Aloha Freightways, Inc. v. Commissioner of Revenue

• Decision Date: 19 November 1998
• Citation: 701 N.E.2d 961,428 Mass. 418
• Parties: ALOHA FREIGHTWAYS, INC. v. COMMISSIONER OF REVENUE.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 961

701 N.E.2d 961

428 Mass. 418

ALOHA FREIGHTWAYS, INC. v. COMMISSIONER OF REVENUE.

Supreme Judicial Court of Massachusetts Suffolk.

Argued Oct. 9, 1998.

Decided Nov. 19, 1998.

Wesley S. Chused, Boston, for taxpayer.

Thomas A. Barnico, Assistant Attorney General, for Commissioner of Revenue.

Daniel R. Barney, Robert Digges, Jr., Alexandria, VA & George A. Berman, Boston, for American Trucking Associations, Inc., amicus curiae, submitted a brief.

Before WILKINS, C.J., and ABRAMS, LYNCH, GREANEY, FRIED, MARSHALL and IRELAND, JJ.

IRELAND, Justice.

This case concerns a challenge to G.L. c. 63, § 39, which establishes the excise imposed on foreign corporations. In 1987, the Commissioner of Revenue (commissioner) determined that Aloha Freightways, Inc. (Aloha), an Illinois-based trucking company, had a substantial nexus with Massachusetts, triggering the imposition of an excise under G.L. c. 63, § 39. Aloha was notified that it had failed to file corporate excise returns for the years 1980 through 1986. Aloha then filed its 1986 return, paid $228 (the then existing minimum corporate excise) ¹ and filed an application for an abatement. See G.L. c. 62C, § 37. The commissioner denied the abatement, and Aloha appealed to the Appellate Tax Board (board). See G.L. c. 62C, § 39. The board affirmed the commissioner's denial of the abatement. The board concluded that (1) by using its trucks in the Commonwealth Aloha is "doing business" in the Commonwealth and, consequently, is subject to the § 39 corporate excise; (2) imposition of the excise does not violate the commerce clause because Aloha has a "substantial nexus" with the Commonwealth; (3) the corporate excise is fairly apportioned; (4) the excise does not discriminate against interstate commerce; and (5) the excise is fairly related to the in-State activities of Aloha. Aloha appealed from the board's decision under G.L. c. 58A, § 13. We transferred the appeal on our own initiative and now affirm the board's decision.

1. Background. We recite the facts briefly. ² Aloha is an Illinois corporation that specializes in transporting machinery throughout the country on flatbed trailers. During 1986, the year in question, Aloha had thirty trucks in operation. Aloha operated as a certified interstate motor carrier of property under certificates of public convenience and necessity issued to Aloha by the Interstate Commerce Commission (ICC). ³ Aloha registered its ICC authority in each State it served, including Massachusetts. As part of its registration with Massachusetts, Aloha purchased registration stamps covering sixteen of its vehicles. Aloha obtained special fuel user licenses and decals for its tractor units from the Department of Revenue (department) at a cost of $483.

During 1986 Aloha used more than twenty different trucks to make fifty-four trips to the Commonwealth to pick up and deliver machinery. The typical freight delivery consisted of heavy machinery with an average weight of 16,000 pounds, and an average dimension of ten cubic feet. Aloha picked up or delivered equipment in thirty-two separate Massachusetts cities and towns. In making these pickups and deliveries Aloha's trucks traveled 10,926 miles on Massachusetts roads, and billed more than $55,000 for its services related to Massachusetts. Aloha did not make any intrastate shipments within Massachusetts. It either shipped goods into Massachusetts from another State, or picked up goods in Massachusetts for delivery out of State.

During 1986 Aloha did not own or lease any property in Massachusetts, nor did it advertise or otherwise solicit business in Massachusetts. Customers contacted Aloha at its Illinois headquarters. None of Aloha's drivers was a resident of Massachusetts. If they were required to stay overnight in Massachusetts, they would sleep in their tractor units.

2. General Laws c. 63, § 39. "[E]very foreign corporation, exercising its charter, or qualified to do business or actually doing business in the commonwealth, or owning or using any part or all of its capital, plant or any other property in the commonwealth, shall pay [the corporate excise]." G.L. c. 63, § 39. The excise imposed is the "greater" of either a combination of property tax and income tax amounts designated in § 39(a ), or the statutory minimum of $200 set out in § 39(b ). Section 39 further provides:

"The excise levied herein is due and payable on any one or all of the following alternative incidents:

"(1) The qualification to carry on or do business in this state or the actual doing of business within the commonwealth in a corporate form. The term 'doing business' as used herein shall mean and include each and every act, power, right, privilege, or immunity exercised or enjoyed in the commonwealth, as an incident to or by virtue of the powers and privileges acquired by the nature of such organizations, as well as, the buying, selling or procuring of services or property.

