Warren E. Burger: We will hear arguments next in Moorman Manufacturing Company v. Bair Mr. Barnes, I think you may proceed when you are ready.
Donald K. Barnes: Mr. Chief Justice and may it please the Court. This is an appeal from a decision of the Supreme Court of Iowa upholding that state?s taxing scheme which has the purpose and effect of imposing a tariff on imports while subsidizing exports. The case differs from General Motors Corporation v. District of Columbia which this Court decided in 1965, only in irrelevant factual details and that the issue here is purely constitutional, whereas the Court was able to decide the District of Columbia case on statutory interpretation. The appellant is the Moorman Manufacturing Company which is an Illinois based corporation with a business of manufacturing animal feeds which it sells to farmers and others. It has warehouses and salesmen in Iowa, but no manufacturing in that state. Everything sold into Iowa is manufactured in Illinois. The corporation paid the Iowa corporate income tax computing its apportionable income in the manner prescribed in the Iowa statute as to which there is no dispute and then it apportioned that income, following the three factor formula of the uniform division of income for tax purposes act, that is in fact a formula of property, payroll and sales equally weighted with the sales assigned to the destination, in this case Iowa. The assessments are for the difference between the tax as such apportioned and the Iowa formula. The Iowa formula provides for a single sales factor by destination, not attributing anything to either property or payroll. The Iowa statute starts with federal taxable income and makes certain adjustments in it. Then having done that, it applies a fraction, numerator of which is Iowa sales and denominator sales to customers all over to that amount of total income and this has the effect of attributing to Iowa all of the income which is derived from the manufacture in Illinois and the sale to customers in Iowa. There was no tax on income from an Iowa manufacturer selling into Illinois. All the facts are stipulated to total taxable income, the apportionment fractions, any one of the three apportionment fractions, the amounts of tax which will be due if the statute is held constitutional and also the amount of tax which will be due if it is held unconstitutional. So the sole question in the case is the constitutionality of a single sales fraction. The appellee agrees with that and that appears in this motion to dismiss and also in its brief.
John Paul Stevens: Mr. Barnes, I just have one question there. If the statute is unconstitutional, why do you owe any tax?
Donald K. Barnes: We do not owe any tax more than we already paid?
John Paul Stevens: But why did you have to pay any at all?
Donald K. Barnes: Because Mr. Justice Stevens, the statute imposing tax is not unconstitutional. The only thing that is unconstitutional is the so called apportionment formula.
John Paul Stevens: But you say that the constitution mandates the three-partite formula that you used in filling out your returns?
Donald K. Barnes: No, Mr. Justice Stevens, we do not call on the Court to impose a formula or perform any other legislative function. We merely say that the single sales factor is unconstitutional and that is all that the Court has asked to do.
Potter Stewart: If that is correct then, as my brother Stevens has indicated, you would owe no tax under the Iowa statute and yet you voluntarily paid the tax, did you not?
Donald K. Barnes: I would not go that far Mr. Justice Stewart. I think the statute is perfectly is valid except for this apportionment formula and the statute not only says that, I should not say apportionment, reasonable apportionment, this single factor sales form of attribution I think is unconstitutional, but the statute also says that in the case of interstate commerce, the tax payer shall pay a reasonable portion and so I think that knocking out the formula does not knock out the statute nor the liability. It just leaves a question as to how it will be computed.
Speaker: How can it be, as a taxing agency, it is already they set up a different formula?
Donald K. Barnes: Yes, they do.
Speaker: They do, and they then compute tax on some three factor or other formulas?
Donald K. Barnes: Well, that is what we agreed on, but the statute almost all these statutes in all states contain a provision that if there is something wrong with a statutory formula, the commissioner or the director can work out something that fits in the particular case. A prime example was the one in California, the McDonald Douglas case and California statute provided that the property factor is going to consider only owned property. McDonald Douglas owned a big factory in California and they leased a big factory in another state. They said it is not fair to attribute all of our property to California when we are using this property in another state, the California Supreme Court agreed. This was a case in which the statute was improper in its application to a particular case. So the statutes permit that all along including the Iowa statute.
Potter Stewart: And you have paid the tax, based on the three factor formula?
Donald K. Barnes: That is right, we did not pay on the additional assessment and filed an appeal bond instead. All the other states, including Illinois, not all, but all the ones that are pertinent, including Illinois used this three factor formula of property payroll and sales.
William H. Rehnquist: When you say that all the states that are pertinent, you mean the ones in which your client is subject to taxation?
Donald K. Barnes: I made that qualification because there are one or two states that while using three factor formula apply some different weights and there is one state which has adopted the only really sound formula which is property and payroll with no sales in it, that is West Virginia.
William H. Rehnquist: Are you saying that because so many other states have adopted the three factor formula, Iowa is under constitutional mandate to do the same thing?
Donald K. Barnes: No. What we say is that they are under constitutional mandate not to adopt something different which imposes a double tax on interstate commerce.
William H. Rehnquist: Well, but supposing every state in the union had adopted Iowa?s formula, could you make the same argument that you are making now that Iowa?s formula is unconstitutional?
