
    The People of the State of New York ex rel. The Brooklyn Union Gas Company, Relator, v. William J. Morgan, as Comptroller of the State of New York, Respondent.
    Third Department,
    June 27, 1906.
    Franchise tax — determination of gross earnings of gas company—cost of raw product deducted.
    Iu determining- the “ gross earnings” of a gas company for the assessment of a franchise tax the value of the raw materials such as coal and oil which are turned into gas should be deducted, otherwise the assessment is not upon the gross earnings as required by the statute, but upon the'gross receipts. Earnings should not include capital which is the source of the earnings.
    
      It seems, however, that -incidental expenses, such as coal to heat furnaces, labor, etc., may be taken as part of thc.gross earnings.
    Certiorari issued out of the Supreme Court and attested on the 6th day of July, 1900, directed to William J. Morgan, as Comptroller of the State of Mew York, requiring- him to certify and return to the office of the clerk of the county of Albany all and singular the proceedings had in relation to the tax imposed upon the relator for the year ending October 31, 1898.
    
      A. Dudley Britton, for the relator.
    
      Julius M. Mayer, Attorney-General, James G. Graham and Horace McGuire, for the respondent.
   Cochrane, J.:

The relator is required by section 186 of the Tax Law (Laws of 1896, chap. 908) to “ pay. to thé State for the privilege of exercising its corporate franchises or carrying on its business in such corporate or organized capacity in this State an annual tax which shall be five-tenths of one per centum upon its gross earnings from all sources within this State.”

The gross receipts of the relator for the year ending October 31, 1898, were $3,805,626.15, and on this amount the Comptroller fixed the tax under the statute above referred to at five-tenths of one per cent, amounting to $19,028.13.

The relator is engaged in the business of manufacturing and selling gas. For tire production of such gas it purchases from time to time raw material, consisting principally of coal and oil, which- is transformed into the manufactured product. It appeared before the Comptroller that at all times during the year ending October 31, 1898, a portion of the capital of the company was invested in such raw material which from time to time was converted into the manufactured product and came back to the relator as cash, being part of the price of gas sold to the consumers. During the year in question the relator thus expended for raw material $947,546.28, which material was made into gas and sold to the consumers and is included in the gross receipts of the company of $3,805,626.15, as above stated.

The Comptroller has thus fixed the tax, not on the ‘‘gross earnings ” of the relator as required by the statute, but on its gross receipts. Capital of a corporation which must first be invested before it begins to earn anything cannot be said to be a part of the earnings of such corporation merely because it is turned into cash and thus in one sense becomes a receipt of the corporation. Earnings do not include capital but are the productions or outgrowth of capital. In some cases like the one now under consideration the capital must he supplemented by labor and such other expenditures as may bo incidental to the development of the manufactured product from the raw material. Such incidental expenditures are doubtless part of the “ gross earnings.” If the coal in question had been used under the boilers for developing heat, such coal like labor would be merely an incidental expenditure in the process of converting the "capital from one form into another, and should probably be included as a part of the “ gross earnings” of the relator. But the evidence is that the coal in question was not used for generating heat, but was of a different kind and was converted into gas. In fixing the “ gross earnings ” of the relator there should, therefore, have been deducted from the gross receipts the cost of the raw material, which amounted to the said sum of $947,546.28.

The relator claims that other deductions should have been made. Perhaps this is so as to some of the claims thus made, but the evidence before the Comptroller was insufficient to form a proper basis for reduction. The entire proceeding should, therefore, be remitted to the Comptroller for a rehearing.

The determination of the Comptroller must be reversed, with fifty dollars costs and disbursements to the relator, and the matter remitted to the Comptroller for a new hearing.

All concurred.

Determination of the Comptroller reversed, with fifty dollars costs and disbursements to the relator, and the matter remitted to the Comptroller for'a new hearing.  