Court Opinion

ID: 1087040
Source: CourtListenerOpinion
Date Created: 2013-10-25 17:09:22.736116+00
Date Added: 2024-06-11T12:30:39.211425
License: Public Domain

Notice: This opinion is subject to correction before publication in the P ACIFIC R EPORTER .
      Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts,
      303 K Street, Anchorage, Alaska 99501, phone (907) 264-0608, fax (907) 264-0878, email
      corrections@appellate.courts.state.ak.us.

               THE SUPREME COURT OF THE STATE OF ALASKA

TESORO CORPORATION                             )
AND SUBSIDIARIES,                              )        Supreme Court No. S-14326
                                               )
                 Appellants,                   )        Superior Court No. 3AN-09-08897 CI
                                               )
      v.                                       )        OPINION
                                               )
STATE OF ALASKA,                               )        No. 6838 – October 25, 2013
DEPARTMENT OF REVENUE,                         )
                                               )

                Appellee.                      )

                                               )

              Appeal from the Superior Court of the State of Alaska, Third
              Judicial District, Anchorage, Fred Torrisi, Judge.

              Appearances:     Mark Wilkerson, Wilkerson Hozubin,
              Anchorage, Gregory A. Castanias, Jones Day, Washington,
              D.C., and David E. Cowling and Roy T. Atwood, Jones Day,
              Dallas, Texas, for Appellants. R . S cott Taylor, Senior
              Assistant Attorney General, Anchorage, Deborah J. Stojak,
              Assistant Attorney General, and Michael C. Geraghty,
              Attorney General, Juneau, and Louisiana W. Cutler, Jennifer
              M. Coughlin, and Serena S. Green, K&L Gates LLP,
              Anchorage, for Appellee.

              Before: Fabe, Chief Justice, Carpeneti, Winfree, and
              Stowers, Justices, and Eastaugh, Senior Justice.*

              EASTAUGH, Senior Justice.

      *
             Sitting by assignment made under article IV, section 11 of the Alaska
Constitution and Alaska Administrative Rule 23(a).
I.    INTRODUCTION
             Tesoro Corporation challenges income taxes assessed against it by the
Alaska Department of Revenue (DOR) for 1994 through 1998. DOR calculated Tesoro’s
Alaska income by applying a three-factor apportionment formula to Tesoro’s worldwide
income, including that of its non-Alaskan subsidiaries. Tesoro challenged DOR’s
apportionment in a trial before an administrative law judge, who ruled that Tesoro was
a unitary business that could be subject to formula apportionment, and that DOR could
permissibly assess penalties against Tesoro. Tesoro appealed to the superior court,
which affirmed.
             Tesoro argues here that only the income of its Alaska-based subsidiaries
should have been subject to taxation in Alaska because Alaska’s tax scheme violates the
Due Process and Interstate Commerce Clauses of the United States Constitution.
Because Tesoro’s business was unitary, we reject Tesoro’s challenge to the
constitutionality of taxing all of its income under formula apportionment. Because
Tesoro lacks standing to challenge the formula’s constitutionality, we do not reach the
internal consistency issue Tesoro raises. We also conclude that applying the formula to
Tesoro satisfied the statutory requirement of reasonableness. Finally, we conclude that
DOR permissibly imposed penalties on Tesoro. We therefore affirm the superior court
decision that affirmed the administrative law judge’s decision and order.
II.   FACTS AND PROCEEDINGS
      A.     Tesoro’s Business Activity
             At relevant times, Tesoro Corporation was a petroleum company
headquartered in San Antonio, Texas.1 Tesoro had 33 subsidiary corporations that were

      1
             Our description of the facts is based on the facts explicitly found by the
administrative law judge and the evidence the administrative law judge found persuasive.

                                          -2-                                     6838
organized into five business segments: (1) the Exploration and Production (E&P)
segment based in Texas and Bolivia; (2) the Retail and Marketing (R&M) segment based
in Alaska;2 (3) the Marine Services segment based in Louisiana and Texas;3 (4) the
Corporate segment based in Texas; and (5) the Finance segment based in Texas.
                Tesoro’s board of directors had an active hand in shaping the financial,
operational, and managerial decisions for Tesoro’s subsidiaries. During the relevant
period, the board met almost monthly to discuss and approve various aspects of the
subsidiaries’ operations.    Furthermore, Tesoro’s Corporate and Finance segments
provided a number of administrative and financial services that were shared across all
subsidiaries.
                Two developments during the relevant tax years caused the companies
within E&P to realize profits greater than those realized by the subsidiaries within R&M.
In 1995 Tesoro sold part of its interest in a valuable natural gas field. And in 1996
Tesoro prevailed on a breach of contract claim and later that year sold its remaining
interest in the same contract. Those events brought E&P nearly $200 million in revenue.
Tesoro’s appeal here effectively tries to shield the profits related to those events from
taxation in Alaska.

      2
              Although E&P and R&M are names the litigants and prior adjudicators
have applied to Tesoro’s operational segments, this semantic choice should not be read
to suggest that the Tesoro subsidiaries within each segment were necessarily somehow
distinct from the Tesoro parent company or each other. All subsidiaries within each
segment bore the name “Tesoro.” For example, the R&M segment included the Tesoro
Northshore Company and the Tesoro Alaska Petroleum Company.
      3
              The Marine Services segment was deemed “relatively insignificant” by the
administrative law judge. Tesoro asserts that the Marine Services operation is not at
issue here, and nothing in DOR’s briefing or the orders below suggests otherwise.

                                            -3-                                    6838

       B.     Tesoro’s Tax History In Alaska
              In 1959 Alaska adopted the Uniform Division of Income for Tax Purposes
Act (UDITPA).4 UDITPA was drafted and approved by the National Conference of
Commissioners on Uniform State Laws in 1957 in an attempt to bring uniformity to state
tax codes.5 In 1970 Alaska adopted the Multistate Tax Compact, which is a restatement
of UDITPA with some minor changes.6 The Multistate Tax Compact is codified at
AS 43.19.010. Per AS 43.19.010, article IV, section 9, the portion of a business’s total
income apportioned to Alaska is determined by “multiplying the income by a fraction,
the numerator of which is the property factor plus the payroll factor plus the sales factor,
and the denominator of which is three.” The property factor is the fraction of the
taxpayer’s total property and the property attributable to the taxpayer’s business in
Alaska; similarly, the sales and payroll factors are fractions of the taxpayer’s respective
total sales and payroll attributable to the taxpayer’s business in Alaska.7
              Alaska Statute 43.19.010, article IV, section 18 permits DOR to adjust a
taxpayer’s tax burden if the statutorily mandated apportionment does not “fairly
represent the extent of the taxpayer’s business activity in this state.” Subsection 18(a)
allows DOR to apportion the taxpayer’s income based on separate accounting, while
subsection 18(c) allows DOR to add “one or more additional factors” to the

       4
              Ch. 175, § 1, SLA 1959.
       5
              Larry D. Scheafer, Annotation, Construction and application of uniform
division of income for tax purposes act, 8 A.L.R. 4th 934 § 2 (1981); see also 1 JEROME
R. H ELLERSTEIN & W ALTER HELLERSTEIN , STATE TAXATION ¶ 8.06[3][b], at 8-70 (3d ed.
2012).
       6
            Ch. 124, § 1, SLA 1970; State, Dep’t of Revenue v. Amoco Prod. Co., 676
P.2d 595, 598 n.3 (Alaska 1984).
       7
              AS 43.19.010, art. IV, §§ 10, 13, 15.

                                            -4-                                       6838

apportionment formula.8 The statute effectively requires that any remedy DOR enforces
under section 18 be “reasonable.”9
              Alaska Statute 43.20.144 modifies AS 43.19.010’s apportionment scheme
for all taxpayers “engaged in the production of oil or gas . . . in this state or engaged in
the transportation of oil or gas by pipeline in this state.”10 Alaska Statute 43.20.144(c)
provides three different apportionment formulas for such taxpayers, depending on the
nature of the taxpayer’s oil or natural gas business in Alaska. Under AS 43.20.144(c)(1),
a taxpayer that only transports oil or gas in Alaska is subject to a two-factor formula
based on property and sales. Under AS 43.20.144(c)(2), a taxpayer that only produces
oil or gas in Alaska is instead subject to a two-factor formula based on property and
extraction. Finally, under AS 43.20.144(c)(3), a taxpayer that both transports and
produces oil or gas in Alaska is subject to a three-factor formula based on property, sales,
and extraction.
              From the time it began doing business in Alaska in 1969 until 1994, Tesoro
filed its tax returns as a unitary business. During this period all of Tesoro’s corporate
income was subject to taxation in Alaska, and the amount actually apportioned to Alaska
was determined by the three-factor property, sales, and payroll formula of AS 43.19.010,
article IV, section 9. In 1995 Tesoro purchased the Kenai Pipeline (KPL), the pipeline
that serviced its Kenai-based refinery. As a result of this purchase, Tesoro became a
taxpayer “engaged in the transportation of oil or gas by pipeline” in Alaska, and thus
became subject to taxation under AS 43.20.144.

