Court Opinion

ID: 4069504
Source: CourtListenerOpinion
Date Created: 2016-09-30 00:38:10.557641+00
Date Added: 2024-06-11T14:32:56.689788
License: Public Domain

ACCEPTED
                                                                       03-15-00113-CV
                                                                               5989837
                                                            THIRD COURT OF APPEALS
                                                                       AUSTIN, TEXAS
                                                                   7/8/2015 8:58:20 PM
                                                                     JEFFREY D. KYLE
                                                                                CLERK
                      No. 03-15-00113-CV

               In the Court of Appeals 3rd COURT  FILED IN
                                                       OF APPEALS
                                               AUSTIN, TEXAS
            for the Third Judicial District7/8/2015 8:58:20 PM
                                             JEFFREY D. KYLE
                    Austin, Texas                  Clerk

                     EMC CORPORATION,
                                   Appellant,
                              v.
   GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS
              OF THE STATE OF T EXAS , AND
K EN PAXTON, ATTORNEY GENERAL OF THE STATE OF TEXAS ,
                                   Appellees.

       On Appeal from the 353rd Judicial District Court
                    Travis County, Texas

                    BRIEF OF APPELLEES

K EN PAXTON                   SCOTT A. K ELLER
Attorney General of Texas     Solicitor General
CHARLES E. R OY               RANCE CRAFT
First Assistant Attorney      Assistant Solicitor General
 General                      State Bar No. 24035655
JAMES E. DAVIS                CHARLES K. ELDRED
Deputy Attorney General for   Assistant Attorney General
 Civil Litigation
                              OFFICE OF THE ATTORNEY GENERAL
                              P.O. Box 12548 (MC 059)
                              Austin, Texas 78711-2548
                              (512) 936-2872
                              (512) 474-2697 [fax]
                              rance.craft@texasattorneygeneral.gov

          Oral Argument Conditionally Requested
                     IDENTITY OF PARTIES AND C OUNSEL

Plaintiff/Appellant
     EMC Corporation

Trial and Appellate Counsel for Plaintiff/Appellant
      Doug Sigel (Doug.Sigel@RyanLawLLP.com)
      State Bar No. 18347650
      RYAN LAW FIRM, LLP
      100 Congress Avenue, Suite 950
      Austin, Texas 78701
      (512) 459-6000
      (512) 459-6601 [fax]

Appellate Counsel for Plaintiff/Appellant
     Ryan Cotter (Ryan.Cotter@RyanLawLLP.com)
     State Bar No. 24075969
     RYAN LAW FIRM, LLP
     100 Congress Avenue, Suite 950
     Austin, Texas 78701
     (512) 459-6000
     (512) 459-6601 [fax]

Trial Counsel for Plaintiff/Appellant
      Olga Goldberg (olga.goldberg@sutherland.com)*
      State Bar No. 24083081
      SUTHERLAND ASBILL & BRENNAN LLP
      1001 Fannin, Suite 3700
      Houston, Texas 77002
      (713) 470-6121
      (713) 654-1301 [fax]

* Ms. Goldberg was associated with Ryan Law Firm LLP when she appeared as trial counsel.
She is no longer counsel in this case. Her current contact information is listed here.
Trial Counsel for Plaintiff/Appellant (continued)
      Gavin Justiss**
      State Bar No. 24070027
      MACDONALD DEVIN
      3800 Renaissance Tower
      1201 Elm Street
      Dallas, Texas 75270
      (214) 744-3300
      (214) 747-0942 [fax]

Defendants/Appellees
     Glenn Hegar, Comptroller of Public Accounts of the State of Texas***
     Ken Paxton, Attorney General of the State of Texas***

Appellate Counsel for Defendants/Appellees
     Rance Craft (rance.craft@texasattorneygeneral.gov)
     Assistant Solicitor General
     State Bar No. 24035655
     OFFICE OF THE ATTORNEY GENERAL
     P.O. Box 12548 (MC 059)
     Austin, Texas 78711-2548
     (512) 936-2872
     (512) 474-2697 [fax]

** Mr. Justiss was associated with Ryan Law Firm LLP when he appeared as trial counsel.
He is no longer counsel in this case. His current contact information is listed here.

*** This suit initially named Susan Combs, then Comptroller of Public Accounts, and Greg
Abbott, then Attorney General, as defendants. Glenn Hegar succeeded Combs on January
2, 2015, and Ken Paxton succeeded Abbott on January 5, 2015. See TEX. R. APP. P. 7.2(a).

                                           ii
Trial and Appellate Counsel for Defendants/Appellees
      Charles K. Eldred (charles.eldred@texasattorneygeneral.gov)
      Assistant Attorney General
      State Bar No. 00793681
      OFFICE OF THE ATTORNEY GENERAL
      P.O. Box 12548 (MC 017)
      Austin, Texas 78711-2548
      (512) 475-1743
      (512) 477-2348 [fax]

                                   iii
                                         TABLE OF C ONTENTS

Identity of Parties and Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Index of Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x

Statement of the Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxii

Statement Regarding Oral Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxiii

Issues Presented . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxiv

Statement of Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

        I.       The Texas Franchise Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

                 A.       The Tax Base for the Franchise Tax . . . . . . . . . . . . . . . . . . 2

                 B.       Apportionment of the Tax Base for the Franchise
                          Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

                          1.       The gross-receipts apportionment method . . . . . . . . 4

                          2.       Requests for alternative apportionment (1970-
                                   1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

                          3.       Narrow exceptions to the gross-receipts
                                   method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

                          4.       Current apportionment statute . . . . . . . . . . . . . . . . . 7

                 C.       Current Calculation of Franchise Tax Due . . . . . . . . . . . . . 7

        II.      The Multistate Tax Compact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

                 A.       Adoption of the Compact . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

                                                          iv
                  B.       The Compact’s Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

                           1.        The Compact’s purposes . . . . . . . . . . . . . . . . . . . . . . . 9

                           2.        The Multistate Tax Commission . . . . . . . . . . . . . . . . 9

                           3.        The Compact’s income-tax articles . . . . . . . . . . . . . 10

                           4.        Compact provisions addressing joinder,
                                     withdrawal, and severability . . . . . . . . . . . . . . . . . . . 11

                  C.       State Variations from the Compact’s Income-Tax
                           Articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

         III.     The Franchise Tax and the Compact . . . . . . . . . . . . . . . . . . . . . . 13

         IV.      EMC’s Tax-Refund Suit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Summary of the Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

         I.       In Calculating Its Franchise Tax, EMC Must Apportion Its
                  Margin to Texas Using the Gross-Receipts Method in Section
                  171.106 of the Tax Code. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

                  A.       Section 171.106 Requires Taxpayers to Apportion
                           Their Margin Using the Gross-Receipts Method,
                           Subject Only to Certain Exceptions Provided in That
                           Section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

                  B.       The Compact’s Three-Factor Income-Apportionment
                           Method Does Not Apply to the Franchise Tax Because
                           It Is Not an Income Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

                                                           v
     1.       Article III.1’s “taxpayer option” and Article IV’s
              apportionment method apply only to
              apportionment of “income” for a state’s “income
              tax.” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

     2.       The Texas franchise tax is not an “income tax”
              and does not involve the apportionment of
              “income.” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

     3.       The Compact’s “income tax” definition does not
              expand Articles III and IV to include the
              franchise tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

              a.       Texas law establishes that the franchise
                       tax does not meet the Compact’s “income
                       tax” definition. . . . . . . . . . . . . . . . . . . . . . . . . . 23

              b.       The franchise tax does not meet the
                       Compact’s definition of an “income tax” on
                       its own terms. . . . . . . . . . . . . . . . . . . . . . . . . . . 24

     4.       The Compact’s definition of “gross receipts tax”
              does not support EMC’s argument that the
              franchise tax falls within the Compact’s “income
              tax” definition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

     5.       The Georgia Tax Tribunal’s analysis in
              Rosenberg v. MacGinnittie is inapposite. . . . . . . . . 27

C.   Section 171.106’s Mandate to Use the Gross-Receipts
     Method Prevails over Any Conflicting Language in the
     Compact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

     1.       As the later-enacted, more specific statute,
              section 171.106(a) prevails over the Compact. . . . . 29

                                    vi
             2.       Section 171.106(a) and the Compact cannot be
                      harmonized so that both apply to the franchise
                      tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

             3.       The presumption against implied repeals does
                      not support EMC’s reading of the Tax Code. . . . . 33

             4.       IBM v. Department of Treasury is
                      distinguishable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

                      a.        The Michigan Supreme Court was evenly
                                divided on the implied-repeal issue. . . . . . . . 36

                      b.        The IBM plurality opinion hinges on
                                Michigan’s distinct tax history. . . . . . . . . . . . 37

                      c.        The IBM plurality misconstrued Article
                                III.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

             5.       The rule that ambiguous tax statutes must be
                      construed in taxpayers’ favor does not apply
                      here. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

II.   Texas’s Membership in the Compact Does Not Preclude the
      Legislature from Requiring a Taxpayer to Use the Gross-
      Receipts Method to Apportion Margin. . . . . . . . . . . . . . . . . . . . . 41

      A.     Articles III and IV of the Compact Do Not Apply to
             the Franchise Tax Because It Is Not an “Income
             Tax.” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

      B.     The Legislature May Restrict the Compact’s
             Application in Texas Law Because It Is Not a Binding
             Regulatory Compact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

             1.       The term “compact” does not make this
                      Compact binding. . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

                                            vii
     2.     U.S. Steel did not address whether the Compact
            is a binding contract. . . . . . . . . . . . . . . . . . . . . . . . . . 44

     3.     The Compact does not exhibit the indicia of a
            binding regulatory compact. . . . . . . . . . . . . . . . . . . . 45

            a.      The Commission is not a joint regulatory
                    body. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

            b.      The Compact provisions do not require
                    reciprocal action to be effective. . . . . . . . . . . 47

            c.      The Compact does not prohibit unilateral
                    repeal or modification. . . . . . . . . . . . . . . . . . . 48

     4.     The Compact is an advisory compact with
            uniform laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

C.   The Compact Does Not Preclude the Legislature from
     Mandating Exclusive Use of Section 171.106’s Gross-
     Receipts Apportionment Method. . . . . . . . . . . . . . . . . . . . 53

     1.     Article III.1 does not unambiguously bar the
            Legislature from enforcing an exclusive
            apportionment method. . . . . . . . . . . . . . . . . . . . . . . . 54

     2.     Article III.1 cannot constitutionally require
            Texas to allow a taxpayer to remove part of its
            tax base from Texas’s taxing authority. . . . . . . . . . 56

D.   The Compact Does Not Supersede Section 171.106
     Because Any Conflict Does Not Unconstitutionally
     Impair Any Contractual Obligations. . . . . . . . . . . . . . . . . 59

                               viii
                            1.        Binding compacts that Congress has not
                                      approved preempt state law only if the law
                                      unconstitutionally impairs contractual
                                      obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

                            2.        Section 171.106 does not unconstitutionally
                                      impair any obligations to EMC under the
                                      Compact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

                            3.        EMC waived the Contracts Clause issue. . . . . . . . . 65

         III.      EMC’s As-Applied Constitutional Challenges Are
                   Jurisdictionally Barred, Waived, And Meritless. . . . . . . . . . . . 66

Prayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Certificate of Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Certificate of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Appendix

                                                             ix
                                     INDEX OF AUTHORITIES

Cases

Alabama v. North Carolina,
     560 U.S. 330 (2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51, 55

Allied Stores of Ohio, Inc. v. Bowers,
      358 U.S. 522 (1959) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Basic Capital Mgmt. v. Dynex Commercial, Inc.,
     348 S.W.3d 894 (Tex. 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

City of Charleston v. Pub. Serv. Comm’n,
      57 F.3d 385 (4th Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63, 64

Combs v. Chapal Zenray,
    357 S.W.3d 751 (Tex. App.—Austin 2011, pet. denied) . . . . . . . . . . . . 40

Combs v. Chevron, Inc.,
    319 S.W.3d 836 (Tex. App.—Austin 2010, pet. denied) . . . . . . . . . . . . 67

Cuyler v. Adams,
     449 U.S. 433 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Employees Ret. Sys. v. Duenez,
    288 S.W.3d 905 (Tex. 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Energy Reserves Grp., Inc. v. Kan. Power & Light Co.,
     459 U.S. 400 (1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63-65

Foster v. TDCJ,
     344 S.W.3d 543 (Tex. App.—Austin 2011, pet. denied) . . . . . . . . . . . . 26

Gaar, Scott & Co. v. Shannon,
     115 S.W. 361 (Tex. Civ. App.—Austin 1908, writ denied),
     aff’d, 223 U.S. 468 (1912) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

                                                       x
Gen. Dynamics Corp. v. Sharp,
     919 S.W.2d 861 (Tex. App.—Austin 1996, writ denied) . . . . . . . 2, 65, 69

Gen. Expressways, Inc. v. Iowa Reciprocity Bd.,
     163 N.W.2d 413 (Iowa 1968) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Gordon v. Lake,
     356 S.W.2d 138 (Tex. 1962) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Graphic Packaging Corp. v. Hegar,
     No. 03-14-00197-CV (Tex. App—Austin) (argued June 3, 2015) . . . xxiii

Green v. Biddle,
     21 U.S. (8 Wheat.) 1 (1823) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Hess v. Port Authority Trans-Hudson Corp.,
     513 U.S. 30 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

IBM v. Dep’t of Treasury,
    852 N.W.2d 865 (Mich. 2014) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-40

In re Nestle USA, Inc.,
      359 S.W.3d 207 (Tex. 2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

In re Nestle USA, Inc.,
      387 S.W.3d 610 (Tex. 2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 70

In re Park Mem’l Condo. Ass’n,
      322 S.W.3d 447 (Tex. App.—Houston [14th Dist.] 2010, no pet.) . . . . 68

Ingram Micro, Inc. v. Dep’t of Treas.,
     No. 11-000035-MT, slip op. (Mich. Ct. Cl. Dec. 19, 2014) . . . . . . . . . . . 46

INOVA Diagnostics, Inc. v. Strayhorn,
    166 S.W.3d 394 (Tex. App.—Austin 2005, pet. denied) . . . . . . . . . . 3, 22

                                                      xi
Jackson v. SOAH,
     351 S.W.3d 290 (Tex. 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Kimberly Clark Corp. v. Comm’r of Revenue,
    No. 8670-R, slip op. (Minn. Tax Ct. June 19, 2015)
    (en banc) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56, 58-59, 64

Liberty Mut. Ins. Co. v. Tex. Dep’t of Ins.,
      187 S.W.3d 808 (Tex. App.—Austin 2006, pet. denied) . . . . . . . . . . . . 63

McComb v. Wambaugh,
    934 F.2d 474 (3d Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Moorman Mfg. Co. v. Bair,
    437 U.S. 267 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48, 64, 65

Nat’l R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Ry.,
      470 U.S. 451 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Ne. Bancorp, Inc. v. Bd. of Governors of Fed. Reserve Sys.,
     472 U.S. 159 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45-47, 49

Nw. Austin MUD No. 1 v. City of Austin,
     274 S.W.3d 820 (Tex. App.—Austin 2008, pet. denied) . . . . . . . . . . . . 24

Rathbun v. State,
     280 N.W. 35 (Mich. 1938) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Rosenberg v. MacGinnittie,
     No. 1414626, slip op. (Ga. Tax Trib. Nov. 25, 2014) . . . . . . . . . . . . 28, 29

Seattle Master Builders Ass’n v. Pac. Nw. Elec. Power &
      Conservation Planning Council,
      786 F.2d 1359 (9th Cir. 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45-47, 49

State v. $1,760.00 in U.S. Currency,
      406 S.W.3d 177 (Tex. 2013) (per curiam) . . . . . . . . . . . . . . . . . . . . . . . . 24

                                                      xii
Sunbeam Envtl. Servs. v. Tex. Workers’ Comp. Ins. Facility,
     71 S.W.3d 846 (Tex. App.—Austin 2002, no pet.) . . . . . . . . . . . . . . . . . 66

Tarrant Reg’l Water Dist. v. Hermann,
     133 S. Ct. 2120 (2013) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 55, 56, 59

U.S. Steel Corp. v. Multistate Tax Comm’n,
      434 U.S. 452 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 44-48, 53, 62

U.S. Trust Co. v. New Jersey,
      431 U.S. 1 (1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63-64, 66

Vincent v. Bank of Am., N.A.,
     109 S.W.3d 856 (Tex. App.—Dallas 2003, pet. denied) . . . . . . . . . . . . . 68

W. Union Tel. Co. v. Kansas,
     216 U.S. 1 (1910) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

W. Union Tel. Co. v. State,
     126 S.W. 1197 (Tex. 1910) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

West Virginia ex rel. Dyer v. Sims,
     341 U.S. 22 (1951) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61, 62

Constitutional Provisions, Statutes, and Rules

1971 Fla. Laws ch. 71-980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

1987 Minn. Law ch. 268 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

2010 Utah Laws ch. 155 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Act approved Apr. 30, 1897, 25th Leg., R.S., ch. 104,
      1897 Tex. Gen. Laws 140 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

                                                      xiii
Act approved Mar. 17, 1917, 35th Leg., R.S., ch. 84,
      1917 Tex. Gen. Laws 168 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Act of Aug. 13, 1991, 72d Leg., 1st C.S., ch. 5,
      1991 Tex. Gen. Laws 134 . . . . . . . . . . . . . . . . . . . . . . . . . 3, 6-7, 14, 30, 34

Act of July 30, 1959, 56th Leg., 3d C.S., ch. 1,
      1959 Tex. Gen. Laws 187 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3, 5

Act of Mar. 1, 1989, 71st Leg., R.S., ch. 3,
      1989 Tex. Gen. Laws 200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 35

Act of Mar. 18, 1919, 36th Leg., R.S., ch. 60,
      1919 Tex. Gen. Laws 100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Act of Mar. 19, 1987, 70th Leg., R.S., ch. 10,
      1987 Tex. Gen. Laws 27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Act of May 17, 1967, 60th Leg., R.S., ch. 566, § 1,
      1967 Tex. Gen. Laws 1254 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Act of Sept. 6, 1969, 61st Leg., 2d C.S., ch. 1,
      1969 Tex. Gen. Laws 61 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 35

Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1,
      2006 Tex. Gen. Laws 1 . . . . . . . . . . . . . . . . . . . . . . . 3, 5, 14, 21, 23, 24, 34

Act of May 30, 1997, 75th Leg., R.S., ch. 1185, § 7,
      1997 Tex. Gen. Laws 4569 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Act of May 31, 1981, 67th Leg., R.S., ch. 389, § 1,
      1981 Tex. Gen. Laws 1490 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 5

ALA. CODE § 40-27-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

ALASKA CONST. art. IX, § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

                                                      xiv
ARK. CODE § 26-5-101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

ARK. CONST. art. 16, § 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

CAL. CONST. art. XIII, § 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

CAL. REV. & TAX CODE § 25128 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

COLO. REV. STAT. § 24-60-1301 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

COLO. REV. STAT. § 39-22-303.5(4)(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

D.C. CODE § 47-441 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

FLA. STAT. § 220.15(4) (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

HAW. CONST. art. VII, § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

IDAHO CODE § 63-3027(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

ILL. CONST. art. IX, § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

MICH. COMP. LAWS § 208.1301 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

MICH. CONST. art. IX, § 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

MINN. CONST. art. X, § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

MINN. STAT. § 290.191 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

MINN. STAT. § 290.171 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

MO. CONST. art. X, § 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

MONT. CONST. art. VIII, § 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

N.D. CONST. art. X, § 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

                                                       xv
O.C.G.A. § 48-7-27(d)(1)(C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

OR. REV. STAT § 314.606 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

OR. REV. STAT § 314.650 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

OR. REV. STAT. § 305.653 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

S.D. CONST. art. XI, § 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

TEX. CONST. art. I, § 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

TEX. CONST. art. VIII, § 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

TEX. FAM. CODE § 60.010, art. XII.A.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

TEX. GOV’T CODE § 311.005(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

TEX. GOV’T CODE § 311.025(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

TEX. GOV’T CODE § 311.026(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

TEX. GOV’T CODE § 510.017, art. I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

TEX. GOV’T CODE § 510.017, art. XIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

TEX. R. APP. P. 38.1(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

TEX. R. APP. P. 7.2(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii

TEX. R. CIV. P. 301 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

TEX. TAX CODE § 112.151(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

TEX. TAX CODE § 112.152(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

TEX. TAX CODE § 141.001 . . . . . . . . . . . . . . . . . . . . . . . . . . . xxii, 8, 13, 18, 19, 21

                                                        xvi
TEX. TAX CODE § 141.001, art. I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 52

TEX. TAX CODE § 141.001, art. II.4 . . . . . . . . . . . . . . . . . . . . . . . . . 23, 24, 25, 28

TEX. TAX CODE § 141.001, art. II.9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

TEX. TAX CODE § 141.001, art. III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 30

TEX. TAX CODE § 141.001, art. III.1 . . . . . . . . . . . . . . . . . . . . . 11, 20, 32, 39, 54

TEX. TAX CODE § 141.001, art. III.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

TEX. TAX CODE § 141.001, art. III.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 20

TEX. TAX CODE § 141.001, art. IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 20, 30

TEX. TAX CODE § 141.001, art. IV.2 . . . . . . . . . . . . . . . . . . . . . . . . 10, 20, 21, 22

TEX. TAX CODE § 141.001, art. IV.2-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

TEX. TAX CODE § 141.001, art. IV.9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 21

TEX. TAX CODE § 141.001, art. VI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

TEX. TAX CODE § 141.001, art. VI.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

TEX. TAX CODE § 141.001, art. VI.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 46

TEX. TAX CODE § 141.001, art. VI.4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

TEX. TAX CODE § 141.001, art. VII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

TEX. TAX CODE § 141.001, art. VII.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

TEX. TAX CODE § 141.001, art. VIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

TEX. TAX CODE § 141.001, art. VIII.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47, 49

                                                  xvii
TEX. TAX CODE § 141.001, art. X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

TEX. TAX CODE § 141.001, art. X.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 57

TEX. TAX CODE § 141.001, art. X.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 49

TEX. TAX CODE § 141.001, art. XII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 57

TEX. TAX CODE § 141.001, art.IV.1(g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

TEX. TAX CODE § 141.001, art.IV.10-17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

TEX. TAX CODE § 141.001, arts. II-V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

TEX. TAX CODE § 141.001, arts. I-XII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

TEX. TAX CODE § 171.002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 7, 21

TEX. TAX CODE § 171.101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 4, 21

TEX. TAX CODE § 171.101(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 25

TEX. TAX CODE § 171.101(a)(1)(B)(ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 25

TEX. TAX CODE § 171.101(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

TEX. TAX CODE § 171.101(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

TEX. TAX CODE § 171.101(B)(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 25

TEX. TAX CODE § 171.106 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

TEX. TAX CODE § 171.106(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

TEX. TAX CODE § 171.106(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 19

                                                   xviii
TEX. TAX CODE § 171.106(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 19

TEX. TAX CODE § 171.106(d)-(g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 19

TEX. TAX CODE § 171.1011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

TEX. TAX CODE § 171.1011(e)-(x) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

TEX. TAX CODE § 171.1012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

TEX. TAX CODE § 171.1013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

TEX. TAX CODE § 171.1014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 34

TEX. TAX CODE § 171.1014(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 15

TEX. TAX CODE § 171.1016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 22

TEX. TAX CODE § 171.1016(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

TEX. TAX CODE § 171.1016(b)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

TEX. TAX CODE § 171.1016(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 26

TEX. TRANSP. CODE § 523.007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

U.S. CONST. art I, § 10, cl. 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

U.S. CONST. art. I, § 10, cl. 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

UTAH CODE § 59-1-801 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

UTAH CODE § 59-1-801.5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

WASH. CONST. art. 7, § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

WYO. CONST. art. 15, § 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

                                                      xix
Other Authorities

BLACK’S LAW DICTIONARY (9th ed. 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

BLACK’S LAW DICTIONARY (6th ed. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

CAROLINE N. BROUN, ET AL.,
    THE EVOLVING USE AND THE CHANGING
    ROLE OF INTERSTATE COMPACTS:
    A PRACTITIONER’S GUIDE (2006) . . . . . . . . . 43, 44, 46, 47, 51, 52, 53, 60

COMPTROLLER’S DECISION NOS. 104,752 & 104,753 (2011) . . . . . . . . . . . . . 41

WILLIAM FLETCHER,
    FLETCHER CYCLOPEDIA OF THE LAW OF CORPORATIONS (2014) . . . 26

WALTER HELLERSTEIN,
    STATE TAXATION (3d ed. 2014) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Annual Reports, MULTISTATE TAX COMM’N,
    http://www.mtc.gov/The-Commission/Annual-Report . . . . . . . . . . . . . 13

MULTISTATE TAX COMM’N, FIRST ANNUAL REPORT (1969),
    available at http://www.mtc. gov/uploadedFiles/
    Multistate_Tax_Commission/Resources/Archives/
    Annual_Reports/FY67-68.pdf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Member States, MULTISTATE TAX COMM’N, http://www.mtc.gov/
    The- Commission/Member-States (last visited July 7, 2015) . . . . . . . . 8

SELECT COMM. ON TAX EQUITY,
    RETHINKING TEXAS TAXES (Jan. 1989) . . . . . . . . . . . . . . . . . . . . . . . 6, 35

NORMAN J. SINGER & J.D. SHAMBIE SINGER,
    SUTHERLAND STATUTES AND STATUTORY
    CONSTRUCTION (7th ed. 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59-60

                                                xx
Kearns B. Taylor,
     Texas’ Exciting Answer in the Battle With
     Proponents of Federal Control Over State Taxation of
     Interstate Commerce, 30 TEX. B.J. 773 (Oct. 1967) . . . . . . . . . . . . . . . 13

TEX. JUR. 3d Statutes § 62 (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

UNIF. DIV. OF INCOME FOR TAX PURPOSES ACT,
     7A U.L.A. 155 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

David A. Vanderhider,
     Comment, A Marginal Tax: The New Franchise
     Tax in Texas, 39 ST. MARY’S L.J. 615 (2008) . . . . . . . . . . . . . . . . . . . . . 22

                                                    xxi
                           STATEMENT OF THE C ASE

Nature of the Case:         EMC Corporation filed this tax-refund suit against
                            the Comptroller and the Attorney General
                            (collectively, “the Comptroller”) to recover franchise
                            taxes that it paid to the State for report years 2010-
                            2012. CR.4-10.1 EMC claimed that it was entitled to
                            reduce its franchise-tax liability for those years by
                            electing the three-factor method for apportioning a
                            multistate taxpayer’s “business income” to a state
                            under the Multistate Tax Compact, TEX. TAX CODE
                            § 141.001, rather than using the single-factor gross-
                            receipts method for apportioning margin to Texas
                            required by the franchise-tax statutes, id.
                            § 171.106(a). CR.6.

Trial Court:                353rd Judicial District Court, Travis County
                            The Honorable Darlene Byrne (presiding)

Course of Proceedings:      The parties filed cross-motions for summary
                            judgment. CR.666-1165.

Trial Court                 The trial court granted the Comptroller’s summary-
Disposition:                judgment motion, denied EMC’s summary-judgment
                            motion, and rendered final judgment for the
                            Comptroller. CR.1172.

1. Citations of the clerk’s record will appear as “CR.[page number].” Citations of the
appendix to this brief will appear as “App. [tab letter].”

                                         xxii
                STATEMENT REGARDING O RAL ARGUMENT

      Oral argument is not necessary. All but two pages of the Argument

section in EMC’s opening brief concern the precise issues that the Court will

decide in Graphic Packaging Corp. v. Hegar, No. 03-14-00197-CV, which was

submitted with oral argument on June 3, 2015. EMC Br. 7-20. And, as

discussed below, those two remaining pages concern issues that EMC waived

by failing to present them in its motion for rehearing before the Comptroller or

its petition in this suit. See infra Argument, Part III. Because the Court’s

decision in Graphic Packaging will control the only properly preserved issues

in this case, hearing oral argument will not be an efficient use of the Court’s or

the parties’ resources.

      That said, if the Court sets this case for oral argument, the Comptroller

respectfully requests the opportunity to participate.

                                      xxiii
                             ISSUES PRESENTED

      This appeal primarily concerns whether a taxpayer may reduce its

franchise-tax liability by choosing to apportion its margin to Texas using the

Multistate Tax Compact’s three-factor method for apportioning business

income for a state income tax, rather than using the single-factor method for

apportioning margin for the franchise tax set forth in section 171.106 of the Tax

Code. If taxpayers must use the single-factor method, EMC further contends

that applying that method to its business in particular violates the Due Process

and Commerce Clauses of the United States Constitution and the Equal and

Uniform Taxation Clause of the Texas Constitution.

      1.    Does the Compact’s three-factor method for apportioning
            business income for a state income tax also apply to
            apportioning margin for the franchise tax?

      2.    Does section 171.106 prohibit a taxpayer from electing the
            Compact’s three-factor method to apportion its margin?

      3.    Does Texas’s membership in the Compact prevent the
            Legislature from making section 171.106’s single-factor
            method the exclusive method for apportioning margin?

      4.    Did EMC preserve its due-process, commerce-clause, and
            equal-and-uniform-taxation challenges for review?

      5.    Does application of the single-factor method to EMC violate
            the Due Process, Commerce, or Equal and Uniform Taxation
            Clauses?

                                      xxiv
                             No. 03-15-00113-CV

                      In the Court of Appeals
                   for the Third Judicial District
                           Austin, Texas
                            EMC CORPORATION,
                                          Appellant,
                                   v.

         GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS
                    OF THE STATE OF T EXAS , AND
      K EN PAXTON, ATTORNEY GENERAL OF THE STATE OF TEXAS ,
                                         Appellees.

              On Appeal from the 353rd Judicial District Court
                           Travis County, Texas

                           BRIEF OF APPELLEES

TO THE HONORABLE THIRD COURT OF APPEALS :

      To accept EMC’s view that it may compute its franchise tax using the

Compact’s three-factor income-apportionment method, the Court would have

to disregard (1) the Tax Code’s command that the only exceptions to the gross-

receipts apportionment method are provided in section 171.106, (2) the

Legislature’s directive that the franchise tax is not an income tax, and (3) the

Compact states’ contrary construction of their agreement over the past 42

years. The Court should reject EMC’s position and affirm the judgment.
                            STATEMENT OF FACTS

I.    THE TEXAS FRANCHISE TAX

      Since 1893, Texas has imposed a franchise tax on certain business entities

that are organized under Texas law or that operate in Texas. See In re Nestle

USA, Inc., 387 S.W.3d 610, 612-14 (Tex. 2012) (Nestle II). Those entities pay

the franchise tax for the privilege of doing business here. Id. at 622.

      The franchise-tax calculation has frequently changed. See id. at 612-16.

Generally, though, it starts with the taxpayer’s “tax base,” which is some

measure of the value of the taxpayer’s entire business during the year. See Gen.

Dynamics Corp. v. Sharp, 919 S.W.2d 861, 863 (Tex. App.—Austin 1996, writ

denied). If the taxpayer transacted business both within and outside Texas, its

tax base must be “apportioned” to Texas to determine the share that may fairly

be attributed to its Texas business and thus taxed by Texas. See id. Finally,

the taxpayer multiplies that Texas portion of its tax base by the tax rate to

compute its tax due. See id. at 864. These components are discussed below.

      A.    The Tax Base for the Franchise Tax

      From 1897 to 1991, the franchise tax base was exclusively some measure

of “capital.” Act approved Apr. 30, 1897, 25th Leg., R.S., ch. 104, § 1, 1897 Tex.

Gen. Laws 140, 141 (“authorized capital stock”); Act of July 30, 1959, 56th Leg.,

                                        2
3d C.S., ch. 1, § 1, 1959 Tex. Gen. Laws 187, 306 (“taxable capital”); Act of May

31, 1981, 67th Leg., R.S., ch. 389, § 1, 1981 Tex. Gen. Laws 1490, 1697 (same).

      In 1991, the Legislature added “earned surplus” as an alternate tax base.

Act of Aug. 13, 1991, 72d Leg., 1st C.S., ch. 5, § 8.09, 1991 Tex. Gen. Laws 134,

159-60. Earned surplus was an adjusted version of “reportable federal taxable

income.” Id. Different tax rates applied to capital and earned surplus, and the

taxpayer used the tax base that yielded the higher tax. See id. § 8.03, 1991 Tex.

Gen. Laws 153; INOVA Diagnostics, Inc. v. Strayhorn, 166 S.W.3d 394, 398

(Tex. App.—Austin 2005, pet. denied).

      In 2008, “margin” replaced both capital and earned surplus as the

franchise tax’s main tax base. Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, § 2,

2006 Tex. Gen. Laws 1, 6-7 (eff. Jan. 1, 2008) (codified at TEX. TAX CODE

§ 171.002). The margin calculation begins with “total revenue,” which is derived

by adding together certain income reportable on a federal tax return, then

subtracting bad debts and other items included as revenue on the federal

return. TEX. TAX CODE §§ 171.101, .1011. Receipts associated with various

transactions are also excluded from total revenue. See id. § 171.1011(e)-(x).

Based on the resulting total revenue, the taxpayer’s margin is the smallest of

four amounts: (1) 70% of total revenue; (2) total revenue minus $ 1 million;

                                        3
(3) total revenue minus “costs of goods sold”; or (4) total revenue minus a

capped amount of wages and compensation paid and costs of benefits provided.

Id. §§ 171.101, .1012, .1013.

      Also beginning in 2008, a taxpayer whose total revenue does not exceed

$10 million may use total revenue instead of margin as its tax base. Id.

§ 171.1016. Taxpayers using this option—named the “E-Z Computation”—pay

a different tax rate and forgo credits and deductions. Id.

      B.    Apportionment of the Tax Base for the Franchise Tax

            1.     The gross-receipts apportionment method

      In 1910, the Texas Supreme Court ruled that the franchise tax was

unconstitutional as applied to foreign corporations because it was based on a

corporation’s capital from its entire business, both within and outside Texas.

See W. Union Tel. Co. v. State, 126 S.W. 1197, 1197 (Tex. 1910) (citing W. Union

Tel. Co. v. Kansas, 216 U.S. 1 (1910) (holding that a similar privilege fee violated

the Due Process and Commerce Clauses)).

      In response, the Legislature amended the franchise tax to require both

Texas and foreign corporations to “apportion” their capital and to use only the

portion attributable to their Texas business in computing the tax. To do this,

a corporation multiplied its capital by a fraction: the “gross receipts” from its

                                         4
Texas business divided by the gross receipts from its entire business. Act

approved Mar. 17, 1917, 35th Leg., R.S., ch. 84, § 1, 1917 Tex. Gen. Laws 168

(foreign corporations); Act of Mar. 18, 1919, 36th Leg., R.S., ch. 60, § 1, 1919

Tex. Gen. Laws 100 (Texas corporations).

      Although the franchise tax’s tax base has changed several times, the

gross-receipts apportionment method has remained constant. The Legislature

retained the gross-receipts fraction as the required method in the 1959 revision,

the 1981 codification, and the 2006 restructuring of the franchise tax. Act of

July 30, 1959, 56th Leg., 3d C.S., ch. 1, § 1, 1959 Tex. Gen. Laws 187, 307-08; Act

of May 31, 1981, 67th Leg., R.S., ch. 389, § 1, 1981 Tex. Gen. Laws 1490, 1698;

Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 21

(codified at TEX. TAX CODE § 171.106).

            2.     Requests for alternative apportionment (1970-1989)

      From 1970 to 1989, a taxpayer could ask the Comptroller to allow it to use

a different apportionment method that would more “fairly represent” its Texas

business. Act of Sept. 6, 1969, 61st Leg., 2d C.S., ch. 1, art. 7, § 1, 1969 Tex.

Gen. Laws 61, 96. Among the options, the taxpayer could request “inclusion of

one or more additional factors [with the gross-receipts fraction].” Id.

                                        5
      This provision was later analyzed by the Select Committee on Tax Equity,

a body created in 1987 to study the Texas tax system and its impact on the state

economy. Act of Mar. 19, 1987, 70th Leg., R.S., ch. 10, §§ 1-2, 1987 Tex. Gen.

Laws 27. The Committee recommended eliminating this option because it gave

foreign corporations a tax advantage over Texas businesses:

      At the taxpayer’s request, additional factors such as property and
      payroll can be included in the calculation. . . . [T]here is no incentive
      to use additional factors unless they result in reduced tax liability.
      . . . [B]usinesses that profit from the use of additional factors tend
      to be out-of-state corporations with substantial sales into Texas but
      more property and payroll in other states. The Committee
      recommends that the use of additional factors be eliminated.

1 SELECT COMM. ON TAX EQUITY, RETHINKING TEXAS TAXES 49 (Jan. 1989).

      In 1989, the Legislature adopted the Committee’s recommendation and

repealed the provision, leaving the gross-receipts fraction as the exclusive

apportionment method. Act of Mar. 1, 1989, 71st Leg., R.S., ch. 3, § 2, 1989 Tex.

Gen. Laws 200.

            3.     Narrow exceptions to the gross-receipts method

      Since 1989, the Legislature has carved out only two exceptions to the

gross-receipts fraction. A tax base derived from sales of services to or for a

regulated investment company is apportioned with a fraction based on company

shares. Act of Aug. 13, 1991, 72d Leg., 1st C.S., ch. 5, § 8.07, 1991 Tex. Gen.

                                         6
Laws 134, 157-58. And a tax base derived from sales of services to an employee

retirement plan is apportioned with a fraction based on plan beneficiaries. Act

of May 30, 1997, 75th Leg., R.S., ch. 1185, § 7, 1997 Tex. Gen. Laws 4569, 4571.

            4.    Current apportionment statute

      Since the tax base changed to margin in 2008, section 171.106 of the Tax

Code has continued to require use of the gross-receipts apportionment method.

TEX. TAX CODE § 171.106(a). The only exceptions are: (1) the different methods

related to investment companies and retirement plans discussed above, id.

§ 171.106(b), (c); and (2) adjustments to the gross-receipts figure for a few

specific entities and transactions, id. § 171.106(d)-(g). An “E-Z Computation”

filer also uses this section to apportion total revenue. Id. § 171.1016(b)(2).

      C.    Current Calculation of Franchise Tax Due

      To calculate its franchise tax, a taxpayer first multiplies its margin by the

gross-receipts fraction to determine “apportioned margin.” Id. § 171.101(a)(2).

From apportioned margin, the taxpayer subtracts any allowable deductions to

obtain “taxable margin.” Id. § 171.101(a)(3). Finally, taxable margin is

multiplied by the tax rate to compute the tax due. Id. § 171.002.

      An “E-Z Computation” filer multiplies its total revenue by the gross-

receipts fraction to obtain its “apportioned total revenue.” Id. § 171.1016(b)(2).

                                        7
That “apportioned total revenue” is multiplied by 0.575% to compute the tax

due. Id. § 171.1016(b)(3).

II.   THE MULTISTATE TAX C OMPACT

      A.    Adoption of the Compact

      In 1967, Texas adopted the Multistate Tax Compact, an interstate

agreement concerning certain issues in the taxation of multistate taxpayers.

Act of May 17, 1967, 60th Leg., R.S., ch. 566, § 1, 1967 Tex. Gen. Laws 1254,

1254-65. The Compact is codified in section 141.001 of the Tax Code. TEX. TAX

CODE § 141.001 (App. A).

      By its terms, id., art. X.1, the Compact became effective in August 1967,

after seven states had enacted it in their state laws, U.S. Steel Corp. v.

Multistate Tax Comm’n, 434 U.S. 452, 454 (1978). Currently, 15 states and the

District of Columbia are members. Member States, MULTISTATE TAX COMM’N,

http://www.mtc.gov/The- Commission/Member-States (last visited July 7, 2015).

Congress never has consented to this Compact under the Constitution’s

Compact Clause. See U.S. Steel, 434 U.S. at 458 n.8.

                                      8
      B.    The Compact’s Provisions

            1.    The Compact’s purposes

      The Compact’s stated purposes are to: (1) “[f]acilitate proper

determination of state and local tax liability of multistate taxpayers, including

the equitable apportionment of tax bases and settlement of apportionment

disputes”; (2) “[p]romote uniformity or compatibility in significant components

of tax systems”; (3) “[f]acilitate taxpayer convenience and compliance in the

filing of tax returns and in other phases of tax administration”; and (4) “[a]void

duplicative taxation.” TEX. TAX CODE § 141.001, art. I.

            2.    The Multistate Tax Commission

      The Compact creates the Multistate Tax Commission, which is composed

of the member states’ tax administrators. Id., art. VI.1. The Compact

authorizes the Commission to study state and local tax systems, to develop

proposals for increasing uniformity or compatibility of tax laws, and to publish

information to help states implement the Compact and to aid compliance with

tax laws. Id., art. VI.3. The Commission also may draft model tax regulations,

which have no force in a state unless the state adopts them. Id., art. VII. A

state may ask the Commission to audit a taxpayer on its behalf. Id., art. VIII.

                                        9
Still, the Compact grants the Commission no regulatory authority over the

member states. See id., arts. I-XII.

            3.    The Compact’s income-tax articles

      Article IV, titled “Division of Income,” reproduces nearly verbatim the

Uniform Division of Income for Tax Purposes Act (“UDITPA”), a model law

promulgated in 1957. Compare id., art. IV, with UNIF. DIV. OF INCOME FOR

TAX PURPOSES ACT, 7A U.L.A. 155 (2002). Article IV.2 states that, subject to

a few exceptions, a taxpayer “shall allocate and apportion his net income as

provided in this article.” TEX. TAX CODE § 141.001, art. IV.2. Article IV.9

provides that method, which uses the equally weighted average of three factors:

      All business income shall be apportioned to this state 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.

Id., art. IV.9. The three factors are fractions representing the proportion of

certain aspects of the taxpayer’s business located in the taxing state: (1) value

of in-state property divided by value of all property, (2) compensation paid in

the state divided by all compensation paid, and (3) gross receipts from in-state

sales divided by gross receipts from all sales. Id., art.IV.1(g), 10-17.

                                       10
      Article III, “Elements of Income Tax Laws,” sets forth two “Taxpayer

Option[s].” Id., art. III.1-2. Article III.1 states that a taxpayer subject to a

Compact state’s income tax may elect to apportion its income “in the manner

provided by the laws of such state” (other than the Compact) or using Article

IV’s three-factor apportionment method. Id., art. III.1. Article III.2 prescribes

an alternate income-tax computation for small taxpayers. Id., art. III.2. These

options do not apply to “any tax other than an income tax.” Id., art. III.3.

            4.     Compact provisions addressing joinder, withdrawal, and
                   severability

      A state joins the Compact by enacting it into state law. Id., art. X. A

Compact provision held to violate a state constitution is severable. Id., art. XII.

      A state withdraws from the Compact “by enacting a statute repealing the

same.” Id., art. X.2. Nothing in the Compact limits when a state may withdraw

or requires notice of the withdrawal. See id., art. X.

      C.    State Variations from the Compact’s Income-Tax Articles

      In 1971, Florida repealed Articles III and IV of the Compact, 1971 Fla.

Laws ch. 71-980, § 1; App. B at 8, and enacted a mandatory three-factor

apportionment method placing double weight on the sales factor, FLA. STAT.

§ 220.15(4) (1971); App. B at 15. At the following Commission meeting, Florida

                                        11
expressed its view that the repeal was “fully consistent with the principles of the

Multistate Tax Compact.” CR.879. In response, the other 17 member states

unanimously approved a resolution recognizing Florida “as a regular member

in good standing” of the Compact. Id.

      Many Compact members followed Florida’s example in some respect,

enacting apportionment laws that disallowed use of Article IV’s equally-

weighted three-factor method and Article III.1’s option to elect that method:

      !     In 1987, Minnesota repealed Articles III and IV and required
            apportionment based on a three-factor method that placed
            greater weight on the sales factor. 1987 Minn. Law ch. 268,
            art. I, §§ 74-75 (codified at MINN. STAT. §§ 290.171, .191).

      !     In 1993, California and Oregon disallowed application of
            Articles III and IV and required apportionment based on a
            three-factor method that placed greater weight on the sales
            factor. CAL. REV. & TAX CODE § 25128; OR. REV. STAT
            §§ 314.606, .650. In 2013, Oregon re-enacted the Compact
            without Articles III and IV. OR. REV. STAT. § 305.653.

      !     In 1995, Arkansas amended Article IV to double-weight the
            sales factor. ARK. CODE § 26-5-101.

      !     In 1996, Idaho disallowed application of Article III.1 and
            required apportionment based on a three-factor method that
            double-weighted the sales factor. IDAHO CODE § 63-3027(i).

      !     In 2008, Michigan required apportionment based only on the
            sales factor. MICH. COMP. LAWS § 208.1301.

