Cooper Tire & Rubber Co. v. Limbach - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

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OPINIONS OF THE SUPREME COURT OF OHIO
The full texts of the opinions of the Supreme Court of
Ohio are being transmitted electronically beginning May 27,
1992, pursuant to a pilot project implemented by Chief Justice
Thomas J. Moyer.
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Cooper Tire & Rubber Company, Appellant, v. Limbach, Tax
Commr., Appellee.
[Cite as Cooper Tire & Rubber Co. v. Limbach (1994), Ohio
St.3d .]
Taxation -- Franchise tax -- In four-fraction formula to
determine extent of corporation's business activity in
Ohio, R.C. 5733.05(B)(2)(a) requires including in the
numerator the value of all property used in Ohio, it does
not provide for an allocation of mobile property used
inside and outside Ohio -- R.C. 5733.05(B)(2)(d) provides
for alternative formula to determine extent of business
activity in Ohio -- Tax Commissioner need not consider
alternative formula, when -- Determining whether tax is
fairly apportioned.
(No. 93-1509 -- Submitted June 9, 1994 -- Decided
September 28, 1994.)
Appeal from the Board of Tax Appeals, Nos. 90-A-1064,
90-A-1065 and 90-A-1066.
Cooper Tire & Rubber Company, appellant, headquartered in
Findlay, Ohio, manufactures tires in Findlay, Texarkana,
Arkansas, and Tupelo, Mississippi. It manufactures tubes in
Clarksdale, Mississippi, and Piedras Negras, Mexico. In
connection with this manufacturing, Cooper operates
distribution centers at Moraine, Ohio; New Brunswick, New
Jersey; Kansas City, Missouri; Elk Grove Village, Illinois;
Buena Park, California; Fife, Washington; and Albany, Georgia.
Cooper also manufactures auto-related rubber products,
hoses, gaskets, and sealings in its engineered products
division, headquartered in Auburn, Indiana. This division owns
additional manufacturing plants in Bowling Green, Ohio, and
Eldorado, Arkansas. Cooper does not operate any warehouses or
distribution centers for the engineered products division.
For interplant hauling of the finished product, Cooper
leases tractors and trailers and manages a private fleet.
Cooper hauls a small percentage of the product with this fleet;
most of the product, however, is hauled by commercial
vehicles. Cooper leases eight tractors and domiciles them at a
truck maintenance facility in Findlay. Six of the tractors

haul trailers out-of-state while two haul exclusively
intrastate. Cooper pays as rent for the tractors a fixed
charge with a mileage component. Cooper keeps the trailers at
the manufacturing plants and leases them for a flat charge.
All this equipment has an Ohio domicile.
Cooper also owns a prop-driven aircraft and a
jet-propelled aircraft. Cooper hangars these aircraft in
Findlay, and its employees utiliize them for travel between
Findlay and other plant locations.
In filing franchise tax returns for 1985 through 1987,
Cooper, for the net-income-basis property fraction, apportioned
in and out of Ohio the value of the tractors and trailers by
allocating their values according to the mileage driven in Ohio
over the total mileage driven everywhere. It calculated the
payroll fraction in the same manner.
As to the aircraft, for its 1985 through 1987 franchise
tax reports, Cooper calculated the property fraction by
allocating values according to hours flown in Ohio over total
air hours flown everywhere. It also allocated the compensation
paid the pilots in the same way for the payroll fraction.
Cooper applied for a refund for tax year 1984 based on similar
allocations of mileage and hours flown applied to the tractors,
trailers, aircraft, and compensation.
In allocating the property and payroll in its reports,
Cooper did not request, in a separate writing, that the
commissioner treat its equipment this way. Cooper applied the
allocation formula to the tractors that it used solely within
Ohio. Finally, Cooper did not allocate the value of the
equipment or the payroll to any other state in which it filed
franchise tax returns, corporate income tax returns, or returns
for taxes similar to the Ohio franchise tax.
The commissioner audited these returns and rejected these
allocations. She also denied the refund for 1984. Instead,
she included the values of all the equipment and all the
payroll in the numerators and the denominators of the property
and payroll fractions, respectively.
On appeal, the Board of Tax Appeals ("BTA") affirmed. The
BTA ruled that R.C. 5733.05 required Cooper to apportion the
value of its mobile property, and compensation for employees
operating this property, to Ohio without allocation. The BTA,
further, found that Cooper had not requested an alternative
approach to compute these fractions under R.C. 5733.05(B)(2)(d)
and that Cooper had not established any discriminatory
application of the statutes.
The cause is now before this court upon an appeal as of
right.

Jones, Day, Reavis & Pogue and John C. Duffy, Jr., for
appellant.
Lee Fisher, Attorney General, and Richard C. Farrin,
Assistant Attorney General, for appellee.

