Perini Corp. v. Commissioner of Revenue

• Decision Date: 22 March 1995
• Citation: 419 Mass. 763,647 N.E.2d 52
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: PERINI CORPORATION & others 1 v. COMMISSIONER OF REVENUE. Suffolk

Page 52

647 N.E.2d 52

419 Mass. 763

PERINI CORPORATION & others ¹ v. COMMISSIONER OF REVENUE.

Supreme Judicial Court of Massachusetts,

Suffolk.

Submitted Jan. 10, 1995.

Decided March 22, 1995.

Kenneth A. Cohen, Boston, for the plaintiffs.

Thomas A. Barnico, Asst. Atty. Gen., for the Commissioner of Revenue.

Before LIACOS, C.J., and WILKINS, NOLAN, LYNCH and GREANEY, JJ.

NOLAN, Justice.

This case concerns the constitutionality of certain portions of the corporate excise statute, namely, G.L. c. 63, § 30(8) and (9) (1992 ed.), which define the taxable net worth of domestic and foreign intangible property corporations. The challenged provisions allow a domestic intangible property corporation to deduct from its taxable net worth the value of a subsidiary of which it owns 80% or more of the voting stock, but only if that subsidiary is incorporated in Massachusetts. A foreign intangible property corporation may deduct from its taxable net worth the value of a subsidiary of which it owns 80% or more of the voting stock, but only if that subsidiary is incorporated outside of Massachusetts and does no business in Massachusetts. The plaintiffs allege that the excise discriminates against interstate commerce in violation of the commerce clause of the United States Constitution, and also that the excise discriminates on the basis of domicil in violation of the equal protection clause of the Fourteenth Amendment to the United States Constitution. The plaintiffs commenced this action in the county court pursuant to G.L. c. 214, § 1 (1992 ed.); G.L. c. 231A, § 1 (1992 ed.); and 42 U.S.C. § 1983 (1988), seeking declaratory and injunctive relief, and attorney's fees pursuant to 42 U.S.C. § 1988 (1988). A single justice of this court reserved and reported the case to the full court based on the pleadings and the statement of agreed facts. We conclude that the challenged provisions of the corporate excise, G.L. c. 63, § 30(8) and (9), facially discriminate against interstate commerce in violation of the commerce clause. ² We remand the matter of attorney's fees to the single justice.

1. Constitutionality of excise. We outline briefly the structure of the corporate excise as applied to both domestic and foreign intangible property corporations. ³ Massachusetts imposes a corporate excise on domestic corporations "for the right ... to exist as such an organization and for the enjoyment under the protection of the laws of the commonwealth, of the powers, rights, privileges and immunities" derived from its corporate existence and operation. G.L. c. 63, § 32 (1992 ed.). See G.L. c. 63, § 39 (1992 ed.), as to foreign corporations. Both domestic and foreign corporations "exercising [their] charter[s], or qualified to do business or actually doing business in the commonwealth," must pay the excise. §§ 32, 39. The excise is measured by a percentage of a corporation's net worth plus a percentage of the corporation's net income. Id.

For domestic intangible property corporations, net worth is calculated according to the definition set forth in G.L. c. 63, § 30(8). ⁴ Under this provision, a domestic corporation may exclude from its taxable net worth the value of its investment in a subsidiary corporation of which it owns80% or more of the voting stock, but only if that subsidiary is incorporated in Massachusetts. A subsidiary incorporated outside of Massachusetts, is not excludable from the net worth calculation.

For foreign intangible property corporations, a different net worth definition applies. ⁵ Under G.L. c. 63, § 30(9), a foreign corporation may exclude from its taxable net worth the value of its investment in a subsidiary of which it owns 80% or more of the voting stock, but only if that subsidiary does not do business in Massachusetts. The Commissioner of Revenue (commissioner) has construed this provision to mean that subsidiaries are excludable only if they are not doing business in Massachusetts and they are incorporated outside of Massachusetts.

The plaintiffs, Perini Corporation (Perini), Perini Land and Development Corporation (PL & D), Dynatech Corporation (Dynatech), and Neworld Bancorp, Inc. (Neworld), are all intangible property corporations as defined in G.L. c. 63, § 30(11). Each plaintiff conducts business in Massachusetts and is subject to the annual corporate excise. Each plaintiff is also a parent corporation which owns 80% or more of the voting stock of one or more subsidiaries.

Two plaintiffs, Perini and Dynatech, are Massachusetts corporations with subsidiaries incorporated both in and outside of Massachusetts. Many of the subsidiaries owned by these corporations either do business in Massachusetts or are incorporated in Massachusetts, and as such, must also pay the annual corporate excise. Under the terms of § 30(8), Perini and Dynatech have been able to exclude from their taxable net worth the value of their Massachusetts subsidiaries, but not the value of their foreign subsidiaries.

