CDR Sys. Corp. v. Okla. Tax Comm'n

• Decision Date: 22 April 2014
• Docket Number: 109,886.
• Citation: 2014 OK 31,339 P.3d 848
• Parties: CDR SYSTEMS CORPORATION, Appellant, v. OKLAHOMA TAX COMMISSION, Appellee.
• Court: Oklahoma Supreme Court

339 P.3d 848

2014 OK 31

CDR SYSTEMS CORPORATION, Appellant

v.OKLAHOMA TAX COMMISSION, Appellee.

109,886.

Supreme Court of Oklahoma.

April 22, 2014.

Rehearing Denied Nov. 24, 2014.

Thomas G. Ferguson, Jr., Walker, Ferguson & Ferguson, Oklahoma City, OK, Attorney for Appellant.

Douglas B. Allen, Larry Patton, Abby Dillsaver, & Elizabeth Field, Oklahoma Tax Commission, Oklahoma City, OK, Attorneys for Appellee.

Kiran A. Phansalkar & Daniel V. Carsey, Conner & Winters, L.L.P., Oklahoma City, OK, Attorneys for Amicus Curiae Council on State Taxation.

Frederick J. Nicely, Council on State Taxation, Washington, DC, Attorney for Amicus Curiae Council on State Taxation.

Opinion

GURICH, J.

¶ 1 Most, if not all states, have tax incentives whose primary purpose is to attract business to the state and to promote economic development within the state.¹ Oklahoma is no different.² The Oklahoma Capital Gains Deduction was passed by the Legislature to promote significant business investment in Oklahoma's economy.³ Specifically, the deduction found in 68 O.S. Supp.2008 § 2358(D)(2)(a)(3) (“deduction”) is a tax incentive that allows a taxpayer to adjust its Oklahoma taxable income for qualifying gains receiving capital treatment that result from the “sale of all or substantially all of the assets of an Oklahoma company.” “Oklahoma company”, is defined as “an entity whose primary headquarters have been located in Oklahoma for at least three (3) uninterrupted years prior to the date of the transaction from which the net capital gains arise.”⁴

¶ 2 Although state tax incentives of this kind attempt to promote economic development within the state, certain types of tax incentives raise constitutional concerns because the U.S. Supreme Court has said that “ ‘[n]o State, consistent with the Commerce Clause, may “impose a tax which discriminates against interstate commerce ... by providing a direct commercial advantage to local business.” ’ ” Westinghouse Elec. Corp. v. Tully, 466 U.S. 388, 403, 104 S.Ct. 1856, 80 L.Ed.2d 388 (1984). In DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 126 S.Ct. 1854, 164 L.Ed.2d 589 (2006), the U.S. Supreme Court avoided deciding the constitutionality of a state tax credit that incentivized corporations to do business in the state of Ohio, and instead, ruled the city and state taxpayers who challenged the tax credit lacked standing to bring the action.

¶ 3 Although the Supreme Court didn't directly weigh in on the issue in Cuno, it has said that there is a “delicate balancing of the national interest in free and open trade and a State's interest in exercising its taxing powers.” Tully, 466 U.S. at 403, 466 U.S. 388. See also Boston Stock Exchange v. State Tax Comm'n, 429 U.S. 318, 329, 97 S.Ct. 599, 50 L.Ed.2d 514 (1977). This “delicate balancing” requires a “case-by-case analysis and ... such analysis has left ‘ “much room for controversy and confusion and little in the way of precise guides to the States in the exercise of their indispensable power of taxation.” ’ ”Tully, 466 U.S. at 403, 104 S.Ct. 1856 (citations omitted). The result in these types of cases often “turns on the unique characteristics of the statute at issue and the particular circumstances in each case.” Boston Stock Exchange, 429 U.S. at 329, 97 S.Ct. 599.

Facts & Procedural History

¶ 4 CDR Systems was incorporated in California in 1970 and manufactures polymer concrete and fiberglass handholes and pads for electric, water, and telephone company utilities.⁵ Eugene McGrane has been the sole shareholder of CDR since 1996. At the time of its sale in 2008, CDR was registered to do business in Florida, California, Michigan, Iowa, and Oklahoma, and its primary headquarters was located in Ormond Beach, Florida. CDR's operations in Oklahoma included a manufacturing facility in Waynoka, Oklahoma.

¶ 5 On September 18, 2008, CDR entered into a stock purchase agreement with Hubbell Lenoir City, Inc. to sell all of CDR's assets. Pursuant to the purchaser's election, the stock sale was treated as an asset sale under the Internal Revenue Code § 338(h)(10). CDR was bound by such election on its Oklahoma Small Business Corporation Income Tax Return.⁶ The assets that transferred on September 18, 2008, had been owned by CDR for more than three years. In August of 2009, CDR filed its 2008 Oklahoma Small Business Corporation Income Tax Return, claiming the Oklahoma Capital Gains Deduction for gains received from the $49,776,316 sale of CDR. The total gains received would have resulted in an exclusion from Oklahoma taxable income in the amount of $3,564,283.⁷

¶ 6 The Compliance Division of the Oklahoma Tax Commission denied the deduction claimed by CDR because CDR was not headquartered in Oklahoma for three years prior to the sale as required by 68 O.S. Supp.2008 § 2358(D).⁸ CDR protested the denial, claiming the statute violated the Privileges and Immunities Clause, the Equal Protection Clause, and the Commerce Clause of the U.S. Constitution.