                                        12
       !    In 2009, Colorado repealed Article III.1, COLO REV. STAT.
            § 24-60-1301, and required apportionment based only on the
            sales factor, id. § 39-22-303.5(4)(a).

       !    In 2010, Utah amended Article IV to increase the weight of
            the sales factor for most taxpayers. 2010 Utah Laws ch. 155
            (formerly codified at UTAH CODE § 59-1-801). In 2013, Utah
            re-enacted the Compact without Articles III and IV. UTAH
            CODE § 59-1-801.5.

       !    In 2011, Alabama amended Article IV to double-weight the
            sales factor. ALA. CODE § 40-27-1.

       !    In 2013, the District of Columbia re-enacted the Compact
            without Articles III and IV. D.C. CODE § 47-441.

Consistent with the Commission’s 1972 Florida resolution, there is no record of

any state ever objecting to these variations. See Annual Reports, MULTISTATE

TAX COMM’N, http://www.mtc.gov/The-Commission/Annual-Report.

III.   THE FRANCHISE TAX AND THE C OMPACT

       When Texas adopted the Compact in 1967, the franchise tax was assessed

only on capital. Thus, although the Compact’s income-tax articles (III and IV)

became part of Texas law, see TEX. TAX CODE § 141.001, they did not apply to

any Texas tax. See Kearns B. Taylor, Texas’ Exciting Answer in the Battle

With Proponents of Federal Control Over State Taxation of Interstate

Commerce, 30 TEX. B.J. 773, 821 (Oct. 1967) (“Texas, of course, not having an

income tax is not affected by the Compact allocation formula.”).

                                      13
      The introduction of the “earned surplus” tax base in 1991 might have

implicated Articles III and IV because it was an adjusted version of a taxpayer’s

federal taxable income. But in that same act, the Legislature enacted former

section 171.112(g), which stated: “Chapter 141 does not apply to this chapter.”

Act of Aug. 13, 1991, 72d Leg., 1st C.S., ch. 5, § 8.10, 1991 Tex. Gen. Laws 134,

162. That is, the Compact does not apply to the franchise tax. Id.

      When the Legislature changed the tax base to “margin,” it removed the

obsolete references to capital and earned surplus. Act of May 2, 2006, 79th

Leg., 3d C.S., ch. 1, §§ 2-7, 2006 Tex. Gen. Laws 1, 1-35. Among those deletions

was the repeal of all of section 171.112 (“Gross Receipts for Taxable Capital”),

including subsection (g)’s proviso that “Chapter 141 does not apply to this

chapter.” Id. § 5, 2006 Tex. Gen. Laws 28. The same act specified, though, that

“[t]he franchise tax imposed by Chapter 171, Tax Code, as amended by this Act,

is not an income tax.” Id. § 21, 2006 Tex. Gen. Laws 38 (emphasis added).

      The 2006 legislation also added a reference to the Compact. Under new

section 171.1014, taxpayers in an affiliated group must file a combined report.

TEX. TAX CODE § 171.1014(a). But a combined group may not include a taxable

entity that conducts business outside the United States “if 80 percent or more

of the taxable entity’s property and payroll, as determined by factoring under

                                       14
Chapter 141, are assigned to locations outside the United States.” Id. Chapter

171 otherwise does not refer to the Compact.

IV.   EMC’S TAX-REFUND SUIT

      For report years 2010 through 2012, EMC calculated its franchise tax

using the gross-receipts apportionment method required by section 171.106.

CR.716. EMC later filed amended reports for those years that re-apportioned

its margin using the Compact’s three-factor income-apportionment method.

CR.717.   Based on those amended reports, EMC filed refund claims of

$1,132,972.54 (2010), $2,110,606.50 (2011), and $2,305,684.62 (2012). Id.

      The Comptroller denied EMC’s refund claims, reasoning that section

171.106 required EMC to use the gross-receipts method to apportion its

margin. CR.1139-42.

      EMC filed a motion for rehearing with the Comptroller. CR.8-10. The

sole ground of error presented in the motion was: “Texas is required to allow

taxpayers to follow Article IV of the Multistate Tax Compact since Texas was

a member of the compact for the years at issue.” CR.8. The Comptroller

denied the motion. CR.718.

      EMC then filed this tax-refund suit. CR.4-10. EMC sought to recover

$5,549,263.66—the sum of its refund claims—on the sole ground that, under the

                                      15
Compact, Texas was required to allow EMC to apportion its margin using the

Compact’s three-factor income-apportionment method. CR.5-6.

      The parties filed cross-motions for summary judgment. CR.666-1165.

The district court granted the Comptroller’s motion, denied EMC’s motion, and

rendered final judgment for the Comptroller. CR.1172. This appeal followed.

CR.1166.

                       SUMMARY OF THE ARGUMENT

      As a matter of Texas law, EMC may not compute its franchise tax by

invoking the “taxpayer option” in Article III.1 of the Compact and applying

Article IV’s income-apportionment method. Section 171.106 of the Tax Code

compels EMC to apportion its margin to Texas using that statute’s gross-

receipts method. But even if EMC could venture outside of section 171.106 for

an apportionment method, the Compact would not be an option because, as the

Legislature has explicitly stated, the franchise tax is not an income tax. And to

the extent that section 171.106 conflicts with the Compact’s application, section

171.106 prevails as the later-enacted, more specific statute.

      The Compact’s status as an interstate compact does not mean that it

trumps section 171.106 here. The Compact’s structure and terms show that it

is only an advisory agreement that contains uniform laws, not a regulatory

                                       16
compact that binds its member states. Indeed, those states have expressly and

consistently treated the Compact as a non-binding instrument. At least 12

(including Texas) have enacted laws that disable Article III.1’s taxpayer option.

      Even if the Compact were binding, Article III.1 would not preclude the

Legislature from requiring taxpayers to use the gross-receipts apportionment

method. That article purports to incorporate state law as an apportionment

option, but it does not account for a law like section 171.106 that by its very

terms is not optional. Nor can Article III.1 surmount the Texas Constitution’s

prohibition against contractual suspensions of the state’s taxing authority.

      Moreover, any conflict with the Compact would not automatically render

section 171.106 invalid. The statute would yield only to the extent that it

qualified as an unconstitutional impairment of contractual obligations under the

Compact—a standard that EMC cannot meet here.

      Finally, the Court should reject EMC’s arguments based on the Due

Process, Commerce, and Equal and Uniform Taxation Clauses. EMC waived

those issues by failing to raise them in its motion for rehearing before the

Comptroller and its petition in this suit. And EMC has not established a

violation of those provisions in any event.

                                       17
                                 ARGUMENT

I.    IN C ALCULATING ITS FRANCHISE TAX, EMC MUST APPORTION ITS
      MARGIN TO TEXAS USING THE GROSS-RECEIPTS METHOD IN SECTION
      171.106 OF THE TAX C ODE.

      EMC claims that, in computing its franchise tax, it may apportion its

margin to Texas pursuant to the Compact, as codified in section 141.001 of the

Tax Code. EMC Br. 7-10. Specifically, EMC contends it may exercise the

“option” in Article III.1 of the Compact to use Article IV’s three-factor method

for apportioning “income.” Id. As a matter of Texas law, that argument fails

because (1) section 171.106 of the Tax Code requires taxpayers to apportion

margin using the gross-receipts method, subject only to a limited set of

exceptions that does not include the Compact; (2) Articles III and IV of the

Compact do not apply to the franchise tax because it is not an income tax; and

(3) section 171.106’s mandatory language prevails over any conflicting provision

outside of the franchise-tax statutes.

      A.    Section 171.106 Requires Taxpayers to Apportion Their Margin
            Using the Gross-Receipts Method, Subject Only to Certain
            Exceptions Provided in That Section.

      Section 171.106(a) of the Tax Code requires taxpayers to apportion their

margin to Texas using the gross-receipts method, unless one of the exceptions

in section 171.106 applies:

                                         18
      Except as provided by this section, a taxable entity’s margin is
      apportioned to this state to determine the amount of tax imposed
      under Section 171.002 by multiplying the margin by a fraction, the
      numerator of which is the taxable entity’s gross receipts from
      business done in this state, as determined under Section 171.103,
      and the denominator of which is the taxable entity’s gross receipts
      from its entire business, as determined under Section 171.105.

TEX. TAX CODE § 171.106(a) (emphasis added). The only exceptions “provided

by this section” are: (1) different apportionment fractions related to investment

companies and retirement plans, id. § 171.106(b), (c); and (2) changes to the

gross-receipts figure for banks, defense readjustment projects, sellers of loans

or securities, and internet hosts, id. § 171.106(d)-(g).

      This statute—which EMC concedes is “unambiguous,” EMC Br.

9—prohibits taxpayers from using the Compact’s income-apportionment

method to apportion their margin for the franchise tax. It permits exceptions

to the gross-receipts method only as “provided by this section,” TEX. TAX CODE

§ 171.106(a) (emphasis added), whereas the Compact is located in another

section of the Tax Code, id. § 141.001. And nothing in section 171.106 refers to

or incorporates section 141.001 as one of the allowed exceptions. Id. § 171.106.

Thus, section 171.106(a) forecloses EMC’s attempt to use the Compact’s

income-apportionment method.

                                        19
      B.    The Compact’s Three-Factor Income-Apportionment Method
            Does Not Apply to the Franchise Tax Because It Is Not an
            Income Tax.

      EMC may not use the Compact’s three-factor apportionment method for

a second reason. That method applies only to the apportionment of “income”

for an “income tax,” id. § 141.001, arts. III, IV, not the apportionment of margin

for the franchise tax.

            1.     Article III.1’s “taxpayer option” and Article IV’s
                   apportionment method apply only to apportionment of
                   “income” for a state’s “income tax.”

      Articles III and IV of the Compact apply only to a member state’s

“income tax.” Article III, captioned “Elements of Income Tax Laws,” states

that “[n]othing in this article relates to the reporting or payment of any tax

other than an income tax.” Id., art. III.3. Similarly, Article IV, titled “Division

of Income,” covers only a “taxpayer having income from business activity which

is taxable both within and without this state.” Id., art. IV.2 (emphases added).

      Predictably, then, the apportionment methods in Articles III and IV

address only the apportionment of “income.” The Article III.1 option states

that a taxpayer “may elect to apportion and allocate his income in the manner

provided by the laws of such state” or “in accordance with Article IV.” Id., art.

III.1. Under Article IV, a taxpayer “shall allocate and apportion his net income

                                        20
as provided in this article,” id., art. IV.2, which states that “business income

shall be apportioned to this state by multiplying the income by a fraction”—the

equally weighted average of the property, payroll, and sales factors. Id., art.

IV.9.

              2.    The Texas franchise tax is not an “income tax” and does
                    not involve the apportionment of “income.”

        Article III.1’s “taxpayer option” and Article IV’s apportionment method

do not apply to the franchise tax because it does not impose an “income tax” or

involve apportioning a tax base of “income,” “net income,” or “business income.”

        The Legislature made this distinction clear when it revised the franchise

tax to its current form: “The franchise tax imposed by Chapter 171, Tax Code,

as amended by this Act, is not an income tax.” Act of May 2, 2006, 79th Leg.,

3d C.S., ch. 1, § 21, 2006 Tex. Gen. Laws 1, 38 (emphasis added). Given that

plain statement, the Legislature could not possibly have intended that the

franchise tax would be subject to the Compact articles in section 141.001 of the

Tax Code that relate exclusively to an “income tax.”

        Moreover, the franchise tax is assessed on and requires apportionment

of “margin,” which differs from the “net income” covered by Article IV’s

apportionment method. Compare TEX. TAX CODE §§ 171.002, .101, .106, with

                                        21
id. § 141.001, art. IV.2. This Court has defined “net income” as the “‘excess of

all revenues and gains for a period over all expenses and losses of the period.’”

INOVA Diagnostics, 166 S.W.3d at 401 n.7 (quoting BLACK’S LAW DICTIONARY

1040 (6th ed. 1990)). By contrast, “margin” never involves deducting “all

expenses and losses.” Some taxpayers do not deduct their expenses to compute

margin; they calculate margin as 70% of total revenue or subtract $1 million

from total revenue, regardless of their expenses.             TEX. TAX CODE

§ 171.101(a)(1)(A), (B)(i). And those taxpayers that deduct some expenses to

compute margin still do not deduct “all” expenses; they deduct only select

expenses—“costs of goods sold” or “compensation.” Id. § 171.101(a)(1)(B)(ii).

For that reason, a taxpayer may have a positive margin, and thus owe franchise

tax, even though it has no net income for the report year. See David A.

Vanderhider, Comment, A Marginal Tax: The New Franchise Tax in Texas,

39 ST. MARY’S L.J. 615, 646-47 (2008) (observing that “[t]he fact that the margin

tax could apply to a company without profits, therefore, undermines the

argument that it is an income tax in disguise”).

      Similarly, the “total revenue” tax base used for the alternate “E-Z

Computation” also differs from the “net income” covered by Article IV.

Compare TEX. TAX CODE § 171.1016, with id. § 141.001, art. IV.2. In contrast

                                       22
to a net-income calculation, an E-Z filer may not make deductions from total

revenue. Id. § 171.1016(c).

             3.    The Compact’s “income tax” definition does not expand
                   Articles III and IV to include the franchise tax.

      EMC counters that the Compact defines “income tax” broadly enough to

cover the franchise tax. EMC Br. 15-16. That definition states:

      “Income tax” means a tax imposed on or measured by net income
      including any tax imposed on or measured by an amount arrived at
      by deducting expenses from gross income, one or more forms of
      which expenses are not specifically and directly related to
      particular transactions.

TEX. TAX CODE § 141.001, art. II.4. Based on this definition alone, EMC urges,

Articles III and IV apply to the franchise tax, EMC Br. 15-16, and (presumably)

we should read those articles’ references to apportionment of “income,” “net

income,” and “business income” to mean “margin” or “total revenue” to make

them fit. EMC is wrong.

                   a.     Texas law establishes that the franchise tax does
                          not meet the Compact’s “income tax” definition.

      The Legislature already has determined that the franchise tax falls

outside the Compact’s “income tax” definition by decreeing that “[t]he franchise

tax . . . is not an income tax.” Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, § 21,

2006 Tex. Gen. Laws 1, 38. In enacting that law, the Legislature is presumed

                                         23
to have been aware of the Compact’s definitions. Nw. Austin MUD No. 1 v.

City of Austin, 274 S.W.3d 820, 828 (Tex. App.—Austin 2008, pet. denied). That

presumption cannot be rebutted because the Legislature referred to the

Compact in the same act, adapting two of Article IV’s “factors” to classify

taxpayers for combined-reporting purposes. Act of May 2, 2006, 79th Leg., 3d

C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 17 (codified at TEX. TAX CODE

§ 171.1014). By legislating that the franchise tax “is not an income tax,” without

qualification, the Legislature foreclosed the possibility that a Tax Code

provision could define that tax as an “income tax.”

                  b.     The franchise tax does not meet the Compact’s
                         definition of an “income tax” on its own terms.

      Even apart from the Legislature’s conclusive statement, the franchise tax

does not satisfy the Compact’s “income tax” definition on its own terms. The

Compact defines “income tax” principally as “a tax imposed on or measured by

net income.” TEX. TAX CODE § 141.001, art. II.4. Because the Compact does

not define “net income,” that phrase takes its ordinary meaning. State v.

$1,760.00 in U.S. Currency, 406 S.W.3d 177, 180 (Tex. 2013) (per curiam). As

discussed above, the franchise tax is not imposed on or measured by “net

income,” as that phrase is commonly understood. See supra Part I.B.2.

                                       24
      EMC argues that the definition’s “including” clause captures the

franchise tax. EMC Br. 15-16. Under that clause, an “income tax” includes

“any tax imposed on or measured by an amount arrived at by deducting

expenses from gross income, one or more forms of which expenses are not

specifically and directly related to particular transactions.” TEX. TAX CODE

§ 141.001, art. II.4. That language does not help EMC.

      Again, some taxpayers do not deduct any expenses to arrive at margin:

those that compute margin as (1) 70% of total revenue or (2) total revenue

minus $1 million. Id. § 171.101(a)(1)(A), (B)(i). EMC tries to dodge that

problem by reframing the first calculation as a “deduction” of 30% of total

revenue. EMC Br. 15. But the Compact’s “income tax” definition requires

deduction of “expenses,” not prescribed percentages of revenue or dollar

amounts. TEX. TAX CODE § 141.001, art. II.4.

      The other taxpayers who use margin do not arrive at that figure “by

deducting expenses from gross income.” They calculate margin by deducting

one type of expense from total revenue: either “costs of goods sold” or

“compensation.”    Id. § 171.101(a)(1)(B)(ii).   The Compact’s “income tax”

definition would cover those taxpayers only if it could be rewritten to include

“an amount arrived at by deducting [any] expense[] from gross income.” See

                                      25
Foster v. TDCJ, 344 S.W.3d 543, 548 (Tex. App.—Austin 2011, pet. denied) (“We

are not free to rewrite the statute in the guise of construing it.”). That rewrite

also would remove the definition too far from its main clause, which defines an

“income tax” as one imposed on “net income.” The “including” clause may

“enlarge” the meaning of “net income,” not transmogrify it. See TEX. GOV’T

CODE § 311.005(13) (noting that “including” is a “term[] of enlargement”).

      Finally, an “E-Z” taxpayer computes its franchise tax based on “total

revenue,” from which no deductions of expenses are permitted. TEX. TAX CODE

§ 171.1016(c).

      Respected treatises agree that the Compact’s “income tax” definition does

not include the franchise tax. One adopts the Compact definition and notes that,

although “[t]he majority of states have statutes imposing an income tax on

corporations,” “[t]he states without a corporate income tax are Nevada, Texas,

and Washington.” 14A WILLIAM FLETCHER, FLETCHER CYCLOPEDIA OF THE

LAW OF CORPORATIONS § 6904.50 & nn.1-2 (2014) (emphases added). Another

observes that “there is considerable doubt as to whether the Texas margins tax

constitutes a tax on ‘income’ under the Compact.” WALTER HELLERSTEIN,

STATE TAXATION ¶ 9.01 (3d ed. 2014). In sum, the franchise tax is a unique tax

that does not qualify as an “income tax,” even as defined by the Compact.

                                       26
            4.    The Compact’s definition of “gross receipts tax” does not
                  support EMC’s argument that the franchise tax falls
                  within the Compact’s “income tax” definition.

      EMC also cites the Compact’s definition of a “gross receipts tax,”

apparently to imply that, because the franchise tax does not meet that

definition, it must be categorized as an “income tax.” See EMC Br. 16. But the

Compact does not demand that a tax be classified as either a “gross receipts

tax” or an “income tax.” The Compact defines “tax” as “an income tax, capital

stock tax, gross receipts tax, sales tax, use tax, and any other tax which has a

multistate impact.” TEX. TAX CODE § 141.001, art. II.9 (emphasis added). The

Compact’s drafters thus anticipated that some taxes would not fit within a

defined category. The franchise tax is an example, because generally it does not

satisfy the Compact’s definitions of “income tax” or “gross receipts tax,” but

instead is a hybrid of both (except the E-Z computation, which resembles a

gross-receipts tax). Accordingly, the “gross receipts tax” definition does not

advance EMC’s argument.

            5.    The Georgia Tax Tribunal’s analysis in Rosenberg v.
                  MacGinnittie is inapposite.

      Finally, EMC asserts that the Georgia Tax Tribunal “has construed the

Texas franchise tax as an ‘income tax,’ to which the Multistate Tax Compact

                                      27
election is applicable.” EMC Br. 19 (citing Rosenberg v. MacGinnittie, No.

1414626, slip op. (Ga. Tax Trib. Nov. 25, 2014) (found at CR.1079-1122)). EMC

is wrong.

      Rosenberg did not address whether the Compact applies to Texas’s

franchise tax; in fact, the opinion did not even mention the Compact. Nor did

Rosenberg concern whether the franchise tax is an “income tax” in any general

sense. CR.1119 (explaining that “the issue in this case is not whether the Texas

Franchise Tax is an ‘income tax.’”).

      At issue in Rosenberg was whether the Texas franchise tax qualified as

a “‘tax on or measured by income’” under a Georgia tax statute. CR.1088

(quoting O.C.G.A. § 48-7-27(d)(1)(C)). If it did, the taxpayer could make an

adjustment for its Texas franchise-tax payments in computing its Georgia

income tax. Id. The tribunal held that the Texas franchise tax did qualify,

primarily because the margin calculation starts with “total revenue,” which is

the sum of relevant items reported as “gross income” on a federal tax return.

CR.1097-1100.

      Rosenberg’s analysis has no bearing on this case. Whereas Rosenberg

concerned whether the Texas franchise tax is a “tax on or measured by

income,” CR.1088 (emphasis added), the Compact defines an “income tax” as

                                       28
a “a tax imposed on or measured by net income,” TEX. TAX CODE § 141.001, art.

II.4 (emphasis added). The Rosenberg tribunal itself specifically distinguished

“income” from “net income,” CR.1103-04, and concluded that whether the Texas

franchise tax is measured by “net income” was irrelevant to the question before

it, CR.1102-12. For that reason, it specifically declined to follow decisions from

other state revenue departments holding that the Texas franchise tax is not

imposed on or measured by “net income.” CR.1115-16. Because the Compact

likewise defines its reach in terms of “net income,” Rosenberg is inapposite.

      C.    Section 171.106’s Mandate to Use the Gross-Receipts Method
            Prevails over Any Conflicting Language in the Compact.

      EMC’s arguments that the Compact’s “taxpayer option” and income-

apportionment method apply to the franchise tax do not help its cause in any

event. Under Texas law, section 171.106’s specific mandate to use the gross-

receipts method prevails over any conflicting text in the Compact.

            1.    As the later-enacted, more specific statute, section
                  171.106(a) prevails over the Compact.

      Reading Articles III and IV of the Compact to provide another method

of apportioning margin creates an irreconcilable conflict with section 171.106(a)

of the Tax Code. If a taxpayer may elect under Article III.1 to apportion its

margin using Article IV’s three-factor income-apportionment method, as EMC

                                       29
urges, that would negate section 171.106(a)’s directive to apportion margin

using the gross-receipts method “[e]xcept as provided by this section.” See

TEX. TAX CODE § 171.106(a) (emphasis added).

      The Code Construction Act resolves any conflict resulting from EMC’s

interpretation in favor of section 171.106(a), in two respects. First, “if statutes

enacted at the same or different sessions of the legislature are irreconcilable,

the statute latest in date of enactment prevails.” TEX. GOV’T CODE § 311.025(a).

The Legislature adopted the Compact in 1967, but added the “except as

provided” clause to section 171.106 in 1991.2 Second, if a general provision

irreconcilably conflicts with a special provision, “the special or local provision

prevails as an exception to the general provision.”                 TEX. GOV’T CODE

§ 311.026(b); see also Jackson v. SOAH, 351 S.W.3d 290, 297 (Tex. 2011).

Section 171.106 specifically concerns the apportionment of margin for the

franchise tax. TEX. TAX CODE § 171.106. By contrast, Articles III and IV of the

Compact concern a category of taxes that qualify as “income taxes.” Id.

§ 141.001, arts. III-IV.

2. Act of Aug. 13, 1991, 72d Leg., 1st C.S., ch. 5, § 8.07, 1991 Tex. Gen. Laws 134, 157-58
(codified at TEX. TAX CODE § 171.106(a)).

                                            30
            2.    Section 171.106(a) and the Compact cannot                   be
                  harmonized so that both apply to the franchise tax.

      EMC counters that the Court need not reach the construction rules just

discussed because section 171.106(a) and the Compact do not irreconcilably

conflict and “can be harmonized to reconcile the various provisions and stand

together.” EMC Br. 11. Of course, the Legislature already has harmonized the

statutes by declaring that the franchise tax is not an income tax. See supra Part

I.B.2. But even assuming that Article III.1’s “taxpayer option” and Article IV’s

income-apportionment method could apply to the franchise tax, those provisions

cannot be reconciled with section 171.106(a).

      EMC’s harmonizing argument hinges on semantics. First, EMC heralds

that “[t]here is no overriding mandate in Section 171.106(a) that taxpayers must

use the Texas formula instead of the Multistate Tax Compact formula.” EMC

Br. 9. But section 171.106(a) expressly requires all taxpayers to use the gross-

receipts method “[e]xcept as provided by this section,” and the Compact is not

one of the provided exceptions. TEX. TAX CODE § 171.106(a). EMC then offers

that using the Compact’s method would not constitute an exception to section

171.106(a)’s gross-receipts method, but an “equally enforceable alternative.”

EMC Br. 9, 10. That is no distinction at all. If a taxpayer can apportion its

                                       31
margin using the Compact’s three-factor income-apportionment method, then

its margin is not “apportioned to this state . . . by multiplying the margin by [the

gross-receipts] fraction,” TEX. TAX CODE § 171.106(a), creating an unrecognized

“exception” to that section’s general rule.

      EMC further claims that Article III.1’s “taxpayer option” harmonizes the

statutes “because a taxpayer that does not elect to use the Multistate Tax

Compact formula effectively elects to use the Texas formula.” EMC Br. 10.

But Article III.1 does not do the harmonizing work that EMC ascribes to it.

Article III.1 presumes that a state’s tax laws (outside the Compact) merely

“provide[]” a different “manner” of apportioning income. TEX. TAX CODE

§ 141.001, art. III.1. Article III.1 does not address the situation in which a

state’s tax law expressly makes an apportionment method exclusive, as section

171.106(a) does. And neither Article III.1 nor any other Compact provision

contains language that resolves that conflict. There is no way to read the Tax

Code as allowing taxpayers to elect to apportion margin using the Compact’s

income-apportionment method and still give full meaning to the words “[e]xcept

as provided in this section” in section 171.106(a).

                                        32
             3.    The presumption against implied repeals does not
                   support EMC’s reading of the Tax Code.

      EMC next asserts that “the only argument” supporting the Comptroller’s

position is that section 171.106(a) impliedly repealed section 141.001 of the Tax

Code, at least as applied to the franchise tax, and that the presumption against

implied repeals should defeat that argument. EMC Br. 10-11. That contention

fails on several fronts.

      As an initial matter, the Court also can agree with the Comptroller by

recognizing, as the Legislature did, that the franchise tax is not an income tax.

See supra Part I.B. That holding would render Compact Articles III and IV in

section 141.001 inapplicable to the franchise tax, not impliedly repealed.

      Regardless, EMC admits that implied repeals are merely “disfavor[ed],”

not forbidden. EMC Br. 10. “Where a later enactment is intended to embrace

all the law upon the subject with which it deals, it repeals all former laws

relating to the same subject.” Gordon v. Lake, 356 S.W.2d 138, 139 (Tex. 1962).

To the extent Articles III and IV of the Compact ever applied to the franchise

tax, section 171.106’s later-enacted “except as provided” clause embraces all

apportionment options for the franchise tax, and thus necessarily repeals those

articles’ application.

                                       33
      More importantly, whether an implied repeal occurred ultimately “is a

matter of legislative intent.” TEX. JUR. 3d Statutes § 62 (2015). The Legislature

never has intended to apply Article III.1’s “taxpayer option” or Article IV’s

income-apportionment method to the franchise tax. When Texas adopted the

Compact, Articles III and IV did not apply to the franchise tax because it was

then imposed on capital, not income. When the Legislature added a tax base

resembling income—“earned surplus”—it simultaneously enacted former

section 171.112(g), which provided that “Chapter 141 [the Compact] does not

apply to this chapter.” Act of Aug. 13, 1991, 72d Leg., 1st C.S., ch. 5, §§ 8.09,

.10, 1991 Tex. Gen. Laws 134, 159-60, 162. And when the Legislature replaced

“earned surplus” with a tax base (margin) that rendered the tax “not an income

tax,” it sensibly repealed former section 171.112(g). Act of May 2, 2006, 79th

Leg., 3d C.S., ch. 1, §§ 5, 21, 2006 Tex. Gen. Laws 1, 28, 38. After all, if the

franchise tax no longer taxed income, Articles III and IV did not apply by their

own terms. Also, removing the total ban against chapter 141’s application paved

the way for the same legislation to borrow two of Article IV’s factors to classify

a taxpayer for combined-reporting purposes. See TEX. TAX CODE § 171.1014.

      When the Legislature wanted to provide a generally available alternative

to the gross-receipts method, it did so expressly in the franchise-tax statutes.

                                       34
From 1970 to 1989, the Legislature allowed taxpayers to ask the Comptroller

to include factors other than gross receipts in the apportionment fraction. Act

of Sept. 6, 1969, 61st Leg., 2d C.S., ch. 1, art. 7, § 1, 1969 Tex. Gen. Laws 61, 96,

repealed by Act of Mar. 1, 1989, 71st Leg., R.S., ch. 3, § 2, 1989 Tex. Gen. Laws

200, 200. The Legislature revoked that option at the urging of the Select

Committee on Tax Equity, which recommended that taxpayers not be allowed

to reduce their tax by requesting the addition of property and payroll factors

to the apportionment method. 1 SELECT COMM. ON TAX EQUITY, RETHINKING

TEXAS TAXES 49 (Jan. 1989). Nothing in the franchise-tax statutes suggests

that the Legislature has since reversed that policy and once again permits

taxpayers to use a method with property and payroll factors, such as the

Compact’s, and now at their option without Comptroller approval.

             4.    IBM v. Department of Treasury is distinguishable.

      EMC suggests that the Court seek guidance on the statutory-construction

issue from IBM v. Department of Treasury, 852 N.W.2d 865 (Mich. 2014),

calling it “an identical case” and involving a “directly analogous” situation.

EMC Br. 16-18. But IBM is largely distinguishable, and the reasoning on which

EMC relies is unpersuasive.

                                         35
                   a.    The Michigan Supreme Court was evenly divided on
                         the implied-repeal issue.

      As a threshold matter, EMC inaccurately cites IBM as a controlling

opinion of the Michigan Supreme Court. Id. To be clear, a three-justice

plurality opined that one may harmonize the Compact and Michigan’s

mandatory sales-factor apportionment statute by treating the mandatory sales-

factor method as an option that a taxpayer may elect under Article III.1 of the

Compact. 852 N.W.2d at 871-76 (plurality op.) (Viviano, J., joined by

Cavanaugh and Markman, JJ.). The same number of justices disagreed,

reasoning that (1) reading the mandatory sales-factor method as optional does

not harmonize the statutes; and (2) as the later-enacted statute, the mandatory

sales-factor method impliedly, but necessarily, repealed Article III.1’s

“taxpayer option.” Id. at 882-85 (McCormack, J., dissenting, joined by Young,

C.J., and Kelly, J.).

      The remaining justice stated that the implied-repeal issue was “a very

close question” that he did not need to reach because of an intervening

legislative act. Id. at 881-82 (Zahra, J., concurring). Specifically, the Michigan

Legislature directly amended the Compact to provide that Article IV’s three-

factor method would be unavailable beginning in 2011. Id. By doing so, Justice

                                       36
Zahra reasoned, the Legislature had affirmatively created a pre-2011 “window”

(which encompassed the refund claims at issue) in which the Compact’s

“taxpayer option” would be available. Id.

      Because the Texas Legislature never has affirmatively created a window

in which the Compact’s “taxpayer option” was operative, Justice Zahra’s

decisive concurrence is inapposite. What remains of IBM’s “guidance,” then,

is an evenly divided court on the implied-repeal issue. Of those opinions, the

Comptroller maintains that Justice McCormack had the better view: treating

a mandatory apportionment method as optional is not a “harmonious

construction”; rather, the mandatory apportionment statute should prevail as

the later enacted statute. Id. at 882-85 (McCormack, J., dissenting).

                  b.     The IBM plurality opinion hinges on Michigan’s
                         distinct tax history.

      In any event, the IBM plurality opinion offers EMC no help. The

plurality began its discussion by noting that “the history of business taxation in

Michigan” is “important to our analysis in this case.” Id. at 869 (plurality op.).

Specifically, the plurality stressed that history’s role in the statutory-

construction analysis because “‘[t]he endeavor should be made, by tracing the

history of legislation on the subject, to ascertain the uniform and consistent

                                       37
purpose of the legislature, or to discover how the policy of the legislature with

reference to the subject matter has been changed or modified from time to

time.’” Id. at 872 (quoting Rathbun v. State, 280 N.W. 35, 43 (Mich. 1938)).

That history led the plurality to conclude that the Michigan Legislature

“uniform[ly] and consistent[ly]” intended “for the Compact’s election provision

to operate alongside Michigan’s tax acts.” Id. at 874.

      Texas’s history of business taxation does not support the same conclusion.

For example, when Michigan adopted the Compact, it already had an income

tax to which Articles III and IV would apply. Id. at 870. By contrast, when

Texas adopted the Compact, it had nothing even resembling an income tax,

meaning that Articles III and IV were inoperative when enacted. See supra

Part I.C.3. Also, as the IBM plurality emphasized, “[t]hroughout the evolution

of [Michigan’s] method of business taxation, the Compact has remained in

effect.” 852 N.W.2d at 871 (plurality op.). But in Texas, when the Legislature

added the earned-surplus tax base that potentially qualified the franchise tax

as an income tax, it simultaneously overrode the Compact’s application by

enacting former section 171.112(g). See supra Part I.C.3. And while Michigan

continues to “allow[] a taxpayer to petition to use another apportionment

method,” 852 N.W.2d at 875 n.55 (plurality op.), Texas revoked that option in

                                       38
1989 specifically to preclude foreign corporations from using property and

payroll factors to apportion their tax bases, see supra Part I.C.3.

       In sum, in no sense does the history of Texas’s franchise tax reveal a

“uniform and consistent purpose” by the Legislature to allow taxpayers to

invoke the Compact’s “taxpayer option” and use its three-factor income-

apportionment method. To the contrary, the Legislature has uniformly and

consistently acted to preclude application of Articles III and IV to the franchise

tax.

                   c.    The IBM plurality misconstrued Article III.1.

       Finally, the IBM plurality’s analysis is unpersuasive. To support its view

that the Compact may be reconciled with Michigan’s mandatory sales-factor

apportionment method, the plurality reasoned that Article III.1 “contemplat[es]

the future enactment of a state income tax with a mandatory apportionment

formula different from the Compact’s.” 852 N.W.2d at 874 (plurality op.)

(emphasis added). Article III.1 says no such thing. Again, it presumes only

that a state’s tax laws (outside the Compact) “provide[]” a different “manner”

of apportioning income. TEX. TAX CODE § 141.001, art. III.1. It does not

address the situation in which a state’s tax law expressly makes an

                                       39
apportionment method exclusive, as section 171.106(a) does. The Court should

decline to follow the IBM plurality’s misreading of the Compact.

            5.       The rule that ambiguous tax statutes must be construed
                     in taxpayers’ favor does not apply here.

      Finally, EMC suggests that, to the extent section 171.106’s effect on the

Compact’s application is ambiguous, the Court must resolve that ambiguity in

EMC’s favor by applying the rule that “[a]ny ambiguity in the Tax Code

regarding the scope of taxation must be resolved in favor of taxpayers.” EMC

Br. 8. That is incorrect.

      The rule EMC invokes comes into play “only when doubt about a statute’s

application remains after the dominant rules of construction have been applied.”

Combs v. Chapal Zenray, 357 S.W.3d 751, 756 (Tex. App.—Austin 2011, pet.

denied). One such “dominant rule” requires deference to the Comptroller’s

construction of an ambiguous tax statute if that construction appears in a

“formal opinion[] adopted after formal proceedings,” is “reasonable,” and does

not contradict the statute’s plain language. Id. (internal quotation marks and

citation omitted).

      The conditions for agency deference are all met here. The Comptroller

resolved this specific issue in a formal decision issued after a formal hearing,

                                      40
concluding that a taxpayer “may not elect the MTC three-factor apportionment

formula and is required to use the single-factor method” in section 171.106.

COMPTROLLER’S DECISION NOS. 104,752 & 104,753 (2011) (App. C). That

conclusion is reasonable—it comports with the Legislature’s express

understanding that the franchise tax is not an income tax and the longstanding

policy against allowing taxpayers to use an alternate apportionment method.

See supra Parts I.B.2, C.3. And the Comptroller’s position does not contradict

the Tax Code’s plain text. To the contrary, his reading enforces section

171.106’s directive that any exceptions to the gross-receipts apportionment

method must be provided by that section. TEX. TAX CODE § 171.106(a).

II.   TEXAS’S MEMBERSHIP IN THE C OMPACT D OES NOT PRECLUDE THE
      LEGISLATURE FROM R EQUIRING A TAXPAYER TO U SE THE GROSS-
      RECEIPTS METHOD TO APPORTION MARGIN.

      In the alternative, EMC urges that any Texas law that forbids it to invoke

Article III.1’s “taxpayer option” and use Article IV’s income-apportionment

method is invalid under contract law and the Contracts Clause of the United

States Constitution. EMC Br. 11-15. Specifically, EMC contends that the

Compact is a contract that bars the Legislature from altering its terms or

application until Texas withdraws from the Compact, and that any alteration

unconstitutionally impairs the obligations of that contract. Id. The Court

                                      41
should reject that argument, for several reasons: (1) regardless of the

Compact’s legal status, Articles III and IV do not apply to the franchise tax

because it is not an “income tax” under the Compact; (2) the Compact is an

advisory agreement, not a binding regulatory compact; (3) Article III.1 does not

clearly and validly preclude the Legislature from mandating exclusive use of the

gross-receipts apportionment method; and (4) any conflict between Texas law

and Articles III and IV would not satisfy the standard for an unconstitutional

impairment of contracts.

      A.    Articles III and IV of the Compact Do Not Apply to the
            Franchise Tax Because It Is Not an “Income Tax.”

      As an initial matter, this appeal does not hinge on whether Texas’s

enactment of the Compact in 1967 contractually bound all future Legislatures

to maintain Articles III and IV as Texas law, because those articles do not apply

to the franchise tax in any event. As discussed above, the franchise tax does not

involve the apportionment of “income,” nor does it meet the Compact’s “income

tax” definition. See supra Part I.B. Regardless of the Compact’s legal force,

then, Articles III and IV do not apply to the franchise tax by their own terms.

For that reason alone, EMC’s compact-related arguments fail.

                                       42
      B.    The Legislature May Restrict the Compact’s Application in
            Texas Law Because It Is Not a Binding Regulatory Compact.

      Even if Articles III and IV somehow could be construed to apply to the

franchise tax, the Compact does not contractually bar Texas from restricting

those articles’ operation elsewhere in Texas law. This Compact is an advisory

compact containing model laws, not a binding regulatory compact that carries

the preemptive force that EMC assigns to it.

            1.    The term “compact” does not make this Compact binding.

      Contrary to EMC’s assertions, EMC Br. 11-12, the mere fact that the

Compact is an “interstate compact” does not resolve whether the Compact

contractually obligates Texas to maintain the application of Articles III and IV

in state law. Only “in some contexts” is a compact “a contract between the

participating states.” McComb v. Wambaugh, 934 F.2d 474, 479 (3d Cir. 1991)

(emphasis added).

      Of the three types of interstate compacts—“boundary,” “regulatory,” and

“advisory”—only the first two potentially create a binding contract. CAROLINE

N. BROUN, ET AL., THE EVOLVING USE AND THE CHANGING ROLE OF

INTERSTATE COMPACTS: A PRACTITIONER’S GUIDE 12-15 (2006). Boundary

compacts “establish official borders between states” “with a high degree of

                                      43
finality.” Id. at 12, 13. And in many “regulatory” compacts, “the member states

have collectively and contractually agreed to reallocate governing authority

away from individual states to a multilateral relationship.” Id. at 21-22.

      By contrast, “nonbinding” “advisory” compacts “are more akin to

administrative agreements between states,” which “lack formal enforcement

mechanisms.” Id. at 13, 14. “[A]dvisory compacts cede no state sovereignty nor

delegate any governing power to a compact-created agency.” Id. at 14. And

they “generally do not require congressional consent.” Id. As discussed below

the Compact fits this advisory-compact category.

            2.    U.S. Steel did not address whether the Compact is a
                  binding contract.

      EMC cites the Supreme Court’s U.S. Steel decision for its contention that

the Compact is a “valid and binding interstate compact.” EMC Br. 13

(emphasis added). But U.S. Steel does not support that proposition. Neither

the word “binding” nor any variation thereof appears in the majority opinion.

See 434 U.S. at 454-79. That is unsurprising because whether the Compact

constitutes a binding compact or contract was not at issue in that case.

      In U.S. Steel, corporations facing audits by the Commission filed suit to

declare the Compact unconstitutional on the ground that the Compact’s lack of

                                      44
congressional consent violated the Compact Clause. Id. at 458 & n.7; see U.S.

CONST. art. I, § 10, cl. 3 (“No State shall, without the Consent of Congress . . .

enter into any Agreement or Compact with another State . . . .”). The Court

rejected that challenge, holding that the Compact Clause does not apply to this

Compact because it does not “enhance the political power of the member States

in a way that encroaches upon the supremacy of the United States.” 434 U.S.

at 472. The Court also rejected claims that the Compact violated the Commerce

Clause and the Fourteenth Amendment. Id. at 478-79. Thus, while the Court

decided that the Compact was “valid” (at least under the provisions at issue), see

id. at 454, it did not address or resolve what type of compact the Compact is or

whether it contractually binds its member states.

            3.    The Compact does not exhibit the indicia of a binding
                  regulatory compact.

      Since U.S. Steel, the Supreme Court has identified three “classic indicia”

of a binding regulatory compact: (1) the establishment of a joint regulatory

body; (2) state enactments that require reciprocal action to be effective; and

(3) the prohibition of unilateral repeal or modification of its terms. See Ne.

Bancorp, Inc. v. Bd. of Governors of Fed. Reserve Sys., 472 U.S. 159, 175 (1985);

see also Seattle Master Builders Ass’n v. Pac. Nw. Elec. Power & Conservation

                                       45
Planning Council, 786 F.2d 1359, 1363 (9th Cir. 1986). As the Michigan Court

of Claims recently concluded, the Compact does not exhibit any of these

characteristics. Ingram Micro, Inc. v. Dep’t of Treas., No. 11-000035-MT, slip

op. at 7-13 (Mich. Ct. Cl. Dec. 19, 2014) (App. D).

                  a.     The Commission is not a joint regulatory body.

      The first trait of a binding regulatory compact is creation of a “joint

organization for regulatory purposes,” Seattle Master Builders, 786 F.2d at

1363 (emphasis added); see also Ne. Bancorp, 472 U.S. at 175. By contrast, an

advisory compact “cede[s] no state sovereignty nor delegate[s] any governing

power to a compact-created agency.” BROUN, supra, at 14 (emphases added).

      The Compact does not create a joint regulatory body. It forms the

Multistate Tax Commission, TEX. TAX CODE § 141.001, art. VI, but that agency

does not qualify. As the Court noted in U.S. Steel: “Nor is there any delegation

of sovereign power to the Commission; each State retains complete freedom to

adopt or reject the rules and regulations of the Commission.” 434 U.S. at 473;

see also TEX. TAX CODE § 141.001, art. VII.3. Aside from drafting non-binding

rules, the Commission’s other powers also evince an advisory compact.

Compare TEX. TAX CODE § 141.001, art. VI.3 (granting the Commission power

to “[s]tudy state and local tax systems,” “[d]evelop and recommend proposals,”

                                       46
and “[c]ompile and publish information”), with BROUN, supra, at 13 (explaining

that advisory compacts “are designed not to actually resolve an interstate

matter, but simply to study such matters”). The Commission conducts audits

only upon request. TEX. TAX CODE § 141.001, art. VIII.2. And its arbitration

functions are inoperative. U.S. Steel, 434 U.S. at 493 (White, J., dissenting).

                   b.    The Compact provisions do not require reciprocal
                         action to be effective.

      The second feature of a binding regulatory compact is the inclusion of

“state enactments which require reciprocal action for their effectiveness.”

Seattle Master Builders, 786 F.2d at 1363; see also Ne. Bancorp, 472 U.S. at

175. For example, the Interstate Compact for Adult Offender Supervision

provides a mechanism for Texas parolees to serve their parole in other compact

states, and vice-versa. See TEX. GOV’T CODE § 510.017, art. I. That agreement

requires reciprocal action to be effective because, among other things, a

“sending” state “transfer[s] supervision authority” over a parolee to a

“receiving” state, which in turn must allow a sending state’s officials to enter the

receiving state to “retake” an offender for a parole violation. See id.

      The Multistate Tax Compact does not similarly require reciprocal action

to effect its substantive terms. The Compact “does not purport to authorize the

                                        47
member States to exercise any powers they could not exercise in its absence.”

U.S. Steel, 434 U.S. at 473. Each member state administers its tax laws,

including the apportionment of its business tax base, without reference to or

consideration of other states’ laws. See Moorman Mfg. Co. v. Bair, 437 U.S.
267, 278-79 (1978) (noting that states enact differing apportionment formulas

“based on political and economic considerations that vary from State to State”).

