Opinion ID: 1979315
Heading Depth: 3
Heading Rank: 1

Heading: Unitary Business Standard

Text: [¶ 11] When a corporation and its affiliates transact business in several states, each state must determine how much of the corporation's total income and losses are attributable to that state as opposed to other states. States are limited in their ability to tax the income of non-domiciled taxpayers by the Due Process and Commerce Clauses of the United States Constitution. MeadWestvaco Corp. v. Ill. Dep't of Revenue, 553 U.S. ___, ___, 128 S.Ct. 1498, 1505, 170 L.Ed.2d 404 (2008); Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 777-78, 112 S.Ct. 2251, 119 L.Ed.2d 533 (1992). A state may only tax an activity to which it has a definite link or connection. MeadWestvaco Corp., 128 S.Ct. at 1505. [A] State may not, when imposing an income-based tax, tax value earned outside its borders. Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 164, 103 S.Ct. 2933, 77 L.Ed.2d 545 (1983) (quotation marks omitted). [¶ 12] Maine uses the unitary business/formula apportionment approach to identify in-state value. Tambrands, Inc. v. State Tax Assessor, 595 A.2d 1039, 1040-41 (Me.1991); 36 M.R.S.A. § 5211(1) (1990). Under this approach, if activities inside and outside of the taxing state constitute one single integrated business enterprise, such that both in-state and out-of-state activities operate as a unit in the ultimate production of income, it is fair to include the income from out-of-state activities in apportionable income. Container Corp., 463 U.S. at 165-66, 103 S.Ct. 2933. A unitary business is defined statutorily to mean a business activity which is characterized by unity of ownership, functional integration, centralization of management and economies of scale. 36 M.R.S. § 5102(10-A) (2007). [¶ 13] The hallmarks of a unitary business relationship are functional integration, centralized management, and economies of scale. MeadWestvaco Corp., 128 S.Ct. at 1508. A unitary business is a functionally integrated enterprise whose parts are mutually interdependent such that there is a substantial flow of value between them. See Container Corp., 463 U.S. at 164-66, 103 S.Ct. 2933. The unitary business concept ignores the separate legal existence of corporations (which are easily manipulated), and focuses on such practical business realities as transfers of value among affiliated corporations. See Allied-Signal, 504 U.S. at 781-83, 112 S.Ct. 2251. [¶ 14] The U.S. Supreme Court's test is not a bright-line rule. Rather, the issue of whether a business is unitary is determined on a case-by-case basis, after examining all of the relevant facts and circumstances. See Container Corp., 463 U.S. at 166, 178 n. 17, 103 S.Ct. 2933. In addition, the relevant Maine Revenue Services rule states in part: The activities of a taxpayer will be deemed to constitute a single business if those activities are integrated with, dependent upon and contributive to each other and to the operations of the taxpayer as a whole. The presence of any of the following factors creates a presumption that the activities of the taxpayer constitute a single trade or business: (1) All activities are in the same general line or type of business; [or] . . . . (3) The taxpayer is characterized by strong centralized management including centralized departments for such functions as financing, purchasing, advertising and research. 4 C.M.R. 18 125 801-1 § 0.1(A) (2000). [2] [¶ 15] In Container Corp., the United States Supreme Court held that the out-of-state activities of the purported `unitary business' [must] be related in some concrete way to the in-state activities, in that there exists some sharing or exchange of value not capable of precise identification or measurementbeyond the mere flow of funds arising out of a passive investment or distinct business operation. 463 U.S. at 166, 103 S.Ct. 2933. In Container Corp., the corporate taxpayer and its subsidiaries were held to be a unitary business because the subsidiaries carried on nearly identical businesses in several countries that were linked by a sharing of technical expertise and financial resources, and a management role by the parent that was grounded in its own operational strategy and expertise. Id. at 178-180 n. 19. [¶ 16] While [i]nvestment in a business enterprise truly `distinct' from a corporation's main line of business often serves as a passive investment, such as to diversify the parent's portfolio, in contrast: [w]hen a corporation invests in a subsidiary that engages in the same line of work as itself, it becomes much more likely that one function of the investment is to make better use  either through economies of scale or through operational integration or sharing of expertise  of the parent's existing business-related resources. Id. at 178, 103 S.Ct. 2933. As in Container Corp., the Cable Division formed part of a single business enterprise with Gannett's newspaper and broadcast television operations so that the production of income by the Cable Division in Kansas and elsewhere was integrated with Gannett's newspaper and broadcast television operations in Maine. In 1998, Gannett's annual report listed cable as one of its three core businesses. Gannett's operations were integrated. One entity supplied technical expertise concerning production and performed key business functions critical to the generation of income by Gannett and its affiliates, which included the Cable Division and Gannett's Maine operations. [¶ 17] The Supreme Court's standard for establishing a unitary business requires a court to distinguish between entities that have significant operational connections and truly function as one business enterprise, see, e.g., Container Corp., 463 U.S. 159, 103 S.Ct. 2933, 77 L.Ed.2d 545; Exxon Corp., v. Wisconsin Department of Revenue, 447 U.S. 207, 100 S.Ct. 2109, 65 L.Ed.2d 66 (1980), and those that have some connections but do not function as a unitary business, see, e.g., F.W. Woolworth Co. v. Taxation & Revenue Department, 458 U.S. 354, 369, 102 S.Ct. 3128, 73 L.Ed.2d 819 (1982). There must be a flow of value, often characterized by substantial