Mobil Oil Corporation v. Commissioner of Taxes of Vermont

• Citation: 445 U.S. 425,63 L.Ed.2d 510,100 S.Ct. 1223
• Decision Date: 19 March 1980
• Docket Number: No. 78-1201,78-1201
• Parties: MOBIL OIL CORPORATION, Appellant, v. COMMISSIONER OF TAXES OF VERMONT
• Court: U.S. Supreme Court

445 U.S. 425

100 S.Ct. 1223

63 L.Ed.2d 510

MOBIL OIL CORPORATION, Appellant,

v COMMISSIONER OF TAXES OF VERMONT.

No. 78-1201.

Argued Nov. 7, 1979.

Decided March 19, 1980.

Syllabus

Appellant is a corporation organized under the laws of New York, where it has its principal place of business and its "commercial domicile." It does business in many States, including Vermont, where it engages in the wholesale and retail marketing of petroleum products. Vermont imposed a corporate income tax, calculated by means of an apportionment formula, upon "foreign source" dividend income received by appellant from its subsidiaries and affiliates doing business abroad. Appellant challenged the tax on the grounds, inter alia, that it violated the Due Process Clause of the Fourteenth Amendment and the Commerce Clause, but the tax ultimately was upheld by the Vermont Supreme Court.

Held :

1. The tax does not violate the Due Process Clause. There is a sufficient "nexus" between Vermont and appellant to justify the tax, and neither the "foreign source" of the income in question nor the fact that it was received in the form of dividends from subsidiaries and affiliates precludes its taxability. Appellant failed to establish that its subsidiaries and affiliates engage in business activities unrelated to its sale of petroleum products in Vermont, and accordingly it has failed to sustain its burden of proving that its "foreign source" dividends are exempt, as a matter of due process, from fairly apportioned income taxation by Vermont. Pp. 436-442.

2. Nor does the tax violate the Commerce Clause. Pp. 442-449.

(a) The tax does not impose a burden on interstate commerce by virtue of its effect relative to appellant's income tax liability in other States. Assuming that New York, the State of "commercial domicile," has the authority to impose some tax on appellant's dividend income, there is no reason why that power should be exclusive when the dividends reflect income from a unitary business, part of which is conducted in other States. The income bears relation to benefits and privileges conferred by several States, and in these circumstances apportionment, rather than allocation, is ordinarily the accepted method of taxation. Vermont's interest in taxing a proportionate share of appellant's divi- dend income thus is not overridden by any interest of the State of "commercial domicile." Pp. 443-446.

(b) Nor does the tax impose a burden on foreign commerce. Appellant's argument that the risk of multiple taxation abroad requires allocation of "foreign source" income to a single situs at home, is without merit in the present context. That argument attempts to focus attention on the effect of foreign taxation when the effect of domestic taxation is the only real issue; its logic is not limited to dividend income but would apply to any income arguably earned from foreign commerce, so that acceptance of the argument would make it difficult for state taxing authorities to determine whether income does or does not have a foreign source; the argument underestimates this Court's power to correct discriminatory taxation of foreign commerce that results from multiple state taxation; and its acceptance would not guarantee a lesser domestic tax burden on dividend income from foreign sources. Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 99 S.Ct. 1813, 60 L.Ed.2d 336, which concerned property taxation of instrumentalities of foreign commerce, does not provide an analogy for this case. Pp. 446-449.

136 Vt. 545, 394 A.2d 1147, affirmed.

Jerome R. Hellerstein, New York City, for appellant.

Richard Johnson King, Waitsfield, Vt., for appellee.

William D. Dexter, Olympia, Wash., for the Multistate Tax Commission et al., as amici curiae, by special leave of Court.

Mr. Justice BLACKMUN delivered the opinion of the Court.

In this case we are called upon to consider constitutional limits on a nondomiciliary State's taxation of income received by a domestic corporation in the form of dividends from subsidiaries and affiliates doing business abroad. The State of Vermont imposed a tax, calculated by means of an apportionment formula, upon appellant's so-called "foreign source" dividend income for the taxable years 1970, 1971, and 1972. The Supreme Court of Vermont sustained that tax.

I

A.

Appellant Mobil Oil Corporation is a corporation organized under the laws of the State of New York. It has its principal place of business and its "commercial domicile" in New York City. It is authorized to do business in Vermont.

