For affirmance in part, reversal in part and remandment -- Chief Justice Weintraub and Justices Francis, Proctor, Hall, Schettino and Haneman. Opposed -- None. The opinion of the court was delivered by Hall, J.
This case involves the tax liability of the appellant (herein Woolworth), a New York corporation authorized to do business in New Jersey, under this State's Corporation Business Tax Act, N.J.S.A. 54:10A-1 et seq., for the privilege of exercising its franchise and doing business here in the year 1959.*fn1 The tax is in two portions, one measured by net worth and the other by net income.
Speaking as of the end of 1959, Woolworth is engaged in the retail, chain-store variety business through the ownership and operation of some 2000 stores under the Woolworth name all over the United States, Puerto Rico and Cuba. It does not engage in manufacturing or processing, confining its business to the purchase of merchandise at wholesale and resale directly to consumers. This enterprise is concededly operated in a unitary manner by this single corporate entity through its executive headquarters in New York. The operation of some 80 stores constitutes its entire New Jersey business activity. Woolworth also owns all or a majority of the stock of five foreign corporations ("the Canadian company," "the Mexican company," "the German companies," "the English company"), which in turn operate almost 1500 similar stores in the same fashion under the same familiar name in many other parts of the world.
The controversy before us arises from the respondent Director's inclusion of the net worth of and income to the parent from these foreign corporations in the New Jersey tax bases and the inclusion of the parent's receipts therefrom in the statutory formula for the allocation to this State of a portion of the entire net worth and net income of corporations also maintaining a regular place of business outside this State and from his refusal to make any adjustment with respect thereto
in the computation and application of the allocation formula under his statutory authority so to do.
Woolworth appealed to the Division of Tax Appeals from the Director's determination. It claimed that the foreign companies are managed and operated so separately and autonomously as not to make the aggregate of American and foreign business a valid unitary whole for tax base purposes in New Jersey and therefore asserted that the Director's inclusion violates the due process clause of the Federal Constitution because it amounts to taxation of extraterritorial values and activities. (The commerce clause is not asserted to be involved.) This contention rests on the application of the act to Woolworth's situation rather than on any alleged intrinsic unconstitutionality of any provision thereof. If such inclusion of the elements relating to the subsidiaries does not go so far as to amount to violation of due process, the taxpayer claimed abuse of discretion by the Director in refusing to make adjustments amounting either to exclusion thereof or to some lesser extent on the ground that otherwise the tax assessed is unfair and contrary to the legislative policy. The Division of Tax Appeals upheld the levy with respect to the net worth aspect on a finding that Woolworth's world-wide business was unitary for this purpose, but determined that New Jersey could not include in the income measure income by Woolworth from the foreign subsidiaries, because it was not reasonably attributable to this State. Since the Division conceived, in essence, that the statutory section permitting the Director to make adjustments was not intended to require application beyond conformity to constitutional limitations, it did not reach the claim that he had abused his discretion in refusing to do so. Both parties appealed to the Appellate Division and we certified the matter while it was pending there. R.R. 1:10-1(a).*fn2
Consideration of the questions posed will be aided by first setting forth a more detailed analysis of the act and of its concrete application here.
This annual levy imposed upon every nonexempt domestic and foreign corporation is an excise (privilege) impost rather than a property tax. N.J.S.A. 54:10A-2; Werner Machine Co. v. Director of Division of Taxation, 17 N.J. 121 (1954), affirmed 350 U.S. 492, 76 S. Ct. 534, 100 L. Ed. 634 (1956); United States Steel Corp. v. Director, Division of Taxation, 38 N.J. 533, 540 (1962). It is computed by adding together prescribed percentages of net worth and net income. N.J.S.A. 54:10A-5. Net worth was the only measure when the tax was originally imposed by L. 1945, c. 162, in lieu of all other state, county or local taxation upon or measured by intangible personal property used in business by corporations covered by the law and to replace the then existing capital stock franchise tax. N.J.S.A. 54:10A-2; United States Steel Corp. v. Director, Division of Taxation, supra (38 N.J., at pp. 539-541). The income tax portion was added as simply another element of the 1945 franchise tax, to provide an increase in the State's revenues, by amendment made by L. 1958, c. 63, effective for the privilege year 1959. (New Jersey imposes no general direct personal or corporate tax measured by or levied upon income.)