       8
              AS 43.19.010, art. IV, §§ 18(a), 18(c).
       9
              AS 43.19.010, art. IV, § 18.
       10
           AS 43.20.144(a). AS 43.20.144 was formerly codified as AS 43.20.072 but
was renumbered in 2012.

                                             -5-                                      6838

              In its tax return for 1995 Tesoro took the position that KPL was not unitary
with the remainder of Tesoro’s business segments. Tesoro thus claimed that only KPL
was subject to taxation under the two-factor property and sales formula specified by
AS 43.20.144(c)(1), while Tesoro’s remaining business segments were subject to
taxation under the three-factor property, sales, and payroll formula specified by AS
43.19.010, article IV, section 9. This was the first time Tesoro had ever asserted in an
Alaska tax return that its subsidiaries were not unitary with each other. In its tax returns
for 1996 and 1997 Tesoro again took the position that KPL was not unitary with the
remainder of Tesoro’s subsidiaries. And in those returns Tesoro also asserted for the
first time that its Finance segment was not unitary with the remainder of its subsidiaries
and as such was not subject to taxation in Alaska at all.
              On October 1, 1998, DOR completed an audit of Tesoro’s tax returns for
the years 1994 and 1995 and rejected Tesoro’s position that KPL and the Finance
segment were not unitary with the remainder of Tesoro’s subsidiaries or each other.
DOR’s resulting assessment stated that “Tesoro is one unitary petroleum business” and
that “the entire group is subject to modified apportionment under AS [43.20.144].”
DOR accordingly apportioned all of Tesoro’s business income under the two-factor
property and sales formula of AS 43.20.144(c)(1) for nine months of 1995 to account for
Tesoro’s March 1995 purchase of KPL. DOR also disallowed the exemptions for
Tesoro’s foreign subsidiaries for this same nine-month period.
              After receiving this assessment, Tesoro filed its 1998 tax return in which
Tesoro again asserted that KPL was not unitary with the remainder of Tesoro’s business
segments. This return also took the position that the subsidiaries within R&M were not

                                            -6-                                       6838

unitary with the remainder of Tesoro’s subsidiaries, including KPL.11 Thus, this 1998
tax return treated only the R&M subsidiaries and KPL as subject to taxation in Alaska:
KPL under AS 43.20.144(c), and the R&M subsidiaries under AS 43.19.010, article IV,
section 9. In response, DOR conducted a second audit assessment of Tesoro’s tax
filings, this time for the years 1996, 1997, and 1998. In the resulting assessment, DOR
rejected Tesoro’s theory concerning the unitariness of Tesoro’s business and reasserted
that all of Tesoro’s businesses were a single unitary group subject to AS 43.20.144.
             But during the interval between DOR’s first audit and its second, the
Attorney General of Alaska issued an opinion calling into question the constitutionality
of AS 43.20.144(c) as applied to businesses that produce oil or gas in state but transport
it out of state.12 In response, DOR issued an advisory letter on November 19, 1999 to all
oil and gas taxpayers in Alaska; the letter stated that DOR would exercise its authority
under AS 43.19.010, article IV, subsection 18(c) to fashion a remedy to the constitutional
infirmity identified by the Attorney General. DOR’s letter stated that this remedy would
allow a taxpayer that both produced and transported oil or gas to use the three-factor
property, sales, and extraction formula of AS 43.20.144(c)(3). The letter stated:
             The department will follow the [Attorney General’s] opinion
             and allow taxpayers to use the three-factor apportionment
             formula in these circumstances pursuant to the authority of
             AS 43.19.010 Art. 4, Sec. 18(c).            Accordingly, an
             AS [43.20.144] taxpayer engaged both in the production of
             oil or gas from a lease or property in any jurisdiction and in
             the pipeline transportation of oil or gas in any jurisdiction

      11
              Tesoro took this position informally for the first time on January 6, 1999,
in a written statement attached to and incorporated by reference in its request for an
informal conference.
      12
             1993-99 FORMAL O P . A TT ’Y G EN . 230-31, available at 1999 WL 1337804.

                                           -7-                                      6838
              may use an apportionment formula consisting of extraction,
              property and sales . . . .
              In its assessment for the years 1996, 1997, and 1998, DOR adhered to its
November 19, 1999, letter and applied the three-factor formula of AS 43.20.144(c)(3)
(hereinafter “the section 18 remedial formula” or “remedial formula”) to Tesoro. DOR
also assessed penalties against Tesoro for its repeated unwillingness to recognize KPL
as unitary with Tesoro’s other subsidiaries.
       C.     Past Proceedings
              Tesoro first appealed the assessments for the years 1994 to 1998 during
informal conferences with DOR; it next appealed in proceedings before an administrative
law judge; it finally appealed to the superior court. The adjudicators at each stage agreed
with DOR’s initial assessment that Tesoro was a single unitary business during the
relevant years; that the three-factor formula applied to Tesoro produced a constitutionally
and statutorily fair apportionment of Tesoro’s total income; and that Tesoro’s conduct
in filing its tax returns justified penalties.
              Thus, Administrative Law Judge Mark T. Handley conducted a ten-day
hearing at which Tesoro and DOR presented testimony from Tesoro employees and
executives, DOR auditors, and expert witnesses familiar with Tesoro’s business
activities. The administrative law judge also reviewed hundreds of exhibits, including
Tesoro’s internal financial records, Tesoro’s public financial filings, correspondence
between Tesoro employees, and reports drafted by expert witnesses. In determining that
Tesoro’s subsidiaries were a unitary business for the relevant years, the administrative
law judge made factual findings referring to the evidence and relied heavily on the
testimony and reports of two of DOR’s expert witnesses: Professors James Smith and
Richard Pomp. The administrative law judge found these two witnesses to be “very
persuasive,” and stated that “these experts demonstrated an impressive understanding of

                                                 -8-                                 6838

Tesoro’s organization and business activities.” Both experts looked at evidence in the
record and found Tesoro to have exhibited functional integration, centralized
management, and economies of scale and thus found Tesoro’s subsidiaries to be one
unitary business. The administrative law judge found these witnesses were particularly
persuasive as compared to Tesoro’s witnesses, whom he found “less convincing”
because he found Tesoro’s witnesses tried to divert focus away from relevant facts and
were dismissive of the relevant legal factors. By contrast, the administrative law judge
found that Professors Pomp and Smith identified which facts in the record were
significant and that these experts provided “strong, but objective, opinions” as to the
import of these facts.
             When Tesoro appealed to the superior court, Superior Court Judge Fred
Torrisi affirmed the administrative law judge’s decision. The superior court held that
Tesoro was a unitary business, that the formula applied to it was not constitutionally
unfair, and that penalties were justified. In its unitary-business holding, the superior
court relied mainly on the factual findings of the administrative law judge and cited to
the findings of shared administrative and financial services across Tesoro’s subsidiaries.
             Tesoro now appeals to us.
III.   STANDARD OF REVIEW
             We review questions of law de novo, using our independent judgment.13
We apply the substantial evidence standard of review to disputed questions of fact in
administrative decisions.14 In applying this standard, we will not re-weigh evidence or

       13
              Ross v. State, Dep’t of Revenue, 292 P.3d 906, 909 (Alaska 2012); Harrod
v. State, Dep’t of Revenue, 255 P.3d 991, 995 (Alaska 2011).
       14
            State, Dep’t of Revenue v. DynCorp & Subsidiaries, 14 P.3d 981, 985
(Alaska 2000) (quoting Handley v. State, Dep’t of Revenue, 838 P.2d 1231, 1233 (Alaska
                                                                         (continued...)

