COURT OF APPEALS DECISION DATED AND FILED June 24, 2010 David
R. Schanker Clerk of Court of Appeals |
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This opinion is subject to further editing. If published, the official version will appear in the bound volume of the Official Reports. A party may file with the Supreme Court a petition to review an adverse decision by the Court of Appeals. See Wis. Stat. § 808.10 and Rule 809.62. |
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Appeal No. |
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STATE OF WISCONSIN |
IN COURT OF APPEALS |
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DISTRICT IV |
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Ameritech Publishing, Inc.,
Petitioner-Appellant, v. Wisconsin Department of Revenue,
Respondent-Respondent. |
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APPEAL from an order of the circuit court for Dane County: Diane m. nicks, Judge. Affirmed.
Before Dykman, P.J., Lundsten and Higginbotham, JJ.
¶1 HIGGINBOTHAM, J. At issue in this case is
the amount of franchise tax owed by Ameritech Publishing, Inc. (API) on income
from local telephone directory advertising for tax years 1994 to 1997. API appeals a circuit court order affirming a
decision of the Tax Appeals Commission, which concluded that all income
generated during these years from API’s sales of its Wisconsin local phone
directory advertising was allocable to
BACKGROUND
¶2 API timely filed a Wisconsin Corporation Franchise/Income Tax
Return for tax years 1994-1996, using an apportionment method that sourced
sales income based on the geographic distribution of phone directories. In December 1998, API filed an amended
Franchise/Income Tax Return for tax years 1994-1996 in which API claimed its
tax liability to be lower than the amount originally paid. The amended return calculated API’s tax owed
for the period based on the cost of performing the advertising services (“cost
of performance”), instead of the geographic distribution of phone directories. Using the cost of performance method, API
determined its income subject to taxation in
¶3 In December 2000, the Wisconsin Department of Revenue (DOR) issued a Notice of Field Audit Action informing API of the denial of its claims for refund of franchise taxes, and rejecting API’s use of the cost of performance method of calculating the tax. API filed a petition for a redetermination of the Field Audit Action, which was denied by DOR. API sought review of DOR’s decision with the Tax Appeals Commission.
¶4 The matter came to the Commission on a Stipulation of Facts filed by the parties. The Commission bifurcated the issues to be decided in the case, declaring that the issue to be decided in Phase I of the proceeding was whether API was allowed to use the cost of performance method in determining its sales factor for apportionment purposes.[2] API moved for partial summary judgment on this issue. After a conference with the parties, the Commission narrowed the scope of this first issue to whether API’s sale of phone directory advertising was the sale of a service under Wis. Stat. § 71.25(9)(d) and not the sale of tangible personal property. API contended that its sale of phone directory advertising was the sale of a service under § 71.25(9)(d). The Commission agreed, granting API partial summary judgment in Phase I.
¶5 In Phase II, the Commission then directed the parties to
brief the issue of whether the performance of API’s directory advertising
services for advertisements placed in Wisconsin telephone directories was the
performance of income-producing activities in
DISCUSSION
¶6 The issues presented in this case are whether the Commission
reasonably concluded that API’s provision of directory advertising services was
income-producing activity performed within the state of
¶7 In the discussion that follows, we first set forth the Commission’s factual findings. Second, we recite the applicable law, including the language of Wis. Stat. § 71.25(9)(d), and summarize the Commission’s legal analysis. Third, we determine the proper standard of review applicable to the Commission’s interpretation of § 71.25(9)(d). Fourth, we examine the Commission’s decision applying that standard of review.
The Commission’s Findings of Fact
¶8 The
parties stipulated to the following pertinent facts, which were restated in the
Commission’s Findings of Fact. API is a
¶9 The sales representatives in the
¶10 API executed agreements with its customers to provide advertising and listings to be inserted into specific directories. The customers did not purchase space and had no right to select the placement of their advertisement, except that they could purchase space on the cover of the directory.
