Opinion ID: 4538890
Heading Depth: 3
Heading Rank: 1

Heading: Kraft’s Business Activity in Maine

Text: [¶17] We begin by observing that Kraft, and KPC specifically, did substantial business in Maine in 2010.8 Kraft reported $159,395,586 in gross receipts from Maine sales that year, of which $1,109,108 was attributable to KPC.9 MRS determined that Kraft’s Maine sales factor for 2010 was 0.007026 (0.7026%), which falls right between its 2008 and 2009 sales factors— 0.006971 (0.6971%) and 0.007370 (0.7370%), respectively. This demonstrates that the extent of Kraft’s business activities in Maine did not change significantly during those years. Although Kraft’s total taxable income in 2010 was substantially larger than in previous years because of the sale, the sales factor, which represents Kraft’s business activity in Maine relative to its total business activity, remained consistent with the sales factors from other tax years. The fact that Kraft’s net income in 2010 was much greater than in previous years does not support the conclusion that the sales factor itself 8 Kraft has conceded that KPC was, in fact, a member of the “affiliated group with which the taxpayer conducts a unitary business,” 36 M.R.S. § 5211(14), in 2010. 9 Because the sale closed on March 1, 2010, the reported figures of KPC’s gross sales in Maine do not adequately represent a typical full year of Maine sales for KPC. Kraft’s filings from previous years are illuminating on this point. In 2009, KPC reported $4,350,242 in gross receipts from Maine sales, and in 2008, KPC reported $3,875,177 in gross receipts from Maine sales. 12 “do[es] not fairly represent the extent of the taxpayer’s business activity in [Maine].” 36 M.R.S. § 5211(17). [¶18] Kraft also argues that an alternative apportionment of the sale income pursuant to the formula used by the Board is appropriate because the sale income was primarily generated by KPC’s frozen pizza sales rather than by Kraft’s overall food product sales, and “pizza was simply not a big seller in Maine relative to other Kraft products.” We reject this argument because it is inconsistent with one of the core principles justifying the use of a sales factor formula to apportion the income of a unitary business for tax purposes. [¶19] Unitary businesses like Kraft often realize “income resulting from functional integration, centralization of management, and economies of scale” that relate to the operation of the business as a whole, so it can be “misleading to characterize the income of the business as having a single identifiable ‘source.’” Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 181 (1983) (quoting Mobil Oil Corp. v. Comm’r of Taxes, 445 U.S. 425, 438 (1980)); see also E.I. Du Pont de Nemours & Co., 675 A.2d at 90 (recognizing that “arriving at precise territorial allocations of value is often an elusive goal both in theory and in practice”) (quotation marks omitted); Tesoro Corp. v. State Dep’t of Revenue, 312 P.3d 830, 849 (Alaska 2013) (declining to assume “that it is possible to 13 determine where the income of a unitary business is ‘unquestionably generated’”). Here, KPC’s frozen pizza sales cannot be set apart as the main source of the value of the assets sold to Nestle because any attempt to do so would fail to account for those “factors of profitability [that] arise from the operation of the business as a whole.” Mobil Oil Corp., 445 U.S. at 438. [¶20] We also reject Kraft’s contention that using the sales factor formula is unfair because KPC’s Maine sales were lower than the Maine sales of other Kraft affiliates and lower than KPC’s sales in other states. The record shows that Kraft grossed more from the sale of frozen pizzas in Maine than from several other product lines, a fact that undermines Kraft’s attempt to downplay the significance of KPC’s Maine sales. A more fundamental problem with Kraft’s argument is that the Legislature has expressed a clear preference that all of a unitary business’s taxable income should be apportioned according to the sales factor. See 36 M.R.S. § 5211(8). Given this clearly-stated preference, we are unpersuaded by Kraft’s arguments. The sales factor calculation adequately addresses state-to-state variations in business activity by requiring a comparison of the business’s Maine sales to its total sales everywhere and apportioning the business’s income accordingly. See id. § 5211(14). 14 [¶21] Taken to its logical conclusion, Kraft’s argument is that when there are variations in the level of sales activity among component parts of a unitary business within Maine, or variations in the level of sales activity conducted in multiple states, apportioning the unitary business’s income using the sales factor formula cannot be fairly representative of the affiliated group’s business activity within the State. But, as the trial court astutely observed, the alternative apportionment provision is not meant to allow an “end-run” around the statutory requirement that a unitary business be taxed as a single group. See Tesoro Corp., 312 P.3d at 848 (observing that “the United States Supreme Court has rejected the argument that disparate profits across subsidiaries are indicative of unfair taxation”). The relevant inquiry is not whether any particular member of a unitary business has higher or lower sales activity in Maine compared to other states; if it were, every national and multinational corporation would be entitled to alternative apportionment on that basis.