General Motors Corp. v. Director of Revenue

• Decision Date: 22 December 1998
• Docket Number: No. 80853,80853
• Citation: 981 S.W.2d 561
• Parties: GENERAL MOTORS CORPORATION and Subsidiaries, Appellants, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

Page 561

981 S.W.2d 561

GENERAL MOTORS CORPORATION and Subsidiaries, Appellants, v. DIRECTOR OF REVENUE, Respondent.

No. 80853.

Supreme Court of Missouri En Banc.

Dec. 22, 1998.

Thomas C. Walsh, Juan D. Keller, John P. Barrie, St. Louis, for appellants.

Jeremiah W. (Jay) Nixon, Atty. Gen., Evan J. Buchheim, Asst. Atty. Gen., Jefferson City, for respondent.

ANN K. COVINGTON, Judge.

The principal issue in this case is whether General Motors Corporation and its subsidiaries have the right to file consolidated Missouri income tax returns for the years 1990, 1991, and 1992 pursuant to section 143.431.3(1), RSMo 1994. ¹ Because construction of the revenue laws of the state is involved, this Court has exclusive appellate jurisdiction. Mo. Const. art. V, sec. 3. This Court reverses the decision of the Administrative Hearing Commission and remands for further proceedings, finding that section 143.431.3(1) violates the United States Constitution, article I, section 8, in that it discriminates against interstate commerce.

General Motors Corporation (GM) is a Delaware Corporation domiciled in Detroit, Michigan. GM is parent to numerous subsidiaries. GM and its subsidiaries constitute GM Group, which engages in manufacturing automobiles, trucks, component parts, and accessories. GM Group is also involved in the financing of those products and in insurance and business management systems. GM and some of its subsidiaries conducted business in Missouri from 1990 through 1992.

GM Group, as an affiliated group of corporations, filed federal consolidated income tax returns for 1990, 1991, and 1992. Approximately 300 subsidiaries were part of the affiliated group. GM Group also filed Missouri consolidated income tax returns in 1990, 1991, and 1992. GM Group conducted substantial business in Missouri from 1990 through 1992. It had approximately $1.3 billion in property, $300 million in payroll, and $2.3 billion in gross receipts in Missouri for each of the three years. Because of its sizable commercial activities in other states, however, GM Group derived less than two percent of its income from sources within Missouri for each of the three years. On all three of its Missouri consolidated returns, GM Group reported zero tax liability. In 1990 and 1991, GM Group requested refunds in the amount of $3,651,703 and $1,172,400 respectively. GM Group did not claim a refund for 1992.

The Director of Revenue concluded that GM Group was not entitled to file consolidated returns for 1990, 1991, and 1992 because it did not derive at least fifty percent of its income from sources within Missouri pursuant to section 143.431.3(1). The director denied GM Group's refund claims for 1990 and 1991. The director further issued a notice of deficiency against GM in the amount of $12,533,176 for 1992.

GM Group appealed to the Administrative Hearing Commission, (AHC), claiming that section 143.431.3(1) is unconstitutional because it violates the Commerce Clause, U.S. Const. art. I, sec. 8; the Due Process Clause, U.S. Const. amends. V and XIV; the Equal Protection Clause, U.S. Const. amends. V and XIV; the Equal Rights and Opportunities Clause, Mo. Const. art. I, sec. 2; and the Uniformity Clause, Mo. Const. art. X, sec. 3. The AHC upheld the director's determination that GM Group did not meet the statutory requirements to file a Missouri consolidated income tax return in that it did not derive fifty percent of its income from sources within Missouri. Because GM Group did not meet the requirements for filing consolidated returns, it was not entitled to refunds for 1990 and 1991. The AHC further held that GM was not liable for Missouri income tax for 1992. The AHC did not reach the constitutional questions because it is without authority to decide constitutional issues. State Tax Comm'n v. Administrative Hearing Comm'n, 641 S.W.2d 69, 75-76 (Mo. banc 1982). This petition for review followed.

Missouri law permits the filing of a consolidated income tax return by an affiliated group of corporations under the conditions specified in section 143.431.3(1), which provides in pertinent part:

If an affiliated group of corporations files a consolidated income tax return for the taxable year for federal income tax purposes and fifty percent or more of its income is derived from sources within this state as determined in accordance with section 143.451, then it may elect to file a Missouri consolidated income tax return....