Donald K. Barnes: Yes, because the taxes would be being paid all to the wrong states which is a due process problem.
William H. Rehnquist: What is the wrong state?
Donald K. Barnes: There would not be any double taxation in that case, but you still have taxes going to places that are unrelated to where the income was earned and to where the governmental services were rendered.
William H. Rehnquist: Well, but certainly, there would be some nexus between the taxes collected and the earning of income.
Donald K. Barnes: No, there is no nexus question in this case. We agreed to nexus and it could have a very tiny nexus and the same problem would arise and the question is not whether a tax is owed, but how much and the measure is entirely our problem.
William H. Rehnquist: You have got to show that Iowa's proposed measure is unconstitutional not just that you do not like it or that you would have done something else if you were a legislator.
Donald K. Barnes: That is right. I think we have no difficulty with that. The hypothetical which this Court used in its opinion in the General Motors District of Columbia case is applicable here. Assume that the particular manufacturer does all his manufacture in Illinois and it sells only to customers in Iowa.
Speaker: Mr. Barnes, you argued the General Motors case, did you not?
Donald K. Barnes: I did sir. You remember, Mr. Justice White.
Byron R. White: I should. Washington in District of Columbia.
Donald K. Barnes: Correct and I tried again, but she would not take it. I lost the Washington, but I won the DC. In that situation, all manufacture in Iowa and all customers in the District of Columbia are in Iowa. Illinois would tax 2/3 of the income by applying its property and payroll factors. It would not apply the sales factor because the sales were all outside the state and Iowa would tax 100% of the income because it attributes all income to a locus of the customer. That a total of 166%, as I say that hypothetical, I have taken from GMC against District of Columbia. Now, this shows a fallacy of the Iowa argument. They are making the same error that the Court of Appeals made in the GMC case because the unrelated income is not taxed, income is apportioned. The fact is that 100% of related income is taxed. Now, they say for instance, Moorman has a factory in Texas that sells to Texas customers, by not taxing any of that, they say, Moorman?s entire income is apportioned, but the apportionment of the entire income is irrelevant. What counts is the income on the segment of the business that consists of manufacture in Illinois and selling to customers in Iowa. The sales fraction of course does not do any apportioning. It merely identifies the income from that segment of the business. Taken by itself, it taxes 100% of that income. The sales factor is economically illegitimate in any case, but is tolerable if combined with property and payroll factors which do measure the income producing activity and which also measure the burden on governmental services.
William H. Rehnquist: This again is a constitutional argument I take it and not just an economics argument?
Donald K. Barnes: Yes, because as we have attempted to point out, the constitutionality of things in this area have to take into consideration the economic realities among other considerations. Constitutional requirements rest to considerable degree on economics.
Speaker: Your basic constitutional claim as I understand it Mr. Barnes is that what Iowa has done, results in the double taxation of interstate commerce?
Donald K. Barnes: That is the interstate commerce argument. There is also a due process point because they are reaching outside their geographical borders to grab something from another state.
William H. Rehnquist: And precisely how does this double taxation as you refer to it take place? How do you define double taxation?
Donald K. Barnes: That was the hypothetical that I went through a minute ago, maybe Illinois uses the three-factor formula which is universal except for Iowa. If we manufacture in Illinois, Illinois will attribute to itself 2/3 of the income derived from that part of the business because it will apply a property factor and a payroll factor. Iowa then, as to shipments into Iowa attributes 100% of the income to itself because it attributes all of it to location of the customer.
William H. Rehnquist: So you say that if the same income is attributed to more than one state, it is double taxation?
Donald K. Barnes: Yes, intuitionally impermissible.
William H. Rehnquist: What case supports that?
Donald K. Barnes: There are many cases that touch on this particular subject, most of them not in this precise context. Of course the best description of a situation is General Motors v. District of Columbia. The only trouble of that is that the Court was able to decide around the statutory ground which cannot be done in this case. Freeman v. Hewitt is a case in which a different type of tax was struck down because of the mere danger of a double taxation by a second state.
William H. Rehnquist: Do you think Freeman v. Hewitt is still good law after our recent decisions in the last two or three years?
Donald K. Barnes: Yes, I do not know of any decision that attacks the conclusion in that one. That was out shipments. Now, the recent decisions that have upheld attacks of somewhat that same type have been on in shipments. Freeman v. Hewitt is not the only case of course. Adams v. Storen is another one. Gwin, White and Prince v, Henneford is still another and there are a great many.
John Paul Stevens: Mr. Barnes, supposing you had a neighboring state, next to Iowa that had a two factor formula, payroll and property and Iowa had the one factor formula sales, would both statutes be unconstitutional and say all the goods are manufactured in the two factor formula state and shipped into the one factor formula state, would both statutes be unconstitutional?
Donald K. Barnes: No, what you would get in that case, 100% duplication, 200%, still the 166 that we have here. The rule has long been that what one state does, does not make much difference to what another state does.
