STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

MALLINCKRODT, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 76-2100

) STATE OF FLORIDA, DEPARTMENT ) OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

This cause on to be heard before Diane D. Tremor, Hearing Officer with the Division of Administrative Hearings. The factual matters were presented by way of testimony, depositions and a summary of deposition testimony in the form of a stipulation prepared by counsel because certain depositions were unintelligible. Both parties have submitted legal memoranda on the issues and proposed recommended orders.

APPEARANCES

For Petitioner: Benjamin K. Phipps

Post Office Box 1351 Tallahassee, Florida 32302

and Raymond H. Mann

Post Office Box 5840

St. Louis, Missouri 63134

For Respondent: Shirley W. Ovletrea

Assistant Attorney General Department of Legal Affairs The Capitol Room LL04 Tallahassee, FL Florida 32301

ISSUE

The issue for consideration in this proceeding is whether the activities of petitioner, Mallinckrodt, Inc., were subject to the Florida corporate income tax for the years 1972, 1973 and 1974.

FINDINGS OF FACT

Upon consideration of the testimony, depositions and stipulation of counsel concerning four depositions, the following relevant facts are found:

1. At the time of enactment of the Florida corporate income tax, petitioner was in the process of closing down a small plastics plant located in

   Jacksonville, Florida. This facility, which had an inventory of $77,054.00, was closed and disposed of at the end of January 1972.

   
   

2. Among other endeavors, petitioner is in the business of manufacturing and selling calcium stearates. The stearates are manufactured in St. Louis, Missouri, and all inventories are located at the St. Louis plant. Calcium stearates are manufactured from animal (usually beef) fats and tallows and are used in the manufacture of polyvinyl chloride (PVC) pipe, essentially as a lubricant to facilitate the extrusion process. They come in a powdered form and are packaged in heavy paper sacks approximating the size of a sack of cement. Numerous sacks are placed on a wooden pallet, strapped with steel binders to the pallet for shipment and, often, the entire pallet will be wrapped in heavy cardboard in order to minimize breakage and spillage. The pallets are then loaded on common carriers in full carload or truckload quantities for shipment to the customers, with freight charges being paid by the petitioner.

   
   

3. During the years in question -- 1972 through 1974, petitioner had from ten to fifteen stearate customers in the State of Florida. Bill Rhymes represented the petitioner in Florida and other southeastern states. He resided in Charlotte, North Carolina, and did not maintain a residence or an office within Florida. His purpose was to make potential customers aware of the products manufactured and sold by the petitioner and to act as a liaison between St. Louis and individual customers if technical problems arose.

   
   

4. Orders from Florida customers were placed directly to St. Louis, either by telephone or by written order. The orders were either accepted or rejected exclusively by the St. Louis office. Credit checks and collection efforts were accomplished out of the St. Louis office. The principal salesman in Florida did not make actual sales arrangements and had no authority over pricing, freight or other conditions of sales. While the salesman in Florida did periodically contact petitioner's Florida customers, this was not done for the purpose of servicing the sold goods. Primarily, the contacts were made to insure that if there was a problem with the stearates due to the customer's machinery or manufacturing process, the next batch ordered would be of a different compound.

   
   

5. The majority of petitioner's customers in Florida were large companies to which full truckload shipments of stearates were made direct. However, petitioner also had three smaller customers new into the field of manufacturing PVC pipe. These new businesses lacked storage capacity and had limited cash flow. In order to accommodate these smaller businesses, petitioner allowed them to purchase under a blanket order specified bulk quantities of stearates at bulk prices. Petitioner then arranged to ship the entire load of stearates to the U & Me Warehouse in West Palm Beach for periodic pick up by the customer and payment by the pickup.

   
   

6. Petitioner entered into an "in and out" arrangement with the U & Me Warehouse. It was charged for the cost of moving the stearates into the warehouse, for the cost of loading them upon the customer's trucks and for the cost of storage based upon the actual amount of space required for the stearates. The prices and costs to petitioner fluctuated from month to month depending upon the amount of activity. The U & Me Warehouse and the petitioner did not have a rental agreement whereby petitioner paid a specified fee for a specified amount of space reserved to it in the warehouse.

