Gillette Co. v. Commissioner of Revenue

• Decision Date: 31 July 1997
• Citation: 425 Mass. 670,683 N.E.2d 270
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: The GILLETTE COMPANY, v. COMMISSIONER OF REVENUE.

Page 270

683 N.E.2d 270

425 Mass. 670

The GILLETTE COMPANY, v. COMMISSIONER OF REVENUE.

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued April 7, 1997.

Decided July 31, 1997.

Jonathan M. Zorn (Theodore M. Hess-Mahan and Steven A. Kaufman, with him), Boston, for the Gillette Company.

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

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

LYNCH, Justice.

This is an appeal from a decision of the Appellate Tax Board (board) denying applications by The Gillette Company (Gillette) for abatement of taxes for tax years 1975 through 1983. Gillette sought to have the Commissioner of Revenue (commissioner) recompute its corporate excise tax using the so-called "unitary method" of net income determination and apportionment. Relying on Polaroid Corp. v. Commissioner of Revenue, 393 Mass. 490, 472 N.E.2d 259 (1984), the board ruled that there was no statutory authority for using the unitary method. On appeal, Gillette claims that the board erred in ruling: (1) that the unitary method was not authorized under G.L. c. 63, § 42; and (2) that requiring unitary businesses to use the "statutory method" did not violate the due process and commerce clauses of the United States Constitution. We granted Gillette's application for direct appellate review, and now affirm the board's decision.

1. a. Facts. The following stipulated facts were adopted by the board. Gillette is a Delaware corporation with its principal offices in Boston. Throughout the years at issue, Gillette engaged in worldwide unitary business with domestic (United States) and foreign (non-U.S.) affiliates. ¹ At all relevant times, Gillette transacted business partly within and without Massachusetts.

Gillette engaged in business outside the United States through foreign subsidiary corporations. These subsidiaries did not conduct business in Massachusetts, but they did make interest and royalty payments to Gillette. These payments were income to Gillette and thus subject to tax in the local countries pursuant to foreign tax statutes, as modified by treaties negotiated with the United States. The subsidiaries withheld the tax owed by Gillette and paid it directly to the foreign government. Gillette also received royalty income from unrelated foreign manufacturers for the right to use its patents.

From 1975 to 1979, Gillette filed a combined return under G.L. c. 63, § 32B, with those United States affiliates which had a nexus with Massachusetts and participated in its Federal consolidated tax returns. ² For tax year 1980, Gillette initially filed a combined return, but prior to a final assessment, amended the 1980 return using the unitary method. Gillette also filed amended returns for the tax years 1975 through 1977 using the unitary method and filed applications for abatement for tax years 1978 through 1979. For tax years 1981 through 1983, Gillette used the unitary method in preparing its initial returns. In short, Gillette sought to have its corporate excise tax liability for 1975 through 1983 assessed under the unitary method.

Gillette's actions were apparently prompted by the commissioner's moves to compel unitary businesses to employ the unitary method. Beginning in the late 1970's, the commissioner selectively assessed taxpayers under the unitary method. In the early 1980's, the commissioner formalized this approach through use of unitary business questionnaires, and finally in 1984, the commissioner promulgated the corporate excise regulations, 830 Code Mass.Regs. § 63.02 (1984) (unitary business regulations). These regulations required unitary businesses to file a report of combined income of the unitary business group, and determine its taxable net income by reference to the combined group. ³

In December, 1984, this court in Polaroid Corp. v. Commissioner of Revenue, supra, held that the commissioner lacked the statutory authority to use the unitary method. In January, 1985, the commissioner repealed the unitary business regulations. ⁴

On appeal to the board, Gillette maintained that the promulgation of the unitary business regulations was based on the commissioner's determination that the statutory method provided in G.L. c. 63, § 38, was inadequate when applied to unitary business. Furthermore, Gillette contended that the commissioner misinterpreted our holding in Polaroid Corp., supra, when he repealed the unitary business regulations. Gillette argued that the Polaroid Corp. case only limited the commissioner's authority to impose the unitary method, but did not limit a taxpayer's right to apply to use the unitary method under G.L. c. 63, § 42.

b. Corporate excise tax structure. Massachusetts utilizes the so-called "statutory method" embodied in G.L. c. 63, § 38, to calculate the portion of a unitary business's net income (taxable net income) subject to our State corporate excise tax. Taxable net income is determined by taking the corporation's Federal net income, as defined in G.L. c. 63, § 30(5)(b ), applying statutory deductions enumerated in G.L. c. 63, § 38(a ), and multiplying the result by the three-factor apportionment formula in G.L. c. 63, § 38(c ). The apportionment formula is the weighted average of three factors--property, payroll, and sales--commonly used to compare the value of business conducted within and without the State. ⁵ Each factor is a fraction in itself, the numerator of which is the local corporate property, payroll, or sales; the denominator of which is the corporation's total property, payroll, or sales "everywhere" during the taxable year.