John Paul Stevens: Then they would both be bad.
Donald K. Barnes: But the conclusion usually is they are both good, but you pose an extreme case and there is something in that case to uphold the neighboring states two factor formula. In West Virginia, they neighbor on Iowa and if they ship things up there, the fiscal soundness, economic soundness of the property and payroll factors would throw a terrific burden on the State of Iowa to justify its own sales factor and it cannot meet that burden. Furthermore the two factors while differing from the three factors used by the majority of states is very close to what is done by the majority of states. It attributes income to the sources of capital and labor which of course this Court has often said are the sources of income.
John Paul Stevens: But Mr. Barnes, what I am asking is does your argument rest on the overlap where you get to and which seems to me would make both statutes unconstitutional or are you arguing quite a different argument that the sales factor just is not justifiable because there is not enough activity in the state? If you are arguing overlap, I do not see what difference it makes which factor you use. Anyone would be unconstitutional if it is not the same as the neighboring state?
Donald K. Barnes: The difference is that I do not think both statutes would be unconstitutional in your case. I think that the sales that state tax would be unconstitutional.
John Paul Stevens: But does not your overlap argument apply equally to both states?
Donald K. Barnes: It does and it puts a burden on both states to prove the validity of its method of doing it and I think that the state that uses property and payroll can easily prove it and the state that uses sales cannot come anywhere near proving it.
John Paul Stevens: But are you then saying that if every state in the country used a purely sales method, every state statute would be unconstitutional and then you do not have to rely on overlap at all.
Donald K. Barnes: That is right. That would eliminate the double taxation. I think Mr. Justice Rehnquist asked me a question similar to that, but what it would do would be the result in the taxes being paid to the wrong states because there is not any basis for attributing taxes on income to the locus of the customers which is what that would do.
John Paul Stevens: You have got two quite different theories and I am trying to understand which one you are really resting on. One is an overlap double taxation theory, the other is that sales is not any good no matter how it is done and which is your principle argument?
Donald K. Barnes: On the interstate commerce phase of the case, the overlap.
Warren E. Burger: And you rely equally on the due process issue I take it?
Speaker: That is the sales factor, just the taxes, income earned in another states?
Donald K. Barnes: That is right. We have said enough about the sales fraction not apportioning. A tax is justified only by governmental services. In the case of corporation, services to corporations, the sales factor is unrelated to services. It does not in any way measure the burden which the corporation imposes upon the state. The income as this Court has often said is a product of capital or labor or both and the sales factor is unrelated to that. Selling effort or course produces income, but that is measured by capital and labor. The Iowa formula has no relation to selling effort. It has not relation to the warehouses and inventories nor to the salesmen employees that are in the state of Iowa. The tax would be the same if there were no property or payroll in Iowa. It would also be the same if Moorman were to pick up its entire Illinois factory and put it in Iowa. It would not increase the tax in the slightest. The effect of the formula then is to tax capital and labor which is in Illinois and again impose a tariff on imports and subsidize the exports and in conjunction with Illinois to cause a double tax. In the powerful brief of 15 distinguished economists, the economic fallacy in the sales factor is pointed out to tariff on imports and inducement to trade war with resulting injury to common market. Now, since our last brief was written, our attention has been drawn to an activity in the state of Minnesota which shows that the trade war which was theoretically envisioned by the economist is actually going on. Minnesota had permitted manufacturers such as Moorman shipping into Minnesota to use the standard three factor formula equally weighted, property, payroll and sales. Now, they have a bill pending which would force Moorman and other similarly situated to use a three factor formula, but only 15% property, 15% payroll and 70% sales. The report that I get is that this is done in retaliation for Wisconsin?s recent changing the weights in its formula and increasing the weight on sales from 1/3 up to ½.
William H. Rehnquist: How much latitude do you think the Constitution allows the various states in using one, two or three formulas and in weighting the formula?
Donald K. Barnes: I think that the decisions of this Court and of other Courts have upheld minor overlap, particularly where the overlap is not directly intentional. It just happens to result from the different way of doing things. That can happen under the three factor formula equally weighted because of different definitions of some parts of the formula, but it does not produce any very serious overlap. In this case, we have a serious overlap, it is 141%, and there is nothing just incidental about it, it is intentional, a deliberate intention to impose a tariff on imports and subsidize exports. Referring to that Minnesota thing again, a very peculiar provision in that statute or its pending bill as it has been reported to us, although we have not seen it, is that it contains a provision that will not take effect if Moorman succeeds in this case.
Byron R. White: Tell me specifically, what impact does this sales factor have with respect to the competition between Iowans and the people from Illinois?
Donald K. Barnes: The effect on competition is nothing in which we can measure. We at this point, what we can do is look at the --
Byron R. White: You say it is a tax on imports because both Illinois and Iowa are taxing the same income and so that tax burden on Moorman is higher?
Donald K. Barnes: Even if Illinois were not taxing the same income, as a matter of fact, the first two years in this appeal, they did not, their corporate income tax came in later, it still is a tax on imports because it is attributing to Iowa a 100% --
Byron R. White: Does it help Iowans control the Iowa market?