Net worth is in essence the stockholders' book equity in the corporation (or fair value if the books do not disclose proper valuation), subject to some compulsory adjustments prior to allocation not pertinent. N.J.S.A. 54:10A-4(d). Net income is "deemed prima facie to be equal in amount to the
taxable income, before net operating loss deduction and special deductions, which the taxpayer is required to report to the United States Treasury Department for the purpose of computing its Federal income tax" with some specified variations, the important one here being the exclusion of 50% of dividends received by the taxpayer which were included for Federal income tax purposes. N.J.S.A. 54:10A-4(k).
Under the well settled thesis that the realistic value of the exercise of a franchise in a particular state by a corporation with business activities in more than one jurisdiction is ordinarily not adequately measured by the worth of its assets or income in that state alone, but is enhanced and contributed to by that of the entire enterprise, state franchise tax statutes built on this thesis must provide for a method of proportionate allocation of the totals everywhere to reflect that enhancement. That set forth in the New Jersey Act (denominated the "allocation factor," N.J.S.A. 54:10A-4(b)) with respect to the net worth measure is succinctly summarized in United States Steel Corp. v. Director, Division of Taxation, supra:
"With respect to multi-state activities, the statute prescribed two basic formulas for the allocation to this State of the portion of total net worth to be taxable here, the tax to be measured by the greater of the portions so allocated. Section 5(a) [N.J.S.A. 54:10A-5(a)] refers to section 6 [N.J.S.A. 54:10A-6] which employs the so-called Massachusetts formula, a composite of average value of real and tangible personal property, receipts, and payroll in New Jersey as against the totals therof everywhere. Section 5(b) [N.J.S.A. 54:10A-5(b)] utilizes the ratio of the average value of assets in New Jersey to assets everywhere." (38 N.J., at pp. 541-542)
The three-part formula, referred to as the business allocation factor, prescribed by N.J.S.A. 54:10A-6, and not the single assets (tangible and intangible) formula, called the assets allocation factor, provided in N.J.S.A. 54:10A-5(b), produced the greater result here on the basis of the taxpayer's return and so was controlling. The business allocation factor requires the portion of the taxpayer's entire net worth allocable
to New Jersey to be computed by multiplying the entire net worth by the average of three fractions:
1. The value of the taxpayer's real and tangible personal property within the State over the value of all such property wherever situated.
2. The taxpayer's gross receipts from sales of tangible personal property, services performed, rentals from property and all other business receipts earned within the State over the total of such receipts whether within or without the State.
3. The total wages, salaries and other personal service compensation of officers and employees within the State over the total of such compensation within and without the State.
The allocated net worth figure thus produced is then multiplied by the two mill rate applying to net worth (N.J.S.A. 54:10A-5(b)) to obtain the amount of this portion of the tax.
The net income part of the tax is ascertained by the same process, i.e., the entire net income of the corporation, less 50% of dividends received and other variations specified by N.J.S.A. 54:10A-4(k), is multiplied by the same business allocation factor to compute the net income allocated to New Jersey, N.J.S.A. 54:10A-6, and that figure is then multiplied by the 1 3/4% rate on income (N.J.S.A. 54:10A-5(c)) to fix the dollar quantum of that part of the tax. It is plain from N.J.S.A. 54:10A-5(c) that the asset allocation factor may not be used for the allocation of net income even if such use would produce a greater result.