                                           -9-                                      6838

re-evaluate the fact finder’s credibility determinations.15 Whether Tesoro’s business is
unitary is a question of law that requires no agency expertise.16 We will consider the
issue de novo, giving only “some weight” to the agency’s decision on the matter.17
Determining the constitutionality of a given statute presents a question of law that we
review de novo.18 Statutory interpretation is also a question of law that we review de
novo.19 In its appeal regarding penalties, Tesoro appears to argue that as a matter of law
it cannot be penalized for violating an unconstitutional statute. The penalties appeal
therefore presents a question of law: whether Tesoro should have been excused from

      14
             (...continued)
1992)) (observing that substantial evidence standard applies to disputed questions of fact
in taxpayer’s appeal of tax assessment).
      15
            See McKitrick v. State, Pub. Emps. Ret. Sys., 284 P.3d 832, 837 (Alaska
2012) (quoting Lindhag v. State, Dep’t of Natural Res., 123 P.3d 948, 952 (Alaska
2005)).
      16
            Earth Res. Co. v. State, Dep’t of Revenue, 665 P.2d 960, 965 (Alaska 1983)
(“[W]e conclude that the question whether a taxpayer’s business is unitary is a question
of law which does not require agency expertise for its resolution.”).
      17
             See Alaska Gold Co. v. State, Dep’t of Revenue, 754 P.2d 247, 251 (Alaska
1988) (holding that question of whether taxpayer is a unitary business is reviewed de
novo giving only some weight to the agency’s decision on the matter); Earth Res. Co.,
665 P.2d at 964-65 (holding that substitution of judgment standard applies to supreme
court’s review of agency decision regarding the unitariness of a taxpayer’s business).
      18
              Harrod, 255 P.3d at 995 (citing Eagle v. State, Dep’t of Revenue, 153 P.3d
976, 978 (Alaska 2007)) (applying independent judgment standard to constitutional
questions in tax assessment appeal).
      19
             Id. (citing Temple v. Denali Princess Lodge, 21 P.3d 813, 815 (Alaska
2001)) (applying independent judgment standard to questions of law in tax assessment
appeal).

                                          -10-                                      6838

paying penalties because one aspect of the tax scheme under which it was penalized was
unconstitutional. We review this question de novo.20
IV.   DISCUSSION
             Tesoro asks us to review three issues on appeal: (1) whether the tax scheme
applied by DOR violates the Due Process and Interstate Commerce Clauses of the United
States Constitution; (2) whether the section 18 remedial formula is statutorily
unreasonable; and (3) whether the penalties DOR assessed against Tesoro are invalid.
We consider each issue in turn.
      A.     Tesoro’s Constitutional Challenge To Formula Apportionment Fails.
             Under the Due Process and Interstate Commerce Clauses of the United
States Constitution, a state “may not tax value earned outside its borders.”21 The central
inquiry is “whether the state has given anything for which it can ask return.” 22 But the
United States Supreme Court has long recognized that taxing multi-state companies
using strict geographic accounting fails to account for “the many subtle and largely
unquantifiable transfers of value that take place among the components of a single
enterprise.”23 The unitary business/formula apportionment method of taxation is meant
to remedy this problem.24 Under this method, a taxing state first identifies the unitary
business of which the taxpayer’s in-state activities are a part and then apportions the

      20
             Ross v. State, Dep’t of Revenue, 292 P.3d 906, 909 (Alaska 2012); Harrod,
255 P.3d at 995 (Alaska 2011).
      21
             ASARCO Inc. v. Idaho State Tax Comm’n, 458 U.S. 307, 315 (1982).
      22
             Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444 (1940).
      23
             Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 164-65 (1983).
      24
             Id. at 165.

                                          -11-                                      6838

income of this unitary business to the taxing state according to a set formula.25 Tesoro
challenges both the administrative law judge’s finding that all of Tesoro’s subsidiaries
constituted a single unitary business and the administrative law judge’s application of the
three-factor apportionment formula of AS 43.20.144(c). We hold that Tesoro was a
unitary business amenable to formula apportionment and that Tesoro lacks standing to
contest the application of the AS 43.20.144(c) three-factor apportionment formula.
               1.	       The administrative law judge did not err in finding Tesoro to be
                         a single unitary business.
               Tesoro bears the burden of proving by clear and cogent evidence that the
state tax results in extraterritorial values being taxed.26 In order for a business to be
unitary, and thus amenable to formula apportionment, there must be flows of value
between the parent and subsidiary.27 The United States Supreme Court has distinguished
these flows of value from the mere passive flow of funds that arises from any parent-
subsidiary relationship.28 Three “factors of profitability” indicate a unitary business:
functional integration, centralization of management, and economies of scale.29
               Tesoro argues that its involvement in its subsidiaries was the type of passive
investor-investment relationship that exists between any parent and subsidiary. DOR

       25	
               See id.
      26
               Id. at 164 (quoting Exxon Corp. v. Wis. Dep’t of Revenue, 447 U.S. 207,
221 (1980)).
       27
               Id. at 178-79.
       28
               Id. at 166.
       29
               Id. at 181 (quoting Mobil Oil Corp. v. Comm’r of Taxes, 445 U.S. 425, 438
(1980)).

                                             -12-	                                     6838

counters that there were sufficient flows of value across Tesoro’s business segments to
justify the administrative law judge’s finding of unitariness in this case.
             Although Tesoro asserts that it is not disputing the administrative law
judge’s factual findings, it repeatedly makes assertions factually at odds with those
findings. The administrative law judge heard ten days of testimony and reviewed more
than 30,000 pages of documents. The administrative law judge also relied extensively
on the report and testimony of Professor Smith, who reviewed much of the voluminous
record before providing his expert opinion as to the nature of Tesoro’s business. To the
extent that Tesoro explicitly or implicitly challenges the administrative law judge’s
findings, we must determine whether substantial evidence supports those findings.30
Applying the substantial evidence standard, we reject any challenge to the administrative
law judge’s factual findings. The administrative law judge relied on the facts discussed
by Professor Smith because he found Professor Smith to be persuasive and the facts
identified by Professor Smith to be relevant. By contrast, the administrative law judge
found Tesoro’s witnesses to be unconvincing, as they seemed to ignore the relevant facts
in the record. Evidence in the record supports the facts reported by Professor Smith and
found by the administrative law judge. It is not our place to re-weigh evidence or re­
evaluate the credibility determinations of the administrative law judge.31
             As we explain below, Tesoro has not carried its burden of proving the non-
unitary nature of its business. The facts as found by the administrative law judge show

      30
            State, Dep’t of Revenue v. DynCorp & Subsidiaries, 14 P.3d 981, 985
(Alaska 2000).
      31
            See McKitrick v. State, Pub. Emps. Ret. Sys., 284 P.3d 832, 837 (Alaska
2012) (quoting Lindhag v. State, Dep’t of Natural Res., 123 P.3d 948, 952 (Alaska
2005)).

                                           -13-                                    6838

that Tesoro’s relationship with its subsidiaries fits within relationships that we and the
United States Supreme Court have held to be unitary.
                    a.     Tesoro’s subsidiaries were functionally integrated.
             Tesoro contends that the subsidiaries within the E&P and R&M segments
were not functionally integrated because there was no overlap in any “actual function”
between them. Tesoro admits that it provided its subsidiaries with shared administrative
and financial services, but asserts that the absence of “synergistic operations” between
the subsidiaries within E&P and R&M is fatal to finding functional integration.
             The pertinent case law refutes Tesoro’s restrictive interpretation of the
functional integration concept. In Container Corp. of America v. Franchise Tax Board,
the United States Supreme Court held a paperboard company to be unitary with its
subsidiaries where the parent provided the subsidiaries with loans and loan guarantees,
occasional assistance in obtaining equipment and fulfilling personnel needs, and general
oversight and guidance.32 In Alaska Gold Co. v. State, Department of Revenue, we
upheld a finding of functional integration where the parent approved capital expenditures
greater than $100,000, handled salaries and payroll for executives, and guaranteed the
subsidiaries’ lease obligations.33 And in Earth Resources Co. of Alaska v. State,
Department of Revenue, we upheld a unitary business finding where the parent provided
the subsidiary with loans and loan guarantees, a uniform pay scale, salary guidelines, and
a uniform retirement plan.34 In each of these cases the courts examined the same sorts

      32
             463 U.S. at 179-80.
      33
             754 P.2d 247, 252 (Alaska 1988).
      34
             665 P.2d 960, 969 (Alaska 1983).