Donald K. Barnes: That results if there is another tax as there is in this case because Moorman has to pay tax on 166% of its income and Iowa --
Byron R. White: So it makes it less able to compete in the Iowa market?
Donald K. Barnes: That is right and an Iowa manufacturer would not pay that. The biggest boom is to the Iowa manufacturer who sells into Illinois or some other place because he does not pay any tax to Iowa at all and taxed only 1/3 of his income when it gets into Illinois because the application of the sale factor in that case. Now, many states do it one way and Iowa does it another?
Byron R. White: So do you think there is a discrimination then against interstate commerce or not?
Donald K. Barnes: Yes, there is.
Byron R. White: Well, is that an independent basis for invalidating?
Donald K. Barnes: No. It is not independent of the overlap --
Byron R. White: Do you think it is the same?
Donald K. Barnes: Yes, the overlap is what illustrates on this is the consequence of the discrimination against interstate commerce. I said when Iowa does it one way and all the other states do it some other way, Iowa has to give way, unless Iowa can clearly establish that it is right and the others are clearly wrong.
William H. Rehnquist: But in other words, Iowa?s constitutional right to tax or the constitutional limitations on Iowa?s? power to tax is affected by the means chosen by other states?
Donald K. Barnes: That is true and Iowa, since it is so different from everybody else, has the burden of proof of showing that it is right.
William H. Rehnquist: I would have thought that every state enactment was presumed constitutional?
Donald K. Barnes: So?
William H. Rehnquist: So why does Iowa have the burden of proof?
Donald K. Barnes: I merely cite the decisions of this Court. The most recent one, very recently, the Raymond Transport Company v. Wisconsin in which a Wisconsin statute was held unconstitutional or regulation because it was different from the regulations of other states, thereby imposing a burden on, in that case a trucking industry, and before that, there have been others like Bibb v, Navajo Trucking is another one of the same type of thing. A perfectly valid statute if it stood by itself, but invalid only because it was incompatible with other states and imposed an unreasonable burden on the interstate commerce involved in those cases.
William H. Rehnquist: But do you think if neither party had introduced evidence in the recent Wisconsin case, the Wisconsin statute would it have been struck down because Wisconsin had the burden of proof to show it was constitutional?
Donald K. Barnes: No. The case had to have evidence to show two things. One was what other states were doing and the second one was that the interplay of Wisconsin and the other states imposed a burden on interstate commerce and that evidence was in the case.
John Paul Stevens: Mr. Barnes, does the record tell us what the tax rates were and how much and how heavy a tax is it?
Donald K. Barnes: In early years, it was 8% and in the latter years, 10%, pretty stiff rate for a state income tax.
John Paul Stevens: Do you think it would be unconstitutional to impose a 10% sales tax on --?
Donald K. Barnes: No, you could do that. The appellee has not made any case of their own. They have argued that 100% of the income is not taxed, that is wrong. The statute defines the income and in their brief, they say that the state taxed a 100% of the income of local businesses which it did, but it also taxed a 100% of the income --
Speaker: You would be making the same argument, I take it if this tax rate were ½ or 1% or 100 to 1%?
Donald K. Barnes: You asked me about that one once before and the answer here is that in this particular case, the total tax if they were to tax on gross receipts which would be a low rate of tax would be substantially less than the tax that is involved in this case. We applied the Washington statute to these facts and came out way down.
Speaker: Yes but why should not a reasonable question be here, whether or not a state is extracting from Moorman a reasonable return for what it does for Moorman?
Donald K. Barnes: There is not any measure. The sales formula does not measure anything that the state does for Moorman, nor any place of Moorman earns the income.
Speaker: No, 1000, so 1% rate, you would not say that it was more that what Iowa is doing for Moorman?
Donald K. Barnes: If the tax was very low, we would not be quarreling about it, but the legal principle, constitutional principles would be just the same, assuming they are applying -
Speaker: Well, unless you say the constitutional principle is that interstate commerce and Moorman have to pay their way and the state can unless somebody can show this state is extracting too much, for what it is giving that this tax is constitutional?
Donald K. Barnes: It would have an interstate commerce objection if they taxed their own corporations on the same basis and then exempt them from the tax as they sales factor does, but applied it to Moorman. Now, of course, if the amount is very small, nobody is going to complain. That is why gross receipts taxes were allowed to exist for so long.
Speaker: Let us say the Iowa people who are exporting and manufacturing and exporting are paying property taxes and everything else in Iowa?
Donald K. Barnes: Yes, but the --
Speaker: The total tax burden imposed by Iowa may be greater than Moormans for all you know?
Donald K. Barnes: No, but Moorman is paying the same taxes to Illinois so that it was not any --
William H. Rehnquist: What if Iowa's tax rate was 1% and it had a single factor formula and Illinois? tax rate were 15%, but it had a three factor formula, would your answer as to the constitutionality of Iowa?s statutes still be the same?
