Legal Document

498 U.S. 358 111 S.Ct. 818 112 L.Ed.2d 884 TRINOVA CORPORATION, Petitioner,v.MICHIGAN DEPARTMENT OF TREASURY. No. 89-1106. Argued Oct. 1, 1990. Decided Feb. 19, 1991. Syllabus Michigan's single business tax (SBT) is a value added (VAT) levied against entities having "business activity" within the State. As part of SBT computation, taxpayer doing both and without State must determine its apportioned base by multiplying total added—which consists profit, as represented federal taxable income, plus compensation paid to labor, depreciation on capital, other factors—by portion activity attributable Michigan—which average three ratios: (1) Michigan payroll payroll, (2) property property, (3) sales sales. During 1980, year in question, petitioner Trinova, an Ohio corporation, maintained 14-person office Michigan. Under formula, 1980 apportionment factors were only 0.2328% 0.0930% respectively, while factor was 26.5892%, representing over $100 million. Although income showed loss almost $42.5 million, Trinova's computation resulted $293,000. Trinova tax, but subsequently filed amended return refund claim, alleging that it entitled relief under law because SBT's provisions did not fairly represent extent The proposed company-wide be excluded from preapportionment added, actual back into base, which would result negative entitle company for entire payment. When respondent Department Treasury denied relief, sued Court Claims, ruled favor. However, Appeals held statutory Supreme affirmed, holding, among things, three-factor formula violate either Due Process Clause or Commerce Federal Constitution. Held: applied during at issue, does Clause. Pp. 372-387. (a) test stated Complete Auto Transit, Inc. v. Brady, 430 274, 279, 97 1076, 1079, 51 326, state upon multistate businesses valid if, relevant here, discriminate interstate commerce. Moreover, encompasses requirement that, inter alia, rational relationship exist between attributed intrastate values enterprise. See, e.g., Mobil Oil Corp. Commissioner Taxes Vt., 445 425, 436-437, 100 1223, 1231, 1232, 63 510. 372-373. (b) Because attempts cannot assigned one geographic location with any precision, decision apportion unconstitutional. may appear isolation susceptible designation, those elements separated located combination series several smaller taxes compensation, depreciation, indivisible different, bona fide measure activity, added. This conclusion no different this has reached upholding validity taxes. same prevent determination where generated—such functional integration extrastate activities unitary enterprise, centralization management, economies scale—make impossible exact precision. Corp., supra, 438, S.Ct., 1232; Amerada Hess Director, Div. Taxation, New Jersey Dept. Treasury, 490 66, 74, 109 1617, 1622, 104 58. Thus, although had relieved business. Such incompatible rationale VAT, becomes due even if unprofitable, unsupported record. approach require factory through consumption capital record easily support finding production operations little offices significant value. 14 personnel need relied sole, substantial, source all can Michigan, doubted company's million sales, have been lower remarkable degree. It distorts application theory confine consequences market solely labor expended resident force. 373-379. (c) unfair, since failed meet burden proving, clear cogent evidence, there contribution process. Cf., Container America Franchise Tax Bd., 463 159, 169, 180-181, 103 2933, 2942, 2948-2949, 77 545; Moorman Mfg. Co. Bair, 437 267, 98 2340, 2345, 57 197. approved see, Butler Bros. McColgan, 315 501, 62 701, 86 L.Ed. 991, gained wide acceptance context "because reflect very large share generated," U.S., 183 2949 (emphasis added). argument—that leads distorted result, out proportion business, to, add nothing depreciable plant contribute base—is rejected, (as demand) do profound impact amount enterprise's basis distinguishing similar arguments pressed, rejected Court, regard income. causes distortion, earned outside argument Ohio, wrongly assumes subject ascertainment inappropriate apportionment. gives estimate take account demand products, whereas consistently enacted further giving intensive taxpayers like Trinova. 