   
   

7. All shipments of stearates by petitioner to the U & Me Warehouse were the result of a blanket order from a specific customer. Due to the labor and space costs of segregating the material, the individual pallets and sacks of

   stearates were not marked as being designated to any particular customer. Prior approval was required from petitioner before any goods were released from U & Me to the customer. Petitioner never sold merchandise out of the U & Me Warehouse to persons other than the customer who originally ordered it and there were no instances where the specified customer failed to pick up on a periodic basis its entire order of stearates. As noted above, the use of the West Palm Beach warehouse was primarily for the benefit of petitioner's smaller customers who had limited cash flow and storage capabilities. The warehouse arrangement allowed those customers to purchase stearates at truckload prices and pick them up in less than truckload quantities. These customers were billed by the pickup, and also received a freight rebate on each delivery. As one of the three original customers which utilized the warehouse method of delivery grew in size, it was able to take direct full truckload shipments at its plant.

   
   

8. During the year 1972, petitioner shipped approximately 60,000 pounds of stearates to the U & Me Warehouse every two or three months. Lesser amounts were shipped in 1973 and 1974. Petitioner's agents did make periodic checks of the status of the stearates located in the warehouse. This was done for the purpose of determining the actual physical condition of the goods and their treatment by the shippers and the warehouse. The goods were briefly examined to determine if the sacks had been broken and how they were stacked and stored. No physical count of the goods was made. No check was made of stearates in the possession of customers.

   
   

9. Because of the presence in the State of Florida of its plastic plant in Jacksonville in January of 1972, petitioner filed a Florida corporate income tax return showing the full value of that property at the beginning of the year and a value of zero at the end of the year. An auditor with the respondent determined that the stearates shipped to the U & Me Warehouse during 1972, 1973 and 1974 constituted inventory which established a tax nexus for those years. The respondent accordingly issued its notice of proposed deficiency. Contending that it's sole activity in Florida beyond January 31, 1972, was the solicitation of orders which were approved and filled outside the State of Florida, petitioner maintains that it is not subject to the Florida corporate income tax and requests that the proposed deficiencies be set aside.

   
   

   CONCLUSIONS OF LAW

   
   

10. At an early prehearing conference in this proceeding, the issue of which party has the burden of proof was raised. It was agreed by all parties and the Hearing Officer that counsel would submit written memoranda on that issue and that the issue would be addressed in the recommended order entered by the Hearing Officer. The parties have submitted legal memoranda on the burden of proof issue, and the undersigned has carefully considered the same, as well as the cases and other authorities cited therein. It is concluded that, as the party asserting the affirmative of an issue (i.e., the imposition of the corporate income tax), the respondent Department of Revenue carries the burden of proof in this proceeding. Jessie Jackson Parrish, Jr., et al v. Fla. Dent. of Revenue, DOAH Case No. 77-429.

    
    

11. The prime issue in this proceeding is whether the activities of Mallinckrodt, Inc. within Florida beyond January 31, 1972, are subject to Florida's corporate income tax for the years 1972 through 1974. It is the position of Mallinckrodt that its activities in Florida were limited to those protected under Public Law 86-272, 15 U.S.C.A. 381(a)(1). The Department of Revenue has taken the position that petitioner's activities in Florida are not exempt from the imposition of the state corporate income tax because petitioner

    maintained inventory in Florida, serviced its products in Florida and provided technical assistance to customers in Florida.

    
    

12. In pertinent part, Public Law 86-272, 15 U.S.C.A. Section 381(a)(1) provides as follows:

    
    

    1. No State, or political subdivision thereof, shall have power to impose, for any taxable year ending after the date of the enactment of this act

       [Sept. 14, 1959], a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during

       such taxable year are either, or both, of the following:

       
       

       1. the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and if approved, are filled by shipment or

          delivery from a point outside the State . . .

          
          

          Inherent in this law is the principal that the mere solicitation of orders does not constitute local activity creating sufficient nexus for the exercise of the power to tax net income, and that such income is attributable to business activity in the state of the corporation's domicile.

          
          

13. The respondent Department has enacted rules which delineate activities which will result in the imposition of Florida's corporate income tax. Florida Administrative Code, Rule 12 C-1.11 delineates certain activities which are subject to Florida taxation unless exempted by the laws of the United States.

    As pertinent tot he facts of this case, the taxable activities include obtaining sales through salesmen who solicit orders on the taxpayer's behalf, and engage in any one of seven other activities. Florida Administrative Code, Rule 12C- 1.11(1)(d). The respondent Department contends that the petitioner engaged in two of these listed activities.

