Hewlett-Packard Co. v. State, Dept. of Revenue

Citation749 P.2d 400
Decision Date11 January 1988
Docket NumberNo. 85SA340,HEWLETT-PACKARD,85SA340
PartiesCOMPANY, a California corporation, Plaintiff-Appellee, v. STATE of Colorado, DEPARTMENT OF REVENUE, and Alan Charnes, as Executive Director, Defendants-Appellants.
CourtColorado Supreme Court

Monte Pascoe, John H. Evans, David P. Temple, Ireland, Stapleton, Pryor & Pascoe, P.C., Denver, for plaintiff-appellee.

Duane Woodard, Atty. Gen., Charles B. Howe, Deputy Atty. Gen., Richard H. Forman, Sol. Gen., Chris J. Eliopulos, Sp. Asst. Atty. Gen., General Legal Services Section, Denver, for defendants-appellants.

Eugene F. Corrigan, Gen. Counsel, Multistate Tax Com'n, Boulder, amicus curiae.


The Colorado Department of Revenue appeals from an order of the district court granting Hewlett-Packard Company's motion for summary judgment. We reverse and remand for further proceedings consistent with this opinion.


Hewlett-Packard Company ("HP") is a California corporation doing business in Colorado. HP and its affiliates manufacture and market precision electronic instruments and equipment, computer systems, and various other related products. HP is a multi-national business which operates throughout the United States and has subsidiaries throughout the world. At the time this case arose, HP had five domestic subsidiaries in the United States and twenty-five foreign subsidiaries incorporated in twenty-three countries outside the United States. For purposes of this opinion, "foreign subsidiary" means a subsidiary incorporated in a country other than the United States. HP conducts extensive activities within Colorado including manufacturing, research and development, and sales. For the tax years in question, the fiscal years beginning November 1, 1972, and ending October 31, 1978, HP filed Colorado corporate income tax returns on a separate accounting basis. Under this method, separate corporations file separate tax returns regardless of affiliations with other corporations. Thus, HP filed its Colorado tax return without regard to any income of its foreign or domestic subsidiaries.

The Colorado Department of Revenue ("Department") audited HP's books and records and made assessments of additional tax on HP in the total amount of $1,643,020.00. In arriving at its assessment figures, the Department used a combined accounting method. The combined method, also known as unitary apportionment, is based on a recognition that an integrated business may operate through several separately incorporated entities. In such case, transactions between corporations under common control may lack economic substance; therefore, it is necessary to consider the corporate group as a whole. This method combines the income of all related business entities which are engaged in the same integrated or unitary business to arrive at a net income base. A percentage of this net income base is then apportioned to the relevant taxing jurisdiction according to a formula which measures the contribution of the business activities within the taxing jurisdiction (e.g., Colorado) to the profit of the entire unitary business. This percentage of the net income base, rather than the entire net income base, is then taxed by the state. See, e.g., McCray, Applying Federal Income Attribution Concepts at the State Level, Multistate Tax Commission Review, November 1985, at 9, 11.

The purpose of unitary apportionment is to fairly apportion to the taxing state its share of the unitary business' income attributable to the unitary business' operations in that state. It is important to note that application of the unitary apportionment method does not necessarily result in a greater tax liability for a corporation than would result from the separate accounting method. In Caterpillar Tractor Co. v. Lenckos, 84 Ill.2d 102, 49 Ill.Dec. 329, 417 N.E.2d 1343 (1981), appeal dismissed sub nom. Chicago Bridge & Iron Co. v. Caterpillar Tractor Co., 463 U.S. 1220, 103 S.Ct. 3562, 77 L.Ed.2d 1402 (1983), for instance, the plaintiff corporations had argued at administrative hearings that unitary apportionment should have been applied to each of the plaintiffs in five of the six tax years in question. The state agreed, thus reducing the plaintiffs' tax liability for those years. 1 Likewise, in debate on changes to the Colorado corporate taxing statutes, members of the Colorado General Assembly have recognized that use of combined reporting could decrease a corporation's state tax liability. Hearings on H.B. 1010 before the Senate Finance Committee, 55th Gen. Assembly, 1st Reg.Sess. (April 2, 1985).

The Department thus included all HP affiliates, including its foreign subsidiaries, engaged in the same unitary business related to HP's activities in Colorado, in a combined report to calculate a net income base. A percentage of the net income base was apportioned to Colorado, pursuant to section 39-22-303, 16 C.R.S. (1973), by multiplying the net income base by the proportion of HP's sales and property within Colorado to HP's total sales and property. This figure, HP's net income, was then taxed at the appropriate corporate tax rates.

