Court Opinion

ID: 9731943
Source: CourtListenerOpinion
Date Created: 2023-08-26 16:02:22.928938+00
Date Added: 2024-06-11T18:26:22.113644
License: Public Domain

WATHEN, Justice,
dissenting.
I respectfully dissent. Apportioning the income of a multi-national multi-state unitary business between different tax jurisdictions is a task that has been aptly described as attempting to slice a shadow. Solely at issue in the present case is the application of the internal consistency test to the apportionment formula specified by Maine law and used extensively in other states. Because of the subject matter, the argument on both sides is somewhat arcane and impenetrable. In the final analysis, however, the taxpayer has failed to demonstrate that, if applied by every jurisdiction, the Maine formula would result in more than all of the unitary business’ income being subjected to the same tax. Thus the internal component of the requirement of fairness imposed by the federal due process and commerce clauses is satisfied.
The fairness of any apportionment formula is first tested by assuming the use of the same formula in all taxing jurisdictions. See Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, 169, 103 S.Ct. 2933, 2942, 77 L.Ed.2d 545 (1983). Internal consistency is established if, hypothetically and in the abstract, the use of the formula would not result in the same tax being imposed on more than all of the taxpayer’s unitary business income. The point of divergence in the position of the parties is illustrated by the following example: A taxpayer (T), through its affiliates, conducts a unitary business in State A, State B and a wholly owned subsidiary (F) in foreign country. Two hundred dollars *1046of income is earned from the domestic operations and the apportionment factor, derived by comparing domestic property, sales and payroll, is 50% for both State A and B. F earns one hundred dollars of operations income and fifty dollars is distributed as a dividend to the T. Tambrands calculation of the amount of business income subject to tax by application of the Maine formula is illustrated in the following:
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Tambrands contends that the formula fails the test because, as the example illustrates, more than 100% of its unitary business income would be taxed. The State Tax Assessor argues that Tambrands has impermissibly changed the tax base by including all of the income of F. The assessor contends that if all jurisdictions, including F, applied the Maine formula and imposed an identical tax on the same tax base, the test is satisfied. Under such circumstances, none of the apportionable income, namely, the two hundred and fifty dollars included in federal taxable income, would be apportioned to F. State A and B would each tax one hundred and twenty-five dollars. Thus, the formula would not impose a tax on more than 100% of the unitary business income.
Maine employs what Tambrands labels a “water’s-edge unitary tax method.” Under Maine law the net income subject to the Maine tax is determined by combining the federal taxable income of all members of the unitary business that are required to file federal income tax returns (ordinarily that would only include members domiciled in one of the states of the United States), and apportioning that income. See 36 M.R.S.A. § 5102(8). Under 36 M.R.S.A. § 5220(5), “[njeither the income, nor the property, payroll and sales of a ... corporation [that is part of the unitary business] which is not required to file a federal tax return shall be included in the combined report.”1 Moreover, the record before us demonstrates that the assessor has consistently construed the formula as applying only to the property, payroll and sales of all members of the unitary business which were required to file a federal tax return in the year at issue.
In my judgment, although the United States Supreme Court has not yet ruled on this issue, an apportionment formula is tested for internal consistency by assuming the imposition of an identical tax on the same tax base. Admittedly, the resulting analysis is contrived and incomplete. It must be remembered, however, that we are dealing with only one of several constraints imposed on an apportionment formula. Tambrands does not raise any question about the external consistency of the Maine formula. Accordingly, we have no occasion to consider whether the formula actually reflects “a reasonable sense of how income is generated,” or results in a gross distortion. Id. We need go no further than holding that the formula is internally consistent.
I would affirm the judgment.

. This language is now found in 36 M.R.S.A. § 5244 (1990). P.L.1985, ch. 675, §§ 2, 3.