Per Curiam. Cooper presents three arguments: (1) R.C.
5733.05(B)(2)(a) should be interpreted to permit apportioning
this mobile tangible personal property and compensation for
employers operating this property; (2) Cooper established,
under R.C. 5733.05(B)(2)(d), that an alternative formula to

allocate these property values would more fairly represent the
extent of Cooper's business in Ohio; and (3) the Federal
Commerce and Equal Protection Clauses require apportioning the
mobile equipment and the compensation paid to truck drivers and
pilots. The commissioner denies these claims and also asserts
that Cooper did not request an alternative formula in writing
in an attachment to its reports. We agree with the
commissioner and affirm the BTA's decision.
Under the franchise tax net income basis, Ohio allocates
some income, usually according to the situs of the property
producing the income, to Ohio and apportions unallocated income
according to the four-fraction apportionment formula of R.C.
5733.05(B). Am. Home Products, Corp. v. Limbach (1990), 49
Ohio St.3d 158, 159, 551 N.E. 2d 201, 203. The four-fraction
formula, designed to attribute to Ohio the extent of the
corporation's business activity in Ohio, id., is an average of
the property fraction, the payroll fraction, and the sales
fraction twice. R.C. 5733.05(B)(2); see Lancaster Colony Corp.
v. Limbach (1988), 37 Ohio St.3d 198, 199, 524 N.E. 2d 1389,
1390.
As to whether R.C. 5733.05(B)(2)(a) allows the proposed
allocation, this statute states:
"The property factor is a fraction the numerator of which
is the average value of the corporation's real and tangible
personal property owned or rented, and used in the trade or
business in this state during the taxable year, and the
denominator of which is the average value of all the
corporation's real and tangible personal property owned or
rented, and used in the trade or business everywhere during
such year. * * *
"(i) Property owned by the corporation is valued at its
original cost. Property rented by the corporation is valued at
eight times the net annual rental rate. * * *"
We read the statute to disallow allocating the value of
the property according to use inside and outside Ohio. R.C.
5733.05(B)(2)(a) requires including in the numerator the value
of all property used inside Ohio; it does not provide for an
allocation of mobile property used inside and outside Ohio. We
view this section in contrast with R.C. 5733.05(B)(2)(b), which
describes the payroll fraction. This latter section allows for
allocation according to in-state and out-of-state mileage for
compensation paid to an employee of a common or contract
carrier. Had the General Assembly chosen to allocate the
disputed property as Cooper proposes, the General Assembly
would have stated such treatment as explicitly as it had in the
payroll fraction for common and contract carriers. Moreover,
as the BTA observed, division (B)(2)(d) provides for an
alternative formula if a taxpayer believes that the
apportionment formula does not fairly represent the extent of
its business activity in Ohio.
Turning next to the alternative formula argument, R.C.
5733.05(B)(2)(d) requires the taxpayer to request the
alternative formula in writing and to submit it with the
report. We so held in Lancaster Colony Corp. v. Limbach,
supra, when we, 37 Ohio St. 3d at 200, 524 N.E. 2d at 1391,
allowed an alternative formula for the tax years for which the
taxpayer had made a request. Since Cooper did not request an

alternative formula in writing and did not submit the request
with its reports, the commissioner need not consider an
alternative formula here.
Finally, as to the constitutional challenges, Cooper first
contends that failing to apportion the property under the
property fraction and the compensation under the payroll
fraction violates the fair apportionment prong of the Commerce
Clause test set forth in Complete Auto Transit, Inc. v. Brady
(1977), 430 U.S. 274, 279, 97 S.Ct. 1076, 1079, 51 L.Ed.2d 326,
331.
To determine whether a tax is fairly apportioned, we must
examine whether it is internally and externally consistent.
Goldberg v. Sweet (1989), 488 U.S. 252, 261-262, 109 S.Ct. 582,
589, 102 L.Ed. 2d 607, 617. According to Goldberg:
"To be internally consistent, a tax must be structured so
that if every State were to impose an identical tax, no
multiple taxation would result. * * *
"* * *
"The external consistency test asks whether the State has
taxed only that portion of the revenues from the interstate
activity which reasonably reflects the in-state component of
the activity being taxed. * * *" Id.
As to the internally consistent claim, we conclude that if
every state required taxpayers to include mobile property
sitused in their state in the numerator of the property
fraction, as Ohio does, the property would only be included in
one state's numerator. Thus, no multiple taxation would result.
As to the external consistency test, Cooper failed to
prove by clear and cogent evidence that the income attributed
to Ohio is in fact out of all appropriate proportion to the
business transacted in Ohio or leads to a grossly distorted
result. Trinova Corp. v. Michigan Dept. of Treasury (1991),
498 U.S. 358, 380, 111 S. Ct. 818, 832, 112 L. Ed. 2d 884,
908-909. The record shows how Cooper allocated the value of
the property and the compensation paid to its employees; it
does not show that the statute's allocation unconstitutionally
affects the income attributed to Ohio.
Finally, as to Cooper's equal protection argument, we hold
that Cooper has not negated every conceivable basis which might
support the tax. Lehnhausen v. Lakeshore Auto Parts Co.
(1973), 410 U.S. 356, 93 S.Ct. 1001, 35 L.Ed. 2d 351. Cooper
maintains that it ought to be treated the same way as common
and contract carriers. However, Cooper earns its profit from
manufacturing while common and contract carriers earn profits
from hauling. Thus, a common or contract carrier's use of its
tractors and trailers relates more directly to its income than
Cooper's use of its private fleet. We conclude that this is a
rational basis for the distinction. Consequently, we reject
Cooper's equal protection argument.
Accordingly, we affirm the BTA's decision because it is
reasonable and lawful.
Decision affirmed.
Moyer, C.J., A.W. Sweeney, Douglas, Wright, Resnick and
F.E. Sweeney, JJ., concur.
Pfeifer, J., dissents.