IRVING PULP & PAPER v. State Tax Assessor

• Decision Date: 09 August 2005
• Citation: 2005 ME 96,879 A.2d 15
• Parties: IRVING PULP & PAPER, LTD. v. STATE TAX ASSESSOR.
• Court: Maine Supreme Court

879 A.2d 15

2005 ME 96

IRVING PULP & PAPER, LTD. v. STATE TAX ASSESSOR.

Supreme Judicial Court of Maine.

Argued: March 24, 2005.

Decided: August 9, 2005.

Philip S. Olsen, Esq. (orally), Douglas W. Clapp, Esq., Holland & Knight LLP, Boston, MA, Sarah B. Tracy, Esq., Bernstein Shur, Portland, for plaintiff.

G. Steven Rowe, Attorney General, Thomas A. Knowlton, Asst. Atty. Gen. (orally), Stanley W. Piecuch, Asst. Atty. Gen., Augusta, for defendant.

Panel: SAUFLEY, C.J., and CLIFFORD, DANA, ALEXANDER, CALKINS, and LEVY, JJ.¹

SAUFLEY, C.J.

[¶ 1] Irving Pulp & Paper, Ltd. appeals from a judgment of the Superior Court (Kennebec County, Marden, J.) affirming a decision of the State Tax Assessor holding Irving accountable for $826,751.57 in taxes and interest that Irving now disputes. Irving contends that for the tax years 1995 through 1999, the denominator in the applicable tax formulas for apportioning Irving's Maine income should have been calculated on a worldwide basis, rather than applying the denominator appropriate to a "water's edge" analysis. We conclude that the trial court correctly interpreted the denominators in a manner consistent with the intent of the Legislature as expressed in the taxation statutes, and we affirm the judgment.

I. BACKGROUND

[¶ 2] The parties stipulated to the following facts. Irving is a Canadian corporation engaged in the forestry and stumpage business. During the tax years in question, 1995 to 1999, Irving owned timberland reserves in Maine, but nowhere else in the United States. Irving reported no payroll in Maine and had no employees in Maine or anywhere else in the United States. Its worldwide payroll for those years ranged from $38,887,000 to $77,879,000. It realized income in those years by selling its timberland reserves in Maine, but it did not make sales anywhere else in the United States. From 1995 to 1997, Irving apportioned 100% of its federal taxable income to Maine on each year's tax return.

[¶ 3] In 1999, Irving filed amended returns seeking refunds for each year from 1995 to 1997, adjusting the apportionment factors to use its worldwide property, payroll, and sales figures in the denominators. Those adjustments reduced its total taxable Maine income and in February 2000, Maine Revenue Services refunded $589,544.02 to Irving, which included interest. For the 1998 and 1999 tax years, Irving apportioned its income as it had in its amended returns for 1995 through 1997.

[¶ 4] In 2001, Maine Revenue Services audited Irving's tax returns and disallowed its inclusion of worldwide sales, payroll, and property amounts in the denominators of the apportionment factors. The Assessor sent a notice of assessment in July 2001 assessing corporate income tax and interest of $1,049,562.18 for the years 1995 through 1999. To avoid the accrual of interest, Irving paid the full amount, but filed a request for reconsideration, resulting in a July 2002 decision upholding the assessment, but granting a partial abatement of interest totaling $222,810.61. Irving filed a petition for review in the Superior Court in August 2002.

[¶ 5] After briefing by both parties, the court affirmed the decision of the Assessor, reasoning that Irving's proposed interpretation of 36 M.R.S.A. § 5211(9), (12), and (14) (1990)² would produce an absurd and illogical result. Taking the statutory subsections in the context of the federal and state tax codes, the court adopted the Assessor's interpretation of the terms "all" and "everywhere" to be understood contextually as all and everywhere in the United States. Specifically, the court reasoned that because the relevant Maine statute apportioned "federal taxable income," 36 M.R.S.A. § 5102(8) (Supp.2004),³ it was necessary to look to the United States Internal Revenue Code, which provided that a foreign corporation's taxable income was limited to that income connected with its business conducted in the United States, 26 U.S.C.A. § 882(a), (b) (West 2002). Irving timely appealed.

II. DISCUSSION

[¶ 6] Each state in the United States may tax and apportion income, subject only to constitutional limits. Great N. Nekoosa Corp. v. State Tax Assessor, 675 A.2d 963, 964 (Me.1996). A state violates the Due Process Clause and the Commerce Clause if it taxes "`value earned outside its borders.'" Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 164, 103 S.Ct. 2933, 77 L.Ed.2d 545, reh'g denied, 464 U.S. 909, 104 S.Ct. 265, 78 L.Ed.2d 248 (1983) (quoting ASARCO Inc. v. Idaho State Tax Comm'n, 458 U.S. 307, 315, 102 S.Ct. 3103, 73 L.Ed.2d 787, reh'g denied, 459 U.S. 961, 103 S.Ct. 275, 74 L.Ed.2d 213 (1982)). Accordingly, states must apportion the income of multi-jurisdictional corporations for taxation purposes. See id. The United States Constitution does not, however, require the states to employ any particular method for achieving fair apportionment of income for tax purposes. Id.