379-384. (d) point treatment in-state out-of-state firms discriminatory face. American Trucking Assns., Scheiner, 483 266, 281, 107 2829, 2839, 226, states "deeper meaning" implicated absent facial discrimination, meaning embodied fair encompass vague accusation discrimination. Nor supported statement Governor promote development investment promotion laudatory goal absence evidence impermissible motive export burdens import revenues. 384-386. 433 Mich. 141, N.W.2d 428, affirmed. KENNEDY, J., delivered opinion REHNQUIST, C.J., WHITE, MARSHALL, O'CONNOR, JJ., joined. SCALIA, concurring judgment, post, p. ---. STEVENS, dissenting opinion, BLACKMUN, joined, SOUTER, took consideration case. Peter S. Sheldon, Lansing, Mich., petitioner. Richard R. Roesch, respondent. Justice KENNEDY Court. 1 principal question before us whether (SBT), Mich.Comp. Laws § 208.1 et seq. (1979), violates applicability well settled, we considered (VAT). We granted certiorari consider discriminates businesses. I 2 Europe Latin VAT's are common, see Lindholm, Origin Value-Added Tax, 6 J.Corp.L. 11 (1980); Due, Economics Value Added 61 (1980), United States they much studied used. first and, parties tell us, VAT activity. begin description general, then discuss SBT. A. 3 economic concept. "Value defined increase goods services brought about whatever them time purchase sale." Haughey, Economic Logic Single Business 22 Wayne L.Rev. 1017, 1018 (1976) (hereinafter Haughey). adds product "the difference sale cost purchased went product." Taxation Policy Office, Analysis 20-21 (1985) Analysis). follows price each step process point. "The loaf bread sum contributed stage distribution Among others, includes farmer, miller, baker, wholesaler retailer." Haughey 1019. 4 A "adds handling processing these [goods] force, machinery, buildings capital." Kleine, Advisory Commission Intergovernmental Relations, Tax: Different Approach (1978) Kleine). In litigation, usually refers term can, however, used product, economy. "[Value added] means measuring size enterprises comprising . Gross National Product virtually equivalent national added." 1017. 5 One acknowledged advantages taxation neutrality. neutral sense alike: pure forms organization (corporation, partnership, proprietorship), types financing (debt, equity) methods (capital intensive, intensive) bear burden. "[T]ax minimized decisions; inherent relative efficiencies allowed operate economy minimum distortions. 7 "This neutrality value-added notable contrast effects corporation former, definition, corporations varies their reliance equity rather than debt efficiency use capital—that is, net profits." Smith, Value-added tax: case for, 48 Harv.Bus.Rev. 77, 79 (Nov.-Dec. 1970). 8 Though theory, often depart practice model special exemptions, deductions, adjustments. These features eliminate claim See generally Lessons (H. Aaron ed.1981). 9 differs important respects corporate tax. based philosophy ability pay, some profit remaining after provided workers, suppliers, creditors. hand, broader firm's Even entity normal circumstances products consequence, will owe VAT. correlates more closely volume governmental received Further, fluctuate widely provides stable revenue Kleine 3, figure 1. " 'The logic [VAT] rests squarely benefits principle taxation—government essential operation enterprise public service costs should properly included business.' Id., (citation omitted). 10 Analysis, 20-21, following simplified example how determined. Assume bakery's sole comes bread. consist materials (flour, sugar, spices, utilities), (baker, clerk), (building, mixer, utensils, oven), credit (interest loans). Any excess revenues represents profit. Thus: Revenue = Cost Labor + Materials Depreciation1 Interest Profit. 12 sold (revenues), going (for firm) second simple equation: Revenues - Materials. 13 another common method. If subtract side equation above, have: 15 Depreciation 16 17 So calculated Revenues-Cost Materials; Not surprisingly, referred "subtraction" "addition" methods. Each identical measurement taxpayer's added.2 Once determined, assessed percentage fiscal period.3 B 18 effect January 1976. 