The act further provides by N.J.S.A. 54:10A-8, as amended in 1958, that the Director may, in any case, adjust the business allocation factor, with respect to its application to either net worth or income or both (but not the asset allocation factor if that be controlling as to net worth in the particular instance), if it appears to him that the factor determined pursuant to N.J.S.A. 54:10A-6 "does not properly reflect the activity, business, receipts, capital, entire net worth or entire net income of a taxpayer reasonably attributable to the State * * * by
(a) excluding 1 or more of the factors therein;
(b) including 1 or more other factors, such as expenses, purchases, contract values (minus subcontract values);
(c) excluding 1 or more assets in computing entire net worth; or
(d) excluding 1 or more assets in computing an allocation percentage; or
(e) applying any other similar or different method calculated to effect a fair and proper allocation of the entire net income and the entire net worth reasonably attributable to the State."
To make the controversy more concrete and understandable, brief reference should be made to the basic figures involved (stated approximately). According to Woolworth's return,*fn3 the total net worth of the domestic company and foreign subsidiaries and thus the net worth tax base, was $647,000,000, of which the domestic company accounts for $282,000,000 and the foreign subsidiaries $365,000,000 (based on the percentage of their stock owned by the parent at the value shown on the subsidiaries' books). The total net income was $51,000,000, $34,500,000 from domestic operations and $16,500,000 receipts, consisting of dividends and interest on moneys loaned or advanced, by the parent from the foreign companies. Since
only 50% of dividend income is includible in the income tax base under the New Jersey statute, that base was $34,500,000 plus $8,400,000 or a total of $42,900,000.
Computation of the allocation factors resulted in the following:
The assets allocation factor, N.J.S.A. 54:10A-5(b) -- the ratio of the average value of assets in New Jersey to assets everywhere, tangible and intangible including the stock of the foreign subsidiaries -- based on respective figures of $22,000,000 to $790,000,000 was 2.793%.
The composite of the three elements making up the business allocation factor, N.J.S.A. 54:10A-6, produced this result:
As to the property element -- the ratio of average value of the taxpayer's real and tangible personal property in New Jersey and everywhere --, the respective figures were a numerator of $15,500,000 and a denominator of $269,300,000, giving a percentage of 5.749%. Necessarily the denominator did not include anything relating to the foreign subsidiaries.
As to the receipts element -- the ratio of sales and other business receipts within New Jersey and everywhere -- the respective figures were a numerator of $38,900,000 and a denominator of $833,400,000, giving a percentage of 4.665%. The denominator included the $16,500,000 dividend and interest receipts by the parent from the foreign subsidiaries and represents the only place in the business allocation factor (except to a very slight degree in the payroll element) where the foreign subsidiaries were taken into account.
As to the payroll element -- the ratio of total wages, salaries and other personal service compensation paid within New Jersey and everywhere -- the respective figures were $7,700,000 and $182,500,000, giving a percentage of 4.234%.
Averaging the three percentages produced a business allocation factor of 4.884%. Since this was greater than the assets allocation factor of 2.793%, it was applied to the two tax bases, resulting in a tax of $63,000 on the net worth portion and of $37,000 on the income portion, or a total of $100,000.
Woolworth's complaint as to the unfairness of the allocation formula on a unitary approach, stated practically, may be summarized by this quotation from its brief:
"* * * the Taxpayer's business outside of New Jersey represented by its investments in the five foreign corporations is not reflected in the business allocation percentage determined pursuant to Section 6 except to the extent that there is included in the denominator of the receipts factor the sum of $16,617,719 * * * out of total receipts of $833,406,502, and it is not represented at all in the assets [real and tangible personal property] factor of $269,281,683 or in any significant degree in the payroll factor of $182,505,150 * * *; so that these vast foreign enterprises, representing almost half, in value and income, of the Company's total business, are given a weight of only 2/3 of 1% in formula (1/3 X 16,617,719 : 833,406,502), which is the equivalent of determining that almost 5% of the net worth and income of the Mexican, Canadian, English and German investments is attributable to the business privilege which the taxpayer enjoys in New Jersey."
If the foreign subsidiaries were to be excluded entirely, as to both the net worth and income tax bases and in the computation of the allocation factor, the result would be, according to Woolworth's request for adjustment annexed to the return, a tax on net worth of $36,000 (here the assets allocation factor would be used since it ...