Opinion ID: 1115733
Heading Depth: 2
Heading Rank: 4

Heading: constitutional challenges to the oil tax

Text: When state corporate income taxes were first adopted, [32] separate accounting was regarded as the most precise method for dividing the income of a multistate corporation for taxation purposes. [33] Although apportionment formulas were employed by states and their use approved by the United States Supreme Court, [34] separate accounting was initially viewed as a benchmark by which to judge the reasonableness of state apportionment formulas. Thus, in Hans Rees' Sons, Inc. v. North Carolina, 283 U.S. 123, 128, 51 S.Ct. 385, 387, 75 L.Ed. 879, 905 (1931), the Supreme Court invalidated a state's apportionment formula under federal due process because the taxpayer showed that under separate accounting only 17% of the income was attributable to the state, whereas under the apportionment formula used, the state taxed from 66% to 85% of the corporation's income. The use of separate accounting as a basis for challenging state formula apportionment methods was eventually rejected in Butler Brothers v. McColgan, 315 U.S. 501, 62 S.Ct. 701, 86 L.Ed. 991 (1942). There, the Court acknowledged that an apportionment formula could be invalidated only if the taxpayer established by clear and cogent evidence that the formula taxed extraterritorial values. The Court held that the fact that no net income would be attributable to the state under separate accounting was insufficient to invalidate an apportionment formula. It is true that appellant's separate accounting system for its San Francisco branch attributed no net income to California. But ... [that] does not prove appellant's assertion that extraterritorial values are being taxed. 315 U.S. at 507, 62 S.Ct. at 704, 86 L.Ed. at 996. The Court developed the doctrine that if a multi-state business is unitary, then the use of a formula apportionment method by the state is presumptively valid. [35] In the instant litigation, all of the companies involved are unitary businesses. Thus, it is undisputed that the use of an apportionment formula would have been a permissible means of attributing a portion of the companies' income to Alaska. This case presents an interesting twist on previous constitutional challenges to state taxation methods by corporate taxpayers. In the past, apportionability often has been challenged by the contention that income earned in one State may not be taxed in another if the source of the income may be ascertained by separate geographical accounting. Mobil Oil v. Commissioner of Taxes, 445 U.S. at 438, 100 S.Ct. at 1232, 63 L.Ed.2d at 521. Conversely, in this litigation, the oil companies seek to defeat Alaska's separate accounting method by arguing that formula apportionment is required for unitary businesses. In recent years, the Court's endorsement of formula apportionment as the preferred method to divide income of a unitary business has become increasingly apparent. [36] However, we do not interpret this preference as being a constitutional ruling that formula apportionment must be employed in lieu of separate accounting. While separate accounting is not constitutionally required, [37] and while it may have some weaknesses when applied to some unitary businesses, [38] this methodology has not been rejected as unconstitutional. The United States Supreme Court in Container Corp. concluded that: Both geographical accounting and formula apportionment are imperfect proxies for an ideal which is not only difficult to achieve in practice, but difficult to describe in theory... . ... . But we see no evidence demonstrating that the margin of error (systematic or not) inherent in the three-factor formula is greater than the margin of error (systematic or not) inherent in ... separate accounting... . 463 U.S. at 182, 183-84, 103 S.Ct. at 2949, 2949-2950, 77 L.Ed.2d at 564, 565.
