Opinion ID: 1751011
Heading Depth: 1
Heading Rank: 3

Heading: Franchise Tax Assessment

Text: A franchise tax is a tax generally measured by capital for the privilege of doing business in the state. In other words, a company is taxed on business that is actually being done or carried on in Mississippi. Capital derivation is determined by a two-step process: one step is to determine total capital and the other step is to determine a relationship to activities in the state to the total activities of the corporation nationwide. The Commission assesses the tax on the corporation's total capital as reflected in the company records when it operates exclusively within state. However, with corporations which operate within and outside the state, the Commission is required to determine what portion of the corporation's capital is being utilized in Mississippi. The following equation represents the franchise tax formula which is the subject of this appeal: Mississippi property + Mississippi receipts __________________________ _________________________ = ratio Property everywhere + Receipts everywhere This two-factor formula is used to determine what part of the corporate taxpayer's capital is used in this state. In order to do this, total capital is multiplied by the ratio. The Chancellor found the following statutory ratio for 1989 to be acceptable: $ 1,231,196,564 + 75,801,931 (up) + 798,418,628 (down) _______________________________________________________________________ 16,002,955,782 + 23,138,944,346 = 5.37893% When this percentage figure is multiplied by $619,097,000, Chevron's capital in Mississippi, which is undisputed, the franchise tax due is $1,547,957. The Chancellor accepted the following ratio for 1990: $ 1,483,390,350 + 84,034,829 + 925,557,835 _______________________________________________________________________ 15,257,146,894 + 29,948,554,325 = 5.51475% This ratio resulted in Chevron's capital in Mississippi being $665,438,000 in 1990 for a franchise tax liability of $1,708,330 which was paid. The second paragraph of Miss. Code Ann. § 27-13-13 calls for another formula in order to identify the Mississippi receipts portion of the first formula. The following equation represents this formula: Income Tax Ratio x Total Unitary Receipts = MS Unitary Receipts MS Unitary Receipts + MS Nonunitary Receipts = MS Receipts The Commission multiplied this average times total downstream receipts to get that portion of the numerator that is the Mississippi receipts. This litigation turns on whether it is proper to use a formula to determine Mississippi receipts when Chevron can report actual receipts so that a franchise tax may be imposed. The State and Chevron differed in the formula as to what Chevron's 1989 downstream receipts were in Mississippi by more than twice the figure: Chevron claimed $798,418,628.00, and the Commission claimed $1,669,544,292.00. For the year 1990, Chevron and the Commission once again agreed on upstream receipts, but disagreed on downstream receipts. Chevron claims its receipts were $925,557,835.00, which were directly ascertained from company records whereas the Commission claimed that Chevron's downstream receipts were $2,234,290,825.00. In both years, the Commission applied the income tax ratio to total receipts generated by the multistate operation to derive at the aforementioned figures. For the year 1989, the income tax ratio was 9.38%, and for 1990, the ratio was 9.54%. Total receipts for 1989 were approximately $23 billion, and for 1990, total receipts were approximately $29 billion. In the Commission's formula for income taxes, Mississippi property is divided by total downstream property, Mississippi payroll is divided by total downstream payroll and Mississippi receipts are divided by total downstream receipts. All three are then averaged such that actual receipts are used to determine hypothetical receipts. Chevron claimed that the only reason its income tax liability cannot be directly determined and is estimated by an apportionment formula is because the company cannot identify Mississippi expenses. Chevron claimed that this is not true of receipts. Chevron advocated paying franchise taxes on actual receipts instead of a formula because so-called bizarre results are avoided. The bizarre results that are avoided are the inflation of franchise taxes as shown by the increased amount owed.