Kimberly-Clark Corp. v. Commissioner of Revenue

Decision Date19 June 2015
Docket Number8670-R
CourtTax Court of Minnesota



No. 8670-R

Tax Court of Minnesota, Regular Division, Ramsey County.

June 19, 2015

Attorneys and Law Firms

Thomas G. Haluska, Judge.

Walter A. Pickhardt, Faegre Baker Daniels LLP, Minneapolis, Minnesota, and Amy L. Silverstein and Edwin P. Antolin, Silverstein & Pomerantz LLP, San Francisco, California, represent appellants Kimberly-Clark Corporation and its subsidiaries.

Alan I. Gilbert, Minnesota Solicitor General, and Alethea M. Huyser, Assistant Minnesota Attorney General, represent appellee Commissioner of Revenue.


Bradford S. Delapena, Judge.

This matter came before the Minnesota Tax Court, sitting en banc, on the parties' cross-motions for summary judgment.

We grant the Commissioner's motion for summary judgment and deny Kimberly-Clark's motion.

The undersigned judges, upon all the files, records, and proceedings herein, now make the following:


1. The Commissioner's motion for summary judgment is granted.

2. Kimberly-Clark's motion for summary judgment is denied.




Appellant Kimberly-Clark Corporation and its subsidiaries (collectively Kimberly) constitute a combined group for purposes of Minnesota's corporate franchise tax.[1] Kimberly-Clark Corporation is the reporting entity for the combined group.[2] Kimberly has done business in Minnesota since 1958 and has filed Minnesota tax returns since at least 1983.[3] During the tax years in issue (2007, 2008 and 2009), Kimberly engaged in a unitary, multi-state business.[4] This case concerns the computation of Minnesota corporate franchise tax liability for Kimberly's unitary business conducted partly within and partly without Minnesota.

Under the unitary-business / formula-apportionment method of deriving local taxable income, a state combines the total income of a unitary business, then uses an apportionment formula to allocate to itself a fair share of that combined income for tax purposes. As the United States Supreme Court has succinctly explained, this approach

rejects geographical or transactional accounting, and instead calculates the local tax base by first defining the scope of the “unitary business” of which the taxed enterprise's activities in the taxing jurisdiction form one part, and then apportioning the total income of that “unitary business” between the taxing jurisdiction and the rest of the world on the basis of a formula taking into account objective measures of the corporation's activities within and without the jurisdiction

Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 165, 103 S.Ct. 2933, 77 L.Ed.2d 545 (1983). Minnesota uses the unitary-business / formula-apportionment method to determine a unitary business' local tax base. See Comm'r of Revenue v. Associated Dry Goods, Inc., 347 N.W.2d 36, 38 (Minn.1984); Minn.Stat. § 290.191, subd. 1(a) (2014) (“[T]he net income from a trade or business carried on partly within and partly without this state must be apportioned to this state as provided in this section.”).

It is undisputed that during the tax years in issue, multistate businesses could: (1) apportion income to Minnesota using the apportionment formula set forth in Minn.Stat. § 290.191; or (2) petition the Minnesota Commissioner of Revenue to permit the use of an alternative apportionment formula. See Minn.Stat. § 290.20, subd. 1 (2014) (providing for such petitions). The dispute in this case concerns whether, during the tax years in issue, multistate businesses also enjoyed a third option, namely, the unfettered right to use the apportionment formula contained in Articles III and IV of Minn.Stat. § 290.171 (Minnesota's version of the Multistate Tax Compact) between 1983 and its repeal in 1987. A proper explication of this dispute requires us to briefly explain the emergence of the Multistate Tax Compact from a controversy over how states tax multistate businesses.