The oil companies claim that the Oil Tax is unconstitutional because it taxes extraterritorial values. They claim that the state impermissibly taxes all of their production income from Alaska oil, despite the contributions that other states have made to those earnings in terms of research, management and sales. As a general principle, a state may not tax value earned outside its borders. Earth Resources v. State, Department of Revenue, 665 P.2d 960, 966 (Alaska 1983) (quoting ASARCO v. Idaho State Tax Commission, 458 U.S. 307, 315, 102 S.Ct. 3103, 3108, 73 L.Ed.2d 787, 794 (1982)); Container Corp. of America v. Franchise Tax Board, 463 U.S. at 164, 103 S.Ct. at 2940, 77 L.Ed.2d at 552. Any attempt to tax extraterritorial values would be an unconstitutional taking of property under the due process clause. [39] Due process imposes two requirements before a state may tax income generated in interstate commerce. First, a minimal connection must exist between the interstate activities and the taxing state. Second, the income attributed to the taxing state must bear a rational relationship to intrastate values of the enterprise. Exxon v. Wisconsin Department of Revenue, 447 U.S. 207, 219-220, 100 S.Ct. 2109, 2118-2119, 65 L.Ed.2d 66, 79 (1980); Mobil Oil v. Commissioner of Taxes, 445 U.S. at 436-37, 100 S.Ct. at 1231-1232, 63 L.Ed.2d at 520; Moorman Manufacturing v. Bair, 437 U.S. at 272-73, 98 S.Ct. at 2343-2345, 57 L.Ed.2d at 204. The first requirement  a minimal connection  is established if the corporation avails itself of the `substantial privilege of carrying on business' within the State. Exxon v. Wisconsin Department of Revenue, 447 U.S. at 220, 100 S.Ct. at 2118, 65 L.Ed.2d at 79 (quoting Mobil, 445 U.S. at 437, 100 S.Ct. at 1231, 63 L.Ed.2d at 520, quoting Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444-45, 61 S.Ct. 246, 249-250, 85 L.Ed. 267, 271 (1940)). Clearly, a nexus exists between the oil production and transportation activities of ARCO, Exxon, and Sohio, and the State of Alaska. As to the second requirement, the United States Supreme Court has not required absolute precision in determining a state's share of interstate income. In Moorman Manufacturing v. Bair, 437 U.S. 267, 98 S.Ct. at 2340, 57 L.Ed.2d 197, an animal feed company which manufactured its product in Illinois and sold it in Iowa challenged the constitutionality of Iowa's statutory apportionment formula. Instead of the typical three-factor (payroll, property and sales) formula, Iowa used a single-factor formula based exclusively on sales. The corporation argued that this formula resulted in extraterritorial taxation and violated the due process and commerce clauses of the federal Constitution. In addressing the rational relationship requirement, the Supreme Court stated: States have wide latitude in the selection of apportionment formulas and ... a formula-produced assessment will only be disturbed when the taxpayer has proved by clear and cogent evidence that the income attributed to the State is in fact out of all appropriate proportion to the business transacted . .. in that State, or has led to a grossly distorted result. 437 U.S. at 274, 98 S.Ct. at 2345, 57 L.Ed.2d at 205 (citations omitted). The Court found the taxpayer had failed to demonstrate any arbitrary result in its case, and thus the tax survived the due process challenge. More recently the United States Supreme Court has expressly refused to constitutionally require a particular income attribution method to the exclusion of all others. In Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, 103 S.Ct. 2933, 77 L.Ed.2d 545, the Supreme Court upheld California's inclusion of the income of Container Corporation's foreign subsidiaries in the state's apportionment formula. The corporation argued that inclusion of this income violated both the due process and commerce clauses, because the same income California was subjecting to apportionment was taxed by foreign jurisdictions under a separate accounting methodology. In rejecting this argument, the Court noted: In the case of a more-or-less integrated business enterprise operating in more than one State, ... arriving at precise territorial allocations of value is often an elusive goal, both in theory and in practice. For this reason and others, we have long held that the Constitution imposes no single formula on the States, and that the taxpayer has the distinct burden of showing by `clear and cogent evidence' that [the state tax] results in extraterritorial values being taxed... . One way of deriving locally taxable income is on the basis of formal geographical or transactional accounting [separate accounting]. 463 U.S. at 164, 103 S.Ct. at 2939, 77 L.Ed.2d at 552-53 (citations omitted, emphasis added). We hold that the Oil Tax satisfies the second requirement of the due process clause. It makes a reasonable attempt to attribute only that income to Alaska that was generated in Alaska, while excluding expenses and profits generated beyond Alaska's borders. Under a separate accounting approach, income is viewed as earned when and where the principal operating activity occurs. Support activities are universally accounted for only as expenses, whether they occur in or outside the income-producing state. As with other states' separate accounting methods, the Oil Tax allows for the deduction of costs and profits from marketing, refining and transportation, and expenses related to other support activities. [40] Moreover, Alaska's tax is unique in allowing a deduction for out-of-state profits as well as costs of general overhead and administrative activities incident to Alaskan oil production and transportation, if the companies report them as such. See 15 AAC 21.290(b) (Eff. 2/22/79, am. 3/26/82). By allowing all of these deductions, the Oil Tax is intended to tax only those profits associated with the companies' activities within the state. Thus, the Oil Tax taxes only a portion of the companies' income, although by a technique quite different from formula apportionment. [41] Because the Oil Tax operates to tax only a portion of the companies' income, we hold that it satisfies the dual requirements of due process.