    
    

    ". . .

    1. Servicing or repairing of its products in this state by its agents or employees or

    2. Maintaining in this state an inventory of merchandise or material for sale, distribution or manufacture, regardless of whether in a public, owned or rented warehouse . . .

    
    

14. The evidence in this proceeding clearly establishes that the petitioner's salesmen did solicit orders for the petitioner. The evidence does not support the contention that petitioner's agents or employees serviced or repaired its products in Florida. The "service" which petitioner provided its Florida customers was not in the nature of servicing or repairing the goods sold. Instead, the service provided was in the form of assistance in the type of goods which would best suit their purposes. It was a part of the

    solicitation process itself. The petitioner did not make repairs of sold merchandise, nor was there any evidence that it replaced damaged goods after the sales were processed. Indeed, the stearates themselves did not lend themselves to repair or service.

    
    

15. Nor does the evidence support the respondent's contention that the stearates stored for pickup at the U & Me Warehouse constituted inventory so as to provide a nexus for taxation purposes. The goods which arrived at the warehouse had already been sold to specific customers and were in the process of being shipped to those specific customers. They were not being held for sale, display or distribution to other customers. No person or entity, other than that which ordered the goods, could purchase or remove them from the warehouse. The stearates located at the U & Me Warehouse were goods in transit to a specified customer whose order had previously been approved in Missouri and was filled by shipment from Missouri. The fact that employees of petitioner occasionally checked the physical condition of the goods located in the warehouse does not negate the conclusion that these goods were not inventory so as to establish a nexus for taxing purposes. The periodic examination of the stearates in the warehouse was not to facilitate sales or reorders. Its purpose was to determine the treatment of the goods by the shippers and the warehouse employees.

    
    

16. In summary, the respondent has failed to demonstrate that petitioner's activities in Florida beyond January of 1972 constituted any more than the solicitation of orders which were sent outside the state for approval or rejection and which were filled by shipment or delivery from a point outside the state. As such, Florida has no power to impose the corporate income tax upon petitioner. Public Law 86-272, 15 U.S.C.A. Section 381(a)(1). The evidence in this case illustrates that petitioner's agents familiarized present and potential Florida customers with petitioner's products and the varieties thereof and check on the treatment that their products were receiving from shippers.

    All orders were approved or rejected in St. Louis. Credit investigations and collection efforts were carried out from the St. Louis office. Petitioner's salesman in Florida did not maintain a residence or office in Florida. In short, their activities in Florida were limited to the solicitation of orders which were filled by shipment or delivery from a point outside the State of Florida. The goods located in the U & Me Warehouse in West Palm Beach were in the process of being shipped to specified customers and were goods in transit and not inventories. A tax nexus in Florida has not been established beyond January 31, 1972.

    
    

17. Petitioner is liable for Florida corporate income tax with respect to its plastic plant located in Jacksonville during the month of January, 1972. Petitioner did file a tax return reflecting the value of this property at the beginning of the year and a value of zero at the end of the year. There was insufficient evidence adduced in this cause to determine the correct manner of computing petitioner's corporate income tax for the 1972 year, and no conclusion can be drawn as to the appropriate tax or as to the amount, if any, which has been previously paid by the petitioner.

RECOMMENDATION

Based upon the findings of fact and conclusions of law recited above, it is RECOMMENDED THAT the proposed deficiency assessment against petitioner of corporate income taxes for 1972, 1973 and 1974 be set aside, and that the petitioner's liability for those years be confined to only that amount (less the

amount previously paid) which reflects petitioner's activities with regard to the plastic plant in Jacksonville which was closed at the end of January, 1972.

DONE AND ORDERED in Tallahassee, Leon County, Florida, this 5th day of May, 1980.

DIANE D. TREMOR

Hearing Officer

Division of Administrative Hearings

101 Collins Building Tallahassee, Florida 32301 (904) 488-9675

COPIES FURNISHED:

Benjamin K. Phipps Post Office Box 1351

Tallahassee, Florida 32302 and

Raymond H. Mann

Post Office Box 1351

St. Louis, Missouri 63134

Shirley W. Ovletrea Assistant Attorney General Department of Legal Affairs The Capitol - Room LL04 Tallahassee, Florida 32301

Randy Miller Executive Director Department of Revenue Carlton Building

Tallahassee, Florida 32301

Docket for Case No: 76-002100

Orders for Case No: 76-002100