[¶ 7] Most states, including Maine, employ a "water's edge" method of reporting, which is ordinarily understood to look only within the geographic boundaries of the United States to determine any factors in the formula for apportioning corporate taxation. See Barclays Bank PLC v. Franchise Tax Bd. of Cal., 512 U.S. 298, 306, 114 S.Ct. 2268, 129 L.Ed.2d 244 (1994)

; E.I. DuPont de Nemours & Co. v. State Tax Assessor, 675 A.2d 82, 83 & n. 3 (Me.1996). Other states have applied a worldwide combined reporting method, which employs worldwide figures in all portions of the apportionment formula. Barclays Bank PLC, 512 U.S. at 306,

114 S.Ct. 2268; E.I. DuPont de Nemours & Co.,

675 A.2d at 83 n. 3. Irving contends that, because of the language in Maine's apportionment statute, Maine tax laws should be construed as a hybrid of the "water's edge" and the worldwide combined reporting methods for the apportionment of taxation. Irving argues that the Assessor should have determined the apportionment ratio to be applied to Irving's federal (that is, United States generated) taxable income based on Maine's share of Irving's worldwide property, payroll, and sales figures.

[¶ 8] The Superior Court declined to accept Irving's argument, holding instead that the water's edge method must be used in both calculations. Because the Superior Court reviews a decision of the Assessor de novo, we review the Superior Court's statutory interpretation directly as a question of law. Foster v. State Tax Assessor, 1998 ME 205, ¶ 7, 716 A.2d 1012, 1014. In interpreting the statute, we "seek to effectuate the intent of the Legislature, which is ordinarily gleaned from the plain language of the statute." Id. We must "`consider[] the language in the context of the whole statutory scheme,'" Jackson Brook Inst., Inc. v. Me. Ins. Guar. Ass'n, 2004 ME 140, ¶ 9, 861 A.2d 652, 656 (quoting Darling's v. Ford Motor Co., 1998 ME 232, ¶ 5, 719 A.2d 111, 114), and construe the statute to "`avoid absurd, illogical, or inconsistent results,'" Estate of Chartier, 2005 ME 17, ¶ 6, 866 A.2d 125, 127 (quoting Estate of Jacobs, 1998 ME 233, ¶ 4, 719 A.2d 523, 524). Only if the language of a statute is ambiguous will we look beyond it to the legislative history or other external indicia of legislative intent. Me. Family Fed. Credit Union v. Sun Life Assurance Co. of Canada, 1999 ME 43, ¶ 18 n. 17, 727 A.2d 335, 341.

[¶ 9] We begin, therefore, with the plain language of the statute. Maine adopted its version of the Uniform Division of Income for Tax Purposes Act (UDITPA) in 1969. P. & S.L.1969, ch. 154, § F(1). Pursuant to this Act, when determining the taxable income of a multi-jurisdictional corporation during the relevant tax years, the State was required to apportion "[a]ll income ... by multiplying the income by a fraction, the numerator of which [was] the property factor plus the payroll factor plus twice the sales factor, and the denominator of which [was] 4." 36 M.R.S.A. § 5211(8) (Supp.2004). The property, payroll, and sales factors were also calculated pursuant to statutory formulae, which during the relevant time provided:

9. Property factor. The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in this State during the tax period and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used during the tax period.

....

12. Payroll factor. The payroll factor is a fraction, the numerator of which is the total amount paid in this State during the tax period by the taxpayer for compensation, and the denominator of which is the total compensation paid everywhere during the tax period.

....

14. Sales factor formula. The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this State during the tax period, and the denominator of which is the total sales of the taxpayer everywhere during the tax period.

36 M.R.S.A. § 5211 (emphasis added).

[¶ 10] The statute is susceptible of at least two different meanings. First, the terms "all" and "everywhere" in subsections 9, 12, and 14 could mean all and everywhere in the world. Second, the terms could mean all and everywhere in the United States. Accordingly, the statute is ambiguous and we look beyond the plain language to determine its meaning. See Me. Family Fed. Credit Union, 1999 ME 43, ¶ 18 n. 17,

727 A.2d at 341.

[¶ 11] Although there is no pertinent legislative history regarding the adoption of UDITPA, we have stated in the past that UDITPA was "designed to permit states to fairly apportion the income of a multistate corporation in accordance with the distribution of a corporation's property, payroll, and sales." Great N. Nekoosa Corp.,675 A.2d at 964. The goal is "to apportion income so that there is neither an overlap nor a gap in taxation." Id. at 966.

Maine determines what portion of a multijurisdictional corporation's income is apportionable to the

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