Mobil Oil Corp. v. Commissioner of Taxes

• Citation: 136 Vt. 545,394 A.2d 1147
• Decision Date: 09 November 1978
• Docket Number: No. 160-77,160-77
• Parties: MOBIL OIL CORPORATION v. COMMISSIONER OF TAXES.
• Court: United States State Supreme Court of Vermont

Page 1147

394 A.2d 1147

136 Vt. 545

MOBIL OIL CORPORATION v. COMMISSIONER OF TAXES.

No. 160-77.

Supreme Court of Vermont.

Nov. 9, 1978.

Douglas C. Pierson and William H. Quinn of Pierson, Affolter & Wadhams, Burlington, and Jerome R. Hellerstein and J. Dwight Evans, Jr., New York City, of counsel, for plaintiff.

M. Jerome Diamond, Atty. Gen., and Richard J. King, Deputy Commissioner and Gen. Counsel, Dept. of Taxes, Montpelier, for defendant.

Before BARNEY, C. J., and DALEY, LARROW, BILLINGS and HILL, JJ.

BILLINGS, Justice.

The Commissioner of Taxes (Commissioner) appeals from a final order of the Washington Superior Court redetermining plaintiff-appellee Mobil Oil Corporation's (Mobil's) income tax liability to the State of Vermont for the years 1970 through 1972 inclusive. The superior court determined that the Commissioner's application of the Vermont corporate income tax to certain of Mobil's dividend and interest income offended the Commerce Clause of the United State Constitution. We reverse.

Vermont imposes an annual apportioned net income tax on corporations authorized to do business within the state or receiving income allocable to Vermont because of business activity within the state. 32 V.S.A. §§ 5811(15), 5831-5833. The application of this tax involves a number of steps. Once it has been ascertained that a corporation is a taxable corporation, 32 V.S.A. § 5811(15), the corporation's tax base is determined. The tax base is defined in 32 V.S.A. § 5811(18) as "the taxable income of the taxpayer for that taxable year under the laws of the United States, excluding income which under the laws of the United States is exempt from taxation by the states." The income items here disputed are not so exempt. The statute applies the misleading term "Vermont net income" to the income base against which the tax is assessed. The term might seem to indicate that the tax base is composed only of income allocable to business activities within the state, when in fact the term refers to a corporation's total net income before any allocation.

The allocation is a distinct step in the process of determining the corporation's tax liability to Vermont. 32 V.S.A. § 5833(a) establishes a procedure for apportioning the net income of a corporation engaging in activity both within and without the state to allocate to Vermont an equitable portion of that income upon which to lay its tax. The computation mandated by the statute seeks to determine the fraction of a corporation's net income derived from its Vermont business activity and utilizes a three factor formula. The value of all of the corporation's Vermont real and tangible property is expressed as a percentage of the value of the corporation's real and tangible property wherever located. The same process is repeated for Vermont payroll and sales. The arithmetic average of these percentages is then determined, yielding an apportionment factor. This apportionment factor multiplied by the corporation's total net income determines the apportioned tax base. It is upon this apportioned net income reflecting net income allocable to business activity within Vermont's borders that Vermont assesses the tax in question.

Mobil is a New York corporation engaged in interstate and foreign commerce. In each of the years in question, Mobil received a large portion of its taxable income in the form of dividends from foreign subsidiary corporations and from domestic subsidiary and nonsubsidiary corporations. Also, in each relevant year, Mobil received a small percentage of its income in the form of interest. These two sources of income will be referred to hereinafter as investment income. All other taxable income will be referred to hereinafter as operating income.

Mobil does not claim that it was not a taxable corporation during the years in question, nor does Mobil argue that the apportionment formula resulted in too great a percentage of its tax base being subject to taxation in this state. Rather, Mobil objects to its investment income being included in its Vermont tax base at all. Mobil filed tax returns during each of the years in question, determining its tax base by applying the apportionment factor, reckoned according to the statute, to operating income only. That is, in determining its "Vermont net income" for each year, Mobil took its net income for federal income tax purposes and reduced this figure by amounts representing dividend and interest income. This is not authorized by law, and upon audit the Vermont Department of Taxes added the amounts back in and assessed deficiencies.

Mobil appealed the deficiencies to the Commissioner under the provisions of 32 V.S.A. § 5833(b). A hearing was held at which time Mobil asserted that the assessments violated the terms of the tax statute, 32 V.S.A. § 5833, the Due Process Clause of the Fourteenth Amendment, and the Interstate and Foreign Commerce Clause of Article I, Section 8 of the United States Constitution. The Commissioner rejected all grounds of invalidity asserted and affirmed the action of the Department of Taxes.