                                          -14­                                      6838
of administrative and financial services that Tesoro argues are irrelevant. In two of these
cases there was little or no “operational synergy.”35
              Tesoro provided services to its subsidiaries to a greater degree than did the
taxpayers in all of these cases combined. Like the taxpayers in Container Corp., Alaska
Gold, and Earth Resources, Tesoro provided its subsidiaries with both loans and loan
guarantees. As the administrative law judge observed:
              Tesoro’s business segments jointly guaranteed major loans or
              “credit facilities” during the audit period. CEO [Bruce]
              Smith explained that the purpose of these credit facilities was
              to keep the entire corporation going and that the credit
              facilities were not dedicated to a particular business segment.
              Tesoro’s central management used the funds obtained from
              the major credit facilities to finance purchases by individual
              subsidiaries as well as to provide working capital for general
              corporate purposes. The heads of R&M and E&P were not
              involved in obtaining financing to fund their operations
              because these functions were performed by CEO [Bruce]
              Smith, Mr. [William] Van Kleef and the corporate finance
              department.
(Footnotes omitted.)
              In the portion of his report cited by the administrative law judge, Professor
Smith noted that these credit facilities were secured using corporate-wide assets and that
the funds were made available to the subsidiaries as needed.
              Tesoro’s involvement in financing the subsidiaries went beyond merely
loaning money to the subsidiaries. As the administrative law judge explained:

       35
             See Container Corp. of Am., 463 U.S. at 172 (“Sales of materials from
appellant to its subsidiaries accounted for only about 1% of the subsidiaries’ total
purchases.”); Earth Res. Co. of Alaska, 665 P.2d at 968 (“[T]here is no highly integrated
flow of business between the business entities. . . .”).

                                           -15-                                      6838
                Various bank accounts were used during the course of the
                audit period to receive customer remittances. However, at
                any one time, a single, shared bank account was used to
                receive remittances from customers of all the subsidiaries.
                Funds belonging to the respective subsidiaries were all
                directed to the same account so that these funds were
                available to fund the working capital needs of all Tesoro
                subsidiaries.
(Footnotes omitted.)
                In the portion of his report cited by the administrative law judge, Professor
Smith elaborated on how cash management was functionally integrated across
subsidiaries. He explained that because Tesoro set overall limits on capital expenditures,
capital investments made by one subsidiary had to be offset by investments in other
subsidiaries.
                Thus, Tesoro exercised near-complete control over the funding of
subsidiary operations. Tesoro pooled customer remittances from all its subsidiaries into
a shared bank account and then distributed this money back to the subsidiaries. There
was evidence that local management had no knowledge or control of the sources of their
operational funds. Furthermore, Tesoro controlled the capital investments made by each
subsidiary and set an overall limit on capital investment across subsidiaries.
      Like the taxpayers in Alaska Gold and Earth Resources, Tesoro also provided
guidance on personnel matters. The administrative law judge found that Tesoro’s human
resources department provided uniform stock option plans, benefits, and salary
guidelines across subsidiaries.
                Moreover, like the taxpayer in Container Corp., Tesoro provided its
subsidiaries with general oversight and guidance. As described in more detail below, the
administrative law judge found that Tesoro’s board of directors was active in overseeing

                                             -16-                                      6838

operations of the subsidiaries. The Tesoro board reviewed and approved annual
operating budgets, major expenses, and specific projects for the subsidiaries.
              Tesoro’s involvement with its subsidiaries went beyond what was held to
be sufficient in the three cases cited above. The administrative law judge found that
Tesoro also provided its subsidiaries with uniform services in the fields of
environmental compliance and safety, information services and technology, internal
auditing, legal affairs, insurance, risk management, purchasing, and accounting. These
shared services refute Tesoro’s assertion that its subsidiaries were not functionally
integrated.
              Tesoro argues that because its witnesses testified that the value of the
administrative services it provided to its subsidiaries accounted for only a “trifling” one
to two percent of its overall costs, these services do not indicate functional integration.
But the administrative law judge did not credit the testimony Tesoro cites for this
proposition; he instead found the value of the relevant services to be $100 million over
the five audited years. Tesoro also contends that the administrative law judge, in
calculating the flow of value created by these services, erroneously relied on the price
Tesoro charged its subsidiaries for these services, rather than the difference between the
price Tesoro charged and the price the subsidiaries would have been charged via arms-
length transactions in the open market. Tesoro’s view of the law would mean that had
Tesoro charged its subsidiaries market prices for these shared services, there would have
been no flow of value. But in Alaska Gold we stated that even if the goods and services
provided by parent to subsidiary were priced “at prevailing market prices, they [were]
nonetheless evidence that the companies were not acting independently.”36 Regardless,
the administrative law judge did find that significant flows of value existed because he

       36
              754 P.2d at 252.

                                           -17-                                      6838
found that the prices Tesoro charged its subsidiaries for administrative and financial
services did not accurately quantify the services’ actual value.
              Tesoro further argues that there was no functional integration across
subsidiaries because, it asserts, each subsidiary had “autonomous local management that
made all day-to-day decisions.” This contention, even if factually correct, would not be
dispositive. In Container Corp., the United States Supreme Court upheld a finding of
functional integration even though the parent company handled only “major problems
and long-term decisions” and “day-to-day management of the subsidiaries” was left to
local management.37
                     b.     Tesoro centrally managed its subsidiaries.
              Tesoro argues that no centralized management existed during the relevant
period because it had no major role in the operational matters of its subsidiaries. Tesoro
instead presents itself as a mere financial overseer, responsible only for capital structure,
major debt, and dividends.
              But the administrative law judge found that Tesoro’s role was in fact much
broader than this. During the relevant period, all of Tesoro’s subsidiaries were governed
by Tesoro’s very active board of directors. The administrative law judge found that
Tesoro’s board met frequently to make all major financial and operational decisions for
the subsidiaries. In making this finding, the administrative law judge found relevant the
testimony of two senior Tesoro executives who discussed how their operational expertise
and management assistance benefitted E&P and R&M. Furthermore, in the portion of
his testimony cited by the administrative law judge, Professor Smith estimated that
Tesoro’s board met almost monthly to discuss issues regarding the subsidiaries. By
contrast, the administrative law judge found that the boards of the subsidiaries that

       37
              463 U.S. at 172.

                                            -18-                                       6838
comprised E&P and R&M never met during the relevant period and that these
subsidiaries’ boards instead acted by signing written consent resolutions handed down
to them by Tesoro’s corporate arm.
             In the portion of his testimony cited by the administrative law judge,
Professor Smith also gave examples of the specific projects that Tesoro’s corporate board
discussed and approved. Many of these were Alaska-based projects. For example, the
Tesoro board discussed increasing the frequent-filler program at Alaskan Tesoro service
stations, expanding Tesoro’s asphalt sales in Alaska, upgrading the Girdwood service
station, increasing home-heating sales in Fairbanks, and expanding the Alaskan
hydrocracker plant and the effects that expansion would have on the jet fuel market in
Anchorage. Tesoro was not a passive rubber-stamp of any independent decisions by the
subsidiaries. For example, Professor Smith testified that in 1997 Tesoro’s corporate
board actually sent back the annual budget submitted by R&M and required revisions.
This hands-on Tesoro involvement in Alaskan business refutes any claim that Tesoro’s
Alaska-based subsidiaries should have been treated as somehow insulated from the rest
of Tesoro’s business enterprise.
                    c.     Tesoro’s business exhibited economies of scale.
             Tesoro argues that there were no economies of scale because the interaction
between parent and subsidiaries during the taxing period represented flows of funds, not
flows of value.
             But the administrative law judge found that Tesoro experienced significant
cost savings by providing its subsidiaries with centralized services instead of leaving
each segment to source these services itself.        In the portion of his report the
administrative law judge cited for this proposition, Professor Smith observed that
eliminating administrative redundancies and offering consolidated services saved Tesoro
$2.24 million a year. Professor Smith further observed that this figure amounted to

                                          -19-                                     6838

approximately 10% of the value of providing these services in total. The administrative
law judge also found that providing these services created further unquantifiable flows
of value by allowing local management to focus on day-to-day business operations
without worrying about these administrative and financial matters.
               Furthermore, in Earth Resources we upheld a finding that economies of
scale existed because the subsidiary was able to receive financing at lower rates due to
the parent’s ability to negotiate lower interest rates for all subsidiaries than any
subsidiary could have negotiated on its own.38 Here the administrative law judge
explicitly credited Professor Smith’s testimony on the subject and found that Tesoro and
its subsidiaries experienced approximately $30 million in interest savings over the five
audited years through the use of shared credit facilities. In fact, in the cited portion of
his testimony, Professor Smith explained that Tesoro Alaska was able to obtain
commercial credit from BP for the shipment of crude oil only after Tesoro provided a
letter of credit.
                     d.	    Tesoro’s other arguments against a unitary finding are
                            unpersuasive.
               Tesoro asserts that the case most analogous to the facts here is F. W.
Woolworth Co. v. Taxation & Revenue Department of New Mexico.39 But we consider
Woolworth to be distinguishable in every material respect. The United States Supreme
Court held there that “no phase of any subsidiary’s business was integrated with the
parent’s.”40 In so holding, the Court noted the absence of the very administrative and

       38
               665 P.2d at 970.
       39
               458 U.S. 354 (1982).
       40
               Id. at 365 (emphasis in original).

