Court Opinion

ID: 9429302
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:26:23.398531+00
Date Added: 2024-06-11T17:23:18.657637
License: Public Domain

Justice Powell,
with whom The Chief Justice and Justice O’Connor join, dissenting.
The Court’s opinion addresses the several questions presented in this case with commendable thoroughness. In my view, however, the California tax clearly violates the Foreign Commerce Clause — just as did the tax in Japan Line, Ltd. v. County of Los Angeles, 441 U. S. 434 (1979). I therefore do not consider whether appellant and its foreign subsidiaries constitute a “unitary business” or whether the State’s apportionment formula is fair.
With respect to the Foreign Commerce Clause issue, the Court candidly concedes: (i) “double taxation is a constitutionally disfavored state of affairs, particularly in the international context,” ante, at 193; (ii) “like the tax imposed in Japan Line, [California’s tax] has resulted in actual double taxation,” ante, at 187; and therefore (iii) this tax “deserves *198to receive close scrutiny,” ante, at 189. The Court also concedes that “[t]his case is similar to Japan Line in a number of important respects,” ante, at 187, and that the Federal Government “seems to prefer the [‘arm’s-length’] taxing method adopted by the international community,” ibid. The Court identifies several distinctions between this case and Japan Line, however, and sustains the validity of the California tax despite the inevitable double taxation and the incompatibility with the method of taxation accepted by the international community.
In reaching its result, the Court fails to apply “close scrutiny” in a manner that meets the requirements of that exacting standard of review. Although the facts of Japan Line differ in some respects, they are identical on the critical questions of double taxation and federal uniformity. The principles enunciated in that case should be controlling here: a state tax is unconstitutional if it either “creates a substantial risk of international multiple taxation” or “prevents the Federal Government from ‘speaking with one voice when regulating commercial relations with foreign governments.’” 441 U. S., at 451.
I
It is undisputed that the California tax not only “creates a substantial risk of international multiple taxation,” but also “has resulted in actual double taxation” in this case. See ante, at 187. As the Court explains, this double taxation occurs because California has adopted a taxing system that “serious[ly] diverge[s]” from the internationally accepted taxing methods adopted by foreign taxing authorities. Ibid. The Court nevertheless upholds the tax on the ground that California would not necessarily reduce double taxation by conforming to the accepted international practice.1 Ante, at *199190-193. This argument fails to recognize the fundamental difference between the current double taxation and the risk that would remain under an “arm’s-length” system. I conclude that the California tax violates the first principle enunciated in Japan Line.
At present, double taxation exists because California uses an allocation method that is different in its basic assumptions from the method used by all of the countries in which appellant’s subsidiaries operate. The State’s formula has no necessary relationship to the amount of income earned in a given jurisdiction as calculated under the “arm’s-length” method. On the contrary, the formula allocates a higher proportion of income to jurisdictions where wage rates, property values, and sales prices are higher. See J. Hellerstein & W. Hellerstein, State and Local Taxation 538-539 (4th ed. 1978). To the extent that California is such a jurisdiction, the formula inherently leads to double taxation.
Appellant’s case is a good illustration of the problem. The overwhelming majority of its overseas income is earned by its Latin American subsidiaries. See App. 112. Since wage rates, property values, and sales prices are much lower in Latin America than they are in California, the State’s apportionment formula systematically allocates a much lower proportion of this income to Latin America than does the internationally accepted “arm’s-length” method.2 Correspond*200ingly, the formula allocates a higher proportion of the income to California, where it is subject to state tax. As long as the three factors remain higher in California, it is inevitable that the State will tax income under its formula that already has been taxed by another country under accepted international practice.
In the tax years in question, for example, over 27% of appellant’s worldwide income was earned in Latin America and taxed by Latin American countries under the “arm’s-length” method. See ibid. Latin American wages, however, represented under 6% of the worldwide total; Latin American property was about 20% of the worldwide total; and Latin American sales were less than 14% of the worldwide total. See id., at 109-111. As a result, roughly 13% of appellant’s worldwide income — less than half of the “arm’s-length” total — was allocated to Latin America under California’s formula. In other words, over half of the income of appellant’s largest group of subsidiaries was allocated elsewhere under the State’s formula. In accordance with international practice, all of this income had been taxed in Latin America, but the California system would allow the income to be taxed a second time in California and other jurisdictions. This problem of double taxation cannot be eliminated without either California or the international community changing its basic tax practices.
If California adopted the “arm’s-length” method, double taxation could still exist through differences in application.3 California and Colombia, for example, might apply different accounting principles to a given intracorporate transfer. But these types of differences, although presently tolerated under international practice, are not inherent in the “arm’s-*201length” system. Moreover, there is no reason to suppose that they will consistently favor one jurisdiction over another. And as international practice becomes more refined, such differences are more likely to be resolved and double taxation eliminated.
In sum, the risk of double taxation can arise in two ways. Under the present system, it arises because California has rejected accepted international practice in favor of a tax structure that is fundamentally different in its basic assumptions. Under a uniform system, double taxation also could arise because different jurisdictions — despite their agreement on basic principles — may differ in their application of the system. But these two risks are fundamentally different. Under the former, double taxation is inevitable. It cannot be avoided without changing the system itself. Under the latter, any double taxation that exists is the result of disagreements in application. Such disagreements may be unavoidable in view of the need to make individual judgments, but problems of this kind are more likely to be resolved by international negotiation.
