Source: http://www.law.cornell.edu/supct/html/06-1413.ZO.html
Timestamp: 2014-10-02 04:45:22
Document Index: 79254789

Matched Legal Cases: ['§5', '§5733', '§210', '§5', '§1', '§9', 'Art. 25', '§25', '§5', '§5']

The Due Process and Commerce Clauses forbid the States to tax “ ‘extraterritorial values.’ ” Container Corp. of America v. Franchise Tax Bd., 463 U. S. 159, 164 (1983)
; Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 U. S. 425, 441–442 (1980)
. A State may, however, tax an apportioned share of the value generated by the intrastate and extrastate activities of a multistate enterprise if those activities form part of a “ ‘unitary business.’ ” Hunt-Wesson, Inc. v. Franchise Tax Bd. of Cal., 528 U. S. 458, 460 (2000)
; Mobil Oil Corp., supra, at 438. We have been asked in this case to decide whether the State of Illinois constitutionally taxed an apportioned share of the capital gain realized by an out-of-state corporation on the sale of one of its business divisions. The Appellate Court of Illinois upheld the tax and affirmed a judgment in the State’s favor. Because we conclude that the state courts misapprehended the principles that we have developed for determining whether a multistate business is unitary, we vacate the decision of the Appellate Court of Illinois.
Mead Corporation (Mead), an Ohio corporation, is the predecessor in interest and a wholly owned subsidiary of petitioner MeadWestvaco Corporation. From its founding in 1846, Mead has been in the business of producing and selling paper, packaging, and school and office supplies.1 In 1968, Mead paid $6 million to acquire a company called Data Corporation, which owned an inkjet printing technology and a full-text information retrieval system, the latter of which had originally been developed for the U. S. Air Force. Mead was interested in the inkjet printing technology because it would have complemented Mead’s paper business, but the information retrieval system proved to be the more valuable asset. Over the course of many years, Mead developed that asset into the electronic research service now known as Lexis/Nexis (Lexis). In 1994, it sold Lexis to a third party for approximately $1.5 billion, realizing just over $1 billion in capital gain, which Mead used to repurchase stock, retire debt, and pay taxes.
Mead did not report any of this gain as business income on its Illinois tax returns for 1994. It took the position that the gain qualified as nonbusiness income that should be allocated to Mead’s domiciliary State, Ohio, under Illinois’ Income Tax Act (ITA). See Ill. Comp. Stat., ch. 35, §5/303(a) (West 1994). The State audited Mead’s returns and issued a notice of deficiency. According to the State, the ITA required Mead to treat the capital gain as business income subject to apportionment by Illinois.2 The State assessed Mead with approximately $4 million in additional tax and penalties. Mead paid that amount under protest and then filed this lawsuit in state court.
The Commerce Clause and the Due Process Clause impose distinct but parallel limitations on a State’s power to tax out-of-state activities. See Quill Corp. v. North Dakota, 504 U. S. 298, 305–306 (1992)
; Mobil Oil Corp., 445 U. S., at 451, n. 4 (Stevens, J., dissenting); Norfolk & Western R. Co. v. Missouri Tax Comm’n, 390 U. S. 317
, n. 5 (1968). The Due Process Clause demands that there exist “ ‘some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax,’ ” as well as a rational relationship between the tax and the “ ‘ “values connected with the taxing State.” ’ ” Quill Corp., supra, at 306 (quoting Miller Brothers Co. v. Maryland, 347 U. S. 340, 344–345 (1954)
). The Commerce Clause forbids the States to levy taxes that discriminate against interstate commerce or that burden it by subjecting activities to multiple or unfairly apportioned taxation. See Container Corp., 463 U. S., at 170–171; Armco Inc. v. Hardesty, 467 U. S. 638, 644 (1984)
. The “broad inquiry” subsumed in both constitutional requirements is “ ‘whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state’ ”—that is, “ ‘whether the state has given anything for which it can ask return.’ ” ASARCO Inc. v. Idaho Tax Comm’n, 458 U. S. 307, 315 (1982)
Where, as here, there is no dispute that the taxpayer has done some business in the taxing State, the inquiry shifts from whether the State may tax to what it may tax. Cf. Allied-Signal, 504 U. S., at 778 (distinguishing Quill Corp., supra). To answer that question, we have developed the unitary business principle. Under that principle, a State need not “isolate the intrastate income-producing activities from the rest of the business” but “may tax an apportioned sum of the corporation’s multistate business if the business is unitary.” Allied-Signal, supra, at 772; accord, Hunt-Wesson, 528 U. S., at 460; Exxon Corp. v. Department of Revenue of Wis., 447 U. S. 207, 224 (1980)
; Mobil Oil Corp., supra, at 442; cf. 1 J. Hellerstein & W. Hellerstein, State Taxation ¶8.07[1], p. 8–61 (3d ed. 2001–2005) (hereinafter Hellerstein & Hellerstein). The court must determine whether “intrastate and extrastate activities formed part of a single unitary business,” Mobil Oil Corp., supra, at 438–439, or whether the out-of-state values that the State seeks to tax “ ‘derive[d] from “unrelated business activity” which constitutes a “discrete business enterprise.” ’ ” Allied-Signal, supra, at 773 (quoting Exxon Corp., supra, at 224, in turn quoting Mobil Oil Corp., supra, at 439 (alteration in original)). We traced the history of this venerable principle in Allied-Signal, supra, at 778–783, and, because it figures prominently in this case, we retrace it briefly here.