                                           -20­                                      6838
financial services present here.41 Furthermore, in Woolworth the parent did not control
subsidiary funds. Instead, each subsidiary “was responsible for obtaining its own
financing from sources other than the parent.”42 Finally, in Woolworth the parent had no
involvement in overseeing subsidiary operations.43 Here Tesoro was active in overseeing
subsidiary operations.
             Tesoro also argues that vertical or horizontal integration is a necessary
condition for finding a unitary business. Tesoro cites no case that affirmatively
establishes this principle, but asserts that it must be true because no United States
Supreme Court case denies it. Tesoro’s position is problematic for two reasons. First,
the United States Supreme Court has been reluctant to issue bright-line rules such as the
one Tesoro proposes, saying instead that the mutual interdependence necessary for a
unitary business finding can arise in “any number of ways.”44 Second, in Earth
Resources we upheld a unitary business finding even where there was “no highly
integrated flow of business between the business entities.”45 We decline Tesoro’s
invitation to overrule past precedent in order to enforce the negative, and unsupported,
inference Tesoro would read into the case law. For these reasons, we hold that Tesoro
was a single unitary business throughout the relevant period.

      41
              Id. at 365-67 (holding businesses not unitary where there was absence of
centralized accounting, legal counsel, financing, and purchasing).
      42
             Id. at 366.
      43
             Id. at 367-68.
      44
             Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 179 (1983).
      45
            Earth Res. Co. of Alaska v. State, Dep’t of Revenue, 665 P.2d 960, 968
(Alaska 1983).

                                          -21-                                     6838

             We recognize that one respected treatise has questioned our holding that the
two businesses in Earth Resources constituted a unitary enterprise.46 We read that
criticism to stem from the authors’ opinion as to what constitutes sound state tax policy,
not the case-based requirements of the federal constitution.47 Tesoro’s appeal from
DOR’s unitary business finding turns only on federal constitutional grounds. There is
no issue before us about whether a different tax policy would be preferable. The
legislative and executive branches made the controlling policy choices. The only
question for us in this case is whether those choices satisfy the federal constitution.

      46
              1 JEROME R. H ELLERSTEIN & W ALTER H ELLERSTEIN , STATE TAXATION ¶
8.10[2][a][ii], at 8-159 to 8-162 (3d ed. 2012).
      47
              The commentator’s analysis is based on his “operational interdependency
test.” Id. ¶ 8.10[2][a][ii], at 8-160 nn.697-98 (citing ¶ 8.09[4] of treatise). This test
explicitly rejects the United States Supreme Court’s holding in Container Corp. Id. ¶
8.04[c], at 8-147 (“The fact that there may be a ‘flow of value’ among the business
segments in a sense sufficient to treat the business segments as unitary under federal
constitutional standards does not, in and of itself, justify treating such income as
apportionable as a matter of sound tax policy.”). The treatise, however, acknowledges
that other states have adopted a broader view of the unitary business principle. Id. ¶
8.03, at 8-139 n.619 (citing cases from California, Kansas, Oregon, Utah, and Wisconsin
as applying the broad approach). Those states that have adopted the operational
interdependency test have done so as a matter of state law. See, e.g., State ex rel. Ariz.
Dep’t of Revenue v. Talley Indus., Inc., 893 P.2d 17, 24-25 (Ariz. App. 1994); Cox
Cablevision Corp. v. Dep’t of Revenue, No. 3003, 1992 WL 132428, at *3 (Or. T.C.,
June 10, 1992). Moreover, the treatise praises the superior court’s opinion in this case,
describing that opinion as “extremely thoughtful, thorough, and fact-intensive.” Id. ¶
8.10[2][a][iii], at 8-162. In this regard we agree with the treatise: Judge Torrisi’s
opinion is commendable.

                                           -22-                                      6838

              2.	       Tesoro lacks standing to challenge the internal consistency of
                        Alaska’s tax scheme because Tesoro does not demonstrate that
                        it was injured by any inconsistency in this scheme.
              Having affirmed the determination that Tesoro’s subsidiaries constituted
a single unitary enterprise, we must next address Tesoro’s argument that the
apportionment scheme applied by DOR was internally inconsistent and thus violated the
Due Process and Interstate Commerce Clauses of the United States Constitution. As the
United States Supreme Court stated in Container Corp.:
              [A]n apportionment formula must, under both the Due
              Process and Commerce Clauses, be fair. The first, and again
              obvious, component of fairness in an apportionment formula
              is what might be called internal consistency — that is the
              formula must be such that, if applied by every jurisdiction, it
              would result in no more than all of the unitary business’s
              income being taxed.[48]
              The test for internal consistency posits a situation in which every
jurisdiction applies the tax at issue; the test then determines whether under such
circumstances more than 100% of the taxpayer’s income would be subject to taxation.49
The hypothetical situation envisioned by the internal consistency test is valuable because
it allows courts to identify when “a State is attempting to take more than its fair share of
taxes from the interstate transaction.”50 In applying this test, courts are attempting to
prevent the taxing state from “overreaching” such that “the portion of value by which
one State exceed[s] its fair share [is] taxed again by a State properly laying claim to it.”51

       48
              463 U.S. at 169 (citations omitted).
       49
              See id.
       50
              Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 185 (1995).
       51
              Id. at 184-85.

                                            -23-	                                       6838

              Tesoro argues that Alaska’s tax scheme is unconstitutional because it
potentially applies two different formulas — either the section 18 property, sales, and
extraction formula or the section 9 property, sales, and payroll formula — and thus could
result in more than 100% of a taxpayer’s income being taxed. Tesoro is correct that
DOR’s taxing scheme applies one of two different apportionment formulas depending
on a taxpayer’s in-state business activity. Per the terms of DOR’s November 19, 1999
advisory letter, the section 18 remedial formula applies to any “AS [43.20.144] taxpayer”
that both produces and transports oil or gas. But this formula only applies to a taxpayer
that conducts at least one of these activities in Alaska, because AS 43.20.144 only
applies to such taxpayers.52 Thus, a taxpayer that both produces and transports oil or gas
anywhere and also does at least one of these activities in this state is taxed under the
section 18 remedial formula that includes the property, sales, and extraction factors.53
But a taxpayer that both produces and transports oil or gas but does neither of those
activities in this state is instead taxed under the formula prescribed in AS 43.19.010,
article IV, section 9 that includes the property, sales, and payroll factors.
              DOR urges us to ignore this feature of Alaska’s tax code and consider only
the specific three-factor formula that it applied to Tesoro in Alaska, not the entire tax
scheme that also contains a different formula that potentially applies, depending on
which activities the taxpayer conducts in the taxing jurisdiction. DOR thus assumes, for
purposes of determining consistency, that every jurisdiction taxing Tesoro would use the
section 18 remedial formula. This assumption fails to recognize that jurisdictions where

       52
               See AS 43.20.144(a) (stating that section .144 applies only to taxpayers
“engaged in the production of oil or gas . . . in this state or engaged in the transportation
of oil or gas by pipeline in this state”).
       53
             Because it is the only fact pattern relevant to this appeal, we will limit our
discussion to taxpayers, like Tesoro, that both transport and produce oil or gas.