The Compact does nothing to change that. A Compact state can allow a

taxpayer to exercise Article III.1’s option and use Article IV to apportion its

business income regardless of how other states tax or apportion that income or

whether those states are even Compact members. TEX. TAX CODE § 141.001,

art. IV.2-3 (noting that the only condition on Article IV’s application is that the

taxpayer’s income be “taxable” in another state).3

                     c.     The Compact does not prohibit unilateral repeal or
                            modification.

       The third characteristic of a binding regulatory compact is “conditional

consent” that prohibits a member state from unilaterally repealing or modifying

3. Likewise, Article V’s “tax credit” and “exemption certificate” provisions do not depend on
whether the other state imposing a sales or use tax or authorizing an exemption has similar
provisions in its laws or is a Compact

                                             48
its participation. Seattle Master Builders, 786 F.2d at 1363; see also Ne.

Bancorp, 472 U.S. at 175. This Compact contains neither condition.

      The Compact expressly provides that a state “may withdraw from this

compact by enacting a statute repealing the same.” TEX. TAX CODE § 141.001,

art. X.2. Withdrawal does not affect any previously incurred liability—e.g.,

dues, payments for audits, id., art. VI.4, VIII.2—but the existence or non-

payment of those liabilities does not prevent or delay withdrawal. Id., art. X.2.

      The Compact also does not prohibit a state from unilaterally modifying

its participation. While no provision explicitly allows a state to unilaterally

modify its participation, that silence favors a construction that states may do so.

The “well-established” presumption is that, “absent some clear indication that

the legislature intends to bind itself contractually,” an enacted law does not

create contractual rights. Nat’l R.R. Passenger Corp. v. Atchison, Topeka &

Santa Fe Ry., 470 U.S. 451, 465-66 (1985). That presumption surely informs

Seattle Master Builders’ framing of this inquiry: the issue is whether a compact

renders a state “not free to modify . . . its participation unilaterally,” not

whether a compact affirmatively allows modification. 786 F.2d at 1363

(emphasis added).

                                        49
      And because the Compact concerns taxation, its silence on modification

weighs even more strongly against construing it as a binding contract. States

“have the attribute of sovereign powers in devising their fiscal systems to

ensure revenue.” Allied Stores of Ohio, Inc. v. Bowers, 358 U.S. 522, 526 (1959).

Since “States rarely relinquish their sovereign powers,” such as taxation, “when

they do we would expect a clear indication of such devolution, not inscrutable

silence.” Tarrant Reg’l Water Dist. v. Hermann, 133 S. Ct. 2120, 2133 (2013).

The Compact’s silence on modification thus indicates that its members did not

intend to contract away their sovereign right to amend their state tax laws in

a way that varies from the Compact’s substantive provisions.

      To the contrary, the Compact states consistently have construed that

silence to mean that members may unilaterally change or restrict the

Compact’s terms in their own laws. In 1972, the Compact states unanimously

ratified Florida’s decision to repeal Articles III and IV of the Compact in its law

and to mandate a different apportionment method, recognizing that it remained

a “regular” Compact member “in good standing.” CR.879. And, as discussed

above, 11 more former and current Compact members (including Texas) have

since taken similar steps to remove or limit the operation of Articles III and IV

in their jurisdictions, all without objection from other states. See supra

                                        50
Statement of Facts, Parts II.C, III.                  Because “the parties’ course of

performance under the Compact is highly significant” in interpreting its

meaning, see Alabama v. North Carolina, 560 U.S. 330, 346 (2010), the Court

should not construe the Compact to be a binding regulatory compact.

       EMC argues that the Compact’s status as an “interstate compact” alone

means that it “is also a contract that cannot be amended, modified, or otherwise

altered without consent of all parties.” EMC Br. 12. But that begs the

question.     “Once entered, the terms of the compact and any rules and

regulations authorized by the compact can, to the extent provided in the

agreement, supersede any substantive state laws that may be in conflict . . . .”

BROUN, supra, at 22 (emphasis added). Unlike other compacts, this Compact

does not provide that it supersedes conflicting state law, nor does it expressly

prohibit changes to the Compact’s text or application in a member state’s law.4

And, in any event, the Compact parties did consent to individual members

4. Cf. TEX. FAM. CODE § 60.010, art. XII.A.2 (Uniform Interstate Compact on Juveniles) (“All
compacting states’ laws other than state constitutions and other interstate compacts
conflicting with this compact are superseded to the extent of the conflict.”); TEX. GOV’T CODE
§ 510.017, art. XIII (Interstate Compact for Adult Offender Supervision) (“Nothing in this
compact prevents the enforcement of any other law of a compacting state that is not
inconsistent with this compact.”); TEX. TRANSP. CODE § 523.007 (Driver’s License Compact
of 1993) (“Except as expressly required by provisions of this compact, nothing contained
herein shall be construed to affect the right of any state to apply any of its other laws relating
to licenses to drive to any person or circumstance . . . .”).

                                               51
eliminating or restricting Article III.1’s “taxpayer option” by unanimously

adopting the 1972 Florida resolution. CR.879.

            4.    The Compact is an advisory compact with uniform laws.

      Because the Compact lacks the indicia of a binding regulatory compact,

it must be an advisory compact. The usual traits of advisory compacts are all

present: it aims to “study” state tax systems, not “resolve” conflicts among

them; it “lack[s] formal enforcement mechanisms”; it “cede[s] no state

sovereignty nor delegate[s] any governing power to a compact-created agency”;

and it “do[es] not require congressional consent.” BROUN, supra, at 13-14.

      The Compact’s structure and terms show that Article II through V’s tax-

law “elements” constitute uniform laws contained within that advisory compact.

The Compact simply inserts those articles into its text, without any prefatory

language requiring members to maintain those provisions unchanged in their

laws or any means of compelling them to do so. See TEX. TAX CODE § 141.001,

arts. II-V. What prefaces those provisions instead is the “Purposes” article,

which describes the Compact as “[f]acilitat[ing]” the determination of multistate

taxpayers’ tax liability and “[p]romot[ing]” uniformity in tax systems—words

that are hortatory, not mandatory. Id., art. I. Indeed, the Compact’s sole

method of implementing those tax-law elements is through the Commission’s

                                       52
draft regulations, which are “advisory only.” U.S Steel, 434 U.S. at 457.

Moreover, Article IV’s text is a uniform law—UDITPA. See supra Statement

of Facts, Part II.B.3. And the Commission’s first annual report recounted that

the Compact had “been enacted as a uniform law” by 15 states. MULTISTATE

TAX COMM’N, FIRST ANNUAL REPORT 12 (1969), available at http://www.mtc.

gov/uploadedFiles/Multistate_Tax_Commission/Resources/Archives/Annual

_Reports/FY67-68.pdf. Because “[u]niform acts do not constitute a contract

between the states,” the Compact members “may make changes to fit individual

state needs.” BROUN, supra, at 16. Accordingly, Texas was free to restrict the

operation of Articles III.1 and IV in Texas law to the extent they would

otherwise apply.

      C.    The Compact Does Not Preclude the Legislature from
            Mandating Exclusive Use of Section 171.106’s Gross-Receipts
            Apportionment Method.

      Regardless of whether the Compact as a whole is a binding contract, the

provisions that EMC relies on—Articles III.1 and IV—still do not compel its

desired outcome, for two reasons. First, applying Article III.1 to the franchise

tax creates a latent ambiguity that must be resolved in favor of section 171.106’s

exclusive apportionment method. And second, under the Texas Constitution,

                                       53
Article III.1 may not suspend Texas’s authority to tax the part of a taxpayer’s

margin that would elude taxation under Article IV’s apportionment method.

            1.    Article III.1 does not unambiguously bar the Legislature
                  from enforcing an exclusive apportionment method.

      Article III.1 states that a taxpayer “may elect to apportion and allocate

his income in the manner provided by the laws of [a Compact] State . . . without

reference to this compact, or may elect to apportion and allocate in accordance

with [the three-factor income-apportionment method in] Article IV.” TEX. TAX

CODE § 141.001, art. III.1. Again, this language presumes that a state’s laws do

no more than “provide[]” a “manner” of apportioning income; it does not

address the circumstance in which that state-law manner mandates exclusive

use of one apportionment method, as section 171.106(a) does. See supra Part

I.C.2. Nor does the Compact preclude a state from adding that sort of exclusive

condition to the laws that Article III.1 incorporates by reference. For all that

Article III.1 reveals, the taxpayer takes the state laws as it finds them. So what

happens when the state law that Article III.1 incorporates as an option is by its

very terms not optional? The Compact doesn’t say.

      Applying Article III.1 to section 171.106’s exclusive apportionment

method thus creates a latent ambiguity. See BLACK’S LAW DICTIONARY 93 (9th

                                       54
ed. 2009) (defining “latent ambiguity” as an “ambiguity that does not readily

appear in the language of a document, but instead arises from a collateral

matter when the document’s terms are applied”). That ambiguity warrants

recourse to “other interpretive tools” to discern the Compact’s meaning in this

scenario. See Tarrant Reg’l Water Dist., 133 S. Ct. at 2132.

      Three construction aids already discussed support the Comptroller’s view

that the Compact does not prevent member states from enforcing exclusive

apportionment provisions such as section 171.106.         First, courts will not

construe a compact to cede a sovereign power like tax apportionment without

a “clear indication” of that purpose. Id. at 2133. Again, Article III.1 does not

address the conflict that arises when it purports to incorporate a non-optional

state law as an option, much less clearly indicate an intent to allow taxpayers to

override a legislative command. See supra Part II.B.3.c. Second, “[t]he parties’

conduct under the Compact” provides “‘highly significant’ evidence of [their]

understanding of the [C]ompact’s terms.” Tarrant Reg’l Water Dist., 133 S. Ct.

at 2135 (quoting Alabama, 560 U.S. at 346). Both the 1972 Florida resolution

and the unopposed disabling of Article III.1’s taxpayer option by 12 Compact

members reflect the parties’ common, long-held view that the Compact does not

preclude them from imposing an exclusive apportionment method. See supra

                                       55
Part II.B.3.c. And third, comparisons to other compacts’ text can shed light on

the parties’ intent here. Tarrant Reg’l Water Dist., 133 S. Ct. at 2133. Unlike

this Compact, other compacts to which Texas belongs explicitly state that the

compact supersedes any conflicting state statute. See supra p. 51, n.4.

      The Minnesota Tax Court, sitting en banc, recently reached a similar

conclusion regarding the Compact. Kimberly Clark Corp. v. Comm’r of

Revenue, No. 8670-R, slip op. (Minn. Tax Ct. June 19, 2015) (en banc) (App. E).

Assuming without deciding that the Compact was a binding contract, id. at 26,

the court held that nothing in the Compact “constitutes a clear and

unmistakable promise to refrain from using the State’s sovereign power to alter

the apportionment election provided by Articles III and IV,” id. at 40. The

court further relied on the Compact members’ course of performance in

determining that “the Compact could not reasonably be understood as

contractually requiring party states to refrain from using their sovereign

powers to alter the apportionment election.” Id. at 55.

            2.    Article III.1 cannot constitutionally require Texas to
                  allow a taxpayer to remove part of its tax base from
                  Texas’s taxing authority.

      Construing Article III.1 to preclude Texas from enacting an exclusive

apportionment method also would impermissibly conflict with the Texas

                                      56
Constitution’s prohibition against contractual suspensions of the sovereign

power of taxation—a conflict that the Compact itself aims to avoid.

       By its terms, the Compact operates within a member state only to the

extent that the state enacts the Compact as a statute. TEX. TAX CODE

§ 141.001, art. X.1. Thus, the Compact’s drafters understood that its provisions

could not conflict with any Compact state’s constitution. To address that

constraint, the Compact decrees that if any provision or part thereof is declared

to be contrary to a state constitution, it is severable, and the Compact otherwise

remains in effect. Id., art. XII.

       Article VIII, section 4 of the Texas Constitution provides that the

Legislature may not surrender or suspend the power to tax corporations “by

any contract or grant to which the State shall be a party.” TEX. CONST. art.

VIII, § 4. Thirteen other former and current Compact states’ constitutions

contain similar prohibitions.5 Yet EMC construes Article III.1 to effect such a

contractual suspension. Under EMC’s reasoning, Texas contracted away its

power to tax that portion of a taxpayer’s tax base that the taxpayer removes

5. ALASKA CONST. art. IX, § 1; ARK. CONST. art. 16, § 7; CAL. CONST. art. XIII, § 31; HAW.
CONST. art. VII, § 1; ILL. CONST. art. IX, § 1; MICH. CONST. art. IX, § 2; MINN. CONST. art.
X, § 1; MO. CONST. art. X, § 2; MONT. CONST. art. VIII, § 2; N.D. CONST. art. X, § 2; S.D.
CONST. art. XI, § 3; WASH. CONST. art. 7, § 1; WYO. CONST. art. 15, § 14.

                                            57
from Texas’s taxing authority by electing Article IV’s income-apportionment

method over section 171.106’s exclusive apportionment method. Here, for

example, EMC claims a contractual right to withdraw part of its margin from

Texas’s taxing power to the tune of over $5 million in forgone revenue. CR.5.

That is precisely the sort of claim that Texas courts have rejected in light of the

constitutional prohibition against contractual suspensions of the taxing power.

See, e.g., Gaar, Scott & Co. v. Shannon, 115 S.W. 361, 362 (Tex. Civ.

App.—Austin 1908, writ denied) (holding that business permit under which

taxpayer paid franchise tax for 10-year term could not foreclose state from

amending franchise tax to impose additional tax burdens during that term),

aff’d, 223 U.S. 468 (1912).

      Because EMC’s reading of Article III.1 cannot be squared with the

constitutions of most Compact states (including Texas), it is not one that the

Compact states could have intended or that the Court should embrace. As the

Minnesota Tax Court reasoned, “[c]onsidering that at least fourteen States have

constitutional provisions prohibiting them from contracting away their taxing

power, it is highly unlikely that the state tax officials and attorneys general who

drafted the Compact intended that party States would surrender their

sovereign authority to alter or repeal the apportionment election.” Kimberly

                                        58
Clark Corp., No. 8670-R, slip. op. at 55; see also Employees Ret. Sys. v. Duenez,

288 S.W.3d 905, 910 (Tex. 2009) (noting that courts “must avoid constitutionally

suspect constructions” of statutes).

      D.    The Compact Does Not Supersede Section 171.106 Because Any
            Conflict Does Not Unconstitutionally Impair Any Contractual
            Obligations.

      A holding that the Compact obligates its members to provide Article

III.1’s “taxpayer option” still would not win this appeal for EMC. Section

171.106’s mandate to use the gross-receipts method would yield only to the

extent that disabling Article III.1 would violate the Contracts Clauses of the

United States and Texas Constitutions. EMC has not shown a violation here.

            1.    Binding compacts that Congress has not approved
                  preempt state law only if the law unconstitutionally
                  impairs contractual obligations.

      When Congress approves an interstate compact, it “transforms” the

compact into federal law. Cuyler v. Adams, 449 U.S. 433, 440 (1981). Under the

Supremacy Clause, then, an approved compact “pre-empts any state law that

conflicts with the Compact.” Tarrant Reg’l Water Dist., 133 S. Ct. at 2130 n.8.

      By contrast, a non-approved compact like the Multistate Tax Compact

operates only as a state statute and, in some cases, a binding contract among

states. See 1A NORMAN J. SINGER & J.D. SHAMBIE SINGER, SUTHERLAND

                                       59
STATUTES AND STATUTORY CONSTRUCTION § 32:5, at 723 (7th ed. 2009). As a

statute, the compact may be trumped by other state law under “the doctrine of

implied repeal” or rules that “give effect to the latest in time.” Id. § 32:6, at 727.

But when the compact also creates a binding contract, it may supersede a

conflicting statute if the statute’s effect on the compact violates the Contracts

Clauses, U.S. CONST. art I, § 10, cl. 1; TEX. CONST. art. I, § 16, which prohibit

laws impairing contractual obligations. Green v. Biddle, 21 U.S. (8 Wheat.) 1,

92 (1823) (holding that a statute abrogating a compact violated Contracts

Clause); Gen. Expressways, Inc. v. Iowa Reciprocity Bd., 163 N.W.2d 413, 419-

21 (Iowa 1968) (evaluating conflicts between a statute and a compact under

contracts-clause principles); SINGER, supra, § 32:3, at 719 (describing compacts

as “deriv[ing] binding force” from the Contracts Clause); BROUN, supra, at 22

(explaining that “[a] compact controls over a state’s application of its own law

through the Supremacy Clause [in the case of approved compacts] and the

Contracts Clause”).

      EMC seems to suggest that a non-approved compact preempts other

state law simply by virtue of being an interstate agreement, independent of the

“binding force” of the Contracts Clauses. See EMC Br. 13. In support, EMC

                                         60
relies primarily on West Virginia ex rel. Dyer v. Sims, 341 U.S. 22 (1951). But

that reliance is misplaced.

      EMC misconstrues Dyer’s analysis as concerning conflicts between

compacts and later-enacted statutes. In Dyer, although the West Virginia

legislature had ratified an interstate compact, the State’s highest court had

invalidated that ratification on state common-law and constitutional grounds.

Id. at 26. On certiorari review, the Supreme Court confronted the antecedent

question whether it had jurisdiction to review a state supreme court judgment

based on a state-law determination. Id. at 28. In this context, the Court held

that it did:

      It requires no elaborate argument to reject the suggestion that an
      agreement solemnly entered into between States by those who
      alone have political authority to speak for a State can be
      unilaterally nullified, or given final meaning by an organ of one of
      the contracting States. A State cannot be its own ultimate judge in
      a controversy with a sister State. To determine the nature and
      scope of obligations as between States, whether they arise through
      the legislative means of compact or the federal common law
      governing interstate controversies . . . is the function and duty of
      the Supreme Court of the Nation.

Id. (citation and internal quotation marks omitted). In other words, the

Supreme Court distinguished between “those who alone have political authority

to speak for a State”—the legislature—and “an organ of one of the contracting

                                      61
States”—e.g., a court—and held that the latter could not nullify or conclusively

construe an agreement adopted by the former. Id. The Court did not address

what happens when the same legislature that adopts a compact later enacts a

potentially conflicting statute, much less prescribe a rule that the statute is

automatically invalid.

      Moreover, EMC ignores the Supreme Court’s later recognition that, in

light of Dyer’s statement that “all compacts” require congressional consent, id.

at 27, Dyer’s discussion is necessarily cabined to the subset of compacts that

actually require that consent under the Compact Clause. U.S. Steel, 434 U.S.

at 471 n.23.6 Because Congress has not consented to the Multistate Tax

Compact, EMC must rely on the Contracts Clauses to give the Compact

controlling effect over subsequent Texas law.

             2.     Section 171.106 does not unconstitutionally impair any
                    obligations to EMC under the Compact.

      Whether a state law violates the federal Contracts Clause involves a

three-part inquiry: (1) whether the state law substantially impairs a contractual

relationship; (2) whether a significant, legitimate public purpose motivated the

6. EMC likewise misplaces reliance on Hess v. Port Authority Trans-Hudson Corp., 513
U.S. 30 (1994). EMC Br. 12. Hess’s analysis concerns “compact[s] accorded congressional
consent.” 513 U.S. at 40-42.

                                          62
state law; and (3) whether the adjustment to the contracting parties’ rights is

based on reasonable conditions and appropriate to the law’s purpose. Energy

Reserves Grp., Inc. v. Kan. Power & Light Co., 459 U.S. 400, 411-13 (1983). The

Texas Constitution’s Contracts Clause requires “[a] similar analysis.” Liberty

Mut. Ins. Co. v. Tex. Dep’t of Ins., 187 S.W.3d 808, 825 (Tex. App.—Austin 2006,

pet. denied). Under this test, section 171.106 validly overrides any possible

application of Article III.1 ’s “taxpayer option” to the franchise tax.

      EMC cannot establish the first requirement because it is not a party to

the Compact. Nor is EMC a third-party beneficiary. See Basic Capital Mgmt.

v. Dynex Commercial, Inc., 348 S.W.3d 894, 900 (Tex. 2011) (holding that a

third party may not recover on a contract unless the contracting parties

intended to secure benefits to that third party and entered into the contract

directly for the third party’s benefit).

      But even if EMC were an intended Compact beneficiary, disabling Article

III.1’s option would not constitute a “substantial” impairment. “In determining

whether an impairment is substantial and so not ‘permitted under the

Constitution,’ of greatest concern appears to be the contracting parties’ actual

reliance on the abridged contractual term.” City of Charleston v. Pub. Serv.

Comm’n, 57 F.3d 385, 392 (4th Cir. 1995) (quoting U.S. Trust Co. v. New Jersey,

                                           63
431 U.S. 1, 21 (1977)). EMC could not have reasonably relied on Article III.1’s

taxpayer option because the Compact did not clearly and unmistakably obligate

its members to refrain from altering or eliminating that option. See supra Part

II.C; see also Kimberly Clark Corp., No. 8670-R, slip op. at 57 (holding that,

because there was no such obligation, Minnesota did not substantially impair

a contractual relationship under the Contracts Clause by repealing Articles III

and IV of the Compact). EMC also could not have reasonably expected that the

option would remain in place because the Compact permits states to withdraw

at will. See City of Charleston, 57 F.3d at 392-93 (noting that the reliance

analysis turns in part on whether the contract “indicated that the abridged term

was subject to impairment by the legislature”). By contrast, since at least 1991

Texas has significantly relied on the Compact states’ shared interpretation that

Article III.1 does not preclude them from adopting exclusive apportionment

methods.

      And even if EMC could demonstrate the threshold substantial

impairment, that still would not establish a constitutional violation because

section 171.106 serves a significant and legitimate purpose. See Energy

Reserves, 459 U.S. at 411-12. States enjoy “wide latitude in the selection of

apportionment formulas.” Moorman, 437 U.S. at 274. Texas once allowed

                                      64
taxpayers to request a multi-factor apportionment method, but later changed

that policy because it disproportionately favored foreign corporations. See

supra Statement of Facts, Part I.B.2. In imposing a single-factor method, and

disallowing any option under the Compact, section 171.106 “treats both local

and foreign concerns with an even hand.” Moorman, 437 U.S. at 277 n.12.

      Finally, to the extent section 171.106 adjusts any taxpayer rights under

the Compact, it does so under reasonable and appropriate conditions. The

Supreme Court has repeatedly held that single-factor apportionment methods

are “presumptively valid.” Id. at 273. Indeed, this Court has specifically

upheld Texas’s gross-receipts method as constitutional. Gen. Dynamics, 919
S.W.2d at 867-69.

            3.      EMC waived the Contracts Clause issue.

      EMC makes no effort to apply the Energy Reserves analysis. EMC Br.

14. Instead, EMC simply asserts that the Comptroller’s interpretation and

application of section 171.106 “impairs Texas’s contractual obligation to allow

taxpayers the three-factor apportionment formula election under the Multistate

Tax Compact.” Id. But merely identifying a breached contractual term does

not establish a Contracts Clause violation. As described above, the Supreme

Court has adopted a standard that requires more, confirming that “[t]he

                                      65
Contract[s] Clause is not an absolute bar to subsequent modification of a State’s

own financial obligations” under a compact. U.S. Trust, 431 U.S. at 25. Having

failed to brief the proper test, EMC has waived its Contracts Clause issue. See

Sunbeam Envtl. Servs. v. Tex. Workers’ Comp. Ins. Facility, 71 S.W.3d 846, 851

(Tex. App.—Austin 2002, no pet.).

III.   EMC’ S A S -A PPLIED C ONSTITUTIONAL C HALLENGES                     A RE
       JURISDICTIONALLY BARRED, WAIVED, AND MERITLESS.

       In its final issue, EMC contends that section 171.106’s gross-receipts

apportionment method, as applied to its business, violates the Due Process and

Commerce Clauses of the United States Constitution and the Equal and

Uniform Taxation Clause of the Texas Constitution. EMC Br. 20-22. In

support, EMC argues that the gross-receipts method “attributes to Texas a

percentage of income that is disproportionate to the business EMC transacts

in Texas and leads to a grossly distorted result.” Id. at 21.

       As a threshold matter, the district court lacked jurisdiction over those

challenges because EMC failed to raise them in its motion for rehearing before

the Comptroller. Among the jurisdictional prerequisites to a tax-refund suit,

a taxpayer must have filed a motion for rehearing that the Comptroller denied,

TEX. TAX CODE § 112.151(a)(2), and “[t]he grounds of error contained in the

                                       66
motion for rehearing are the only issues that may be raised in [the] suit,” id.

§ 112.152(a).   See Combs v. Chevron, Inc., 319 S.W.3d 836, 845 (Tex.

App.—Austin 2010, pet. denied) (describing this requirement as a “necessary”

“condition for trial-court jurisdiction”); see also In re Nestle USA, Inc., 359
S.W.3d 207, 211-12 (Tex. 2012) (Nestle I) (dismissing constitutional challenges

to the franchise tax for failure to comply with the administrative prerequisites

to suit in chapter 112 of the Tax Code).

      EMC’s motion for rehearing listed a single ground of error: “Texas is

required to allow taxpayers to follow Article IV of the Multistate Tax Compact

since Texas was a member of the compact for the years at issue.” CR.8. The

motion elaborated that the Compact was binding on Texas, that Texas could not

deviate from the Compact’s terms without withdrawing from the Compact, and

that any law purporting to override the Compact would unconstitutionally

impair Texas’s contract obligations. CR.8-9. But the motion never mentioned

the Due Process, Commerce, or Equal and Uniform Taxation Clauses, and it

never complained that EMC’s use of the gross-receipts method resulted in a

disproportionate or grossly distorted tax burden. Id. Accordingly, EMC was

jurisdictionally barred from raising those issues in this suit.

                                       67
      Alternatively, the district court correctly granted summary judgment to

the Comptroller on these issues because EMC failed to plead them. A trial

court may not grant relief on a claim that was neither pleaded nor tried by

consent. In re Park Mem’l Condo. Ass’n, 322 S.W.3d 447, 450-51 (Tex.

App.—Houston [14th Dist.] 2010, no pet.) (citing TEX. R. CIV. P. 301); accord

Vincent v. Bank of Am., N.A., 109 S.W.3d 856, 863 (Tex. App.—Dallas 2003,

pet. denied) (“A party may not obtain a judgment based on a theory not pled.”).

      EMC’s petition alleged only that the Compact contractually obligated

Texas to allow EMC to elect the Compact’s three-factor apportionment method.

CR.5-6. It did not mention the Due Process, Commerce, or Equal and Uniform

Taxation Clauses, and it did not assert that the gross-receipts method caused

EMC to suffer a disproportionate or grossly distorted tax burden. CR.4-7. Nor

were those issues tried by consent. When EMC included those issues in its

summary-judgment briefing, the Comptroller specifically objected that they

were outside the pleadings and asked the district court to disregard them.

CR.1133-34. Thus, if the Court does not dismiss these issues as jurisdictionally

barred, it should affirm the judgment for the Comptroller.

      Finally, EMC’s arguments lack merit. As this Court has explained,

Texas’s gross-receipts apportionment method is presumptively valid under the

                                      68
Due Process and Commerce Clauses. Gen. Dynamics, 919 S.W.2d at 868. To

meet its “heavy burden” to overcome that presumption, EMC was required to

show by “clear and cogent evidence” that the part of its margin apportioned to

Texas is “out of all appropriate proportion to the business transacted” here or

“has led to a grossly distorted result.” Id. (citations and internal quotation

marks omitted).    And that showing must rest on a comparison of the

apportioned margin under EMC’s proposed formula to that actually

apportioned under the gross-receipts method. Id. at 868-69. Surveying

Supreme Court precedent on this issue, this Court has observed that the

Supreme Court “has only twice held the application of a single-factor formula

to be unconstitutional”—specifically, in cases where the challenged formula

increased the apportioned tax base by 162-205% (depending on the method

used) and 250%. Id. at 869. By contrast, the Supreme Court has upheld

apportionment formulas that increased the apportioned tax base within a range

of 14-93%. Id.

      Here, the evidence showed that application of the gross-receipts method

rather than the Compact’s three-factor method increased EMC’s apportioned

margin within the range of 57.6-61.8% (depending on the year). CR.1135, 1143-

54. Because those increases fall well within the range of apportionment

                                      69
differences upheld as constitutional by the Supreme Court, and well outside

those that the Court has found unconstitutional, EMC failed to show that, as

applied to its business, the gross-receipts method violates the Due Process or

Commerce Clauses.7

7. EMC offers no argument regarding the Equal and Uniform Taxation Clause. See EMC
Br. 20-22. And EMC’s discussion regarding the Due Process and Commerce Clauses does
not support an action under the Equal and Uniform Taxation Clause; the claims and
standards are different. See Nestle II, 387 S.W.3d at 618-26 (treating these as distinct
claims). Accordingly, EMC has waived any equal-and-uniform-taxation issue. See TEX. R.
APP. P. 38.1(i).

                                          70
                                PRAYER

    The district court’s judgment should be affirmed.

                                Respectfully submitted.

K EN PAXTON                      SCOTT A. K ELLER
Attorney General of Texas        Solicitor General

CHARLES E. R OY                  /s/ Rance Craft
First Assistant Attorney         RANCE CRAFT
 General                         Assistant Solicitor General
                                 State Bar No. 24035655
JAMES E. DAVIS
Deputy Attorney General for      CHARLES K. ELDRED
 Civil Litigation                Assistant Attorney General

                                 OFFICE OF THE ATTORNEY GENERAL
                                 P.O. Box 12548 (MC 059)
                                 Austin, Texas 78711-2548
                                 (512) 936-2872
                                 (512) 474-2697 [fax]
                                 rance.craft@texasattorneygeneral.gov

                                   71
                       C ERTIFICATE OF C OMPLIANCE

       According to WordPerfect 12, this brief contains 14,850 words, excluding

the portions of the brief exempted by Texas Rule of Appellate Procedure

9.4(i)(1).

                                        /s/ Rance Craft
                                        Rance Craft

                         C ERTIFICATE OF SERVICE

       On July 8, 2015, this Brief of Appellees was served by File & Serve

Xpress on:

    Doug Sigel
    RYAN LAW FIRM, LLP
    100 Congress Avenue, Suite 950
    Austin, Texas 78701
    Doug.Sigel@RyanLawLLP.com

    Lead Counsel for Appellant

                                           /s/ Rance Craft
                                           Rance Craft

                                      72
APPENDIX
                    APPENDIX TABLE OF C ONTENTS

A.   TEX. TAX CODE § 141.001

B.   Addendum to Volume 1 of Florida Statutes, 1971

C.   COMPTROLLER’S DECISION NOS. 104,752 & 104,753 (2011)

D.   Ingram Micro, Inc. v. Dep’t of Treas., No. 11-000035-MT, slip op. (Mich.
     Ct. Cl. Dec. 19, 2014)

E.   Kimberly Clark Corp. v. Comm’r of Revenue, No. 8670-R, slip op. (Minn.
     Tax Ct. June 19, 2015) (en banc)
A
V.T.C.A., Tax Code § 141.001                                                                 Page 1

                                   Effective:[See Text Amendments]

Vernon's Texas Statutes and Codes Annotated Currentness
 Tax Code (Refs & Annos)
    Title 2. State Taxation (Refs & Annos)
        Subtitle D. Compacts and Uniform Laws
          Chapter 141. Multistate Tax Compact (Refs & Annos)
               § 141.001. Adoption of Multistate Tax Compact

The Multistate Tax Compact is adopted and entered into with all jurisdictions legally adopting it to read as
follows:

                                    MULTISTATE TAX COMPACT

                                        ARTICLE I. PURPOSES

The purposes of this compact are to:

1. Facilitate proper determination of state and local tax liability of multistate taxpayers, including the
equitable apportionment of tax bases and settlement of apportionment disputes.

2. Promote uniformity or compatibility in significant components of tax systems.

3. Facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax
administration.

4. Avoid duplicative taxation.

                                       ARTICLE II. DEFINITIONS

As used in this compact:

1. “State” means a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico,

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V.T.C.A., Tax Code § 141.001                                                                   Page 2

or any territory or possession of the United States.

2. “Subdivision” means any governmental unit or special district of a state.

3. “Taxpayer” means any corporation, partnership, firm, association, governmental unit or agency or
person acting as a business entity in more than one state.

4. “Income tax” means a tax imposed on or measured by net income including any tax imposed on or
measured by an amount arrived at by deducting expenses from gross income, one or more forms of which
expenses are not specifically and directly related to particular transactions.

5. “Capital stock tax” means a tax measured in any way by the capital of a corporation considered in its
entirety.

6. “Gross receipts tax” means a tax, other than a sales tax, which is imposed on or measured by the gross
volume of business, in terms of gross receipts or in other terms, and in the determination of which no
deduction is allowed which would constitute the tax an income tax.

7. “Sales tax” means a tax imposed with respect to the transfer for a consideration of ownership, posses-
sion or custody of tangible personal property or the rendering of services measured by the price of the
tangible personal property transferred or services rendered and which is required by state or local law to be
separately stated from the sales price by the seller, or which is customarily separately stated from the sales
price, but does not include a tax imposed exclusively on the sale of a specifically identified commodity or
article or class of commodities or articles.

8. “Use tax” means a nonrecurring tax, other than a sales tax, which (a) is imposed on or with respect to the
exercise or enjoyment of any right or power over tangible personal property incident to the ownership,
possession or custody of that property or the leasing of that property from another including any con-
sumption, keeping, retention, or other use of tangible personal property and (b) is complementary to a
sales tax.

9. “Tax” means an income tax, capital stock tax, gross receipts tax, sales tax, use tax, and any other tax
which has a multistate impact, except that the provisions of Articles III, IV and V of this compact shall
apply only to the taxes specifically designated therein and the provisions of Article IX of this compact
shall apply only in respect to determinations pursuant to Article IV.

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V.T.C.A., Tax Code § 141.001                                                                  Page 3

                         ARTICLE III. ELEMENTS OF INCOME TAX LAWS

                                 Taxpayer Option, State and Local Taxes

1. Any taxpayer subject to an income tax whose income is subject to apportionment and allocation for tax
purposes pursuant to the laws of a party state or pursuant to the laws of subdivisions in two or more party
states may elect to apportion and allocate his income in the manner provided by the laws of such state or
by the laws of such states and subdivisions without reference to this compact, or may elect to apportion
and allocate in accordance with Article IV. This election for any tax year may be made in all party states or
subdivisions thereof or in any one or more of the party states or subdivisions thereof without reference to
the election made in the others. For the purposes of this paragraph, taxes imposed by subdivisions shall be
considered separately from state taxes and the apportionment and allocation also may be applied to the
entire tax base. In no instance wherein Article IV is employed for all subdivisions of a state may the sum
of all apportionments and allocations to subdivisions within a state be greater than the apportionment and
allocation that would be assignable to that state if the apportionment or allocation were being made with
respect to a state income tax.

                                       Taxpayer Option, Short Form

2. Each party state or any subdivision thereof which imposes an income tax shall provide by law that any
taxpayer required to file a return, whose only activities within the taxing jurisdiction consist of sales and
do not include owning or renting real estate or tangible personal property, and whose dollar volume of
gross sales made during the tax year within the state or subdivision, as the case may be, is not in excess of
$100,000 may elect to report and pay any tax due on the basis of a percentage of such volume, and shall
adopt rates which shall produce a tax which reasonably approximates the tax otherwise due. The Multi-
state Tax Commission, not more than once in five years, may adjust the $100,000 figure in order to reflect
such changes as may occur in the real value of the dollar, and such adjusted figure, upon adoption by the
commission, shall replace the $100,000 figure specifically provided herein. Each party state and subdi-
vision thereof may make the same election available to taxpayers additional to those specified in this
paragraph.

                                                 Coverage

3. Nothing in this article relates to the reporting or payment of any tax other than an income tax.

                                 ARTICLE IV. DIVISION OF INCOME

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V.T.C.A., Tax Code § 141.001                                                                  Page 4

1. As used in this article, unless the context otherwise requires:

 (a) “Business income” means income arising from transactions and activity in the regular course of the
 taxpayer's trade or business and includes income from tangible and intangible property if the acquisition,
 management, and disposition of the property constitute integral parts of the taxpayer's regular trade or
 business operations.

 (b) “Commercial domicile” means the principal place from which the trade or business of the taxpayer is
 directed or managed.

 (c) “Compensation” means wages, salaries, commissions and any other form of remuneration paid to
 employees for personal services.

 (d) “Financial organization” means any bank, trust company, savings bank, industrial bank, land bank,
 safe deposit company, private banker, savings and loan association, credit union, cooperative bank,
 small loan company, sales finance company, investment company, or any type of insurance company.

 (e) “Nonbusiness income” means all income other than business income.

 (f) “Public utility” means any business entity (1) which owns or operates any plant, equipment, property,
 franchise, or license for the transmission of communications, transportation of goods or persons, except
 by pipe line, or the production, transmission, sale, delivery, or furnishing of electricity, water or steam;
 and (2) whose rates of charges for goods or services have been established or approved by a federal, state
 or local government or governmental agency.

 (g) “Sales” means all gross receipts of the taxpayer not allocated under paragraphs of this article.

 (h) “State” means any state of the United States, the District of Columbia, the Commonwealth of Puerto
 Rico, any territory or possession of the United States, and any foreign country or political subdivision
 thereof.

 (i) “This state” means the state in which the relevant tax return is filed or, in the case of application of
 this article to the apportionment and allocation of income for local tax purposes, the subdivision or local
 taxing district in which the relevant tax return is filed.

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V.T.C.A., Tax Code § 141.001                                                                     Page 5

2. Any taxpayer having income from business activity which is taxable both within and without this state,
other than activity as a financial organization or public utility or the rendering of purely personal services
by an individual, shall allocate and apportion his net income as provided in this article. If a taxpayer has
income from business activity as a public utility but derives the greater percentage of his income from
activities subject to this article, the taxpayer may elect to allocate and apportion his entire net income as
provided in this article.

3. For purposes of allocation and apportionment of income under this article, a taxpayer is taxable in an-
other state if (1) in that state he is subject to a net income tax, a franchise tax measured by net income, a
franchise tax for the privilege of doing business, or a corporate stock tax, or (2) that state has jurisdiction
to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not.

4. Rents and royalties from real or tangible personal property, capital gains, interest, dividends or patent or
copyright royalties, to the extent that they constitute nonbusiness income, shall be allocated as provided in
paragraphs 5 through 8 of this article.

5. (a) Net rents and royalties from real property located in this state are allocable to this state.

  (b) Net rents and royalties from tangible personal property are allocable to this state: (1) if and to the
  extent that the property is utilized in this state, or (2) in their entirety if the taxpayer's commercial
  domicile is in this state and the taxpayer is not organized under the laws of or taxable in the state in
  which the property is utilized.

  (c) The extent of utilization of tangible personal property in a state is determined by multiplying the
  rents and royalties by a fraction, the numerator of which is the number of days of physical location of the
  property in the state during the rental or royalty period in the taxable year and the denominator of which
  is the number of days of physical location of the property everywhere during all rental or royalty periods
  in the taxable year. If the physical location of the property during the rental or royalty period is unknown
  or unascertainable by the taxpayer, tangible personal property is utilized in the state in which the
  property was located at the time the rental or royalty payer obtained possession.

6. (a) Capital gains and losses from sales of real property located in this state are allocable to this state.

  (b) Capital gains and losses from sales of tangible personal property are allocable to this state if (1) the
  property had a situs in this state at the time of the sale, or (2) the taxpayer's commercial domicile is in
  this state and the taxpayer is not taxable in the state in which the property had a situs.

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V.T.C.A., Tax Code § 141.001                                                                     Page 6

 (c) Capital gains and losses from sales of intangible personal property are allocable to this state if the
 taxpayer's commercial domicile is in this state.

7. Interest and dividends are allocable to this state if the taxpayer's commercial domicile is in this state.

8. (a) Patent and copyright royalties are allocable to this state: (1) if and to the extent that the patent or
copyright is utilized by the payer in this state, or (2) if and to the extent that the patent or copyright is
utilized by the payer in a state in which the taxpayer is not taxable and the taxpayer's commercial domicile
is in this state.

 (b) A patent is utilized in a state to the extent that it is employed in production, fabrication, manufac-
 turing, or other processing in the state or to the extent that a patented product is produced in the state. If
 the basis of receipts from patent royalties does not permit allocation to states or if the accounting pro-
 cedures do not reflect states of utilization, the patent is utilized in the state in which the taxpayer's
 commercial domicile is located.

 (c) A copyright is utilized in a state to the extent that printing or other publication originates in the state.
 If the basis of receipts from copyright royalties does not permit allocation to states or if the accounting
 procedures do not reflect states of utilization, the copyright is utilized in the state in which the taxpayer's
 commercial domicile is located.

9. All business income shall be apportioned to this state 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.

10. The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and
tangible personal property owned or rented and used in this state during the tax period and the denomi-
nator of which is the average value of all the taxpayer's real and tangible personal property owned or
rented and used during the tax period.

11. Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued
at eight times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer
less any annual rental rate received by the taxpayer from subrentals.

12. The average value of property shall be determined by averaging the values at the beginning and ending

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V.T.C.A., Tax Code § 141.001                                                                    Page 7

of the tax period but the tax administrator may require the averaging of monthly values during the tax
period if reasonably required to reflect properly the average value of the taxpayer's property.

13. The payroll factor is a fraction, the numerator of which is the total amount paid in this state during the
tax period by the taxpayer for compensation and the denominator of which is the total compensation paid
everywhere during the tax period.

14. Compensation is paid in this state if:

  (a) the individual's service is performed entirely within the state;

  (b) the individual's service is performed both within and without the state, but the service performed
  without the state is incidental to the individual's service within the state; or

  (c) some of the service is performed in the state and (1) the base of operations or, if there is no base of
  operations, the place from which the service is directed or controlled is in the state, or (2) the base of
  operations or the place from which the service is directed or controlled is not in any state in which some
  part of the service is performed, but the individual's residence is in this state.

15. The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state
during the tax period, and the denominator of which is the total sales of the taxpayer everywhere during
the tax period.

16. Sales of tangible personal property are in this state if:

  (a) the property is delivered or shipped to a purchaser, other than the United States government, within
  this state regardless of the f. o. b. point or other conditions of the sale; or

  (b) the property is shipped from an office, store, warehouse, factory, or other place of storage in this state
  and (1) the purchaser is the United States government or (2) the taxpayer is not taxable in the state of the
  purchaser.

17. Sales, other than sales of tangible personal property, are in this state if:

  (a) the income-producing activity is performed in this state; or

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V.T.C.A., Tax Code § 141.001                                                                   Page 8

 (b) the income-producing activity is performed both in and outside this state and a greater proportion of
 the income-producing activity is performed in this state than in any other state, based on costs of per-
 formance.

18. 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;

 (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.

                     ARTICLE V. ELEMENTS OF SALES AND USE TAX LAWS

                                                 Tax Credit

1. Each purchaser liable for a use tax on tangible personal property shall be entitled to full credit for the
combined amount or amounts of legally imposed sales or use taxes paid by him with respect to the same
property to another state and any subdivision thereof. The credit shall be applied first against the amount
of any use tax due the state, and any unused portion of the credit shall then be applied against the amount
of any use tax due a subdivision.

                                Exemption Certificates, Vendors May Rely

2. Whenever a vendor receives and accepts in good faith from a purchaser a resale or other exemption
certificate or other written evidence of exemption authorized by the appropriate state or subdivision taxing
authority, the vendor shall be relieved of liability for a sales or use tax with respect to the transaction.

                                    ARTICLE VI. THE COMMISSION

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V.T.C.A., Tax Code § 141.001                                                                    Page 9

                                       Organization and Management

1. (a) The Multistate Tax Commission is hereby established. It shall be composed of one “member” from
each party state who shall be the head of the state agency charged with the administration of the types of
taxes to which this compact applies. If there is more than one such agency the state shall provide by law
for the selection of the commission member from the heads of the relevant agencies. State law may pro-
vide that a member of the commission be represented by an alternate but only if there is on file with the
commission written notification of the designation and identity of the alternate. The attorney general of
each party state or his designee, or other counsel if the laws of the party state specifically provide, shall be
entitled to attend the meetings of the commission, but shall not vote. Such attorneys general, designees, or
other counsel shall receive all notices of meetings required under paragraph 1(e) of this article.

 (b) Each party state shall provide by law for the selection of representatives from its subdivisions af-
 fected by this compact to consult with the commission member from that state.

 (c) Each member shall be entitled to one vote. The commission shall not act unless a majority of the
 members are present, and no action shall be binding unless approved by a majority of the total number of
 members.

 (d) The commission shall adopt an official seal to be used as it may provide.

