Opinion ID: 2181168
Heading Depth: 1
Heading Rank: 3

Heading: Adjustment of the Apportionment Formula

Text: Included in NCR's federal taxable income for 1976 and 1977 were both dividends for the tax years 1976 and 1977 and royalty income for the tax years 1972 through 1977. The royalties were paid to NCR by some ten foreign subsidiaries, one 70 percent owned by NCR, the others wholly owned. The royalty payments were made under licensing agreements whereby the subsidiaries compensated NCR for the right to use certain trademarks, patentable and nonpatentable know-how and trade secrets. The dividends and royalties formed part of NCR's business income for purposes of Md. Code (1980 Repl. Vol.), Art. 81, § 316 (c), a proposition NCR does not now challenge. Under § 316 (c) the portion of the business income of a unitary business allowable to this State  that is, the taxpayer's Maryland tax liability  is determined by using a three-factor (sales, property and payroll) apportionment formula, each factor being a fraction. The numerator of the sales factor, for example, is the amount of a corporation's in-state sales; the denominator of the sales factor is the total amount of a corporation's in-state and out-of-state sales. The property and payroll factors are computed in the same manner. The three factors are averaged and the resulting fraction, expressed as a percentage, is multiplied by the corporation's business income. The resulting dollar amount constitutes the business income apportioned to this State. The applicable tax rate is then applied to the corporation's apportioned income. Xerox, 290 Md. at 130, 428 A.2d at 1211. In other words, the Maryland share of the apportionable income is 1 Md. tangible property Md. payroll Md. sales - (---------------------- + ----------- + ---------) 3 All tangible property All payroll All sales Random House v. Comptroller, 310 Md. at 701, 531 A.2d at 685. Although the Comptroller included the dividend and royalty income in NCR's apportionable income, he did not reflect, in the denominators of the formula, the property, payroll, and sales values of the subsidiaries that generated the dividend and royalty income. NCR insists that the formula should have been adjusted to include these values. It argues that to include the income paid to NCR by the subsidiaries, but to exclude the subsidiaries' property, payroll, and sales figures, impermissibly skews the formula by apportioning to Maryland an unduly large share of NCR's business income. The adjustments NCR seeks, it says, are required by the foreign commerce and due process clauses of the United States Constitution, as well as by the correct reading of § 316. [5] We can dispose of the foreign commerce argument in short order. The issue was not raised in the Tax Court, the Circuit Court for Baltimore City, or the Court of Special Appeals. NCR's petition for certiorari is silent on that subject. The question is not before us. See former Md. Rules 885 and 813 a and present Rules 8-131 (a) and 8-131 (b)(1). The other two contentions require more extensive consideration.
If, as NCR asserts, § 316 (c) mandates the formula adjustments it seeks, we need proceed no further. We turn to that problem first. Section 316 (c) is not too explicit as to what the apportionment formula must contain. The statute speaks only of a three-factor formula of property, payroll and sales, in which each factor shall be given equal weight and in which the property factor shall include rented as well as owned property and tangible personal property having a permanent situs within this State and used in the trade or business shall be included as well as real property. The Comptroller's regulations in effect for tax years 1976 and 1977 added some flesh to the statutory bones: b. [T]here shall be allocated to this State such percentage [of business income] ... as the average value of the property ... and business within this State and payroll within this State bears to the average value of the total property ... and total business and total payroll....       f. The business within this State shall be measured by the ratio of the gross sales [within Maryland, as defined] ... to the gross sales made everywhere during the taxable year. Comptroller's Regulation 4A (5), revised 1 January 1968 [emphasis supplied]. The current regulations are very similar. See Md. Regs. Code tit. 3, § 03.04.01.03.C(2), (3), (5), and (6) (1977). Pointing to this language, NCR avers that both total and everywhere mean what they say; the words are all inclusive and require the Comptroller to include worldwide values in the denominators of the formula. It finds support for its position in Kellogg Co. v. Herrington, 216 Neb. 138, 343 N.W.2d 326 (1984). NCR's reading of Kellogg is accurate, but that will avail it naught. The case's reasoning is wholly inconsistent with the Maryland approach to statutory construction. The Nebraska plan for taxing unitary businesses, as revealed in Kellogg, is much like ours. Nebraska, like Maryland, starts with federal taxable income. In the case of a unitary business operating partly within and partly without Nebraska, the federal taxable income (after certain state adjustments are made) is, as in Maryland, apportioned by use of a three-factor formula. The denominators consist of all the taxpayer's real and tangible property, all of its sales, and payroll everywhere. Neb. Rev. Stat. §§ 77-2744, 77-2747, and 77-2749 (Reissue 1981). The similarity to the language of the Maryland regulations is apparent. Kellogg was a multijurisdictional corporation engaged in the unitary business of manufacturing and selling food products. It had 17 foreign subsidiaries from which it received dividends and know how fees (like royalties). The Nebraska tax authorities declined to exclude the dividends and fees from federal taxable income. They also refused to include the subsidiaries' property, sales, and payroll values in the denominators of the formula. The trial court, to the contrary, concluded that worldwide income and worldwide property, sales, and payroll figures should be used. The Supreme Court of Nebraska took a slightly different approach, reaching a result virtually identical to the one NCR seeks here. The Kellogg court first pointed out that Nebraska's federal taxable income beginning point precluded inclusion of a unitary business's worldwide income in the apportionable income figure. The income of the foreign subsidiaries simply was not part of federal taxable income. That portion of the analysis seems unexceptionable. Next, however, the court invoked various canons of statutory construction, particularly the plain language rule. Applying them with remorseless rigidity, it read all and everywhere as statutorily mandating inclusion of the worldwide property values of both Kellogg and its subsidiaries in the formula denominators. 