The Department later issued a final determination upholding each of the assessments and adding $1,066,842.00 in interest through October 2, 1984. HP appealed the Department's final determination to the district court for a de novo determination of its Colorado taxable income. HP filed a motion for summary judgment in the district court based on its argument that the Colorado statutory definition of corporate net income as federal taxable income prohibits the inclusion of the income of HP's foreign subsidiaries in HP's net income base. The district court granted HP's motion for summary judgment. The Department filed an appeal and this court accepted jurisdiction of the case.


The United States Supreme Court has upheld unitary apportionment in many different contexts. Several of its decisions demonstrate that there is no constitutional barrier to state taxation of foreign subsidiaries. The Court has upheld New York's taxation of a British corporation, Bass, Ratcliff & Gretton, Ltd. v. State Tax Comm'n, 266 U.S. 271, 45 S.Ct. 82, 69 L.Ed. 282 (1924), Vermont's taxation of a New York corporation's "foreign source" dividend income received by such corporation from its subsidiaries and affiliates doing business abroad, Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 100 S.Ct. 1223, 63 L.Ed.2d 510 (1980), and California's taxation of a Delaware corporation's overseas subsidiaries, Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 103 S.Ct. 2933, 77 L.Ed.2d 545, reh'g denied, 464 U.S. 909, 104 S.Ct. 265, 78 L.Ed.2d 248 (1983). Consistent themes running through these and other opinions are that the form of a business organization may have nothing to do with the underlying unity or diversity of the business enterprise, Container Corp. of America, 463 U.S. at 168, 103 S.Ct. at 2941; Mobil Oil Corp., 445 U.S. at 440, 100 S.Ct. at 1233, that the income of a business is not immune from fairly apportioned state taxation, e.g., Mobil Oil Corp., 445 U.S. at 436, 100 S.Ct. at 1231, Northwestern States Portland Cement Co. v. Minn., 358 U.S. 450, 458-462, 79 S.Ct. 357, 362-364, 3 L.Ed.2d 421 (1959), and that the source of income does not preclude its taxability, Mobil Oil Corp., 445 U.S. at 438, 100 S.Ct. at 1232, see, e.g., Butler Bros. v. McColgan, 315 U.S. 501, 506-508, 62 S.Ct. 701, 703-704, 86 L.Ed. 991 (1942). The Court has stated that unitary apportionment is a "proper and fair method of taxation [that] happens, however, to be quite different from the method employed ... by the Federal Government in taxing ... business...." Container Corp. of America, 463 U.S. at 184, 103 S.Ct. at 2950.

Colorado has likewise upheld unitary apportionment. Lone Star Steel Co. v. Dolan, 668 P.2d 916 (Colo.1983); Joslin Dry Goods Co. v. Dolan, 200 Colo. 291, 615 P.2d 16 (1980); Union Pacific R.R. v. Heckers, 181 Colo. 374, 509 P.2d 1255, appeal dismissed, 414 U.S. 806, 94 S.Ct. 74, 38 L.Ed.2d 42 (1973); Kraftco Corp. v. Charnes, 636 P.2d 1300 (Colo.App.1981). This court has approved domestic unitary apportionment which combined the income of the taxpayer corporation with its parent corporation and other subsidiaries of the parent corporation. Joslin Dry Goods Co. 615 P.2d at 19. We have also upheld the inclusion in the taxpayer corporation's net income base of dividends from a Delaware subsidiary of the taxpayer corporation operating in Texas; this base was then apportioned and taxed. Lone Star Steel Co., 668 P.2d at 922, 924. We have held that a company's internal accounting techniques are not binding on a state for tax purposes, Lone Star Steel Co., 668 P.2d at 925 (quoting Exxon Corp. v. Department of Revenue, 447 U.S. 207, 221, 100 S.Ct. 2109, 2119, 65 L.Ed.2d 66 (1980)); see Joslin Dry Goods Co., 615 P.2d 16, and that there is no reason to find different results based simply on different formal business structures, a consequence which is inevitable without use of the unitary method, Joslin Dry Goods Co., 615 P.2d at 20 (quoting Caterpillar Tractor Co. v. Lenckos, 77 Ill.App.3d 90, 99, 32 Ill.Dec. 786, 794, 395 N.E.2d 1167, 1175 (1979), aff'd, 84 Ill.2d 102, 49 Ill.Dec. 329, 417 N.E.2d 1343 (1981), appeal dismissed sub nom. Chicago Bridge & Iron Co. v. Caterpillar Tractor Co., 463 U.S. 1220, 103 S.Ct. 3562, 77 L.Ed.2d 1402 (1983)).


HP concedes that HP and its subsidiaries, including its foreign subsidiaries, constitute a unitary business under the applicable state and federal constitutional standards. In this court, HP has not challenged the Department's authority to combine the income of HP's domestic subsidiaries to determine its net income base; the Department's authority to do so was settled by Joslin and related cases. However, we have not previously addressed the tax treatment of foreign subsidiaries of a...

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