On its face, the present double taxation violates the Foreign Commerce Clause. I would not reject, as the Court does, the solution to this constitutional violation simply because an international system based on the principle of uniformity would not necessarily be uniform in all of the details of its operation.
II
The Court acknowledges that its decision is contrary to the Federal Government’s “preference for] the taxing method adopted by the international community.” Ante, at 187. It also states the appropriate standard for assessing the State’s rejection of this preference: “a state tax at variance with federal policy will violate the ‘one voice’ standard if it either implicates foreign policy issues which must be left to the Federal Government or violates a clear federal directive.” Ante, at 194 (emphasis in original). The Court concludes, however, that the California tax does not prevent the Federal *202Government from speaking with one voice because it perceives relevant factual distinctions between this case and Japan Line. I conclude that the California taxing plan violates the second principle enunciated in Japan Line, despite these factual distinctions, because it seriously “implicates foreign policy issues which must be left to the Federal Government.”
The Court first contends that “the tax here does not create an automatic ‘asymmetry.’” Ante, at 194-195 (emphasis in original) (quoting Japan Line, 441 U. S., at 453). This seems to mean only that the California tax does not result in double taxation in every case. But the fundamental inconsistency between the two methods of apportionment means that double taxation is inevitable. Since California is a jurisdiction where wage rates, property values, and sales prices are relatively high, double taxation is the logical expectation in a large proportion of the cases. Moreover, we recognized in Japan Line that “[e]ven a slight overlapping of tax — a problem that might be deemed de minimis in a domestic context — assumes importance when sensitive matters of foreign relations and national sovereignty are concerned.” Id., at 456.
The Court also relies on the fact that the taxpayer here technically is a domestic corporation. See ante, at 195. I have several problems with this argument. Although appellant may be the taxpayer in a technical sense, it is unquestioned that California is taxing the income of the foreign subsidiaries. Even if foreign governments are indifferent about the overall tax burden of an American corporation, they have legitimate grounds to complain when a heavier tax is calculated on the basis of the income of corporations domiciled in their countries. If nothing else, such a tax has the effect of discouraging American investment in their countries.
The Court’s argument is even more difficult to accept when one considers the dilemma it creates for cases involving foreign corporations. If California attempts to tax the Ameri*203can subsidiary of an overseas company on the basis of the parent’s worldwide income, with the result that double taxation occurs, I see no acceptable solution to the problem created. Most of the Court’s analysis is inapplicable to such a case. There can be little doubt that the parent’s government would be offended by the State’s action and that international disputes, or even retaliation against American corporations, might be expected.4 It thus seems inevitable that the tax would have to be found unconstitutional — at least to the extent it is applied to foreign companies. But in my view, invalidating the tax only to this limited extent also would be unacceptable. It would leave California free to discriminate against a Delaware corporation in favor of an overseas corporation. I would not permit such discrimination5 without explicit congressional authorization.
The Court further suggests that California could impose the same tax burden on appellant under the “arm’s-length” system simply by raising the general tax rate. See ante, at 195. Although this may be true in theory, the argument ignores the political restraints that make such a course infeasible. If appellant’s tax rate were increased, the St@£t@ *204would be forced to raise the rate for all corporations.6 If California wishes to follow this course, I see no constitutional objection. But it must be accomplished through the political process in which corporations doing business in California are free to voice their objections.
Finally, the Court attaches some weight to the fact that “the Executive Branch has decided not to file an amicus curiae brief in opposition to the state tax.” Ibid. The Court, in a footnote, dismisses the Solicitor General’s memorandum in Chicago Bridge & Iron Co. v. Caterpillar Tractor Co., No. 81-349, despite the fact that it is directly on point and the case is currently pending before the Court. See ante, at 195, n. 33. In this memorandum, the Solicitor General makes it clear beyond question what the Executive Branch believes: “imposition of [a state tax] on the apportioned combined worldwide business income of a unitary group of related corporations, including foreign corporations, impairs federal uniformity in an area where such uniformity is essential.”7 Memorandum for United States as Amicus Curiae in Chicago Bridge & Iron Co. v. Caterpillar Tractor Co., O. T. 1982, No. 81-349, p. 2. I recognize that the Government may change its position from time to time, but I see no reason to ignore its view in one case currently pending before the Court when considering another case that raises exactly the same issue. The Solicitor General has not withdrawn his memorandum, nor has he supplemented it with anything taking a contrary position. As long as Chicago Bridge & Iron remains before us, we must conclude that the Government’s views are accurately reflected in the Solicitor General’s memorandum in that pending case.
*205In sum, none of the distinctions on which the Court relies is convincing. California imposes a tax that is flatly inconsistent with federal policy. It prevents the Federal Government from speaking with one voice in a field that should be left to the Federal Government.8 This is an intrusion on national policy in foreign affairs that is not permitted by the Constitution.
Ill
In Japan Line we identified two constraints that a state tax on an international business must satisfy to comply with the Foreign Commerce Clause. We explicitly declared that “[i]f a state tax contravenes either of these precepts, it is unconstitutional.” 441 U. S., at 451. In my view, the California tax before us today violates both requirements. I would declare it unconstitutional.