Donald K. Barnes: Yes, sir, the rate and the base are unaffected in an argument of apportionment which is all we are arguing about here. The present situation then is that we have a double tax which is a violation of commerce clause. We have a tax on manufacturing that is out of the state which violates due process. It also violates fundamental principle of federalism which confines states to their own geographical jurisdiction and it favors local industry which is a violation of equal protection.
Warren E. Burger: Mr. Griger?
Harry M. Griger: Mr. Chief Justice and may it please the Court. The issues today as far as the constitutionality of the Iowa corporate income tax scheme resolved itself around the due process clause and equal protection clause of the Fourteenth Amendment and the Commerce Clause. Sub issues are facial constitutionality of the Iowa tax scheme on its face and then if it is constitutional in its face, whether or not it has been constitutionally applied to Moorman Manufacturing Company.
William H. Rehnquist: What do you mean by facial constitutionality?
Harry M. Griger: I believe that facial constitutionality means that it must be unconstitutional under all conceivable circumstances. If it simply has a possibility of being unconstitutional some of the time or under some conceivable circumstances, I believe that should be a applied issue.
William H. Rehnquist: That is really over breadth you are talking about, is it not?
Harry M. Griger: Yes, I believe the whole case is over breadth.
William H. Rehnquist: Well, that is only going to apply in the First Amendment area, has it not? Why do you need to wrestle with facial constitutionality at all when you are talking about a tax statute that has nothing to do with free speech?
Harry M. Griger: No, maybe I am being misunderstood. When this case began, Moorman basically put into issue that the Iowa sales factor is invalid, under any conceivable circumstances.
William H. Rehnquist: Well, you did not have to buy that, did you?
Harry M. Griger: No, we do not and our trial judge in Iowa held that it was unconstitutional under all conceivable circumstances. Our Iowa Supreme Court which we believe correctly met the issue said no, there is no showing, it can be facially unconstitutional because it is not facially unconstitutional under all circumstances and secondly as to this particular taxpayer, there has been no proof of unconstitutionality. But what I am saying is as far as the facial due process issue, this would mean that no matter what the circumstances, the Iowa single sales factor formula would automatically cause extraterritorial taxation, Mr. Justice Rehnquist, regardless of the circumstances. I believe that is what Moorman is saying. That is not our position, we do not think they have proved that in any event. The Iowa single sales factor formula in exploring this one step further, applies not simply to corporations such as Moorman which manufacture outside the State of Iowa and sell within. It applies to retail merchants, wholesale merchants, in state manufacturers, out of state manufacturers, manufacturers manufacturing in state and out of state. Moorman?s evidence of course was only directed towards its own facts which it agrees on page of four of its brief that that is all the issues really are. This as I say suggests that this case really involves the constitutionality of the Iowa formula as applied to Moorman?s facts and it is too broad to say that it involves an attack upon the statute that as invalid under any conceivable circumstances which are not even before the Court today. Due process principles derived from constitutional apportionment cases decided by this Court are as follows. First, the statutory formula and the results reached in its application are presumed constitutional and a tax payer must show unconstitutionality beyond reasonable doubt, rebut all reasonable bases to support the formula. Second, the states have great leeway in their choice and application of formula. Third, Court has never stricken an apportionment formula on its face. In the 100 and some odd years of constitutional history of formulas in this country it has never been stricken on its face, but has adopted the case by case approach, carefully reviewing the record in the Courts below to see if the taxpayer showed constitutional transgression. A taxpayer has in this area not merely the burden of proof, but extremely heavy burden of proof in challenging a formula?s constitutionality. This generally requires a powerful evidentiary showing against the formula and not merely as in this case, arguments of counsel and of course precise apportionment is impossible, rough approximation being sufficient, the Court having long recognized that it is generally impossible to specifically allocate the profits of a unitary business to activities carried on in taxing state. Now, an application of these due process principles to this case for the years in question, the Iowa apportionment formula as applied to the Iowa computed net income tax base showed that Moorman earned from about 21.9 or 22% of its income in Iowa to about 18.7% for the five years in question. This is stipulated and there is really no dispute as to the fact that the formula shows that. We believe that Moorman was required to show to satisfy its burden of proof that the Iowa law was unconstitutional, that they did not earn that amount, but they earned a substantially lesser amount. Now, the only evidence in this case in the stipulated data, there were no witnesses, we have stipulated data in this case, consisted of mere comparison of the results reached by Moorman?s three factor formula which is about 12.2 to 14.5% of its income in Iowa and of course the Iowa formula listing the percentages that I mentioned. In other words, we have a comparison of one estimate with another estimate with no evidence in the case which estimate may be right or which estimate may be wrong. For all that appears in this case, we have actually undertaxed Moorman.
Speaker: It is true is it not General that your single formula does benefit your Iowa manufacturers and this I take it is why we have an amicus brief from Deer & Co and Maytag and others who ship out of the state?
Harry M. Griger: I might point out Deer & Co, Maytag is quite local, they manufacture washing machines, Monsanto is located is located in St. Louis, most of those --
Speaker: Their headquarters are, but you have an Iowa establishment, do you not in Monsanto?