1975 Mich.Pub. Acts 228.4 replaced seven 22; Brief Respondent 8. Before 1976, typical manufacturer franchise intangible ad valorem inventories. Mitchell, Repealed Amended, 1029 (1976); 8-9. After enactment SBT, pay 19 addition method inevitably permits various exclusions, adjustments examples described above. Subject exemptions contained Mich.Comp.Laws 208.35 person 208.31(1).5 order calculate must, first, base. method: 208.9 begins (representing profit), including dividends, interest taxpayer, makes detailed 20 Second, That portion, crux case, §§ 208.45, 208.46, 208.49, 208.51. multiplied (under formula), adjustments, "adjusted base." 208.31(2). 21 Two here: 208.23(a), deduct acquisitions, 208.31(5), labor-intensive reduce adjusted equal exceeds 63% such reduction exceed maximum 37%. Actual liability equals rate 2.35%.6 II manufactures automobile components. Its Maumee, suburb Toledo near border. fixed presence Michigan: employees who solicited orders, contact customers, performed clerical work. industry, major products. Indeed, made $103,981,354 worth 26.5892% $391,065,866. follows: U. (loss) ($42,466,114) Add: 23 Compensation $226,356,271 24 $23,262,909 Dividends, interest, royalties 25 $22,908,950 26 Other $549,526 27 Subtotal $230,611,542 Subtract: 28 ($9,486,223) 29 Total Base $221,125,319 Apportionment 30 Payroll Factor 31 Property 32 Sales 33 Average 8.9717% Apportioned Base: 34 35 x 36 $ 19,838,700 37 150-152, 431-433 (1989). subtracting acquisition deduction ($9,063) taking (37%) taxpayers. $12,492,671. 2.35%, amounted $293,578 ($12,492,671 2.35%).7 timely liability. 38 1985, intermediate similarly situated "relief" 208.69 provision Jones & Laughlin Steel 145 Mich.App. 405, 377 397 (1985), leave appeal reconsideration denied, 424 895 (1986). At time, "fairly could, alternatives, petition employment "any effectuate equitable allocation 39 Soon Laughlin, year. Based despite admitted $221 purposes treated also negative, payment.8 Upon denial favor authority Laughlin. 86-10430-CM (May 5, 1987); App. Pet. Cert. 42a-51a. 40 While Treasury's pending Appeals, legislature 208.69. 1987 Mich.Pub.Acts 39. creates presumption unless meets two tests, neither could satisfy, merit discussion here. Ann. 208.69(3) (West Supp.1990). legislature's Act intended 41 "curative, expressing original intent type formulary extraordinary circumstances." 39, 2. 42 Relying language, determined amendment given retroactive "remedial procedural" statute relief. 166 656, 666, 421 258, 262 (1988). 43 affirmed Appeals. 428 Without addressing amendments 208.69, construed "constitutional 'circuit breaker' required save unconstitutional application. 156, N.W.2d, 434. court upheld constitutional challenges. noted uncontroversial "not believe 'business activity' [SBT] accurate analysis when component effort examined." 163, 438. concluded averaged ratios representation making ineligible grounds. 163-166, 438-439. writ certiorari. 494 1015, 110 1317, 108 492 (1990). III 44 principles govern seek accommodate necessary abstractions realities marketplace. 326 (1977), sustain challenge so long substantial nexus taxing State, apportioned, commerce, related State." four-part later cases variety Goldberg Sweet, 488 252, 260, n. 12, 582, 588, 102 607 (1989) (citing applications involving severance, use, occupation taxes). 45 Auto, renounced formalistic Spector Motor Service, O'Connor, 340 602, 71 508, 95 573 (1951), prohibited privilege treating commerce beyond avoid formalism rely "consistent inquiry [focusing on] practical challenged tax." 443, 1234, 510 (1980). test, responsive dictates, "a 'minimal connection' enterprise." 1231-1232; 80, 1625, 58 (SCALIA, concurring). 46 dispute State's authority. argue bears relation 1079. instead contends fails prongs test: claims matter 47 concentrates formula. difficulty identifying Underwood Typewriter Chamberlain, 254 113, 120-121, 45, 46-47, 65 165 (1920) (legislature "faced impossibility allocating specifically profits [taxpayer's] processes conducted borders"). problem 192, 2954, 545 (1983): "Allocating taxingjurisdictions resemblance slicing shadow." argues composed source, reject altogether. accept premise permitted precise feasible, allow theoretical justification provide opportunity prohibits competitive mischief. issue whether, assign components separate locations accounts decided serious difficulty, review determination. 