 (e) The commission shall hold an annual meeting and such other regular meetings as its bylaws may
 provide and such special meetings as its executive committee may determine. The commission bylaws
 shall specify the dates of the annual and any other regular meetings, and shall provide for the giving of
 notice of annual, regular and special meetings. Notices of special meetings shall include the reasons
 therefor and an agenda of the items to be considered.

 (f) The commission shall elect annually, from among its members, a chairman, a vice-chairman and a
 treasurer. The commission shall appoint an executive director who shall serve at its pleasure, and it shall
 fix his duties and compensation. The executive director shall be secretary of the commission. The
 commission shall make provision for the bonding of such of its officers and employees as it may deem
 appropriate.

 (g) Irrespective of the civil service, personnel or other merit system laws of any party state, the executive
 director shall appoint or discharge such personnel as may be necessary for the performance of the
 functions of the commission and shall fix their duties and compensation. The commission bylaws shall

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V.T.C.A., Tax Code § 141.001                                                              Page 10

 provide for personnel policies and programs.

 (h) The commission may borrow, accept or contract for the services of personnel from any state, the
 United States, or any other governmental entity.

 (i) The commission may accept for any of its purposes and functions any and all donations and grants of
 money, equipment, supplies, materials and services, conditional or otherwise, from any governmental
 entity, and may utilize and dispose of the same.

 (j) The commission may establish one or more offices for the transacting of its business.

 (k) The commission shall adopt bylaws for the conduct of its business. The commission shall publish its
 bylaws in convenient form, and shall file a copy of the bylaws and any amendments thereto with the
 appropriate agency or officer in each of the party states.

 (l) The commission annually shall make to the governor and legislature of each party state a report
 covering its activities for the preceding year. Any donation or grant accepted by the commission or
 services borrowed shall be reported in the annual report of the commission, and shall include the nature,
 amount and conditions, if any, of the donation, gift, grant or services borrowed and the identity of the
 donor or lender. The commission may make additional reports as it may deem desirable.

                                              Committees

2. (a) To assist in the conduct of its business when the full commission is not meeting, the commission
shall have an executive committee of seven members, including the chairman, vice-chairman, treasurer
and four other members elected annually by the commission. The executive committee, subject to the
provisions of this compact and consistent with the policies of the commission, shall function as provided
in the bylaws of the commission.

 (b) The commission may establish advisory and technical committees, membership on which may in-
 clude private persons and public officials, in furthering any of its activities. Such committees may
 consider any matter of concern to the commission, including problems of special interest to any party
 state and problems dealing with particular types of taxes.

 (c) The commission may establish such additional committees as its bylaws may provide.

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V.T.C.A., Tax Code § 141.001                                                                  Page 11

                                                   Powers

3. In addition to powers conferred elsewhere in this compact, the commission shall have power to:

 (a) Study state and local tax systems and particular types of state and local taxes.

 (b) Develop and recommend proposals for an increase in uniformity or compatibility of state and local
 tax laws with a view toward encouraging the simplification and improvement of state and local tax law
 and administration.

 (c) Compile and publish information as in its judgment would assist the party states in implementation
 of the compact and taxpayers in complying with state and local tax laws.

 (d) Do all things necessary and incidental to the administration of its functions pursuant to this compact.

                                                  Finance

4. (a) The commission shall submit to the governor or designated officer or officers of each party state a
budget of its estimated expenditures for such period as may be required by the laws of that state for
presentation to the legislature thereof.

 (b) Each of the commission's budgets of estimated expenditures shall contain specific recommendations
 of the amounts to be appropriated by each of the party states. The total amount of appropriations re-
 quested under any such budget shall be apportioned among the party states as follows: one-tenth in equal
 shares; and the remainder in proportion to the amount of revenue collected by each party state and its
 subdivisions from income taxes, capital stock taxes, gross receipts taxes, sales and use taxes. In deter-
 mining such amounts, the commission shall employ such available public sources of information as, in
 its judgment, present the most equitable and accurate comparisons among the party states. Each of the
 commission's budgets of estimated expenditures and requests for appropriations shall indicate the
 sources used in obtaining information employed in applying the formula contained in this paragraph.

 (c) The commission shall not pledge the credit of any party state. The commission may meet any of its
 obligations in whole or in part with funds available to it under paragraph 1(i) of this article: provided that
 the commission takes specific action setting aside such funds prior to incurring any obligation to be met
 in whole or in part in such manner. Except where the commission makes use of funds available to it
 under paragraph 1(i), the commission shall not incur any obligation prior to the allotment of funds by the

                     © 2014 Thomson Reuters. No Claim to Orig. US Gov. Works.
V.T.C.A., Tax Code § 141.001                                                                  Page 12

 party states adequate to meet the same.

 (d) The commission shall keep accurate accounts of all receipts and disbursements. The receipts and
 disbursements of the commission shall be subject to the audit and accounting procedures established
 under its bylaws. All receipts and disbursements of funds handled by the commission shall be audited
 yearly by a certified or licensed public accountant and the report of the audit shall be included in and
 become part of the annual report of the commission.

 (e) The accounts of the commission shall be open at any reasonable time for inspection by duly con-
 stituted officers of the party states and by any persons authorized by the commission.

 (f) Nothing contained in this article shall be construed to prevent commission compliance with laws
 relating to audit or inspection of accounts by or on behalf of any government contributing to the support
 of the commission.

                       ARTICLE VII. UNIFORM REGULATIONS AND FORMS

1. Whenever any two or more party states, or subdivisions of party states, have uniform or similar provi-
sions of law relating to an income tax, capital stock tax, gross receipts tax, sales or use tax, the commission
may adopt uniform regulations for any phase of the administration of such law, including assertion of
jurisdiction to tax, or prescribing uniform tax forms. The commission may also act with respect to the
provisions of Article IV of this compact.

2. Prior to the adoption of any regulation, the commission shall:

 (a) As provided in its bylaws, hold at least one public hearing on due notice to all affected party states
 and subdivisions thereof and to all taxpayers and other persons who have made timely request of the
 commission for advance notice of its regulation-making proceedings.

 (b) Afford all affected party states and subdivisions and interested persons an opportunity to submit
 relevant written data and views, which shall be considered fully by the commission.

3. The commission shall submit any regulations adopted by it to the appropriate officials of all party states
and subdivisions to which they might apply. Each such state and subdivision shall consider any such
regulation for adoption in accordance with its own laws and procedures.

                      © 2014 Thomson Reuters. No Claim to Orig. US Gov. Works.
V.T.C.A., Tax Code § 141.001                                                                   Page 13

                                 ARTICLE VIII. INTERSTATE AUDITS

1. This article shall be in force only in those party states that specifically provide therefor by statute.

2. Any party state or subdivision thereof desiring to make or participate in an audit of any accounts, books,
papers, records or other documents may request the commission to perform the audit on its behalf. In
responding to the request, the commission shall have access to and may examine, at any reasonable time,
such accounts, books, papers, records, and other documents and any relevant property or stock of mer-
chandise. The commission may enter into agreements with party states or their subdivisions for assistance
in performance of the audit. The commission shall make charges, to be paid by the state or local gov-
ernment or governments for which it performs the service, for any audits performed by it in order to re-
imburse itself for the actual costs incurred in making the audit.

3. The commission may require the attendance of any person within the state where it is conducting an
audit or part thereof at a time and place fixed by it within such state for the purpose of giving testimony
with respect to any account, book, paper, document, other record, property or stock of merchandise being
examined in connection with the audit. If the person is not within the jurisdiction, he may be required to
attend for such purpose at any time and place fixed by the commission within the state of which he is a
resident: provided that such state has adopted this article.

4. The commission may apply to any court having power to issue compulsory process for orders in aid of
its powers and responsibilities pursuant to this article and any and all such courts shall have jurisdiction to
issue such orders. Failure of any person to obey any such order shall be punishable as contempt of the
issuing court. If the party or subject matter on account of which the commission seeks an order is within
the jurisdiction of the court to which application is made, such application may be to a court in the state or
subdivision on behalf of which the audit is being made or a court in the state in which the object of the
order being sought is situated. The provisions of this paragraph apply only to courts in a state that has
adopted this article.

5. The commission may decline to perform any audit requested if it finds that its available personnel or
other resources are insufficient for the purpose or that, in the terms requested, the audit is impracticable of
satisfactory performance. If the commission, on the basis of its experience, has reason to believe that an
audit of a particular taxpayer, either at a particular time or on a particular schedule, would be of interest to
a number of party states or their subdivisions, it may offer to make the audit or audits, the offer to be
contingent on sufficient participation therein as determined by the commission.

                      © 2014 Thomson Reuters. No Claim to Orig. US Gov. Works.
V.T.C.A., Tax Code § 141.001                                                                 Page 14

6. Information obtained by any audit pursuant to this article shall be confidential and available only for tax
purposes to party states, their subdivisions or the United States. Availability of information shall be in
accordance with the laws of the states or subdivisions on whose account the commission performs the
audit, and only through the appropriate agencies or officers of such states or subdivisions. Nothing in this
article shall be construed to require any taxpayer to keep records for any period not otherwise required by
law.

7. Other arrangements made or authorized pursuant to law for cooperative audit by or on behalf of the
party states or any of their subdivisions are not superseded or invalidated by this article.

8. In no event shall the commission make any charge against a taxpayer for an audit.

9. As used in this article, “tax,” in addition to the meaning ascribed to it in Article II, means any tax or
license fee imposed in whole or in part for revenue purposes.

                                      ARTICLE IX. ARBITRATION

1. Whenever the commission finds a need for settling disputes concerning apportionments and allocations
by arbitration, it may adopt a regulation placing this article in effect, notwithstanding the provisions of
Article VII.

2. The commission shall select and maintain an arbitration panel composed of officers and employees of
state and local governments and private persons who shall be knowledgeable and experienced in matters
of tax law and administration.

3. Whenever a taxpayer who has elected to employ Article IV, or whenever the laws of the party state or
subdivision thereof are substantially identical with the relevant provisions of Article IV, the taxpayer, by
written notice to the commission and to each party state or subdivision thereof that would be affected, may
secure arbitration of an apportionment or allocation, if he is dissatisfied with the final administrative de-
termination of the tax agency of the state or subdivision with respect thereto on the ground that it would
subject him to double or multiple taxation by two or more party states or subdivisions thereof. Each party
state and subdivision thereof hereby consents to the arbitration as provided herein, and agrees to be bound
thereby.

4. The arbitration board shall be composed of one person selected by the taxpayer, one by the agency or
agencies involved, and one member of the commission's arbitration panel. If the agencies involved are

                      © 2014 Thomson Reuters. No Claim to Orig. US Gov. Works.
V.T.C.A., Tax Code § 141.001                                                                  Page 15

unable to agree on the person to be selected by them, such person shall be selected by lot from the total
membership of the arbitration panel. The two persons selected for the board in the manner provided by the
foregoing provisions of this paragraph shall jointly select the third member of the board. If they are unable
to agree on the selection, the third member shall be selected by lot from among the total membership of the
arbitration panel. No member of a board selected by lot shall be qualified to serve if he is an officer or
employee or is otherwise affiliated with any party to the arbitration proceeding. Residence within the
jurisdiction of a party to the arbitration proceeding shall not constitute affiliation within the meaning of
this paragraph.

5. The board may sit in any state or subdivision party to the proceeding, in the state of the taxpayer's in-
corporation, residence or domicile, in any state where the taxpayer does business, or in any place that it
finds most appropriate for gaining access to evidence relevant to the matter before it.

6. The board shall give due notice of the times and places of its hearings. The parties shall be entitled to be
heard, to present evidence, and to examine and cross-examine witnesses. The board shall act by majority
vote.

7. The board shall have power to administer oaths, take testimony, subpoena and require the attendance of
witnesses and the production of accounts, books, papers, records, and other documents, and issue com-
missions to take testimony. Subpoenas may be signed by any member of the board. In case of failure to
obey a subpoena, and upon application by the board, any judge of a court of competent jurisdiction of the
state in which the board is sitting or in which the person to whom the subpoena is directed may be found
may make an order requiring compliance with the subpoena, and the court may punish failure to obey the
order as a contempt. The provisions of this paragraph apply only in states that have adopted this article.

8. Unless the parties otherwise agree the expenses and other costs of the arbitration shall be assessed and
allocated among the parties by the board in such manner as it may determine. The commission shall fix a
schedule of compensation for members of arbitration boards and of other allowable expenses and costs.
No officer or employee of a state or local government who serves as a member of a board shall be entitled
to compensation therefor unless he is required on account of his service to forego the regular compensa-
tion attaching to his public employment, but any such board member shall be entitled to expenses.

9. The board shall determine the disputed apportionment or allocation and any matters necessary thereto.
The determinations of the board shall be final for purposes of making the apportionment or allocation, but
for no other purpose.

                      © 2014 Thomson Reuters. No Claim to Orig. US Gov. Works.
V.T.C.A., Tax Code § 141.001                                                                 Page 16

10. The board shall file with the commission and with each tax agency represented in the proceeding: the
determination of the board; the board's written statement of its reasons therefor; the record of the board's
proceedings; and any other documents required by the arbitration rules of the commission to be filed.

11. The commission shall publish the determinations of boards together with the statements of the reasons
therefor.

12. The commission shall adopt and publish rules of procedure and practice and shall file a copy of such
rules and of any amendment thereto with the appropriate agency or officer in each of the party states.

13. Nothing contained herein shall prevent at any time a written compromise of any matter or matters in
dispute, if otherwise lawful, by the parties to the arbitration proceeding.

                      ARTICLE X. ENTRY INTO FORCE AND WITHDRAWAL

1. This compact shall enter into force when enacted into law by any seven states. Thereafter, this compact
shall become effective as to any other state upon its enactment thereof. The commission shall arrange for
notification of all party states whenever there is a new enactment of the compact.

2. Any party state may withdraw from this compact by enacting a statute repealing the same. No with-
drawal shall affect any liability already incurred by or chargeable to a party state prior to the time of such
withdrawal.

3. No proceeding commenced before an arbitration board prior to the withdrawal of a state and to which
the withdrawing state or any subdivision thereof is a party shall be discontinued or terminated by the
withdrawal, nor shall the board thereby lose jurisdiction over any of the parties to the proceeding neces-
sary to make a binding determination therein.

                   ARTICLE XI. EFFECT ON OTHER LAWS AND JURISDICTION

Nothing in this compact shall be construed to:

(a) Affect the power of any state or subdivision thereof to fix rates of taxation, except that a party state
shall be obligated to implement Article III 2 of this compact.

(b) Apply to any tax or fixed fee imposed for the registration of a motor vehicle or any tax on motor fuel,

                      © 2014 Thomson Reuters. No Claim to Orig. US Gov. Works.
V.T.C.A., Tax Code § 141.001                                                                 Page 17

other than a sales tax; provided that the definition of “tax” in Article VIII 9 may apply for the purposes of
that article and the commission's powers of study and recommendation pursuant to Article VI 3 may ap-
ply.

(c) Withdraw or limit the jurisdiction of any state or local court or administrative officer or body with
respect to any person, corporation or other entity or subject matter, except to the extent that such juris-
diction is expressly conferred by or pursuant to this compact upon another agency or body.

(d) Supersede or limit the jurisdiction of any court of the United States.

                       ARTICLE XII. CONSTRUCTION AND SEVERABILITY

This compact shall be liberally construed so as to effectuate the purposes thereof. The provisions of this
compact shall be severable and if any phrase, clause, sentence or provision of this compact is declared to
be contrary to the constitution of any state or of the United States or the applicability thereof to any
government, agency, person or circumstance is held invalid, the validity of the remainder of this compact
and the applicability thereof to any government, agency, person or circumstance shall not be affected
thereby. If this compact shall be held contrary to the constitution of any state participating therein, the
compact shall remain in full force and effect as to the remaining party states and in full force and effect as
to the state affected as to all severable matters.

CREDIT(S)

Acts 1981, 67th Leg., p. 1528, ch. 389, § 1, eff. Jan. 1, 1982.

Current through the end of the 2013 Third Called Session of the 83rd Legislature

(C) 2014 Thomson Reuters. No Claim to Orig. US Gov. Works.

END OF DOCUMENT

                      © 2014 Thomson Reuters. No Claim to Orig. US Gov. Works.
B
                         ADDENDUM
                                        to
                           VOLUME 1
                                        of
    FLORIDA STATUTES, 1971

The Florida Legislature met in special session between November 29 and Decem-
ber 9, 1971, and enacted a number of measures appropriate for inclusion in the
Florida Statutes . However, the printing of this 1971 edition had by then proceeded
too far to permit incorporation of these measures at the appropriate places in
these volumes. Therefore, it has been decided to publish the product of the special
session as Addenda to volumes 1 and 2. However, entries reflecting the special
session have been inserted at the proper places in the tables of section changes,
tracing table, and alphabetical index .

The format is the same as that used for the Supplement to the Florida Statutes,
1969. The full text of each section amended during the special session is published
in the Addendum to the volume in which it would otherwise have appeared.
Repealed sections are identified by catchline and bracketed note only. In order
to make the Addenda more noticeable, colored paper has been used.
§199.032                                                     ADDENDUM                                        §212.02

            CHAPTER 199                                          or trailer ramps, as hereinafter defined in this
   INTANGIBLE PERSONAL PROPERTY                                   chapter;
              TAX ACT                                                 (c) The producing, fabricating, processing,
                                                                  printing or imprinting of tangible personal
                     PART I                                       property for a consideration for consumers who
               GENERAL PROVISIONS                                furnish either directly or indirectly the ma-
                                                                  terials used in the producing, fabricating, pro-
199.032      Levy.                                                cessing, printing or imprinting; and
   *199.032 Levy.-There is hereby levied, to                          (d) The furni!;hing, preparing or serving
be assessed and collected as provided by this                     for a con:sideration of any tangible personal
                                                                  property for wnsumption on or off the prem-
chapter:                                                          ise:,; of the person furnishing, preparing, or
   (1) An annual tax of one mill on the dollar                   serving such tangible personal property which
of the just valuation of all intangible personal                  includes the sale of meals or prepared food by
property except money as defined in §199.023                     an employer to his employees.
(1Xa), and except notes, bonds, and other
obligations for payment of money which are                            (e ) A transaction whereby the possession of
secured by mortgage, deed of trust, or other                     property is transferred but the seller retains
                                                                  tit!~ as security for the payment of the price.
lien upon real property situated in the state;
   (2) A nonrecurring tax of two mills on the                         (3) (a) "Retail sale" or a "sale at retail"
dollar of the just valuation of all notes, bonds,                 means a sale to a consumer or to any person
and other obligations for payment of money,                       for any purpose other than for resale in the
which are secured by mortgage, deed of trust, or                  form of tangible personal property, and shall
other lien upon real property situated in the                     mean and include all such transactions that
state.                                                            may be made in lieu of retail sales or sales at
                                                                  retail. A resale must be in strict compliance
  Hislory.-§1, ch . 71·134: §1. ch. 71·987.
  •Note.-Section, as amended.    ~ffective   July I. 1972.        with rules and regulations <•nd any dealer mak-
                                                                  ing a sale for resale which is not in strict com-
                                                                  pliance with rules and regulations shall him-
                                                                 self be liable for and pay the tax.
                                                                     (b ) The terms "retail sales," "sales at re-
                                                                 tail," "use," "storage," and "consumption" shall
               CHAPTER 212                                       include the sale, use, storage or consumption
              TAX ON SALES,                                      of all tangible advertising materials imported
       USE AND OTHER TRANSACTIONS                                or caused to be imported into this state.
                                                                 Tangible advertising material shall include
212.02  Definitions.                                             displays, display containers, brochures, cata-
212.03  Transient rentals tax; rate, procedure,                  logs, pt·ice lists, point of sale advertising and
          enforcement, etc.                                      technical manuals or any tangible personal
212.031 Lease or rental of real property.                        property which does not accompany the prod-
                                                                 uct to the ultimate consumer.
212.08 Sales, rental, storage, use tax; specified                     (c) The terms "retail sales," "sale at retail,"
          exemptions.                                            "use," "storage," and "consumption" &hall not
                                                                 include materials, containers, labels, sacks, or
    212.02 Definitions.- The following terms                     bags intended to be used one time only for pack·
and phrases when used in this chapter, shall                     aging tangible personal property for sale, and
 have the meaning ascribed to them in this                       shall not include the sale, use, storage, or con-
 section, except where the context clearly indi-                 sumption of industrial materials for future pro-
 cates a different meaning:                                      cessing, manufacture, or conversion into articles
    (1) "Person" includes any individual, firm,                  of tangible personal property for resale when
 copartnership, joint adventure, association, cor-               such industrial materials become a component
poration, estate, trust, business trust, receiver,               or ingredient of the finished product. However,
syndicate, or other group or combination acting                  said terms shall include the sale, use, storage, or
as a unit, and shall include any political sub-                  consumption of tangible personal property, in-
 division, municipality, state agency, bureau or                 cluding fuels. used and dissipated in fabricat-
department, and the plural as well as the singu-                 ing, converting, or processing tangible personal
 lar number.                                                     property for sale.
    (2) "Sale" means and includes:                                   (d ) The term "gross sales" means the sum
    (a) Any transfer of title or possession, or                  total of all retail sales of tangible personal
both, exchange, barter, lease or rental, condi·                  property as defined herein, without any deduc-
tiona! or otherwise, in any manner or by any                     tion whatsoever of any kind or character, ex-
means whatsoever of tangible personal prop-                      cept as provided in this chapter.
erty for a consideration;                                            (4) "Sales price" means the total amount
   (b) The rental of living quarters, sleeping                   paid for tangible personal property, including
or housekeeping accommodations in hotels,                        any services that are a part of the sale, valued
apartment hou~es or rooming houses, touri:st                     in money, whether paid in money or othendse,
                                                              1966
§212.02                                       ADDENDUM                                          §212.02

and includes any amount for which credit is               (f) A "trailer camp" is a place where space
given to the purchaser by the seller. without         is offered, with or without service facilities, by
any deduction therefrom on account of the CO!-;t      any persons or municipality to the public for
of the prope1ty sold, the cost of materials used,     the parking and accommodation of two or more
labor or service t:ost, interest charged, losses      automobile trailers which are used for lodging,
or any other expense whatweYer. Sales price           for either a direct money consideration or an
also includes the consideration fo1· a transac-       indirect benefit to the lessor or owner in con-
tion which requires both labor and material to        nection with a related business, such space
alter, remodel, maintain, adjust or repair tan-       being hereby defined as living quarters, and
gible personal property. Trade-ins or discounts       the rental price thereof shall include all service
allowed and taken at the time of sale shall not       charges paid to the lessor.
be included within the purview of this sub-               (g) "Lease," "let" or "rental" also means
section.                                              the leasing or rental of tangible personal prop-
   (5) ''Cost price" means the adual cost of
articles of tangible personal property without        erty and the possession or use thereof by the
anv deductions therefrom on account of the cost       lessee or rentee fo1· a consideration, without
or'materials used, IaLor or servit:e costs, trans-    transfe1· of the title of such property, except
portation charges, o1· any expenses whatsoeyer.       as expressly provided to the contrary herein.
                                                      Provided that, where two taxpayers, in con-
   (6) "Lease," "let," or "rental" means leas-        nection with the interchange of facilities, 1·ent
ing or renting of Jiving quarters, sleeping or        or lease property, each to the other, for use
housekeeping accommodations in hotels, apart-         in providing or fumishing any of the services
ment houses, rooming houses, tourist or trailer       mentioned in §167.4!31, the term lease or rental
ramps and real property, the same being de-
                                                      shall mean only the net amount of rental in-
fined as follows:                                     volved.
   (a) Every building or other structure kept,
used, maintained, advertised as or held out to            *(h) "Real property" means any interest in
the public to be a place where sleeping accom-        the surface of real property unless said prop-
modations are supplied fo1· pay to transient or       erty is:
permanent guests or tenants, in which ten or             1. Assessed as agricultural property under
more rooms are furnished for the accommoda-           ~ 193.461.
tion of s·uch guests, and having one or more            2.    Used exclusively as dwelling units.
dining rooms or cafes where meals or lunches            3. Property subject to tax on parking,
are served to such transient or permanent            docking or storage spaces under ~212.03 (6).
guests, such sleeping accommodations and din-            (7)   "Storage" mear.s and includes any keep-
ing rooms or cafes being conducted in the same       ing or retention in this state of tangible per-
building or buildings in connection therewith,       sonal property for use or consumption in this
shall, for the purpose of this chapter, be           state, or for any purpose other than sale at re-
deemed a hotel.                                      tail in the regular course of busines s.
   (b) Any building or part thereof, where              (8) "Us e" means and includes the exercise
separate accommodations for two or more fam-         of any right or power over tangible personal
ilies living independently of each othe1· are        property incident to the ownership thereof, or
supplied to transient or permanent guests or         interest therein, except that it shall not include
tenants, shall for the purpose of this chapter       the sale at retail of that pro·perty in the regular
be deemed an apartment house.                        course of business.
   (c) Every house, boat, vehicle, motor court,         (9) "Business" means any activity engaged
trailer court or other structure or any place or     in by any person, or caused to be engaged in
location kept, used, maintained, advertised or       by him, with the object of private or public
held out to the publit: to be a place where living   gain, benefit, or advantage, either direct or in-
quarters, sleeping or housekeeping, accommo-         direct. Except for sales of motor vehicles, the
dations are supp lied for pay to transient or        term "business" shall not be construed in this
permanent guests or tenants, whether in one          chapter to include occasional or isolated sales
or adjoining buildings, shall for the purpose of     or transactions involving tangible personal prop-
this chapter be deemed a rooming house.              erty by a person who does not hold himself out
                                                     as engaged in business, but shall include other
   (d)   In all hotels, apartment houses and         charges for the sale or rental of tangible per-
rooming houses within the meaning of this            sonal property, sales of or charges of admis-
chapter, the parlor, dining room, sleeping           sion, communication services, all rentals and
porches, kitchen, office and sample rooms shall      leases of living quarters, other than low rent
be construed to mean rooms.                          housing operated under chapter 421, sleeping or
   (e) A "tourist camp" is a place where             housekeeping accommodations in hotels, apart-
two or more tents, tent houses, or camp cot-         ment houses, rooming houses, tourist or trailer
tages are located and offered by a person or         camps, and all rentals of real property, other
municipality for sleeping or eating accommoda-       than low rent housing operated under chapter
tions, most generally to the transient public        421, all leases or rentals of parking lots or ga-
for either a direct money consideration or an        rages for motor vehicles, docking or storage
indirect benefit to the lessor or owner in con-      spaces for boats in boat docks or marinas as de-
nection with a related business.                     fined in this chapter and made subject to a tax
                                                1967
§212.02                                      ADDENDUM                                                             §212.03

imposed by this chapter. Any tax on such sales,        (17) "In this state" or "in the state" means
charges, rentals, admissions, or other transac-     within the exterior limits of Florida and in-
tions made subject to the tax imposed by this       cludes all territory within these limits owned
chapter shall be collected by the state, county,    by or ceded to the United States.
municipality, any political subdivision, agency,      Hlslor:r.-12. ch. 263!e, !e48; Ul-3, ch. 26811, 1851; 11. ch.
bureau or department or other state or local gov-   28883, 1855; 113, ch. 58·1: Ul-4, ch. 58·288; !3. ch. 61-214;
                                                    11. ch. 63·526; 11. ch. 63·253 ; Ul-3, ch . 65-329 ; t5, ch. 65-311;
ernmental instrumentality in the same manner        !2. ch. 65-420; 11. ch. 67·180 : 111. 2, ch. 68-21 ; 11. ch. 68-118;
as other dealers, unless specifically exempted by   §§21, 35, ch. 69-106; §§1-3. ch. 69-222: §1, ch. 70-206; §1. ch. 71 -360;
                                                    §47, ch. 71 -377; §2, ch. 71-986.
this chapter.                                        •Note.-Paragraph (h), as amended, effectiv• March 1, 1972.
   (10) "Retailer" means and includes every
person engaged in the business of making sales         212.03 Transient rentals tax; rate, pro-
at retail, or for distribution, or use, or con-      cedure, enforcement, etc.-
sumption, or storage to be used or consumed in
this state.                                            (1) It is hereby declared to be the legisla-
                                                    tive intent that every person is exercising a
    (11) The term "department" means the
                                                    taxable privilege who engages in the business
department of revenue.                              of renting, leasing or letting any living quar-
    (12) "Tangible personal property" means         ters, sleeping or housekeeping accommodations
and includes personal property which may be         in, from, or a part of, or in connection with
seen, weighed, measured, or touched or is in        any hotel, apartment house, rooming house,
any manner perceptible to the senses, including     tourist or trailer camp, as hereinbefore defined
electric power or energy, boats, motor vehicles     in this chapter. For the. exercise of said priv-
as defined in §320.01(1), aircraft as defined in    ilege a tax is hereby levied as follows: in the
§330.01, and all other types of vehicles. The       amount equal to four per cent of and on the
term "tangible personal property" shall not in-     total rental charged for such living quarters,
clude stocks, bonds, notes, insurance, or other     sleeping or housekeeping accommodations by
obligations or securities; intangibles as defined   the person charging or collecting the rental;
by the intangible tax law of the state; or pari·    provided that such tax shall apply to hotels,
mutuel tickets sold or issued under the racing      apartment houses, rooming houses, tourist or
laws of the state.                                  trailer camps, as hereinbefore defined in this
   (13) The term "use tax" referred to in this      chapter, whether or not there be in connection
chapter includes the use, the consumption, the      with any of the same, any dining rooms, cafes
distribution, and the storage as herein defined.    or other places where meals or lunches are sold
   (14) The term "intoxicating" or "alcoholic       or served to guests.
beve1·ages" 1·eferred to in this chapter includes      (2) The tax provided for herein shall be in
all such beverages as are so defined or may be      addition to the total amount of the rental and
hereafter defined by the Ia ws of the state.        shall be charged by the lessor or person receiv-
    (15) The terms "cigarettes" or "tobacco"        ing the rent in and by said rental arrangement
or "tobacco products" referred to in this chap-     to the lessee or person paying the rental, and
ter include all such products as are defined or     shall be due and payable at the time of the re-
 may be hereafter defined by the laws of the        ceipt of such rental payment by the lessor or
state.                                              person, as defined in this chapter, who receives
                                                    said rental or payment. The owner, lessor or
   (16) The term "admissions" means and in-         person receiving the rent shall remit the tax to
cludes the net sum of money after deduction         the department at the times and in the manner
of any federal taxes for admitting a person         hereinafter provided for dealers to remit taxes
or vehicle or persons to any place of amuse-        under this chapter. The same duties imposed
ment, sport, or recreation or for the privilege     by this chapter upon dealers in tangible per-
of entering or staying in any place of amuse-       sonal property respecting the collection and re-
ment, sport or recreation, including but not        mission of the tax, the making of returns, the
limited to theaters, outdoor theaters, shows,       keeping of books, records and accounts and the
exhibitions, games, races or any place where        compliance with the rules and regulations of
charge is made by way of sale of tickets, gate      the department in the administration of this
charges, seat charges, box charges, season          chapter shall apply to and be binding upon all
pass charges, cover charges, greens fees, par-      persons who manage or operate hotels, apart-
ticipation fees, entrance fees or other fees or     ment houses, rooming houses, tourist and
 receipts of anything of value measured on an       trailer camps, and to all persons who collect or
admission or entrance or length of stay or seat     receive such rents on behalf of such owner or
box accommodations in any place where there         lessor taxable under this chapter.
is any exhibition, entertainment, including
admissions to performances of philharmonic             (3) Where rentals are received by way of
associations, opera guilds, little theaters, and    property, goods, wares, merchandise, services
similar organizations, amusement, sport or          or other things of value, the tax shall be at
 recreation, and all dues paid to private clubs     the rate of four per cent of the value of said
providing recreational facilities, including but    property, services or other things of value.
not limited to golf, tennis, swimming, yachting        ( 4) The tax levied by this section shall not
and boating facilities.                             apply to, be imposed upon, or collected from
                                                1968
§212.03                                                           ADDENDUM                                         §212.031

 any person who shall reside continuously longer                              212.031 Lease or rental of real property.-
 than twelve months at any one hotel, apartment                               (1)*(a) It is declared to be the legislative
 house, rooming house, tourist or trailer camp,                            intent that every person is exercising a taxable
 and shall have paid the tax levied by this                                privilege who engages in the business of rent-
 section for twelve months of residence in any                             ing, leasing, or letting any real property unless
ont! hotel, rooming house, apartment house,                                such property is:
 tourist or trailer camp. Notwithstanding other
                                                                             1. Assessed as agricultural property under
 provisions of this chapter, no tax shall be im-
 posed upon rooms provided guests when there                               §193.461.
 is no consideration involved between guest and                              2. Used exclusively as dwelling units.
the public lodging establishment.                                             ~1.  Property subject to tax on parking, dock-
    (5)   The tax imposed by this section shall                            ing or storage spaces under §212.03 (6).
constitute a lien on the property of the lessee                               *(b) When a lease involves multiple use of
or rentee of any sleeping accommodations in the                            real property wherein a part of the real prop-
same manner as and shall be collectible as are                            erty is subject to the commercial rental tax
liens authorized and imposed by §§713.68 and                              herein, and a part of the property would be
713.69.                                                                   excluded from the tax under subparagraphs
    (6) It is the legislative intent that every                           1., 2., or 3. of this subsection, the depart-
person is engaging in a taxable privilege who                             ment shall determine from the lease and such
leases or rents parking or storage spaces for                             other information as may be available, that
motor vehicles in parking lots or garages or                              portion of the total rental charge which is
who leases or rents docking or storage spaces                             exempt from the tax imposed by this section.
for boats in boat docks or marinas. For the                                  (c) For the exercise of such privilege a
exercise of this privilege a tax is hereby levied                         tax is levied in the amount equal to four per
at the rate of four per cent on the total renta l                         cent of and on the total rent charged for such
charged.                                                                  real property by the person charging or col-
    *(7)(a) The tax levied by this section shall                          lecting the rental.
not apply to or be imposed upon or collected                                 (d) Where the rental of any such real
on the basis of rentals to any person who resides                        property is paid by way of property, goods,
in any building or group of buildings intended                           wares, merchandise, services or other thing of
primarily for lease or rent to persons as their                          value, the tax shall be at the rate of four
permanent or principal place of residence.                               per cent of the value of the property, services
    (b) It is the intent of the legislature that this                    or other things of value.
subsection provide tax relief for persons who                                (2) (a) The tenant actually occupying, using
rent living accommodations rather than own                               or entitled to the use of any pr The road t~x collected shall be only fo1·    office address of each .
the remaining portion of the year from when               Hislory.-§16. ch. H764 . 1931: CGL 1936 Supp. 13351151; ~3.
the motor vehicle is placed in service by the           rh . 18026. 1937: n . rh . 22834 . 1945: n. ch . 26663 . 1951 : u.
                                                        ch . 61-272 : !1 , ch. 63·279 ; H. ch . 63-496; !1 . ch . 65 · 337 ; H I. 2.
motor carrier as fo llows:                              ch. 67-:!97: §2, ch. 71·984 .
     (a) If the annual tax is one hundred dollars          •Note.-Subsection (6). as amended. effective January I, 1972.
and the motor vehicle is placed in service be-          rf.-!323 .05 Permit to operate mot o r vehicles for hire .
tween July 1 and September 30, then one hun-
dred dollars is to be paid: between October 1
                                                    1986
§339.241                                      ADDENDUM                                                           §339.241

                 CHAPTER 339                         primary highway, except the following :
                                                        (a) Junkyards which are screened by
           FLORIDA HIGHWAY CODE,                     natural objects, plantings, fences or other
                 SIXTH PART                          appropriate means so as not to be visible
                                                     from the main traveled way of the highway
            Financing; Miscellaneous                 or otherwise removed from sight.
                                                        (b) Junkyards or scrap metal processing
339.241 Florida junkyard control law.                facilities which are located in areas which are
                                                     zoned for industrial use.
  339.241    Floridajunkyard controllaw.-               (c) Junkyards or scrap metal processing
    (1) SHORT TITLE.-This section shall be           facilities which are not visible from the main
known as the "Florida junkyard control law."         traveled way of any interstate or primary high-
    (2) DEFINITIONS.-Wherever used or re-            way.
ferred to in this section, unless a different
meaning clearly appears from the context:            Any junkyard in existence on December 8, 1971
    (a) "Automobile graveyard" means any             which the secretary determines cannot be
establishment or place of business which is          screened because of topography and elevation
maintained, used, or operated for storing,           shall not be required under this section to be
keeping, buying, or selling wrecked, scrapped,       removed, relocated, or disposed of until federal
ruined, or dismantled motor vehid es or motor        funds are available.
vehicle parts.                                           (4) REQUIREMENTS AS TO FENCES;
    (b) "Junk,"       "junkyard,"   and    "scrap    RULES AND REGULATIONS; EXPENDI-
metal processing facility" means the same as         TURE OF FUNDS.-
described in paragraphs 205.371 (1) (a), (b),           (a) A fence constructed under the provisions
and (e).                                             of this section shall be kept in good order and
    (c) "Areas zoned for industrial use" means       repair, and any advertisement thereon shall be
all areas zoned for industrial use by municipal      regulated by a pplicable state law.
or county governmental units within the state or        (b) The department shall have the power to
an unzoned industrial area as defined by the         promulgate rules and regulations governing the
department and approved by the secretary of          location , construction, plantings, and materials
trans portation. Such areas must be ba sed upon      of said fence, living or otherwise.
the existence of at least one industrial activity       (c) The department is authorized to spend
other than the junkyard or scrap metal process-      such funds as are necessary to obtain federal-aid
ing plant.                                           funds for the purposes described in this
    (d) " Distance from edge of right-of-way"        subsection.
means the distance presently defined in sub-            (5) EMINENT DOMAIN.-The power of
section (g), section 136, title 23, United States    eminent domain is vested in the department to
Code.                                                condemn such interests in land as the depart-
    (e) "Fence" means an enclosure so con-           ment shall determine are required for the pur-
structed or planted and maintained as to obscure     poses of screening, relocation, removal, or
the junkyard from ordinary view to those persons     disposal of junkyards and scrap metal proces-
passing upon the highways in this state.             sing facilities . Such condemnation proceedings
    (f)   "Interstate highway" means the system      shall be maintained in the name of the depart-
presently defined in subsection (e), section 103,    ment under the procedure defined and set forth
title 23, United States Code.                        in chapters 73 and 74. Such relocation, removal,
    (g) "Federal aid primary highway" means          or disposal, for which compensation shall be
any highway within that portion of the state         paid, shall be restricted to those projects
highway system as included and maintained            wherein federal participation is available.
under chapter 335, including extensions of such         (6) ENFORCEMENT.-H is the function
system within municipalities, which has been         and duty of the department to administer and
approved by the secretary of transportation          enforce the provisions of this section. In addition
pursuant to subsection (b), section 103, title 23,   to the power of eminent domain, negotiation,
United States Code.                                  and compensation, the department or any public
    (h) "Person" means any individual, firm,         official may apply to the circuit court or other
agency, company, association, partnership,           court of competent jurisdiction of the county in
business trust, joint stock company, or corpora-     which said junkyard or scrap metal processing
tion .                                               facility may be located for an injunction to abate
    (i) "Department" means the department            such nuisance.
of transportation of the state.                         (7) PENALTY.-Any person violating any
    (3) RESTRICTIONS AS TO LOCATION.                 provision of this section shall be subject to fine
-No junk, junkyard, automobile graveyard, or         of not less than $50 or more than $200. Each day
scrap metal processing facility shall be operated    during any portion of which such violation occurs
or maintained within 1,000 feet of the nearest       constitutes a continuing separate offense.
edge of the right-of-way of any interstate or          History.-§§ 1·6. ch. 7 1·338:   ~§1 -7.   ch.   71-97~.

                                                1987
C
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         Texas Comptroller of Public Accounts STAR System

                  201108230H

                  SOAH DOCKET NO. XXX-XX-XXXX.13
                  CPA HEARING NO. 104,752

                  RE: *************
                  TAXPAYER NO.: *************
                  AUDIT OFFICE: *************
                  AUDIT PERIOD: January 1, 2009 THROUGH December 31, 2009

                  Franchise Tax/RFD

                  BEFORE THE COMPTROLLER
                  OF PUBLIC ACCOUNTS
                  OF THE STATE OF TEXAS

                  SUSAN COMBS
                  Texas Comptroller of Public Accounts

                  JAMES ARBOGAST
                  Representing Tax Division

                  *************
                  Representing Claimant

                  SOAH DOCKET NO. XXX-XX-XXXX.13
                  CPA HEARING NO. 104,753

                  RE: *************
                  TAXPAYER NO.: *************
                  AUDIT OFFICE: *************
                  AUDIT PERIOD: January 1, 2008 THROUGH December 31, 2008

                  Franchise Tax/RFD

                  BEFORE THE COMPTROLLER
                  OF PUBLIC ACCOUNTS
                  OF THE STATE OF TEXAS

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                  SUSAN COMBS
                  Texas Comptroller of Public Accounts

                  JAMES ARBOGAST
                  Representing Tax Division

                  *************
                  Representing Claimant

                  COMPTROLLER’S DECISION

                  ************* (Claimant) filed amended Texas Franchise Tax Reports for the 2008
                  and 2009 report years claiming a refund on franchise tax paid in error.
                  Claimant filed the amended reports using the three-factor apportionment method
                  under the Multistate Tax Compact (MTC), rather than the single-factor
                  apportionment method permitted under the Texas Franchise Tax Act, which was
                  used in filing its original franchise tax reports. The Texas Comptroller of
                  Public Accounts (Comptroller) denied the refund claims on the grounds that
                  Chapter 141 of the Texas Tax Code (TEX. TAX CODE ANN. Section 141.001 –
                  141.006), which adopted the MTC, does not apply to the Texas franchise tax.
                  Claimant requested a refund hearing, contending that the current version of the
                  franchise tax, which is based on a taxable entity’s taxable margin, is an
                  income tax and therefore subject to the MTC. Comptroller Staff (Staff) asserts
                  that the Texas Franchise Tax Act requires use of the single gross receipts
                  factor mandated by TEX. TAX CODE ANN. (Tax Code) Section 171.106, which does
                  not provide for an alternative apportionment method. In his Proposal for
                  Decision (PFD), the Administrative Law Judge (ALJ) concludes that Claimant may
                  not elect the MTC three-factor apportionment formula and is required to use the
                  single-factor method, and therefore recommends that the refund claims be
                  denied.

                  I. PROCEDURAL HISTORY, NOTICE & JURISDICTION

                  On April 5, 2011, Staff referred the cases to the State Office of
                  Administrative Hearings (SOAH) for hearings based on the parties’ written
                  submissions. The parties subsequently requested that the cases be joined for
                  purposes of conducting the hearing and issuing a PFD. The ALJ issued an order
                  granting the joinder. The Comptroller was represented by Assistant General
                  Counsel James Arbogast. Claimant was represented by *************, Claimant’s
                  Vice President of Finances. ALJ Peter Brooks closed the record on June 15,
                  2011. There are no issues of notice or jurisdiction in this proceeding.
                  Therefore, these matters are set out in the Findings of Fact and Conclusions of
                  Law without further discussion here.

                  II. REASONS FOR DECISION

                  A. Evidence Presented

                  Claimant provided the Amended Texas Franchise Tax Reports for report year 2008.
                  Staff filed for each hearing the 60-day Letter, the refund denial letter, and
                  the refund audit plan. Staff also submitted the pleadings filed by the parties
                  while these matters were pending before the Comptroller. The documents have
                  been admitted into the record without objection.

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                  B. Adjustments

                  Staff has not agreed to any adjustments.

                  C. ALJ’s Analysis

                  Resolution of the issue presented by these contested cases turns on whether
                  Claimant is required to use the single gross receipts factor in apportioning a
                  taxable entity’s margin to Texas as provided for under Tax Code Section
                  171.106(a) or may elect to use the alternate three-factor apportionment
                  authorized under Article IV the MTC. The ALJ concludes that Claimant was
                  required to use the single-factor method and therefore finds that Staff did not
                  err in denying the refund claims.

                  Tax Code Section 171.106(a) provides for a taxable entity’s margin to be
                  apportioned as follows:

                  Except as provided by this section, a taxable entity's margin is apportioned to
                  this state to determine the amount of tax imposed under Section 171.002 by
                  multiplying the margin by a fraction, the numerator of which is the taxable
                  entity's gross receipts from business done in this state, as determined under
                  Section 171.103, and the denominator of which is the taxable entity's gross
                  receipts from its entire business, as determined under Section 171.105.