¶11 The directories for which API solicited advertising included the Yellow Pages, White Pages and Internet Yellow Pages. The familiar Yellow Pages directories are organized by categories, and advertisements are in a variety of formats, including display ads, leader ads and coupons. The Yellow Pages also offer “image” and “reach” advertising in the form of cover, spine and tab ads. White Pages advertisements consist of enhancements to an existing telephone listing, such as bold or feature type or the addition of a company logo. The Internet Yellow Pages provide online advertising in various formats. API estimates that, for the years 1994-97, Yellow Pages advertising accounted for 88-92% of its annual income, White Pages advertising made up a 3-6% share of income, while interest and all other income (including, presumably, Internet advertising) totaled 2-7% of annual income.
¶12 Sales representatives generated API’s income by contacting
customers for placement of advertising in upcoming directories. The cost of an ad in the Yellow Pages
directories was based in part on the circulation of the directory. Directories are distributed free of charge to
all Wisconsin Bell, Inc. (WBI) subscribers and other
¶13 During the years at issue, API entered into agreements with WBI in which API agreed to publish the White Pages and Yellow Pages directories on WBI’s behalf. Under the agreements, API paid WBI an annual fee for the exclusive right to solicit advertising in Yellow Pages directories. API contracted with R.R. Donnelly & Sons Company to print and bind telephone directories. API contracted with Product Development Corporation (PDC) to distribute and deliver telephone directories. Additional facts stipulated to by the parties are provided in the discussion section.
Applicable Law and the Commission’s Analysis
¶14 A state may tax only that portion of a corporation’s value that
is earned within its borders. Container
Corp. v. Franchise Tax Bd., 463
¶15 For tax years 1994-1997,
¶16 The version of Wis.
Stat. § 71.25(9)(a) in effect during tax years 1994-1997 defined
the “sales factor” as “a fraction,” consisting of “[a] numerator … which is the
total sales of the taxpayer in this state during the tax period, and [a]
denominator … which is the total sales of the taxpayer everywhere during the
tax period.” Sales of tangible personal
property within the state of
¶17 As noted, the Commission concluded in its Phase I decision that
the sale of phone directory advertising was the sale of a service, and was
therefore not taxable under paragraph (b) of Wis.
Stat. § 71.25(9) as the sale of tangible personal property. In its Phase II decision, the Commission
addressed the issue of whether the sale of directory advertising services was
nonetheless fully taxable under paragraph (d) of § 71.25(9) as
“income-producing activity performed within the state of Wisconsin.” This question required the Commission to
consider whether API’s sales of advertising services were performed within
¶18 After determining that there were no disputed issues of
material fact and that the matter of the allocation for tax purposes of the
income from API’s directory advertising services could be decided on summary
judgment, the Commission granted summary judgment on the issue to the
Department. The Commission’s decision
relied on its prior interpretation of Wis.
Stat. § 71.25(9)(d) in The Hearst Corporation v. DOR, Wis.
Tax Rptr (CCH) ¶203-149 (WTAC May 15, 1990).
The Commission noted that, in Hearst, it had considered whether
advertising income Hearst, the operator of WISN-TV in
Like
API, WISN generated advertising revenue in
The Commission found that ‘the
network and national advertising revenues are based upon the showing or
broadcasting thereof. Without broadcasting there is no income.’ The Commission further found that ‘advertisers
choose spots based upon the demographic profile of the audience viewing the
particular programming during which the spots occur or are available, and that
the advertisers are buying the spots due to the programming and its demographic
makeup.’ In its findings of fact, the
Commission concluded ‘the income producing activity is the actual broadcasting
of the programming desired by the advertiser and the commercial spots during
that programming and, thus, is in
On these facts, the Commission
held: ‘The national advertising income is a result of the income-producing
activity of broadcasting in
The Commission then turned to
the concurring discussion of Commissioner Bartley about the issue of whether
the income from national advertising was includable in full in determining the
sales factor. The Commission described
Commissioner Bartley’s opinion as “directly address[ing] the issue” in the API
case, and noted his conclusion that WISN’s “income-producing activity [for
national advertising] occurs entirely in
¶19 The Commission concluded that, as in Hearst, the
“income-producing activity” of advertising services associated with
advertisements run in
Standard of
Review
¶20 The issue presented in this case was decided by the Commission
on summary judgment. Summary judgment is
appropriate if there are no genuine issues as to any material fact and one
party is entitled to judgment as a matter of law. Vohs v. Donovan, 2009 WI 181, ¶7, 322
¶21 We review the Commission’s decision, not the circuit
court’s. See DOR v. Menasha Corp.,
2008 WI 88, ¶46, 311
¶22 Under the great weight standard, we will uphold an agency’s
interpretation as long as it is reasonable and not contrary to the statute’s
clear meaning, even if we find a different interpretation to be more
reasonable. UFE Inc. v. LIRC, 201
¶23 When applying due weight deference, we will uphold the agency’s
interpretation of a statute if it comports with the purpose of the statute, and
no alternative interpretation is more reasonable than the agency’s. See id. (citation omitted). Due weight deference is appropriate “when the
agency has some experience in an area, but has not developed the expertise that
necessarily places it in a better position to make judgments regarding the
interpretation of the statute than a court.”