                                            -24-                                       6838

Tesoro neither produces nor transports oil or gas would instead tax Tesoro under the
AS 43.19.010, article IV, section 9 formula. In effect, DOR would look narrowly at the
formula it actually applied here rather than at the broader statutory scheme. This is not
the test. In Armco Inc. v. Hardesty, the United States Supreme Court assessed an internal
consistency challenge to a West Virginia tax scheme in which businesses that
manufactured in state were subject to a manufacturing tax, businesses that sold goods
at wholesale in state were subject to a wholesaling tax, and businesses that did both
activities in state were exempt from the wholesaling tax but subject to the manufacturing
tax.54 The tax scheme was analogous to the one at issue in this case in that taxpayers
were subject to different tax formulas depending on the extent of their in-state business
activities.55 A taxpayer that sold at wholesale in state but manufactured out of state
challenged the constitutionality of West Virginia’s scheme.56 If DOR were correct, the
United States Supreme Court should have scrutinized only “the formula actually used”
for the taxpayer: the exemptionless wholesaling tax. It did not. The Court instead
scrutinized the “precise scheme” and held that the scheme was internally inconsistent
because under it taxpayers “from out of State [would] pay both a manufacturing tax and
a wholesale tax while sellers resident in West Virginia [would] pay only the
manufacturing tax.”57      The Court was specifically interested in the potential for
differential application of the various formulas.58 We therefore reject DOR’s invitation

      54
             467 U.S. 638 (1984).
      55
             Id. at 642.
      56
             Id. at 639-41.
      57
             Id. at 644.
      58
             Id.

                                          -25-                                     6838

to consider only the particular three-factor formula applied here; we instead look at the
precise two-formula scheme at issue when evaluating Tesoro’s internal consistency
challenge.
              On appeal, Tesoro bases its internal consistency argument on an example
that illustrates the property, sales, extraction, and payroll factors for a hypothetical
taxpayer that is amenable — as was Tesoro — to taxation in Alaska, Texas, and
California. Per Tesoro’s hypothetical example, the taxpayer is subject to the property,
sales, and extraction formula in Alaska and Texas, and is subject to the property, sales,
and payroll formula in California (where it neither produces nor transports oil or gas).
The example’s choice between different apportionment formulas causes 106.7% of the
hypothetical taxpayer’s income to be taxed in total. In its opening brief, Tesoro appears
to argue that this hypothetical taxpayer bears no specific relationship to Tesoro. Tesoro
there argues only that the example shows how DOR’s proposed tax structure could result
in double taxation if it were applied to “a business with production and/or pipeline
activities outside but not inside Alaska.” Tesoro was not such a business during the
contested years because it owned KPL, an Alaska-based pipeline, and Tesoro did not
otherwise assert that its hypothetical example in fact described Tesoro’s actual situation.
Although we reserve judgment on the issue, the only state to have reached the issue
rejected a taxpayer’s argument that internal inconsistency can be demonstrated by
applying a tax scheme to a purely hypothetical taxpayer rather than the actual taxpayer.59
              In its reply brief, Tesoro subtly refines its argument. It there contends that
the example in its opening brief was meant to illustrate Tesoro’s actual business situation
and thus that the example showed that if all states adopted Alaska’s tax scheme Tesoro

         59
              See In re Alt. Minimum Tax Refund Cases, 546 N.W.2d 285, 290-91 (Minn.
1996).

                                           -26-                                       6838
“would face an unconstitutional apportionment of more than 100% of its income.” 60
(Emphasis added.)
              We will address arguments that a party has properly asserted and briefed
and decline to address arguments that it has not.61 The taxpayer bears the burden of
establishing the internal inconsistency of the challenged tax statute.62 Tesoro has alleged
an internal consistency violation exclusively in context of the specific hypothetical facts
set out in its example. Accordingly, we will address the internal consistency argument
under the assumption that the information in the example is substantially similar to
Tesoro’s actual business situation. We consider Tesoro to have waived any other
internal consistency challenge to Alaska’s tax scheme.
              Because Tesoro has not explained how it has been harmed by any internal
inconsistency in Alaska’s tax scheme, Tesoro lacks standing to raise its internal
consistency argument. “Standing is a rule of judicial self-restraint based on the principle

       60
              Tesoro has a colorable claim that it has been making this argument all
along. Like Tesoro, the hypothetical taxpayer exemplified in its opening brief is taxed
under the property, sales, and extraction formula in Alaska and thus, like Tesoro, must
have produced or transported oil or gas in Alaska. Confusingly, the text of Tesoro’s
opening brief describes the exemplified taxpayer as having no production or
transportation inside Alaska. Nonetheless, the example itself supports an assertion —
refined in Tesoro’s reply brief — that the example illustrates Tesoro’s actual situation
even though the text of Tesoro’s opening brief suggests otherwise. We therefore assume
that Tesoro’s reply brief permissibly refines its prior argument, and thus preserves the
contention for appellate review.
       61
              See, e.g., McGraw v. Cox, 285 P.3d 276, 281 (Alaska 2012).
       62
            Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 170 (1983)
(quoting Moorman Mfg. Co. v. Blair, 437 U.S. 267, 274 (1978)).

                                           -27-                                      6838

that courts should not resolve abstract questions or issue advisory opinions.”63 In order
to have interest-injury standing, a plaintiff must have an interest adversely affected by
the complained-of conduct.64        Tesoro complains that DOR’s tax scheme is
constitutionally infirm because the scheme chooses between two different apportionment
formulas. But Tesoro has not shown that it has been adversely affected by this choice.
Instead, Tesoro’s example demonstrates that DOR applied the formula that was more
favorable to Tesoro. Its example states that the property, sales, and extraction formula
allowed 46.7% of its income to be subject to taxation in Alaska. But its example also
demonstrates that 65% of Tesoro’s total income would have been subject to taxation in
Alaska under the property, sales, and payroll formula.65 The 6.7% of double taxation that
Tesoro’s example identifies is the amount by which California’s hypothetical property,
sales, and payroll apportionment would exceed California’s hypothetical property, sales,
and extraction apportionment. As footnote 65 indicates, in presenting its example,
Tesoro has not demonstrated that the inconsistency it identifies has increased its tax

      63
              Friends of Willow Lake, Inc. v. State, Dep’t of Transp. & Pub. Facilities,
Div. of Aviation & Airports, 280 P.3d 542, 546 (Alaska 2012) (quoting Law Project for
Psychiatric Rights, Inc. v. State, 239 P.3d 1252, 1255 (Alaska 2010)).
      64
             Id. (quoting Keller v. French, 205 P.3d 299, 304 (Alaska 2009)).
      65
              In Tesoro’s example the taxpayer’s property, extraction, sales, and payroll
factors in Alaska are 65%, 0%, 75%, and 55%, respectively. The taxpayer’s property,
extraction, sales, and payroll factors in Texas are 30%, 100%, 20%, and 25%,
respectively. And the taxpayer’s property, extraction, sales, and payroll factors in
California are 5%, 0%, 5%, and 20%, respectively. Applying the property, sales, and
extraction formula in Alaska causes 46.7% ((65% + 0% + 75%) / 3 = 46.7%) of the
taxpayer’s total income to be subject to taxation in Alaska, while applying the property,
sales, and payroll formula in Alaska causes 65% ((65% + 75% + 55%) / 3 = 65%)) to be
subject to taxation in Alaska. The hypothetical example demonstrates that the formula
Alaska chose to apply is more favorable to Tesoro (taxing 46.7%, rather than 65%, of
Tesoro’s total income) than the alternative formula.

                                          -28-                                     6838

burden in Alaska. Tesoro therefore lacks standing to raise its internal consistency claim
because it has not identified an actual injury it has suffered as a result of the alleged
constitutional infirmity.
              Tesoro cites Armco v. Hardesty for the proposition that it need not show
actual double taxation because the constitutional harm under the internal consistency test
is the risk of double taxation.66 In Armco, the United States Supreme Court rejected the
argument that the taxpayer attacking the West Virginia tax scheme described above was
required to show that other states where it did business actually applied a manufacturing
tax to it that caused its total tax burden to be higher than the tax burdens of its in-state
competitors who benefitted from the challenged exemption.67 The Court held that if this
were the test it “would depend on the shifting complexities of the tax codes of 49 other
States, and . . . the validity of the taxes imposed on each taxpayer would depend on the
particular other States in which it operated.”68
              To show injury here Tesoro is not required to demonstrate that multiple
taxation has resulted because other states have treated it unfairly. It must only show that
there is a risk of multiple taxation because this state, Alaska, has treated it unfairly. But
unlike the taxpayer in Armco, Tesoro has not made this showing. In Armco, the taxpayer
was an out-of-state manufacturer that suffered injury because West Virginia refused to
grant it a tax exemption that was available to in-state manufacturers.69 West Virginia
could have cured the injury by granting the exemption to the taxpayer regardless of the
location of the taxpayer’s manufacturing activity. By contrast, Tesoro has suffered no

       66
              Armco v. Hardesty, 467 U.S. 638 (1984).
       67
              Id. at 644-45.
       68
              Id. at 645.
       69
              Id. at 640-41.