The essential purpose of allowing corporations to file a consolidated return is to permit affiliated corporations, which may be separately incorporated for various business reasons, to be treated as if they were one corporation. Mid-America Television Co. v. State Tax Comm'n, 652 S.W.2d 674, 680 (Mo. banc 1983), cert. denied, 465 U.S. 1065, 104 S.Ct. 1413, 79 L.Ed.2d 740 (1984). If an affiliated group files a consolidated Missouri return, the individual corporations within the group will not be required to file separate corporate income tax returns for the taxable year. Section 143.431.3(3). It is undisputed that filing a consolidated return allows an affiliated group to offset the gains of one or more of its companies with the losses of one or more of its companies, which may result in lower tax. In addition, filing a consolidated return is administratively more convenient than filing separate returns. It is also undisputed that the right to file a Missouri consolidated income tax return confers a valuable tax benefit to an affiliated group.

GM Group contends, among other arguments, that section 143.431.3(1) violates the Commerce Clause of the United States Constitution because the threshold requirement that an affiliated group derive fifty percent of its income from sources within Missouri discriminates against interstate commerce. GM Group claims that it is being denied specific tax benefits because of GM Group's corporate form and the geographic location of the group's business activities. Under section 143.431.3(1), only business groups that perform the majority of their business activities in Missouri may elect to file a Missouri consolidated income tax return. GM Group's Commerce Clause claim is dispositive.

In recent years, the United States Supreme Court has addressed challenges under the Commerce Clause that provide guidance in resolving the present case. In American Trucking Ass'n, Inc. v. Scheiner, 483 U.S. 266, 286, 107 S.Ct. 2829, 97 L.Ed.2d 226 (1987), the Court held that two Pennsylvania statutes that imposed lump-sum annual taxes on the operation of trucks and truck tractors plainly discriminated against interstate commerce. Because Pennsylvania provided a reduction in registration fees designed to offset the lump-sum tax for vehicles registered in Pennsylvania, the practical effect of the statute was to tax only vehicles registered out of state. Id. at 277-78, 107 S.Ct. 2829. The Commerce Clause prohibits state taxes that favor in-state businesses over out-of-state businesses for no reason other than the geographic location of the business. Id. at 286, 107 S.Ct. 2829.

In Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 567-68, 117 S.Ct. 1590, 137 L.Ed.2d 852 (1997), the Court scrutinized a Maine statute providing a general exemption from property taxes for charitable institutions that primarily served Maine residents. Institutions that principally served non-residents of Maine qualified for a limited tax benefit, if any. Id. at 568, 117 S.Ct. 1590. The Court held that:

It is not necessary to look beyond the text of this statute to determine that it discriminates against interstate commerce. The Maine law expressly distinguishes between entities that serve a principally interstate clientele and those that primarily serve an intrastate market, singling out camps that serve mostly in-staters for beneficial tax treatment, and penalizing those camps that do a principally interstate business. As a practical matter, the statute encourages affected entities to limit their out-of-state clientele, and penalizes the principally non-resident customers of businesses catering to a primarily interstate market.

Id. at 575-76, 117 S.Ct. 1590. The Court further stated that the fact that the tax discrimination resulted from depriving certain institutions of an available tax benefit rather than from imposing a specific tax penalty had no effect on the determination of whether the statute discriminated against interstate commerce. Id. at 578-79, 117 S.Ct. 1590.

In the preceding year in Fulton Corp. v. Faulkner, 516 U.S. 325, 327-28, 116 S.Ct. 848, 133 L.Ed.2d 796 (1996), the Court examined a North Carolina statute that reduced the intangibles tax on the fair market value of corporate stock based upon the amount of business the corporation performed within the state. The tax scheme favored North Carolina corporations over out-of-state competitors because corporate stock was taxed only to the extent that the corporation conducted out-of-state business. Id. at 328, 116 S.Ct. 848. The Court held that "there is no doubt" that the intangibles tax facially discriminates against interstate commerce. Id. at 333, 116 S.Ct. 848. The Court further stated that state laws that discriminate against interstate commerce "on their face are 'virtually' per se invalid." ² Id. at 331, 116 S.Ct. 848.

In Associated Indust. of Missouri v. Lohman, 511 U.S. 641, 647, 114 S.Ct. 1815, 128 L.Ed.2d 639 (1994), the Court held that Missouri's use tax statute, which applied only to articles of personal property purchased outside the state, discriminated against interstate commerce. A use tax that does not exceed the state's sales tax is valid under the Commerce Clause. Id. at 648, 114 S.Ct. 1815. Missouri's use tax scheme discriminated against interstate commerce because the use tax exceeded the local sales tax in certain locations. Id. at 649, 114 S.Ct. 1815. Out-of-state goods brought into these locations were subject to taxes higher than...