49 outset, amici curiae analyzed activity." Council Governments al. Amici Curiae 11. say "tax 2.35% every allocated state." 208.31(1) (1979) threshold measure, labeling permit forgo examination provisions. "A sleeping measured number pairs shoes you your closet shoes." Jenkins, Interstate Commerce, Tenn.L.Rev. 239, 242 (1960). 50 errs opposite direction. dissect independent taxes: apportioned. insists calculation. taxed depreciation. additional apportionable characterization, argument, fails. Doubtless identify equipment compensation. taxes, purport assuming third cannot. year, 8, good problems accompany argument. 52 less short, unprofitable. event. conclude somehow lost process, perhaps left customers 53 For shows, might value, superior marketing skill, liaison mere fortuity. 272, 2343, 197 (record lacked what manufacturing, phase operations). 54 But variables reference other. way knowing extent, increased. fact, increased increase. inextricable, codependent variables. 55 sustained arise solely, substantially, personnel. doubt requirements direction design, production, By serving meeting demands, generated sums did. assume strategies integral 56 attempted characterization arguable calculates subtraction calculating paths result. 2, supra. Had method, reporting minus materials, collapse own weight. geographically locate materials. much. revenues, greater (26.5892%) (8.9717%). An justifiable form lacks significance. chose convenience taxpayers, whom easy starting 6-7 (discussing method); (same). Constitution resulting penalty selection easier calculation Both calculation, moreover, illustrate adoption remainder residual contains element dependent (revenues costs) equation; itself remainder, assignable impractical test. thus agree Legislature's not, purposes, taxes," "indivisible," ibid., 59 discrete designation. Nevertheless, (1920), recognized impracticability source. respect, familiar genre challenge: 60 "[A]pportionability contention [particular] ascertained geographical accounting. formed 506-508 [62 703-704, 991] (1942); Ford Beauchamp, 308 331, 336 [60 273, 276, 84 304] (1939); cf. 272 [98 2344]. circumstances, accounting, purports isolate portions States, fail contributions integration, scale. 508-509 704-705]. profitability whole, misleading characterize identifiable 'source'. accounting useful internal auditing, constitutionally required." 1232. recent principle, particular N.J. benchmark certain SBT). oil companies taken windfall objected "an exclusively expense associated Jersey." 1622. manner, objects grounds are, limited exception, expenses. outright idea income: "[J]ust oil-producing revenue—as business—is confined Exxon [v. Wisconsin ], 447 [207] 226 [100 2109, 2121, 66 (1980) too producing nature. 182 [103 2949] (the deemed locality incurred)." Ibid. 64 reasoning applies force generated, scale, make concluding merely reaffirm written before: "In more-or-less integrated operating arriving territorial allocations 'value' elusive goal, practice." 164, 2939. Having proper, next fair. our apportionment: 67 again obvious, fairness called consistency—that jurisdiction, business' being taxed. difficult external consistency—the actually reasonable generated." 2942. 68 contest consistency question. 69 Instead, prevail challenge, prove "by 'clear evidence' fact 'out appropriate proportions transacted State,' [Hans Rees' Sons, North Carolina ] 283 [123], 135 [51 385, 389, 75 879 (1931) 'led grossly result,' [Norfolk Western Missouri Comm'n,] 390 [317], [88 995, 1002, 1201 (1968) ]." Co., 2345. demonstrate 2948-2949. 70 uses Brothers 991 (1942). standard become "something formulas judged." 170, 2943; 282, 2349 (BLACKMUN, dissenting); id., 283-284, 2349-2350 (Powell, dissenting). one-third weight factors—payroll, sales—is "has approval precisely 183, used, Uniform Division Income Purposes Act, 7A U.L.A. 331 (1990 Cum.Supp.) (approved 1957 Conference Commissioners Bar Association). facts done constituted .0930% averages ratios, $19,838,700, reduced 72 proposes alternative two-factor apportionment, excluding factor. 