If two or more affiliated corporations have a nexus with Massachusetts and file a consolidated return for Federal tax purposes, they may elect to use their combined net income as the base income subject to apportionment. G.L. c. 63, § 32B. When a corporation files a combined return, property, payroll, and sales of all the affiliated corporations are included in the denominator of the apportionment factors. Finally, if the allocation and apportionment provision of G.L. c. 63, § 38, are not reasonably adapted to approximate the net income derived from business carried on within this State, G.L. c. 63, § 42, provides that the taxpayer may petition the commissioner to use a "method other than that set out" in § 38.

The unitary and statutory methods differ in how they account for foreign subsidiaries in the net income base and apportionment formula. The unitary method combines net income from all businesses in the unitary group, makes adjustments as necessary, and then apportions the income to the local jurisdiction using the unitary group's factors in the apportionment formula. There are two significant consequences. First, the unitary method's net income base includes income from foreign subsidiaries, thus increasing combined net income and eliminating intercompany transactions, such as interest and royalty payments. Second, all members in the unitary group are included in the statutory apportionment formula. This means that the property, payroll, and sales from foreign corporations are included in the denominator of the apportionment factors, thus decreasing the percent of combined net income apportioned to a State. With this background in mind, we now consider whether there is statutory authority for using the unitary method.

2. Discussion. There is no doubt that the unitary method is permissible under the Constitution of the United States. See, e.g., Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 103 S.Ct. 2933, 77 L.Ed.2d 545 (1983). However, constitutional approval does not mean that taxpayers and taxing authorities are free to employ the unitary method when it suits their respective tax planning and assessment objectives. "[T]he State has no power to tax unless that power has been expressly conferred by statute." Commissioner of Revenue v. Franchi, 423 Mass. 817, 822, 673 N.E.2d 854 (1996). "The general rule of construction is that where the language of the statute is plain, it must be interpreted in accordance with the usual and natural meaning of the words. O'Sullivan v. Secretary of Human Servs., 402 Mass. 190, 194 (1988). This rule has particular force in interpreting tax statutes." Commissioner of Revenue v. AMIWoodbroke, Inc., 418 Mass. 92, 94, 634 N.E.2d 114 (1994). In addition, "words of a statute must be construed in association with other statutory language and the general statutory plan." Polaroid Corp. v. Commissioner of Revenue, 393 Mass. 490, 497, 472 N.E.2d 259 (1984). No method of determining tax liability is valid unless authorized by statute and assessed in conformity to its terms. See Commissioner of Revenue v. AMIWoodbroke, Inc., supra.

In Polaroid Corp. v. Commissioner of Revenue, supra, we were asked to decide whether the commissioner had the statutory authority to employ the unitary method in determining a corporation's taxable net income. After holding that the commissioner could not lawfully use the unitary method without first adopting appropriate regulations, id. at 496, 472 N.E.2d 259, we declared that G.L. c. 63, §§ 39A and 42, did not grant the commissioner the authority to impose the unitary method. Id. at 500, 472 N.E.2d 259. At the same time, we observed in dictum that "s 42 itself seems not to authorize a unitary approach of the type adopted by the commissioner in this case to determine taxable net income even of a corporation seeking relief under § 42." Id. at 501, 472 N.E.2d 259. We see no reason to disturb this conclusion.

"[A] statutory pattern that determines taxable income by starting with Federal gross income casts doubt on the propriety of the adoption of a worldwide unitary approach in determining taxable net income." Id. at 498 n. 10, 472 N.E.2d 259. Massachusetts corporate excise statutes use consolidated Federal net income as the basis for calculating combined net income. See G.L. c. 63, §§ 30, 32B, 38....