                                            -29-                                       6838

injury as a result of DOR’s failure to apply the property, sales, and payroll formula to it
because application of this formula in Alaska would have caused Tesoro’s Alaska tax
burden to increase. The risk of double taxation that Tesoro alleges is not affected by
Alaska’s choice between two possible three-factor tax formulas. Instead, the risk of
double taxation in this case is caused entirely by the possibility that California and Texas
may choose tax formulas that would increase Tesoro’s tax burden. Because Tesoro has
not demonstrated that it has suffered any harm as a result of the alleged internal
inconsistency, it has failed to establish its standing in this case. We do not see why a
taxpayer should be excused from application of a tax scheme whose alleged internal
inconsistency results in no-less-favorable tax treatment than would have resulted from
a consistent scheme.
       B.	    The Administrative Law Judge Did Not Err In Finding That DOR’s
              Alternative Apportionment Formula Was Reasonable As Applied To
              Tesoro.
              Alaska Statute 43.19.010, article IV, subsection 18(c) gives DOR the
authority to add an additional factor to an apportionment formula if the formula
otherwise prescribed by statute does not fairly represent the extent of the taxpayer’s in­
state business activity. But section 18 permits DOR to apply an alternative formula only
“if reasonable.”70 As we have stated in the past, “[i]nherent in the use of formula

       70	
              AS 43.19.010, art. IV, § 18 provides:
                     If the allocation and apportionment provisions of this
              Article do not fairly represent the extent of the taxpayer’s
              business activity in this state, the taxpayer may petition for or
              the tax administrator may require, in respect to all or any part
              of the taxpayer’s business activity, if reasonable:
                     (a) separate accounting;
                                                                              (continued...)

                                            -30-	                                     6838

apportionment is the legislative decision that a certain degree of distortion will be
tolerated.”71 In determining whether the section 18 remedial formula DOR adopted met
the statutory “if reasonable” test, the question is whether the formula is within tolerable
limits.72
              DOR argues that the administrative law judge correctly placed the burden
on Tesoro to prove the unreasonableness of DOR’s remedy. There is contrary authority
that indicates that if a taxing state invokes section 18 of the Multistate Tax Compact to
deviate from a prescribed tax statute, it bears the burden of proving the reasonableness

       70
              (...continued)
                     (b) the exclusion of any one or more of the factors;
                      (c) the inclusion of one or more additional factors
              which will fairly represent the taxpayer’s business activity in
              this state; or
                    (d) the employment of any other method to effectuate
              an equitable allocation and apportionment of the taxpayer’s
              income.
(Emphasis added.)
       71
              Gulf Oil Corp. v. State, Dep’t of Revenue, 755 P.2d 372, 381 (Alaska 1988).
As the United States Supreme Court has stated in applying the external consistency test:
“The Constitution does not ‘invalidate an apportionment formula whenever it may result
in taxation of some income that did not have its source in the taxing State.’ ” Container
Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 169-70 (1983) (quoting Moorman Mfg.
Co. v. Bair, 437 U.S. 267, 272 (1978)) (emphasis in original) (internal quotation marks
and alterations omitted).
       72
             See Gulf Oil Corp., 755 P.2d at 381. Tesoro does not challenge the
reasonableness of DOR’s conclusion that, given the Department of Law’s 1999 opinion
that AS 43.20.144(c) is constitutionally infirm as written, it was appropriate for DOR to
invoke its authority under section 18 to adopt some remedial deviation from
AS 43.20.144(c).

                                           -31-                                      6838

of the proposed alternative.73 We do not need to decide whether DOR had this burden,
because even if DOR had the burden of proving the reasonableness of its proposed
remedy, it met this burden.
              1.	    The property and sales factors were reasonable as applied to
                     Tesoro.
              Courts have traditionally judged the reasonableness of an apportionment
formula by applying the constitutional test of external consistency.74 The external
consistency test evaluates whether the tax “reflect[s] a reasonable sense of how [the
taxpayer’s] income is generated.”75 Although the constitutional cases are not directly
relevant to the statutory question of whether a given formula meets the “if reasonable”
test of section 18, they provide useful guidance in deciding this issue.
              During the contested years, DOR applied the three-factor property, sales,
and extraction formula of AS 43.20.144(c)(3) to apportion Tesoro’s income. Tesoro
argues that the property and sales factors were unreasonable as applied to it, and
advances three challenges to DOR’s calculation of the property factor.
              First, Tesoro argues that because the R&M subsidiaries invested in massive
infrastructure in Alaska, while the E&P subsidiaries’ out-of-state property holdings
consisted of leased land and partially owned equipment, the property factor overvalued
Tesoro’s in-state activities. Tesoro’s argument seems to be that because it owned more
property in Alaska than elsewhere, the property factor is distortive. But the property
factor uses a taxpayer’s in-state property as an estimate of the “protection, benefits, and

         73
              See, e.g., Microsoft Corp. v. Franchise Tax Bd., 139 P.3d 1169, 1178 (Cal.
2006).
         74
              See, e.g., Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 169
(1983).
         75
              Id.

                                           -32-	                                     6838

services that the state furnishes to the enterprise and of the costs that the enterprise
imposes upon the state.”76      As DOR observes, Tesoro’s ownership of “massive
infrastructure” in Alaska shows that it made greater use of state protections and benefits
in Alaska than in other areas where its property holdings were more modest. There is
nothing distortive about attributing Tesoro’s tax burden accordingly.
              Second, Tesoro argues that DOR’s calculation of the property factor
unreasonably undervalued its out-of-state assets by calculating their value at cost and not
at fair market value. As DOR points out, we have already considered and rejected this
argument. In Gulf Oil, we declined to value non-producing wells at their market value
instead of at their cost.77 We noted that if we valued one asset in the property factor
calculation at market value, we would have to so value all assets.78 We refused then to
assign DOR this “formidable task.”79 Other courts considering this issue have reached
the same result.80 Gulf Oil forecloses Tesoro’s argument.
              Third, Tesoro argues that the property factor was distortive because it
excluded intangible property and thus excluded a valuable contract that an E&P
subsidiary owned during the relevant period. Excluding intangible property in the
calculation of the property factor is a practice that has been universally accepted across

       76
              1 JEROME R. H ELLERSTEIN & W ALTER H ELLERSTEIN , STATE TAXATION ¶
8.06[2], at 8-67 (3d ed. 2012).
       77
              Gulf Oil Corp., 755 P.2d at 385-87.
       78
              Id. at 387.
       79
              Id.
       80
            See In re Colo. Interstate Gas Co., 79 P.3d 770, 786 (Kan. 2003). See also
Chase Brass & Copper Co. v. Franchise Tax Bd., 138 Cal. Rptr. 901, 911 (Cal. App.
1977).

