Moorman Manufacturing Company v. Bair

• Decision Date: 15 June 1978
• Docket Number: No. 77-454,77-454
• Citation: 57 L.Ed.2d 197,437 U.S. 267,98 S.Ct. 2340
• Parties: MOORMAN MANUFACTURING COMPANY, Appellant, v. G. D. BAIR, etc
• Court: U.S. Supreme Court

437 U.S. 267

98 S.Ct. 2340

57 L.Ed.2d 197

MOORMAN MANUFACTURING COMPANY, Appellant,

v G. D. BAIR, etc.

No. 77-454.

Argued March 21, 1978.

Decided June 15, 1978.

Rehearing Denied Oct. 2, 1978.

See 439 U.S. 885, 99 S.Ct. 233.

Syllabus

An Iowa statute prescribes a so-called single-factor sales formula for apportioning an interstate corporation's income for state income tax purposes. Under this formula, the part of income from such a corporation's sale of tangible personal property attributable to business within the State and hence subject to the state income tax is deemed to be in that proportion which the corporation's gross sales made within the State bear to its total gross sales. Appellant, an Illinois corporation that sells animal feed it manufactures in Illinois to Iowa customers through Iowa salesmen and warehouses, brought an action in an Iowa court challenging the constitutionality of the single-factor form la. The trial court held the formula invalid under the Due Process Clause of the Fourteenth Amendment and the Commerce Clause, but the Iowa Supreme Court reversed. Held :

1. Iowa's single-factor formula is not invalid under the Due Process Clause. Pp. 271-275.

(a) Any assumption that at least some portion of appellant's income from Iowa sales was generated by Illinois activities is too speculative to support a claim that Iowa in fact taxed profits not attributable to activities within the State. P. 272.

(b) An apportionment formula, such as the single-factor formula, that is necessarily employed as a rough approximation of a corporation's income reasonably related to the activities conducted within the taxing State will only be disturbed when the taxpayer has proved by "clear and cogent evidence" that the income attributed to the State is in fact "out of all reasonable proportion to the business transacted . . . in that State," Hans Rees' Sons v. North Carolina ex rel. Maxwell, 283 U.S. 123, 135, 51 S.Ct. 385, 389, 75 L.Ed. 879 or has "led to a grossly distorted result," Norfolk & western R. Co. v. State Tax Comm'n, 390 U.S. 317, 326, 88 S.Ct. 995, 1001, 19 L.Ed.2d 1201. Here, the Iowa statute afforded appellant an opportunity to demonstrate that the single-factor formula produced an arbitrary result in its case, but the record contains no such showing. Pp. 272-275.

2. Nor is Iowa's single-factor formula invalid under the Commerce Clause. Pp. 276-281.

(a) On this record, the existence of duplicative taxation as between Iowa and Illinois (which uses the so-called three-factor property, payroll, and sales—formula) is speculative, but even assuming some overlap, appellant's argument that Iowa, rather than Illinois, was necessarily at fault in a constitutional sense cannot be accepted. Where the record does not reveal the sources of appellant's profits, its Commerce Clause claim cannot rest on the premise that profits earned in Illinois were included in its Iowa taxable income and therefore the Iowa formula was at fault for whatever overlap may have existed. Pp. 276-277.

(b) The Commerce Clause itself, without implementing legislation by Congress, does not require, as appellant urges, that Iowa compute corporate net income under the Illinois three-factor formula. If the Constitution were read to mandate a prohibition against any overlap in the computation of taxable income by the States, the consequences would extend far beyond this particular case and would require extensive judicial lawmaking. Pp. 277-281.

254 N.W.2d 737, affirmed.

Donald K. Barnes, Detroit, Mich., for appellant.

Harry M. Griger, Des Moines, Iowa, for appellee.

Mr. Justice STEVENS delivered the opinion of the Court.

The question in this case is whether the single-factor sales formula employed by Iowa to apportion the income of an interstate business for income tax purposes is prohibited by the Federal Constitution.

I

Appellant, Moorman Manufacturing Co., is an Illinois corporation engaged in the manufacture and sale of animal feeds. Although the products it sells to Iowa customers are manufactured in Illinois, appellant has over 500 salesmen in Iowa and it owns six warehouses in the State from which deliveries are made to Iowa customers. Iowa sales account for about 20% of appellant's total sales.