A. State Taxation of Multistate Businesses

In 1959, the United States Supreme Court held that a state could tax net income from the interstate operations of a foreign corporation whose only connections to the taxing state were the solicitation of sales within the state and the maintenance of a modest sales office. Nw. States Portland Cement Co. v. Minnesota, 358 U.S. 450, 453-57, 472, 79 S.Ct. 357, 3 L.Ed.2d 421 (1959). Within seven months of the Supreme Court's decision, Congress passed Public Law No. 86-272, Title II, 73 Stat. 555 (1959), which barred states from imposing an income tax on a business whose only activity in the state was (1) soliciting orders or (2) using an independent contractor to make sales in the state.[5] Congress also established the Special Subcommittee on State Taxation of Interstate Commerce to

make full and complete studies of all matters pertaining to the taxation by the States of income derived within the States from the conduct of business activities which are exclusively in furtherance of interstate commerce or which are a part of interstate commerce, for the purpose of recommending to the Congress proposed legislation providing uniform standards to be observed by the States in imposing income taxes on income so derived.[6]

In 1964, the Special Subcommittee (known as the Willis Committee) issued the first in a series of reports.[7] The subcommittee characterized the existing system as one “which calls upon tax administrators to enforce the unenforceable, and the taxpayer to comply with the uncompliable.”[8] The subcommittee further found “inescapable” the conclusion “that the voluntary adoption by the States of any kind of uniform system [for taxing the income of multistate businesses] is a slow and halting process, if not a virtual impossibility.”[9] The subcommittee recommended that all corporate income be apportioned among the states by a two-factor formula based on property and payroll attributed to the state, with no provision for state-specific formulas.[10]

B. Development and Summary of the Multistate Tax Compact

Following the issuance of the Willis Report, the National Association of Tax Administrators convened a special meeting in January 1966 to both oppose pending federal legislation and “to suggest workable alternatives which would eliminate the need for the kind of congressional action embodied in” the federal legislation.[11] The text of the Multistate Tax Compact was released in December 1966 by the Council of State Governments.[12]

Article I of the Compact lists its purposes, including “[f]acilitat[ion of] proper determination of State and local tax liability of multistate taxpayers” and “[p]romot[ion of] uniformity or competibility [sic, compatibility] in significant components of tax systems.”[13]

Article II sets out definitions of various terms used in the Compact, none of which need be recited here.[14]

Articles III and IV are at the center of the parties' dispute. Articles III and IV incorporate, almost verbatim, the Uniform Division of Income for Tax Purposes Act, a uniform act drafted by the National Conference of Commissioners on Uniform State Laws in 1957.[15] Article III, section 1, allows a multistate taxpayer to “elect to apportion and allocate his income in the manner provided by the laws of such State ... without reference to this compact” or “in accordance with Article IV.”[16] Article IV, in turn, provides for the apportionment of income by a three-factor, equally-weighted formula using sales, payroll, and property:

All business income shall be apportioned to this State by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three.[17]

Article IV, sections 10, 13, and 15, define the three factors.[18] Under Article III, section 1, the taxpayer may elect which apportionment formula to use “without reference to the election made” in any other state.[19]

Article V, section 1, allows a credit against use tax on tangible personal property imposed in one state for use tax paid to another state with respect to the same property.[20] Article V, section 2 allows a seller to rely on an exemption certificate.[21]

Article VI establishes the Multistate Tax Commission, composed of one “member” from each “party State.”[22] Article VI further requires that any action of the Commission be approved by a majority of members, requires the Commission to adopt bylaws, establishes the Commission's governing and financial structure, and enumerates the powers of the Commission.[23]

Article VII allows the Commission to “adopt uniform regulations for any phase of the administration” of income taxes.[24] It requires the Commission to submit such regulations “to the appropriate officials of all party States and subdivisions to which they might apply” and provides that each such state “shall consider any such regulation for adoption in accordance with its own laws and procedures.”[25]

Article VIII allows any party state to ask the Commission to perform audits on its behalf and sets procedures for such audits.[26] Article VIII must be specifically adopted by a party state.[27]

Article IX provides for arbitration of “disputes concerning apportionments and allocations” by taxpayers “dissatisfied with the final administrative determination of the tax agency of the State” and establishes procedures for such arbitrations.[28]

Article X, also important to the parties' dispute, provides in section 1 that the Compact “shall enter into force when enacted into law by any seven States.”[29] Article X, section 2, provides:

Any party State may withdraw from this compact by enacting a statute repealing the same. No

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