Link to Mo. Sup. Ct. Opinion
The Supreme Court of Missouri held that an auto dealership was not entitled to corporate income tax apportionment on income from vehicles purchased by out-of-state buyers. Before apportionment of a corporation’s income is allowed, the corporation must first have income produced outside of Missouri. When a buyer purchases and takes delivery of an auto in Missouri, the sale is deemed to have occurred wholly within Missouri, even if the buyer lists an out-of-state address in the dealership’s records. The court affirmed the tax assessment of the Director of Revenue and the Administrative Hearing Commission.
Jay Wolfe Imports Missouri, Inc. (“Jay Wolfe”) is an auto dealership in Kansas City, Missouri.[1] Most of the dealership’s customers come from Missouri or Kansas, and buyers take possession of purchased autos at the dealership when sales are completed.[2] For tax years 2002-04, when a buyer had an out-of-state address, Jay Wolfe treated the sale as partly within Missouri and partly in another state for corporate income tax purposes, which reduced the dealership’s tax liability.[3] The Director of Revenue conducted a tax audit and determined that all of Jay Wolfe’s sales should have been classified as occurring solely within Missouri.[4] The Missouri Administrative Hearing Commission (the “Commission”) upheld the Director of Revenue’s decision, finding that apportionment is intended for corporations that do business in more than one state and that Jay Wolfe paid no income tax in any state other than Missouri.[5] The Commission also stated that, under Missouri’s “source of income” test, Jay Wolfe was not entitled to apportionment because all of its income was derived from activities in Missouri.[6]
On appeal to the Supreme Court of Missouri, Jay Wolfe first argued that the Commission wrongly applied the source of income test as a threshold requirement in determining whether the dealership was eligible for apportionment.[7] The court noted that under Missouri law[8] all income derived from sources in Missouri is subject to state corporate income tax.[9] The court then held that the Commission did not err in requiring Jay Wolfe to meet the source of income test.[10]
Next, Jay Wolfe argued it was entitled to apportion its taxable income because its sales to out-of-state customers met the statutory definition of sales that occur “partly within [Missouri] and partly without [Missouri.]”[11] The Supreme Court of Missouri rejected Jay Wolfe’s argument and affirmed the determinations of the Director of Revenue and the Commission.[12]
II. Legal Background
A. Source of Income Test as Threshold Determination
Corporations in Missouri must pay state income tax on “all income derived from sources within [Missouri.]”[13] According to section 143.451.2 of the Missouri Revised Statutes, if a corporation has income from sales transactions occurring partly in Missouri and partly in another state, the taxable income from those sales may be apportioned.[14] However, Missouri courts have recognized under the “source of income” test that before a corporation can apportion its taxable income under the statute it must have income from a source outside of Missouri.[15] This test is used as a threshold requirement for corporations to meet.[16] In its briefs, Jay Wolfe argued that section 143.451.2(3) of the Missouri Revised Statutes[17] and its predecessor abrogated this test, making cases applying the source of income test as a threshold requirement inapplicable.[18]
In its response brief, the Director of Revenue argued that the concept of a source of income requirement was found throughout Missouri’s corporate taxation scheme.[19] The Director noted that apportionment is intended to ensure that Missouri does not wrongly tax income that should instead be taxed by another state and that Jay Wolfe did not file corporate income tax in any other state.[20]
