Health Net, Inc. v. Dep't of Revenue

• Jurisdiction: Oregon
• Parties: HEALTH NET, INC. and subsidiaries, Plaintiffs-Appellants, v. DEPARTMENT OF REVENUE, Defendant-Respondent.
• Citation: 362 Or. 700,415 P.3d 1034
• Docket Number: TC 5127,SC S063625
• Court: Oregon Supreme Court
• Decision Date: 12 April 2018

362 Or. 700

415 P.3d 1034

HEALTH NET, INC. and subsidiaries, Plaintiffs-Appellants,

v.DEPARTMENT OF REVENUE, Defendant-Respondent.

TC 5127

SC S063625

Supreme Court of Oregon.

Argued and submitted September 19, 2016.

April 12, 2018

Amy L. Silverstein, San Francisco, California, argued the cause for appellants.James E. Mountain, Jr., Harrang Long Gary Rudnick P.C., Portland, filed the brief.Also on the brief were Edwin P. Antolin and Amy L. Silverstein, Silverstein & Pomerantz LLP, and C. Robert Steringer, Harrang Long Gary Rudnick P.C.

Benjamin Gutman, Solicitor General, Salem, argued the cause for respondent.Darren Weirnick, Assistant Attorney General, filed the brief.Also on the brief was Ellen F. Rosenblum, Attorney General.

Timothy R. Volpert, Portland, and Richard L. Masters, Louisville, Kentucky, filed the brief for amici curiaeInterstate Commission for Juveniles and The Association of Compact Administrators of the Interstate Compact on the Placement of Children.

Per A. Ramfjord, Stoel Rives LLP, Portland, filed the brief for amicus curiaeCouncil on State Taxation.Also on the brief was Nikki E. Dobay, Council on State Taxation, Portland.

Thomas M. Christ, Cosgrave Vergeer Kester LLP, Portland, filed the brief for amicus curiaeMultistate Tax Commission.Also on the brief were Helen Hecht, General Counsel, and Sheldon H. Laskin, Counsel, Multistate Tax Commission, Washington, D.C.

Katherine Thomas, Assistant County Attorney, Office of Multnomah County Attorney, Portland, filed the brief for amici curiae the States of Texas, Alaska, Arkansas, California, Hawaii, Idaho, Michigan, Minnesota, Missouri, Montana, North Dakota, Utah, and Washington, and the District of Columbia.Also on the brief were Jenny M. Madkour, County Attorney, and Jed Tomkins, Assistant County Attorney, Office of Multnomah County Attorney, Portland; and Ken Paxton, Attorney General of Texas, Jeffrey C. Mateer, First Assistant Attorney General, Scott A. Keller, Solicitor General, and Rance Craft, Assistant Solicitor General, Office of the Attorney General, Austin, Texas.

Before Balmer, Chief Justice, and Kistler, Walters, Nakamoto, Flynn, and Duncan, Justices, and Armstrong, Judge of the Court of Appeals, Justice pro tempore.^**

KISTLER, J.

In 1967, Oregon enacted the Multistate Tax Compact (MTC) to promote the uniform apportionment of income earned by multistate businesses.Or. Laws 1967, ch. 242, § 1(stating the purposes of the act).That statute, which was codified as ORS 305.655, set out formulas that multistate businesses could use to determine the portion of their income that was subject to taxation in Oregon.¹In 1993, the Oregon legislature provided that businesses could not use the apportionment formulas set out in ORS 305.655 to the extent that those formulas differed from apportionment formulas set out in another set of Oregon statutes.Or. Laws 1993, ch. 726, § 20.

In 2010 and 2011, Health Net, Inc., and its subsidiaries (collectively "taxpayer") sought a refund for tax years 2005 to 2007, claiming that ORS 305.655 had created contractual obligations, which the 1993 law impaired in violation of the state and federal contract clauses.The Tax Court rejected that claim, holding that ORS 305.655 created only statutory rights, which the legislature was free to modify.In doing so, the Tax Court aligned Oregon with all the state courts that have addressed this issue.We now affirm the Tax Court's judgment.

This case presents primarily two issues.The first is whether, in enacting ORS 305.655, the 1967legislature went beyond enacting a statute intended to promote the uniform taxation of multistate businesses and instead entered into a binding contract, which the 1993 law impaired in violation of the state and federal contract clauses.The second is whether the 1993legislation impliedly repealing part of ORS 305.655 violated Article IV, section 22, of the Oregon Constitution by not setting out the text of that statute.Before addressing those issues, we first describe briefly the background that underlies taxpayer's claims.