                  The exceptions provided for in Tax Code Section 171.106, which do not apply to
                  Claimant, still require a single factor in apportioning the taxable entity’s
                  margin to Texas. The rules adopted by the Comptroller in implementing Tax Code
                  Section 171.106 apply the statutory directive without any modification. SEE 34
                  TEX. ADMIN. CODE Section 3.591(c), which tracks Section 171.106(a) and directs
                  that a “taxable entity's margin is apportioned to this state to determine the
                  amount of franchise tax due by multiplying the taxable entity's margin by a
                  fraction, the numerator of which is the taxable entity's gross receipts from
                  business done in this state and the denominator of which is the taxable
                  entity's gross receipts from its entire business.” The rule was effective
                  January 1, 2008, and applied to Claimant’s 2008 and 2009 franchise tax reports.
                  The Comptroller clearly did not contemplate that an alternative method was
                  available for apportioning a taxable entity’s margin. This is further reflected
                  in the Frequently Asked Questions (FAQ) that were issued to advise taxable
                  entities in filing their Texas Franchise Tax Reports. In FAQ 2 issued under
                  the topic heading Apportionment, the Comptroller advised taxable entities that
                  there were no changes to how receipts are apportioned:

                  The apportionment factor is generally the same as under previous law; however,
                  the throw-back provisions were repealed. Also see exceptions for Texas gross
                  receipts for transactions between members of a combined group under TTC
                  171.1055. [ENDNOTE: (1)]

                  This advice was subsequently reaffirmed in a more detailed policy statement
                  that was adopted and issued in 2010 as State Tax Automated Research System
                  (STAR) Accession No. 201007003L (July 1, 2010). The policy statement addresses
                  the question whether a taxable entity may elect to use the MTC’s three-factor
                  apportionment formula and explicitly provides that taxable entities are
                  required to use the single-factor apportionment factor:

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                  Use of the Multistate Tax Compact (MTC) Apportionment Formula is Prohibited for
                  Texas Franchise Tax:

                  The Texas franchise tax is apportioned to Texas using a single-factor
                  apportionment formula based on gross receipts as specifically provided in Texas
                  Tax Code Section 171.105. The apportionment provision in Texas Tax Code Chapter
                  141, related to the Multistate Tax Compact (MTC), does not apply to the revised
                  Texas franchise tax and entities may not elect to use the MTC's three -factor
                  apportionment formula in lieu of the formula specified in Texas Tax Code
                  Chapter 171.

                  This policy statement was added to the Apportionment FAQs as FAQ 3 on January
                  26, 2011.

                  The Comptroller’s determination that the single-factor apportionment continues
                  to apply unchanged to the franchise tax, even after the extensive revisions
                  adopted in 2006 by the Legislature (HB 3), [ENDNOTE: (2)] is also reflected in
                  the Legislature’s own assessment of the proposed changes. In the House
                  Research Organization’s Bill Analysis, the proposed apportionment provisions
                  are described as applying a single gross receipts factor, and no reference is
                  made directly or indirectly to the three-factor formula available under the
                  MTC. [ENDNOTE: (3)]

                  Claimant’s contention that it could elect to use the MTC’s three-factor formula
                  relies principally on the fact that TEX. TAX CODE ANN. Section 171.112(g),
                  which provided that Chapter 141 did not apply to Chapter 171 (i.e., Franchise
                  Tax), was repealed by HB 3, and not reenacted by the Legislature. Claimant
                  argues that, as the specific bar against applying the MTC to the Franchise Tax
                  Act was repealed, the MTC’s three-factor formula may be used in apportioning
                  its margin to Texas. However, notwithstanding the absence of the repealed
                  statutory prohibition, the specific and unqualified requirement in Tax Code
                  Section 171.106(a) to use a single-factor formula, buttressed by the
                  Comptroller’s rule and policy statements, is more than sufficient to preclude a
                  taxable entity from electing to use the MTC three-factor formula.

                  The Comptroller’s interpretation of the revised Franchise Tax Act is entitled
                  to due deference as the agency entrusted with implementing the statute, as long
                  as its statutory construction is reasonable and does not contradict the plain
                  language of the statute. SEE TENNESSEE GAS PIPELINE CO. V. RYLANDER, 80 S.W.3d
200, 203 (Tex. App.--Austin 2002, pet. denied). The Comptroller’s
                  interpretation as stated in both its rules and policy statements is consistent
                  with the plain language of Section 171.106 and with the intent of the
                  Legislature. Moreover, Article IV of the MTC was adopted by the 60th
                  Legislature in Tax Code Section 141.001, effective June 13, 1967. Section
                  141.001 has not been reenacted or amended since its adoption. In contrast, the
                  single-factor sales formula has survived numerous amendments, most recently the
                  2006 adoption of a franchise tax based on a taxable margin, which lends further
                  weight to the Comptroller’s position that no substantive changes to the
                  single-factor apportionment provisions were intended with the latest changes.
                  As noted by Staff the specific rule in Tax Code Section 171.106(a) addressing
                  apportionment controls over the general provisions of Tax Code Section 141.001.

                  In summary, the ALJ concludes that Claimant was required to follow the
                  single-factor apportionment formula under Section 171.106, and therefore its
                  amended franchise tax reports and the attendant refund claims were properly

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                  rejected by Staff.

                  III. FINDINGS OF FACT

                  1. ************* (Claimant) filed amended Texas Franchise Tax Reports for the
                  2008 and 2009 report years claiming a refund on franchise tax paid in error.

                  2. Claimant filed the amended reports using the three-factor apportionment
                  method under the Multistate Tax Compact (MTC). TEX. TAX CODE ANN. Section
                  141.001.

                  3. Claimant had used the single-factor apportionment method set out in TEX.
                  TAX CODE ANN. Section 171.106(a) in filing its original franchise tax reports.

                  4. The Texas Comptroller of Public Accounts (Comptroller) denied the refund
                  claims on the grounds that Chapter 141 of the Texas Tax Code (TEX. TAX CODE
                  ANN. SectionSection141.001 – 141.006), which adopted the MTC, does not apply
                  to the Texas franchise tax.

                  5. Claimant requested a refund hearing contesting the denial.

                  6. On April 5, 2011, Comptroller Staff (Staff) referred the cases to the State
                  Office of Administrative Hearings (SOAH) for hearings based on the parties’
                  written submissions.

                  7. Staff issued Notices of Hearing by Written Submission. The Notices of
                  Hearing contained a statement of the nature of the hearing; a statement of the
                  legal authority and jurisdiction under which the hearing was to be held; a
                  reference to the particular sections of the statutes and rules involved; and a
                  short, plain statement of the matters asserted.

                  8. The parties subsequently requested that the cases be joined for purposes of
                  conducting the hearing and issuing a proposal for decision. The Administrative
                  Law Judge (ALJ) issued an order granting the joinder.

                  9. ALJ Peter Brooks closed the record on June 15, 2011.

                  IV. CONCLUSIONS OF LAW

                  1. The Comptroller has jurisdiction over this matter pursuant to TEX. TAX CODE
                  ANN. ch. 111.

                  2. SOAH has jurisdiction over matters related to the hearing in this matter,
                  including the authority to issue a proposal for decision with findings of fact
                  and conclusions of law pursuant to TEX. GOV’T CODE ANN. ch. 2003.

                  3. The Comptroller provided proper and timely notice of the hearing pursuant
                  to TEX. GOV’T CODE ANN. ch. 2001.

                  4. TEX. TAX CODE ANN. Section 171.106(a) provides for a taxable entity’s
                  margin to be apportioned by multiplying the margin by a fraction, the numerator
                  of which is the taxable entity's gross receipts from business done in this
                  state, as determined under Section 171.103, and the denominator of which is the
                  taxable entity's gross receipts from its entire business, as determined under
                  Section 171.105.

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                  5. Rule 3.591, 34 TEX. ADMIN. CODE Section 3.591(c), tracks Section 171.106(a)
                  and directs that a “taxable entity's margin is apportioned to this state to
                  determine the amount of franchise tax due by multiplying the taxable entity's
                  margin by a fraction, the numerator of which is the taxable entity's gross
                  receipts from business done in this state and the denominator of which is the
                  taxable entity's gross receipts from its entire business.” The rule was
                  effective January 1, 2008, and applied to Claimant’s 2008 and 2009 franchise
                  tax reports.

                  6. In Frequently Asked Question (FAQ) 2 that was issued to advise taxable
                  entities in filing their Texas Franchise Tax Reports, the Comptroller advised
                  taxable entities that there were no changes to how receipts are apportioned.
                  SEE, http://www.window.state.tx.us/taxinfo/franchise/faq_apport.html#apport3.

                  7. The Comptroller issued and adopted a policy statement affirming that
                  taxable entities were to use the single-factor apportionment formula and not
                  the MTC’s three-factor formula. State Tax Automated Research System (STAR)
                  Accession No. 201007003L (July 1, 2010). This policy statement was also added
                  to the Apportionment FAQs as FAQ 3.

                  8. The House Research Organization’s Bill Analysis of the proposed
                  apportionment provisions are described as applying a single gross receipts
                  factor, and no reference is made directly or indirectly to the three-factor
                  formula available under the MTC. SEE,
                  http://www.legis.state.tx.us/BillLookup/Text.aspx?LegSess=793&Bill=HB3#.

                  9. TEX. TAX CODE ANN. Section 171.112(g), which provided that TEX. TAX CODE
                  ANN. ch. 141 did not apply to TEX. TAX CODE ANN. ch. 171 (i.e., the Texas
                  franchise tax), was repealed in 2006 by the Legislature, and not reenacted.
                  Tex. H.B. 3, 79th Leg., 3rd C. S. (2006).

                  10. The Comptroller’s interpretation of the revised Franchise Tax Act is due
                  deference as the agency entrusted with implementing the statute, as long as its
                  statutory construction is reasonable and does not contradict the plain language
                  of the statute. SEE TENNESSEE GAS PIPELINE CO. V. RYLANDER, 80 S.W.3d 200, 203
                  (Tex. App.--Austin 2002, pet. denied). The Comptroller’s interpretation as
                  stated in both its rules and policy statements is consistent with the plain
                  language of Section 171.106 and with the intent of the Legislature.

                  11. Based on the foregoing Findings of Fact and Conclusions of Law, Claimant
                  was required to use the single gross receipts factor in apportioning its margin
                  to Texas, and consequently the amended reports and attendant refund claims were
                  properly rejected by Staff.

                  Hearing Nos. 104752 and 104753

                  ORDER OF THE COMPTROLLER

                  On June 16, 2011, the State Office of Administrative Hearings’ (SOAH)
                  Administrative Law Judge (ALJ), Peter Brooks, issued a Proposal for Decision in
                  the above referenced matter. The parties were given fifteen days from the date
                  of the Decision to file exceptions with SOAH. No exceptions were filed, and
                  the Comptroller has determined that the ALJ’s Proposal for Decision, except for

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                  minor changes to correct typographical or clerical errors, should be adopted as
                  written.

                  The above Decision is approved and adopted in all respects. This Decision
                  becomes final twenty days after the date Claimant receives notice of this
                  Decision. If either party desires a rehearing, that party must file a motion
                  for rehearing, which must state the grounds for rehearing, no later than twenty
                  days after the date Claimant receives notice of this Decision. Notice of this
                  Decision is presumed to occur on the third day after the date of this Decision.

                  Signed on this 18th day of August 2011.

                  SUSAN COMBS
                  Texas Comptroller of Public Accounts

                  by: Martin A. Hubert
                  Deputy Comptroller

                  ENDNOTE(S)
                  (1) See,
                  http://www.window.state.tx.us/taxinfo/franchise/faq_apport.html#apport3.
                  (2) Tex. H.B. 3, 79th Leg., 3rd C. S. (2006).
                  (3) http://www.legis.state.tx.us/BillLookup/Text.aspx?LegSess=793&Bill=HB3#.

                  ACCESSION NUMBER: 201108230H
                  SUPERSEDED: N
                  DOCUMENT TYPE: H
                  DATE: 08/18/2011
                  TAX TYPE: FRANCHISE

7 of 7                                                                                                                            1/27/2015 12:05 PM
D
                                   STATE OF MICHIGAN

                                    COURT OF CLAIMS

INGRAM MICRO, INC. & SUBSIDIARIES,
                                                     OPINION AND ORDER
              Plaintiff,

v                                                    Case No. 11-000035-MT

DEPARTMENT OF TREASURY,                              Hon. Michael J. Talbot

              Defendant.

       This matter comes before the Court pursuant to its sua sponte order issued to plaintiff

Ingram Micro, Inc. to show cause why judgment should not be entered in favor of defendant

Department of Treasury (Department) in light of the retroactive effect of 2014 PA 282 (PA 282).

In addition, plaintiff has filed a motion for summary disposition pursuant to MCR 2.116(C)(10).

The Court concludes that the Department is entitled to judgment as a matter of law and so

DENIES plaintiff’s motion and instead GRANTS summary disposition in favor of the

Department pursuant to MCR 2.116(I)(2).

                                      INTRODUCTION

       This case is one of many cases currently pending in the Court of Claims involving

taxpayers that have claimed refunds of tax under the Michigan Business Tax (MBT) Act, MCL

208.1101 et seq., based on an election to utilize a three-factor apportionment formula under the

                                              -1-
Multistate Tax Compact (Compact) provisions, MCL 205.581 et seq. 1 The underlying premise

of these claims is that the elective three-factor apportionment provision of the Compact, as

adopted by 1969 PA 343, remained viable under the MBT Act, as enacted by 2007 PA 36. Use

of the single-factor apportionment formula under the MBT Act, it is argued, is not mandated

because the Compact provisions, including the three-factor apportionment election provisions,

remain in effect. 2

        The validity of this argument was addressed on July 14, 2014, by the Michigan Supreme

Court in Int’l Business Machines Corp v Dep’t of Treasury, 496 Mich. 642; 852 N.W.2d 865

(2014) (“IBM”). Finding that the Legislature, in adopting the MBT Act, did not repeal by

implication the three-factor apportionment formula as set forth in MCL 205.581 et seq., the

Court concluded that the taxpayer was entitled to use the Compact’s three-factor apportionment

formula in calculating its 2008 taxes.

        On September 11, 2014, in response to IBM, the Legislature enacted PA 282, which

retroactively repealed the Compact provisions under MCL 205.581 et seq., to January 1, 2008,

and mandated the use of a single-factor apportionment formula for purposes of calculating MBT.

        The Court now considers the retroactive application of PA 282. Having considered the

arguments made in response to the Court’s show cause order, and for the reasons stated below,

the Court concludes that PA 282 retroactively applies to this case, and all pending MBT refund

1
 Section 1 of 1969 PA 343, codified under MCL 205.581 et seq., includes the provisions of the
Compact originally enacted by parties to the Compact (Member States).
2
 Taxpayers in some of these cases have also argued that the Compact provisions remain in effect
with regard to the Income Tax Act, MCL 206.1 et seq.

                                              -2-
actions filed in reliance on the Compact’s elective, three-factor apportionment formula under the

former MCL 205.581 et seq.

                                       BACKGROUND

History of the Compact

       The Compact is an interstate tax agreement that was originally enacted in 1967 by the

legislatures of seven states.   The Compact was initially drafted out of concerns of state

sovereignty in reaction to the introduction of federal legislation that sought to regulate various

areas of state taxation. 3 The original purposes of the Compact included:

       (1) facilitating proper determination of state and local tax liability of multistate
       taxpayers, including the equitable apportionment of tax bases and settlement of
       apportionment disputes; (2) promoting uniformity and compatibility in state tax
       systems; (3) facilitating taxpayer convenience and compliance in the filing of tax
       returns and in other phases of tax administration; and (4) avoiding duplicative
       taxation. [US Steel Corp v Multistate Tax Comm, 434 U.S. 452, 456; 98 S. Ct. 799;
       54 L. Ed. 2d 682 (1978). 4]

Michigan adopted the Compact provisions, effective in 1970, through enactment of 1969 PA
343.

3
  The legislation, which was never enacted, was introduced in the wake of Northwestern States
Portland Cement Co v Minnesota, 358 U.S. 450; 79 S. Ct. 357; 3 L. Ed. 2d 421 (1959), which held
that there is no Commerce Clause barrier to the imposition of a direct income tax on a foreign
corporation carrying on interstate business within a taxing state.
4
  The Compact was never approved by Congress, but it was upheld against constitutional
challenges in US Steel, 434 U.S. 452.

                                               -3-
Apportionment Formulas under the Compact and the MBT Act

         The present case, and others like it, concern two alternative methods of apportioning

income for purposes of calculating MBT. Under the MBT Act, created by 2007 PA 36, 5 income

is apportioned by applying a single factor apportionment formula based solely on sales. MCL

208.1301(2). In contrast, under the Compact’s election provision, income may be apportioned

using an equally-weighted, three-factor apportionment formula based on sales, property and

payroll. The potential effect of electing “out” of the MBT Act’s single-factor apportionment

methodology is a reduction of the overall apportionment percentage for companies that do not

have significant property and payroll located in Michigan.

Decision in IBM

         In IBM, 496 Mich. 642, the Supreme Court considered the issue of whether MBT

taxpayers must use a single-factor apportionment formula as mandated by the MBT Act or

whether MBT taxpayers may elect to apply a three-factor apportionment formula under the

Compact. The parties were asked by the Court to brief four issues:

          (1) whether the plaintiff could elect to use the apportionment formula
          provided in the Multistate Tax Compact, MCL 205.581, in calculating its
          2008 tax liability to the State of Michigan, or whether it was required to use
          the apportionment formula provided in the Michigan Business Tax Act, MCL
          208.1101 et seq.; (2) whether § 301 of the Michigan Business Tax Act, MCL
          208.1301, repealed by implication Article III(1) of the Multistate Tax
          Compact; (3) whether the Multistate Tax Compact constitutes a contract that
          cannot be unilaterally altered or amended by a member state; and (4) whether
          the modified gross receipts tax component of the Michigan Business Tax Act
          constitutes an income tax under the Multistate Tax Compact. [Int’l Business
          Machines v Dep’t of Treasury, 494 Mich. 874; 832 NW2d 388 (2013).]

5
    For a history of business taxation in Michigan, see IBM, 496 Mich. at 648-650.

                                                -4-
       In its decision, the Court determined that for tax years 2008 through 2010, 6 the

Legislature did not repeal by implication the three-factor apportionment formula as set forth in

MCL 205.581 et seq., and concluded that the taxpayer was entitled to use the Compact’s three-

factor apportionment formula in calculating its 2008 taxes. The Court also concluded that both

the business income tax base and the modified gross receipts tax base of the MBT are “income

taxes” within the meaning of the Compact. The Court did not reach the third issue of whether

the Compact constitutes a contract. 7 On November 14, 2014, the Michigan Supreme Court

denied reconsideration. Int’l Business Machines v Dep’t of Treasury, ___Mich___; 855 NW2d

512 (2014).

Retroactive Repeal of the Compact Provisions by PA 282

       On September 11, 2014, 2013 SB 156 (SB 156) was enacted into law as PA 282,

amending the MBT Act and expressly repealing the Compact provisions, as codified under MCL

205.581 to MCL 205.589. The Legislature gave the Act retroactive effect by providing as

follows:

       Enacting section 1. 1969 PA 343, MCL 205.581 to 205.589, is repealed
       retroactively and effective beginning January 1, 2008. It is the intent of the
       legislature that the repeal of 1969 PA 343, MCL 205.581 to 205.589, is to express
       the original intent of the legislature regarding the application of section 301 of the
       Michigan business tax act, 2007 PA 36, MCL 208.1301, and the intended effect

6
 The Legislature explicitly repealed the Compact apportionment provisions effective January 1,
2011, through enactment of 2011 PA 40.
7
  Thus, this Court is bound only by the Supreme Court’s pre-PA 282 ruling that (1) the
Compact’s election provision under Article III(1) of the Compact was not implicitly repealed by
enactment of the MBT Act in 2008, (2) the election provision properly applied to the modified
gross receipts tax component of the MBT, and (3) IBM could elect to use the Compact’s three-
factor apportionment formula in calculating its 2008 MBT liability.

                                                -5-
       of that section to eliminate the election provision included within section 1 of
       1969 PA 343, MCL 205.581, and that the 2011 amendatory act that amended
       section 1 of 1969 PA 343, MCL 205.581, was to further express the original
       intent of the legislature regarding the application of section 301 of the Michigan
       business tax act, 2007 PA 36, MCL 208.1301, and to clarify that the election
       provision included within section 1 of 1969 PA 343, MCL 205.581, is not
       available under the income tax act of 1967, 1967 PA 281, MCL 206.1 to 206.713.

PA 282 thus amended the MBT Act to express the “original intent” of the Legislature with

regard to (1) the repeal of the Compact provisions, (2) application of the MBT Act’s

apportionment provision under MCL 208.1301, and (3) the intended effect of the Compact’s

election provision under MCL 205.581. 8 The effect of the amendments, as written, retroactively

eliminates a taxpayer’s ability to elect a three-factor apportionment formula in calculating tax

liability under both the MBT Act and income tax act.

                                 PROCEDURAL SUMMARY

       During the pertinent period, plaintiff was an out-of-state corporation with business

activities in Michigan. Plaintiff, and other similar taxpayers, filed their MBT returns calculating

tax by taking an election under Article III(1) of the Compact to apportion the MBT tax base

using a three-factor apportionment formula. The returns reflected overpayments of tax, and

taxpayers requested refunds of these amounts.         The Department denied the refund claims,

asserting that use of the three-factor apportionment was improper and that use of the single-

factor apportionment was mandated by MCL 208.1301. In response, taxpayers paid the tax and

filed actions in the Court of Claims.

8
PA 282 also clarified that the Compact’s election provision is not available under the income
tax act of 1967, 1967 PA 281.

                                                -6-
       Pending the Supreme Court’s resolution of IBM, this Court ordered this case and other

similar cases held in abeyance. After the case was decided, the Court lifted its order holding the

cases in abeyance and ordered the Department to brief the Court on why IBM, 496 Mich. 642,

should not control the disposition of these cases. After the Legislature enacted PA 282 that

retroactively repealed the Compact provisions, the Court issued the show cause order concerning

that legislation. Plaintiff also filed a motion for summary disposition. The Court now considers

the arguments against retroactive application of PA 282.

                                     LEGAL ANALYSIS

I.     THE UNILATERAL REPEAL OF THE COMPACT PROVISIONS BY
       ENACTMENT OF PA 282 WAS A PERMISSIBLE EXERCISE OF THE
       LEGISLATURE’S SOVEREIGN AUTHORITY TO LEGISLATE

       The Court first considers whether the Legislature was authorized to unilaterally repeal the

Compact provisions by enacting PA 282. This determination will depend on an analysis of (1)

whether the Compact created a binding contract with Member States, (2) whether enactment of

PA 282 impaired contractual obligations under the federal or state constitutional Contracts

Clauses, and (3) under Michigan law, whether 1969 PA 343 could restrict subsequent

legislatures from repealing the Compact provisions.        For the following reasons, the Court

concludes that the Legislature acted constitutionally and within its sovereign authority to

legislate when it repealed the Compact provisions through enactment of PA 282.

A.     THE COMPACT IS NOT A BINDING CONTRACT

       In evaluating whether repeal of the Compact by application of PA 282 unconstitutionally

impairs a contract or whether a future legislature is bound to the provisions created by 1968 PA

                                               -7-
343, there must first be a determination that a contract exists. See IBM, 496 Mich. at 681

(MCCORMACK, J., dissenting).

       1.      The Compact Lacks the “Classic Indicia” of a Binding Interstate Compact
               under Federal Compact Law

       The United State Supreme Court has recognized that not all interstate compacts are

binding contracts that restrict future legislatures. See Northeast Bancorp, Inc v Bd of Governors,

472 U.S. 159; 105 S. Ct. 2545; 86 L. Ed. 2d 112 (1985). While a Congressionally-approved

interstate compact has the force of federal law and is binding on Member States, 9 an interstate

compact that has not been approved by Congress, such as the Compact here, can be either a

binding interstate compact or merely an advisory compact. 10

       The test for distinguishing between an advisory compact and a binding interstate compact

is set forth in Northeast Bancorp, as further explained in Seattle Master Builders Ass’n v Pacific

Northwest Electric Power, 786 F2d 1359, 1363 (CA 9, 1986). The three “classic indicia” of a

binding interstate compact are: (1) the establishment of a joint regulatory body, (2) the

requirement of reciprocal action for effectiveness, and (3) the prohibition of unilateral

modification or repeal. Northeast Bancorp, 472 U.S. at 175; Seattle Master Builders, 786 F2d at

1363. Looking at the three indicia of a binding interstate compact, the Compact has none of

these features and is more properly characterized as a non-binding advisory compact.

9
  The Compact Clause of the US Constitution, art I, §10, cl 3, provides, “No State shall, without
the Consent of the Congress, . . . enter into any Agreement or Compact with another State . . . .”
10
   Advisory interstate compacts have no formal or regulatory enforcement mechanisms and are
intended to study and make recommendations on interstate problems. Broun, et al, The Evolving
Use and the Changing Role of Interstate Compacts: A Practitioner’s Guide (2006), p 13.

                                               -8-
                  a.     The Compact did not establish a joint regulatory agency

          A hallmark of an advisory compact, as opposed a binding contract, is that advisory

compacts “cede no state sovereignty nor delegate any governing power to a compact-created

agency.” Broun, et al, The Evolving Use and the Changing Role of Interstate Compacts: A

Practitioner’s Guide (2006), p 14. When the Compact, through Article VI, established the

Multistate Tax Commission (Commission), 11 no governing or regulatory powers were conferred.

Enumerated in Article VI, the powers of the Commission are (1) to study state and local tax

systems, (2) to develop and recommend proposals for greater uniformity, and (3) to compile

information helpful to the states. 12 None of these purposes is regulatory, and it in no way

indicates a delegation of sovereign authority to tax.

          The conclusion that the Compact did not cede state authority or governing power to the

Commission was expressly acknowledged by the Court in US Steel Corp:

                 [The Compact] does not purport to authorize the Member States to
          exercise any powers they could not exercise in its absence. Nor is there any
          delegation of sovereign power to the Commission; each State retains complete
          freedom to adopt or reject the rules and regulations of the Commission.
          [Emphasis added.] [US Steel Corp, 434 U.S. at 473.]

In summary, the Compact, by its terms, does not create a regulatory body.

                  b.     The Compact does not require reciprocal action

          There is nothing reciprocal about the Compact’s provisions. Each member state operates

its respective tax systems independently from the tax systems of other Member States, and the

11
     MCL 205.581, Art VI.
12
     Id. at Art VI(3).

                                                -9-
determination of tax in one state is generally independent of the determination in another state.

With respect to apportionment formulas, in particular, Articles III(1) and IV’s application in one

member state has no bearing on another state. And the functionality of one member state’s

apportionment methodology does not hinge on whether another member state’s apportionment

methodology is reciprocal in nature. As the Supreme Court recognized in Moorman Mfg Co v

Bair, 437 U.S. 267, 274; 98 S. Ct. 2340; 57 L. Ed. 2d 197 (1978), “the States have wide latitude in

the selection of apportionment formulas.” Consistent with Moorman, a Member State’s decision

to allow or eliminate a certain apportionment formula is unaffected by the choice of formula that

another member state has made.

               c.     The Compact allows unilateral withdrawal and modification

       Under the express terms of the Compact, Member States are free to unilaterally withdraw

at any time without notice to another member state. MCL 205.581, Art X(2) (“Any party state

may withdraw from this compact by enacting a statute repealing the same.) See also US Steel,
434 U.S. at 473 (“[E]ach State retains complete freedom to adopt or reject the rules and

regulations of the Commission.”) Thus unilateral withdrawal is clearly permitted under the

Compact.

       Whether unilateral modification is permitted under the Compact is less clear and is not

directly addressed under the Compact. However, three factors lead to a conclusion that Member

States did not intend to restrict their ability to vary terms of the Compact. First, as pointed out

recently by the United States Supreme Court, “States rarely relinquish their sovereign powers, so

when they do we would expect a clear indication of such devolution, not inscrutable silence.”

Tarrant Regional Water Dist v Herrmann, ___ US ___; 133 S. Ct. 2120, 2133; 186 L. Ed. 2d 153

                                               -10-
(2013). Because there is no such “clear indication” under the terms of the Compact that states

are prevented from asserting their sovereign powers to legislate and vary the Compact’s terms, it

is reasonable to conclude that the parties were free to unilaterally amend the Compact provisions,

including Articles III(1) and IV.

       Second, language in the Compact that it “shall be liberally construed as to effectuate the

purposes thereof,” supports an interpretation that flexibility in administering Compact provisions

was contemplated. MCL 205.581, Art XII.

       Third, the Member States’ course of performance shows that unilateral amendments to or

withdrawals from the Compact have long been accepted. As pointed out by the dissent in IBM,
496 Mich. at 681-682, “[M]ember [S]tates did not view strict adherence to Articles III and IV as a

binding contractual obligation, as Compact members have deviated without objection from other

members.” 13 Moreover,

                “It bears emphasizing that Compact members have not only refrained from
       bringing legal action against one another for deviating from Articles III and IV,
       they have endorsed the Commissioner’s interpretation of the Compact: in the
       Gillette [Co v Franchise Tax Bd, 151 Cal Rptr 3d 106; 291 P3d 327 (2013)]
       litigation, all of the member states jointly filed an amicus brief urging the
       Supreme Court of California to reject the lower court’s construction of the
       Compact as a binding contract. [IBM, 496 Mich. at 682 n 7 (MCCORMACK, J.,
       dissenting).]

13
  As summarized in Hellerstein & Hellerstein, State Taxation (2014), the course of performance
of states with regard to the Compact provisions generally, and the elective apportionment
provisions specifically, shows that unilateral repeal and modifications to the Compact provisions
have been widespread.

                                              -11-
          Because the Compact fails to create a regulatory body, contemplates no reciprocal

actions, and contains no bar to unilateral deviations or repeal, the Court concludes that none of

the “classic indicia” of a binding compact exist. Rather than a binding interstate contract, it is

more properly interpreted as an advisory compact that did not act to bind future legislatures.

          2.     The Compact is not a Binding Contract under Michigan Law

          Because it was not congressionally-approved, the Compact is governed by state law. See

Doe v Young Marines of The Marine Corps League, 277 Mich. App. 391, 399; 745 NW2d 168

(2007) (finding that Michigan courts are not bound to follow a federal court’s interpretation of

state law.) See also McComb v Wambaugh, 934 F2d 474, 479 (CA 3, 1991) (finding that

because a non-Congressionally approved compact does not express federal law, it must be

construed as state law.) Michigan law therefore governs the interpretation of the Compact.

          In Michigan, there is a “strong presumption that statutes do not create contractual rights.”

Studier v Mich Pub Sch Employees’ Retirement Bd, 472 Mich. 642, 661; 698 NW2d 350 (2005).

“In order for a statute to form the basis of a contract, the statutory language must be plain and

susceptible of no other reasonable construction than that the Legislature intended to be bound to

a contract.” Id. at 662 (quotation marks and citation omitted). As noted in the dissent in IBM,

“[t]his presumption is grounded in the principle that ‘surrenders of legislative power are subject

to strict limitations that have developed in order to protect the sovereign prerogatives of state

governments.’ ” IBM, 496 Mich. at 682 (MCCORMACK, J., dissenting), quoting Studier, 472 Mich.

at 661.

          There are no words in the Compact, as adopted by the Legislature under 1969 PA 343,

that indicate that the state intended to be bound to the Compact, and specifically to Article III(1).

                                                  -12-
Therefore, the presumption must be that the state did not surrender its legislative power to

require use of a particular apportionment formula.       Such interpretation comports with the

Supreme Court’s recognition of “the basic principle[] that the States have wide latitude in the

selection of apportionment formulas . . . .” Moorman, 437 U.S. at 274. This interpretation is also

consistent with the Court’s recent acknowledgment that states “do not easily cede their sovereign

powers . . . .” Tarrant, 133 S. Ct. at 2132. Because there is no clear indication under MCL

205.581 that the state contracted away its ability to either select an apportionment formula that

differs from the Compact, or to repeal the Compact altogether, the Court concludes that no

contractual obligation was created by enactment of 1969 PA 343 that would prohibit the

enactment of PA 282. 14

B.     REPEAL OF THE COMPACT BY PA 282 DOES NOT VIOLATE THE
       CONTRACTS CLAUSES OF THE STATE OR FEDERAL CONSTITUTIONS

       The United States Constitution provides, “No State shall . . . pass any . . . Law impairing

the Obligation of Contracts . . . .” US Const, art I, § 10, cl 1. The Michigan Constitution

provides: “No . . . law impairing the obligation of contract shall be enacted.” Const 1963, art 1,

14
   Even if the Compact could somehow be construed as a binding contract under Michigan law,
the Member States’ course of performance supports a determination that Member States either
waived or modified the Compact’s terms under Articles III(1) and IV, or materially breached the
terms under Articles III(1) and IV well before the repeal of the Compact provisions under PA
282. See n 12. In addition, as suggested in the dissenting opinion in IBM, taxpayers would have
no standing to enforce the terms of any purported contract that was made with Member States.
       [I]t is not entirely clear to me why IBM has standing to enforce the Compact as a
       contract, given that IBM is neither a party to the Compact nor is it clear that they
       were intended as a third-party beneficiary. See Schmalfeldt v North Pointe Ins
       Co, 469 Mich. 422; 670 NW2d 651 (2003); MCL 600.1405. In any event, because
       I conclude that no such contractual relationship was formed, I find it unnecessary
       to address this issue sua sponte. [IBM at 681 n 5 (MCCORMACK, J., dissenting).]

                                              -13-
§10. “Statutes are presumed to be constitutional, and courts have a duty to construe a statute as

constitutional unless its unconstitutionality is clearly apparent.” In re Request for Advisory

Opinion Regarding Constitutionality of 2011 PA 38, 490 Mich. 295, 307; 806 NW2d 683 (2011)

(citation and quotation marks omitted). In addition, “ ‘[t]he presumption of constitutionality is

especially strong’ ” when tax legislation is concerned. Id. at 308 (citation omitted).

       As discussed earlier, the Compact creates no binding contract, and therefore the

Legislature’s repeal of the Compact by PA 282 does not impair an obligation of contract in

violation of the Michigan or United States Constitutions.

C.     BECAUSE LEGISLATURES CANNOT BIND SUBSEQUENT LEGISLATURES
       UNDER MICHIGAN LAW, 1969 PA 343 DOES NOT RESTRICT THE ABILITY
       OF A SUBSEQUENT LEGISLATURE TO CORRECT AN ERROR, EITHER
       PROSPECTIVELY OR RETROACTIVELY

       Generally, legislatures have the power to repeal legislation and are not bound by the acts

of prior legislatures, so long as existing contractual obligations are not impaired. See, e.g.,

Studier, 472 Mich. at 660; LeRoux v Secretary of State, 465 Mich. 594, 615-616; 640 NW2d 849

(2002). See also Atlas v Wayne Co Board of Auditors, 281 Mich. 596, 599; 275 N.W. 507 (1937)

(“The power to amend and repeal legislation as well as to enact it is vested in the legislature, and

the legislature cannot restrict or limit its right to exercise the power of legislation by prescribing

modes of procedure for the repeal or amendment of statutes; nor may one legislature restrict or

limit the power of its successors”). The principle that one legislature cannot bind a succeeding

legislature is thus derived from the constitutional power of the Legislature to legislate. Const

1963, art 4, § 1. As discussed earlier, no contract was created by enactment of the Compact

provisions. Thus, the Legislature’s constitutional right to change, amend or repeal the law could

not be restricted by enactment of 1969 PA 343. Studier, 472 Mich. at 660. Therefore, the

                                                -14-
Legislature, by enacting PA 282 to correct its drafting error contained in 2007 PA 36, acted

within the scope of its legislative powers as vested in it by the Michigan Constitution.

       Moreover, correcting the drafting errors from 2007 PA 36 by repeal of the Compact

provisions through PA 282 is consistent with the intent of the Legislature in enacting 1969 PA
353. This is evidenced by the language of Article X of the Compact:

               Any party state may withdraw from this compact by enacting a statute
       repealing the same. No withdrawal shall affect any liability already incurred by
       or chargeable to a party state prior to the time of such withdrawal. [MCL
       205.581, Art X(2).]

“When interpreting a statute, courts must ascertain the legislative intent that may reasonably be

inferred from the words expressed in the statute.” Andrie Inc v Dep’t of Treasury, 496 Mich. 161,

167; 853 NW2d 310 (2014) (quotation marks omitted). This requires the Court to consider “the

plain meaning of the critical word or phrase as well as its placement and purpose in the statutory

scheme.” Id. (citations and quotation marks omitted).

       It is clear from the language of Article X(2) that in 1969 the Legislature contemplated the

possibility of future withdrawal from the Compact. Withdrawal from the Compact provisions by

PA 282 is therefore consistent with the Legislature’s intent. The Court rejects any argument that

under Article X(2) repeal of the Compact can be prospective only. As made clear by the

enacting provisions of PA 282, the repeal of the Compact provisions was intended to apply

prospectively from January 1, 2008. Because it is this Court’s duty to carry out the intent of the

Legislature, repeal of the Compact provisions by PA 282 must be given effect.

                                               -15-
D.     CONCLUSION

       The Court concludes that the Compact did not create a binding contract with Member

States, but it was merely an advisory compact. Because no contract was created under federal

Compact or Michigan law, there was no impairment of contractual obligations and therefore no

violations of the Contracts Clauses of the federal or state constitutions. Finally, inasmuch as

there is no impairment of contractual obligations, the Legislature was free to amend or repeal

1969 PA 343. Thus this Court must give effect to and apply the intent of PA 282 as a valid

expression of the Legislature’s sovereign and constitutional authority to legislate.

II.    THE RETROACTIVE APPLICATION OF PA 282 DOES NOT VIOLATE
       OTHER PROVISIONS OF THE STATE OR FEDERAL CONSTITUTIONS

       Other constitutional arguments against the retroactive application of PA 282 concern due

process, separation of powers, the Commerce Clause, and the First Amendment’s right to

petition. 15 These arguments have no merit.

       It is well settled that a tax act is not necessarily unconstitutional because it is retroactive.

Welch v Henry, 305 U.S. 134, 147; 59 S. Ct. 121; 83 L. Ed. 87 (1938). A statute is presumed

constitutional unless there is a clear showing to the contrary. Ammex, Inc v Dep’t of Treasury,

273 Mich. App. 623, 635; 732 N.W.2d 116 (2007); Gen Motors Corp v Dep’t of Treasury, 290

15
  Contracts Clause arguments are relevant in the context of whether a contract that was allegedly
entered into vis-à-vis the adoption of the Compact, and for reasons discussed earlier, must fail.
As to whether the retroactive application of a tax statute would generally implicate the Contracts
Clauses of the Michigan or United States Constitutions, taxes are not considered contractual in
nature, but are instead statutory. Welch v Henry, 305 U.S. 134, 146; 59 S. Ct. 121; 83 L. Ed. 87
(1938). Any further discussion of whether PA 282 violates the Contracts Clauses is unnecessary.

                                                -16-
Mich App 355, 369; 803 N.W.2d 698 (2010). In addition, a taxing statute must be shown to

“clearly and palpably violate the fundamental law before it will be declared unconstitutional.”

Ammex, 273 Mich. App. at 635-636 (citation and internal quotation marks omitted). For the

following reasons, the presumption that PA 282 is constitutional remains intact.

A.     RETROACTIVE APPLICATION OF PA 382 DOES NOT VIOLATE DUE
       PROCESS

       PA 282’s retroactive application does not violate due process of law. First, taxpayers

have no vested interests in tax laws, and therefore no valid claim that an interest in “life, liberty,

or property” has been deprived by retroactive application of PA 282. Second, the Legislature

had a legitimate purpose for giving retroactive effect to PA 282. And third, the period of

retroactivity of PA 282 is rationally related to that purpose.

       1.      Taxpayers have No Vested Interests

       “The due process clauses of the United States and Michigan Constitutions apply when

government actions deprive a person of a liberty or property interest.” Edmond v Dep’t of

Corrections, 143 Mich. App. 527, 533; 373 NW2d 168 (1985). To determine whether the Due

Process Clause applies, courts look to the nature of the interest at stake. Id. A property interest

must be a vested right to be protected under due process. Detroit v Walker, 445 Mich. 682, 698-

699; 520 NW2d 135 (1994).

       In United States v Carlton, 512 U.S. 26; 114 S. Ct. 2018; 129 L. Ed. 2d 222 (1994), the

Supreme Court specifically rejected the argument that the taxpayer had a viable vested right in

tax legislation. Id. at 33. It explained that “[t]ax legislation is not a promise, and a taxpayer has

no vested right in the Internal Revenue Code.” Id. The Michigan Court of Appeals has also

made clear that a taxpayer “does not have a vested right in a tax statute or in the continuance of
                                                -17-
any tax law.” Gen Motors Corp, 290 Mich. App. at 371. See also Walker, 445 Mich. at 703;

GMAC v Treasury Dep’t, 286 Mich. App. 365, 377-378; 781 NW2d 310 (2009). Similarly, no

taxpayer has a vested right in a tax refund based on the continuation of the Compact election

provisions, and any due process claim must fail.

       2.      The Legislature had a Legitimate Purpose for Giving Retroactive Effect to
               PA 282

       Not only are taxpayers’ rights not vested here, but there are no substantive due process

violations implicated by the retroactive application of PA 282. The test for determining whether

due process has been violated by retroactive tax legislation was set forth by the Supreme Court in

Carlton, 512 U.S. 26. Under Carlton, a statute’s retroactive application satisfies due process if:

(1) it is supported by a legitimate legislative purpose, and (2) it is rationally related to that

legislative purpose. Carlton, 512 U.S. at 30.

       In enacting PA 282 and giving it retroactive effect, the Legislature had a legitimate

purpose: to protect state revenues. The potential ramifications of not giving retroactive effect to

PA 282 were made clear in the Senate Fiscal Agency’s legislative analysis of SB 156: 16

       The first enacting section of the bill would retroactively repeal the State’s
       enactment of the Multistate Tax Compact, effective January 1, 2008. As a result,
       taxpayers filing under the MBT would not be allowed to use alternative
       apportionment calculations provided under the Compact when computing a

16
   Although legislative bill analyses are not official statements of legislative intent, they
nonetheless can have probative value. See, e.g., North Ottawa Community Hosp v Kieft, 457
Mich. 394, 406 n 12; 578 NW2d 267 (1998); Nemeth v Abonmarche Dev, Inc, 457 Mich. 16, 27-
29; 576 NW2d 641 (1998); People v Grant, 455 Mich. 221, 240-241; 565 NW2d 389 (1997);
Travis v Dreis & Krump Mfg Co, 453 Mich. 149, 164-166, 551 NW2d 132 (1996) (opinion by
BOYLE, J.).

                                               -18-
       Michigan tax base. While the Department of Treasury has not allowed taxpayers
       to use these alternative calculations, the Michigan Supreme Court’s recent
       decision in IBM Corp. v Department of Treasury may enable certain taxpayers to
       use these calculations, and the Department estimates that approximately $1.1
       billion in refunds would be paid as a result. Because MBT revenue is directed to
       the General Fund, these refunds would reduce General Fund revenue, and the bill
       would prevent a reduction in General Fund revenue of $1.1 billion. [Senate
       Legislative Analysis, SB 156, September 10, 2014, p 5. (Emphasis added.)]

Furthermore, as was recognized by the Court in Gen Motors, 290 Mich. App. at 373, a

legislature’s purpose to “mend a leak in the public treasury or tax revenue” is legitimate. See

also Carlton, 512 U.S. at 32 (finding a legitimate governmental purpose where the Internal

Revenue Code was retroactively amended for purposes of correcting a legislative error that

would have “created a significant and unanticipated revenue loss.”)

       Here, PA 282 served the legitimate governmental purpose of fixing a legislative error and

preventing the potential loss of over $1 billion of MBT revenues in the form of tax refunds from

overpayments.

       3.       Retroactive Application of PA 282 is a Rational Means of Furthering this
                Legitimate Purpose

       In addition to having a legitimate legislative purpose of preventing a catastrophic fiscal

shortfall, the retroactive application of PA 282 is also a rational means of furthering this

legitimate purpose. In Gen Motors, 290 Mich. App. at 375, the Court of Appeals found that

whether a retroactive tax law met the rational means prong of Carlton includes a consideration of

whether the retroactive period is “modest” as tested against the “totality of circumstances.” In

determining that a five-year look back period was a rational means of accomplishing the

prevention of revenue loss, the Court looked to whether (1) the retroactive amendment created a

“wholly new tax,” (2) the taxpayer acted in reliance on an expectation its activity would not be

                                              -19-
taxed, (3) how promptly the Legislature acted to correct the problem leading to loss in revenue,

and (4) the period of time to which the amendment retrospectively applies.

        Applying the “totality of circumstances” here, the retroactive application of PA 282 does

not exceed the modest limitation of the Due Process Clause and is a rational means of

accomplishing the Legislature’s purpose of stemming revenue losses.