With the coming of the Industrial Revolution in the 19th century, the United States witnessed the emergence of its first truly multistate business enterprises. These railroad, telegraph, and express companies presented state taxing authorities with a novel problem: A State often cannot tax its fair share of the value of a multistate business by simply taxing the capital within its borders. The whole of the enterprise is generally more valuable than the sum of its parts; were it not, its owners would simply liquidate it and sell it off in pieces. As we observed in 1876, “[t]he track of the road is but one track from one end of it to the other, and, except in its use as one track, is of little value.” State Railroad Tax Cases, 92 U. S. 575
The unitary business principle addressed this problem by shifting the constitutional inquiry from the niceties of geographic accounting to the determination of the taxpayer’s business unit. If the value the State wished to tax derived from a “unitary business” operated within and without the State, the State could tax an apportioned share of the value of that business instead of isolating the value attributable to the operation of the business within the State. E.g.,
Exxon Corp., supra, at 223 (citing Moorman Mfg. Co., supra, at 273). Conversely, if the value the State wished to tax derived from a “discrete business enterprise,” Mobil Oil Corp., 445 U. S., at 439, then the State could not tax even an apportioned share of that value. E.g.,
Container Corp., supra, at 165–166.
We recognized as early as 1876 that the Due Process Clause did not require the States to assess trackage “in each county where it lies according to its value there.” State Railroad Tax Cases, 92 U. S., at 608. We went so far as to opine that “[i]t may well be doubted whether any better mode of determining the value of that portion of the track within any one county has been devised than to ascertain the value of the whole road, and apportion the value within the county by its relative length to the whole.” Ibid. We generalized the rule of the State Railroad Tax Cases in Adams Express Co. v. Ohio, State Auditor, 165 U. S. 194 (1897)
. There we held that apportionment could permissibly be applied to a multistate business lacking the “physical unity” of wires or rails but exhibiting the “same unity in the use of the entire property for the specific purpose,” with “the same elements of value arising from such use.” Id., at 221. We extended the reach of the unitary business principle further still in later cases, when we relied on it to justify the taxation by apportionment of net income, dividends, capital gain, and other intangibles. See Underwood Typewriter Co. v. Chamberlain, 254 U. S. 113, 117, 120–121 (1920)
(net income tax); Bass, Ratcliff & Gretton, Ltd. v. State Tax Comm’n, 266 U. S. 271, 277, 280, 282–283 (1924)
(franchise tax); J. C. Penney Co., supra, at 443–445 (tax on the “privilege of declaring dividends”); cf. Allied-Signal, supra, at 780 (“[F]or constitutional purposes capital gains should be treated as no different from dividends”); see also 1 Hellerstein & Hellerstein ¶8.07[1] (summarizing this history).
We rejected both contentions. We concluded that “the unitary business principle is not so inflexible that as new methods of finance and new forms of business evolve it cannot be modified or supplemented where appropriate.” Id., at 786; see also id., at 785 (“If lower courts have reached divergent results in applying the unitary business principle to different factual circumstances, that is because, as we have said, any number of variations on the unitary business theme ‘are logically consistent with the underlying principles motivating the approach’ ” (quoting Container Corp., 463 U. S., at 167)).3 We explained that situations could occur in which apportionment might be constitutional even though “the payee and the payor [were] not … engaged in the same unitary business.” 504 U. S., at 787. It was in that context that we observed that an asset could form part of a taxpayer’s unitary business if it served an “operational rather than an investment function” in that business. Ibid. “Hence, for example, a State may include within the apportionable income of a nondomiciliary corporation the interest earned on short-term deposits in a bank located in another State if that income forms part of the working capital of the corporation’s unitary business, notwithstanding the absence of a unitary relationship between the corporation and the bank.” Id., at 787–788. We observed that we had made the same point in Container Corp., where we noted that “capital transactions can serve either an investment function or an operational function.” 463 U. S., at 180, n. 19; cf. Corn Products Refining Co. v. Commissioner, 350 U. S. 46, 50 (1955)
Where, as here, the asset in question is another business, we have described the “hallmarks” of a unitary relationship as functional integration, centralized management, and economies of scale. See Mobil Oil Corp., 445 U. S., at 438 (citing Butler Brothers v. McColgan, 315 U. S. 501, 506–508 (1942)
(same). The trial court found each of these hallmarks lacking and concluded that Lexis was not a unitary part of Mead’s business. The appellate court, however, made no such determination. Relying on its operational function test, it reserved judgment on whether Mead and Lexis formed a unitary business. The appellate court may take up that question on remand, and we express no opinion on it now.