I.BACKGROUND

A.National developments

In 1957, the National Conference of Commissioners on Uniform State Laws promulgated a uniform act—the Uniform Distribution of Income for Tax Purposes Act (UDITPA)—to provide a fair way to apportion income earned by multistate businesses among the various states.Arthur D. Lynn, Jr., The Uniform Division of Income for Tax Purposes Act , 19 Ohio St.L.J. 41(1958).UDITPA divides income into two categories: business and nonbusiness income.Id. at 43.It provides different formulas for apportioning each category of income.Id. at 46.Of relevance here, UDITPA provides that all business income shall be apportioned using an equally weighted average of three ratios, which reflect a business's property, payroll, and sales within and without a state.SeeAtlantic Richfield Co. v. Dept. of Rev. , 300 Or. 637, 639-40, 717 P.2d 613, adh'd to on recons., 301 Or. 242, 722 P.2d 727(1986)(illustrating application of the three-factor formula).Additionally, UDITPA specifies how sales of tangible property and other types of sales should be allocated to states to determine the percentage of a multistate business's income that each state may tax.SeePowerex Corp. v. Dept. of Rev. , 357 Or. 40, 60, 346 P.3d 476(2015)(discussing allocation principles for sales of tangible property).

In 1959, two years after the National Conference of Commissioners on Uniform State Laws promulgated UDITPA, the United States Supreme Court confirmed that states constitutionally may tax income derived exclusively from interstate commerce.Northwestern Cement Co. v. Minnesota , 358 U.S. 450, 79 S.Ct. 357, 3 L.Ed. 2d 421(1959).Specifically, the Court held that the Commerce Clause did not prohibit Minnesota from taxing a foreign corporation's in-state sales, even though those sales were exclusively in furtherance of interstate commerce.Id. at 452, 464, 79 S.Ct. 357.Although the Court recognized that permitting Minnesota to tax those sales raised the possibility that two states could tax the same income, it observed that the petitioners had not challenged the formula Minnesota used to apportion the corporation's income among the states.Id. at 462-63, 79 S.Ct. 357.The Court accordingly found it unnecessary to decide whether a different method of apportioning income from interstate sales would raise constitutional issues.Id.

The decision in Northwestern Cement Co. led to two related but separate congressional responses.First, six months after Northwestern Cement Co. was decided, Congress enacted a statute that precluded a state from taxing an out-of-state corporation's income when the corporation's only activity within the state was either soliciting sales or using an independent contractor to solicit those sales.James E. Sabine, Constitutional and Statutory Limits on the Power to Tax , 12 Hast. L.J. 23, 24-27(1960)(summarizing federal legislation).Second, Congress appointed a commission to study whether further federal measures were necessary to avoid unduly burdensome taxation of multistate businesses.Id.

Among other things, the resulting study noted that there was a "widespread adoption of the three-factor property-payroll-sales formula" for apportioning income.State Taxation of Interstate Commerce: Report of the Special Subcommittee on State Taxation of Interstate Commerce , H.R. Rep. No. 88-1480, at 119(1964).The study also noted, however, that there were variations in the way that sales were allocated to states, and Congress considered legislation that would have limited the states' authority to tax multistate business income.Id.;seeFrank M. Keesling and John S. Warren, California's Uniform Division of Income for Tax Purposes Act , 15 UCLA L. Rev. 156, 159-63(1967)(discussing proposed federal legislation).

By 1967, 19 of the 38 states that taxed income earned by multistate businesses had adopted "most or all of [UDITPA's] provisions."Keesling & Warren, 15 UCLA L. Rev.at 158.To further promote the uniform taxation of business income and to ward off further federal intervention in state taxation, the Council of State Governments drafted the MTC in 1966 and circulated it among the states in early 1967.The MTC consists of 12 articles.Article IV incorporates the apportionment formulas set out in UDITPA.Article III permits a multistate business to elect either the apportionment formulas set out in Article IV or apportionment formulas set out elsewhere in a state's tax code to determine the portion of the business's income that is subject to taxation in that state.

Article VI creates the Multistate Tax Commission, which is composed of representatives from member states and funded by donations and grants.²The commission may recommend rules to member states to advance the uniform application of state tax laws, but member states are free to accept or reject any rule the commission recommends.Art. VII.

Two other articles provide additional means for enhancing the uniform application of state tax laws.Article VIII permits a member state to ask the commission to audit a corporation's books, papers, and records, but "only in those party States that specifically provide therefor by statute."Art. VIII, § 1.Article IX provides for arbitration of a state agency's determination regarding apportionment or allocation if the commission adopts a regulation "placing this Article in effect."Art. IX, § 1.California enacted the MTC on the condition that Article IX not be placed in effect, and that article is not in effect.Gillette Co. v. Franchise Tax Bd. , 62 Cal. 4th 468, 482, 196 Cal.Rptr.3d 486, 363 P.3d 94(2015), cert. den. , ––– U.S. ––––, 137 S. Ct. 294, 196 L.Ed.2d 238(2016).

Finally, Article X provides that "[t]his compact shall enter into force when enacted into law by any seven States" and shall "become effective as to any other State upon its enactment thereof."Art. X, § 1.Article X also...