¶24 API contends that we should review the Commission’s interpretation of Wis. Stat. § 71.25(9)(d) de novo because, in API’s view, the Commission has virtually no experience interpreting the statute.[5] While acknowledging that the Commission has construed § 71.25(9)(d) once before in Hearst, API argues that one prior interpretation of a statute by an agency is not sufficient to accord a deferential standard of review to a subsequent interpretation of the statute, citing La Crosse Queen, Inc. v. DOR, 208 Wis. 2d 439, 446, 561 N.W.2d 686 (1997) (applying de novo review when the Commission had interpreted the statute at issue on one prior occasion). The Commission argues that it is entitled to at least due weight deference. For the reasons that follow, we conclude that the Commission’s interpretation and application of § 71.25(9)(d) to the facts of this case is entitled to due weight deference.
¶25 First, API’s reliance on La Crosse Queen is misplaced. Case law does not support a general rule that de novo review is appropriate when the agency has interpreted the statute in only one prior case. See, e.g. Gilbert v. LIRC, 2008 WI App 173, ¶10, 315 Wis. 2d 726, 762 N.W.2d 671 (applying due weight deference where LIRC had interpreted the statute in one prior case, and the agency was charged with administering the statute); Thomas More High Sch. v. Burmaster, 2005 WI App 204, ¶14, 287 Wis. 2d 220, 704 N.W.2d 349 (applying due weight deference to Department of Public Instruction’s (DPI) interpretation of the statute codifying the Milwaukee School Choice Program despite the fact that DPI had “no experience” with the issue in the case); Madison Newspapers, Inc. v. DOR, 228 Wis. 2d 745, 759, 599 N.W.2d 51 (Ct. App. 1999) (applying due weight deference where agency had interpreted a particular statutory exemption in only one prior case).
¶26 Second, we observe that de novo review was appropriate in La Crosse
Queen as much for the nature of the particular interpretive task in
that case as for the Commission’s relative inexperience with the statute. That case turned on the meaning of the
constitutional phrase “interstate commerce” as used in Wis. Stat. § 77.54(13) (1989-90), which the parties to
the case agreed had the same meaning as the phrase “commerce ... among the
several States” in the Commerce Clause of the federal Constitution, U.S. Const.
art I, § 8, cl. 3. See La Crosse Queen,
208
¶27 We conclude that the Commission’s interpretation of Wis. Stat. § 71.25(9)(d) is
entitled to due weight deference. The
legislature has charged the agency with administration of the allocation and
apportionment provisions of Wis. Stat. § 71.25(9),
a fact that, in most cases, results in a court affording the agency’s
interpretation at least due weight deference.
See, e.g., City
of Oak Creek v. PSC, 2006 WI App 83, ¶20, 292 Wis. 2d 119, 716
N.W.2d 152 (applying due weight standard to agency’s interpretation even though
the circumstances of the case were “unprecedented” because PSC was charged with
executing the statutory scheme at issue); Epic Staff Mgmt., Inc. v. LIRC, 2003
WI App 143, ¶17, 266 Wis. 2d 369, 667 N.W.2d 765 (applying due weight
deference where agency had never applied statute to a particular circumstance
because LIRC was charged with administering the statute in question, and was
required to make significant policy judgments relating to the implementation and
administration of the statute). As
noted, moreover, the Commission has interpreted the statutory provisions at
issue here in the Hearst case under facts that, while not identical to those of
the present case, are similar enough for the agency to have acquired at least
some expertise pertinent to the task at hand.