0.1629% $360,213, Petitioner 33-34.9 73 "can justified rough, approximation corporation's sources social generates," General Motors District Columbia, 380 553, 561, 85 1156, 1161, (1965), generated. flaw, contends, "Sales [compensation plant] Michigan." 31. position finds economists. Barlow Connell, Fiscal Structure 673, 704 Brazer ed.1982); 7, 14, 5. 74 have, 376, already therefore complete exclusion critique distinguish nearly criticisms apportioning economists theorize (like added) marketplace contributes Studenski, Need Curbs Commerce: Economist's Viewpoint, Va.L.Rev. 1121, 1131-1132 (1960); Harriss, Aspects Income, 327, 362-363 (1959); Am.Econ.Rev. 398, 400 (1959). age, verbatim brief: "[S]ales-by-destination proper Taken themselves, necessarily productive income-creating effort. Only wholly destination identifies hence situs imposition it." 1131-1132. Despite criticism, importance generating 2949. responded "from standpoint legislative policy, litigation [the State] yea[r 1980]." 2344. rejecting precedents approve 76 find distortion caused "value [Michigan's] borders." ASARCO Idaho Comm'n, 458 307, 315, 3103, 3108, 787 (1982). inappropriateness reasons given, arguments. method—unadjusted ($19,838,700), ($360,213), urged (- $2,042,458), ($12,492,671)—gives most convincingly demonstrated accurate. proving evidence,' result.10 C 78 urges struck down violation face, cites. Westinghouse Electric Tully, 466 388, 393, 1856, 1860, 80 388 (1984) (tax gross receipts shipped regular place York); Boston Stock Exchange 429 318, 324-328, 599, 604-606, 514 (1977) facially discriminated transactions securities exchanges York discourage growth exchanges); Halliburton Well Cementing Reily, 373 64, 83 1201, 202 (1963) (sales exempted isolated exemption state). recalls (1987), deeper though allocate insiders outsiders manner discriminatory." requires content expressed tests consistency. presents constitutionality discrimination relies 'to Michigan.' Executive Message James J. Blanchard Nov. 6, 1987, 73a. helps all. design system jobs prosperity citizens free "structur[e] systems encourage industry." Exchange, 336, 610. repeats Governor's attempt contemporaneous concerning passage suggests benign motivation, combined revenues.11 Neither nor secondary present inspired IV 81 reviewing schemes Clause, "to ensure transaction." 260-261, 588-589, act defense which, inadvertence, give rise concerns double taxation, capture belong right jurisdictions. always "declined undertake essentially task establishing 'single mandated taxation.' 261, quoting 171, 2943. today adopt acceptable hold Clauses 82 judgment Affirmed. SOUTER judgment. notes, ante, 384, discriminatory. Since am view suffices comply judgment); Tyler Pipe Industries, Washington Revenue, 232, 265, 2810, 199 (1987) part), articulated (1977). Some analysis, quite complies 1231-1232, 80-81, 1625 judgment). 87 concedes minimal connection Mobil, supra; 373. then, extraterritorial values. Parts III-A III-B Court's not. 88 BLACKMUN joins, dissenting. 89 refer "Single Tax" (VAT), text statute. describes "certain commercial, financial activities."1 matter, amalgam assets, 90 percent readily identifiable. occurring scheme established * executive manufacturing facilities Ohio. Most live work significantly assets employed 1980.2 operated presented unprofitable sufficient attribute (and tax) approximately nine activities, occurred 91 concludes bulk follow value-adding Rather, largely contingent generates realized until consumers, greatly allowing justified. 92 assumption sold, simply wrong. Finished goods, stored warehouse yet valuable raw statute, finished reflected loss, reduced, enhanced, ultimate expenses incurred allows 93 jurisprudence, nexus. 165-166, 2940-2941, (1983). "unitary" businesses, deviate rule flexible doing, cautioned "[t]he [of activities] sharing exchange capable [geographic] identification renders taxation." 166, 2940. 94 extends exception general situations imprecise longer holds. Unlike allocated, SBT—property warrant concedes, far rejects logical added" identified commands considered. states, cannot." Ante, 375. "[i]n increase." 