We have previously recognized that the commerce clause [42] places restraints upon the taxing power of states similar to those of the due process clause. In fact, these two constitutional limits overlap to a great extent. Sjong v. State, Department of Revenue, 622 P.2d at 973. Generally, if a state tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce and is fairly related to the services provided by the State, there is no impermissible burden on interstate commerce. Complete Auto Transit v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 1079, 51 L.Ed.2d 326, 331 (1977). The nexus and fair apportionment factors have been discussed in the previous due process section. We now turn to a consideration of the other two factors of the Complete Auto Transit test. The oil companies contend that the Oil Tax violates the commerce clause because it inevitably results in overlapping or duplicative taxation, thus discriminating against businesses engaged in interstate commerce. They claim that recent United States Supreme Court decisions on the subject of multiple taxation render the Oil Tax unconstitutional, citing Japan Line v. County of Los Angeles, 441 U.S. 434, 99 S.Ct. 1813, 60 L.Ed.2d 336 (1979), Mobil Oil v. Commissioner of Taxes, 445 U.S. 425, 100 S.Ct. at 1223, 63 L.Ed.2d 510, and Exxon v. Wisconsin Department of Revenue, 447 U.S. 207, 100 S.Ct. 2109, 65 L.Ed.2d 66. We disagree. In Japan Line, six Japanese companies challenged a California property tax on shipping containers. The Japanese-owned containers were subject to a property tax on 100% of their value in their home port of Japan. Under California's tax, all containers in the state on a specified tax day were subject to an apportioned ad valorem property tax. The companies contended that California's tax, as applied to their containers, created multiple taxation and violated the commerce clause. The Court in Japan Line assumed that the Complete Auto Transit test was met. However, because taxation of instrumentalities of foreign commerce was at issue, the Court found it necessary to inquire whether California's tax, notwithstanding its fair apportionment, created a substantial risk of international multiple taxation. 441 U.S. at 451, 99 S.Ct. at 1823, 60 L.Ed.2d at 349. In this regard, the Court contrasted taxation of interstate instrumentalities with that of international instrumentalities: In order to prevent multiple taxation of interstate commerce, this Court has required that taxes be apportioned among taxing jurisdictions, so that no instrumentality of commerce is subjected to more than one tax on its full value. The corollary of the apportionment principle, of course, is that no jurisdiction may tax the instrumentality in full. The rule which permits taxation by two or more states on an apportionment basis precludes taxation of all of the property by the state of the domicile.... Otherwise there would be multiple taxation of interstate operations. The basis for this Court's approval of apportioned property taxation, in other words, has been its ability to enforce full apportionment by all potential taxing bodies. 441 U.S. at 446-47, 99 S.Ct. at 1820-1821, 60 L.Ed.2d at 347 (citations omitted). While the Court could require apportionment among the states for property taxation purposes, it obviously could not prevent Japan from taxing 100% of the value of the containers. The Court held California's nondiscriminatory tax unconstitutional because it resulted in actual multiple taxation of instrumentalities of international commerce. [43] The oil companies in the present litigation argue that if Alaska had been the home port instead of Japan in Japan Line, the Supreme Court would have invalidated Alaska's 100% ad valorem tax. We agree that Alaska would not be entitled to apply a property tax to the full value of instrumentalities of foreign commerce. But the oil companies' attempt to equate a property tax on the full value of goods used in foreign commerce with the Oil Tax is inappropriate. While the single situs property tax may be analogous to the specific allocation by situs method of income taxation, it is a totally different species from separate accounting. [44] The Oil