 The Court also appears to attach some weight to its view that California is unable “simply [to] adher[e] to one bright-line rule” to eliminate double taxation. See ante, at 189. From California’s perspective, however, a *199bright-line rule that avoids Foreign Commerce Clause problems clearly exists. The State simply could base its apportionment calculations on appellant’s United States income as reported on its federal return. This sum is calculated by the “arm’s-length” method, and is thus consistent with international practice and federal policy. Double taxation is avoided to the extent possible by international negotiation conducted by the Federal Government. California need not concern itself with the details of the international allocation, but could apportion the American income using its three-factor formula.

 Although there are a few foreign countries where wage rates, property values, and sales prices are higher than they are in California, appellant’s principal subsidiaries did not operate in such countries.

 Similarly, there could be double taxation if the entire international community adopted California’s method of formula apportionment. Different jurisdictions might apply different accounting principles to determine wages, property values, and sales. Indeed, any system that calls for the exercise of any judgment leaves the possibility for some double taxation.

 This is well illustrated by the protests that the Federal Government already has received from our principal trading partners. Several of these are reprinted or discussed in the papers now before the Court. See, e. g., App. to Brief for Committee on Unitary Tax as Amicus Curiae 7 (Canada); id., at 9 (France); id., at 13-16 (United Kingdom); id., at 17-19 (European Economic Community); App. to Brief for International Bankers Association in California et al. as Amici Curiae in Chicago Bridge & Iron Co. v. Caterpillar Tractor Co., O. T. 1982, No. 81-349, pp. 4-5 (Japan); Memorandum for United States as Amicus Curiae in Chicago Bridge & Iron Co. v. Caterpillar Tractor Co., O. T. 1982, No. 81-349, p. 3 (“[A] number of foreign governments have complained — both officially and unofficially— that the apportioned combined method . . . creates an irritant in their commercial relations with the United States. Retaliatory taxation may ensue...”); App. to id., at 2a-3a (United Kingdom); id., at 8a-9a (Canada).

 California is, of course, free to tax its own corporations more heavily than it taxes out-of-state corporations.

 The State could not raise the tax rate for appellant alone, or even for corporations engaged in foreign commerce, without facing constitutional challenges under the Equal Protection or the Commerce Clause.

 Chicago Bridge & Iron, it might be noted, is a case in which the state tax is imposed on an American parent corporation.

 The Court relies on the absence of a “clear federal directive.” See ante, at 194, 196-197. In light of the Government’s position, as stated in the Solicitor General’s memorandum, see supra, at 204, the absence of a more formal statement of its view is entitled to little weight.