Mississippi State Tax Com'n v. Chevron U.S.A., Inc., 93-CA-0787

Decision Date19 January 1995
Docket NumberNo. 93-CA-0787,93-CA-0787
Citation650 So.2d 1353
PartiesMISSISSIPPI STATE TAX COMMISSION v. CHEVRON U.S.A., INC.
CourtMississippi Supreme Court

Bobby R. Long, MS State Tax Com'n, Gary W. Stringer, Jackson, for appellant.

William F. Goodman Jr., Jamie G. Houston III, Watkins & Eager, Jackson, for appellee.

Before PRATHER, P.J., and PITTMAN and McRAE, JJ.

McRAE, Justice, for the Court:

Chevron, U.S.A., Inc. appeals the Mississippi Tax Commission's (hereinafter "Commission") interpretation of the franchise tax formula as set forth in Miss.Code Ann. Sec. 27-13-13 for a multistate corporation. The Commission conducted a hearing on February 5, 1992, on the tax liability of Chevron, U.S.A., Inc. and held it owed additional franchise taxes in the amount of $2,240,304.00 for the 1989 and 1990 fiscal years. Chevron filed suit in the Hinds County Circuit Court,

which reversed the Commission's order requiring the payment of additional franchise taxes. The specific issue on appeal is whether actual or hypothetical Mississippi downstream receipts should be used in the formula for determining franchise tax liability. Thereafter, the Commission perfected an appeal to this Court. The following issues were raised:

I.

The lower court was incorrect in its interpretation of the franchise tax formula for multi-state corporations as set forth in Miss.Code Ann. Sec. 27-13-13.

II.

The Chancellor was in error in concluding that the interpretation of the statutory formula raises constitutional concerns.

Finding that the Commission was correct in its interpretation of the franchise tax requirements of Chevron, we reverse the judgment of the lower court.

FACTS

Overview of Chevron

The franchise tax controversy between Chevron and the Mississippi Tax Commission has a long history dating back to when the refinery was built in 1963. The current controversy revolves around whether the Commission should use the so-called formula method or actual receipts to determine the amount of taxes owed to the State. Chevron primarily defines "receipts" to include the company's sales, but it can also include dividends, interest, rents, royalties and other income. Franchise tax analysis must occur within the context of income tax formulation due to the nature of the franchise tax statute. However, it must be kept in mind that the two taxes have totally different premises for their support. While both taxes are revenue builders for the state, income taxes are based on taxing individuals and entities on monies made whereas franchise taxes stem from the notion that a company should pay for the privilege of operating its business in this state.

There are two types of taxes which corporations in Mississippi must pay: income and franchise. State income taxes and state franchise taxes are reported on the same state-prescribed form. These two taxes are also tied together by the statutory requirement that if a corporation uses a formula method of apportionment in preparing income tax returns, the Commission expects it to also use a formula method for franchise tax determinations. Miss.Code Ann. Sec. 27-13-13, the statute applicable to the Chevron and Commission controversy, states:

In the case of organizations doing business both within and without Mississippi, the value of capital employed in this state shall be determined by first computing the ratio between (1) the real and tangible personal property owned in Mississippi and gross receipts from business carried on in Mississippi, and (2) the total real and tangible personal owned and gross receipts wherever located and from wherever received. Said ratio then shall be applied to the total capital stock, surplus, undivided profits and true reserves and the result of that application shall be the capital employed in this state. Provided, however, that the amount of the determined capital in Mississippi shall in no case be less than the assessed value of the Mississippi property of the organization for the year preceding the year in which the return is due.

For the purpose of this section, an organization which uses a formula method of apportionment in making income tax returns to this state shall determine its gross receipts from business carried on in Mississippi by applying total unitary receipts the ratio achieved, or which would be achieved by such formula and adding to the result of such application any nonunitary Mississippi receipts.

Miss.Code Ann. Sec. 27-13-13 (Revised 1991).