Tax, as a separate accounting division-of-income method, does not automatically conflict with an apportionment method and result in double taxation. [45] Because separate accounting and formula apportionment can coexist without overlapping tax bases, Japan Line does not require invalidation of the Oil Tax. [46] In Mobil Oil v. Commissioner of Taxes, 445 U.S. 425, 100 S.Ct. 1223, 63 L.Ed.2d 510, the Court upheld the constitutionality of the inclusion of foreign source dividend income in the total income subject to taxation by Vermont. Mobil argued that Vermont could not tax its dividend income because New York, the state of commercial domicile, had the power under the commerce clause to allocate all of the dividend income to itself. Allowing Vermont to tax a share of the income by apportionment would, therefore, result in double taxation if New York implemented such a tax. In this situation, the Court considered the risk of multiple taxation to be sufficient since the specific allocation by situs method was theoretically incommensurate with apportionment. [47] The Court found that if one method were constitutionally preferable, a tax based on the other method could not be sustained. 445 U.S. at 444-45, 100 S.Ct. at 1235-1236, 63 L.Ed.2d at 525. Instead of accepting Mobil's argument that specific allocation by situs was preferable, the Court found apportionment to be the better approach. While the Court chose not to rule on the constitutionality of a hypothetical New York tax, the Court stated that in theory New York could not exclusively tax Mobil's dividend income since the dividends reflect income from a unitary business, part of which is conducted in other states. In that situation, the income bears relation to benefits and privileges conferred by several states. These are the circumstances in which apportionment is ordinarily the accepted method. Id. at 446, 100 S.Ct. at 1236, 63 L.Ed.2d at 526 (emphasis added). Several months after the Mobil case, the Court decided Exxon v. Wisconsin Department of Revenue, 447 U.S. 207, 100 S.Ct. 2109, 65 L.Ed.2d 66. Exxon, like this litigation, involved state taxation of oil production income. Exxon's activities in Wisconsin were limited to the marketing of petroleum products. Exxon challenged Wisconsin's inclusion of oil production income in the income subject to apportionment by Wisconsin. Exxon argued that production of oil and marketing of oil were two distinct operations. In Exxon's view, since it could illustrate by separate accounting that these two activities were distinct, Wisconsin could not constitutionally include production income in the tax base for apportionment. Exxon contended that the commerce clause required the allocation of all income derived from exploration and production functions to the situs state, rather than inclusion in the apportionment formula. Exxon asserted that since the producing state was constitutionally entitled to allocate all production income to itself, nonproducing states could not tax an apportioned share of this same income. To this, the Supreme Court replied: We do not agree. As was the case with income from intangibles, there is nothing talismanic about the concept of situs for income from exploration and production of crude oil and gas. Presumably, the States in which appellant's crude oil and gas production is located are permitted to tax in some manner the income derived from that production, there being an obvious nexus between the taxpayer and those States. However, there is no reason in theory why that power should be exclusive when the [exploration and production income as distinguished through separate functional accounting] reflect[s] income from a unitary business, part of which is conducted in other States. In that situation, the income bears relation to benefits and privileges conferred by several States. These are the circumstances in which apportionment is ordinarily the accepted method. In short, the Commerce Clause does not require that any income which a taxpayer is able to separate through accounting methods and attribute to exploration and production of crude oil and gas be allocated to the States in which those production centers are located. The geographic location of such raw materials does not alter the fact that such income is part of the unitary business of the interstate enterprise and is subject to fair apportionment among all States to which there is a sufficient nexus with the interstate activities of the business. 