        First, PA 282 does not reach back in time to assess a “wholly new tax” on long-

concluded transactions, but rather it confirmed that single-factor apportionment under the MBT

was mandatory and that an election to use a three-factor apportionment formula could not be

made.

        Second, as a matter of law, there can be no valid claim that an MBT taxpayer acted in

reliance on an expectation that for the MBT its income would be apportioned by the three-factor

apportionment provision. As the Supreme Court recognized in Moorman, 437 U.S. 267, the states

have wide latitude in the selection of an apportionment methodology. Moreover, it is also well

established that a taxpayer does not have a vested right in a tax statute or in the continuance of

any tax law. Walker, 445 Mich. at 703; Ludka v Dep’t of Treasury, 155 Mich. App. 250; 399

NW2d 490 (1986). And as Carlton, 512 U.S. at 33, made clear, even where a taxpayer has

detrimentally relied on a tax statute, this does not result in a constitutional violation:

        Although Carlton’s reliance is uncontested—and the reading of the original
        statute on which he relied appears to have been correct—his reliance alone is
        insufficient to establish a constitutional violation. Tax legislation is not a
        promise, and a taxpayer has no vested right in the Internal Revenue Code.
        [Emphasis added.]

        Because taxpayers do not, as a matter of law, have a reliance interest in any particular

apportionment formula a state chooses in dividing the income of multistate taxpayer, this Court

                                                 -20-
rejects any assertion that a taxpayer would have changed its behavior or structured its affairs

differently had it known that the Compact’s elective provision was no longer available.

       Third, the Legislature acted promptly in correcting its error. Not until July 14, 2014,

when the Court decided IBM, was it made clear to the Legislature that 2007 PA 36 was

defective. SB 156, H-1, which added the retroactive repeal of the Compact, provisions, was

introduced on September 9, 2014, and was enacted into law on September 11, 2014.

       Fourth, the period of time to which the amendment applies was modest, particularly in

light of the time frames of other retroactive legislation that Michigan courts and those of other

jurisdictions have held were within the modesty limits of the Due Process Clause. For example,

in Gen Motors, 290 Mich. App. 355, the Court concluded that a five-year retroactive period

(eleven years as applied to the specific taxpayer’s tax years) was modest. In GMAC, 286 Mich

App 365, the Court upheld a law with a seven-year retroactive period. See also Enterprise

Leasing Co v Arizona Dep’t of Revenue, 221 Ariz 123; 211 P3d 1 (Ariz Ct App, 2008) (six year

period); King v Campbell Co, 217 S.W.3d 862 (Ky Ct App, 2006) (upholding 2005 legislation that

denied refunds of taxes overpaid since 1986 under 2004 judicial decision); Miller v Johnson

Controls, Inc, 296 S.W.3d 392 (Ky, 2009) (upholding 2000 legislation retroactively ratifying 1988

tax-agency policy that a 1994 judicial decision overruled); Zaber v City of Dubuque, 789 NW2d

634 (Iowa, 2010) (five-and-one-half years); Licari v Comm’r, 946 F2d 690 (CA 9, 1991) (four

years); Tate & Lyle, Inc v Comm’r of Internal Revenue, 87 F3d 99 (CA 3, 1996) (six years);

Montana Rail Link, Inc v United States, 76 F3d 991 (CA 9, 1996) (four years).

                                              -21-
       All of these factors lead to the conclusion that the Legislature’s means of stemming the

loss of revenues, by giving retroactive effect to PA 282, was a rational means of furthering a

legitimate governmental purpose.

B.     RETROACTIVE APPLICATION OF PA 282                                DOES      NOT      VIOLATE
       PRINCIPLES OF SEPARATION OF POWERS

       In addition to being a rational means of achieving a legitimate purpose, PA 282 does not

violate the principle of separation of powers under the Michigan Constitution. The Separation of

Powers Clause is set forth in Const 1963, art 3, § 2:

               The powers of government are divided into three branches;
       legislative, executive and judicial. No person exercising powers of one
       branch shall exercise powers properly belonging to another branch except
       as expressly provided in this constitution.17

       With respect to retroactive legislation, the Legislature is permitted to retroactively change

legislation, so long as it does not “not reverse a judicial decision or repeal a final judgment.”

GMAC, 286 Mich. App. at 380; Romein v Gen Motors Corp, 436 Mich. 515, 536-537; 462 NW2d

555 (1990), aff’d 503 U.S. 181; 112 S. Ct. 1105; 117 L. Ed. 2d 328 (1992). See also Wylie v City

Comm’n of Grand Rapids, 293 Mich. 571; 292 N.W. 668 (1940). Furthermore, a legislature is

17
   As expressly provided in the Constitution, the legislative power is vested in a senate and a
house of representatives, Const 1963, art 4, § l; the executive power is vested in the governor,
Const 1963, art 5, § l Sec. 1; and the judicial power is vested exclusively in the courts, Const
1963, art 6, § 1. Pursuant to these powers, it is the legislature’s duty to state what the law is, it is
the judiciary’s role to interpret this law, and it is and it is the executive branch’s obligation to
enforce the law as written and as interpreted by the judiciary. 1 Official Record, Constitutional
Convention 1961, pp 601-602 (“[H]e who makes a law shall not enforce it, nor sit in judgment
upon it; that he who enforces a law shall not make or change it nor shall he judge of its violation;
and he who sits in judgment shall have neither made the law nor enforced it.”)

                                                 -22-
entitled to correct its own mistakes though retroactive legislation. See Gen Motors, 290 Mich

App at 373.

       By enacting PA 282, the Legislature acted within its authority to legislate by correcting a

mistake made clear to it by the Court in IBM. PA 282 did not purport to overturn the IBM

decision, nor did it repeal the final judgment as it applied to the plaintiff. The Court’s holding in

IBM was limited to a finding that there was no implicit repeal of the Compact apportionment

provisions through enactment of 2007 PA 36, and PA 282 does not conflict with or disturb this

ruling. Through enactment of PA 282, the Legislature took steps to retroactively repeal the

Compact provisions explicitly, clarifying its original intent in enacting the MBT. Such action did

not impinge upon the judiciary’s functions in violation of the separations of powers.

       Although IBM left unresolved the issue of whether the retroactive repeal of the Compact

provisions would be constitutional, both the majority and the concurring opinions suggest that an

explicit, retroactive repeal of the Compact provisions, effective January 1, 2008, could have led

to a different result. 18 Rather than deviating from the Court’s opinion, PA 282’s explicit,

retroactive repeal of the Compact provisions is consistent with the language in IBM suggesting

that retroactive repeal would be an appropriate legislative response to the challenges being made.

18
   Discussing 2011 PA 40, which retroactively repealed the Compact apportionment provisions
effective January 1, 2011, the majority stated that “[t]here is no dispute that the Legislature
specifically intended to retroactively repeal the Compact’s election provision for taxpayers
subject to the [MBT] beginning January 1, 2011. The Legislature could have—but did not—
extend this retroactive repeal to the start date of the [MBT].” IBM, 496 Mich. at 659. (Emphasis
added.) See also concurring opinion of Justice Zahra, noting that “the [MBT’s] exclusive
apportionment method remains in conflict with the election provision of the Compact. This
conflict, in my view, is easily resolved because the Legislature in 2011 also expressly
supplemented the Compact.” Id. at 669. (Emphasis added.)

                                                -23-
The Legislature did not violate the separation of powers doctrine when it passed the retroactive

amendments under PA 282.

C.        PA 282 DOES NOT VIOLATE THE COMMERCE CLAUSE

          PA 282 does not violate the Commerce Clause 19, which prohibits state laws that (1)

facially discriminate against interstate commerce, (2) have a discriminatory effect, or (3) are

enacted for a discriminatory purpose. Caterpillar Inc v Dep’t of Treasury, 440 Mich. 400, 422-

425; 488 NW2d 182 (1992). Under the dormant Commerce Clause, states may not discriminate

against interstate commerce by “unduly burden[ing] interstate commerce.” Quill Corp v North

Dakota, 504 U.S. 298, 312; 112 S. Ct. 1904; 119 L. Ed. 2d 291 (1992) (citations omitted). PA 282

neither discriminates against, nor unduly burdens, interstate commerce.

          First, PA 282 is not facially discriminatory. Facial discrimination requires an “explicit

discriminatory design to the tax.” Amerada Hess Corp v Dir, 490 U.S. 66, 75; 109 S. Ct. 1617; 104
L. Ed. 2d 58 (1989). The text of PA 282 makes clear, on its face, that no taxpayer, regardless of

location, can elect the three-factor apportionment.

          Second, PA 282 has no discriminatory effect. The effect of PA 282 is that no taxpayer,

whether in-state or out-of-state, can make an election to apply a three-factor apportionment for

MBT purposes. As the United States Supreme Court made clear in Moorman, 437 U.S. 267,

requiring a single-factor apportionment formula does not have the effect of discriminating

against an out-of-state taxpayer.

19
     US Const, art I, § 8, cl 3.

                                                -24-
       In addition, PA 282 was not enacted for a discriminatory purpose, but rather sought to

clarify the original intent of the 2007 Legislature with respect to all taxpayers, both in-state and

out-of-state. Any claims made that PA 282 violates the Commerce Clause of the United States

Constitution must therefore fail.

D.     PA 282 DOES NOT VIOLATE THE FIRST AMENDMENT PETITION CLAUSE

       Neither does PA 282, by retroactively revoking taxpayers’ right to petition the

Department and appeal to a court for a refund of tax, violate their First Amendment right to

petition the government.

       The right of citizens to petition the government for redress of grievances is specifically

guaranteed by the United States and Michigan Constitutions. US Const Amend I; Const 1963,

art 1, § 3. This right is not unlimited, however, and “may be circumscribed to the extent

necessary to achieve a valid state objective.” Jackson Co Ed Ass’n v Grass Lake Community Sch

Bd of Ed, 95 Mich. App. 635, 641-642; 291 NW2d 53 (1979).

       The Supreme Court has long made clear that the First Amendment does not require the

government to listen to individuals or to respond to individual grievances.         In Bi-Metallic

Investment Co v State Bd of Equalization, 239 U.S. 441; 36 S. Ct. 141; 60 L. Ed. 372 (1915), the

Court responded to a real estate owner’s argument that it had no opportunity to be heard in

opposition to a legislative tax valuation increase by stating:

              Where a rule of conduct applies to more than a few people it is impracticable that
       everyone should have a direct voice in its adoption. The Constitution does not require all
       public acts to be done in town meeting or an assembly of the whole. Generally statutes
       within the state power are passed that affect the person or property of individuals,
       sometimes to the point of ruin, without giving them a chance to be heard. Their rights
       are protected in the only way that they can be in a complex society, by their power,
       immediate or remote, over those who make the rule. [Id. at 445 (emphasis added).]
                                                -25-
See also Smith v Arkansas State Highway Employees, Local 1315, 441 U.S. 463, 464-465; 99 S. Ct.
1826; 60 L. Ed. 2d 360 (1979) (finding that the Arkansas Highway Commission did not have an

affirmative obligation under the First Amendment “to listen, to respond or, in this context, to

recognize the association and bargain with it.”)

       The Supreme Court’s analysis in Bi-Metallic Investment applies here. There is no merit

to any argument that the retroactive application of PA 282 violates a taxpayers’s First

Amendment right to petition the government. Taxpayers’ First Amendment rights on matters of

tax legislation—whether prospective or retroactive—are properly protected by taxpayers’ power

over those who “make the rule[s]”—that is, the Legislature. Bi-Metallic Investment, 239 U.S. at

445. While the Court has an obligation, within jurisdictional limits, to respond to taxpayers’

grievances with respect to individual overpayments of tax, it is under no constitutional obligation

under the First Amendment to answer to taxpayers about general validity of the legislation itself.

Thus application of PA 282 does not violate a taxpayer’s First Amendment rights.

       Moreover, to the extent that PA 282 may impact taxpayers’ procedural rights of

petitioning the court for a refund of tax, these rights are properly safeguarded under rights of due

process, which “affirmatively require[s] the government to provide meaningful procedural

opportunities in response to judicial petitions, far and above any required by the First

Amendment standing alone.” Andrews, A Right of Access to Court Under the Petition Clause of

the First Amendment: Defining the Right, 60 Ohio St L J 557, 634 (1999). And as the Court has

already discussed, plaintiff’s constitutional rights of due process have been satisfied with respect

to the application of PA 282.

                                               -26-
III.      THERE WERE NO PROCEDURAL                        VIOLATIONS         THAT      BAR
          APPLICATION OF PA 282

A.        THE TITLE-OBJECT CLAUSE OF THE MICHIGAN CONSTITUTION WAS
          NOT VIOLATED
          PA 282 satisfies the Title-Object Clause of the Michigan Constitution. This clause states:

          No bill shall be altered or amended on its passage through either house so as to
          change its original purpose as determined by its total content and not alone by its
          title. [Const 1963, art 4, § 24.]

       PA 282 is titled as follows:

          AN ACT to amend 2007 PA 36, entitled “An act to meet deficiencies in state funds by
          providing for the imposition, levy, computation, collection, assessment, reporting,
          payment, and enforcement of taxes on certain commercial, business, and financial
          activities; to prescribe the powers and duties of public officers and state departments; to
          provide for the inspection of certain taxpayer records; to provide for interest and
          penalties; to provide exemptions, credits, and refunds; to provide for the disposition of
          funds; to provide for the interrelation of this act with other acts; and to make
          appropriations,” by amending sections 111, 305, 403, and 433 (MCL 208.1111,
          208.1305, 208.1403, and 208.1433), sections 111 and 305 as amended by 2012 PA 605,
          section 403 as amended by 2008 PA 434, and section 433 as amended by 2007 PA 215,
          and by adding section 508; and to repeal acts and parts of acts.

          The three different challenges that may be brought against a statute on the basis of the

Title-Object Clause are: (1) a multiple-object challenge, (2) a title-body challenge, and (3) a

change of purpose challenge. Ray Twp v B & BS Gun Club, 226 Mich. App. 724, 728; 575 NW2d

63 (1997); HJ Tucker & Assoc, Inc v Allied Chucker & Engineering Co, 234 Mich. App. 550,

556-557; 595 NW2d 176 (1999). In assessing the validity of these challenges, the constitutional

requirements under the Title-Object clause are to be construed reasonably. Mooahesh v Dep’t of

Treasury, 195 Mich. App. 551, 563; 492 NW2d 246 (1992). See also Gen Motors Corp, 290
Mich. App. at 388.

                                                 -27-
          1.     Multiple-Object Challenge

          With respect to the multiple-object challenge, the body of the law, as well as its title,

must be examined to determine whether the act embraces more than one object or purpose. Ray

Twp, 226 Mich. App. at 731. The object of the legislation must be determined by examining the

law as enacted, not as originally introduced. People v Kevorkian, 447 Mich. 436, 456; 527

NW2d 714 (1994). A bill that is enacted into law may include all matters germane to its object,

as well as all provisions that directly relate to, carry out, and implement the principal object.

City of Livonia v Dep’t of Social Servs, 423 Mich. 466, 497; 378 NW2d 402 (1985). “The

purpose of the single-object rule is to avoid bringing into one bill diverse subjects that have no

necessary connection.” Mooahesh, 195 Mich. App. at 564.

          In determining whether PA 282 violated the single object rule, Mooahesh is instructive.

Mooahesh involved a title-object challenge to 1988 PA 136, which (1) amended the Individual

Income Tax Act to provide that lottery winnings are taxable, and (2) repealed a section from the

Lottery Act that had previously exempted lottery winnings from taxation. 20 The Court first

determined that the general purpose of the act as found in the title (“to meet deficiencies in state

20
     The title of 1988 PA 516 provided, in pertinent part:

          An act to amend sections . . . of the Public Acts of 1967, entitled “An act to meet
          deficiencies in state funds by providing for the imposition, levy, computation, collection,
          assessment, and enforcement by lien and otherwise of taxes on or measured by net
          income; to prescribe the manner and time of making reports and paying the taxes, and the
          functions of public officers and others as to the taxes; to permit the inspection of the
          records of taxpayers; to provide for interest and penalties on unpaid taxes; to provide
          exemptions, credits and refunds of the taxes; to prescribe penalties for the violation of
          this act; to provide an appropriation; and to repeal certain acts and parts of acts. . . .”
          [Emphasis added.]

                                                  -28-
funds”) was to raise revenues, and that “[a] statute may authorize the doing of all things that are

in furtherance of the general purpose of act without violating the one-object limitation of art 4, §

24.” Mooahesh, 195 Mich. App. at 564 (emphasis added). It further stated that “[t]he object of

‘meet[ing] deficiencies in state funds’ may reasonably be found to include the repeal of a tax

exemption, even if that exemption does not appear in any act specifically devoted to taxation.”

Mooahesh, 195 Mich. App. at 566. In addition, acknowledging that “it might have been ‘better

draftsmanship,’ to have provided for a separate amendment to the Lottery Act,” the Court

determined that “the inclusion of the repeal of the tax exemption provision in an act amending

the income tax laws does not render the act in violation of the single-object requirement.” Id.

(internal citations omitted.)

         Just as the statute considered in Mooahesh had as its general purpose the raising of

revenues, so too was the general purpose of PA 282. And just as it might have been “better

draftsmanship” to have provided for a separate amendment repealing § 34 of the Lottery Act, the

Legislature in enacting PA 282 might have been better advised to repeal the Compact provisions

in a separate act. But like the choice to amend the ITA and repeal a section of the Lottery Act in

one act, the choice to include the repeal of the Compact and amend the MBT in one act is not a

violation of the single-object requirement. 21

21
     As repeated by the Court in Mooahesh, 195 Mich. App. at 564:

         There is . . . no constitutional requirement that the legislature do a tidy job in
         legislating. It is perfectly free to enact bits and pieces of legislation in separate
         acts or to tack them on to existing statutes even though some persons might think
         that the bits and pieces belong in a particular general statute covering the matter.
         The constitutional requirement is satisfied if the bits and pieces so enacted are
         embraced in the object expressed in the title of the amendatory act and the act

                                                 -29-
       2.      Title-Body Challenge

       With respect to a title-body challenge, the title of an act must express the general purpose

or object of the act. Ray Twp, 226 Mich. App. at 728. “ ‘[T]he title need not serve as an index of

all that the act contains.’ ” Midland Twp v Mich State Boundary Comm’n, 401 Mich. 641, 653;

259 N.W.2d 326 (1977) (quoting People v Milton, 393 Mich. 234, 246-247; 224 NW2d 266

(1974)). It is sufficient if the title “ ‘is a descriptive caption, directing attention to the subject

matter which follows . . . or if it be expressive of the purpose and scope of the enactment.’ ”

Mooahesh, 195 Mich. App. at 556-557, quoting People ex rel Wayne Prosecuting Atty v Sill, 310
Mich. 570, 574; 17 NW2d 756 (1945). The test under a title-body challenge is whether the title

“gives fair notice to the legislators and the public of the challenged provision.” H J Tucker &

Assocs, 234 Mich. App. at 559. “The notice aspect is violated where the subjects are so diverse in

nature that they have no necessary connection.” Mooahesh, 195 Mich. App. at 569.

       Here, as discussed earlier, the Legislature’s broad purpose of PA 282 was to raise

revenue through the imposition of tax. The title adequately expressed this object and gave notice

of this general purpose. To withstand scrutiny under Const 1963, art 4, § 24, it was not

necessary for the Legislature to provide in the title “an index of all that the act contains,”

Midland Twp, 401 Mich. at 653. In addition, the subjects within the title all had a nexus to the

purpose of raising revenue and were not “so diverse in nature that they [had] no necessary

connection” to this purpose. Mooahesh, 195 Mich. App. at 569. There was no violation of the

title-body rule under PA 282.

       being amended. [Id. quoting Detroit Bd of Street R Comm’rs v Wayne Co, 18
Mich. App. 614, 622-623; 171 NW2d 669 (1969).]

                                                -30-
       3.      Change-of-Purpose Challenge

       Finally, a change of purpose challenge to PA 282 on the ground that its purpose changed

during passage through the Legislature, is tested as to whether “the change represents an

amendment or extension of the basic purpose of the original, or the introduction of entirely new

and different subject matter.” Anderson v Oakland Co Clerk, 419 Mich. 313, 328; 353 NW2d

448 (1984) (LEVIN, J., concurring) (internal quotation marks omitted). See also Kevorkian, 447
Mich. at 461 (“[T]he test for determining if an amendment or substitute changes a purpose of the

bill is whether the subject matter of the amendment or substitute is germane to the original

purpose.”)

       Here, as discussed earlier, the general purpose of SB 156 as originally introduced was to

raise revenues. This original purpose of SB 156 did not change under Substitute H-1, as

introduced and later enrolled as PA 282.

       As originally introduced, SB 156 amended the MBT by (1) allowing an adjustment to the

modified gross receipts tax base for amounts attributable to the taxpayer pursuant to a discharge

of indebtedness, (2) revising the calculation of the investment credit with respect to the recapture

of revenue when property previously subject to the credit is sold, (3) revising the calculation of

the credit for a taxpayer located and conducting business in a renaissance zone before December

1, 2002, and, (4) revising a provision concerning a dock sale, for purposes of apportionment.

See Senate Legislative Analysis, SB 156, March 19, 2013. The original bill stated that the act

was “curative and intended to clarify the original intent of the Legislature.” Id. Substitute H-1,

as enrolled as PA 282, retained the original proposed amendments, and added, in pertinent part,

(1) a requirement that a taxpayer claim a refund in 2015 if as a result of the amendments, there

                                               -31-
was an overpayment for a tax year between 2010 and 2014, and (2) a provision that the bill

would retroactively repeal the Compact provisions under Public Act 343 of 1969 to January 1,

2008, and express legislative intent regarding the single-factor apportionment formula and the

elimination of the Compact’s election provision. See Senate Legislative Analysis, SB 156,

September 10, 2014.

       Substitute H-1, as enrolled as PA 282, was “an extension of the basic purpose of the

original,” rather than “the introduction of the entirely new and different subject matter” that

would otherwise violate the change-of-purpose rule. Anderson, 419 Mich. at 327. The general

purpose of both the bill as originally enacted, and substitute H-1, as enrolled as PA 282, was also

to raise revenues. Because the general purpose of the bills did not change or introduce new and

different subject matter, a change-in-purpose challenge to PA 282 must fail.

       In conclusion, given the presumption that PA 282 is constitutional, and in light of the fact

that the Title-Object Clause is to be liberally construed, the Court concludes that PA 282 does

not violate the Title-Object Clause of the Constitution.

B.     THE “FIVE-DAY RULE” UNDER THE MICHIGAN CONSTITUTION WAS
       NOT VIOLATED

       The issue whether PA 282 violates the Title-Object Clause is integrally related to the

“five-day rule” of art 4, § 26 of Const 1963 which states, in pertinent part, that no bill can be

                                               -32-
passed until it has been printed or reproduced and in the possession of each house for at least five

days. 22 This rule was not violated by passage of PA 282.

       Whether the five-day rule has been violated depends on whether (1) the bill was in the

possession of both houses for five days, and (2) whether there has been a change in purpose.

Anderson, 419 Mich. at 339 (LEVIN, J., concurring). Here, SB 156 was before both the House

and Senate for at least 5 days. 23 And as discussed earlier, SB 156 as finally passed served the

original bill’s general purpose of raising revenues. The Court therefore concludes that enactment

of PA 282 did not violate Const 1963, art 4, § 26.

C.     THE TAX-TITLE CLAUSE OF THE MICHIGAN CONSTITUTION WAS NOT
       VIOLATED

       PA 282 does not violate the “tax-title” clause of art 4, § 32 of the Michigan Constitution.

That provision, also known as the “distinct-statement” clause, requires that “[e]very law which

imposes, continues or revises a tax shall distinctly state the tax.” Id. The purpose of this clause

is “ ‘to prevent the Legislature from being deceived in regard to any measure for levying taxes,

and from furnishing money that might by some indirection be used for objects not approved by

the Legislature.’ ” Dawson v Sec of State, 274 Mich. App. 723, 747; 739 NW2d 339 (2007).

(Citation omitted.)

22
   As explained by the Court in Anderson, 419 Mich. at 329-330, “The five-day rule and the
change of purpose provision were contained in the same article and section of the Constitution of
1908. Const 1908, art 5, § 22. It is clear that the function of the change of purpose provision,
both in the Constitution of 1908 and as modified in the Constitution of 1963, is to fulfill the
command of the five-day rule.”
23
   See 2013 Senate Journal 9; 2014 Senate Journal 61.

                                               -33-
       Both the title and the body of PA 282 make clear that the act related distinctly to tax, and

there is no language within SB 156, enrolled as PA 282, that would have caused the Legislature

to be “deceived in regard to any measure for levying taxes.” Dawson, 274 Mich. App. at 747.

There is no merit to any claim that PA 282 violates Const 1963, art 4, § 32.

IV.    CONCLUSION

       The passage of PA 282 is a valid, constitutional act by the Legislature that provided

clarity to taxpayers as to the original intent of the MBT Act. 24 It also prevented the significant

fiscal harm to the state that would have resulted if taxpayers had been permitted to elect

apportionment provisions under the Compact.           The Legislature’s choice in PA 282 to

retroactively repeal the Compact provisions was within the boundaries of the Michigan and

United States Constitutions and stayed true to the Legislature’s original intent to require single-

factor apportionment under the MBT Act. Application of PA 282 to the disposition of this case,

and others like it, is appropriate; 25 failure to do so would otherwise provide taxpayers with a

windfall that the Legislature did not mean to provide. See Hochman, The Supreme Court and the

Constitutionality of Retroactive Legislation, 73 Harv L Rev 692, 705 (1960).

24
PA 282 also clarified that the Compact’s election provision is not available under the Income
Tax Act, MCL 206.1, et seq.
25
  Similar claims brought under the Income Tax Act, MCL 206.1, et seq., would likewise fail;
PA 282 would apply and negate the basis for the plaintiff's claim.

                                               -34-
       IT IS HEREBY ORDERED that plaintiff’s motion for summary disposition is DENIED,

and summary disposition is GRANTED in favor of the Department pursuant to MCR

2.116(I)(2).

       This order resolves the last pending claim and closes the case.

Dated: December 19, 2014                                 ________________________________
                                                         Hon. Michael J. Talbot
                                                         Chief Judge, Court of Claims

                                              -35-
E
STATE OF MINNESOTA                                                                 TAX COURT

COUNTY OF RAMSEY                                                           REGULAR DIVISION

 Kimberly-Clark Corporation &
 Subsidiaries,                                              ORDER GRANTING THE
                                                            COMMISSIONER'S MOTION
                              Appellants,                   FOR SUMMARY JUDGMENT

           vs.                                              File No.    8670-R

 Commissioner of Revenue,                                   Filed: June 19, 2015

                               Appellee.

       This matter came before the Minnesota Tax Court, sitting en bane, on the parties' cross-

motions for summary judgment.

          Walter A. Pickhardt, Faegre Baker Daniels LLP, Minneapolis, Minnesota, and AmyL.

Silverstein and Edwin P. Anto lin, Silverstein & Pomerantz LLP, San Francisco, California,

represent appellants Kimberly-Clark Corporation and its subsidiaries.

       Alan I. Gilbert, Minnesota Solicitor General, and Alethea M. Huyser, Assistant Minnesota

Attorney General, represent appellee Commissioner of Revenue.

       We grant the Commissioner's motion for summary judgment and deny Kimberly-Clark's

motion.

       The undersigned judges, upon all the files, records, and proceedings herein, now make the

following:

                                            ORDER

          1.     The Commissioner's motion for summary judgment is granted.

       2.        Kimberly-Clark's motion for summary judgment is denied.
       IT IS SO ORDERED. THIS IS A FINAL ORDER. LET JUDGMENT BE ENTERED

ACCORDINGLY.

                                                   BY THE COURT,

                                                   ~:2,Ju~
                                                   MINNESOTA TA.X COURT

DATED: June 19,2015

                                      MEMORANDUM

I.     FACTUAL BACKGRO UND

       Appellant Kimberly-Clark Corporation and its subsidiaries (collectively Kimberly)

constitute a combined group for purposes ofMinnesota's corporate franchise tax.' Kimberly-Clark

Corporation is the reporting entity for the combined group. 2 Kimberly has done business in

Minnesota since 1958 and bas filed Minnesota tax returns since at least 1983.3 During the tax

years in issue (2007, 2008 and 2009), Kimberly engaged in a unitary, multi-state business.4 This

       I Stip. ~~ 1, 4.
       2 St. .r ~
           lp. II ).

       3
           Stip. ~ 6.
       4
           Stip. ~ 9.

                                               2
case concerns the computation of Minnesota corporate franchise tax liability for Kimberly's

unitary business conducted partly within and partly without Minnesota.

       Under the unitary-business I formula-apportionment method of deriving local taxable

income, a state combines the total income of a unitary business, then uses an apportionment

formula to allocate to itself a fair share of that combined income for tax purposes. As the United

States Supreme Court has succinctly explained, this approach

       rejects geographical or transactional accounting, and instead calculates the local tax
       base by first defining the scope of the "unitary business" of which the taxed
       enterprise's activities in the taxing jurisdiction form one part, and then apportioning
       the total income of that "unitary business" between the taxing jurisdiction and the
       rest of the world on the basis of a formula taking into account objective measures
       of the corporation's activities within and without the jurisdiction.

Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 165 (1983). Minnesota uses the

unitary-business I formula-apportionment method to determine a unitary business' local tax base.

See Comm 'r of Revenue v. Associated Dry Goods, Inc., 347 N.W.2d 36, 38 (Minn. 1984); Minn.

Stat. § 290.191, subd. 1(a) (2014) ("[T]he net income from a trade or business carried on partly

within and partly without this state must be apportioned to this state as provided in this section.").

       It is undisputed that during the tax years in issue, multistate businesses could: (1) apportion

income to Minnesota using the apportionment formula set forth in Minn. Stat. § 290.191; or (2)

petition the Minnesota Commissioner of Revenue to permit the use of an alternative apportionment

formula. See Minn. Stat. § 290.20, subd. 1 (2014) (providing for such petitions). The dispute in

this case concerns whether, during the tax years in issue, multistate businesses also enjoyed a third

option, namely, the unfettered right to use the apportionment formula contained in Articles III and

IV of Minn. Stat. § 290.171 (Minnesota's version of the Multistate Tax Compact) between 1983

and its repeal in 1987. A proper explication of this dispute requires us to briefly explain the

                                                  3
emergence of the Multistate Tax Compact from a controversy over how states tax multistate

businesses.

       A.        State Taxation of Multistate Businesses

       In 1959, the United States Supreme Court held that a state could tax net income fr358 U.S. 450, 453-57, 472 (1959). Within seven months of

the Supreme Court's decision, Congress passed Public Law No. 86-272, Title II, 73 Stat. 555

(1959), which barred states from imposing an income tax on a business whose only activity in the

state was (1) soliciting orders or (2) using an independent contractor to make sales in the state. 5

Congress also established the Special Subcommittee on State Taxation of Interstate Commerce to

       make full and complete studies of all matters pertaining to the taxation by the States
       of income derived within the States from the conduct of business activities which
       are exclusively in furtherance of interstate commerce or which are a part of
       interstate commerce, for the purpose of recommending to the Congress proposed
       legislation providing uniform standards to be observed by the States in imposing
       income taxes on income so derived. 6

       In 1964, the Special Subcommittee (known as the Willis Committee) issued the first in a

series of reports. 7 The subcommittee characterized the existing system as one "which calls upon

tax administrators to enforce the unenforceable, and the taxpayer to comply with the
                   8
uncompliable."         The subcommittee further found "inescapable" the conclusion "that the

voluntary adoption by the States of any kind of uniform system [for taxing the income ofmultistate

       5
           See Ex. J51 (H.R. Rep. No. 88-1480 (1964)), at 7-8.
       6
           Ex. J51, at 8-9; see Pub. L. No. 86-272, Title II, 73 Stat. 555, 556 (1959).
       7
           Ex. J51.
       8   Ex. J51, at 598.

                                                   4
                                                                                 9
businesses] is a slow and halting process, if not a virtual impossibility."          The subcommittee

recommended that all corporate income be apportioned among the states by a two-factor formula

based on property and payroll attributed to the state, with no provision for state-specific formulas. 10

        B.         Development and Summary of the Multistate Tax Compact

        Following the issuance of the Willis Report, the National Association of Tax

Administrators convened a special meeting in January          ~ 966   to both oppose pending federal

legislation and "to suggest workable alternatives which would eliminate the need for the kind of

congressional action embodied in" the federal legislation. 11         The text of the Multistate Tax

Compact was released in December 1966 by the Council of State Governments. 12

        Article I of the Compact lists its purposes, including "[t]acilitat[ion of] proper

determination of State and local tax liability of multistate taxpayers" and "[p]romot[ion of]

                                                                                                13
uniformity or competibility [sic, compatibility] in significant components of tax systems."

        Article II sets out definitions of various terms used in the Compact, none of which need be

recited here. 14

        Articles III and IV are at the center of the parties' dispute. Articles III and IV incorporate,

almost verbatim, the Uniform Division of Income for Tax Purposes Act, a uniform act drafted by

        9
            Ex. J51, at 133.
        10
          Ex. 152, at KC1135, KC1144, KC1162 ("[N]o modifications should be permitted which
involve the use of specific allocation or of factors other than those based on tangible property and
payroll.").
        11
             Ex. 136, at KC 11434.
        12
             Ex. 132.
        13
             Ex. 132, at KC11505.
        14
             Ex. 132, at KC 11505-06.

                                                   5
the National Conference of Commissioners on Uniform State Laws in 1957. 15 Article III, section

1, allows a multistate taxpayer to "elect to apportion and allocate his income in the manner

provided by the laws of such State ... without reference to this compact" or "in accordance with
                16
Article IV."         Article IV, in turn, provides for the apportionment of income by a three-factor,

equally-weighted formula using sales, payroll, and property:

                All business income shall be apportioned to this State 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. 17

Article IV, sections 10, 13, and 15, define the three factors. 18 Under Article III, section 1, the

taxpayer may elect which apportionment formula to use "without reference to the election made"

in any other state. 19

        Article V, section 1, allows a credit against use tax on tangible personal property imposed

in one state for use tax paid to another state with respect to the same property. 20 Article V, section

2 allows a seller to rely on an exemption certificate. 21

        Article VI establishes the Multistate Tax Commission, composed of one "member" from

each "party State." 22 Article VI further requires that any action of the Commission be approved

        15
             See Ex. J35, at KC11530 (explaining the history of the Uniform Division of Income for
Tax Purposes Act).
        16
             Ex. J32, at KC 11506.
        17
             Ex. J32, at KC11509.
        18
             Ex. J32, at KC11509-10.
        19
             Ex. J32, at KC11506.
        20
             Ex. J32, at KC11510-11.
        21
             Ex. J32, at KC11511.
        22
             Ex. J32, at KC11511-12.

                                                    6
by a majority of members, requires the Commission to adopt bylaws, establishes the Commission's

governing and financial structure, and enumerates the powers of the Commission. 23

       Article VII allows the Commission to "adopt uniform regulations for any phase of the

administration" of income taxes. 24 It requires the Commission to submit such regulations "to the

appropriate officials of all party States and subdivisions to which they might apply" and provides

that each such state "shall consider any such regulation for adoption in accordance with its own

laws and procedures." 25

       Article VIII allows any party state to ask the Commission to perform audits on its behalf

and sets procedures for such audits. 26 Article VIII must be specifically adopted by a party state. 27

       Article IX provides for arbitration of"disputes concerning apportionments and allocations"

by taxpayers "dissatisfied with the final administrative determination of the tax agency of the

State" and establishes procedures for such arbitrations. 28

       Article X, also important to the parties' dispute, provides in section 1 that the Compact

                                                                           29
"shall enter into force when enacted into law by any seven States."             Article X, section 2,

provides:

               Any party State may withdraw from this compact by enacting a statute
       repealing the same. No withdrawal shall affect any liability already incurred by or
       chargeable to a party State prior to the time of such withdrawal. 30

       23
            Ex. J32, at KC11511-12.
       24
            Ex. J32, at KC11514.
       25
            Ex. J32, at KC11514.
       26
            Ex. J32, at KC11514-15.
       27
            Ex. J32, at KC11514.
       28
            Ex. J32, at KC11516.
       29
            Ex. J32, at KC11517.
       30   Ex. J32, at KC11517.

                                                  7
       Article XI states that "[n]othing in this compact shall be construed to," among other things,

"[a]ffect the power of any State or subdivision thereof to fix rates of taxation, except that a party

State shall be obligated to implement Article III [section] 2 of this compact." 31 Article III, section

2, allows a taxpayer whose only activity in a state consists of sales, and whose sales do not exceed

$100,000 during the tax year, to "elect to report and pay any tax due on the basis of a percentage"

of sales, and further requires the state to "adopt rates which shall produce a tax which reasonably

approximates the tax otherwise due." 32

       Finally, Article XII of the Compact provides that it "shall be liberally construed so as to

effectuate the purposes thereof." 33 It further provides that the provisions of the Compact "shall
                 34
be severable."        If any portion of the Compact is declared unconstitutional, "the compact shall

remain in full force and effect as to the remaining party States and in full force and effect as to the

State affected as to all severable matters." 35

       By August 4, 1967, at least nine states (not including Minnesota) had enacted the

Compact. 36

        C.       Post-Adoption History

       In 1972, Florida-one of the first states to adopt the Compact-repealed Articles III

and IV. Act of December 16, 1971, ch. 71-980, § 1, 1971 Fla. Laws 51, 52 (Aff. of Pickhardt

Ex. 1). At the same time, Florida provided by statute for the apportionment of income to Florida

        31
             Ex. 132, at KC11518.
        32
             Ex. 132, at KC11506-07.
        33
             Ex. 132, at KC115l8.
        34
             Ex. 132, at KC11518.
        35
             Ex. 132, at KC11518.
        36
             Ex. 136, at KC11435.

                                                   8
based on a three-factor, equally-weighted formula using a "property" factor, a "payroll" factor,

and a "sales" factor. § 2, 1971 Fla. Laws at 52. After these legislative actions, the Multistate Tax

Commission determined that Florida remained "a regular member in good standing of the

Multistate Tax Compact and the Multistate Tax Commission." 37

       In August 1972, U.S. Steel Corporation and three other multistate corporations brought suit

on behalf of themselves and all other multi state taxpayers threatened with audits by the Multistate

Tax Commission. See U.S. Steel Corp. v. Multistate Tax Comm 'n, 434 U.S. 452, 458 (1978).

Plaintiffs sought two things: (1) declaratory judgment that the Multistate Tax Compact was invalid

because (among other things), it had never received the consent of Congress under Article I,

section 10, clause 3 of the United States Constitution; and (2) a permanent injunction barring the

operation and enforcement of the Compact. U.S. Steel Corp. v. Multistate Tax Comm 'n, 417 F.

Supp. 795, 797 (S .D .N.Y. 1976). The district court granted the Commission's motion for summary

judgment. Jd at 805.

       Plaintiffs appealed to the United States Supreme Court. U.S. Steel, 434 U.S. 452. In its

brief to the Court, the Multistate Tax Commission characterized itself as "only [] an advisory

agency" whose "work product is not binding on anyone," and the Compact as consisting "solely

of uniform laws, an advisory mechanism for the uniform interpretation and application of those

laws, and an advisory mechanism for otherwise developing uniformity and compatibility in state

and local taxation of multistate businesses." 38 In addition, the Commission wrote:

       37
            Ex. J43, at MDOR 00015.
       38
            Ex. 154, at MDOR 03904-05, 3909.

                                                 9
                Under the Compact, the member states administer their own tax laws and
        do not delegate any of their authority to anyone. Each state, independent of the
        Compact, has the power to adopt uniform legislation, to audit Appellants' books
        and records on its individual account, to grant multistate taxpayers certain options
        in the determination of their tax liability, and to enter into reciprocal joint audit
        agreements with other states. By adoption of the Compact, each state has retained
        complete and absolute control over its own tax system. 39

Noting that "[a]ny state is free to join or withdraw from the Compact at will," the Commission

argued that '"there is a serious question as to whether the Compact is an 'agreement or compact"'

within the meaning of the Compact Clause or merely a reciprocal arrangement among the member

states.40

        The Supreme Court affirmed the district court, agreeing that the Compact was not invalid

for lack of Congressional approval.       U.S. Steel, 434 U.S. at 479. The Supreme Court also

commented, in part:

        This pact does not purport to authorize the member States to exercise any powers
        they could not exercise in its absence. Nor is there any delegation of sovereign
        power to the Commission; each State retains complete freedom to adopt or reject
        the rules and regulations of the Commission. Moreover, ... each State is free to
        withdraw at any time.

Jd at 473.

        D.       Minnesota's Adoption of the Compact

        Against this backdrop, Minnesota enacted the Compact in 1983. Act of June 14, 1983,

ch. 342, art. 16, § 1, 1983 Minn. Laws 2168, 2339-52 (codified as Minn. Stat. § 290.171).

Minnesota did not, however, adopt certain portions of Article IV, specifically, section 4 (allocating

"[r]ents and royalties from real or tangible personal property, capital gains, interest, dividends or

patent or copyright royalties"), section 5 (allocating "[n]et rents and royalties from real property"),

        39   Ex. J54, at MDOR 03919-20.
        40
             Ex. J54, at MDOR 03920-21.

                                                  10
section 6 (allocating "[c]apital gains and losses from sales of real property"), section 7 (allocating

"[i]nterest and dividends"), and section 8 (allocating "[p]atent and copyright royalties"). 41

       E.        Minnesota's Repeal of Articles III and IV

       Four years after adopting the Compact, Minnesota amended its version of the Compact to

eliminate Articles III and IV. Act of May 28, 1987, ch. 268, art. 1, § 74, 1987 Minn. Laws 1039,

1098-1112.       At the same time, Minnesota amended its equally-weighted three-factor

apportionment formula, placing greater weight on the sales factor and correspondingly lesser

weight on the property and payroll factors. §§ 75, 127, 1987 Minn. Laws 1039, 1112-19, 1156

(codified at Minn. Stat. § 290.191 ). 42 In proposing these changes, the Minnesota Department of

Revenue offered that doing so "would simplify the tax, improve predictability, improve conformity
                                                                                   43
with other states, and transfer tax burdens away from in-state corporations."           Nothing in the

Department's proposal, however, addressed the legal effect of repealing only articles III and IV.

Even after repeal of Articles III and IV, Minnesota remained a member in good standing of the

Commission.44 Indeed, Minnesota's then-Commissioner of Revenue was vice-chair and chair of

the Commission in 1988 and 1989, respectively. 45

       41
            Compare Ex. 144, art. IV, with Minn. Stat.§ 290.171, art. IV (1984).
       42
           Under Minn. Stat. § 290.191, subd. 2 (1987), as originally enacted, the apportionment
formula assigned a weight of 70% to the proportion of the taxpayer's total sales made in
Minnesota; a weight of 15% to the proportion of the taxpayer's total tangible property used in
Minnesota; and a weight of 15% to the proportion of the taxpayer's total payroll either paid or
incurred in Minnesota. See§ 75, 1987 Minn. Laws at 1112-19. Over time, the weight given to
sales increased; since 2013, no weight has been given to either the property or the payroll factor.
See Minn. Stat. § 290.191, subd. 2(b) (2014) (setting out the percentages to be applied to each of
the three factors starting with the 2007 taxable year).
       43
            Ex. J47, at MDOR 03419.
       44
            Stip. ~~ 23-24.
        Huddleston Aff. ~ 11; Ex. J41, at 7 (Twenty-First Annual Report, Multistate Tax
       45

Commission).

                                                 11
       F.       Minnesota's Subsequent Withdrawal from the Compact

       In 1993, California (which had adopted the Compact and its equally-weighted three-factor

apportionment formula in 1974, see Gillette Co. v. Franchise Tax Bd, 147 Cal. Rptr. 3d 603, 608

(Cal. Ct. App. 2012), review granted and opinion superseded sub nom. Gillette v. Franchise Tax

Bd, 291 PJd 327 (Cal. 2013) (No. S206587) (citing former§ 38001, Cal. Stats. 1974, ch. 93, § 3,

p. 193)), amended its statutory apportionment formula to give double weight to the sales factor,

and made the new apportionment formula mandatory "[n]ot withstanding" the provisions of the

Compact, ld at 610 (citing§ 25128, subd. (a), Cal. Stats. 1993, ch. 946, § 1, p. 5441). In 2010,

the Gillette Company and others sought refunds of California state income taxes totaling about

$34 million, claiming that they could continue to use the Compact's equally-weighted three-factor

apportionment formula. Id at 606-07. The California Franchise Tax Board denied the requested

refunds, but California's intermediate appellate court reversed. !d. at 619. 46

       In 2013, the Minnesota Department of Revenue recommended to the Legislature that

Minnesota repeal Minn. Stat. § 290.171 in its entirety, citing the California court's decision in

Gillette. 47 Although the Department indicated its "strong belie[f] that the legislature's repeal of

Articles III and IV of the compact [in 1987] properly eliminated the option to use the Uniform

Law to apportion income," the Department nevertheless recommended repeal of section 290.171

       46
           Similar cases have been brought by other taxpayers in other states, with varying results.
See, e.g., Int'l Bus. Machs. Corp. v. Dep't ofTreasury, 852 N.W.2d 865, 870 (Mich.), reh. denied
(Mich. 2014) (concluding that the taxpayer was entitled to use the Compact's three-factor
apportionment formula for tax year 2008 because the Michigan Legislature's enactment of the
Business Tax Act did not repeal the Compact's apportionment formula, even by implication);
Health Net, Inc. v. Dep't ofRevenue, No. TC 5127 (Or. T.C. filed Jan. 17, 2013) (appeal of denial
of refund claim pending); Graphic Packaging Corp. v. Combs, No. D-1-GN-12-003038 (Travis
Cnty. Dist. Ct. Jan. 15, 2014) (order dismissing without opinion a petition denying claim for refund
based on three-factor apportionment formula), appeal granted.
       47
            Ex. J53, at MDOR 02297.

