause cases is that such discrimination is constitutionally impermissible.
In
Boston,
the Supreme Court held that an amendment to a New York tax statute violated the Commerce Clause. The statute imposed a transfer tax on securities transactions. The tax rate was based solely on the price of the securities and the total tax was determined by the number of shares sold. The amendment first provided that transactions by non-residents are afforded a 50 percent reduction in the rate of tax when the transaction involves an in-state sale. Second, the amendment limited the total tax liability of any taxpayer (resident or nonresident) to $350.00 (maximum tax) for a single transaction when it involves a New York sale. The Supreme Court held, " [b]ecause it imposes a greater tax liability on out-of-state sales than on in-state sales, the New York transfer tax, as amended by § 270-a, falls short of the. substantially even-handed treatment demanded by the Commerce Clause."
Boston,
Consolidated quotes
Maryland v. Louisiana,
*783 It may be true that further hearings would be required to provide a precise determination of the extent of the discriinination in this case, but this is an insufficient reason for not now declaring the Tax unconstitutional and eliminating the discrimination. We need not know how unequal the Tax is before concluding that it unconstitutionally discriminates.
In
Maryland,
the Supreme Court held that a Louisiana Act aimed at taxing the "first use" of any natural gas imported from the federally owned outer continental shelf violated the Commerce Clause. The Court held that the tax "unquestionably discriminates against interstate commerce in favor of local interests as a result of various tax credits and exclusions."
Maryland,
Consolidated quotes
Armco Inc. v. Hardesty,
In the present case, the circuit court relied on
Commonwealth Edison
in finding the Tax 2.47 formula non
*784
discriminatory. In
Commonwealth Edison,
the Supreme Court upheld Montana's severance tax on coal mined in Montana finding the tax to be non-discriminatory. Consolidated, however, asserts that
Commonwealth Edison
was "rejected" in a subsequent motor carrier case,
American Trucking Assns., Inc. v. Scheiner,
In
American Trucking,
the Supreme Court held that Pennsylvania's "marker" tax and "axle" tax statutes, which imposed lump-sum annual taxes on the operation of motor carriers, violated the Commerce Clause. Pennsylvania required an identification marker to be affixed to every motor carrier. Until 1980, the "marker" tax was $2.00 per vehicle. In 1980, the "marker" tax was raised to $25.00. Vehicles registered in Pennsylvania were.effectively exempted from this increase since the statute specifically provided that for each vehicle registered in Pennsylvania, the "marker fee shall be deemed a part of and included in the vehicle registration fee."
American Trucking,
In 1982, Pennsylvania imposed an "axle" tax requiring an annual fee of $36.00 per axle. Again, Pennsylvania effectively exempted vehicles registered in Pennsylvania since the statute also reduced the registration fees for those vehicles registered in Pennsylvania subject to the axle tax.
The Supreme Court in
American Trucking
distinguished Pennsylvania's flat taxes from Montana's coal severance tax in
Commonwealth Edison.
The coal severance tax was levied at varying rates depending on the value, energy content, and method of extraction of the coal.
Commonwealth Edison,
The flat taxes in this case are distinguishable [from Montana's severance tax] in two ways. First, the amount of Pennsylvania's marker and axle taxes owed by a trucker does not vary directly with miles traveled or with some other proxy for value obtained from the state . . .. Second, unlike the Montana coal tax, highway use taxes can be imposed by other states.
American Trucking,
American Trucking's first reason for distinguishing American Trucking's flat "marker" and "axle" taxes from the Commonwealth Edison coal severance tax is precisely the same reason American Trucking's flat taxes are distinguishable from Wisconsin's tax formula. Wisconsin's formula does vary with miles travelled and with "some other proxy for value obtained" from Wisconsin. The first factor of Wisconsin's formula, the originating revenues factor, is the "proxy" for value obtained by Consolidated in Wisconsin. The second factor, the ton miles ratio, is a function of miles travelled.
Therefore, since the Tax 2.47 formula is distinguishable from
American Trucking
for the same reason that the tax challenged in
Commonwealth Edison
was, we are persuaded that the holding and rationale of
Commonwealth Edison,
and not
American Trucking,
applies to the present case. The formula is not facially discriminatory between in-state and out-of-state carriers. In addition, the formula is unlike the flat taxes in
American Trucking
which effectively exempted vehicles registered in-state. The Tax 2.47 formula is apportioned by averag
*786
ing the ratios of originating miles and ton miles, not according to distinctions between in-state and out-of-state businesses. Unlike the taxes in the cases relied upon by Consolidated, the Tax 2.47 formula contains no exemptions, credits, or provisions that treat in-state carriers differently than out-of-state carriers. The distinction between intrastate and interstate business is the issue. As found in
Commonwealth Edison,
The essence of Complete Auto Transit's fourth element, that the tax be fairly related to services provided by the state, was explained in Commonwealth Edison:
The relevant inquiry under the fourth prong of the Complete Auto Transit test is not, as appellants suggest, the amount of the tax or the value of the benefits allegedly bestowed as measured by the costs the State incurs on account of the taxpayer's activities . . .. [T]he fourth prong of the Complete Auto Transit test imposes the additional limitation that the measure of the tax must be reasonably related to the extent of the contact, since it is the activities or presence of the taxpayer in the State that may properly be made to bear a "just share of state tax burden."