A brief discussion of Chevron's participation in Mississippi may aid in understanding In the petroleum industry, Chevron operates both "upstream" and "downstream" activities in Mississippi. "Upstream" operations refer to the exploration and production of petroleum products. "Downstream" operations are basically twofold: refining crude oil to a usable product and distribution of that product to the consumer. Both activities of Chevron are taxable by the State of Mississippi. Chevron is audited to insure that these taxes are paid. During the years 1989 and 1990, the Commission found discrepancies in the taxes that Chevron had paid on its downstream operations versus what was owed.

how receipts (sales) are derived for tax purposes. Chevron is a world-wide corporation headquartered in San Francisco, California. Chevron, U.S.A., a domestic operating company, is the subsidiary of Chevron (hereinafter all references to Chevron will be Chevron, U.S.A. unless otherwise stated). It was issued a Certificate of Authority to do business in Mississippi on December 29, 1956. Chevron also does business in the other forty-nine states.

For the year 1989, Chevron produced 4,341,309 barrels of oil and 3,613,692 MCF of gas (MCF is a quantity of measurement for gas just as a barrel is a quantity of measurement for oil. One MCF equals 1000 cubic feet). In 1990, Chevron produced 3,880,149 barrels of oil and 6,409,699 MCF of gas. The refinery in Pascagoula, Mississippi processes over twelve million gallons of crude oil per day or approximately three hundred barrels per day. It employs over 1,100 people and approximately 400 contractors per year. The products from the refinery are distributed both within and outside Mississippi. The Pascagoula refinery is the largest Chevron owns in terms of processing capability.

In addition to the refinery, Chevron owns and operates four petroleum terminals in Mississippi which are located at Pascagoula, Meridian, Collins and Greenville. During each of the audits in dispute, these terminals received and distributed approximately 200,000,000 gallons of petroleum products. All Chevron products processed in Mississippi are distributed by one of four methods: vessel, pipeline, rail car (tanker) or tank truck.

Pipeline and marine sales are instigated by a customer contacting a Chevron representative in Houston, Texas. At this point, a customer number is established, and the customer can then call one of Chevron's terminals and indicate the amount of product needed and the method of shipment. This information is transmitted to Chevron's central order entry group in Concord, California which invoices the customer and the terminal. The customer makes payment to Chevron's bank in San Francisco, California.

Chevron contends that the real and tangible personal property in Mississippi can be determined by these corporate records. Its records indicate who the customer was, what product was sold, the origin of the sale, and the destination of the product sold. Chevron advocated that based on these records, the downstream receipts for the company can be directly determined, and therefore, the statutory formula, as required by the Commission, should not be applicable.

Income Tax Assessment

Mississippi requires corporate taxpayers doing business in multiple states to report and pay income tax on the basis of direct accounting whenever feasible. When this method is used to determine net business income, there is no estimate or approximation. The State requires multi-state corporate taxpayers to report income tax on the basis of apportionment only when direct accounting is impossible. Apportionment simply means an estimation of the taxpayer's net income. Mississippi's system for tax reporting prefers direct accounting presumably because it is more accurate. Direct or separate accounting involves interpreting from the company records what portion of the company's net income is attributable to Mississippi.

Mississippi provides for a formula method by default, i.e. only if income cannot be traced from direct records. The formula averages three downstream components: payroll Chevron can account directly for expenditures in Mississippi in its upstream aspect of the business, but not in its downstream business due to factors, such as marketing a product, from which it is difficult to ascertain a value. For downstream operations, Chevron is required to derive a ratio from its property, payroll and sales in Mississippi by averaging these together from actual company records to achieve a hypothetical income to be taxed. Chevron argued that the Mississippi sales factor used in income tax law should also be used as the Mississippi receipts factor for franchise tax purposes. This argument ignores the different concepts behind the two tax statutes.

property and sales. See Miss.Code Ann. Sec. 27-7-23.

The majority of multi-state corporations can identify their property and payroll factors, but the sales factor poses problems. The problem is where to allocate an interstate sale. For example, Chevron produces petroleum products at its refinery in Pascagoula, Mississippi. A customer wanting to receive a finished product in Florida must place an order in California or Texas. Conceivably, any one of the four states could claim the sale: California, Florida, Mississippi, or Texas. Corporations use five ways to apportion interstate sales for income tax purposes:

1. Destination Sales

2. Sales Office

3...

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