                                           -33-                                      6838

states.81 Most courts have adhered to this general rule even if, as here, the taxpayer
asserts that the exclusion of a particularly valuable intangible asset causes unreasonable
distortion of the property factor.82 We are unpersuaded by Tesoro’s argument that
DOR’s adherence to this widely accepted practice was unreasonable.
              Tesoro also argues that DOR’s calculation of the sales factor is
unreasonable because it takes into account gross income and not net profits. Tesoro
contends that such a calculation overvalues its business activities in state relative to its
activities out of state because its in-state businesses were high volume but low margin,
while its out-of-state businesses were low volume but high margin. Again, Tesoro
quarrels with universally accepted taxing practice. Every state with a broad-based
corporate income tax uses a gross sales or gross receipts factor in its apportionment
formula.83 Furthermore, as DOR observes, the United States Supreme Court has rejected
the argument that disparate profits across subsidiaries are indicative of unfair taxation.84
              Regardless, formula apportionment is meant to measure “the corporation’s

       81
              Walter Hellerstein, State Taxation of Corporate Income from Intangibles:
Allied-Signal and Beyond, 48 TAX L. REV . 739, 779 (1993) (“No state, however, takes
account of intangible property in the property factor of the standard three factor formula,
which is limited to the taxpayer’s real and tangible personal property.”).
       82
             See, e.g., Random House, Inc. v. Comptroller of the Treasury, 531 A.2d
683, 685-90 (Md. 1987); Disney Enter., Inc. v. Tax Appeals Tribunal of the State, 830
N.Y.S.2d 614, 617 (N.Y. App. Div. 2007), aff’d, 888 N.E.2d 1029 (N.Y. 2008). But see
Crocker Equip. Leasing, Inc. v. Dep’t of Revenue, 838 P.2d 552, 557-58 (Or. 1992).
       83
              1 JEROME R. H ELLERSTEIN & W ALTER H ELLERSTEIN , STATE TAXATION ¶
8.06[3], at 8-67 to 8-68 (3d ed. 2012); id. at ¶ 9.02, at 9-18 to 9-19 (3d ed. 2011).
       84
              Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 181 (1983).

                                           -34-                                       6838

activities within and without the jurisdiction.”85 Tesoro’s sales factor argument is built
on the flawed premise that a business’s in-state activities are only as great as the profits
it generates from its in-state activities. In fact, the sales factor is designed to attribute a
taxpayer’s income to the jurisdictions in which its goods and services are consumed.86
Tesoro admits that the R&M subsidiaries “sold a large volume of gasoline each day” as
compared to E&P’s “small-scale operation,” which generated “far more modest” sales.
But Tesoro contends that we should ignore the relative size of R&M’s business
operations as compared to E&P’s and instead focus on the relative size of the net income
generated by these operations. We reject Tesoro’s argument because we conclude that
a business’s in-state activities may be fairly measured by the amount of goods or services
that consumers purchase in state regardless of whether the business later turns a profit
or loss on those purchases.
              In support of its position that profits and not sales should be used to
measure in-state business activities, Tesoro cites cases in which other courts have held
that taxing states could vary their apportionment formulas to account for the distortion
caused by including in the sales factor gross sales generated by a corporate treasury
department’s short-term investment receipts.87 This body of case law is distinguishable
for two reasons. First, in the cited cases, distortion resulted because the short-term
investments served no operational function and were thus qualitatively different from the

       85
              Id. at 165.
       86
              1 JEROME R. H ELLERSTEIN & W ALTER H ELLERSTEIN , STATE TAXATION ¶
8.06[3], at 8-68 (3d ed. 2012).
       87
            See Microsoft Corp. v. Franchise Tax Bd., 139 P.3d 1169, 1180 (Cal.
2006); Am. Tel. & Tel. Co. v. State Tax Appeal Bd., 787 P.2d 754, 757 (Mont. 1990);
Sherwin-Williams Co. v. Johnson, 989 S.W.2d 710, 712 (Tenn. App. 1998).

                                             -35-                                        6838

companies’ other business activities.88 There is no risk of similar distortion here because
R&M was an operational segment; its sales therefore could reasonably be compared to
those of Tesoro’s other major operational segment, E&P. Second, in the cases Tesoro
cites no court held that an adjustment was required; the courts held instead that an
adjustment was constitutionally permissible.89 Tesoro cites no authority for its position
that because one of Tesoro’s operational segments was less profitable than the others the
sales factor is unreasonably distortive.
              2.     The overall formula was reasonable as applied to Tesoro.
              Tesoro argues that unreasonable distortion can be seen in the disparity
between the income subject to taxation under the section 18 remedial formula and the
income that would be subject to taxation under separate accounting. Tesoro asserts that
because DOR taxed $89 million in income whereas under separate accounting it would
have taxed only $14 million in income, DOR taxed $75 million that was “unquestionably
generated” outside Alaska.
              Tesoro mistakenly assumes that it is possible to determine where the
income of a unitary business is “unquestionably generated.” In Container Corp., the
United States Supreme Court stated that the “basic theoretical weakness” of separate
accounting is that for a unitary business it is “misleading to characterize the income of

       88
            See Microsoft Corp., 139 P.3d at 1180 (limiting holding to circumstances
in which sales factor would otherwise include income from “corporate treasury
departments whose operations are qualitatively different from the rest of a corporation’s
business”).
       89
            See id. at 1178-79; Am. Tel. & Tel. Co., 787 P.2d at 757; Sherwin-Williams
Co., 989 S.W.2d at 716.

                                           -36-                                      6838

the business as having a single identifiable ‘source.’ ”90 Tesoro cites the United States
Supreme Court’s 1931 decision in Hans Rees’ Sons, Inc. v. North Carolina 91 for the
proposition that a state’s apportionment should be struck down if the taxpayer is able to
show a large disparity between the income taxed under separate accounting and the
income taxed under the state’s apportionment formula. But the Hans Rees’ Sons Court
never explicitly held this, and in the years since it decided that case the United States
Supreme Court has declined to hold formula apportionment unreasonable even when
presented with a large disparity between the income that would have been taxed under
separate accounting and the income that was actually taxed under formula
apportionment.92 We also reject the argument that such a disparity, without more,
renders an apportionment unreasonable.
      C.	    The Administrative Law Judge Did Not Err In Finding Penalties To
             Be Permissible In This Case.
             DOR’s September 21, 2001 assessment imposed failure-to-pay and
negligence penalties against Tesoro. Relying on the 1999 Attorney General’s Opinion
that AS 43.20.144’s tax scheme was unconstitutional, Tesoro argues that as a matter of
law it cannot be penalized for failing to pay taxes under an unconstitutional
apportionment scheme. We are unpersuaded for two reasons. First, as the United States

      90
            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)).
      91	
             283 U.S. 123 (1931).
      92
              See Trinova Corp. v. Mich. Dep’t of Treasury, 498 U.S. 358, 368-70 & n.8
(1991) (holding taxable income of $221,125,319 under formula apportionment
constitutional even when compared to taxable income of -$28,493,861 under separate
accounting); Butler Bros. v. McColgan, 315 U.S. 501, 505 (1942) (holding taxable
income of $1,149,677 under formula apportionment constitutional even when compared
to a taxable income of -$82,851 under separate accounting).

                                          -37-	                                    6838

Supreme Court has held, a state may require, under threat of penalty, that a taxpayer pay
a tax before contesting it.93 Second, DOR did not assess the penalties because Tesoro
failed to acquiesce in AS 43.20.144’s apportionment scheme, but because Tesoro failed
to acknowledge that KPL was unitary with R&M.
              Tesoro repeatedly took the position that its Alaskan refinery was not unitary
with the Alaskan pipeline that fed it, despite the obvious invalidity of this position 94 and
despite DOR’s October 1, 1998 determination that KPL and R&M were unitary. DOR
there found that “Tesoro is one unitary petroleum business” and that “the entire group
is subject to modified apportionment under AS 43.20.072.” Notwithstanding that 1998
finding, Tesoro not only failed to amend its filings for the years 1994-1997 to reflect its
unitary business, but it also thereafter filed its 1998 tax return as if KPL were a wholly
separate enterprise. DOR’s September 18, 2001 assessment imposed penalties against
Tesoro for failing to amend its 1995-1997 filings and for again asserting the same,
invalid position in its 1998 return. It was not until June 2005 — almost four years after
the penalties were assessed and more than six years after the 1998 determination — that
Tesoro amended its filings to reflect DOR’s 1998 unitary finding. Tesoro’s unjustified
position would have warranted penalties regardless of what apportionment scheme was
ultimately applied to it. DOR permissibly assessed the penalties.

       93
             See, e.g., McKesson Corp. v. Div. of Alcoholic Beverages & Tobacco, Dep’t
of Bus. Regulation of Fla., 496 U.S. 18, 51 (1990); see also AS 43.05.242(g) (requiring
payment of tax by litigant disputing tax).
       94
              See 1 JEROME R. H ELLERSTEIN & W ALTER H ELLERSTEIN , STATE TAXATION
¶ 8.08[2][a][i], at 8-102 (3d ed. 2012) (“[A]n integrated oil company is the quintessential
unitary business.”).

                                            -38-                                       6838

V.    CONCLUSION
             For these reasons, we AFFIRM the superior court’s decision that affirmed
the administrative law judge’s award of taxes, interest, and penalties.

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