Opinion ID: 2106518
Heading Depth: 1
Heading Rank: 3

Heading: Tambrands Revisited

Text: Having determined that the Augusta Formula does not discriminate against foreign commerce, we must now determine whether the tax assessed against Du Pont under the Augusta Formula violates the Due Process Clause. To withstand constitutional scrutiny the challenged taxing method must, among other things, be fairly apportioned. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 1079, 51 L.Ed.2d 326 (1977). To determine whether the Augusta Formula results in a fair apportionment, we must necessarily revisit the Supreme Court's internal consistency test and our application of that test in Tambrands v. State Tax Assessor, 595 A.2d 1039 (Me.1991). In Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 169, 103 S.Ct. 2933, 2942, 77 L.Ed.2d 545 (1983), the Supreme Court observed that the Due Process Clause and Commerce Clause require that the states be fair in applying apportionment formulas to determine how much of the business's income they may tax. A fair apportionment formula demonstrates both internal and external consistency. Id. With respect to internal consistency the Court declared: The first, and ... obvious, component of fairness in an apportionment formula is what might be called internal consistency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. A formula ceases to be internally fair when, if theoretically applied across all taxing states, it inevitably would subject a multijurisdictional enterprise to taxation of more than 100% of its tax base. See Oklahoma Tax Comm'n v. Jefferson Lines, ___ U.S. ___, ___, 115 S.Ct. 1331, 1338, 131 L.Ed.2d 261, 271 (1995) (the internal consistency test asks nothing about the degree of economic reality reflected by the tax, but simply looks to the structure of the tax at issue to see whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate.). See also Goldberg v. Sweet, 488 U.S. 252, 261, 109 S.Ct. 582, 588-89, 102 L.Ed.2d 607 (1989) ([T]o be internally consistent a tax must be structured so that if every state were to impose an identical tax, no multiple taxation would result. Thus, the internal consistency test focuses on the text of the challenged statute and hypothesizes a situation where other states have passed an identical statute.); Armco Inc. v. Hardesty, 467 U.S. 638, 644-45, 104 S.Ct. 2620, 2623-24, 81 L.Ed.2d 540 (1984) (internal consistency test requires that tax at issue be evaluated on its own merits without regard to taxes that may or may not actually be imposed by other jurisdictions); Container Corp., 463 U.S. at 188, 103 S.Ct. at 2952 (finding that taxing scheme that resulted in multiple taxation was not internally inconsistent where such double taxation was not inevitable) (citing Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 447, 99 S.Ct. 1813, 1820-21, 60 L.Ed.2d 336 (1976)). In Tambrands, Tambrands and its foreign affiliates conducted a horizontally and vertically integrated unitary business. 595 A.2d at 1040. Tambrands received dividends from the earnings of the portion of the unitary business conducted by its foreign affiliates. Id. The Assessor assessed an income tax against Tambrands based on the inclusion of the foreign dividends in Tambrands' apportionable business income, without considering the property, payroll, or sales of the foreign affiliates. Id. We concluded that this omission led to an overstatement of in-state income by understating the denominators of the three fractions contained in the numerator of the three factor formula, and hence the Assessor's approach flunked the internal consistency test because its application by all jurisdictions would result in the taxation of more than 100% of the taxpayer's income. Id. at 1045-47. Two of the leading authorities in the area of state taxation have criticized our application of the internal consistency test in Tambrands. The error in the Maine court's application of the internal consistency test was that it was applied to taxes imposed on two different sets of taxpayersTambrands and its subsidiariesnot merely to a tax imposed on Tambrands. If there is an objection to such taxation, it is that the same income is taxed twice, once to the corporation and again to the stockholder. The internal consistency test deals, however, only with taxes that may be imposed on the same taxpayer by various States. The Maine court thus improperly applied the test of that State's taxation of Tambrands' dividends and the tests of other jurisdictions on the foreign source income of the subsidiary. See 1 JEROME R. HELLERSTEIN & WALTER HELLERSTEIN, STATE TAXATION ¶ 9.13[3][a] (2d. ed. 1993 & Supp.1994). It is now clear to us that in applying the internal consistency test in Tambrands, we improperly applied the test to two different taxpayersTambrands and its subsidiariesrather than to just Tambrands. Moreover, by misidentifying the taxpayer in our application of the internal consistency test in Tambrands we insured that no apportionment method other than complete exclusion of the foreign subsidiaries' income and dividends would satisfy the test. In Tambrands we unnecessarily injected the issue of internal consistency into a dispute which, much like the present one, was not a question of multiple taxation, but rather a question of the taxation of extraterritorial value. As the Hellersteins concluded: Considering the case from a broader constitutional and policy point of view, taxation by one State of the income of a subsidiary doing business within its borders and taxation by another State of its parent company that does business within that State on dividends paid by the subsidiary out of its earnings are part of a long-accepted and established practice in State corporate taxation. Such taxation does not constitute the type of multiple taxation that is prohibited by the Commerce Clause, and there is no Supreme Court decision, including the cases dealing with the internal consistency doctrine, that invalidate such levies. Id. Thus, our discussion of the internal consistency test in Tambrands was superfluous. We therefore abandon the internal consistency analysis set forth in Tambrands. At the same time, we reaffirm the ultimate conclusion in Tambrands that the Assessor's failure to adjust a taxpayer's apportionment factors to reflect the taxpayer's activities both within and without the state of Maine may result in the taxation of extra-territorial value and, therefore, may run afoul of the fairness principles of the Due Process Clause. Thus, we review the Assessor's Augusta Formula to determine whether it