Corporations, both foreign and domestic, doing business in Iowa are subject to the State's income tax. The taxable income for federal income tax purposes, with certain adjustments, is treated as the corporation's "net income" under the Iowa statute. If a corporation's business is not conducted entirely within Iowa, the statute imposes a tax only on the portion of its income "reasonably attributable" to the business within the State.

There are essentially two steps in computing the share of a corporation's income "reasonably attributable" to Iowa. First, certain income, "the geographical source of which is easily identifiable," is attributed entirely to a particular State.¹ Second, if the remaining income is derived from the manufacture or sale of tangible personal property, "the part thereof attributable to business within the state shall be in that proportion which the gross sales made within the state bear to the total gross sales." ² This is the single-factor formula that appellant challenges in this case.

If the taxpayer believes that application of this formula subjects it to taxation on a greater portion of its net income than is "reasonably attributable" to business within the State, it may file a statement of objections and submit an alternative method of apportionment. If the evidence submitted by the taxpayer persuades the Director of Revenue that the statute is "inapplicable and inequitable" as applied to it, he may recalculate the corporation's taxable income.

During the fiscal years 1949 through 1960, the State Tax Commission allowed appellant to compute its Iowa income on the basis of a formula consisting of three, equally weighted factors property, payroll, and sales—rather than the formula prescribed by statute.³ For the fiscal years 1961 through 1964, appellant complied with a directive of the State Tax Commission to compute its income in accordance with the statutory formula. Since 1965, however, appellant has resorted to the three-factor formula without the consent of the commission.

In 1974, the Iowa Director of Revenue revised appellant's tax assessment for the fiscal years 1968 through 1972. This assessment was based on the statutory formula, which pro- duced a higher percentage of taxable income than appellant, using the three-factor formula, had reported on its return in each of the disputed years.⁴ The higher percentages, of course produced a correspondingly greater tax obligation for those years.⁵

After the Tax Commission had rejected Moorman's appeal from the revised assessment, appellant challenged the constitutio ality of the single-factor formula in the Iowa District Court for Polk County. That court held the formula invalid under the Due Process Clause of the Fourteenth Amendment and the Commerce Clause. The Supreme Court of Iowa reversed, holding that an apportionment formula that is necessarily only a rough approximation of the income properly attributable to the taxing State is not subject to constitutional attack unless the taxpayer proves that the formula has produced an income attribution "out of all proportion to the business transacted" within the State. The court concluded that appellant had not made such a showing.

We noted probable jurisdiction of Moorman's appeal, 434 U.S. 953, 98 S.Ct. 478, 54 L.Ed.2d 311 and now affirm.

II

Appellant contends that Iowa's single-factor formula results in extraterritorial taxation in violation of the Due Process Clause. This argument rests on two premises: first, that appellant's Illinois operations were responsible for some of the profits generated by sales in Iowa; and, second, that a formula that reaches any income not in fact earned within the borders of the taxing State violates due process. The first premise is speculative and the second is foreclosed by prior decisions of this Court.

Appellant does not suggest that it has shown that a significant portion of the income attributed to Iowa in fact was generated by its Illinois operations; the record does not contain any separate accounting analysis showing what portion of appellant's profits was attributable to sales, to manufacturing, or to any other phase of the company's operations. But appellant contends that we should proceed on the assumption that at least some portion of the income from Iowa sales was generated by Illinois activities.

Whatever merit such an assumption might have from the standpoint of economic theory or legislative policy, it cannot support a claim in this litigation that Iowa in fact taxed profits not attributable to activities within the State during the years 1968 through 1972. For all this record reveals, appellant's manufacturing operations in Illinois were only marginally profitable during those years and the high-volume sales to Iowa customers from Iowa warehouses were responsible for the lion's share of the income generated by those sales. Indeed, a separate accounting analysis might have revealed that losses in Illinois operations prevented appellant from earning more income from exploitation of a highly favorable Iowa market. Yet even were we to assume that the Illinois activities made some contribution to the profitability of the Iowa sales, appellant's claim that the Constitution invalidates an apportionment formula whenever it may result in taxation of some income that did not have its source in the taxing State is incorrect.

The Due Process Clause places two restrictions on a State's power to tax income generated by the activities of an interstate business. First, no tax may be imposed, unless there is some minimal connection between those activities and the taxing State. National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753, 756, 87...