VFJ Ventures, Inc., petitioner, v. G. Thomas Surtees, in his official capacity as Commissioner of the Alabama Department of Revenue, et al., respondent: on petition for a writ of certiorari to the Alabama Supreme Court.

BRIEF OF TAX EXECUTIVES INSTITUTE, INC. AS AMICUS CURIAE IN SUPPORT OF THE PETITIONER

INTEREST OF AMICUS CURIAE

Pursuant to Rule 37 of the Rules of this Court, Tax Executives Institute, Inc. respectfully submits this brief as amicus curiae in support of the petition for a writ of certiorari/ Tax Executives Institute (hereinafter "TEI" or "the Institute") is a voluntary, non-profit association of corporate and other business executives, managers, and administrators who are responsible for the tax affairs of their employers. TEI was organized in 1944 under the ... laws of the State of New York and is exempt from taxation under section 501(c)(6) of the Internal Revenue Code (26 U.S.C.). The Institute is dedicated to promoting the uniform and equitable enforcement of the tax laws, reducing the costs and burdens of administration and com-pliance to the benefit of both the government and taxpayers, and vindicating the Commerce Clause and other constitutional rights of all business taxpayers.

The issue presented is whether the State of Alabama's "add-back" statute, which denies a deduction for ordinary business expenses paid to corporations located outside Alabama, discriminates against inter-state commerce in violation of the Commerce Clause. Alabama is not alone among the States in enacting legislation that reaches beyond its borders to tax extraterritorial values in contravention of the Commerce Clause. Indeed, Alabama's "add-back" statute is just the latest effort to distend the Court's decisions in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), Hunt-Wesson, Inc. v. Franchise Tax Board, 528 U.S. 458 (2000), and other cases by unconstitutionally using a State's taxing authority to exact from multijurisdictional taxpayers that which is not its due.

TEI has more than 7,000 members who represent more than 3,200 of the leading corporations in the United States, Canada, Europe and Asia, including many domiciled or doing business in Alabama. TEI members represent a cross-section of the business community whose employers are, almost without exception, engaged in inter state commerce. TEI has a keen interest in the resolution of issues relating to the constitutionality of Alabama's "add-back" statute, not only with respect to its members whose companies are taxed by Alabama but also in respect of those in the approximately 20 other States with "add-back" statutes. The disposition of this case will have a direct bearing on the permissibility of the "add-back" device across the Nation and, indirectly, States' other efforts to tax beyond their borders.

Summary of Argument

1. The core issue presented by this case is whether the State of Alabama's "addback" statute violates the Commerce Clause of the Constitution. It is well settled that a State may not tax value outside its borders. Such taxation is forbidden because the "fundamental purpose of the [Commerce] Clause is to as-sure that there be free trade among the several States," Boston Stock Exchange v. State Tax Commission, 429 U.S. 318, 335 (1977), and because extraterritorial taxation offends fundamental notions of due process and constitutes an "unreasonable clog upon the mobility of commerce." Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511, 527 (1935).

2. Like many States, Alabama imposes a corporate income tax on corporations doing business within its borders. Alabama has chosen to impose its corporate income tax on a "separate company" basis. A direct consequence of that policy choice is the requirement that Alabama must recognize the separate existence of individual corporations. It is within this separate company reporting context that Alabama's "add-back" statute must be tested by and withstand the scrutiny of the Commerce Clause and the Due Process Clause. Alabama's "add-back" statute fails that test.

3. Alabama's "add-back" statute, like those of many other States, requires corporate taxpayers to "add-back" otherwise deductible interest and intangible expenses paid to or incurred with respect to related members. This "add-back" does not apply, however, to interest and intangible expenses to the extent the related corporation is subject to tax in a State that mandates separate company filing for corporate taxpayers and that taxes intangible income such as royalties. As a result, the amount of interest and intangible expenses taxable in Alabama fluctuates based on the taxing scheme in the States in which the recipient does business--not on the taxpayer's level of activity in Alabama.

4. In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), this Court established a four-prong test for determining whether a state tax statute violates the Commerce Clause--that is to say, whether it impermissibly reaches extraterritorial values. These four tests are not wholly independent of one another, but rather represent four ways of answering the same question--whether a State is attempting to tax "value outside its borders." See Connecticut General Life Ins. Co. v. Johnson, 303 U.S. 77, 80-81 (1938). Alabama's "add-back" statute does not satisfy the requirements of Complete Auto Transit.

5. Alabama's "add-back" statute does not pass the fair apportionment test. Fair apportionment necessitates a "rational relationship between the income attributed to the State and the intrastate values of the enterprise." Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 436-37 (1980). The failure to provide factor representation is "inherently arbitrary," Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113, 121 (1920), and cannot help but produce a result that reflects neither "a reasonable sense of how [the] income [was] generated" (as required by Container Corp. v.

   Franchise Tax Board, 463 U.S. 159, 169 (1983)) nor "the relative contribution of the activities in the various States [specifically, Alabama] to the production of total unitary income" (Butler Brothers v. McColgan, 315 U.S. 501, 509 (1942)). Because the amount of royalty income taxable in Alabama under its "add-back" statute is controlled by the taxing choice of other States, there is no rational relationship between the royalties Alabama seeks to tax and a taxpayer's activities in Alabama. Alabama may not constitutionally cherry pick items of income or expense (to include or exclude) in order to increase the taxes it exacts from multijurisdictional companies without making correlative adjustments to the formula used to apportion the income among Alabama and the other States.

6. To survive constitutional challenge a State tax must not discriminate against interstate commerce. The prohibition on discrimination was borne of a fear of "economic protectionism--that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors." New Energy Co. v. Limbach, 486 U.S. 269, 273-74 (1988). This Court has defined "discrimination" for purposes of Commerce Clause analysis as "differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter." Oregon Waste Systems, Inc. v. Department of Environmental Quality of Oregon, 511 U.S. 93, 99 (1994). Most recently...