¶ 7 The protest was tried to an ALJ on the briefs and stipulated facts. The ALJ denied the protest because the Division's adjustment complied with the statute, and the OTC was without authority to decide the constitutional validity of the tax statute. CDR timely appealed, and COCA found that CDR's Privileges and Immunities argument was without merit because the U.S. Supreme Court has held that a corporation is not a citizen within the meaning of the Privileges and Immunities Clause, citing Monell v. Dep't of Social Servs. of City of New York, 436 U.S. 658, 720, 98 S.Ct. 2018, 56 L.Ed.2d 611 (1978).

¶ 8 COCA also found that CDR's only contention regarding its Equal Protection claim was that “[i]n other decisions the U.S. Supreme Court has recognized that states cannot discriminate against non-residents and based its decisions on violation of the Equal Protection Clause of the United States Constitution.” COCA observed that CDR only cited one case for this proposition, Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 105 S.Ct. 1676, 84 L.Ed.2d 751 (1985), and that CDR provided no argument on its equal protection claim and did not show how application of the deduction violated equal protection. CDR did not petition for certiorari on either of these adverse rulings from COCA. As such, neither the Privileges and Immunities Clause nor the Equal Protection Clause is before this Court.⁹

¶ 9 However, COCA found the deduction discriminated on its face against interstate commerce and its effects on interstate commerce were not evenhanded or incidental. As such, COCA concluded the deduction violated the dormant commerce clause. The OTC petitioned this Court for certiorari review on the issue of whether the statute is an unconstitutional violation of the dormant commerce clause. We granted certiorari on October 14, 2013.

Standard of Review

¶ 10 In considering a statute's constitutionality, courts are guided by well-established principles and a heavy burden is cast on those challenging a legislative enactment to show its unconstitutionality.” Thomas v. Henry, 2011 OK 53, ¶ 8, 260 P.3d 1251, 1254. “Every presumption is to be indulged in favor of the constitutionality of a statute.” Id. “It is also firmly recognized that it is not the place of this Court, or any court, to concern itself with a statute's propriety, desirability, wisdom, or its practicality as a working proposition.”

Fent v. Okla. Capitol Improvement Auth., 1999 OK 64, ¶ 3, 984 P.2d 200, 204. “A court's function, when the constitutionality of a statute is put at issue, is limited to a determination of the validity or invalidity of the legislative provision and a court's function extends no farther in our system of government.” Id. In cases where the constitutionality of a state tax statute is at issue, the taxpayer bears the heavy burden of proving the statute is unconstitutional. EOG Res. Mktg., Inc. v. Okla. State Bd. of Equalization, 2008 OK 95, ¶ 13, 196 P.3d 511, 519.

The Dormant Commerce Clause Does Not Apply in this Case

¶ 11 Article 1, § 8 of the U.S. Constitution “expressly authorizes Congress to ‘regulate Commerce with foreign Nations, and among the several states.’ ” Quill Corp. v. North Dakota By and Through Heitkamp, 504 U.S. 298, 309, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). The Commerce Clause “says nothing about the protection of interstate commerce in the absence of any action by Congress. Nevertheless ... the Commerce Clause is more than an affirmative grant of power; it has a negative sweep as well. The Clause ... ‘by its own force’ prohibits certain state actions that interfere with interstate commerce.” Id. “The negative or dormant implication of the Commerce Clause prohibits state taxation or regulation that discriminates against or unduly burdens interstate commerce and thereby ‘imped [es] free private trade in the national marketplace.’ ” Gen. Motors Corp. v. Tracy, 519 U.S. 278, 287, 117 S.Ct. 811, 136 L.Ed.2d 761 (1997) (citations omitted). “No State, consistent with the Commerce Clause, may ‘impose a tax which discriminates against interstate commerce ... by providing a direct commercial advantage to local business.” Boston Stock Exchange, 429 U.S. at 329, 97 S.Ct. 599. The “Commerce Clause does not, however, eclipse the reserved ‘power of the States to tax for the support of their own governments.’ ” Id. at 328, 97 S.Ct. 599.

¶ 12 In Tracy, 519 U.S. at 282, 117 S.Ct. 811, “Ohio levied a 5% tax on the in-state sales of goods, including natural gas, and it imposed a parallel 5% use tax on goods purchased out-of-state for use in Ohio.” “[N]atural gas sales by ‘natural gas compan[ies]’ ” were exempted from all state and local sales taxes. Id. Local natural gas utilities located in Ohio satisfied the definition of natural gas company under Ohio law, but “non-LDC gas sellers, such as producers and independent marketers” did not fall under this definition, and the state denied the exemption to such producers and independent marketers. Id.

¶ 13 The Tax Commissioner of...