Tambrands, Inc. v. State Tax Assessor, s. 5909
| Decision Date | 07 August 1991 |
| Docket Number | Nos. 5909,KEN-90-296,s. 5909 |
| Parties | TAMBRANDS, INC. v. STATE TAX ASSESSOR. |
| Court | Maine Supreme Court |
James G. Good (orally), John R. Goldsbury, Pierce, Atwood, Scribner, Allen, Smith & Lancaster, Portland, for plaintiff.
Michael Carpenter, Atty. Gen., Clifford B. Olson (orally), Asst. Atty. Gen., Augusta, for defendant.
Before WATHEN, GLASSMAN, CLIFFORD, COLLINS and BRODY, JJ.
From a summary judgment entered in the Superior Court (Kennebec County, Silsby, J.) in favor of the State Tax Assessor, Tambrands, Inc. appeals, challenging the constitutionality of the Maine corporate income tax assessed against Tambrands in 1984.
Tambrands is a Delaware corporation, with its headquarters and commercial domicile in New York. In 1984, Tambrands produced feminine protection products at its facility in Auburn, and distributed its products for sale throughout Maine. In addition to pursuing similar activities in other states, Tambrands had foreign affiliates in Canada, France and the United Kingdom (the Foreign Affiliates). Tambrands received $7,493,965 in dividends in 1984 paid from earnings of the Foreign Affiliates. Those dividends paid by the Foreign Affiliates to Tambrands were included by the Assessor in the business income of Tambrands to be apportioned for income tax purposes. The income was apportioned pursuant to a formula used by the Assessor to determine the portion of Tambrands' income that is taxable in Maine. It is the exclusion from the apportionment formula of certain factors relating to the Foreign Affiliates that generates the constitutional issue presented in this case.
Tambrands and its affiliates constitute an integrated unitary business. See 36 M.R.S.A. § 5102(10-A) (1990). 1 Maine employs a unitary business/formula apportionment method to determine the portion of the income of a corporation subject to taxation in more than one state or jurisdiction that is attributable to the corporation's business activity in Maine. That Maine-attributable income is taxed as Maine income. This unitary business/formula apportionment method is modeled on the Uniform Division of Income for Tax Purposes Act (UDITPA). 36 M.R.S.A. §§ 5102, 5211 (1984), amended by P.L.1987, ch. 841, §§ 2, 10-13; see Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 165, 103 S.Ct. 2933, 2940, 77 L.Ed.2d 545 (1983).
This method of taxation first defines the scope of the unitary business of which the corporation's activities within Maine form a part. Under the statute in effect in 1984, that part of the federal taxable income of the unitary business classified as "business income" was apportioned to Maine through the use of a three-factor formula that compares the business activities of the unitary business in Maine with its activities "everywhere." 36 M.R.S.A. §§ 5102(8), 5211. The three factors, which are derived from the property (real property and tangible personal property) used, the sales made and the payroll paid by the taxpaying business, are considered to be a reliable reflection and thus objective measures of the corporation's business activities inside and outside the State of Maine. The factors are calculated as follows: the value of property used by the unitary business in Maine is divided by the value of property of the unitary business everywhere; the amount of sales made by the business in Maine is divided by the sales of the unitary business everywhere; and the Maine payroll of the business is divided by the payroll of the unitary business everywhere. The sum of the property, sales and payroll factors is divided by three to yield an apportionment ratio. The apportionment ratio is then multiplied by the corporation's apportionable business income to determine the net income of the business that can be said to be attributable to activities in Maine, and thus taxable by the State of Maine. 2 Because the factors are thought to accurately reflect the business activity of a unitary business such as Tambrands, the use of the three-factor apportionment formula has met with general approval. See Container Corp., 463 U.S. at 165, 103 S.Ct. at 2940.
In utilizing the apportionment formula for the tax year 1984, the Assessor included as part of Tambrands' business income the dividends paid to Tambrands by the Foreign Affiliates. 3 The property used, sales made and payroll paid by the Foreign Affiliates, however, were completely excluded by the Assessor from the denominators of the factors in the formula. Contending that the property, sales and payroll of the Foreign Affiliates should have been taken into account by the Assessor and included in the apportionment formula, 4 Tambrands petitioned the State Tax Assessor for reconsideration of the assessment of the 1984 corporate income tax. See 36 M.R.S.A. § 151 (1990). Pursuant to section 151 and M.R.Civ.P. 80C, Tambrands then appealed the denial of that reconsideration petition to the Superior Court. It is from the summary judgment in favor of the Assessor entered by the Superior Court that Tambrands appeals to this court.