                                                 12
"in its entirety to avoid even the possibility going forward of the State having to pay refunds on

some previously filed returns or lose future tax revenue" if Gillette were affirmed by the California

Supreme Court, and Minnesota courts likewise concluded that Minnesota taxpayers could still use

the Compact's apportionment formula. 48 In 2013, Minnesota repealed section 290.171 in its

entirety. Act of May 23, 2013, ch. 143, art. 13, § 24, 2013 Minn. Laws 2445, 2680. 49

II.     PROCEDURAL BACKGROUND

        Between 1989 and 2009, Kimberly and its subsidiaries determined their Minnesota taxable

income using the non-equally-weighted apportionment formula found in Minn. Stat. § 290.191,

subd. 2. 50

        In April 2013, Kimberly filed amended tax returns and claims for refund for the 2007,

2008, and 2009 tax years, using the equally-weighted formula found in Articles III and IV of the

Compact. 51 According to Kimberly's amended returns, it is entitled to a total refund of $1,205,749

for those three years combined. 52 By order dated October 14, 2013, the Commissioner denied

Kimberly's refund claims. 53

        48
              Ex. J53, at MDOR 02298.
        49
         In 2013, Oregon, Utah, and the District of Columbia also eliminated articles 111.1 and IV
from their respective statutes. Walter Hellerstein, State Taxation , 9.01 The State Statutory
Framework Governing Division of Corporate Income (3rd ed. 20 15). According to the Multistate
Tax Commission, by 2013 only ~ix of its members continued to require use of an equally weighted
apportionment formula. Ex. J55, at MDOR 03475 & n.23 (Brief of Amicus Curiae Multistate Tax
Comm'n filed in Int'l Business Machines Corp. v. Dept. ofTreasury ofState ofMichigan).
        50
          Stip. , 11; see Exs. J 11-28 (Minnesota corporate franchise tax returns for years 1989-
2006), Ex. J4, at Sch. M4A (2007 Minnesota corporate franchise tax return), Ex. J6, at Sch. M4A
(2008 Minnesota corporate franchise tax return), Ex. J8, at Sch. M4A (2009 Minnesota corporate
franchise tax return).
        51
          Stip. ,, 14-15; Ex. J3 (amended return for tax year 2007), Ex. J 5 (amended return for
tax year 2008), Ex. J7 (amended return for tax year 2009).
        52
              Stip. ,, 14-15, 20; see Exs. J3, J5, J7.
        53
              Stip. , 18; Ex. J2.

                                                         13
       Kimberly timely appealed the Commissioner's order to this court. 54 Kimberly's notice of

appeal alleged, among other things, that "Minnesota's attempted elimination of Articles III and IV

from the Compact was invalid as a unilateral modification of core provisions of a binding interstate

compact and contract entered into between Minnesota and the other signatory states," and that

"Minnesota's attempted elimination of Articles III and IV from the Compact" violated the

Compact Clause of the United States Constitution and the Contract Clauses of both the United

States and Minnesota Constitutions. 55

       Because the notice of appeal raised constitutional issues, the parties jointly moved to refer

those issues to the district court for decision or transfer back to this court and proposed specific

transfer language. 56 See Erie Mining Co. v. Comm 'r of Revenue, 343 N.W.2d 261, 264 (Minn.

1984) (prescribing the procedure for giving the tax court subject matter jurisdiction over

constitutional questions). On September 5, 2014, this court stayed further proceedings in the

appeal and referred the constitutional issues, as framed by the parties, to the Ramsey County

District Court for decision or transfer back to this court. 57 By order dated September 15,2014, the

       54
           Not. Appeal (filed Dec. 12, 2013). As part of the notice of appeal, Kimberly also
appealed "the failure by the Commissioner ofRevenue ... to allow or deny its claim for refund for
the tax period ending December 31, 2010." Not. Appeal!; see Minn. Stat.§ 289A.50, subd. 7(d)
(2014) (allowing the taxpayer to bring an action in the tax court if the commissioner fails to deny
a claim for refund within six months of the filing of the claim). By stipulation filed on March 31,
2014, Kimberly dismissed its claims with respect to tax year 2010, without prejudice to either the
right of the Commissioner to audit tax year 2010 or the right of Kimberly to appeal tax year 2010.
Stip. Partial Dismissal Without Prejudice (filed March 31, 2014), ~ 7.
       55
            Not. Appeal~~ 24-25.
       56
          Joint Mot. Refer Issues Distric~ Ct. (filed Sept. 4, 2014). The parties framed the issue to
be referred as follows: "Whether the Minnesota Legislature's repeal of the apportionment formula
election codified in 1983 at Minn. Stat. § 290.171 (1983 Supp.) violated the Compact Clause of
the United States Constitution and the Contract Clauses of the United States and Minnesota
Constitution." Joint Mot. 1.
       57
            Order (Sept. 5, 2014).

                                                 14
Ramsey County District Court transferred the constitutional issues, as framed by the parties, back

to this court for decision. 58

        The parties filed their respective motions for summary judgment in October 2014. 59 As

part of their cross-motions for summary judgment, the parties also filed a partial stipulation of

facts and a joint exhibit list. 60 Briefs and supporting affidavits followed. The court heard oral

argument on the parties' motions on March 19, 2015. 61

III.    THE PARTIES' PRINCIPAL CONTENTIONS

        Kimberly contends that the Compact is a binding contract among party States, 62 which

requires Minnesota, among other things, both: ( 1) to furnish multistate taxpayers with an election

        58   Order of Transfer (Sept. 15, 2014).
        59
         Kimberly's Not. Mot. Mot. Summ. J. (filed Oct. 21, 2014); Comm'r's Not. Mot. Mot.
Summ. J. (filed Oct. 28, 2014).
        60
          Partial Stip. Facts (filed Oct. 21, 2014); Joint Ex. List Stip. Regarding Admissibility of
Exhibits (filed Oct. 21, 2014).
        61
          On April14, 2014, in preparation for a pretrial conference call, this matter was assigned
to The Hon. Joanne H. Turner. On April 21, 2014, the Commissioner filed a notice of removal,
requesting the removal of Judge Turner. See Minn. R. Civ. P. 63.03 (allowing "[a]ny party or
attorney" to file a notice of removal of a judge within 10 days after the party receives notice of the
identity of the assigned judge). On April24, 2014, the matter was reassigned to The Hon. Bradford
S. Delapena. Order (Apr. 24, 2014). On November 4, 2014, Judge Delapena moved to hear the
parties' cross-motions en bane. See Minn. Stat. § 271.04, subd. 1 (2014) ("Upon petition by a
party to a case, or upon a motion by a Tax Court judge, and approval by a majority of the Tax
Court, a case may be tried before the entire Tax Court."). The motion was approved by unanimous
decision. Order En Bane Consideration (Nov. 4, 2014). The Commissioner subsequently objected
to en bane consideration on the ground of the previous notice of removal of Judge Turner and
requested that the matter be heard by Judge Delapena alone. Appellee Comm'r Revenue's
Objection Order En Bane Consideration & Mot. Reset Case (filed Nov. 18, 2018). The court
(Judge Turner abstaining) overruled the Commissioner's objections and denied the
Commissioner's motion to reassign the matter. Order Overruling Appellee's Objections En Bane
Consideration Denying Mot. Re-Assign Case (Jan. 16, 2015).
        62
         Kimberly's Mem. Supp. Summ. J. 1, 10, 22 n.7, 29-30; Kimberly's Reply Mem. Supp.
Summ. J. 6-10.

                                                   15
to use the Compact's equally-weighted three-factor apportionment fonnula; 63 and, more

importantly, (2) to refrain from exercising its sovereign power to eliminate the apportionment

election unless and until it first withdraws from the Compact. 64 Although acknowledging that

Article X, section 1, of the Minnesota Constitution provides, "[t ]he power of taxation shall never

be surrendered, suspended or contracted away," Kimberly asserts that-because enacting states

may re-acquire full sovereignty over apportionment by completely withdrawing from the

Compact-Minnesota's 1983 Compact enactment did not violate this constitutional prohibition. 65

And, although implicitly acknowledging that a State's contractual surrender of sovereign power

normally must be stated in unmistakably clear language, Kimberly argues that this requirement is

inapplicable to interstate compacts, the very purpose of which (according to Kimberly) is to

surrender sovereign power. 66 So reasoning, Kimberly contends that Minnesota validly enacted the

Compact in 1983, and thereby contractually obligated itself both to furnish the apportionment

election and to refrain from using its sovereign power to repeal the election. 67

           The United States and Minnesota Constitutions separately prohibit the State from passing

any law impairing the obligation of contracts, including its own. 68        Kimberly contends that

           63
                Kimberly's Mem. Supp. Summ. J. 6-7.
           64   Kimberly's Mem. Supp. Summ. J. 10, 12, 16, 30; Kimberly's Rely Mem. Supp. Summ.
J. 1-2, 4.
           65   Kimberly's Mem. Supp. Summ. J. 17, 26-28; Kimberly's Reply Mem. Supp. Summ.
J. 7, 9.
           66
         Kimberly's Mem. Supp. Summ. J. 17; Kimberly's Reply Mem. Supp. Summ. J. 5, 7;
Tr. 100-01, 111.
           67   Kimberly's Mem. Supp. Summ. J. 1, 8, 28, 32; Kimberly's Reply Mem. Supp. Summ.
J. 2.
           68
          U.S. Const. art. I, § 10, cl. 1 states: "No state shall ... pass any ... law impairing the
obligation of Contracts." Minn. Const. art. I, § 11 states: "No ... law impairing the obligation of
contracts shall be passed."

                                                  16
Minnesota violated these constitutional prohibitions in 1987 by repealing Articles III and IV of the

Compact, the sections furnishing the apportionment election. More specifically, Kimberly asserts

that the Minnesota Legislature's 1987 exercise of sovereign power repealing the election both

violated the terms of the Compact69 and impaired the State's obligation under the Compact to

furnish taxpayers the apportionment election. 70 Kimberly thus asserts that we must strike down

the 1987 repeal as an unconstitutional legislative act, that we must recognize the continued vitality

of Articles III and IV (notwithstanding the Legislature's purported repeal of those provisions), and

that we must therefore allow Kimberly's refund claim based upon its invocation of the election. 71

       The Commissioner responds that, for numerous reasons, the Legislature's 1987 repeal of

Articles III and IV was a valid legislative act that does not unlawfully impair the obligation of

contracts. First, the Commissioner asserts that the Compact is actually a model law with only

advisory effect. 72 Second, she contends that the State's purported entry into a contract obligating

it to refrain from exercising sovereign taxing power to alter or repeal the apportionment election

would be void ab initio as a violation of Minnesota Constitution Article X, section 1. 73 Third, the

Commissioner argues that no Compact provision surrenders in unmistakable terms the State's

sovereign power to alter or repeal the election and, again, that even unmistakably clear language

       69
           Kimberly's Mem. Supp. Summ. J. 16-17, 32; Kimberly's Reply Mem. Supp. Summ.
J. 2-6; Tr. 57. Although Kimberly insists that it alleges only impairment of contract (not breach
of contract), it repeatedly asserts that the Legislature violated the terms of the Compact by
repealing Articles III and IV.
       70
            Kimberly's Mem. Supp. Summ. J. 30-35; Kimberly's Reply Mem. Supp. Summ.
J. 13-15.
       71
           Kimberly's Mem. Supp. Summ. J. 1, 10, 30, 34; Kimberly's Reply Mem. Supp. Summ.
J. 2; Tr. 56-58, 60-61.
       72
            Comm'r's Mem. Supp. Summ. J. 2, 4, 18, 32.
       73
            Comm'r's Mem. Supp. Summ. J. 14, 15-16; Comm'r's Reply Mem. Supp. Summ. J 2-3.

                                                 17
purporting to do so would violate Article X, section 1. 74 Fourth, she contends that-even if the

State had promised not to exercise its sovereign power to repeal the apportionment election-

Kimberly could not enforce that contractual obligation because: (a) it was not a party to the

contract, and lacks standing to enforce the obligation; (b) the 6-year statute of limitations for a

contract-impairment claim based on a 1987 legislative act expired long ago; (c) Compact party

States have waived enforcement of the particular obligation in question; and (d) enforcement is

barred by the doctrine of laches. 75 Finally, the Commissioner argues that, even assuming the

existence of both an enforceable contract right and a litigant who could demand its enforcement,

Kimberly cannot demonstrate that the 1987 repeal substantially impaired the right. 76

IV.    DECISIONAL STANDARDS

       Kimberly asks us to rule as a matter of law that the Legislature's 1987 act of repealing

Articles III and IV of the Compact violated the contract clauses of the United States and Minnesota

Constitutions. The Commissioner asks us to rule as a matter of law that the 1987 repeal was a

lawful and valid legislative act.

        Summary judgment shall be rendered if the pleadings, the record in the case, and any

supporting affidavits show that there is no genuine issue as to any material fact and that a party is

entitled to judgment as a matter of law. Minn. R. Civ. P. 56.03; DLH, Inc. v. Russ, 566 N.W.2d

60, 69 (Minn. 1997). When, as here, parties file cross-motions for summary judgment, they tacitly

agree that there are no genuine issues of material fact. Am. Family Mut. Ins. Co. v. Thiem, 503

        74
           Comm'r's Mem. Supp. Summ. J. 14, 17-19; Comm'r's Reply Mem. Supp. Summ.
J. 3-4, 7-8.
        75   Comm'r's Mem. Supp. Summ. J. 14, 22-27; Comm'r's Reply Mem. Supp. Summ.
J. 10-12.
        76
             Comm'r's Mem. Supp. Summ. J. 14, 27-30; Comm'r's Reply Mem. Supp. Summ.
J. 12-13.

                                                 18
N.W.2d 789, 790 (Minn. 1993). Summary judgment is a suitable vehicle for addressing the

application of law to undisputed facts. See, e.g., Anderson v. Christopherson, 816 N.W.2d 626,

630 (Minn. 2012); A.J. Chromy Constr. Co. v. Commercial Mech. Serv., Inc., 260 N.W.2d 579,

581 (Minn. 1977); Sauter v. Sauter, 244 Minn. 482,486, 70 N.W.2d 351, 354 (1955).

       "It is well settled that acts of the legislature are presumed to be constitutional and will not

be declared unconstitutional unless their invalidity appears clearly or unless it is shown beyond a

reasonable doubt that they violate some constitutional provisions." Minn. Energy & Econ. Dev.

Auth. v. Printy, 351 N.W.2d 319,338 n.l (Minn. 1984) (citation omitted) (internal quotation marks

omitted). A court invokes every presumption "in favor of the constitutionality of an act of the

legislature," Contos v. Herbst, 278 N.W.2d 732, 736 (Minn. 1979), including the presumption that

"the legislature does not intend to violate the Constitution of the United States or of this state."

Minn. Stat.§ 645.17(3) (2014); McLane Minn., Inc. v. Comm 'r ofRevenue, 773 N.W.2d 289,298

(Minn. 2009) (applying presumption). Courts exercise the power to declare a legislative act

unconstitutional with extreme caution and only when absolutely necessary. 78th St. OwnerCo,

LLC v. Cnty. of Hennepin, 813 N.W.2d 409, 416 (Minn. 2012); Dohs v. Holm, 152 Minn. 529,

536, 189 N.W. 418, 421 (1922). The party challenging a legislative act carries the heavy burden

of showing unconstitutionality beyond a reasonable doubt. See, e.g., Singer v. Comm 'r ofRevenue,

817 N.W.2d 670, 675 (Minn. 2012). 17

       77
           The Commissioner agrees that Kimberly is entitled to a refund in the requested amount
if Kimberly was entitled to use the Compact's apportionment formula. Stip. 1 20. Likewise,
Kimberly agrees that it is entitled to no refund if it was not so entitled. Stip. 1 21. Consequently,
there are no disputed material facts in dispute and we can resolve this case by deciding the disputed
legal issues.

                                                 19
V.     ANALYSIS

       To determine whether the Legislature's 1987 repeal of Articles III and IV impaired

Minnesota's obligations under the Compact, we must first determine what, if any, obligations were

created by the Legislature's 1983 enactment of the Compact. This requires us to interpret the

Compact.

       A.      Interstate Compacts Generally

       Interstate compacts are "negotiated agreements among member states that have the status

of both contract and statutory law." Caroline N. Broun et al., The Evolving Use and the Changing

Role ofInterstate Compacts 2 (2006); id. at 128 (same); see also Alabama v. N Carolina, 560 U.S.

330, 351 (2010); Doe v. Pennsylvania Bd of Prob. & Parole, 513 F.3d 95, 105 (3d Cir. 2008)

(emphasizing contractual nature of compacts). States enter compacts by enacting statutes

containing model compact language. See, e.g., Doe, 513 F.3d at 105. The United States Supreme

Court has thus characterized compacts as a legislative means "for adjusting interstate

controversies" that "adapts to our Union of sovereign States the age-old treaty making power of

independent sovereign nations." Hinderlider v. La Plata River & Cherry Creek Ditch Co., 304

U.S. 92, 104 (1938). Because interstate compacts can involve matters that concern states as

sovereigns, compacts sometimes involve a partial surrender of sovereign power. See, e.g., Port

Auth. Trans-Hudson Corp. v. Feeney, 495 U.S. 299, 314 (1990) (Brennan, J., concurring) ("[T]o

achieve the practical advantages of coordinated planning and administration through the Port

Authority, New York and New Jersey each has ceded partial control over the regulation and

operation of transportation facilities in its own State since 1921 .... "); Int 'I Union of Operating

Eng'rs, Local 542 v. Delaware River Joint Toll Bridge Comm 'n, 311 F.3d 273, 276 (3d Cir. 2002)

("By compacting together to form the Commission, New Jersey and Pennsylvania have each

                                                 20
surrendered a portion of their sovereignty over certain Delaware River bridge operations in order

to better serve the regional interest.").

        The Compact Clause of the United States Constitution provides: "No State shall, without

the Consent of Congress, ... enter into any agreement or compact with another State .... " U.S.

Const. art. I, § 10, cl. 3.    Read literally, this provision "would require the States to obtain

congressional approval before entering into any agreement among themselves, irrespective of

form, subject, duration, or interest to the United States." U.S. Steel, 434 U.S. at 459. The United

States Supreme Court, however, has rejected this literal interpretation, holding instead that the

"application of the Compact Clause is limited to agreements that are directed to the formation of

any combination tending to the increase of political power in the States, which may encroach upon

or interfere with the just supremacy of the United States." Id. at 471 (internal quotation marks and

citations omitted). Congressional consent is not required for interstate agreements that fall outside

the scope ofthe Compact Clause as so interpreted. Cuyler v. Adams, 449 U.S. 433,440 (1981).

        Congressional consent is nevertheless significant:           it ''transforms an interstate

compact ... into a law of the United States .... " Cuyler, 449 U.S. at 438. Consequently, the

Supreme Court has held "that the construction of an interstate agreement sanctioned by Congress

under the Compact Clause presents a federal question." Id         Where Congressional consent is

neither given nor required, an interstate compact is construed as state law. See,. e.g., McComb v.

Wambaugh, 934 F.2d 474,479 (3d Cir. 1991).

       B.       Interpretive Principles

       Because compacts "have the status of both contract and statutory law," Broun et al., at 2,

we set forth the governing principles for interpreting both statutes and contracts.

                                                 21
                1.      Statutes

         "The object of all interpretation and construction of laws is to ascertain and effectuate the

intention of the legislature." Minn. Stat. § 645.16 (2014).          Legislative intent is determined

"primarily from the language of the statute itself." Brayton v. Pawlenty, 781 N.W.2d 357, 363

(Minn. 2010) (quoting Gleason v. Geary, 214 Minn. 499, 516, 8 N.W.2d 808, 816 (1943)).

Nevertheless, "[i]t is a cardinal rule of statutory construction that a particular provision of a statute

cannot be read out of context but must be taken together with other related provisions to determine

its meaning." Kollodge v. F & L. Appliances, Inc., 248 Minn. 357,360, 80 N.W.2d 62,64 (1956).

Courts thus "read and construe a statute as a whole and must interpret each section in light of the

surrounding sections to avoid conflicting interpretations," Am. Family Ins. Grp. v. Schroedl, 616

N.W.2d 273,277 (Minn. 2000), and to "harmonize and give effect to all its parts," Van Asperen v.

Darling Olds, Inc., 254 Minn. 62,73-74, 93 N.W.2d 690,698 (1958). Likewise, separate statutes

in pari materia-those "relating to the same person or thing or having a common purpose"-are

construed in light of one another. Apple Valley Red-E-Mix, Inc. v. State, 352 N.W.2d 402, 404

(Minn. 1984). Finally, it is presumed that "[i]n enacting statutes ... the legislature acts with full

knowledge of existing law." Goodyear Tire & Rubber Co. v. Dynamic Air, Inc., 702 N.W.2d 237,

244 (Minn. 2005).

         "When the Legislature's intent is discernible from plain and unambiguous language,

statutory construction is neither necessary nor permitted; and courts apply the statute's plain

meaning." State v. Jones, 848 N.W.2d 528, 535 (Minn. 2014) (citing Am. Tower, L.P. v. City of

Grant, 636 N.W.2d 309, 312 (Minn. 2001)). Statutory language is ambiguous if it is reasonably

susceptible to more than one interpretation. Christianson v. Henke, 831 N.W.2d 532, 539 (Minn.

2013).    Multiple parts of a statute may be read together to ascertain whether the statute is

ambiguous. !d. at 537.

                                                   22
                2.      Contracts

        Correspondingly, the primary goal of contract interpretation is "to ascertain and enforce

the intent of the parties." Valspar Refinish, Inc. v. Gaylord's, Inc., 764 N.W.2d 359, 364 (Minn.

2009). In so doing, the court looks to the contract as a whole. Save/a v. City of Duluth, 806

N.W.2d 793, 801 (Minn. 2011). The intent of the parties is not ascertained "by a process of

dissection in which words or phrases are isolated from their context, but rather from a process of

synthesis in which the words and phrases are given a meaning in accordance with the obvious

purpose of the contract ... as a whole." Motorsports Racing Plus, Inc. v. Arctic Cat Sales, Inc.,

666 N.W.2d 320,324 (Minn. 2003) (quoting Republic Nat'/ Lifo Ins. Co. v. Lorraine Realty Corp.,

279 N.W.2d 349, 354 (Minn. 1979)) (alteration in original); Country ·club Oil Co. v. Lee, 239

Minn. 148, 151-52, 58 N.W.2d 247,249 (1953) (holding that "[a]s far as is reasonably possible [a

contract] is to be construed so as to harmonize all of its parts.").

       "Where there is a written instrument, the intent of the parties is determined from the plain

language of the instrument itself." Travertine Corp. v. Lexington-silverwood, 683 N.W.2d 267,

271 (Minn. 2004). When a contract's language is clear and unambiguous, the court enforces the

parties' agreement as expressed in the contract. Caldas v. Affordable Granite & Stone, Inc., 820

N.W.2d 826, 832 (Minn. 2012). A contract is ambiguous if its language is susceptible to two or

more reasonable interpretations. Dykes v. Sukup Mfg. Co., 781 N.W.2d 578, 582 (Minn. 2010).

       Contracting parties are presumed to know of laws that directly affect their rights. Albrecht

v. Sell, 260 Minn. 566, 569-70, 110 N.W.2d 895, 897 (1961). Moreover, they are generally

presumed to enter contracts "with reference to the existing rules and principles of law applicable

to the subject matter." Propp v. Johnson, 211 Minn. 159, 163-64, 300 N.W. 615, 617 (1941).

       Courts disfavor construing government contracts as relinquishing a state's sovereign

powers, and have long held that any such relinquishment must be stated "in language and terms

                                                  23
too clear to admit of doubt." State v. Great N Ry. Co., 106 Minn. 303, 322, 119 N.W. 202, 205

(1908), a.ff'd, 216 U.S. 206 (1910).        This clear-statement requirement is known as the

unmistakability doctrine. See generally United States v. Winstar Corp., 518 U.S. 839, 872 (1996);

State ex rei. Humphrey v. Philip Morris USA, Inc., 713 N.W.2d 350, 359-63 (Minn. 2006); see

also Tarrant Reg'! Water Dist. v. Herrmann, 133 S. Ct. 2120, 2133 (2013) (applying clear-

statement requirement to Congressionally approved interstate compact).

        C.       Compact Interpretation

        Kimberly contends that Articles III and IV of the Compact unambiguously provide for the

apportionment election and that, because section 290.171 enacts a multistate compact containing

a withdrawal provision, the State bound itself to provide the election to multistate taxpayers unless

and until it completely withdrew from the Compact. 78 Kimberly reasons that because the 1987

legislation repealing Articles III and IV was not a complete withdrawal, it violated the State's

contractual obligation to provide the apportionment election until withdrawal, and was therefore

unlawful as an impairment of that obligation. 79 The Commissioner acknowledges that Articles III

and IV clearly provide for the apportionment election, 80 but asserts that the Compact is merely a

model law with only advisory force. 81 In the alternative, she argues that even though Minnesota

was obligated to provide the election while Articles III and IV remained in force, the State made

no unmistakably clear promise not to amend or repeal it. 82 Reasoning that the State had no

        78
         Kimberly's Mem. Supp. Summ. J. 7-10, 12, 24, 30; Kimberly's Reply Mem. Supp.
Summ. J. 1-2, 4.
        79
             Kimberly's Mem. Supp. Summ. J. 12, 29-30; Kimberly's Reply Mem. Supp. Summ.
J. 2.
        8
         °Comm'r's Reply Mem. Supp. Summ. J. 7.
        81
             Comm'r's Mem. Supp. Summ. J. 2, 4, 18, 32.
        82
             Comm'r's Mem. Supp. Summ. J. 14, 15-16; Comm'r's Reply Mem. Supp. Summ. J. 2-3.

                                                 24
enforceable obligation not to amend the election, the Commissioner argues that the Legislature's

1987 repeal neither violated nor impaired a contractual obligation. 83

                 1.    Binding Force

       As a preliminary matter, we reject the Commissioner's claim that the Compact is actually

a model law with only advisory effect. 84 Although asserting this position, the Commissioner never

actually argues that the Compact creates no binding obligations-never identifies and applies

criteria for determining the Compact's legal effect.      Instead, she argues more narrowly, for

example, that "[t]he enactment of section 290.171 did not form a contract surrendering the

Legislature's authority to modify or repeal Articles III and IV of the Statute." 85 This ambiguous

formulation can be read either: (a) as arguing that no contract was formed, or (b) as conceding

that a contract was formed, but asserting that it contained no provision prohibiting the repeal of

Articles III and IV. 86 Because the Commissioner never actually argues that the Legislature's

enactment of section 290.171 did not form a binding contract, that argument is waived. See, e.g.,

State v. Krosch, 642 N.W.2d 713, 719 (Minn. 2002) (finding argument waived when a "brief

contain[ed] no argument or citation to legal authority in support of the allegations").

       83
            Comm'r's Mem. Supp. Summ. J. 21-22.
       84
            Comm'r's Mem. Supp. Summ. J. 2, 4, 18, 32.
       85
            Comm'r's Mem. Supp. Summ. J. 15.
       86
          See also Comm'r's Mem. Supp. Summ. J. 16, 17, 18, 19, 20, 21, 31,32 (making similarly
qualified and therefore ambiguous assertions); Tr. 40-41, 86 (same).

                                                25
Consequently, we assume (without deciding) that the Compact was a contract among Minnesota

and the other States that adopted it and that the Compact created binding obligations. 87

               2.      Unmistakability Doctrine

       The rule of contract construction requiring that government contracts must be strictly

construed against the relinquishment of sovereign powers is known as the "unmistakability

doctrine." Winstar, 518 U.S. at 874 (plurality opinion); Philip Morris, 713 N.W.2d at 359.

                       a.      Rationale and Requirements

       As the United States Supreme Court has explained, "sovereign power ... governs all

contracts subject to the sovereign's jurisdiction, and will remain intact unless surrendered in

unmistakable terms." Winstar, 518 U.S. at 872 (ellipsis in original) (internal quotation marks

omitted) (quoting Bowen v. Pub. Agencies Opposed to Soc. Sec. Entrapment, 477 U.S. 41, 52

(1986)). The doctrine recognizes that the Contracts Clause of the United States Constitution can

limit the sovereign power of a State, but that this potential limitation can be problematic. Id at

873-74. "Although [the Contracts] Clause made it possible for state legislatures to bind their

successors by entering into contracts, it soon became apparent that such contracts could become a

threat to the sovereign responsibilities of state governments." !d. at 874.

       87
          The Michigan Court of Claims recently concluded that the Compact (as drafted in 1966,
presented to the States in 1967, and enacted by Michigan in 1969) was an "advisory compact"
rather than a binding interstate compact, because it lacked the three "classic indicia" of a binding
compact. See Ingram Micro, Inc. v. Dep 't ofTreasury, No. 11-000035-MT, slip op. at 7-12 (Mich.
Ct. Cl. Dec. 19, 2014), appeal docketed, No. 325507 (Mich. Ct. App. Jan. 9, 2015); Yaskawa Am.
Inc. v. Dep 'to/Treasury, No. 11-000077-MT, slip op. at 7-11 (Mich. Ct. Cl. Dec. 19, 2014), appeal
docketed, No. 325475 (Mich. Ct. App. Jan. 8, 2015). In contrast to binding compacts, advisory
compacts "cede no state sovereignty nor delegate any governing power to a compact-created
agency." Broun et al., at 14. The California Court of Appeals previously concluded that the
Compact (as enacted by California in 1974) was a binding interstate compact that had all three
"classic indicia" of such compacts. Gillette, 147 Cal. Rptr. 3d at 613-15. For the reasons we
explain, we need not and do not reach the issue.

                                                 26
       Courts thus developed the unmistakability doctrine in early Contracts Clause cases "to

protect state regulatory powers." Winstar, 518 U.S. at 874; Philip Morris, 713 N.W.2d at 359-60.

       Under this rule that all public grants are strictly construed, we have insisted that
       nothing can be taken against the State by presumption or inference, and that neither
       the right of taxation, nor any other power of sovereignty, will be held ... to have
       been surrendered, unless such surrender has been expressed in terms too plain to be
       mistaken.

Winstar, 518 U.S. at 874-75 (alteration in original) (internal quotation marks and citations

omitted). As a result of this plain-statement requirement,

       a contract with a sovereign government will not be read to include an unstated term
       exempting the other contracting party from the application of a subsequent
       sovereign act (including an Act of Congress), nor will an ambiguous term of a grant
       or contract be construed as a conveyance or surrender of sovereign power.

Id at 878. When a contract provision implicates a State's sovereign power, the doctrine requires

the State to make a clear "second promise" to refrain from using that sovereign power to alter the

primary promise. !d. at 887 (commenting in a case where the doctrine did not apply, "[t]here being

no need for an unmistakably clear 'second promise' not to change the capital requirements, it is

sufficient that the Government undertook an obligation that it subsequently found itself unable to

perform"). The doctrine serves "the dual purposes of limiting contractual incursions on a State's

sovereign powers and of avoiding difficult constitutional questions about the extent of state

authority to limit the subsequent exercise of legislative power." !d. at 875.

       The unmistakability doctrine does not apply to all government contracts. Winstar, 518

U.S. at 871, 879-84; Philip Morris, 713 N.W.2d at 360-63. Its applicability to a particular claim

"turns on whether enforcement of the contractual obligation alleged would block the exercise of a

sovereign power of the Government." Winstar, 518 U.S. at 879.

                                                27
       At one end of the spectrum are obligations to which the unmistakability doctrine
       always applies, that is, claims for enforcement of contractual obligations that could
       not be recognized without effectively limiting sovereign authority . . . . At the other
       end of the spectrum are ordinary contracts, such as humdrum supply contracts,
       where sovereign power is not compromised by enforcement of the promise made,
       and the unmistakability doctrine therefore never applies.

Philip Morris, 713 N.W.2d at 361 (citations and internal quotation marks omitted).

       The Minnesota Supreme Court has long applied the unmistakability doctrine to resist

construing contracts as abrogating the State's sovereign power. For example, before the passage

in 1906 of Article X, section 1, of the Minnesota Constitution (providing that "[t]he power of

taxation shall never be surrendered, suspended or contracted away"), it was settled law that the

State could "by contract, irrevocably bind itself not to exercise, or may irrevocably limit the

exercise of, its power of taxation." State ex rei. Hahn v. Young, 29 Minn. 474, 538, 9 N.W. 737,

747 (1881). Despite the State's then clear authority to abrogate its own power of taxation, the

Minnesota Supreme Court nevertheless resisted fmding that this authority had been exercised.

               The right of a state government ... by contract to limit its power of taxation,
       is a doctrine too firmly established to admit of discussion at this time.... The
       contract to be irrepealable, however, must clearly and conclusively appear. The
       power of taxation is a sovereign prerogative; its exercise is indispensable to the
       maintenance of the state and its institutions, and no inferences or presumptions
       arising from indefinite and uncertain language that it has relinquished, limited, or
       abandoned the right as to any particular person or corporation should be indulged
       by the court in support of an immunity not enjoyed by all taxpayers alike. Therefore
       the contract is strictly to be construed, and must be in language and terms too clear
       to admit of doubt.

Great N Ry., 106 Minn. at 322, 119 N. W. at 205 (emphasis added) (citations omitted). Thus, even

when the Minnesota Constitution permitted surrender of the taxing power, the supreme court

resisted construing contracts to effect that purpose. All ambiguity must be resolved in favor of

reserving the State's sovereign power. /d. at 323; see also Minneapolis Gas Co. v. Zimmerman,

253 Minn. 164, 184, 91 N.W.2d 642, 656 (1958) ("[A]ll contracts made by the state are entered

                                                 28
into subject to the implied condition that they are ever subordinate to a reasonable and proper

exercise of the state's inalienable police power.").

       The Minnesota Supreme Court most recently applied the unmistakability doctrine to reject

a claim by cigarette manufacturers that their 1998 settlement agreement with the State

contractually prohibited the Legislature from subsequently imposing a health impact fee on

cigarettes. Philip Morris, 713 N.W.2d at 353. The court ruled that imposition of the fee "does not

violate the settlement agreement because the terms of the settlement agreement do not

unmistakably relinquish the state legislature's sovereign authority to impose such an exaction on

tobacco products." /d. Along the way, the court rejected the manufacturers' claim that the doctrine

did not apply because the settlement agreement was a simple risk-shifting instrument that could

be enforced without implicating sovereign power. Id. at 360-63. "[T]he very relief respondents

seek requires the state either to exempt respondents from the exercise of the state's sovereign

powers to tax and to regulate, or to surrender those powers with respect to the cigarette industry

altogether." ld at 361.

                       b.      Applicability

       We reject Kimberly's contention that the unmistakability doctrine does not apply to

interstate compacts. 88 Indeed, a treatise addressing the modern use of interstate compacts indicates

that they exemplify implementation of the unrnistakability doctrine, rather than representing an

exception to that doctrine: "Many compacts constitute an unmistakable surrendering of state

       88
           Kimberly's Mem. Supp. Summ. J. 17; Tr. 51 ("The fact that this is a Compact, an
interstate compact, ... that's the reason that the State can't repeal Articles 3 and 4. A compact
does not need to say, you may not repeal this provision, or you may not repeal any provision.
That's the premise of a compact.").

                                                 29
authority that is binding on subsequent state legislative action. Such compacts are, therefore,

examples of the so-called 'unmistakability doctrine' at work." Broun et al., at 20.

        Kimberly's assertion that the doctrine does not apply to interstate compacts is further belied

by Tarrant Regional Water District v. Herrmann, adjudicating a dispute involving the Red River

Compact, which allocates water rights within the Red River basin among the States of Oklahoma,

Texas, Arkansas, and Louisiana. 133 S. Ct. 2120, 2125 (2013). Petitioner Tarrant Regional Water

District, a Texas state agency responsible for providing water to north-central Texas, alleged that

"it [wa]s entitled to acquire water under the Compact from within Oklahoma and that therefore the

Compact pre-empt[ed] several Oklahoma statutes that restrict out-of-state diversions of water."

!d. Specifically, Tarrant claimed that under a compact provision that did not mention state borders,

it had "the right to cross state lines and divert water from Oklahoma located in [a particular]

subbasin .... " !d. at 2129.

       The Supreme Court commented that "[u]nraveling the meaning of [the contested

provision's] silence with respect to state lines is the key to resolving whether the Compact

pre-empts the Oklahoma water statutes." Tarrant, 133 S. Ct. at 2130. The Court concluded that

problems with Tarrant's proposed textual interpretation "suggest that [the provision's] silence is

ambiguous regarding cross-border rights under the Compact." !d. at 2132. The Court therefore

turned "to other interpretive tools to shed light on the intent of the Compact's drafters." !d. The

first of these tools was "the well-established principle that States do not easily cede their sovereign

powers, including their control over waters within their own territories." !d.

        The Court commented: "The background notion that a State does not easily cede its

sovereignty has informed our interpretation of interstate compacts." Tarrant, 133 S. Ct. at 2133.

In spite of this longstanding principle, Tarrant asked the Court "to infer from [the provision's]

                                                  30
silence regarding state borders that the signatory States ha[ d] dispensed with the core state

prerogative to control water within their own boundaries." !d. at 2132-33. The Court not only

rejected this request, but concluded that a precisely contrary inference was warranted:

        [A]s the above demonstrates, States rarely relinquish their sovereign powers, so
        when they do we would expect a clear indication of such devolution, not inscrutable
        silence. We think that the better understanding of [the provision's] silence is that
        the parties drafted the Compact with this legal background in mind, and therefore
        did not intend to grant each other cross-border rights under the Compact.

Tarrant, 133 S. Ct. at 2133.

        Based on the foregoing, we conclude that the unmistakability doctrine's clear-statement

requirement applies to interstate compacts, and that compacts are drafted with this requirement in

mind. See Ingram, No. 11-000035-MT, slip op. at 10-11 (applying Tarrant to the Multistate Tax

Compact). Kimberly's effort to exempt compacts from the doctrine 89 is nothing more than an

attempt to impermissibly shift the burden to the Commissioner to demonstrate that some provision

of the Compact expressly reserved to the State its sovereign power. See Winstar, 518 U.S. at 878

(noting that ''unmistakability [i]s needed for waiver [of sovereign power], not reservation").

        We further conclude that the doctrine applies to Kimberly's Contract Clause claim in

particular. Kimberly contends that the Legislature's 1987 repeal of the election unconstitutionally

impaired the State's alleged obligation under the Compact to furnish taxpayers the election.90

Kimberly thus asserts that we must strike down the 1987 repeal as an unconstitutional legislative

act, recognize the continued vitality of Articles III and IV during the tax years at issue, and allow

       89
          Tr. 103 ("[W]hen the Compact allows a state to deviate from [its] terms, it expressly says
this provision is optional.").
       9
        ° Kimberly's   Mem. Supp. Summ. J. 30-35; Kimberly's Reply Mem. Supp. Summ.
J. 13-15.

                                                 31
Kimberly to invoke the election for those tax years. 91 Plainly, Kimberly's requested relief"would

block the exercise of a sovereign power of the [State]." Winstar, 518 U.S. at 879. First, it would

retroactively block the Legislature's sovereign act of repealing the election. Second, it would

prevent the Commissioner from enforcing existing Minnesota law, which does not include the

election. 92

                           c.   Analysis

        The unmistakability doctrine requires that "a contract purporting to limit the state's right

to tax in the future 'is to be strictly construed, and must be in language and terms too clear to admit

of doubt.' " Philip Morris, 713 N.W.2d at 360 (internal quotation marks and citation omitted); see

also Winstar, 518 U.S. at 875. Although Kimberly asserts that Articles III and IV provide for the
                                                       93
apportionment election "[i]n unmistakable terms,"           its written submissions do not identify any

Compact provision satisfying the unmistakability doctrine. During oral argument, Kimberly again

declined to identify any particular Compact provision satisfying the doctrine, and instead pointed

to the document as a whole and to its status as an interstate compact. 94

        91
           Kimberly's Mem. Supp. Summ. J. 1, 10, 30, 34; Kimberly's Reply Mem. Supp. Summ.
J. 2; Tr. 56-58, 60-61.
        92
           The unmistakability doctrine's purpose of constitutional avoidance is doubly implicated
in the present case. First, application of the doctrine may eliminate the need to address Kimberly's
Contracts Clause claim that the 1983 Compact enactment limited the Legislature's subsequent
authority to control apportionment. See Winstar, 518 U.S. at 87 5 (explaining that the doctrine was
developed to avoid difficult constitutional questions concerning "the extent of state authority to
limit the subsequent exercise of legislative power"). In this case, moreover, application may also
eliminate the need to address an additional constitutional issue raised by the Commissioner:
whether the 1983 enactment of the Compact violated Article X, section 1, of the Minnesota
Constitution, which provides that "[t]he power of taxation shall never be surrendered, suspended
or contracted away." Comm'r's Mem. Supp. Summ. J. 15-16, 21; Comm'r's Reply Mem. Supp.
Summ. J. 2-3.
        93Kimberly's Mem. Supp. Summ. J. 6; id at 17 (arguing that "the Compact's terms are
plain and unmistakable - they require that the election be provided to taxpayers").
        94
             Tr. 100-04.

                                                  32
        We have already rejected Kimberly's assertion that the unmistakability doctrine does not

apply to interstate compacts. We now address Kimberly's apparent contention that the language

of Articles III and IV prohibited Minnesota from revoking the apportionment election (unless it

first completely withdrew from the Compact). Article III(1) provides that any qualifying taxpayer

"may elect to apportion and allocate his income in the manner provided by the laws of such

state . . . without reference to this compact, or may elect to apportion and allocate in accordance

with article IV." Minn. Stat. § 290.171, Art. III(1 ). Kimberly argues that this provision "requires

party states to allow taxpayers to elect either the Compact Formula or a party state's own
                               95
alternative State Formula"          and concludes on this basis that "[t]he election provision is not an

option for party states." 96

        The Commissioner acknowledges the prenuse, but argues that it does not support

Kimberly's conclusion: "There is no dispute that a taxpayer could use the election prior to the

repeal of articles III and IV in 1987. The issue here is whether section 290.171 prohibited the
                                                          97
legislature from repealing articles III and IV."               We agree with both· the Commissioner's

formulation of the issue and her assertion that nothing in the text of Articles III and IV constitutes

a promise that Minnesota would not amend or repeal the election. Put another way, Articles III

and IV clearly provide for the apportionment election, but do not contain a separate and distinct

promise that the State would not alter or repeal the election. If the Compact contains such a

separate promise, it must be located elsewhere.

        95
             Kimberly's Mem. Supp. Summ. J. 16.
       96
             Kimberly's Mem. Supp. Summ. J. 16.
       97
             See Comm'r's Reply Mem. Supp. Summ. J. 7.

                                                     33
       A treatise on interstate compacts contains an example of compact language clearly

surrendering sovereign power against the background of the unmistakability doctrine:

               A perfect example of states ceding their sovereignty through an interstate
       compact can be found in Article XIV, Sections A and B of the Interstate Compact
       for Adult Offender Supervision. These two sections of the compact provide, in
       part, that (1) "[a]ll compacting States' laws conflicting with this Compact are
       superseded to the extent of the conflict;" and (2) "All lawful actions of the Interstate
       Commission, including all Rules and By-laws promulgated by the Interstate
       Commission, are binding upon the Compacting States."

Broun et al., at 22 (quoting Interstate Compact for Adult Offender Supervision (2002)).

