Opinion ID: 1087040
Heading Depth: 3
Heading Rank: 2

Heading: Tesoro’s Tax History In Alaska

Text: In 1959 Alaska adopted the Uniform Division of Income for Tax Purposes Act (UDITPA).4 UDITPA was drafted and approved by the National Conference of Commissioners on Uniform State Laws in 1957 in an attempt to bring uniformity to state tax codes.5 In 1970 Alaska adopted the Multistate Tax Compact, which is a restatement of UDITPA with some minor changes.6 The Multistate Tax Compact is codified at AS 43.19.010. Per AS 43.19.010, article IV, section 9, the portion of a business’s total income apportioned to Alaska is determined by “multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three.” The property factor is the fraction of the taxpayer’s total property and the property attributable to the taxpayer’s business in Alaska; similarly, the sales and payroll factors are fractions of the taxpayer’s respective total sales and payroll attributable to the taxpayer’s business in Alaska.7 Alaska Statute 43.19.010, article IV, section 18 permits DOR to adjust a taxpayer’s tax burden if the statutorily mandated apportionment does not “fairly represent the extent of the taxpayer’s business activity in this state.” Subsection 18(a) allows DOR to apportion the taxpayer’s income based on separate accounting, while subsection 18(c) allows DOR to add “one or more additional factors” to the 4 Ch. 175, § 1, SLA 1959. 5 Larry D. Scheafer, Annotation, Construction and application of uniform division of income for tax purposes act, 8 A.L.R. 4th 934 § 2 (1981); see also 1 JEROME R. H ELLERSTEIN & W ALTER HELLERSTEIN , STATE TAXATION ¶ 8.06[3][b], at 8-70 (3d ed. 2012). 6 Ch. 124, § 1, SLA 1970; State, Dep’t of Revenue v. Amoco Prod. Co., 676 P.2d 595, 598 n.3 (Alaska 1984). 7 AS 43.19.010, art. IV, §§ 10, 13, 15. -4- 6838 apportionment formula.8 The statute effectively requires that any remedy DOR enforces under section 18 be “reasonable.”9 Alaska Statute 43.20.144 modifies AS 43.19.010’s apportionment scheme for all taxpayers “engaged in the production of oil or gas . . . in this state or engaged in the transportation of oil or gas by pipeline in this state.”10 Alaska Statute 43.20.144(c) provides three different apportionment formulas for such taxpayers, depending on the nature of the taxpayer’s oil or natural gas business in Alaska. Under AS 43.20.144(c)(1), a taxpayer that only transports oil or gas in Alaska is subject to a two-factor formula based on property and sales. Under AS 43.20.144(c)(2), a taxpayer that only produces oil or gas in Alaska is instead subject to a two-factor formula based on property and extraction. Finally, under AS 43.20.144(c)(3), a taxpayer that both transports and produces oil or gas in Alaska is subject to a three-factor formula based on property, sales, and extraction. From the time it began doing business in Alaska in 1969 until 1994, Tesoro filed its tax returns as a unitary business. During this period all of Tesoro’s corporate income was subject to taxation in Alaska, and the amount actually apportioned to Alaska was determined by the three-factor property, sales, and payroll formula of AS 43.19.010, article IV, section 9. In 1995 Tesoro purchased the Kenai Pipeline (KPL), the pipeline that serviced its Kenai-based refinery. As a result of this purchase, Tesoro became a taxpayer “engaged in the transportation of oil or gas by pipeline” in Alaska, and thus became subject to taxation under AS 43.20.144. 8 AS 43.19.010, art. IV, §§ 18(a), 18(c). 9 AS 43.19.010, art. IV, § 18. 