The Supreme Court of Missouri rejected Jay Wolfe’s argument.[21] Because the language of section 143.451.1 states that only income from sources within Missouri is taxable[22], income derived from sources outside Missouri is not taxable.[23] The court stated that a corporation must show that it had income from outside Missouri before it may apportion its income[24] and that the source of income test was properly applied as a threshold determination.[25]
B. Apportionment Based on Sales Partly Out of Missouri
Section 143.451.2(3)(b) of the Revised Statutes of Missouri defines an apportionable sale of tangible property that is “partly within… and partly without” as one in which the seller’s shipping point is in Missouri and the purchaser’s destination point is outside of Missouri or vice versa.[26] Jay Wolfe claimed that because its out-of-state customers picked up their vehicles at the Missouri dealership (shipping point) and drove them to their out-of-state addresses (destination point) it satisfied the statute’s requirements and could apportion its taxable income.[27]
The Supreme Court of Missouri stated that, though section 143.451.2(3)(b) requires a shipping point, Jay Wolfe does not ship anything, and out-of-state customers purchase and take possession of the vehicles in Missouri, not out-of-state.[28] Although Jay Wolfe’s customers may use the instrumentalities of commerce to travel from out of state to the dealership, the sales transactions are not considered partly outside Missouri. Accordingly, Jay Wolfe was not allowed to apportion its income.[29]
III. Commentary
Whatever hope Missouri corporations may have had that they had seen the last of the “source of income” test, the instant decision reaffirmed its continued significance. A main purpose of apportionment is to keep states from taxing income that belongs to another state. Like Missouri, Kansas requires payment of income taxes on income produced in Kansas, yet Jay Wolfe paid no taxes in Kansas. The court recognized that, had the dealership been allowed to apportion its income, it would have effectively avoided paying taxes on the apportioned amount in any state. Similarly, the decision prevented the unworkable scenarios found in the Director’s brief, in which corporations could apportion their income by treating a buyer’s out-of-state license plate as an out-of-state “destination point.”[30] The Supreme Court of Missouri showed it is unwilling to abandon the source of income test that has survived for decades, and future challenges are sure to be met with skepticism.
-Neil D. Fossum
[1] Jay Wolfe Imps. Mo., Inc. v. Dir. of Revenue, 282 S.W.3d 839, 840 (Mo. 2009) (en banc).
[2] Id.
[3] Id.
[4] Id.
[5] Id. at 840-41.
[6] Id. at 841.
[7] Id.
[8] Mo. Rev. Stat. § 143.451.1 (2000).
[9] Jay Wolfe, 282 S.W.3d at 841.
[10] Id.
[11] Id. at 841-42.
[12] Id. at 842.
[13] Mo. Rev. Stat. § 143.451.1 (2000).
[14] Mo. Rev. Stat. § 143.451.2(2)(b) (2000).
[15] See, e.g., Dick Proctor Imps., Inc. v. Dir. of Revenue, 746 S.W.2d 571, 573-74 (Mo. 1988) (en banc); In re Kan. City Star Co., 142 S.W.2d 1029, 1038-39 (Mo. 1940), overruled on other grounds, J.C. Nichols Co. v. Dir. of Revenue, 796 S.W.2d 16 (Mo. 1990).
[16] Jay Wolfe, 282 S.W.3d, at 841.
[17] Mo. Rev. Stat. § 143.451.2(3)(b) (defining a transaction “[p]artly within this state and partly without this state”).
[18] Appellant’s Brief at 6-12, Jay Wolfe Imps. Mo., Inc. v. Dir. of Revenue, 282 S.W.3d 839 (Mo. 2009) (No. SC89568).
[19] Brief of Respondent at 18, Jay Wolfe Imps. Mo., Inc. v. Dir. of Revenue, 282 S.W.3d 839 (Mo. 2009) (No. SC89568).
[20] Id. at 22-24.
[21] Jay Wolfe, 282 S.W.3d, at 841.
[22] Mo. Rev. Stat. § 143.451.1 (2000).
[23] Jay Wolfe, 282 S.W.3d, at 841.
[24] Id. (citing Dick Proctor Imps., Inc. v. Dir. of Revenue, 746 S.W.2d 571, 573-74 (Mo. 1988) (en banc).
[25] Jay Wolfe, 282 S.W.3d, at 841.
[26] Mo. Rev. Stat. § 143.451.2(3)(b) (2000).
[27] Appellant’s Brief, at 16-17, Jay Wolfe, 282 S.W.3d 839 (No. SC89568).
[28] Jay Wolfe, 282 S.W.3d, at 842.
[29] Id.
[30] Brief of Respondent, at 29, Jay Wolfe, 282 S.W.3d 839 (No. SC89568).
