512 U.S. 298 (1994), 92-1384, Barclays Bank PLC v. Franchise Tax Bd. of Cal.

Docket Nº:No. 92-1384
Citation:512 U.S. 298, 114 S.Ct. 2268, 129 L.Ed.2d 244, 62 U.S.L.W. 4552
Case Date:June 20, 1994
Court:United States Supreme Court

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512 U.S. 298 (1994)

114 S.Ct. 2268, 129 L.Ed.2d 244, 62 U.S.L.W. 4552




No. 92-1384

United States Supreme Court

June 20, 1994[*]

Argued March 28, 1994



During the years at issue in these consolidated cases, California used a "worldwide combined reporting" method to determine the corporate franchise tax owed by unitary multinational corporate group members doing business in California. California's method first looked to the worldwide income of the unitary business, and then taxed a percentage of that income equal to the average of the proportions of worldwide payroll, property, and sales located within California. In contrast, the Federal Government employs a "separate accounting" method, which treats each corporate entity discretely for the purpose of determining income tax liability. In Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, this Court upheld the California scheme as applied to domestic-based multinationals, but did not address the constitutionality of the scheme as applied to domestic corporations with foreign parents or to foreign corporations with foreign parents or foreign subsidiaries. Both petitioner Barclays Bank PLC (Barclays)—a foreign multinational—and petitioner Colgate-Palmolive Co. (Colgate)—a domestic multinational—have operations in California. In separate cases, two members of the Barclays group and Colgate were denied refunds by the California authorities.


The Constitution does not impede application of California's tax to Barclays and Colgate. Pp. 310-331.

(a) Absent congressional approval, a state tax on interstate or foreign commerce will not survive Commerce Clause scrutiny if the taxpayer demonstrates that the tax (1) applies to an activity lacking a substantial nexus to the taxing State; (2) is not fairly apportioned; (3) discriminates against interstate commerce; or (4) is not fairly related to the services the State provides. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279. A tax affecting foreign commerce raises two additional concerns: one prompted by the "enhanced risk of multiple taxation," Container Corp., 463 U.S., at 185, and the other related to the Federal Government's capacity to " 'speak with one voice when regulating

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commercial relations with foreign governments,' " Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 449. California's tax easily meets all but the third of the Complete Auto criteria. As to the third, Barclays has not shown that the system in fact operates to impose inordinate compliance burdens on foreign enterprises, and its claim of unconstitutional discrimination against foreign commerce thus fails. Pp. 310-314.

(b) Nor has Barclays shown that California's "reasonable approximations" method of reducing the compliance burden is incompatible with due process. Barclays argues that California employs no standard to determine what approximations will be accepted, but Barclays has presented no example of an approximation California rejected as unreasonable. Furthermore, the state judiciary has construed California law to curtail the discretion of state tax officials, and the State has afforded Barclays the opportunity to seek clarification of the meaning of the relevant regulations. Rules governing international multijurisdictional income allocation have an inescapable imprecision given the subject matter's complexity, and rules against vagueness are not mechanically applied; rather, their application is tied to the nature of the enactment. Pp. 314-316.

(c) California's system does not expose foreign multinationals, such as Barclays, to constitutionally intolerable multiple taxation. In the face of a similar challenge, Container Corp. approved this very tax when applied to a domestic-based multinational. The considerations that informed the Container Corp. decision are not dispositively diminished when the tax is applied to a foreign-based enterprise. Multiple taxation is not the inevitable result of California's tax, and the alternative reasonably available to the State—separate accounting—cannot eliminate, and in some cases may even enhance, the risk of double taxation. Pp. 316-320.

(d) California's scheme also does not prevent the Federal Government from speaking with "one voice" in international trade. Congress holds the control rein in this area. In the 11 years since Container Corp., Congress has not barred States from using the worldwide combined reporting method. In the past three decades, aware that foreign governments deplored use of the method, Congress nevertheless failed to enact any of numerous bills, or to ratify a treaty provision, that would have prohibited the practice. Executive Branch actions, statements, and amicus filings do not supply the requisite federal directive proscribing States' use of worldwide combined reporting, for the regulatory authority is Congress' to wield. Executive Branch communications that express federal policy but lack the force of law cannot render unconstitutional

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California's otherwise valid, congressionally condoned scheme. Pp. 320-331.