mutual interdependence, for a business to be unitary. Container Corp., 463 U.S. at 178-79, 103 S.Ct. 2933. No one fact necessarily determines whether functional integration, centralization of management or economies of scale exist. Id. at 179-80, 103 S.Ct. 2933. Rather, the totality of the facts are examined and weighed for cumulative effect. See id. [¶ 18] Functional integration refers to transfers between, or pooling among, business segments that significantly affect the business operations of the segments. See F.W. Woolworth Co., 458 U.S. at 364-66, 102 S.Ct. 3128; Exxon Corp., 447 U.S. at 224-25, 100 S.Ct. 2109. Economies of scale result when integrated businesses gain advantages from an umbrella of centralized management and controlled interaction. Exxon Corp., 447 U.S. at 222, 224, 100 S.Ct. 2109. [¶ 19] In particular, as part of the unitary business determination, a court must distinguish between connections that demonstrate integration and those that typify investment oversight. As the United States Supreme Court stated in Container Corp., there must be sharing or exchange of value not capable of precise identification or measurement that exceeds the mere flow of funds arising out of a passive investment or a distinct business operation. 463 U.S. at 166, 103 S.Ct. 2933. [¶ 20] Gannett's affiliates, including those in the Cable Division, were functionally integrated in various ways. Gannett provided centralized tax, legal, internal audit, financial, and risk management services to all affiliates, which were billed at cost. Gannett billed only for the labor and overhead costs associated with providing the services. It determined the amount billed, with no opportunity for negotiation. [¶ 21] As many courts have held, the provision of intercompany services that an independent business would ordinarily perform for itself, such as accounting, insurance, legal, tax, and financing, is a form of centralized management. See, e.g., Earth Res. Co., 665 P.2d at 969-70; Borden, Inc. v. Ill. Dep't of Revenue, 295 Ill.App.3d 1001, 230 Ill.Dec. 169, 692 N.E.2d 1335, 1339-41 (1998). There is a flow of value that results from these services. Furthermore, the provision of these centralized services creates economies of scale and shows functional integration. Citizens Utils. Co. of Ill. v. Dep't of Revenue, 111 Ill.2d 32, 94 Ill.Dec. 737, 488 N.E.2d 984, 991 (1986). [¶ 22] The overlap between Gannett's broadcast and cable groups as to some operational matters, including the sharing of expertise, resulted in additional integration. Further, legal services provided to the Cable Division by the general counsel of Gannett's Broadcasting Division created additional economies of scale and functional integration. See Container Corp., 463 U.S. at 173 n. 9, 103 S.Ct. 2933 (the fact that parent company's employee negotiated a contract on behalf of the subsidiary was evidence of a unitary business); Borden, 692 N.E.2d at 1339-40. [¶ 23] The centralized provision of health and benefit plans also provides evidence of a unitary business due to the resulting functional integration and economies of scale. See, e.g., Pentzien, Inc. v. Neb. Dep't of Revenue, 227 Neb. 434, 418 N.W.2d 546, 553 (1988). Gannett provided its common group health insurance plan, as well as its common auto, life, and property and casualty insurance policies, to employees of both Gannett and the Cable Division. [¶ 24] Centralization of management entails substantial participation and oversight by the management of the parent company in the operational decisions of the subsidiary. Container Corp., 463 U.S. at 180 n. 19, 103 S.Ct. 2933. The inquiry focuses on whether the management role that the parent does play is grounded in its own operational expertise and its overall operational strategy. Id. In Container Corp., the taxpayer corporation's affiliates were engaged in their respective local markets in essentially the same business as the taxpayer. Id. at 171-72, 103 S.Ct. 2933. As a result, the taxpayer had technical and operational expertise that it could share with its affiliates. See id. at 173, 179, 103 S.Ct. 2933. As described above, Gannett shared the expertise of its management with all of its affiliates, including the Cable Division, in a variety of ways. [¶ 25] A system of interlocking directors and officers is evidence of a unitary business because of the centralized management and functional integration that results. See, e.g., Citizens Utils., 488 N.E.2d at 990; In re Appeal of A.M. Castle & Co., 245 Kan. 739, 783 P.2d 1286, 1291 (1989). Gannett's CEO and CFO were the sole members of the boards of directors of each Gannett corporation involved in cable television, including the Cable Division. In addition, three of the Cable Division's officers held the same positions for all of Gannett's corporate affiliates. [¶ 26] Gannett's cash management system, a common pool of cash from which any one of the more than 120 Gannett affiliates could draw (interest-free) to pay for capital expenses or for their operating systems, is further evidence that Gannett was a unitary business. Courts have held that such a system creates economies of scale and functional integration. For example, in ruling that a unitary relationship existed in Container Corp., the United States Supreme Court noted the substantial role played by [the parent] in loaning funds to the subsidiaries and guaranteeing loans provided by others. 463 U.S. at 179, 103 S.Ct. 2933. The Court stated that the resulting flow of value is obvious. Id. at 180 n. 19, 103 S.Ct. 2933. In addition, the Supreme Court of Illinois held that the use of a cash management system, which allows subsidiaries to readily access interest-free funds simply by making a telephone call, also results in a flow of value. See Citizens Utils., 488 N.E.2d at 991. [¶ 27] Therefore, the record provides ample undisputed material facts. Gannett's provision of intercompany services, the sharing of expertise among affiliates, its centralized health and benefit plans, the interlocking directors and officers, and its cash management system all support our conclusion that Gannett operated a unitary business.