Harry M. Griger: I believe they do have an Iowa plant, but most of their manufacturing is outside of state.
Speaker: We certainly do if Deer & Co at the quad cities on the Iowa side.
Harry M. Griger: Deer has manufacturing both in Iowa and Illinois, yes sir.
Speaker: And this is why they are in favor of the single sales formula.
Harry M. Griger: In other words, how do you answer Mr. Barnes argument that you are not favoring the exporters at the cost of the importers?
Speaker: If there is an answer.
Harry M. Griger: First of all, the only answer I can think of giving on a particular question like that was that you are talking about a theory.
Speaker: Well, this is a legitimate question.
Harry M. Griger: I am not saying it is not. We are talking about a theory. The same question cropped up in prior I believe anyway they propped up, in prior apportionment cases decided by this Court involving single property factors cases. There of course, the formula would tax the total segment income if you accept the theory of a company manufacturing in the state whereas it gives, theoretically in the formula, it does not take into account what is going on in the state of sale. Now, Mr. Barnes is saying the same thing insofar as this case. I believe however, that the Iowa tax is triggered and is applied against corporations who sell in the Iowa marketplace and if they do that, they become subject to the Iowa corporate income tax.
Speaker: I am not suggesting that Mr. Barnes necessarily will prevail here, but I am just wondering if the so called Iowa formula on the single factor is not the result of the legislative response to Iowa manufacturing?
Harry M. Griger: Your Honor, the formula was adopted in 1934. Why it was adopted, I honestly do not know. Back at that period of time, there were certainly I think as Mr. Barnes brought out in the brief, back around 1929, there were the basic formula effect at that time or the single properties and the single sales.
Speaker: So having practiced in the neighboring state, they were adopted in these times of tax laws of that time and they were fairly simple and they wanted single factors. Iowa never has pressed beyond that point I suppose because it is helpful to them. I am not saying that is unconstitutional.
Harry M. Griger: No, in trying to answer your questions a little bit difficult for me to point out why we would want to do it. Our Iowa based companies, Iowa manufacturer who sells totally in Iowa or sells very little out of Iowa certainly gets no legislative benefit.
Thurgood Marshall: Let us put it in another way, would not Moorman be better off if they moved their factory to Iowa?
Harry M. Griger: I do not think we know that. This assumes that they are having --
Thurgood Marshall: Really!
Harry M. Griger: No, I do not think we do. That would assume for example that they are earning substantial income out of their manufacturing activity. There is no evidence of that, in this particular record anyway. For all that the record shows here, they could be earning a great deal of money on their Iowa sales activity more than we are taxing and moving their factory to Iowa might not have any effect insofar as their overall tax liability is concerned, but it does not mean that what we are doing right now is wrong.
Potter Stewart: It would not increase their Iowa taxes and it would presumably reduce their Illinois taxes so why is my brother Marshall not correct?
Harry M. Griger: Well, I do not think there is any question that would reduce their Illinois taxes and --
Potter Stewart: And they would not increase their Iowa tax?
Harry M. Griger: No, unless they increase their Iowa sales, but assuming everything remained constant --
Potter Stewart: Moving their factory to Iowa, they came out ahead, would they not, is not my brother Marshall exactly right?
Harry M. Griger: I do not know if they would come out ahead that assumes that --
Byron R. White: They have not paid that component of the Illinois tax at all and there would not be any increase in Iowa?
Harry M. Griger: Okay from an economic standpoint, yes.
Speaker: You have a property tax in Iowa?
Harry M. Griger: Yes sir, one of the highest in the country.
Speaker: They would pay then Iowa property?
Harry M. Griger: Certainly, yes.
Warren E. Burger: This assumption also would rest on Illinois keeping the same tax that is has now, it is not likely, but it might abolish its taxes?
Harry M. Griger: They might.
Warren E. Burger: Rescind what they have got now?
Harry M. Griger: They could very well.
Thurgood Marshall: And I gather from your reluctance to answer my question that if you did answer that it would be better off and you would lose your case?
Harry M. Griger: Would Iowa be better off we lose our case? No.
Thurgood Marshall: No sir, I said do I assume that if you answer my question yes, you would lose your case and that is why you did not say yes? You might answer it.
Harry M. Griger: No, I want to answer your question, Your Honor and let me put it like this if I may rely on a prior case, the Hans Rees case in which a taxpayer came in and actually was able to break down the components of his profit and show that the formula of a single property in that case just was not any good and it over reached. Now, if Moorman can make the same showing, fine. We would like this case to simply be treated as the Court has been treating apportionment cases for a number of years in a case by case basis. In other words, there is a case for example, Kent Coffee where 99% of the income was taxed by the manufacturing state. Now, would that taxpayer be better off if it moved out of, in that case North Carolina, maybe so, but that did not make the statute unconstitutional in the absence of proof.
Speaker: Do you think that in the Moorman would be better off or have a better chance of winning this case if it had put some accountants on the stand and proved by cost accounting that part of its net profit is attributable to its manufacturing operations in Illinois, that was Hans Rees, was it not?