Mobil engages in an integrated petroleum business, ranging from exploration for petroleum reserves to production, refining, transportation, and distribution and sale of petroleum and petroleum products. It also engages in related chemical and mining enterprises. It does business in over 40 of our States and in the District of Columbia as well as in a number of foreign countries.

Much of appellant's business abroad is conducted through wholly and partly owned subsidiaries and affiliates. Many of these are corporations organized under the laws of foreign nations; a number, however, are domestically incorporated in States other than Vermont.¹ None of appellant's subsidiaries or affiliates conducts business in Vermont, and appellant's shareholdings in those corporations are controlled and managed elsewhere, presumably from the headquarters in New York City.

In Vermont, appellant's business activities are confined to wholesale and retail marketing of petroleum and related products. Mobil has no oil or gas production or refineries within the State. Although appellant's business activity in Vermont is by no means insignificant, it forms but a small part of the corporation's worldwide enterprise. According to the Vermont corporate income tax returns Mobil filed for the three taxable years in issue appellant's Vermont sales were $8,554,200, $9,175,931, and $9,589,447 respectively; its payroll in the State was $236,553, $244,577, and $254,938, respectively; and the value of its property in Vermont was $3,930,100, $6,707,534, and $8,236,792, respectively. App. 35-36, 49-50, 63-64. Substantial as these figures are, they too, represent only tiny portions of the corporation's total sales, payroll, and property.²

Vermont imposes an annual net income tax on every corporation doing business within the State. Under its scheme, net income is defined as the taxable income of the taxpayer "under the laws of the United States." Vt.Stat.Ann., Tit. 32, § 5811(18) (1970 and Supp.1978).³ If a taxpayer corporation does business both within and without Vermont, the State taxes only that portion of the net income attributable to it under a three-factor apportionment formula. In order to determine that portion, net income is multiplied by a fraction representing the arithmetic average of the ratios of sales, payroll, and property values within Vermont to those of the corporation as a whole. § 5833(a).⁴ Appellant's net income for 1970, 1971, and 1972, as defined by the Federal Internal Revenue Code, included substantial amounts received as dividends from its subsidiaries and affiliates operating abroad. Mobil's federal income tax returns for the three years showed taxable income of approximately $220 million, $308 million, and $233 million, respectively, of which approximately $174 million, $283 million, and $280 million was net dividend income.⁵ On its Vermont returns for these years, however, appellant subtracted from federal taxable income items it regarded as "nonapportionable," including the net dividends. As a result of these subtractions, Mobil's Vermont returns showed a net income of approximately $23 million for 1970 and losses for the two succeeding years. After application of Vermont's apportionment formula, an aggregate tax liability of $1,871.90 to Vermont remained for the 3-year period; except for a minimum tax of $25 for each of 1971 and 1972, all of this was attributable to 1970.⁶ The Vermont Department of Taxes recalculated appellant's income by restoring the asserted nonapportionable items to the preapportionment tax base. It determined that Mobil's aggregate tax liability for the three years was $76,418.77, and deficiencies plus interest were assessed accordingly.⁷ Appellant challenged the deficiency assessments before the Commissioner of Taxes. It argued, among other things, that taxation of the dividend receipts under Vermont's corporate income tax violated the Due Process Clause of the Fourteenth Amendment, as well as the Interstate and Foreign Commerce Clause, U.S.Const., Art. I, § 8, cl. 3. Appellant also argued that inclusion of the dividend income in its tax base was inconsistent with the terms of the Vermont tax statute, because it would not result in a "fair" and "equitable" apportionment, and it petitioned for modification of the apportionment. See Vt.Stat.Ann., Tit. 32, § 5833(b) (1970 and Supp.1978).⁸ It is evident from the transcript of the hearing before the Commissioner that appellant's principal object was to achieve the subtraction of the asserted nonapportionable income from the preapportionment tax base; the alternative request for modification of the apportionment formula went largely undeveloped. See App. 18-31.

The Commissioner held that inclusion of dividend income in the tax base was required by the Vermont statute, and he rejected appellant's Due Process Clause and Commerce Clause arguments.⁹

Mobil sought review by the Superior Court of Washington County. That court reversed the Commissioner's ruling. It held that inclusion of dividend income in the tax base unconstitutionally subjected appellant to prohibitive multiple taxation because New York, the State of appellant's commercial domicile, had the authority to tax the dividends in their entirety. Since New York could tax without apportionment, the court concluded, Vermont's use of an apportionment formula would not be an adequate safeguard against...