Commonwealth Edison,
In the present case, the tax formula is "reasonably related" to Consolidated's "contact" within Wisconsin. The income earned by Consolidated through its transportation of goods to, from, and through Wisconsin, and through its thirteen terminals in Wisconsin, reasonably *787 and fairly relates to Wisconsin for taxation purposes under the Commerce Clause.
Because we hold that the Commerce Clause is not violated, we also hold the Due Process Clause
10
is not violated. In
Trinova Corp. v. Michigan Dept. of Treasury,
— U.S. —,
The Complete Auto test, while responsive to Commerce Clause dictates, encompasses as well the Due Process requirement that there be "a 'minimal connection' between the interstate activities and that taxing State, and a rational relationship between the income attributed to the State and the intrastate values of the enterprise."
Trinova,
— U.S. —,
By the Court. — The decision of the court of appeals is reversed.
Notes
Consolidated Freightways Corp. v. DOR,
Tax 2.47 Apportionment of net business income of interstate motor carriers of property.
*769 (s. 71.07(2)(e), Stats.) The apportionable income of an interstate motor carrier of property, doing business in Wisconsin, shall be apportioned to Wisconsin, on the basis of the arithmetical average of the following 2 ratios:
(a) The ratio of the gross receipts from carriage of property first acquired for carriage in Wisconsin to the total gross receipts from carriage of property everywhere;
(b) The ratio of ton miles of carriage in Wisconsin to ton miles of carriage everywhere.
(2) Whenever gross receipts' data is not available, the department may authorize or direct substitution of a similar factor (e.g. gross tonnage) and whenever ton mile data is not available the department may similarly authorize substitution of a similar factor (e.g. revenue miles).
(3) For purposes of this regulation a "ton mile” reflects the movement of one ton of freight for the distance of one mile.
(4) This regulation shall not apply to mercantile or manufacturing businesses which engage in some interstate hauling as an incident of such mercantile or manufacturing businesses.
(5) This regulation shall apply with respect to the determination of income tax or franchise tax liability for any income year open to assessment or refund on the effective date hereof.
Section 71.07 Situs of income; allocation and apportionment.
(2)(e) The net business income of financial organizations; and public utilities requiring apportionment shall be apportioned pursuant to rules of the department of revenue, but the income taxed is limited to the income derived from business transacted and property located within the state.
Chapter 71, after substantial revision by 1987 Act 27, was repealed and recreated by 1987 Act 312, sec. 2, effective January 1, 1989. Section 71.07(2)(e) was renumbered 71.04(8)(c) and 71.25(10) (c).
United States Constitution, Article I, sec. 8: The Congress shall have power ... To regulate commerce . . . among the several states. . ..
Though Consolidated states that the formula as applied violates the fourteenth amendment, Consolidated does not specify how it is violated. In their brief, under the section claiming a fourteenth amendment violation, Consolidated discusses the four element test of
Complete Auto Transit, Inc. v. Brady,
The United States Supreme Court stated:
It is settled that a State may not directly burden interstate commerce, either by taxation or otherwise. But a tax that only indirectly affects the profits or returns from such commerce is not within the rule.
U.S. Glue,
Section 71.01 Imposition of tax; exempt income.
(1) Normal Tax. For the purpose of raising revenue for the state and the counties, cities, villages and towns, there shall be assessed, levied, collected and paid a tax on all net incomes as hereinafter provided, by every person residing within the state or by his personal representative in case of death; and by every nonresident of this state, upon such income as is derived from property located or business transacted within the state . . . except as hereinafter exempted.
Section 71.07 Situs of income; allocation and apportionment.
(2) Persons engaged in business within and without the state shall be taxed only on such income as is derived from business transacted and property located within the state.
(5) If the income of any such person properly assignable to the state of Wisconsin cannot be ascertained with reasonable certainty by either of the foregoing methods, then the same shall be apportioned and allocated under such rules and regulations as the department of taxation may prescribe.
Moore,
Consolidated admitted, and the Tax Appeals Commission found, that Consolidated "has no means to allocate costs or revenues, in the nature of a separate accounting, to activity in Wisconsin."
United States Constitution, Article XIV, sec. 1: No state shall . . . deprive any person of life, liberty, or property, without due process of law . . ..