Harry M. Griger: Yes, Hans Rees did involve I believe a cost accounting where the evidence was not rebutted by the state. As a lawyer and not being an accountant or an economist, I would have to talk to my own witnesses and we may very well generate some type of a jury question for lack of a better description of it, although it would decided in our case by a judge as to whether or not they have proved the case. But yes, if we were dealing with the Hans Rees situation here, we would be dealing with a far different situation than what we are dealing with now.
Speaker: General, Iowa has not joined in the multistate tax commission yet?
Harry M. Griger: No, we have not joined it for neither a regular member nor an associate member. I think they have 19 regular and 13 associate members.
Speaker: Nor have you been in and out of it as some states have?
Harry M. Griger: No, we have not. No sir, not at all. We believe that the cornerstone of Moorman?s argument in the whole case where they talk about due process, equal protection and interstate commerce, rests upon abstract argument of counsel that Iowa necessarily taxed 100% of Moorman?s income from Iowa sales of goods manufactured in Illinois. We disagree that Moorman showed that Iowa so taxes 100% of such income and implicated the facial validity of the Iowa formula.
Warren E. Burger: We will resume there at 1:00. [Recess]. You may continue counsel.
Harry M. Griger: Mr. Chief Justice and May it please the Court. Before the recess, I was getting into Moorman?s contention that 100% of their income was necessarily taxed by Iowa, that is income that they derive from selling goods in Iowa which goods were manufactured in Illinois. One of the points I would like to make in this regard is there is a total lack of evidence in this record as to whether or not there is any manufacturing profit in Illinois. Such lack of evidence was held to be a fatal defect by this Court in the Bass case, the Underwood case, Kent Coffee cases, all involving single property factor formulas.
Speaker: Could I just pursue that again, that we had an exchange about this before lunch, but if there had been a cost accounting evidence that part of the profit was assignable to Illinois manufacturing, and assume that it was uncontradicted, what would you say then, could you still use the sales formula?
Harry M. Griger: One of the things I would want to know is how much because in this sense, the states are allowed rough approximation. If they had manufacturing profit for example that we were trying to tax out of all reasonable proportion to business done.
Byron R. White: Suppose that was a third, that is what the accountants testified to and on any reasonable accounting basis a third of the income is assignable to the Illinois manufacturing and then Iowa said well, we are still going to use the single sales formula. What would you say then?
Harry M. Griger: Of course, they could prove it. I think we are getting into a Hans Rees type situation that is breaking down the component parts of the business to show income.
Byron R. White: So are you suggesting that you will agree that constitutionally, Iowa may not tax income that could be shown to be traceable to the Illinois manufacturing?
Harry M. Griger: Well, I think this is what extraterritorial taxation is all about is trying to over reach beyond the state. The states have been granted some leeway in this area.
William H. Rehnquist: General Griger, what you do understand Justice White?s phrase traceable to Illinois manufacturing to mean when you answered his question?
Harry M. Griger: As I understand there may not be able to be a precise apportionment to Illinois, but it may be a situation like Hans Rees where the evidence different, I think it was between 17 and 21% earned in the State of North Carolina in that case where as the formula attributed 80 some percent to North Carolina.
Byron R. White: You would not say the evidence like that would be irrelevant or inadmissible, would you?
Harry M. Griger: No, I believe this Court?s scope --
Byron R. White: And if the judges concluded or made findings that based on the evidence before me, 1/3 of the income is due to manufacturing in Illinois and if there is a finding like that, would you argue that Iowa could nevertheless tax that part of the income?
Harry M. Griger: If a finding could be made, I am not an accountant or an economist and I might want to consult my own expert witnesses.
Byron R. White: I understand that, but if you --
Harry M. Griger: I think what you are saying is basically the Hans Rees situation and yes, the Court has already held that would be inappropriate.
William H. Rehnquist: Would your understand as such a finding by a trial judge that if 1/3 of the income is ?due to? manufacturing in the Illinois to mean economically?
Harry M. Griger: If we can break the business down into its components that he would actually be making a finding in that Hans Rees that the income can be directly traceable to that activity. Now, generally this cannot be done in the unitary business. From CPAs I have talked to in our Department of Revenue in Iowa, they say it cannot be done.
William H. Rehnquist: I take it, for instance, when you are talking about the production of copper wire, you have copper that may have been mined in Arizona and Utah, smelted in El Paso, refined somewhere else and made into wires still somewhere else. It would hard to describe ?due to? finding to any one of those activities?