See Gilbert, 315
Reasonableness of the Commission’s and API’s
Interpretations
of Wis. Stat. § 71.25(9)(d)
¶28 API contends that the Commission’s interpretation of Wis. Stat. § 71.25(9) in its Phase
II decision ignores the basic structure of the statute, which provides
different sourcing rules for the sale of tangible personal property under
paragraph (b) of § 71.25(9) than for the sale of services under paragraph
(d) of the subsection. API argues that,
once the Commission concluded in Phase I that the sale of directory advertising
was the sale of a service and not tangible personal property, it should have
made the sales factor allocation according to actual costs of performance,
which, in this case, would include the various activities performed by API
within and without
¶29 API further argues that the Commission erred by basing its assessment solely on the last activity in its chain of service activities, the distribution of directories, to the exclusion of the vast majority of its activities. API notes that it is undisputed that the distribution of the directories was not performed by API, but by a third party, PDC. API argues that the Commission’s determination was contrary to Wis. Admin. Code § Tax 2.39(6)(c)3. (1994-1997),[6] which explicitly stated that the activity of a third party cannot be taken into account as an “income-producing activity” for tax allocation purposes.
¶30 DOR contends that the Commission reasonably concluded that all
income from API’s sales of local directory advertising was allocable to
¶31 API responds that it is not unusual for a service provider not to specify in a contract each activity constituting the provision of a service. Implicit in the agreement, API argues, is the promise that API will take all steps necessary to provide the service. API contends that these activities were essential to customers receiving the service for which they contracted, and that without each of these activities, API would have no income from its directory advertising service. Hearst, API maintains, is of negligible value here for the following reasons: it concerned allocation of national TV advertising, where income is generated by the broadcast of the advertisement, not telephone directory sales, where income, in API’s view, is generated by the sale of the service; WISN was a wholly Wisconsin-based business, whereas API is a multistate operation; Hearst/WISN was not involved in production of the advertising, whereas API is directly involved in the production of the ads at its sales offices in the five states, at its graphic design center in Michigan, and production offices in Ohio and Michigan; and, finally, the Hearst Commission merely adopted the reasoning of the Department in addressing the allocation issue, and failed to engage its own independent analysis.
¶32 In the analysis of Wis. Stat. § 71.25(9)(d) that follows, we conclude, applying due weight deference, that the Commission’s interpretation of the version of the statute in effect for tax years 1994-1997 is reasonable, and that API’s interpretation of the statute is also reasonable but not more reasonable than the Commission’s interpretation.
¶33 As noted, the Commission determined in its Phase I decision
that API’s sale of directory advertising was the sale of a service and not
tangible personal property under the former Wis.
Stat. § 71.25(9)(b). The
version of Wis. Stat. § 71.25(9)(d)
effective during the period at issue provided that sales of things other than
tangible personal property, such as services, “are in this state if the
income-producing activity is performed in this state.” The issue in this case is whether the “income-producing
activity” associated with the telephone directory advertising services provided
by API was performed in
¶34 We are persuaded of the reasonableness of the Commission’s and
DOR’s view that the “income-producing activity” associated with API’s service
from 1994 to 1997 was, at bottom, the provision of access to a
¶35 Moreover, the Commission reasonably concluded that this service
of providing access to Wisconsin consumers is income-producing activity performed
within the state of
¶36 We also think that the Commission correctly discounted the fact
that the actual distribution of the printed directories was performed by a
third-party, PDC. First, as the
Commission noted, API controlled the distribution of the directories following
a schedule established by its agreement with PDC and, by entering into an
agreement with Wisconsin Bell, assumed full responsibility for publishing and
delivering the Yellow Pages directory in Wisconsin. PDC’s role was simply to distribute the
directories at API’s direction. More
importantly, PDC’s distribution of the printed directories—while necessary to
the provision of API’s service—was not the income-producing activity
itself. Again, the income-producing
activity associated with the service API offered its customers was access to a
¶37 Finally, we conclude that the Commission reasonably relied on
its prior interpretation of Wis. Stat. § 71.25(9)(d)
in Hearst. As in the present case, the service provided
by the taxpayer in Hearst (WISN) was the furnishing of access to a local market;
in that case, a Milwaukee-area television audience. WISN contended that certain activities
leading up to the airing of the advertisements were performed out-of-state, and
therefore not all of its tax could be allocated to
¶38 API’s attempts to distinguish Hearst are
unavailing. The fact that API provides
some advertising production services, while WISN did not, does not alter the
analysis. API and WISN provide
essentially the same service central to this case: access to
¶39 Turning to API’s interpretation of Wis. Stat. § 71.25(9)(d), we conclude that its view that
part of its income-producing activity was performed outside of the state is
reasonable. It is undisputed that
salespersons and graphic designers working in several Midwestern states
(including
¶40 However, we cannot conclude that API’s proposed interpretation
of Wis. Stat. § 71.25(9)(b)
is more reasonable than the Commission’s because it fails to account for the
fact that API’s primary income-producing activity is furnishing access to a
CONCLUSION
¶41 In sum, we conclude, applying due weight deference, that the
Commission reasonably defined API’s income-producing activity under the version
of Wis. Stat. § 71.25(9)(d)
in effect from 1994 to 1997 as the furnishing of access to a
By the Court.—Order affirmed.