No. 92-1384, 10 Cal.App.4th 1742, 14 Cal.Rptr.2d 537, and No. 92-1839,10 Cal.App.4th 1768, 13 Cal.Rptr.2d 761, affirmed.

Ginsburg, J., delivered the opinion of the Court, in which Rehnquist, C.J., and Blackmun, Stevens, Kennedy, and Souter, JJ., joined, and in all but Part IV-B of which Scalia, J., joined. Blackmun, J., filed a concurring opinion, post, p. 331. Scalia, J., filed an opinion concurring in part and concurring in the judgment, post, p. 331. O'Connor, J., filed an opinion concurring in the judgment in part and dissenting in part, in which Thomas, J., joined, post, p. 332.

Joanne M. Garvey argued the cause for petitioner in No. 92-1384. With her on the briefs were Joan K. Irion, Miles N. Ruthberg, and Teresa A. Maloney. James P. Kleier argued the cause for petitioner in No. 92-1839. With him on the briefs were Walter Hellerstein, Prentiss Willson, Jr., Clare M. Rathbone, and Franklin C. Latcham.

Timothy G. Laddish, Assistant Attorney General of California, argued the cause for respondent in both cases. With him on the brief for respondent in No. 92-1384 were Daniel E. Lungren, Attorney General of California, Robert D. Milam, Deputy Attorney General, and Benjamin F. Miller. Mr. Lungren, Lawrence K. Keethe, Supervising Deputy Attorney General of California, John D. Schell, Deputy Attorney General, and Claudia K. Land filed a brief for respondent in No. 92-1839.

Solicitor General Days argued the cause for the United States as amicus curiae urging affirmance in both cases. With him on the brief were Assistant Attorney General Argrett and Deputy Solicitor General Wallace.[†]

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Justice Ginsburg delivered the opinion of the Court.

Eleven years ago, in Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159 (1983), this Court upheld California's income-based corporate franchise tax, as applied to a

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multinational enterprise, against a comprehensive challenge made under the Due Process and Commerce Clauses of the Federal Constitution. Container Corp. involved a corporate taxpayer domiciled and headquartered in the United States; in addition to its stateside components, the taxpayer had a number of overseas subsidiaries incorporated in the countries in which they operated. The Court's decision in Container Corp. did not address the constitutionality of California's taxing scheme as applied to "domestic corporations with foreign parents or [to] foreign corporations with either foreign parents or foreign subsidiaries." Id., at 189, n. 26. In the consolidated cases before us, we return to the taxing scheme earlier considered in Container Corp. and resolve matters left open in that case.

The petitioner in No. 92-1384, Barclays Bank PLC (Barclays), is a United Kingdom corporation in the Barclays Group, a multinational banking enterprise. The petitioner in No. 92-1839, Colgate-Palmolive Co. (Colgate), is the United States-based parent of a multinational manufacturing and sales enterprise. Each enterprise has operations in California. During the years here at issue, California determined the state corporate franchise tax due for these operations under a method known as "worldwide combined reporting." California's scheme first looked to the worldwide income of the multinational enterprise, and then attributed a portion of that income (equal to the average of the proportions of worldwide payroll, property, and sales located in California) to the California operations. The State imposed its tax on the income thus attributed to Barclays' and Colgate's California business.

Barclays urges that California's tax system distinctively burdens foreign-based multinationals and results in double international taxation, in violation of the Commerce and Due Process Clauses. Both Barclays and Colgate contend that the scheme offends the Commerce Clause by frustrating the Federal Government's ability to "speak with one voice when

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regulating commercial relations with foreign governments." Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 449(1979) (internal quotation marks omitted). We reject these arguments, and hold that the Constitution does not impede application of California's corporate franchise tax to Barclays and Colgate. Accordingly, we affirm the judgments of the California Court of Appeal.



The Due Process and Commerce Clauses of the Constitution, this Court has held, prevent States that impose an income-based tax on nonresidents from "tax[ing] value earned outside [the taxing State's] borders." ASARCO Inc. v. Idaho Tax Comm'n, 458 U.S. 307, 315 (1982). But when a business enterprise operates in more than one taxing jurisdiction, arriving at ...

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