       As Kimberly acknowledges, 98 the Compact contains no language similarly stating that

Minnesota laws conflicting with the Compact are superseded or that actions of the Multistate Tax

Commission are binding upon Minnesota. The absence of such a provision "counts heavily"

against Kimberly's interpretation that the Compact surrenders sovereign power. See Tarrant, 133

S. Ct. at 2133 (noting that many compacts "feature language that unambiguously permits signatory

States to cross each other's borders to fulfill obligations under the compacts" and concluding that

"[t]he absence of comparable language in the Red River Compact counts heavily against Tarrant's

reading of it."). Although Article IX of the Compact, titled "Arbitration," provides in part that

"[e]ach party state ... hereby consents to the arbitration as provided herein, and agrees to be bound

thereby," Minn. Stat. § 290.171, Art. IX(3) (emphasis added), there is no similar language binding

party States to other Compact provisions generally, or to Articles III and IV, in particular.

Moreover, the United States Supreme Court has concluded that the Compact involves no

"delegation of sovereign power to the [Multistate Tax] Commission." U.S. Steel, 434 U.S. at 453.

No Compact provision in clear and unmistakable language bars Minnesota from amending or

repealing the apportionment election.

       98   Tr. 100-04; see also Comm'r's Reply Mem. Supp. Summ. J. 3.

                                                 34
       In response to a parallel invocation of the Compact election by IBM in Michigan, three

dissenting Justices similarly concluded that the Compact created "no contractual obligation to

strictly adhere to Articles III and IV." Int 'I Bus. Machines Corp. v. Dep 't ofTreasury, 852 N.W.2d

865, 888 (Mich. 2014) (McCormack, J ., dissenting). This conclusion rested, in large part, on

"principles of state sovereignty." ld Under Michigan law, as under Minnesota law, "surrenders

of legislative power are subject to strict limitations that have developed in order to protect the

sovereign prerogatives of state governments." Id        In the dissenters' view, "[t]he Compact's

silence on the effect of a member state's ability to elect an exclusive apportionment formula

indicates that Michigan did not contract away its right to do exactly that." !d. 99

       We agree with the Commissioner that although Articles III and IV unambiguously provide

for the apportionment election, 100 no Compact provision contains or constitutes a separate clear

and unmistakable promise that the State would not alter or repeal the election. 101 See Ingram,

No. 11-000035-MT, slip op. at 10 (noting that although the Compact expressly permits unilateral

withdrawal, "[w]hether unilateral modification is permitted under the Compact is less clear and is

       99
          Because the IBM majority concluded that the Michigan Legislature had never repealed
the Compact, IBM, 852 N.W.2d at 872-77, and accordingly that "the Compact's election provision
remained in effect" for the tax years in issue, id. at 876, the majority had no occasion to consider
whether the Compact contractually obligated Michigan not to alter the election.
       10
         °Comm'r's Reply Mem. Supp. Summ. J. 7.
       101
             Comm'r's Mem. Supp. Summ. J. 18; Comm'r's Reply Mem. Supp. Summ. J. 3-4.

                                                 35
not directly addressed under the Compact.").           Accordingly, we conclude that no Compact

provision satisfies the unmistakability doctrine's clear-statement requirement. 102

        Kimberly implies in the alternative that a surrender of sovereignty can be inferred from the

Compact's audit and withdrawal provisions. 103 We disagree.

       The Compact's audit provision, Article VIII, "authorizes any member State ... to request

that the Commission perform an audit on its behalf." U.S. Steel, 434 U.S. at 457. Article VIII,

Section 3, in tum, authorizes the Commission "as the State's auditing agent, [to] seek compulsory

process in aid of its auditing power in the courts of any State that has adopted Art. VIII." !d. It

also provides that "[t]he provisions of this paragraph apply only to courts in a state that has adopted

this article." Minn. Stat. § 290.171, Art. VIII(3).

       Based on the foregoing language, Kimberly infers: (1) that States were free not to adopt

Article VIII; and, by negative implication, (2) that they were therefore required to adopt the

        102
           In considering a California taxpayer's claim that the Compact (as adopted by California
in 1974) prohibited the State from eliminating the apportionment election, the California Court of
Appeals concluded that the Compact surrendered sovereign authority: "[S]ignatory states cede a
level of sovereignty over matters covered in a compact . . . . Because the Compact is both a statute
and a binding agreement among sovereign signatory states, having entered into it, California could
not, by subsequent legislation, unilaterally alter or amend its terms." Gillette, 147 Cal. Rptr. 3d
at 616 (citations omitted). The court found a contractual surrender of sovereign power, however,
without applying the unmistakability doctrine's clear-statement requirement. See, e.g., Standard
Oil Co. ofCal. v. Johnson, 76 P.2d 1184, 1189 (Cal. 1938) ("The taxing power of the state is never
presumed to have been relinquished unless the language in which the surrender is made is clear
and unmistakable.") (citation and internal quotation marks omitted); Coso Energy Developers v.
Cnty. of Inyo, 19 Cal. Rptr. 3d 669, 685 (Cal. Ct. App. 2004) (applying doctrine). We note that
Gillette was filed on October 2, 2012, approximately eight months before Tarrant reiterated that
the clear-statement requirement applies to interstate compacts. Tarrant, 133 S. Ct. at 2133. In any
event, applying the unmistakability doctrine, we conclude that the Compact does not surrender
state sovereign power.
        103
           Kimberly's Mem. Supp. Summ. J. 7-8, 17; Kimberly's Reply Mem. Supp. Summ. J. 7;
Tr. 51, 103-04.

                                                  36
Compact's remaining articles. 104 Then, characterizing the remaining articles as "mandatory," 105

Kimberly argues in substance that party States surrendered the sovereign authority to alter or repeal

the mandatory provisions, including Articles III and IV. 106 There are several flaws in this

reasoning.

       First, other Compact language undermines Kimberly's initial inference that all Compact

provisions other than Article VIII were mandatory. Article XI provides in part that nothing in the

Compact shall be construed to "[a]ffect the power of any state ... to fix rates of taxation, except

that a party state shall be obligated to implement article III 2." Minn. Stat. § 290.171, Art. XI(a)

(emphasis added). If, as Kimberly asserts, all Compact provisions other than Article VIII were

mandatory, then the emphasized passage expressly making Article III(2) mandatory would be

superfluous. Moreover, by specifically mandating the implementation of Article III(2) alone,

Article XI( a) suggests that all provisions other than Article III(2) were optional. Article VIII(3)

       104
             Kimberly's Mem. Supp. Summ. J. 17; Tr. 51-52.
       105
             Kimberly's Mem. Supp. Summ. J. 6-8, 15-17; Tr. 51-52, 108-09.
       106
            Kimberly's Mem. Supp. Summ. J. 17. We say "argues in substance" because Kimberly
avoids directly stating that Minnesota surrendered sovereign power to alter or repeal the election
Instead, Kimberly asserts generally that "parties to an interstate compact cede some sovereignty."
Kimberly's Reply Mem. Supp. Summ. J. 7; Tr. 101 (asserting that interstate compacts "cede some
sovereign authority"). Then, invoking the notion of "mandatory" provisions, see Kimberly's
Mem. Supp. Summ. J. 17 ("the Compact is express when it allows variations from its terms"),
Kimberly finesses the sovereignty issue by asserting that Minnesota "simply obligated itself to
comply with the Compact's terms until such time as it withdrew in accordance with the Compact."
Kimberly's Mem. Supp. Summ. J. 17. Accordingly, what Kimberly means by a "mandatory"
provision is one that the state may not alter or repeal. Thus, in substance, Kimberly argues that
Minnesota lacked sovereign authority to alter or amend the legislation that established the
apportionment election unless and until it completely withdrew from the Compact. As to Chief
Judge Turner's concurrence, we are unaware of any principle that prohibits a court from critically
evaluating a litigant's submissions and plainly stating the true import of its arguments. We trust
that the careful reader, in particular, will perceive that this is precisely what we have done.

                                                 37
actually supports this interpretation, because it specifically contemplates that some party States

might not adopt Article VIII.

        In any event, there is a second, more fundamental, problem with Kimberly's reasoning.

Even if Articles III and IV were "mandatory," this would establish only that party States had to

adopt the articles and to honor the obligations stated therein while those articles remained in force.

The question presented by the unmistakability doctrine, however, is not whether government

contracts create binding obligations; the entire impetus for the doctrine arises from the assumption

that they surely do, and can thus prevent the proper exercise of state regulatory powers. Winstar,

518 U.S. at 874-75. Specifically to avoid the difficult constitutional questions that arise because

government contracts bind, !d. at 872, the doctrine also assumes that, "absent an unmistakable

provision to the contrary, contractual arrangements, including those to which a sovereign itself is

a party, remain subject to subsequent legislation by the sovereign," ld at 877 (citation and internal

quotation marks omitted).       The determinative question for unmistakability purposes is thus

whether the Compact includes a "second promise" clearly indicating that party states were

surrendering the sovereign power generally assumed to govern all contracts. !d. Even if Articles

III and IV are considered "mandatory," this does not resolve the unmistakability inquiry; to the

contrary, it actually triggers that inquiry.

        Finally, Kimberly's assertion that Article VIII satisfies the unmistakability doctrine fails

on the merits. Section 3 provides simply that its provisions "apply only to courts in a state that

has adopted this article." Minn. Stat. § 290.171, Art. VIII(3 ). This limitation upon the applicability

of a single Compact provision is not a clear and unmistakable promise that party states ·are

surrendering sovereign power. Nor can Kimberly's tenuous inference of surrender (as previously

                                                  38
summarized) satisfy the doctrine because "[n]othing can be taken against the State by presumption

or inference." Winstar, 518 U.S. at 874 (citation and internal quotation marks omitted).

        We likewise reject Kimberly's argument that the Compact's withdrawal provision, Article

X(2), satisfies the unmistakability doctrine. 107 That section provides: "Any party state may

withdraw from this compact by enac_ting a statute repealing the same. No withdrawal shall affect

any liability already incurred by or chargeable to a party state prior to the time of such withdrawal."

Minn. Stat. § 290.171, Art. X(2). Kimberly's argument-which again conflates whether the

Compact is binding with whether it surrenders sovereign power-runs as follows:                   "The

withdrawal provision supports the binding nature of the Compact....            Because parties to an

interstate compact cede some sovereignty, a withdrawal provision allows a state to regain complete

sovereignty. Many other compacts contain similar withdrawal provisions." 108 The Commissioner

responds that the withdrawal provision is silent concerning whether Articles III and IV may be

repealed. 109

        We conclude that the withdrawal provision does not satisfy the unmistakability doctrine.

First, the withdrawal provision addresses how a party State may entirely withdraw from the

agreement, not whether party States are surrendering sovereign power to legislate with respect to

the Compact's subject matter. We thus agree with the Commissioner that Article X(2) is silent

concerning the surrender of sovereignty.         Second, some compacts containing withdrawal

provisions also contain separate provisions expressly indicating that compact provisions prevail

over conflicting state laws and that actions of the compact's commission are binding on party

        107
              Kimberly's Reply Mem. Supp. Summ. J. 7; Tr. 7, 66, 104.
        108
              Kimberly's Reply Mem. Supp. Summ. J. 7 (citation omitted).
        109
              Comm'r's Reply Mem. Supp. Summ. J. 3-4; Tr. 21.

                                                  39
States. See, e.g., Interstate Compact for Adult Offender Supervision, Art. XII(A) ("Withdrawal"),

Art. XIV(A)-(B) ("Binding Effect of Compact and Other Laws"). The inclusion of such separate

and express provisions demonstrates an understanding that the surrender of sovereignty cannot be

accomplished by means of a standard withdrawal provision that is silent as to sovereignty. As the

United States Supreme Court has noted, compacts are drafted against the legal background of the

unmistakability doctrine's clear-statement requirement, and a surrender of state sovereignty will

not be inferred from ambiguity or silence. Tarrant, 133 S. Ct. at 2133.

                       d.     Unmistakability Conclusion

       The unmistakability doctrine applies only when "enforcement of the contractual obligation

alleged would block the exercise of a sovereign power of the Government." Winstar, 518 U.S. at

879; see also Philip Morris, 713 N.W.2d at 361. The doctrine applies here because Kimberly:

(1) asserts that the State contractually promised not to alter the apportionment election provided

by Articles III and IV of the Compact; and (2) asks that we invalidate the 1987 repeal of Articles

III and IV and allow it to invoke the election for the tax years at issue, remedies that would block

the exercise of State sovereign power. Applying the doctrine, we conclude that no Compact

provision constitutes a clear and unmistakable promise to refrain from using the State's sovereign

power to alter the apportionment election provided by Articles III and IV. 110

               3.      Silence as Ambiguity Concerning Surrender of Sovereign Power

       Although application of the unmistakability doctrine reveals that the Legislature did not-

by enacting the Compact-promise to refrain from using its sovereign power to alter the

        110We have no occasion to consider or decide whether the doctrine would apply to other
claims involving the Compact (which might neither implicate sovereign power in the first place
nor request a remedy ultimately blocking the exercise of such a power).

                                                40
apportionment election, consideration ofboth the Compact's history and of the party States' course

of performance under the Compact furnishes an alternative route to the same conclusion.

       As Tarrant indicates, interstate compacts are drafted against the legal background of the

unmistakability doctrine's clear-statement requirement.      Tarrant, 133 S. Ct. at 2133. Thus,

absence from the Compact of a provision clearly surrendering sovereign power to alter the

apportionment election renders the Compact ambiguous as to any such surrender. See id. at 2132

(ruling that contested provision's "silence is ambiguous regarding cross-border rights under the

Compact"). Put another way, the absence of a clear surrender provision renders the Compact

reasonably susceptible to an interpretation (a) that it surrenders sovereign power (leaving aside

application of the unmistakability doctrine), or (b) that it does not. Christianson, 831 N.W.2d

at 538-39 (stating standard for ambiguity of a statute); Dykes, 781 N.W.2d at 582 (stating standard

for ambiguity of a contract).

       "When a statutory provision is ambiguous, it is appropriate to tum to the canons of statutory

construction to ascertain a statute's meaning." State v. Leathers, 799 N.W.2d 606, 611 (Minn.

2011). To determine legislative intent, a court also may "consider the legislative history of the act

under consideration, the subject matter as a whole, the purpose of the legislation, and objects

intended to be secured thereby."      Sevcik v. Comm 'r of Taxation, 257 Minn. 92, 103, 100

N.W.2d 678, 686-87 (1959); see also Minn. Stat. § 645.16(1)-(8) (2014) (setting out factors for

statutory interpretation); Oklahoma v. New Mexico, 501 U.S. 221, 234-36 & n.5 (1991) (noting

that extrinsic evidence of negotiating history may be used to interpret an ambiguous interstate

compact).

       Correspondingly, in construing ambiguous contract language, "resort may be had to

extrinsic evidence." Cut Price Super Markets v. Kingpin Foods, Inc., 256 Minn. 339, 354, 98

                                                41
N.W.2d 257,268 (1959). Pertinent extrinsic evidence includes the parties' course of performance.

See id. at 354; 98 N.W.2d at 268; see also Restatement (Second) of Contracts § 202(5) (1981)

("Wherever reasonable, the manifestations of intention of the parties to a promise or agreement

are interpreted as consistent with each other and with any relevant course of performance, course

of dealing, or usage of trade.").

                          a.        Compact's Drafting History

          The parties largely agree on the Compact's drafting history. 111 In 1959, the United States

Supreme Court clarified its jurisprudence with respect to the power of States to tax interstate

businesses, holding that "net income from the interstate operations of a foreign corporation may

be subjected to state taxation provided the levy is not discriminatory and is properly apportioned

to local activities within the taxing State forming sufficient nexus to support the same." Portland

Cement, 358 U.S. at 452. The Court thus affirmed state taxes on the net income of non-resident

businesses whose only connection to the taxing state was the maintenance of a modest sales office

and the solicitation of sales within the state. !d. at 453-57 (describing the taxed businesses' in-

state facilities and activities).

          As relevant here, Portland Cement engendered two Congressional responses. First, within

seven months, Congress passed Public Law 86-272, which prohibited States from taxing the net

income of interstate businesses whose sole activity in the taxing state was soliciting orders for the

sale of tangible personal property. See Heublein, Inc. v. S.C. Tax Comm 'n, 409 U.S. 275, 278-81

(1972).

          111   See, e.g., Kimberly's Mem. Supp. Summ. J. 4-6; Comm'r's Mem. Supp. Summ. J. 4-5.

                                                   42
                In this statute, Congress attempted to allay the apprehension of businessmen
        that "mere solicitation" would subject them to state taxation. Such apprehension
        arose because, as businessmen who sought relief from Congress viewed the
        situation, Northwestern States Portland Cement did not adequately specify what
        local activities were enough to create a "sufficient nexus" for the exercise of the
        State's power to tax. [The statute] was designed to define clearly a lower limit for
        the exercise of that power. Clarity that would remove uncertainty was Congress'
        primary goal.

Jd at 280.

        Second, Congress "authorized a study for the purpose of recommending legislation

establishing uniform standards to be observed by the States in taxing income of interstate

businesses." US. Steel, 434 U.S. at 455. More specifically, Congress established "[a] special

subcommittee (the Willis Committee)" which "reported five years later with specific

recommendations for federal statutory solution to the interstate allocation problem." ld at 487

(White, J ., dissenting). The 1965 Willis Report criticized the variety and changeability of state

apportionment formulas and made specific recommendations to increase the uniformity of state

taxation of interstate businesses. 112 Shortly after the Report's publication, a bill was introduced in

Congress to implement its recommendations. See H.R. 11798, 89th Cong., 2nd Sess. (1965). That

bill, however, failed to become law. US. Steel, 434 U.S. at 455-56 & n.4.

       Given this congressional activity in the wake of Portland Cement, States perceived a

"growing likelihood that federal action will curtail seriously existing State and local taxing power
                                                                              113
if appropriate coordinated action is not taken very soon by the States."            Consequently, "[a]

special meeting of the National Association of Tax Administrators was called in January 1966;

that gathering was the genesis of the Multistate Tax Compact." US. Steel, 434 U.S. at 487 (White,

       112
             Ex. J51, at 118-19, 1133-38 (H.R. Rep. No. 89-952 (1965)).
       113
             Ex. J35, at KC11525.

                                                 43
J., dissenting). In its first annual report dated January 28, 1969, the Multistate Tax Commission

stated:

                 The origin and history of the Multistate Tax Compact are intimately related
          and bound up with the history of the states' struggle to save their fiscal and political
          independence from encroachments of certain federal legislation introduced in
          congress during the past three years. These were the Interstate Taxation Acts, better
          known as the Willis bills. 114

A completed draft of the Compact "was presented to the states in January 1967." 115 The Compact

became effective on August 4, 1967, after it was enacted into law by seven states. 116

          Again conflating the separate questions of whether the Compact is binding and whether its

terms "remain[ed] subject to subsequent legislation' [sic] by the sovereign," Winstar, 518 U.S. at

877 (citation and internal quotation marks omitted)-K.imberly argues that "the Compact drafters
                                                                          117
intended the apportionment election to be mandatory and binding."               According to Kimberly:

                  Variation in state apportionment formulas was a primary focus of the
          Congressional [Willis] report, and Congress was poised to impose a mandatory
          apportionment formula on all states. The election was a core element of the
          Compact in order to secure a base-line level of uniformity and thus critical for states
          to avoid federal imposition of a one-size-fits-all apportionment formula. 118

In Kimberly's view, the Compact's drafting history is "compelling evidence" that "the election is
                   119
not optional."

          We have no difficulty agreeing with Kimberly's general thesis: that through coordinated

action, States sought to increase uniformity and thereby to reduce the perceived need in Congress

          114
                Ex. 136, at KC 11434.
          115
                Ex. 136, at KC11435.
          116
                Ex. 136, at KC11433.
          117   Kimberly's Mem. Supp. Summ. J. 21.
          118
                Kimberly's Mem. Supp. Summ. J. 21-22 (citation omitted).
          119
                Kimberly's Mem. Supp. Summ. J. 22.

                                                    44
for federal intervention. We question, however, whether the numerous State officials who either

directly drafted the Compact, or cooperated in its drafting, would have considered an agreement

surrendering the States' sovereign taxing powers as a viable means for achieving this purpose.

       As the Commissioner observes, "Minnesota and at least 13 current or former Compact

members have provisions in their state constitutions prohibiting the surrendering or contracting

away of taxation authority."    ° Five of the eleven States represented at a June 15, 1967 meeting
                               12

to organize the Multistate Tax Commission created by the Compact had such provisions in their

state constitutions. 121 Sophisticated parties, in particular, are presumed to know the law. Brekke

v. THM Biomedical, Inc., 683 N.W.2d 771, 782-83 (Minn. 2004) (Gilbert, J., dissenting). In

addition, the "settled law of the land at the time a contract is made become[ s] part of it and must

be read into it except where the contract discloses an intention to depart therefrom." William

Lindeke Land Co. v. Kalman, 190 Minn. 601, 607,252 N.W. 650, 653 (1934).

       Considering that the Compact was developed "under the auspices of the Council of State

Governments, with the cooperation of the National Association of Tax Administrators, the
                                                                                            122
National Association of Attorneys General and the National Legislative Conference,"               it is

unreasonable to suppose that state constitutional limitations upon contracting away the taxing

power were not raised and considered during the Compact's drafting. Put another way, it is

unlikely that state tax administrators and attorneys general would have drafted an agreement:

(1) that many States had questionable authority to enact; and (2) that, immediately upon enactment

       12
         ° Comm'r's Mem. Supp. Summ. J. 16 n.12 (listing the other states as Alaska, Arkansas,
California, Hawaii, Illinois, Michigan, Missouri, Montana, North Dakota, South Dakota, Texas,
Washington, and Wyoming).
       121
             Ex. J36, at KC11435 (Arkansas, Illinois, Missouri, Texas and Washington).
       122
             Ex. J30, at KC11496.

                                                45
in such states, would be subject to challenge on the ground that it had unlawfully contracted away

the state's taxing power. 123 An agreement that was either void ab initio or ultimately unenforceable

against approximately one third of all States would hardly have advanced the States' contemplated

objective of appeasing Congress. Indeed, the States would likely have concluded that uniformity

could better be achieved by creating an agreement that all States had clear authority to enact, even

if some party States might later alter certain of the Compact's provisions or withdraw from the

agreement altogether.

       As an aside, we cannot agree with Kimberly's argument that the Compact must have

deprived states of their power to alter the apportionment election, because only a mandatory

election could be expected to stave off congressional intervention. 124 This argument makes little

sense considering that Article X(2) of the Compact expressly permits party States to completely

withdraw from the agreement at any time. Even if the States hoped federal intervention might be

avoided if Congress perceived the Compact as a viable means of increasing state tax uniformity,

they had no reason to believe that Congress would have considered alteration of the apportionment

election as a greater threat to uniformity than complete withdrawal from the agreement. Either

way, party States could avoid ihe election and defeat the uniformity at the heart of Congressional

concern.

        123Here, citing Minnesota Constitution Article X, section 1, the Commissioner argues both
that the Legislature could not lawfully have enacted an agreement obligating the State to refrain
from altering the apportionment election and that, if the Contract did create such an obligation, its
enactment was void ab initio. Comm'r's Mem. Supp. Summ. J. 15-16; Comm'r's Reply Mem.
Supp. Summ. J. 2-3.
        124
              Kimberly's Mem. Supp. SUmm. J. 21-22 & n.6.

                                                 46
                       b.      Course of Performance Before Minnesota Enacted the Compact

        We need not decide, however, whether the Compact as originally drafted in 1966 and

enacted by numerous States in 1967 was intended to surrender party States' sovereign taxing

powers. For the Minnesota Legislature did not enact the Compact until 1983, over fifteen years

after it first became effective. By that time, party States operating under the Compact had clearly

manifested their understanding that they retained sovereign authority to alter or eliminate the

Compact's apportionment election.

        When an interstate compact provision is ambiguous, courts may consider extrinsic

evidence including the party States' course of performance. Tarrant, 133 S. Ct. at 2132, 2135.

Course of performance refers to the actions of parties during performance of the contract at issue.

Cut Price Super Mkts., 256 Minn. at 354, 98 N.W.2d at 268. Evidence of course of performance

is useful because it demonstrates the parties' practical construction of the terms of a contract, which

is probative oftheir intent. Cornell v. NF.C. Eng'g Co., 274 Minn. 391,395-96, 144 N.W.2d 369,

372 (1966). 125 "A 'part[y's] course of performance under the Compact is highly significant'

evidence of its understanding of the compact's terms." Tarrant, 133 S. Ct. at 2135 (alteration in

original) (citation and internal quotation marks omitted).

        125
           Although not expressly invoking the concept "course of performance," other Minnesota
cases similarly recognize that the parties' own construction of an ambiguous contract term is
highly probative of its intended meaning. See Brachmann v. Netzinger, 293 Minn. 405,407, 196
N.W.2d 616,618-19 (1972) (commenting with respect to ambiguous option agreement that "parol
evidence concerning the parties' interpretation of the [agreement's] language must control in
determining their understanding"); Kastner v. Dalton Dev., Inc., 265 Minn. 511, 517, 122
N.W.2d 183, 187 (1963) (where the p~ies had agreed "that the option [to purchase] must be
exercised on the entire 23 lots," the court noted that "the rule is that the interpretation placed upon
the contract by the parties themselves is to be considered by the court, and is entitled to great, if
not controlling, influence in ascertaining their understanding of its terms").

                                                  47
       The Compact became effective on August 4, 1967, after it was enacted into law by seven

states, 126 one of which was Florida. 127 See Fla Stat. § 213.15 ( 1969). In December 1972, however,

Florida enacted legislation: ( 1) repealing Articles III and IV of the Compact; and (2) adopting as

a matter of Florida law an equally-weighted three-factor apportionment formula. See§ 1, 1971

Fla. Laws at 52. In response to Florida's repeal of Articles III and IV, no party State alleged a

violation of the Compact. To the contrary, during a Multistate Tax Commission meeting held on

December 1, 1972, the party States unanimously passed a resolution (with Florida abstaining)

providing that whereas "the State of Florida has repealed Articles III and IV of the Multistate Tax

Compact, while still legislatively, adhering to the spirit of the compact;" and whereas "the State

of Florida will continue to strive together with tax administrators, national tax groups, and

representatives of the business community to develop new and additional methods of resolving

multistate tax problems;" therefore "be it resolved that the State of Florida be recognized as a

regular member in good standing of the Multistate Tax Compact and the Multistate Tax

                  128
Commission."            The meeting minutes note that "associate member[] Minnesota . . . had been

                                               129
taking part in the meeting during the week."         By late 1972, then, party States-both individually

and collectively through the Multistate Tax Commission-had unanimously concluded and

publicly declared that Florida, a party State that originally enacted Articles III and IV, remained a

Compact member in good standing despite its subsequent repeal of those two Articles.

       126 Ex.   136, at KC11433.
        127
              Ex. 136, at KC11445.
        128Ex. 143, at MDOR 00015 (Minutes of Meeting of the Multistate Tax Commission,
Dec. 1, 1972).
        129
              Ex. 143, at MDOR 00014.

                                                     48
       Party States soon had further occasion to indicate their understanding of the Compact's

effect on their sovereign powers. In 1972, the United States Steel Corporation sued the Multistate

Tax Commission "its individual Commissioners, and its Executive Director," challenging the

constitutionality of the Compact on four stated grounds. US. Steel, 434 U.S. at 458. In its 1977

brief to the United States Supreme Court, the Commission addressed, among other things, its

understanding of the Compact's effect on the sovereign taxing power of party States: "Individual

member states of the Compact retain exclusive control over any and all legislation or

administrative actions including (i) the rate of tax; (ii) what is included in any tax base, such as

what constitutes taxable income or lawful deductions therefrom for income tax purposes; and

(iii) the means and methods of determining any tax liability and of collecting any taxes which may
                                 130
be determined to be due .... "         The Supreme Court plainly credited this statement by the

Commission, for it commented that "individual member States retain complete control over all

legislation and administrative action affecting the rate of tax, the composition of the tax base

(including the determination of the components of taxable income), and the means and methods

of determining tax liability and collecting any taxes   d~termined   to be due." ld at 457.

       Approximately twenty years later, the Supreme Court likewise credited an agency's

interpretation of the multistate compact it administered. In Alabama v. North Carolina, eight states

including Alabama and North Carolina entered into the Southeast Interstate Low-Level

Radioactive Waste Management Compact, which provided for the development of a new facility

for the long-term disposal of low-level radioactive waste generated in the region. 560 U.S. at 334.

The Compact was administered by a Commission composed of two voting members from each

party State. ld North Carolina was designated to "host" the new facility, and thus became

       130
             Ex. 154, at MDOR 03903.

                                                49
obligated by the compact to "take appropriate steps" to obtain a license to construct and operate

the contemplated facility. !d. at 335.

        Although the compact specifically provided that the Commission was not responsible for

any costs associated with creating the new facility, North Carolina "asked the Commission for

financial assistance with building and licensing costs." Alabama, 560 U.S. at 335.                "The

Commission responded by adopting a resolution, which declared it was both 'appropriate and

necessary' for the Commission 'to provide financial assistance' to North Carolina." !d. (quoting

record). Thereafter, the Commission provided North Carolina with approximately $80 million in

financial assistance towards obtaining licensing. Id at 336-37. After South Carolina withdrew

from the agreement, and North Carolina and the Commission reached an impasse concerning a

long-term fmancing plan, North Carolina "informed the Commission it would commence an

orderly shutdown of its licensing project." Id

       Several party States, joined by the Commission, filed a complaint against North Carolina

alleging, among other things, that North Carolina had breached the compact because it was no

longer taking "appropriate steps" to obtain licensing. Alabama, 560 U.S. at 338, 345. After

concluding that the compact term "appropriate steps" was ambiguous, the Court looked to the

parties' course of performance to ascertain its meaning: "In determining whether, in terminating

its efforts to obtain a license, North Carolina failed to take what the parties considered 'appropriate'

steps, the parties' course of performance under the Compact is highly significant." !d. at 346.

Such evidence "firmly establishes that North Carolina was not expected to go it alone .... The

history of the Compact consists entirely of shared financial burdens." Id

                                                  50
       There is nothing to support the proposition that the other States had an obligation
       under the Compact to share the licensing costs through the Commission; but we
       doubt that they did so out of love for the Tarheel State. They did it, we think,
       because that was their understanding of how the Compact was supposed to work.
       One must take the Commission at its word, that it was "appropriate" to share the
       cost-which suggests that it would not have been appropriate to make North
       Carolina proceed on its own.

Id (emphasis added).

       Taken together, U.S. Steel and Alabama v. North Carolina demonstrate that the United

States Supreme Court places considerable weight on the manner in which a representative

commission interprets the interstate compact it is charged with administering. Naturally, such

evidence cannot be used to contradict a compact's plain meaning. Kansas v. Colorado, 514

U.S. 673, 690-91 (1995). When a contested term is ambiguous, however, course of performance

evidence, including the interpretation of a representative administrative commission, is highly

significant. Tarrant, 133 S. Ct. at 2135.

       The U.S. Steel Court plainly took the Multistate Tax Commission "at its word" concerning

the Compact's effect on the sovereignty of party States. Closely paraphrasing the Commission's

appellate brief, the Court concluded not only that the States had "retain[ed] complete control over

all legislation ... affecting the rate of tax, the composition of the tax base ... , and the means and

methods of determining tax liability ... ," U.S. Steel, 434 U.S. at 457, but also that the States had

delegated no sovereign power to the Commission itself, Id at 4 73.

       By 1979, then, the Compact's party States had expressly declared in the United States

Supreme Court their understanding that the Compact did not abridge their taxing powers. In

addition, the Supreme Court had adopted this understanding of the Compact. Consequently,

following the 1979 publication of U.S. Steel, the Compact could not reasonably be understood as

requiring party States to contract away sovereign powers.

                                                 51
       We note that Minnesota's own enactment of the Compact in 1983 indicates that the

Minnesota Legislature, in particular, did not consider itself bound to adopt the Compact's

allocation and apportionment provisions. When enacting section 290.171, Minnesota omitted

from the Model Act (as drafted in 1966) five of Article IV's eighteen sections. Article IV(4) of

the Model Compact provides that "[r]ents and royalties from real or tangible personal property,

capital gains, interest, dividends or patent or copyright royalties, to the extent that they constitute

nonbusiness income, shall be allocated as provided in paragraphs 5 through 8 of this Article."      131

Minnesota omitted this Model Compact allocation provision from section 290.171, along with

Articles IV (5)-(8), which facilitate its implementation. Thus, whereas Article IV of the Model

Compact contained eighteen sections, Article IV of section 290.171 had only thirteen sections. 132

The Minnesota Legislature's conclusion that it was free to enact only certain portions of Article

IV manifests its understanding that member States were free to adopt or alter the Compact's

allocation and apportionment provisions as they saw fit.

       By 1979, the Compact's existing party States had clearly and consistently manifested their

understanding that they retained sovereign authority to alter or eliminate the Compact's

apportionment and allocation provisions. Consequently, we conclude that by the time Minnesota

enacted section 290.171 in 1983, the Compact could not reasonably be understood as contractually

requiring party states to refrain from using their sovereign powers to alter the apportionment

election.

        131
              Ex. J32, at KC11508.
        132   Compare Ex. J32 at KC11507-10 with Minn. Stat.§ 290.171, Art. IV (1984).

                                                  52
                         c.     Course of Performance after 1983

       Although the Compact's drafting history and the party States' pre-1983 course of

performance are most relevant to our conclusion that the Legislature's 1983 Compact enactment

did not constitute a relinquishment of the State's sovereign power to alter the apportionment

election, the party States' subsequent course of performance is fully consistent with that

conclusion.

       As previously noted, the version of the Compact Minnesota enacted in 1983 omitted

Articles IV(4)-(8) of the Model Compact governing the allocation of nonbusiness income. 133

Despite this alteration of Article IV, the Multistate Tax Commission admitted Minnesota as a full

member ofthe Commission. 134 Perhaps more significantly, the Commission allowed Minnesota

to remain a full member even after it repealed Articles III and IV in 1987. 135 Indeed, then-

Minnesota Commissioner of Revenue John James was Vice-Chair of the Multistate Tax

Commission for fiscal year 1988, and was its Chair for fiscal year 1989. 136

       The Commission has similarly treated other party States that have eliminated or altered the

election. In a 2013 amicus curiae brief filed in the California Supreme Court (supporting the State

of California's claim that-despite its enactment of the Compact in 1974-the State retained

lawful authority to abrogate the apportionment election), the Commission indicated that as of

October 2012,

       133
             Compare Ex. J32 at KC11507-10 with Minn. Stat.§ 290.171, Art. IV (1984).
       134
             Stip., 23; Ex. J40, at 12 (Sixteenth Annual Report, Multistate Tax Commission).
       135
          Stip. ~, 23-24; Ex. J42, at 3 (Annual Report FY11-12, Multistate Tax Commission);
Huddleston Aff. ~ 10; Getschel Aff. ,, 3, 7-8.
       136
             Huddleston Aff. ~ 11; Ex. J41, at 7.

                                                    53
       nine other compact members had enacted a version of the Multistate Tax Compact
       that ... emphasizes the sales factor and does not recognize an Article III.1 election
       [to use the Compact's equally weighted apportionment formula]. Three Compact
       members [including Minnesota] eliminated or limited the election directly. Three.
       amended Article IV to be consistent with their statutory apportionment formula that
       emphasizes the sales factor. And three, like California, indicted by separate statute
       or other guidance that the Compact election does not apply to factor-weighting. 137

The Commission further noted that "[i]n no case has any compact member in any way objected

that such an action was inconsistent with the letter or spirit of the Compact."   138

       The record indicates that the Commission has "never sanctioned or expelled a state that

amended or repealed Articles III and IV. To the contrary, states that repealed Articles III and IV

remained members in good standing with the Multistate Tax Commission." 139 The Commission's

        137
           Ex. 157, at 03891 (footnotes omitted); see also id. at 03896 ("Since 1972, at least ten
additional members, including California, have varied from Articles III.1 and IV by enacting
mandatory apportionment formulae other than the Article IV equally-weighted formula, without
allowing an Article III.1 election.") (footnote omitted).
       138
           Ex. 157, at 03896; see also Huddleston Aff. ,, 6-7 (indicating that neither the MTC nor
any party state ever objected to a repeal of Articles III or IV). In response to a parallel invocation
of the Compact election by IBM in Michigan, three dissenting Justices similarly noted:
       [I]t is plain that the member states did not view strict adherence to Articles III and
       IV as a binding contractual obligation, as Compact members have deviated from
       the Compact's election provision and apportionment formula without objection
       from other members .... Nondeviating members have not pursued actions against
       those states that have deviated, and no member state has intervened on IBM's
       behalf in this case. Further, the Multistate Tax Commission-the organization
       charged with administering the Compact-has urged us to reject IBM's rigid
       interpretation of the Compact. These facts weigh heavily in favor of rejecting
       IBM's argument that the Compact creates a binding contractual obligation on its
       member states to refrain from amending the election provision.
IBM, 852 N.W.2d at 888 (McCormack, J., dissenting) (citation omitted). Because the IBM
majority concluded that the Michigan Legislature had never repealed the Compact, id at 872-77,
and accordingly that "the Compact's election provision remained in effect" for the tax years in
issue, id at 876, the majority had no occasion to consider whether the Compact contractually
obligated Michigan not to alter the election and, more specifically, had no occasion to consider the
party States' course of performance under the Compact.
        139   Huddleston Aff. ,, 8-9.

                                                 54
ongoing acceptance of party States that alter or eliminate the Compact's apportionment election,

and its express and public support of State authority to do so, further evidence the party States'

understanding that the Compact does not contractually require them to refrain from using their

sovereign powers to alter the Compact's apportionment election. 140

               4.      Extrinsic Evidence Conclusion

       Leaving aside application of the unmistakability doctrine, the Compact's silence

concerning the surrender of sovereign power renders it ambiguous as to such surrender.

Considering that at least fourteen States have constitutional provisions prohibiting them from

contracting away their taxing power, it is highly unlikely that the state tax officials and attorneys

general who drafted the Compact intended that party States would surrender their sovereign

authority to alter or repeal the apportionment election. Moreover, the party States' course of

performance indicates that by the time Minnesota enacted section 290.171 in 1983, the Compact

could not reasonably be understood as contractually requiring party states to refrain from using

their sovereign powers to alter the apportionment election. We conclude that extrinsic evidence

independently supports the conclusion that the Legislature's 1983 Compact enactment did not

constitute a relinquishment of the State's sovereign power to alter or repeal the Compact's

apportionment election.

       140
            At some point in time (although on this record we cannot determine exactly when), the
Multistate Tax Commission amended the Compact's preface to indicate that it is "a model law,"
and that it is "not truly a compact in that actions taken under its authority have only an advisory
and/or recommendatory effect on its member states." Ex. 144, at 02415. Although these
statements are further evidence of the Commission's views concerning the effect of the Compact,
we do not rely on them.

                                                 55
       D.      Contracts Clause Claim

       The Contract Clause of the United States Constitution provides that "[n]o state shall ... pass

any ... Law impairing the Obligation of Contracts." U.S. Const. art. I,§ 10, cl. 1. The Minnesota

Constitution likewise provides that "[n]o ... law impairing the obligation of contracts shall be

passed." Minn. Const. art. I, § 11.

       Whether an enactment unconstitutionally impairs a contract is determined by applying a

three prong test. See Energy Reserves Grp., Inc. v. Kansas Power & Light Co., 459 U.S. 400,

411-13 (1983); U.S. Trust Co. v. New Jersey, 431 U.S. 1, 17-22 (1977); Jacobsen v. Anheuser-

Busch, Inc., 392 N.W.2d 868, 872 (Minn. 1986). The threshold question is whether the challenged

law substantially impairs a contractual relationship. Energy Reserves, 459 U.S. at 411. If so, the

State must demonstrate a "significant and legitimate public purpose" for the statute, "such as the

remedying of a broad and general social or economic problem." /d. at 411-12. Finally, if the State

identifies such a purpose, the court must examine whether "the adjustment of the rights and

responsibilities of contracting parties [is based] upon reasonable conditions and [is] of a character

appropriate to the public purpose justifying [the legislation's] adoption." /d. at 412 (alterations in

original) (quoting U.S. Trust Co., 431 U.S. at 22).

       The substantial-impairment inquiry focuses on "the extent to which the law has

contravened the reasonable [contract] expectations of the parties." Lipscomb v. Columbus Mun.

Separate Sch. Dist., 269 F.3d 494, 506 (5th Cir. 2001); see ·also Acton Const. Co. v. Comm 'r of

Revenue, 391 N.W.2d 828, 833 (Minn. 1986); Drewes v. First Nat. Bank of Detroit Lakes, 461

N.W.2d 389, 391 (Minn. App. 1990). Kimberly asserts that by enacting the Compact, Minnesota

"committed to provide multistate taxpayers with the election to apportion under the Compact

unless and until [it] withdrew from the Compact" and, consequently, that taxpayers reasonably

                                                 56
expected "that the Compact's terms w[ould] not be amended on a piecemeal basis." 141 From these

premises, Kimberly concludes that "the 1987 Amendment's attempt to eliminate the Compact
                                                                  142
election [wa]s a substantial impairment of the entire Compact."         We disagree.

       As previously indicated, we have assumed (without deciding) that the Compact is a

contract that created binding obligations. See supra§ V.C.l. Moreover, the Commissioner has

acknowledged, and we agree, that the State was bound to honor the Compact's apportionment

election while Articles III and IV remained in force. 143 See supra§ V.C.2.c. We have concluded,

however that no Compact provision constitutes a clear and unmistakable promise by the State to

refrain from using its sovereign power to alter or repeal the apportionment election contained in

Articles III and IV. See supra § V .C.2.c. Absent such an obligation, taxpayers could have no

reasonable expectation that the Legislature would not alter or eliminate the election.

Consequently, the Legislature's 1987 repeal of Articles III and IV did not substantially impair a

contractual relationship. Energy Reserves, 459 U.S. at 411. We need go no further in the analysis.

See Acton Const., 391 N.W.2d at 833 (so holding).

       For the foregoing reasons, we conclude that Kimberly has failed to carry its heavy burden

to prove beyond a reasonable doubt that the Legislature's 1987 repeal of Articles III and IV was

unconstitutional as a violation of the state and federal contracts clauses. See, e.g., Singer, 817

N.W.2d at 675. Because this ruling fully resolves the matter, we need not address the parties'

remaining contentions.

                                                    B.S.D & T.G.H.

       141
             Kimberly's Mem. Supp. Summ. J. 32.
       142
             Kimberly's Mem. Supp. Summ. J. 32.
       143
             Comm'r's Reply Mem. Supp. Summ. J. 7.

                                               57
TURNER, C.J. (concurring specially)

       I respectfully concur in all but section III of the court's opinion.

       I agree that in enacting the Compact in 1983, Minnesota in no way agreed not to alter or

repeal the three-factor equally weighted apportionment election. I further agree that determination

resolves both Kimberly's Compacts Clause claim and its Contracts Clause claim.

       But I believe a section of an opinion specifically labeled "The Parties' Principal

Contentions" and which purports to reference the parties' briefs in doing so, should recite those

contentions and cite those briefs accurately. The court's opinion does not follow this principle.

For example, the opinion states that appellants contend that the Compact requires Minnesota "to

refrain from exercising its sovereign power to eliminate the apportionment election unless and

until it first withdraws from the Compact." Slip op. at 16 (citing Kimberly's Mem. Supp. Summ. J.

10, 12, 16, 30; Kimberly's Reply Mem. Supp. Summ. J. 1-2, 4); see also slip op. at 16 (claiming

that appellants contend that Minnesota "contractually obligated itself both to furnish the

apportionment election and to refrain from using its sovereign power to repeal the election"). Not

even the careful reader will find any mention on any of the cited pages of the phrase "sovereign

power" or much of anything, for that matter, like the opinion's recitation of Kimberly's

contentions. The opinion goes on to state that appellants "implicitly acknowledg[e] that a State's

contractual surrender of sovereign power normally must be stated in unmistakably clear language."

Slip op. at 16 (citing Kimberly's Mem. Supp. Summ. J. 17; Kimberly's Reply Mem. Supp. Summ.

J. 5, 7; Tr. 100-01, 111). There is no such acknowledgment, implicit or explicit, on any ofthe

cited pages. Indeed, many pages later, the opinion concedes that Kimberly in fact "avoids directly

stating that Minnesota surrendered sovereign power to alter or repeal the [apportionment]

election." Slip op. at 37 n.106.

                                                 58
        I agree wholeheartedly that a court is entitled to "critically evaluat[e] a litigant's

submissions" and to "plainly stat[e] the true import of [the litigant's] arguments." Slip op.

at 37 n.l 06. But in doing so, a court should clearly distinguish between its own editorializing and

the litigant's actual submissions. Because of this opinion's failure to do so, I respectfully decline

to concur in section III.

                                                      J.H.T.

                                                59