Harry M. Griger: As I understand it that it would be. I think we were assuming hypothetically, it could be done. I do not know that it can be done. but if it could be, then I think we have a burden of going forward with our own evidence. Maybe we can attack that finding and show that it is based on faulty premises, but as I understood his question, if it could be shown, then would we be overreaching by taxing all that income. I suppose the answer would yes because the answer was yes in the Hans Rees case. That is what I least I meant my answer to be. I believe that this Court has also held and correctly so in Ford Motor Company v. Beauchamp that constitutionality of state taxation ought not to turn upon so narrow an issue as to whether local assets rather than local gross receipts are used in an apportionment formula. The presumption of constitutionality must in this type of a case, in apportionment cases must be overcome by evidence and not by the argument of counsel to satisfy the heavy burden of proof. I would like to get on now into the argument in this case involving interstate commerce. Now again, as far as the Iowa statute is concerned, the basic argument of Moorman which is that the Iowa formula is bad per se, means that it must necessarily regardless of the facts cause multiple taxation to be visited upon Moorman or anybody else for that matter. We believe that the sum and substance of Moorman?s argument in this regard is that anybody that deviates from the three factor formula automatically creates multiple taxation or a risk of multiple taxation. We think Moorman?s argument is somewhat inconsistent in that in its brief at page 25, it says it accepts a single property factor formula which of course is such a deviation. The argument also we think assumes that you have an easily definable tax base such as what you would have in the gross receipts area where everybody can see the gross receipts and that that is what you are apportioning, that is not true. What is being apportioned here is net income. A state like Iowa offers what might be called somewhat of a low tax base. We do allow large deductions, including a federal income tax deduction. I do not believe that is allowed by the state of Illinois for example. It is only allowed by about six states. If Moorman?s argument were accepted, any formula that would deviate somehow from a uniform formula or a tax base that would be different, would somehow create the risk of multiple taxation, destroying the leeway states have in this area, a leeway I might add and it seems to me that this Court has recognized at least in the area of non business income and disparate use of combination corporate tax reporting recently in the US Steel Corporation vs. Multistate tax commission case decided in February 21. While that case did involve the compact clause of the constitution I believe there were arguments made as to interstate commerce and the Court recognized that the states did do things differently but held that that was not necessarily bad. Of course, only Congress would have the power in any event to act affirmatively under the Commerce Clause and if they wanted to impose upon all the states a uniform apportionment formula or even a uniform tax base. The power of taxation. It is the most fundamental power a state can have in fact. I would also like to make a few comments about General Motors v. District of Columbia. I think the parties here agreed that that case did not reach the constitutional issues that are being raised here. In addition, there was no exclusive formula in that case approved by the Court. The Court read the district?s statute which of course prescribed no formula as requiring one which automatically would give effect to geographical spread of all components of a manufacturing business. There was no overruling of prior constitutional case presence particularly the single factor cases and the Ford Motor case involving the very formula that we have here today. The case does not implicate a taxpayer?s heavy burden of proof that a statutory formula is unconstitutional and we believe that based upon this Court?s reading of the district statute in that case that a single property factor probably would have been inconsistent with the statute insofar as applying it to an integrated manufacturing selling business, manufacturing in one state and selling goods in the district of Columbia. We believe that the Court?s standards on multiple taxation should be derived from the cases of Northwest Portland Cement case and also its recent case in 1975, the Standard Press Steel case in which the Court seems to be going to an actual burden and it certainly is not a mere risk on the basis of argument of counsel that is an abstract notion of a risk of multiple taxation. For these reasons, we do not feel that the Iowa formula contravenes the Commerce Clause of the United States Constitution. As to facial equal protection, again, this involves that there is necessarily a discrimination against out of state manufacturers. No evidence on this issue was introduced, only extreme hypotheticals were presented by Moorman. It should also be remembered that even if there were some companies along the extreme hypotheticals Moorman presented that as a company manufacturing totally out of Iowa and then selling in Iowa or an Iowa manufacturer manufacturing in Iowa and selling totally out of Iowa, that iron rule of taxation is neither attainable nor required that as this Court has held under the equal protection clause, too rigorous a scrutiny ought not to be made, otherwise all taxing schemes would fall since it is impossible to define any taxing scheme or to make one up which has no discriminatory impact whatsoever. We fail to see that Moorman?s argument with reference to that portion of its brief regarding constitutionality as applied is any different from that portion of its brief with reference to facial constitutionality. The Iowa Supreme Court agreed with this in that regard and because they held that the Iowa formula was not proven bad on its face, they also held that Moorman did not satisfy its burden of proof to overturn the formula. In conclusion, we believe that the decision of the Iowa Supreme Court is correct and that it ought to be affirmed by this Court.
Warren E. Burger: Mr. Barnes, you have one minute remaining.
Donald K. Barnes: Mr. Chief Justice and may it please the Court. That one minute is quite sufficient. The arguments that have been made are all adequately answered in our briefs and reply brief, but I want to emphasize to the Court one thing, that the directive here is challenging the assumption which is inherent in the statute. We did not make any assumption, the statute makes it. That assumption is that the income derived with respect to any dollar of sales is the same as income derived from any other dollar of sales and that is the basis for the attribution of income to the income producing activities in Illinois. They keep arguing for separate accounting because this Court has held that separate accounting is impermissible in the case of a unitary business. Hans Rees was not a unitary business.
Warren E. Burger: Thank you, gentlemen. The case is submitted.