Taxation of Multistate Corporations-mobil, Exxon and Colorado
| Jurisdiction | United States,Federal,Colorado |
| Citation | Vol. 9 No. 10 Pg. 2058 |
| Pages | 2058 |
| Publication year | 1980 |
1980, October, Pg. 2058. Taxation of Multistate Corporations-Mobil, Exxon and Colorado
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The scope of a state's authority to tax multistate and multinational corporations is currently the subject of great controversy, both at the federal level and within the state of Colorado. The U.S. Supreme Court recently handed down two decisions on the controversy, no less than three bills on the subject are pending before Congress, the Colorado Supreme Court recently handed down a major decision and various lower Colorado courts are considering other cases, all of which deal with fundamental questions as to the proper reach of the states' taxing powers. This article considers these developments.
At least in the U.S. Supreme Court, the states seem to be winning the war. Both recent decisions, Mobil Oil Corp. v. Commissioner of Taxes of Vermont(fn1) and Exxon Corp. v. Wisconsin Department of Revenue,(fn2) affirmed the states' pervasive taxing powers. The Court dealt in the Mobil case with the constitutional limits on a non-domiciliary state's power to tax income received by a U.S. corporation in the form of dividends from domestic and foreign subsidiaries and affiliates. In the Exxon case, the Court considered whether the due process clause of the Fourteenth Amendment prevented a state from applying its apportionment formula to the taxpayer's total corporate income, notwithstanding the taxpayer's assertion that its use of separate functional accounting showed what portion of its income was derived from income-producing activities carried on outside the state.
Mobil Oil Corporation, incorporated and commercially domiciled in the state of New York, was engaged in business in both the state of Vermont and at least forty other states and a number of foreign countries. The U.S. Supreme Court found that Mobil was engaged in an integrated petroleum business which included exploration, production, refining, transportation, distribution and sales, as well as chemical and mining enterprises. Mobil's business activities in Vermont consisted solely of the wholesale and retail marketing of petroleum products. A majority of Mobil's business outside of Vermont was conducted through wholly and partially owned subsidiaries and affiliates, organized under both the laws of foreign nations and in states other than Vermont.
Vermont, in imposing a net income tax on Mobil's taxable income attributable to Vermont, used a three-factor apportionment
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formula. The majority of Mobil's taxable income to which the apportionment formula was applied consisted of dividends received from Mobil's foreign subsidiaries and foreign and domestic affiliates operating in foreign countries. All dividends were received by Mobil outside Vermont, and Mobil's control and use of the dividend income was managed by its New York headquarters. On its Vermont returns, Mobil had subtracted the dividends received from the apportionment base as "nonapportionable items." Vermont recalculated the apportionment base by including the dividends and assessed Mobil the deficiency.
In challenging Vermont's inclusion of the dividend income in the apportionment base, Mobil presented three constitutional arguments. First, Mobil argued that the dividends could not be taxed in Vermont because there was no nexus between that state and either Mobil's management of its investments or the business activities of the payor corporations. Second, Mobil argued that the taxation of the dividends in Vermont would create an unconstitutional burden of multiple taxation because the dividends would be allocable to, and taxable in full by, New York, the state of commercial domicile. Finally, Mobil argued that the foreign source of the dividends precluded state income taxation in this country, at least in states other than the commercial domicile, because of the risk of multiple taxation at the international level.(fn3)
The majority viewed Mobil as having elected not to challenge the accuracy or the fairness of Vermont's apportionment formula and as having based its attack solely upon the contention that "dividends from a 'foreign source' by their very nature are not apportionable income."(fn4) As a result, the Court confined its inquiry to
the question whether there is something about the character of income earned from investments in affiliates and subsidiaries operating abroad that precludes, as a constitutional matter, state taxation of that income by the apportionment method.(fn5)
In upholding the determination of the Vermont Commissioner of Taxes, the Supreme Court cited several of its prior decisions which established the basic principle that so long as certain requirements are met, the income of a corporation operating in interstate commerce is subject to fairly apportioned state taxation.(fn6) The prerequisites to state taxation of income derived from interstate commerce imposed by the due process clause of the Constitution are a "minimal connection" between the corporation's interstate activities and the taxing state(fn7) and a "rational relationship between the income attributed to the State and the intrastate values of the enterprise."(fn8)
The existence of a "minimal connection" or "nexus" is a factual question which depends primarily upon the extent of the corporation's presence within the taxing state.(fn9) Utilizing the "substantial privilege of carrying on business" within a state has been held to be sufficient to establish the requisite nexus.(fn10)
Mobil offered two arguments as to why the essential nexus was not present. First, Mobil argued that the foreign source of the income negated the existence of the necessary minimal connection. The Court rejected this argument on the ground that the existence of a "unitary business" supplied the requisite nexus notwithstanding the foreign source of the income, citing Bass, Ratdiff & Gretton, Ltd. v. State Tax Commission.(fn11)
Several previous decisions of the Court had rejected the proposition that separate geographic accounting was effective to establish the true "source" of income.(fn12) Citing these decisions, the Court explained that "separate accounting, while it purports to isolate portions of income received in various States, may fail to account for contributions to income resulting from functional
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integration, centralization of management, and economies of scale.(fn13) According to the majority, Mobil failed to sustain its burden of proving that the dividend income "was earned in the course of activities unrelated to the sale of petroleum products in [Vermont]."(fn14)
Mobil's second argument in support of the proposition that there was no nexus between the dividend income and Mobil's activities in Vermont was based on the form of the income; i.e., the fact that it was received as dividends on stock owned by Mobil. Mobil sought to characterize the receipt of the dividend income as part of a separate investment business.
This argument also was rejected because of the nature of the activities of the subsidiaries and affiliates. The Court stated:
If there had not been separate corporate entities but rather mere divisions of a single corporation, the income from the divisions clearly would meet the due process requirements for apportionability.(fn16) The interposition of separate corporations "ought not to affect the apportionability of income the parent receives."(fn17)So long as dividends from subsidiaries and affiliates reflect profits derived from a functionally integrated enterprise, those dividends are income to the parent earned in a unitary business.(fn15)
The opinion suggested, however, that the relationship between the use of apportionment to determine the income taxable by a state and the existence of an integrated business might cut both ways, saying:
Where the businss activities of the dividend payor have nothing to do with the activities of the recipient in the taxing State, due process considerations might well preclude apportionability,
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because there would be no underlying unitary business.(fn18)
In addition to its due process arguments, Mobil offered two arguments based on the commerce clause. Both arguments were based on an alleged multiple tax burden that an intrastate taxpayer would not bear. The first argument was derived from the prohibition on discrimination against interstate commerce.(fn19) Mobil asserted that since in theory the state of its commercial domicile, New York, could levy an income tax on the entire amount of its dividend income, any tax on Mobil's dividend income levied by Vermont would be duplicative and therefore prohibited by the commerce clause.(fn20)
The response of the Court was to question New York's right to tax the dividends in toto. Citing Curry v. McCanless,(fn21) the Court indicated that any rationale for allocating income from intangibles to a fictionalized situs was inapplicable when the taxpayer's activities with respect to such intangibles involved relations with several states. The Court stated that there was
and observed that apportionment was...no reason in theory why [the power of the state of commercial domicile to lay some tax on a corporation's dividend income] should be exclusive when the dividends reflect income from a unitary business, part of which is conducted in other States,(fn22)
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