"(2) The exercising of a corporation's charter or the continuance of its charter within the commonwealth.

"(3) The owning or using any part or all of its capital, plant or other property in the commonwealth in a corporate capacity.

"It is the purpose of this section to require the payment of this excise to the commonwealth by foreign corporations for the enjoyment under the protection of the laws of the commonwealth, of the powers, rights, privileges and immunities derived by reason of the corporate form of existence and operation."

3. The commerce clause. The Commonwealth's power to tax foreign corporations is constrained by the Federal government's broad power to regulate interstate commerce under the commerce clause of the United States Constitution. The commerce clause grants Congress the power "to regulate commerce with foreign nations, and among the several States." The commerce clause seeks to foster and protect economic intercourse between the States. "The very purpose of the Commerce Clause [is] to create an area of free trade among the several States." McLeod v. J.E. Dilworth Co., 322 U.S. 327, 330, 64 S.Ct. 1023, 88 L.Ed. 1304 (1944).

When a State imposes a tax that touches on interstate commerce it implicates the dormant commerce clause. "[W]e have consistently held [the commerce clause] to contain a further, negative command, known as the dormant Commerce Clause, prohibiting certain state taxation even when Congress has failed to legislate on the subject." Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 179, 115 S.Ct. 1331, 131 L.Ed.2d 261 (1995). A State tax will be upheld "against [a] Commerce Clause challenge when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State." Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). Brady focuses on the practical effect on interstate commerce of a challenged tax statute, not the specific language used in the statute. Id. Brady achieves its goal of focusing on the effect of the tax by way of its four-prong test.

The first prong is self-explanatory. The tax must be applied to an activity with a substantial nexus with the taxing State. The business must have some constitutionally sufficient degree of contact with the taxing State before the State can impose any tax on it.

The next prong, apportionment, is designed to "ensure that each State taxes only its fair share of an interstate transaction." Goldberg v. Sweet, 488 U.S. 252, 261, 109 S.Ct. 582, 102 L.Ed.2d 607 (1989). Apportionment also seeks to avoid multiple taxation by different States. Oklahoma Tax Comm'n, supra at 184, 115 S.Ct. 1331. "[W]e determine whether a tax is fairly apportioned by examining whether it is internally and externally consistent." Goldberg, supra at 261, 109 S.Ct. 582, citing American Trucking Ass'ns v. Scheiner, 483 U.S. 266, 285, 107 S.Ct. 2829, 97 L.Ed.2d 226 (1987). A tax is internally consistent if it is "structured so that if every State were to impose an identical tax, no multiple taxation would result." Goldberg, supra. External consistency exists where "the State has taxed only that portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed." Id. at 262, 109 S.Ct. 582, citing Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 169-170, 103 S.Ct. 2933, 77 L.Ed.2d 545 (1983).

The third prong, that the tax cannot discriminate against interstate commerce, prevents States from aiding local business in competition with foreign businesses. Oklahoma Tax Comm'n, supra at 197, 115 S.Ct. 1331.

The final prong requires that there be a fair relation between the tax imposed and the services provided by the State. The test here is closely related to the requirement of "nexus." While "nexus" demands some constitutionally sufficient degree of contact with the taxing State before any tax can be imposed, fair relation requires that the degree of contact justifies the degree of the specific tax imposed. Commonwealth Edison Co. v. Montana, 453 U.S. 609, 626, 101 S.Ct. 2946, 69 L.Ed.2d 884 (1981). The requirement that there be a fair relation does not require that the tax be compensatory in nature, merely reimbursing the State for its cost incurred supporting the activity. It is an "incorrect assumption that the amount of state taxes that may be levied on an activity connected to interstate commerce is limited to the costs incurred by the State on account of that activity.... [I]nterstate commerce may be required to contribute to the cost of providing all governmental services, including those services from which it arguably receives no direct 'benefit' " (emphasis in original). Commonwealth Edison Co., supra at 627 n. 16, 101 S.Ct. 2946. The Court also rejected the assertion that it is the role of the judiciary to...