447 U.S. at 229-30, 100 S.Ct. at 2123-2124, 65 L.Ed.2d at 85 (emphasis added; citations omitted). Basically, both the oil companies and the state view Japan Line, Mobil and Exxon as prohibiting allocation of oil production income entirely to the situs state. The debate focuses on whether the Oil Tax allocates all oil production income to Alaska, as the oil companies contend, or is instead a distinct method of dividing the production income, as the state contends. Because we hold that the Oil Tax is a distinct method of dividing oil production income by use of separate accounting, its constitutional validity is not directly determined by these three cases. [48] While Mobil and Exxon indicate the Court's strong endorsement of the use of apportionment formulas, the Court clearly implied that the use of separate accounting is constitutionally permissible under the commerce clause. [49] The constitutional preference for apportionment of unitary dividend income in Mobil stemmed from the fact that the two competing methods at issue  specific allocation and formula apportionment  were theoretically incommensurate. Mobil, 445 U.S. at 444, 100 S.Ct. at 1235, 63 L.Ed.2d at 525. [50] The type of duplicative taxation found unacceptable in Japan Line, Exxon and Mobil all involved one taxing jurisdiction using the specific allocation by situs method, while another used apportionment. In other words, one taxing jurisdiction taxed the whole pie, while another taxed a slice. In such a situation, double taxation is inevitable, and one method has to be chosen over another. By contrast, in Moorman Manufacturing v. Bair, 437 U.S. 267, 98 S.Ct. 2340, 57 L.Ed.2d 197, two jurisdictions used different apportionment formulas. Each took only a slice of the pie, but since they used different formulas to divide the pie, the Court recognized that there was high probability of some overlap. While the potential for overlap existed, it certainly was not inevitable, and the Court upheld Iowa's apportionment method. The Court held that prevention of duplicative taxation should be effected by a national uniform rule for the division of income, but that the Constitution ... is neutral with respect to the content of any uniform rule. Id. at 279, 98 S.Ct. at 2347, 57 L.Ed.2d at 208. Given the absence of federal legislation, the Court was unwilling to specify that a particular methodology was constitutionally preferable. While acknowledging a clear risk of multiple taxation in a variety of situations due to the divergence in division-of-income techniques employed by the various states, the Court found such risk preferable to choosing one technique as constitutionally superior to another. Id. at 278-80, 98 S.Ct. at 2347-2348, 57 L.Ed.2d at 207-09. The oil companies in the present litigation acknowledge that Moorman evidenced the Supreme Court's high degree of tolerance for apportionment formulas. But in their view, this tolerance does not extend beyond the apportionment method. They claim that Moorman does not sanction the use of Alaska's Oil Tax because the tax is not apportioned. We disagree. First, as we have previously explained, the Oil Tax utilizes a division-of-income method. Second, while Moorman pertained to the conflict presented when two jurisdictions employ different types of formula apportionment, the principle of the opinion was that non-uniform state taxes are inevitable and constitutionally permissible. Since Moorman, the Court has continued to maintain that states enjoy broad leeway in their choice of division-of-income methods. See Container Corp. of America v. Franchise Tax Board, 463 U.S. at 164, 103 S.Ct. at 2939, 77 L.Ed.2d at 552. Container Corp. closely resembles the situation in this case. In Container Corp., California sought to determine its share of total income by use of formulary apportionment, while foreign jurisdictions employed separate accounting. [51] Discussing discrimination against interstate commerce, the Court reiterated its view that the Constitution does not require the elimination of all overlapping taxation on the interstate level. 