ensures that Du Pont's tax liability fairly represents its business activity in the state of Maine consistent with constitutional due process. Id. The Assessor developed the Augusta Formula pursuant to the discretionary authority afforded him by 36 M.R.S.A. § 5211(17). Generally referred to as the equitable apportionment section of the Uniform Division of Income for Tax Purposes Act (UDITPA), the purpose of this section, according to its drafter, was to permit the tax assessor to deviate from the prescribed three factor apportionment method in those exceptional circumstances where use of the three factor formula presented constitutional problems or failed to accurately reflect a corporation's income due to the corporation's unique characteristics. See Uniform Division of Income for Tax Purposes Act, U.L.A. available on Westlaw, ULA Database; William J. Pierce, Uniform Division of Income for State Tax Purposes, 35 TAXES 747, 748 (1957). See also Twentieth Century-Fox Film Corp. v. Department of Revenue, 299 Or. 220, 700 P.2d 1035, 1039-40 (1985) (stating that relief under this section of UDITPA is only available in two situations: (1) to remedy unconstitutional results, or (2) to provide an alternative means of apportionment where three factor formula does not fairly represent the business activity of taxpayer). Courts have construed this section of the UDITPA to vest broad discretion in the tax assessor to consider additional factors when deviation from the statutory method is necessary. See, e.g., McDonnell Douglas Corp. v. Franchise Tax Bd., 69 Cal.2d 506, 72 Cal.Rptr. 465, 469, 446 P.2d 313, 317 (1968). Pursuant to the statute, the adjustments may range from separate accounting to exclusion of one or more factors, and inclusion of other factors, or to any other method that effectuates an equitable allocation and apportionment of the taxpayer's income. See 36 M.R.S.A. § 5211(17). Therefore, when the taxpayer, as here, contends that the formula ultimately adopted by the tax assessor is arbitrary and reaches unreasonable results, the burden is on the taxpayer to establish such facts by clear and convincing evidence. McDonnell Douglas Corp., 72 Cal.Rptr. at 468, 446 P.2d at 316. A state is faced with an almost impossible task in assuring that a multijurisdictional business shoulders its fair share of the burden of taxation. The United States Supreme Court has noted that arriving at precise territorial allocations of value is often an elusive goal both in theory and in practice, Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 182, 103 S.Ct. 2933, 2949, 77 L.Ed.2d 545 (1983), and hence, rough approximation rather than precision is sufficient as a matter of practical tax administration. International Harvester Co. v. Evatt, 329 U.S. 416, 422, 67 S.Ct. 444, 447, 91 L.Ed. 390 (1946). Indeed, [e]very method of allocation devised involves some degree of arbitrariness. Barclays Bank v. Franchise Tax Bd., ___ U.S. ___, ___, 114 S.Ct. 2268, 2269, 129 L.Ed.2d 244, 253 (1994). The Augusta Formula simply adopts the worldwide reporting method as a means of verifying the fairness of the tax liability of the unitary business as established by the tax assessor. The worldwide reporting method is widely acknowledged as a fair and accurate method of estimating a multijurisdictional corporation's taxable business activities in the state, and the Supreme Court has repeatedly upheld the constitutionality of this method of accounting. See e.g. Barclays Bank v. Franchise Tax Bd., ___ U.S. ___, 114 S.Ct. 2268, 129 L.Ed.2d 244 (1994); Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 103 S.Ct. 2933, 77 L.Ed.2d 545 (1983). Pursuant to the worldwide reporting method, the state takes into account the property, payroll, and sales for the unitary business in the taxing jurisdiction as fractions of the total worldwide property, payroll, and sales. The sum of these fractions is then averaged and multiplied against the unitary business's total income producing an apportioned amount of taxable income. See generally, Irene Cannon-Geary, Note, State Worldwide Unitary Taxation: The Foreign Parent Case, 23 COLUM.J.TRANSNAT'L L. 445 (1985). The worldwide computation includes in the denominators of the three apportionment factors the property, payroll, and sales of the dividend-paying foreign subsidiary whose dividends are included in the domestic parent corporation's tax base. Under the Augusta Formula, the tax assessed to a multijurisdictional corporation will exceed the amount calculated under the worldwide reporting method only in those instances when the tax calculated pursuant to the water's edge combined reporting method, with foreign source dividends excluded, is greater than the amount owed using the worldwide combined reporting method. Foreign dividends are included without any accompanying factor relief only in that instance when their addition yields a tax liability that is less than that calculated by the worldwide reporting method. Thus, each calculation pursuant to the Augusta Formula represents permissible means of insuring that the State in its assessment does not capture extraterritorial value, and that the assessed tax reasonably reflects the extent of a multijurisdictional taxpayer's business activity in Maine. The fact that in some instances this calculation results in a higher tax, or that an alternate formula might result in a lower tax, does not change this result. Indeed, Du Pont implicitly concedes this point. In making its argument that the Augusta Formula is unreasonable, Du Pont does not suggest that an alternative formula would produce a more accurate apportionment. Rather, it urges the complete exclusion of foreign source dividends. The Augusta Formula permits the Assessor to establish a level of taxation for a multijurisdictional unitary business between two constitutionally and statutorily permissible levels, and Du Pont's claim that its tax liability pursuant to the Augusta Formula may exceed its potential liability by some other formula does not undermine the validity of this method of apportionment. The Augusta Formula's use of the worldwide combined reporting method as a check on the tax assessed on the income of a multijurisdictional corporation with foreign subsidiaries was an appropriate response to our mandate in Tambrands. The entry is: Judgment on Counts I through IV and VI of Du Pont's petition for review vacated. Remanded for entry of a judgment affirming the decision of the State Tax Assessor with respect to Counts I through IV and VI. WATHEN, C.J., and ROBERTS, GLASSMAN, RUDMAN, and DANA, JJ., concurring.