Not recommended for publication in the official reports.
[1] The versions of the statutes in effect at the time of the tax assessments in this case were 1993-94, 1995-96 and 1997-98. The statutory provisions at issue in this case are identical in each of these versions of the statutes. Unless otherwise noted, the statutory references in this opinion are to the versions of the statutes in effect from 1993 to 1997.
Effective January
1, 2005, Wis. Stat. § 71.25(9)
now provides that if the benefit of a service is received in Wisconsin, the
income from that service is fully allocable to Wisconsin, if “[t]he service
relates to … tangible personal property that is delivered directly or
indirectly to customers in this state,” or “[t]he service is provided to a
person engaged in a trade or business in this state and relates to that
person’s business in this state.” 2005
Wisconsin Act 25, sec. 1349, creating Wis.
Stat. § 71.25(9)(dh)2.b. and d.
The parties agree that income generated after January 1, 2005, from the
advertising services at issue in this case would be allocable to
[2] As we explain later in this opinion, the “sales factor” was defined in Wis. Stat. § 71.25(9)(a) as “a fraction,” consisting of “[a] numerator … which is the total sales of the taxpayer in this state during the tax period, and [a] denominator … which is the total sales of the taxpayer everywhere during the tax period.”
[3] Beginning
in the 2008 tax year,
[4] The oft-cited principles of statutory interpretation set forth in State ex rel. Kalal v. Circuit Court for Dane County, 2004 WI 58, ¶¶43-51, 271 Wis. 2d 633, 681 N.W.2d 110, are familiar and need not be repeated here.
[5] API
also argues that de novo review is appropriate because, in API’s view, the
statutory language at issue in this case—“income-producing activity performed
in this state,” Wis. Stat. § 71.25(9)(d)—is
unambiguous, and courts give no deference to an agency interpretation of an
unambiguous statute. See DOR
v. Caterpillar, Inc., 2001 WI App 35, ¶6,
241
The plain meaning of a statute takes precedence over all extrinsic sources and rules of construction, including agency interpretations … [E]ven if an agency interpretation is accorded the highest level of deference by a court, great weight, it will not be upheld if the interpretation directly contravenes the clear meaning of the statute.
[6] During the tax years at issue, Wis. Admin. Code § Tax 2.39(6)(c)3., removed by Register November 2006, No. 611, provided in relevant part:
For purposes of this paragraph, “income producing activity” means the act or acts directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profit. This activity does not include activities performed on behalf of a taxpayer, such as those conducted on its behalf by an independent contractor. Accordingly, the income producing activity includes … [t]he rendering of personal services by employees or the utilization of tangible and intangible property by the taxpayer in performing a service.
[7] Nor does API make the alternative argument that, even if providing access to a Wisconsin audience were its primary income-producing activity, the Commission erred in its interpretation of Wis. Stat. § 71.25(9)(d) because it failed to add to its Wisconsin tax other, secondary income-producing activities, such as the creation of the advertisement and page placement in the directory, that occurred outside of Wisconsin. We observe that API’s tax for the years at issue might well be greater under this interpretation of Wis. Stat. § 71.25(9)(d) than under even the Commission’s interpretation of the statute.