490 U.S. 66 (1989), 87-453, Amerada Hess Corp. v. Director, Division of Taxation,

Docket Nº:No. 87-453
Citation:490 U.S. 66, 109 S.Ct. 1617, 104 L.Ed.2d 58, 57 U.S.L.W. 4418
Party Name:Amerada Hess Corp. v. Director, Division of Taxation,
Case Date:April 03, 1989
Court:United States Supreme Court

Page 66

490 U.S. 66 (1989)

109 S.Ct. 1617, 104 L.Ed.2d 58, 57 U.S.L.W. 4418

Amerada Hess Corp.


Director, Division of Taxation,

No. 87-453

United States Supreme Court

April 3, 1989

New Jersey Department of the Treasury

Argued November 29, 1988



Appellant oil companies do business in New Jersey and are subject to that State's Corporation Business Tax. They are also subject to the federal windfall profit tax on their crude-oil production, which does not occur in New Jersey. They each sought a deduction for the federal tax in calculating "entire net income" on their 1980 and 1981 state tax returns, but appellee, the Director of the New Jersey Division of Taxation, assessed deficiencies on the ground that the "add-back" provision of the state tax statute prohibited corporations from deducting a federal tax that is "on or measured by profits or income." The State Tax Court affirmed the assessments, but the Appellate Division of the State Superior Court reversed. The State Supreme Court in turn reversed and reinstated the Tax Court's judgment, holding that the windfall profit tax is measured by "profits or income" for the purposes of the add-back provision and that, as so construed, that provision did not violate the Commerce Clause or the Fourteenth Amendment to the Federal Constitution.


1. The New Jersey tax satisfies all four elements of the test set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, and therefore passes Commerce Clause scrutiny even though the add-back provision denies appellants deductions for windfall profit tax payments. Pp. 72-79.

(a) New Jersey has a "substantial nexus" with the activities that generate appellants' "entire net income," including oil production occurring entirely outside the State, since each appellant's New Jersey operations are part of an integrated "unitary business" that includes crude-oil production. P. 73.

(b) The tax is fairly apportioned, since the part of the "entire net income" to be taxed is determined according to the standard three-factor apportionment formula that this Court has expressly approved. See, e.g., Container Corp. of America v. Franchise Tax Board, 463 U.S.

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159, 170. The use of the formula as applied to appellants is not invalid on the ground that the windfall profit tax is an exclusively out-of-state expense, since the costs of a unitary business cannot be deemed confined to the locality in which they are incurred. Pp. 73-75.

(c) The tax does not discriminate against interstate commerce. The add-back provision is not facially discriminatory, since there is no explicit discriminatory design to the tax. Nor does the provision apply exclusively to a localized industry, [109 S.Ct. 1619] since it generally excludes any federal tax "on or measured by income or profits," including the nationwide federal income tax. Moreover, appellants concede that no discriminatory motive underlies the provision, which cannot be held to exert pressure on an interstate business to conduct more of its activities in New Jersey. Pp. 75-79.

(d) The tax is "fairly related" to the benefits the State provides appellants, including police and fire protection, a trained workforce, and the advantages of a civilized society. P. 79.

2. The New Jersey tax does not violate the Fourteenth Amendment. Pp. 79-80.

107 N.J. 307, 526 A.2d 1029, affirmed.

BLACKMUN, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and BRENNAN, WHITE, MARSHALL, STEVENS, and KENNEDY, JJ., joined. SCALIA, J., filed an opinion concurring in the judgment, post, p. 80. O'CONNOR, J., took no part in the consideration or decision of the cases.

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BLACKMUN, J., lead opinion

JUSTICE BLACKMUN delivered the opinion of the Court.

Appellants in this litigation are 13 major oil companies that do business in the State of New Jersey. They are subject to New Jersey's Corporation Business Tax. They also are subject to the federal windfall profit tax imposed on producers of crude oil. None of appellants' oil production takes place in New Jersey.

Each appellant has sought to deduct its federal windfall profit tax in calculating "entire net income" for purposes of the New Jersey Corporation Business Tax. Under the applicable New Jersey statute, however, a corporation may not deduct a federal tax that is "on or measured by profits or income." The Supreme Court of New Jersey ruled that the windfall profit tax is a tax "on or measured by profits or income." The question before us is whether, as so construed, the New Jersey provision runs afoul of the Commerce Clause or of the Fourteenth Amendment to the United States Constitution.



In conjunction with the decontrol of oil prices, Congress enacted the Crude Oil Windfall Profit Tax Act of 1980, Pub.L. 96-223, Tit. I, 94 Stat. 230, now codified as 26 U.S.C.

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§§ 4986-4998 (Act).1 The Act imposes a tax on the "windfall profit" that a crude-oil producer receives from the oil it produces. The "windfall profit" for each barrel of oil is essentially the difference between (a) the deregulated price for the oil (that is, its actual sales price)2 and (b) the regulated price that would have applied had decontrol not taken place.3

[109 S.Ct. 1620] One significant provision of the Act, known as the "net income limitation," places a cap on the amount of a producer's windfall profit that may be taxed each year: "The windfall profit on any barrel of crude oil shall not exceed 90 percent of the net income attributable to such barrel." § 4988(b)(1). The net income attributable to each barrel is the taxable income derived from the oil removed from a particular property for a given year divided by the number of barrels from that property taken into account for that year. § 4988(b)(2).4

Congress specifically has provided that, for federal income tax purposes, the windfall profit tax is deductible. 26

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U.S.C. § 164(a)(4) (1982 ed., Supp. V). Although Congress may have assumed that "the windfall profit tax generally would be deductible under State income taxes," see H.R.Rep. No. 96-304, p. 9 (1979), the Act does not require a State, in imposing a tax, to allow the deduction.


New Jersey's Corporation Business Tax Act, N.J.Stat.Ann. § 54:10A-l et seq. (West 1986), imposes a tax on a portion of the "entire net income" of a corporation "for the privilege of doing business, employing or owning capital or property, or maintaining an office in this State." § 54:10A-2. For a corporation doing business both within and outside New Jersey, the portion of the "entire net income" to be taxed is determined according to a three-factor formula concerning property, receipts, and payroll. The formula calls for the average of three ratios: in-state property to total property; in-state to total receipts; and in-state to total wages, salaries, and other forms of employee compensation. § 54:10A-6. Cf. Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978).

Under the Corporation Business Tax Act, a corporation's "entire net income" is presumptively the same as its federal taxable income "before net operating loss deduction and special deductions." § 54:10A-4(k). The statute also provides:

Entire net income shall be determined without the exclusion, deduction, or credit of . . . [t]axes paid or accrued to the United States on or measured by profits or income.

§ 54:10A-4(k). The New Jersey Legislature adopted this "add-back" provision in 1958, long before Congress enacted the windfall profit tax in 1980. 1958 N.J. Laws, ch. 63. See 107 N.J. 307, 313, 526 A.2d 1029, 1032 (1987).


In reporting to New Jersey its "entire net income" for 1980 and 1981, each of the appellants did not "add back" the

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amount of its federal windfall profit tax. In effect, then, each appellant claimed a deduction for that tax from its "entire net income." As a result, appellee, the Director of the New Jersey Division of...

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