376 96 Driving recognition netted $42 This, concludes, resources Resisting perceived awkwardness "that process," 375, holds generates. belied underlying "concept derived basic facts—the scarcity resources—and measures scarce up available elsewhere) (1976). ultimately diminish utilized product. utilization loss. fully process—at stages consumed. expended. ibid. (value "add[ing] payments internally owners used"). Regardless (or unprofitability) eliminated diminished unable command marketplace.3 early "[e]ven VAT." 364. immunity vagaries SBT: "[B]ecause 99 Concededly, looking complicated unprofitability expenditures (consisting expenses) skill entrepreneurial Insofar costs. nevertheless additive undiminished suffers chooses lead where) purchased, resources. 101 SBT—labor capital—are quantified occur, results unconstitutionaltax ation activities.4 borders, applying treats ten expenses.5 respectfully dissent. wear tear, obsolescence, factors, roughly capital. McGraw-Hill Dictionary Modern 130 (3rd ed.1983); P. Samuelson W. Nordhaus, 902 (12th ed.1985). Aaron, Introduction Summary, ed.1981) Aaron); 1018; Special Committee Section Association, Choice Between Levels Lawyer 457, 459 (addition "reac[h] means"); "two alternative, ways conceptually, calculations "). nations European Community (EEC) levy multistage Aaron. EEC system, bakery bread, receive Similarly, link chain distribution, purchases. places did, requests credit. version advocated promoting compliance, view. Oldman Woods, Would System Relieve Compliance Problems, Compliance: Report ABA Invitational 317 (1983) (multistage traditionally regarded self-enforcing mechanism said induce report accurately). "fiscal frontiers" multi-stage impracticable individual McLure, Relations Added, 127, 130-131 1025 ("invoice workable subeconomy legal control flow imports exports"). On international transactions, EEC's jurisdiction destination. exports, full imports. 1024-1025; 4. destination, origin. experiment 1953 1967, Activities (BAT) BAT profits, outlay allowed," Lock, Rau, Hamilton, Nat.Tax 357, 363 (1955), Mich.Stat.Ann. 7.557(1)-7.557(24) (Supp.1955), repealed, 1967 281. remarkably here Armco 359 430, 552, 555-556 (1960) (Ohio nominal sales). dismissed want 364 337, 124, focused best characterized receipts, concern jurisprudence "direct" "Business broadly transfer title rental real, personal, mixed, tangible intangible, performance services, thereof, engaged in, state, intrastate, interstate, foreign object gain, benefit, advantage, direct indirect, shall include rendered employee his employer, director casual transaction. ." 208.3 (1979). (derived using formula) divided ever 1.175% receipts. 208.31(2) ($391,065,866) (8.9717%) (equals $17,542,628) $412,251. amounts 0.4% Of course, 0.28% sales) Base—statutory formula: Deduct ($226,356,271) ($23,262,909) Proposed ($28,493,861) ($2,556,384) Add $511,774 $2,152 ($2,042,458) 147, 4, 431, drastically requested courts. court, $2,042,458. now $360,213. ground reminds repeatedly Standard Pressed Dept., 419 560, 564, 706, 709, 719 (1975); Washington, 436, 448, 1564, 1571, (1964); McGoldrick Berwind-White Coal Mining 309 33, 58, 565 (1940). analogy drawn recognize similarities gross-receipts (based receipts) limit possibility light disposition, address According proponents argued volatile economy, proven unpredictably cyclical, poor revenue. source; lessen thereby encouraging new investment; replace numerous paperwork collector; (4) organization; (5) inefficient efficient equally government heavily efficient, highly profitable firms. addition, enactment, faced crisis. overlap old cash $180 20-23. "exporting" "was great [SBT]." 23. preamble part: "AN ACT imposition, levy, collection, assessment enforcement, lien otherwise, activities. 208.1, explanation significance label tax" below, explained: employs impose conducting MCL 208.31(4); MSA 7.558(31)(4)." 149, 431-432 Company's $226,356,271; one-fourth percent. $2,152, one-tenth bases found South countries, 365-366, affected brings insofar jurisdictions utilizing computing subtracted warranted traditional models unjustified invalid, imposes illegitimate restraint denies due. permitted, shelter ignoring peculiarities 'project power plainly borders. .' relationship, face application, connected Norfolk 317, 325, 1001, (footnote implies unjust appreciation. 381-382, 9. My reaction just opposite. imposing collect whose operations, produced

Classification Label: 7