The other two plaintiffs, PL & D and Neworld, are both foreign corporations each of which wholly owns a Massachusetts subsidiary. Because PL & D and Neworld are foreign corporations, neither corporation has been able to exclude from its taxable net worth the value of its Massachusetts subsidiary. G.L. c. 63, § 30(9).

Before considering whether the challenged excise violates interstate commerce, we consider whether the excise has a sufficient effect on interstate commerce to evoke commerce clause scrutiny. Aronson v. Commonwealth, 401 Mass. 244, 248, 516 N.E.2d 137 (1987), cert. denied, 488 U.S. 818, 109 S.Ct. 58, 102 L.Ed.2d 36 (1988). The plaintiffs are parent corporations which currently conduct business in Massachusetts. The plaintiffs own subsidiaries located both in and outside of Massachusetts. "By its nature, a unitary business is characterized by a flow of value among its components." Kraft Gen. Foods, Inc. v. Iowa Dep't of Revenue & Fin., 505 U.S. 71, ----, 112 S.Ct. 2365, 2369, 120 L.Ed.2d 59 (1992). The flow of value between the plaintiffs and their foreign subsidiaries clearly constitutes interstate commerce. This flow includes not only the acquisition of foreign subsidiaries, but also the flow of dividends, employee benefits, insurance, and other services from parent corporations to their subsidiaries. ⁶

Having concluded that the excise has impact on interstate commerce, we turn next to the question whether the challenged provisions are unconstitutional under the commerce clause, which provides that "congress shall have power ... to regulate commerce ... among the several states." "Though phrased as a grant of regulatory power to Congress, the Clause has long been understood to have a 'negative' aspect that denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce." Oregon Waste Sys., Inc. v. Department of Envtl. Quality, 511 U.S. 93, ----, 114 S.Ct. 1345, 1349, 128 L.Ed.2d 13 (1994). The first step in analyzing a law subject to judicial scrutiny under the negative commerce clause is to determine whether the law regulates evenhandedly with only incidental effects on interstate commerce, or whether it discriminates against interstate commerce. Id. at ----, 114 S.Ct. at 1350. The term "discrimination" as used in this context means "differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter." Id. The purpose of, or justification for, a law has no bearing on whether it is facially discriminatory. "If a restriction on commerce is discriminatory, it is virtually per se invalid." Id.

We conclude that the challenged provisions of the corporate excise facially discriminate against interstate commerce. Under G.L. c. 63, § 30(8), a domestic parent corporation may exclude from its taxable net worth the value of its subsidiary, but only if that subsidiary is also incorporated in Massachusetts. This provision draws a distinction solely on the basis of the domicil of the subsidiary, and treats a domestic corporation more favorably if it chooses to acquire a domestic subsidiary, rather than a foreign subsidiary. Consequently, the statutory scheme imposes a heavier burden on domestic corporations who own foreign subsidiaries than on domestic corporations who own domestic subsidiaries. See Kraft Gen. Foods, Inc. v. Iowa Dep't of Revenue & Fin., supra 505 U.S. at ----, 112 S.Ct. at 2372 (Iowa statute that treated dividends received from foreign subsidiaries less favorably than those received from domestic subsidiaries facially discriminated against foreign commerce in violation of foreign commerce clause).

The challenged deductions also create an incentive for domestic corporations to acquire in-State subsidiaries, and penalize corporations that choose to cross State lines. State laws that tax a transaction or incident more heavily when it crosses State lines than when it occurs entirely within the State have repeatedly been struck down as discriminatory. Oregon Waste Sys., Inc. v. Department of Envtl. Quality, supra 511 U.S. at ----, 114 S.Ct. at 1350, quoting Chemical Waste Management, Inc. v. Hunt, 504 U.S. 334, 342, 112 S.Ct. 2009, 2014, 119 L.Ed.2d 121 (1992). In Healy v. Beer Inst., Inc., 491 U.S. 324, 326, 109 S.Ct. 2491, 2494, 105 L.Ed.2d 275 (1989), a Connecticut statute requiring out-of-State shippers of beer to affirm that their posted prices for products sold to Connecticut wholesalers were no higher than the prices at which those products were sold in bordering States, was struck down as violative of the commerce clause. The Supreme Court held that the statute on its face discriminated against brewers and shippers of beer engaged in interstate commerce. Id. at 341, 109 S.Ct. at 2502. The Court stated: "This discriminatory treatment establishes a substantial disincentive for companies doing business in Connecticut to engage in interstate commerce, essentially penalizing...