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Marky Kay6/15/2003
Corporate Excise Tax
ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT and DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
Plaintiff (hereinafter taxpayer) appeals from a magistrate decision holding that cars leased as part of the Mary Kay Career Car Program (hereinafter Career Car Program) were properly included by Defendant Department of Revenue (hereinafter the department) in the property factor for purposes of calculating taxpayer's income apportionable to Oregon for the 1994 and 1995 tax years. The matter is before the court on stipulated facts and cross motions for summary judgment.
I. FACTS
Taxpayer was founded in 1963 with a sales force of nine consultants plus its co-founders; by 1994 taxpayer's sales force had grown to more than 325,000 consultants. (Stip Ex F at 23.) Taxpayer uses the direct sales method to market its line of skin care products, cosmetics, toiletries, and other personal care products. (Stip Facts at 1, 2.) Independent Beauty Consultants (hereinafter Consultants) purchase products directly from taxpayer and then make retail sales to their customers. (Stip Facts at 2.) Consultants are independent contractors and receive commissions from taxpayer based on the wholesale value of the products purchased from taxpayer. (Stip Facts at 4.) Commissions paid by taxpayer to Consultants, as well as the value of any prizes and awards, are reported to the IRS as independent contractor income on a Federal 1099 form. (Stip Facts at 16.) After meeting minimum qualifications, a Consultant becomes eligible to submit an application to become an Independent Sales Director (hereinafter Director). Once accepted as a Director, commissions are based on the wholesale purchases of the Director's "unit". A unit includes the personal recruits of the Director, as well as the recruits of those personal recruits, and the recruits of their recruits. (Stip Facts at 7.)
To motivate product sales by Consultants and Directors, taxpayer has developed various incentive programs. (Stip Facts at 18.) Those incentives follow the progression of the "Mary Kay Consultant Career Path." (Stip Ex F at 195.) The Mary Kay Consultant Career Path includes six steps: (1) Beauty Consultant; (2) Star Recruiter; (3) Team Leader; (4) Team Manager, Silver and Gold Key Team Managers; (5) Director in-Qualification; and (6) Director. ( Id.) An example of the incentive to achieve the level of Star Recruiter is eligibility "to wear the beautiful red jacket with a black skirt" which the Consultant then continues to wear at "each step of the Consultant Career Path." ( Id at 196.) When the level of Team Manager is achieved, the Consultant is eligible to participate in the Career Car Program. ( Id at 197.)
Once the necessary criteria has been achieved, a Consultant may qualify for the Career Car Program through which the Consultant may use a Career Car leased from a third party lessor. (Stip Facts at 18.) The entire lease payment is reported on the Consultant's form 1099 as a commission; however, the lease payment is paid directly by taxpayer to the leasing company, which, for the years at issue, was Automotive Rentals, Inc. (hereinafter ARI). (Stip Facts at 22, 32.)
If the Consultant fails to meet the production standards for participation in the Career Car Program, the Consultant must make an out-of-pocket co-payment of all or a portion of the lease payment for the Career Car. (Stip Facts at 27.) If a qualifying Consultant chooses not to participate in the Career Car Program, an additional cash commission is paid by taxpayer directly to the Consultant. (Stip Facts at 18.)
Taxpayer establishes all of the eligibility crit
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