463 U.S. at 171, 103 S.Ct. at 2943, 77 L.Ed.2d at 557. Thus, if the problem were limited to the interstate level, the fact that different jurisdictions applied different methods of taxation ... would probably make little constitutional difference. 463 U.S. at 185, 103 S.Ct. at 2950, 77 L.Ed.2d at 566. In Container Corp., the Court faced the additional complication of international commerce. Even so, the Court upheld the tax, distinguishing Japan Line on the ground that Japan's specific allocation by situs method necessarily resulted in double taxation. Here, by contrast, we are faced with two distinct methods of allocating the income of a multi-national enterprise. The arm's-length approach [i.e., separate accounting] divides the pie on the basis of formal accounting principles. The formula apportionment method divides the same pie on the basis of a mathematical generalization. Whether the combination of the two methods results in the same income being taxed twice or in some portion of income not being taxed at all is dependent solely on the facts of the individual case. 463 U.S. at 188, 103 S.Ct. at 2952, 77 L.Ed.2d at 568 (footnote omitted). The Court held that the two taxing methods do not create an automatic `asymmetry'. Id. at 194-95, 103 S.Ct. at 2955-2956, 77 L.Ed.2d at 572. [I]t would be perverse, [therefore,] simply for the sake of avoiding double taxation, to require California to give up one allocation method that sometimes results in double taxation in favor of another allocation method that also sometimes results in double taxation. Id. at 193, 103 S.Ct. at 2955, 77 L.Ed.2d at 571. The fact that the Court found the two methods could coexist on the international level, where duplicative taxation is viewed more strictly, makes separate accounting a quite permissible alternative when only interstate commerce is involved, as is the case in the present litigation. The Supreme Court has repeatedly recognized that neither separate accounting nor formula apportionment will result in the attribution of the exact amount of income earned in the state to that particular state. Some multiple taxation may result when one jurisdiction employs one method and another uses a different approach. This threat is inherent in any system where state attribution methods are nonuniform. But a state does not offend the commerce clause merely because its method of dividing income is different from that of its neighbors. Moorman Manufacturing v. Bair, 437 U.S. at 278-80, 98 S.Ct. at 2347-2348, 57 L.Ed.2d at 208-09. We have already explained that the separate accounting method employed by the State of Alaska does not tax all profits generated from Alaskan oil production and does not impermissibly attribute extraterritorial values to Alaska. Using the leeway it retains absent a federal uniform approach, the Alaska legislature chose a constitutionally permissible method of income division, albeit not the one ordinarily employed for most other types of unitary businesses. We hold that the Oil Tax comports with the requirements of the Complete Auto Transit test and creates no impermissible burden on interstate commerce. The location of the oil fields in Prudhoe Bay creates a substantial nexus between the oil companies' activities and the State of Alaska. [52] As discussed above, the Oil Tax is fairly apportioned to represent only that part of the companies' income generated from its Alaskan activities  oil and gas production and transportation. As in Container Corp., the Oil Tax does not inevitably result in multiple taxation. Moreover, any possible overlap created by Alaska's use of separate accounting and other jurisdictions' use of different income division methods is not the fault, in the constitutional sense, of Alaska. Thus, the Oil Tax does not discriminate against interstate commerce. Finally, because the oil companies all benefit from the substantial privilege [53] of extracting oil in Alaska, the Oil Tax is fairly related to services provided in the state.