216 Neb. at 145-149, 343 N.W.2d at 331-333. This exercise in statutory construction produced the lowest possible tax for Kellogg under the formula and, according to one commentator thrust the revenue position of Nebraska into confusion.... Comment, Unitary Taxation: An Analysis of State Taxation of Multijurisdictional Corporations in Nebraska, 64 Neb.L.Rev. 135, 136 (1985). We decline to follow Kellogg, not because to do so would reduce Maryland revenues, but because to do so would repudiate settled Maryland law dealing with statutory construction. The Supreme Court of Nebraska, as we have noted, mechanically applied canons of statutory construction. It was heedless of legislative intent and legislative history. Indeed, the result it reached, it confessed, probably ... does not provide the State with the result it had hoped to obtain by adopting the ... Act. 216 Neb. at 149, 343 N.W.2d at 332. And it admitted that under its interpretation the State realizes the smallest tax possible  an outcome that was not what the legislature intended.... 216 Neb. at 148-149, 343 N.W.2d at 332-333. [6] But in Maryland we do not engage in mindless application of canons of statutory construction. We look at statutory language in context; we consider legislative history when it is available. Kaczorowski v. City of Baltimore, 309 Md. at 514-516, 525 A.2d at 632-633. Our endeavor always is to construe a statute so as to implement the legislative goal, not to frustrate it. Neal v. Fisher, 312 Md. 685, 692, 541 A.2d 1314, 1318 (1988). We have already held that the goal of § 316 (c) is taxation of so much of a corporation's net income as is constitutionally permissible. Xerox, 290 Md. at 142, 428 A.2d at 1217. See also Random House, 310 Md. at 700, 531 A.2d at 684-685. It is also reasonable to conclude that the legislature intended to draft a law that was internally consistent. See Comment, 64 Neb.L.Rev. at 179. Article 81, § 280A (a) establishes a corporate taxpayer's federal taxable income as the beginning point for apportionment. We read § 316 (a) and its implementing regulations as applying to that same corporate taxpayer. That is, it is the taxpayer's property, sales, and payroll values, in Maryland and in total or everywhere, that enter the formula. The taxpayer does not, of course, include the taxpayer's subsidiaries or their property, sales, and payroll values, just as the subsidiaries' income is not included in the taxpayer's federal taxable income. This construction of the statute will effectuate apparent legislative goals and is fully consistent with the language of the statute and the regulations. Accordingly, we reject NCR's proposed construction of § 316 (c).
NCR strenuously contends that our construction of §§ 280A and 316 (c), as applied to its circumstances, deprives it of due process of law. It insists that when royalty income and foreign subsidiary dividend income are included in the apportionable income, but the subsidiaries' property, sales, and payroll values used in producing that income are excluded from the formula denominators, then the result is unconstitutionally skewed in favor of the Comptroller. The remedy, it asserts, is to require the Comptroller to modify the formula. There is no doubt that an apportionment formula must, under both the Due Process and Commerce Clauses, be fair.... The first, and again 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. The second and more difficult requirement is what might be called external consistency  the factor or factors used in the apportionment formula must actually reflect a reasonable sense of how income is generated. The Constitution does not invalidat[e] an apportionment formula whenever it may result in taxation of some income that did not have its source in the taxing State.... Container Corp., supra, 463 U.S. at 169-170, 103 S.Ct. at 2942, 77 L.Ed.2d at 556 (quoting Moorman Mfg. Co. v. Bair, 437 U.S. at 272, 98 S.Ct. at 2344, 57 L.Ed.2d at 204) [citations omitted; emphasis in original]. Nor do we doubt that if a tax as applied is unfair in the constitutional sense ( i.e., unconstitutional), the Comptroller may be required to modify the § 316 (c) formula to produce a constitutional result. Ordinarily, formula modification is within the Comptroller's discretion. See Random House v. Comptroller, 310 Md. at 705, 531 A.2d at 687; Chesapeake Industries v. Comptroller, 59 Md. App. 370, 382, 475 A.2d 1224, 1230 (1984). Section 316 (c) grants him the right to do so in those cases where circumstances warrant.... When application of the formula yields an unconstitutional outcome, the right becomes a duty. The question is whether NCR has demonstrated that in this case there is such an outcome. We address that question while remaining mindful that NCR does not question that all the activities and income involved here are part of a unitary business. The issue that was before the Supreme Court in ASARCO, supra, (whether certain income payers were part of a unitary business) is not implicated here. In Mobil Oil Corp. v. Comm'r of Taxes, supra , the Vermont Department of Taxes included Mobil Oil's foreign subsidiary dividend income in that state's apportionable income. But in its three-factor formula application, the department failed to include the property, payroll and sales factors responsible for producing the foreign subsidiary dividend income. For reasons that are not important here, the majority declined to decide whether application of Vermont's formula produced a fair attribution of [Mobil Oil's] ... dividend income to that State. Mobil Oil, 445 U.S. at 434, 100 S.Ct. at 1230, 63 L.Ed.2d at 519.