State v. Nabors Int'l Fin., Inc., Supreme Court Nos. S-17883/17903

CourtSupreme Court of Alaska (US)
Writing for the CourtWINFREE, Chief Justice.
Citation514 P.3d 893
Parties State of Alaska, DEPARTMENT OF REVENUE, Appellant and Cross-Appellee, v. NABORS INTERNATIONAL FINANCE, INC. & Subsidiaries, Appellee and Cross-Appellant.
Docket NumberSupreme Court Nos. S-17883/17903
Decision Date05 August 2022

514 P.3d 893

State of Alaska, DEPARTMENT OF REVENUE, Appellant and Cross-Appellee,
NABORS INTERNATIONAL FINANCE, INC. & Subsidiaries, Appellee and Cross-Appellant.

Supreme Court Nos. S-17883/17903

Supreme Court of Alaska.

August 5, 2022

Katherine Demarest and Mary Hunter Gramling, Assistant Attorneys General, Anchorage, and Treg R. Taylor, Attorney General, Juneau, for Appellant/Cross-Appellee.

Jennifer M. Coughlin, Landye Bennett Blumstein, LLP, Anchorage, and Doug Sigel, Ryan Law Firm, PLLC, Austin, Texas, for Appellee/Cross-Appellant.

Before: Winfree, Chief Justice, Maassen, Carney, Borghesan, and Henderson, Justices.


WINFREE, Chief Justice.


The Alaska Department of Revenue conducted a tax audit of a non-resident corporation doing business in Alaska. The Department issued a deficiency assessment based in part on an Alaska tax statute requiring an income tax return to include certain foreign corporations affiliated with the taxpaying corporation. The taxpayer exhausted its administrative remedies and then appealed to the superior court.

The taxpayer argued that the tax statute the Department applied is facially unconstitutional for three reasons: (1) it violates the dormant Commerce Clause by discriminating against foreign commerce based on countries’

514 P.3d 897

corporate income tax rates; (2) it violates the Due Process Clause by being arbitrary and irrational; and (3) it violates the Due Process Clause by failing to provide notice of what affiliates a tax return must include, and therefore is void for vagueness. The superior court rejected the first two arguments but ruled in the taxpayer's favor on the third argument.

The Department appeals, asserting that the superior court erred by concluding that the statute is void for vagueness in violation of the Due Process Clause. The taxpayer cross-appeals, asserting that the court erred by concluding that the statute does not violate the Commerce Clause and is not arbitrary. For the reasons set forth below, we reverse the court's decision that the statute is facially unconstitutional on due process grounds and affirm the court's decision that it otherwise is facially constitutional.


Nabors International Finance, Inc. is "part of a corporate financial reporting group" and the lead nominal taxpayer in this case. Within the international conglomerate of Nabors corporations, it is "the parent entity of the U.S. group." Nabors "provides oil field services throughout the world," including in Alaska.

Alaska law requires corporations doing business in Alaska to file corporate income tax returns and to pay tax on income "derived from sources within the state."1 Under AS 43.20.145(a)(5) corporations doing business in Alaska must also report the income of certain affiliated corporations that are part of a "unitary business" with the filing corporation.2 Specifically, AS 43.20.145(a)(5) requires including affiliated corporations incorporated in or doing business in low-tax countries. Nabors is a unitary business with foreign-affiliated corporations incorporated in or doing business in low-tax countries.

The Department audited Nabors for tax years 2007 through 2010, requesting information about Nabors's affiliated corporations not included in its Alaska tax return. Nabors identified its affiliates that were incorporated or did substantial business in low-tax jurisdictions. The Department then applied AS 43.20.145(a)(5) and included in Nabors's combined return the income from its affiliated corporations doing business in low-tax jurisdictions. This resulted in a deficiency assessment.