The oil companies assert that the Oil Tax violates both state and federal equal protection since it arbitrarily [and] irrationally subject[s] a special group of taxpayers to treatment not accorded taxpayers at large. They argue, in effect, that using a distinct method of taxation for multistate oil companies, but not for any other unitary businesses, violates equal protection. We reject the oil companies' equal protection challenge. The analysis under Alaska's equal protection clause involves a three-step process. Alaska Pacific Assurance v. Brown, 687 P.2d 264, 269-70 (Alaska 1984) [hereinafter cited as ALPAC]; State v. Ostrosky, 667 P.2d 1184, 1192-94 (Alaska 1983), appeal dismissed, ___ U.S. ___, 104 S.Ct. 2379, 81 L.Ed.2d 339 (1984); State v. Erickson, 574 P.2d 1, 11-12 (Alaska 1978). [54] First, in order to ascertain the appropriate level of review, the nature of the constitutional interest affected must be identified. ALPAC, 687 P.2d at 269. Next, the validity of the statutes' purpose must be analyzed in light of the interest impinged. Id. Lastly, the means chosen must be examined, also in light of the interest, to insure that they are sufficiently related to the goals of the statute. Id. at 269-70. The interest involved here, freedom from disparate taxation, lies at the low end of the continuum of interests protected by the equal protection clause. [55] Regarding the statute's purpose, the oil companies claim that greed and other improper motives led the Alaska legislature to enact the Oil Tax. The state, however, has adequately established that a primary purpose of the Oil Tax was to rectify a perceived underestimation of oil production and pipeline transportation income that occurred with the application of an apportionment formula. The goal was to insure that the tax rate assessed to the oil companies on this income was commensurate with the rate applicable to the income of other corporations in the state. Ch. 110, § 1, SLA 1978. Taxing the oil companies differently to rectify a perceived inequity was the legislature's attempt to prevent disparate treatment; thus, the validity of this purpose in light of the companies' interest is established. Finally, the means chosen were sufficiently related to the goals of the legislation. The use of separate accounting, rather than formula apportionment, increased the amount of production and transportation income subject to Alaska taxation and more fairly represented the extent of the business activities of the oil companies in Alaska. The Oil Tax did not adversely affect any fundamental interest, nor did it contain a suspect classification. Thus, to be upheld under the federal analysis, it need only to have been rationally related to a legitimate state interest. Exxon v. Eagerton, 462 U.S. 176, 195-96, 103 S.Ct. 2296, 2307-2309, 76 L.Ed.2d 497, 513 (1983). The rational basis standard is particularly easy to meet in the area of taxation. The United States Supreme Court has stated that [l]egislatures have especially broad latitude in creating classifications and distinctions in tax statutes. Regan v. Taxation with Representation of Washington, 461 U.S. 540, 547, 103 S.Ct. 1997, 2002, 76 L.Ed.2d 129, 138 (1983). The Oil Tax clearly bore a rational relationship to the state's goal of correcting a perceived inequity in the tax structure. While the oil companies dispute the underlying premise that the Oil Tax rectifies inequities, the legislature could have reasonably concluded that the Oil Tax would more accurately compute the companies' income generated in Alaska. Thus, the Oil Tax survives the equal protection challenge, under both the United States and the Alaska Constitutions.
The oil companies argue that the Oil Tax is invalid because it impairs the obligation of the state's lease contracts with them. [56] They contend that the tax increases the state's share under the lease contracts, and that such modification of the terms of the leases violates the contract clause of the United States Constitution. [57] This argument is without merit. No lease provision has been impaired. In entering into the leases the state could not, [58] and did not, contract away its power as a sovereign to tax income earned in the state. Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 102 S.Ct. 894, 71 L.Ed.2d 21 (1982) disposes of this issue: Contractual arrangements remain subject to subsequent legislation by the presiding sovereign. Even where the contract at issue requires payment of a royalty for a license or franchise issued by the governmental entity, the government's power to tax remains unless it has been specifically surrendered in terms which admit of no other reasonable interpretation. St. Louis v. United R. Co., 210 U.S. 266, 280, 28 S.Ct. 630, 634, 52 L.Ed. 1054, 28 S.Ct. 630 (1908). 455 U.S. at 148, 102 S.Ct. at 907, 71 L.Ed.2d at 36 (citations omitted); see also Exxon v. Eagerton, 462 U.S. at 187-94, 103 S.Ct. at 2304-2307, 76 L.Ed.2d at 508-12.