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Lone Star Steel Co. v. Dolan, 668 P.2d 916

Facts

Lone Star Steel Co. is an integrated steel company primarily operating in Texas, with a manufacturing plant in Fort Collins, Colorado. The company produces various types of steel products, including pipe, and has its commercial domicile in Texas. The case arose from tax deficiencies assessed against Lone Star for the years 1970-73, which the company protested but were upheld by the Department of Revenue and affirmed by the district court and the court of appeals.

Lone Star is an integrated steel company that mines its own iron ore; processes it into pig iron and then into steel; rolls the steel into skelp, which in turn is made into pipe; and markets the pipe. The corporation also has its own coal mines in Oklahoma and Arkansas. It has its commercial and legal domicile in Texas, with its executive offices in Dallas.

Issue

The main legal issues were whether certain sales constituted Colorado sales for tax purposes, whether dividends from a subsidiary were to be apportioned or allocated to Texas, and whether interest from loans to the parent company was apportionable or allocable.

At issue in this case are three questions: (1) whether certain sales constitute Colorado sales; (2) whether dividends paid by a subsidiary of Lone Star are to be apportioned or are to be allocated to Texas; and (3) whether interest paid by Northwest Industries to Lone Star is to be apportioned or allocated to Texas.

Rule

Under the Multistate Tax Compact, a corporate taxpayer may elect to apportion its income according to the Compact or under Colorado's corporate income tax provisions. Business income is defined as income arising from transactions in the regular course of business, while nonbusiness income is allocated to the state of the taxpayer's commercial domicile.

Under the Multistate Tax Compact (Compact), to which Colorado is a party, a corporate taxpayer may elect to apportion its income according to the provisions of the Compact or under the regular Colorado corporate income tax apportionment provisions.

Analysis

The court analyzed the nature of the sales and determined that the delivery of pipe to an intermediary for wrapping did not constitute a Colorado sale, as the actual delivery to the out-of-state purchaser occurred after the wrapping. Additionally, the court found that the interest income from short-term loans to the parent company was integral to Lone Star's unitary business and thus apportionable to Colorado.

We agree with Lone Star that these sales should not be considered Colorado sales. The principal draftsman of the Uniform Division of Income for Tax Purposes Act (UDITPA) has described the purpose behind paragraph 16 as follows: 'Sections 15 through 17 of the act provide for the computation of the sales factor… Moreover, it is believed that the contribution of the consumer states toward the production of the income should be recognized by attributing the sales to those states.'

Conclusion

The court concluded that there was no Colorado sale for income tax purposes when the pipe was delivered to an intermediary for wrapping before being shipped out of state. However, it held that the interest income from loans to the parent was business income apportionable to Colorado.

Consequently, we hold that when the pipe is delivered to Gaido-Lingle for wrapping and then shipped by common carrier to an out-of-state purchaser there is no Colorado sale for income tax purposes.

Who won?

The prevailing party was the Department of Revenue, as the court upheld the taxation of interest income and affirmed part of the lower court's ruling.

The Department of Revenue (Department) contends that once the pipe is delivered to Gaido-Lingle Lone Star's obligations are satisfied.

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