10 AS 43.20.144(a). AS 43.20.144 was formerly codified as AS 43.20.072 but was renumbered in 2012. -5- 6838 In its tax return for 1995 Tesoro took the position that KPL was not unitary with the remainder of Tesoro’s business segments. Tesoro thus claimed that only KPL was subject to taxation under the two-factor property and sales formula specified by AS 43.20.144(c)(1), while Tesoro’s remaining business segments were subject to taxation under the three-factor property, sales, and payroll formula specified by AS 43.19.010, article IV, section 9. This was the first time Tesoro had ever asserted in an Alaska tax return that its subsidiaries were not unitary with each other. In its tax returns for 1996 and 1997 Tesoro again took the position that KPL was not unitary with the remainder of Tesoro’s subsidiaries. And in those returns Tesoro also asserted for the first time that its Finance segment was not unitary with the remainder of its subsidiaries and as such was not subject to taxation in Alaska at all. On October 1, 1998, DOR completed an audit of Tesoro’s tax returns for the years 1994 and 1995 and rejected Tesoro’s position that KPL and the Finance segment were not unitary with the remainder of Tesoro’s subsidiaries or each other. DOR’s resulting assessment stated that “Tesoro is one unitary petroleum business” and that “the entire group is subject to modified apportionment under AS [43.20.144].” DOR accordingly apportioned all of Tesoro’s business income under the two-factor property and sales formula of AS 43.20.144(c)(1) for nine months of 1995 to account for Tesoro’s March 1995 purchase of KPL. DOR also disallowed the exemptions for Tesoro’s foreign subsidiaries for this same nine-month period. After receiving this assessment, Tesoro filed its 1998 tax return in which Tesoro again asserted that KPL was not unitary with the remainder of Tesoro’s business segments. This return also took the position that the subsidiaries within R&M were not -6- 6838 unitary with the remainder of Tesoro’s subsidiaries, including KPL.11 Thus, this 1998 tax return treated only the R&M subsidiaries and KPL as subject to taxation in Alaska: KPL under AS 43.20.144(c), and the R&M subsidiaries under AS 43.19.010, article IV, section 9. In response, DOR conducted a second audit assessment of Tesoro’s tax filings, this time for the years 1996, 1997, and 1998. In the resulting assessment, DOR rejected Tesoro’s theory concerning the unitariness of Tesoro’s business and reasserted that all of Tesoro’s businesses were a single unitary group subject to AS 43.20.144. But during the interval between DOR’s first audit and its second, the Attorney General of Alaska issued an opinion calling into question the constitutionality of AS 43.20.144(c) as applied to businesses that produce oil or gas in state but transport it out of state.12 In response, DOR issued an advisory letter on November 19, 1999 to all oil and gas taxpayers in Alaska; the letter stated that DOR would exercise its authority under AS 43.19.010, article IV, subsection 18(c) to fashion a remedy to the constitutional infirmity identified by the Attorney General. DOR’s letter stated that this remedy would allow a taxpayer that both produced and transported oil or gas to use the three-factor property, sales, and extraction formula of AS 43.20.144(c)(3). The letter stated: The department will follow the [Attorney General’s] opinion and allow taxpayers to use the three-factor apportionment formula in these circumstances pursuant to the authority of AS 43.19.010 Art. 4, Sec. 18(c). Accordingly, an AS [43.20.144] taxpayer engaged both in the production of oil or gas from a lease or property in any jurisdiction and in the pipeline transportation of oil or gas in any jurisdiction 11 Tesoro took this position informally for the first time on January 6, 1999, in a written statement attached to and incorporated by reference in its request for an informal conference. 12 1993-99 FORMAL O P . A TT ’Y G EN . 230-31, available at 1999 WL 1337804. -7- 6838 may use an apportionment formula consisting of extraction, property and sales . . . . In its assessment for the years 1996, 1997, and 1998, DOR adhered to its November 19, 1999, letter and applied the three-factor formula of AS 43.20.144(c)(3) (hereinafter “the section 18 remedial formula” or “remedial formula”) to Tesoro. DOR also assessed penalties against Tesoro for its repeated unwillingness to recognize KPL as unitary with Tesoro’s other subsidiaries.