Upon appeal, the superior court reversed on the sole ground that the tax as applied violated the prohibition against multiple taxation contained in the Commerce Clause. As the superior court correctly noted in its order, the legal questions concerning apportionment and due process had already been answered adversely to Mobil's contentions by recent decisions of this Court. In re Goodyear Tire and Rubber Co., 133 Vt. 132, 335 A.2d 310 (1975); F. W. Woolworth Co. v. Commissioner of Taxes, 133 Vt. 93, 328 A.2d 402 (1974); F. W. Woolworth Co. v. Commissioner of Taxes, 130 Vt. 544, 298 A.2d 839 (1972); Gulf Oil Corp. v. Morrison, 120 Vt. 324, 141 A.2d 671 (1958).

The single question presented here is: Does Vermont's application of its apportioned net income tax to the investment income in issue constitute multiple taxation prohibited by the Commerce Clause?

Mobil's argument that Vermont's tax would impose an unconstitutional burden on interstate commerce involves a number of propositions. The first is that taxes subjecting interstate businesses to a risk of multiple taxation not borne by intrastate business violate the Commerce Clause. The next is that the test of multiple taxation is the power of other jurisdictions to tax rather than the exercise of that power. The last is that the state of a corporation's commercial domicile, in Mobil's case New York, has the constitutional power to tax its corporation's dividend and interest income without apportionment. Mobil argues that if New York has the authority to tax all of Mobil's investment income, there is a risk that it will do so. If Vermont's tax upon a portion of the same income is sustained, there then will be a risk of multiple taxation. If the mere existence of the power is the constitutional test, then an impermissible burden would be shown by establishing New York's right to tax without apportionment. There is no allegation that New York presently taxes or intends to tax this investment income on an unapportioned basis, and so, no double taxation in fact is alleged. Mobil asks us to hold that the possibility that New York may so tax prevents Vermont and every other state from laying even a properly apportioned tax upon this investment income.

The burden is upon the taxpayer to demonstrate a risk of multiple taxation. Standard Pressed Steel Co. v. Department of Revenue of Washington, 419 U.S. 560, 563, 95 S.Ct. 706, 42 L.Ed.2d 719 (1975); General Motors Corp. v. Washington, 377 U.S. 436, 449, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1964).

Mobil in the case at bar has not established that its commercial domicile can tax the investment income of its domiciliary corporation without apportionment. Mobil claims that this proposition is "well established," but only cites four cases in support of its claim. Chestnut Securities Co. v. Oklahoma Tax Commission, 125 F.2d 571 (10th Cir.) Cert. denied, 316 U.S. 668, 62 S.Ct. 1035, 86 L.Ed. 1744 (1942); Pacific Telephone & Telegraph Co. v. Franchise Tax Board, 7 Cal.3d 544, 102 Cal.Rptr. 782, 498 P.2d 1030 (1972); Southern Pacific Co. v. McColgan, 68 Cal.App.2d 48, 156 P.2d 81 (1945); United Gas Corp. v. Fontenot, 241 La. 488, 129 So.2d 748 (1961). Two of these four were decided more than thirty years ago, when apportionment was not looked upon as favorably as it is today. All of the cases construed statutes very different from the apportioned net income tax here in issue. Only the United Gas opinion mentioned the Commerce Clause. The Louisiana Supreme Court there held only that the commercial domicile could tax the income from its corporation's intangibles "unless it is established by the evidence (that) such taxation does, in fact, place an undue burden on interstate commerce." United Gas Corp. v. Fontenot, supra, 241 La. at 510, 129 So.2d at 756. Whether or not an undue burden upon interstate commerce exists, is, of course, the precise point in issue in this case, and on this point the United Gas case is no authority. Congress or the United States Supreme Court may ultimately have to decide on the power of the states to tax on such a basis, but neither has done so yet.

We do not decide this issue in the case at bar since Mobil has failed to establish on the record that New York has the power to tax investment income without apportionment, and hence no risk of multiple taxation is here shown. A number of recent decisions of the United States Supreme Court imply that the issue would be decided by requiring that taxation of investment income of corporations engaged in interstate be on an apportioned basis, rather than by permitting the commercial domicile to tax such income to the exclusion of all other jurisdictions. Moorman Manufacturing Co. v. Bair, 437 U.S. 267, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978); Department of Revenue of Washington v. Association of Washington Stevedoring Companies, 435 U.S. 734, 98 S.Ct....