The facts in this case are not in dispute, and therefore we review the record to determine if in denying the petition for reconsideration, the State Tax Assessor, applying the relevant law, rationally could have concluded that Tambrands failed to demonstrate the unconstitutionality of the apportionment formula. Jackson Advertising v. State Tax Assessor, 551 A.2d 1365, 1366-67 (Me.1988); see Container Corp., 463 U.S. at 175, 103 S.Ct. at 2945.
In taxing the income of a nonresident corporation operating within its borders, Maine is limited to taxing that portion of the corporation's income attributable to business activity within the State of Maine. Container Corp., 463 U.S. at 164, 103 S.Ct. at 2939. For Maine to tax income not so attributable violates the due process and commerce clauses of the United States Constitution. U.S. Const. amend. XIV; art. I, § 8, cl. 3. Although a state cannot tax the income of a corporation earned outside or not attributable to that state, a state is not without any power to tax the income of a business engaged in interstate and foreign commerce. Income of such a business may be taxed by the various states if that income is apportioned among the states and the foreign countries to reflect income that is attributable to those states. Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 436-37, 100 S.Ct. 1223, 1231, 63 L.Ed.2d 510 (1980).
Tambrands is a unitary business. Because the Foreign Affiliates are a part of that single business enterprise, the dividends paid by the Foreign Affiliates to Tambrands were properly included in the unitary business income that was apportioned to determine the amount subject to taxation by Maine. Id. at 438-39, 100 S.Ct. at 1232. Tambrands does not dispute its status as a unitary business, nor does it contend that Maine may not properly include the dividends received from its Foreign Affiliates in its business income to be apportioned to Maine. Tambrands' argument is with the apportionment itself. Its contention is that the formula used by the Assessor apportioned more of Tambrands' income to Maine than was warranted. Tambrands argues that because the dividends from the Foreign Affiliates were included in the apportionable business income of Tambrands, the apportionment formula also should have included at least part of the property, sales and payroll of the Foreign Affiliates. 5 Tambrands contends that the Assessor's failure to include at least a portion of the Foreign Affiliates' property, payroll and sales in the formula is inconsistent with the unitary business concept, and results in Maine taxing extra-territorial income in violation of the due process and commerce clauses of the United States Constitution. We agree.
In Container Corp., the Supreme Court outlined two tests to aid in determining if an apportionment formula used by a state to tax corporate income fairly identifies that portion of the income that is attributable to activity in that state. Container Corp., 463 U.S. at 169, 103 S.Ct. at 2942. The second of these tests, external consistency, requires that the income attributable to the state under the apportionment formula not be " 'out of all appropriate proportions to the business transacted' " in the state, or result in a gross distortion. Container Corp., 463 U.S. at 169-70, 103 S.Ct. at 2942 (quoting Hans Rees' Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U.S. 123, 125, 51 S.Ct. 385 386, 75 L.Ed. 879 (1931)). Tambrands does not rely on a violation of the external consistency test. 6
The internal consistency test, upon which Tambrands does rely, is designed to determine whether an apportionment formula impermissibly interferes with free trade by not fairly apportioning taxable income to reflect the business conducted by a corporation within a state. Armco v. Hardesty, 467 U.S. 638, 644, 104 S.Ct. 2620, 2623, 81 L.Ed.2d 540 (1984). The application of the test in the formula apportionment context has not been fully developed by the Supreme Court. As set forth in Container Corp., the test requires that the apportionment formula under challenge be applied, hypothetically, in every state and in every jurisdiction in which the unitary business operates and from which income is generated. 463 U.S. at 169, 103 S.Ct. at 2942. If, upon hypothetical application of the formula in all of the jurisdictions, no more than all of the income of the unitary business is taxed, the apportionment formula passes the internal consistency test and there is no constitutional violation. See id.; Goldberg v. Sweet, 488 U.S. 252, 261, 109 S.Ct. 582, 589, 102 L.Ed.2d 607 (1989).
In this case, if the Assessor's formula were applied in all of the jurisdictions in which Tambrands and its affiliates operate, more than 100% of Tambrands' income would be taxed. All of the business income of the Foreign...
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