We decline this invitation because the question that the State and its amici call upon us to answer was neither raised nor passed upon in the state courts. It also was not addressed in the State’s brief in opposition to the petition. We typically will not address a question under these circumstances even if the answer would afford an alternative ground for affirmance. See Glover v. United States, 531 U. S. 198, 205 (2001)
The case for restraint is particularly compelling here, since the question may impact the law of other jurisdictions. The States of Ohio and New York, for example, have both adopted the rationale for apportionment that respondents urge us to recognize today. See Ohio Rev. Code Ann. §§5733.051(E)–(F) (West 2007 Supp. Pamphlet); N. Y. Tax Law Ann. §210(3)(b) (West Supp. 2008); see also Allied-Signal Inc. v. Department of Taxation & Finance, 229 App. Div. 2d 759, 762, 645 N. Y. S. 2d 895, 898 (3d Dept. 1996) (finding that a “sufficient nexus existed between New York and the dividend and capital gain income” of the nondomiciliary parent because “the corporations generating the income taxed … each have their own connection with the taxing jurisdiction”); 1 Hellerstein & Hellerstein ¶9.11[2][a]. Neither Ohio nor New York has appeared as an amicus in this case, and neither was on notice that the constitutionality of its tax scheme was at issue, the question having been raised for the first time in the State’s brief on the merits. So postured, the question is best left for another day.4
1 See Prospectus of MeadWestvaco Corporation 3 (Mar. 19,2003), online at http://www.sec.gov/Archives/edgar/data/1159297/000119312503085265/d424b5.htm (as visited Apr. 1, 2008, and available in Clerk of Court’s case file); App. 9.
2 When the sale of Lexis occurred in 1994, the ITA defined “business income” as “income arising from transactions and activity in the regular course of the taxpayer’s trade or business,” as well as “income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations.” Ill. Comp. Stat., ch. 35, §5/1501(a)(1) (West 1994). This language mirrors the definition of “business income” in the Uniform Division of Income for Tax Purposes Act (UDITPA). See UDITPA §1(a) (2002); see also §9 (subjecting “[a]ll business income” to apportionment). In 2004, the Illinois General Assembly amended the definition of “business income” to “all income that may be treated as apportionable business income under the Constitution of the United States.” Pub. Act 93–840, Art. 25, §25–5 (codified at Ill. Comp. Stat., ch. 35, §5/1501(a)(1) (West 2004)); cf. Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U. S. 768, 786 (1992)
(declining to adopt UDITPA’s “business income” test as the constitutional standard for apportionment).
3 The dissent agreed that the unitary business principle remained sound, 504 U. S., at 790 (opinion of O’Connor, J.), but found merit in New Jersey’s premise (and the New Jersey Supreme Court’s conclusion) that no logical distinction could be drawn between short- or long-term investments for purposes of unitary analysis, id., at 793 (“Any distinction between short-term and long-term investments cannot be of constitutional dimension”). We need not revisit that question here.
4 Resolving this question now probably would not spare the State a remand. The State calculated petitioner’s tax liability by applying the State’s tax rate to Mead’s apportioned business income, which in turn was calculated by applying Mead’s apportionment percentage to its apportionable business income. See App. 28; Ill. Comp. Stat., ch. 35, §5/304(a) (West 1994). But if a constitutionally sufficient link between the State and the value it wishes to tax is founded on the State’s contacts with Lexis rather than Mead, then presumably the apportioned tax base should be determined by applying the State’s four-factor apportionment formula not to Mead but to Lexis. Naturally, applying the formula to Lexis rather than Mead would yield a different apportionment percentage. See Brief for Multistate Tax Commission as Amicus Curiae 18–19, and n. 9; see also Hellerstein 802–803.