Opinion ID: 1979315
Heading Depth: 3
Heading Rank: 2

Heading: Constitutional Distortion Analysis

Text: [¶ 28] The State may tax an apportioned sum of [Gannett's] multistate business if the business is unitary. Allied-Signal, 504 U.S. at 772, 112 S.Ct. 2251. However, there are constitutional limitations on state taxation of income generated by the interstate activities of a unitary business. See Container Corp., 463 U.S. at 169, 103 S.Ct. 2933. For a state to proportionally tax income arising out of interstate activities, the Due Process Clause of the United States Constitution requires a minimal connection or nexus between the taxing state and the interstate activities, as well as a rational relationship between the income attributed to the State and the intrastate values of the enterprise. Mobil Oil Corp. v. Comm'r of Taxes, 445 U.S. 425, 436-37, 100 S.Ct. 1223, 63 L.Ed.2d 510 (1980). In addition, the Commerce Clause requires any apportionment formula to be fair and to avoid gross distortion. See Container Corp., 463 U.S. at 169-70, 103 S.Ct. 2933. [¶ 29] Pursuant to the Due Process Clause, a court must determine whether intrastate and extrastate activities formed part of a single unitary business or whether the out-of-state values that the State seeks to tax derived from unrelated business activity which constitutes a discrete business enterprise. MeadWestvaco Corp., 128 S.Ct. at 1505 (quotation marks omitted). Here, the Assessor seeks to tax income derived from Gannett's sale of its Cable Division. The Due Process Clause requires us to consider whether the value of Gannett's activities in Maine and the income it received from the sale of the Cable Division were rationally related, and whether the relationship resulted in some sharing or exchange of value. See Container Corp., 463 U.S. at 165-66, 103 S.Ct. 2933. [¶ 30] In fact, Gannett's unitary business had extensive business in Maine in 2000, totaling approximately $26 million in sales, which included $22 million in Maine sales by Gannett's subsidiary Pacific & Southern, Inc., $2.75 million in sales by Gannett's corporate entity GANSAT, and $900,000 in USA Weekend, Inc., sales. Gannett's unitary business also owned or rented about $16 million in Maine property in 2000, $15 million of which was used by Pacific & Southern in connection with its operation of two television stations, WCSH-6 in Portland and WLBZ-TV in Bangor. Finally, Gannett's Maine payroll exceeded $7.4 million in 2000, most of which was for its broadcast television operations in Portland and Bangor. [¶ 31] Gannett was also involved in the publication, sale, and distribution of USA Today and Baseball Weekly by GANSAT in Maine and elsewhere. Gannett also distributed other publications in Maine. USA Weekend, Inc., published and sold the magazine USA Weekend to newspapers in Augusta, Bangor, Biddeford, Lewiston-Auburn, and Waterville. Times News Group, Inc., sold newspapers directed at members of the armed forces (such as Army Times ) and advertised these newspapers in Maine and other states. Another Gannett subsidiary, Cape Publications, Inc., was a partner in a limited partnership that bought real estate in Maine in 1999. That real estate, in turn, was leased to Pacific & Southern for its Maine broadcast TV operations. [¶ 32] In addition, Gannett's Maine activities were integrally related to its unitary business enterprise, thereby producing an exchange of value. For example, the operations of the Bangor and Portland television stations benefited from funds they received from the cash management system, to which the cable television operations contributed. The general counsel of Gannett's Broadcasting Division, whose legal services were available to the Bangor and Portland television stations from 1998 through 2000, also served as general counsel for the Cable Division at the same time. On a few occasions, the Cable Division's president advised general managers in Gannett's Broadcasting Division regarding how the cable business person looks at a deal to help them negotiate deals for TV broadcasting. Finally, the Cable Division received input from Broadcasting Division managers on how to better negotiate deals with broadcasters. [¶ 33] Gannett's activities in Maine were therefore significantly related to Gannett's unitary business. All of Gannett's operating components formed a functionally integrated corporation, which benefited from an exchange of value among those various components in Maine and elsewhere. Maine's apportionment formula is therefore valid under the Due Process Clause. [¶ 34] However, we must also consider, pursuant to the Commerce Clause, whether the apportionment formula is fair and avoids gross distortion. See Container Corp., 463 U.S. at 169-70, 103 S.Ct. 2933. Accordingly, two factors must be considered. Id. at 169, 103 S.Ct. 2933. First, the apportionment formula must be internally consistentthat is, the formula must be such that, if applied by every jurisdiction, it would result in no more than all of the unitary business' income being taxed. Id. Gannett does not raise this issue on appeal, and we therefore need not address it. Second, the Court will look to whether there is external consistencythat is, the State's apportionment formula must actually reflect a reasonable sense of how income is generated. Id. A court will strike down the application of an apportionment formula if the taxpayer can prove by clear and cogent evidence that the income attributed to the State is in fact out of all appropriate proportions to the business transacted in that State, or has led to a grossly distorted result. Id. at 170, 103 S.Ct. 2933 (quotation marks and alterations omitted). However, this standard of proof is a difficult one for the taxpayer to meet. [¶ 35] The external consistency requirement allows a state to tax only that portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed. Goldberg v. Sweet, 488 U.S. 252, 262, 109 S.Ct. 582, 102 L.Ed.2d 607 (1989). External consistency is a pragmatic test, requiring us to examine the in-state business activity which triggers the taxable event and the practical or economic effect of the tax on that interstate activity. Id. at 262, 264, 109 S.Ct. 582. However, an apportionment formula is not invalid simply because some income, which did not have its source in the taxing state, may end up being taxed by that state. Container Corp., 463 U.S. at 169-70, 103 S.Ct. 2933. [¶ 36] Gannett's unitary business, which had substantial activity in Maine in 1999 and 2000, was much more profitable in 2000 than 1999 due to the sale of its Cable Division. Gannett's business benefited as a whole from the functional integration and exchange of value that its various components, including the Cable Division and Gannett's significant Maine operations, provided to each other. Maine's apportioned share of the larger amount of income in 2000, which amounts to approximately one-third of one percent, is not unreasonable or disproportionate. Accordingly, Gannett has failed to show by clear and convincing evidence the apportionment formula resulted in gross distortion. The entry is: Judgment vacated. Remanded to the Superior Court for entry of judgment in favor of the State Tax Assessor.