Nabors appealed and requested a formal hearing with the Office of Administrative Hearings.3 The only issue on appeal was AS 43.20.145(a)(5) ’s constitutionality. The parties participated in a two-day hearing before an Administrative Law Judge (ALJ), who heard testimony from each party's expert witness about state tax policy, tax treatises, international taxation, discrimination against international commerce, and holding companies. Nabors's witness, describing Nabors's legal position, explained: "The statute at issue in this case has a fatal drafting error. Moreover, subsequent developments have rendered the statute obsolete, irrational, and arbitrary. Furthermore, the statute improperly interferes with foreign commerce. From a policy perspective, the statute fails to achieve its purpose." The ALJ issued a decision setting out findings of fact that were essentially undisputed between the parties, but without ruling on the ultimate legal question of the statute's constitutionality.4

Nabors appealed to the superior court, asserting that AS 43.20.145(a)(5) is facially unconstitutional for three reasons: (1) it violates

514 P.3d 898

the Commerce Clause through "unconstitutional location-based discrimination"; (2) it violates the Due Process Clause by being arbitrary and irrational; and (3) it violates the Due Process Clause because the lack of a conjunction between subparts (A) and (B) renders the statute void for vagueness. The court rejected Nabors's first two arguments but ruled in Nabors's favor on its third argument.


Alaska taxes income attributable to a corporation's activities within the state.5 Corporate taxpayers are required to "file a return using the water's edge combined reporting method,"6 defined by AS 43.20.145(h)(4) as "a reporting method in which the only corporations besides the taxpayer that may be included in the return are the corporations listed in (a) of this section." A return "must include" the corporations listed in subsections (a)(1)-(5) if they are "part of a unitary business with the filing corporation."7 The subsection at issue — (a)(5) — requires a return to include:

(5) a corporation that is incorporated in or does business in a country that does not impose an income tax, or that imposes an income tax at a rate lower than 90 percent of the United States income tax rate on the income tax base of the corporation in the United States, if

(A) 50 percent or more of the sales, purchases, or payments of income or expenses, exclusive of payments for intangible property, of the corporation are made directly or indirectly to one or more members of a group of corporations filing under the water's edge combined reporting method;

(B) the corporation does not conduct significant economic activity.[8 ]

Unitary foreign corporations thus must be included on a corporation's Alaska tax return only if they meet the conditions stated in AS 43.20.145(a)(5). After determining which corporations must be included on the combined return, another statute applies to calculate income attributable to Alaska.9 The apportionment formula statute is not at issue in this case. Nabors challenges only AS 43.20.145(a)(5).


"The constitutionality of a statute and matters of constitutional or statutory interpretation are questions of law to which we apply our independent judgment, adopting the rule of law that is most persuasive in light of precedent, reason, and policy."10 "Statutes should be construed, wherever possible, so as to conform to the constitutions of the United States and Alaska."11


A. Alaska Statute 43.20.145(a)(5) Is Not Unconstitutionally Vague.

The superior court concluded that the missing conjunction between subparts (A) and (B) of AS 43.20.145(a)(5) rendered the statute void for vagueness in violation of the Due Process Clause. The court determined that it is unclear whether subparts (A) and (B) should be read conjunctively, with an implied "and" between them, or disjunctively, with an implied "or" between them. The court noted that a disjunctive "or" made the most sense but was "not the only logical reading." The court ultimately concluded: "[T]he Legislature's intent cannot be discerned. This is the essence of unconstitutional vagueness.... [O]ne of two potential

514 P.3d 899

interpretations must be applied. But if a taxpayer guesses wrong, or a new administration or auditor applies a different interpretation, significant adverse tax consequences may result."

1. Subsection .145(a)(5) is a civil statute subject to a more lenient vagueness standard.

"The basic element of the doctrine of vagueness is a requirement of fair notice."12 "We have recognized, in accord with the United States Supreme Court, that a law ‘which either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application violates the first essential of due process of law.’ "13 Two considerations are applicable when determining whether a law is void for vagueness. We first "consider whether there is a history or a strong likelihood of arbitrary enforcement and uneven application," and we next "determine whether the [statute] provides adequate notice of prohibited conduct."14 "[T]he fact that people can, in...

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