SALT 11-3

2 requirements for a stat to tax a company

-nexus -must have link between corporations income an the activities conducted within the state. A state may only tax the portion of income that is fairly attributable to its income-producing activities in that state

Traditional evenly weighted three factor formula

-payroll, sales, property all with even weights

3 approaches for determining amount of corporations taxable income they may tax under constituion

-separate accounting -formulary apportionment -specific allocation

separate accounting

Company isolates taxable income portions attributable to respective states. Attempts to treat income earned in that state as income from a separate entity. \ -Least used method today

Level of generality

how do you define the business? if an aerospace company makes widgets, is it a aerospace company that makes widgets? is it just an aerospace company? is it a manufacturer? this is a big question in determining whether or not a business is unitary and thus subject to apportionment

formulary apportionment

most popular -income apportioned to respective state equals amount of worldwide income under state A law divided by 3 multiplied by the sum of ((sales in state A/worldwide sales) + (payroll in state A/worldwide payroll) + (property in state A/worldwide property))/3 x worldwide income = income apportionable to state. see handout

Container Corp. v. California FTB

see asarco word doc -Good case for how to determine fairness of apportionment formula: internal/external consistency -step 1: is business unitary? -step 2: if yes, is apportionment formula fair and satisfy internal/external consistency tets?

barclays

see asarco word doc.

double throw back

see pg 10-93 if asked about drop shipping

Unitary Business

some identifying elements include: -unity of use and management -concrete relationship between in state and out of state activities -functional integration -centralization of management -economies of scale -substantial mutual interdependence -sharing or exchange of value not capable of precise identification or measurement beyond mere flow of funds arising out of passive investment or distinct business operation

unitary business nonbusiness or investment income

states don't have the right to apportion this income even if unitary business. This would be specifically allocated. Some investment income can be apportioned. see top of pg 10-89

Dock sales

when customer takes delivery at vendor's shipping dock. Some states treat this as sale in that state, others say sale occurred in state where customer took goods.

Exxon corp. v. Wisconsin

word doc

Can company be taxed more or less than 100% of taxable income

yes because states have different apportionment formulas.

underwood typewriter

Sells typewriters and the like. Also fixes them and rents them. main office NYC. All manufacturing is done in CT and has branch offices in other states for sale, repair, or rent of goods, one of which is in CT. Compared tangible personal property and real estate within CT to tangible personal property and real estate outside CT. Took this percentage and applied it to net sales. TP said this violates the 14th amendment because it imposed tax on income arising from out of state boundaries. Said large part of the income was from the manufacturing within the state even if the sale occurred outside of the state. This fact would make it impossible to specifically allocate income and therefore apportionment was used. Lastly, the TP did not prove that the tax imposed by CT was not reasonably attributable to net income within CT. TP loses

UDIPTA definition of sale

all receipts that are not allocated.

MTC reccomendation

allow state to define its own factor weighting but recommended double weighted sales factor

Incidental or occasional sale

excluded from the sale factor is substantial amounts of gross receipts from incidental or occasional sale of a fixed asset used in regular course of business

Throwback Rule

Assigns sale to state in which good was shipped from.

Bass, Ratcliff & Gretton, Limited v. state tax commission

NY had a tax to foreign manufacturing and mercantile companies for the privilege of doing business in the state. This tax was paid in advance and based on preceding year's net income. If corporation isn't fully in the state, the tax is based on income determined by aggregate value of classes of assets in the state compared to total aggregate classes of assets. Classes of assets in formula are: -tangible property -real property -bills and AR resulting from merchandise and services -stock owned in other companies Bass ratcliff gretton is a brewery based in britain. had branch in ny where it imported beer to sell. The preceding year, the company had no income to the united states. However, its income from everywhere it did business was 2 mil and it had classes of assets in ny. TP argued this tax was a tax on income earned outside borders of NY. Court said TP is unitary business and therefore income earned was partly do to the sale within the state. Furthermore, the apportionment formula used is not arbitrary. TP loses

Arm's length sales price

theoretical price at which one portion of the company would sell to another portion. Ex. If company manufactures in state A and sells to customers in B, need to determine price at which A would sell to unrelated 3rd party in order to determine what its income would be. see issues with this on pg -41 -administratively impractical -expensive -usually ignores transfer of value in businesses that have inegration and synergistic processes. see pg

Do states have right to apportion

Yes if the company has taxable income from activities within and out of state. A corporation is taxable in another state if: -it is subject in that state to net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or corporate stock tax or -that state has jurisdiction to subject tp to net income tax regardless of whether or not the state exercises that jurisdiction.

Northwestern States Portland Cement v. Minnesota

1. Net income from the exclusively 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. Pp. 358 U. S. 452-465. 2. In each of these two cases, a State imposed on a foreign corporation an income tax computed at a nondiscriminatory rate on that portion of the net income from the corporation's interstate business which was reasonably attributable to its business activities within the State. In each case, the corporation had within the taxing State an office and one or more salesmen who actively solicited within the State orders for the purchase of the corporation's products, which orders were accepted at, and filled from, the corporation's head office in another State. In neither case was any question raised as to the reasonableness of the apportionment of net income nor as to the amount of the final assessment made. Held: These taxes did not violate either the Commerce Clause or the Due Process Clause of the Federal Constitution. Pp. 358 U. S. 452-465. (a) The entire net income of a corporation, generated by interstate as well as intrastate activities, may be fairly apportioned among the States for tax purposes by formulas utilizing in-state aspects of interstate affairs. Pp. 358 U. S. 459-461. (b) The state taxes here involved are not regulations of interstate commerce in any sense of that term; they do not discriminate against or subject interstate commerce to an undue burden; and they are not levied on the privilege of engaging in interstate commerce. Pp. 358 U. S. 461-462. (c) There is no showing here that the formula applied by the State in determining the portion of the taxpayer's total income attributable to activities within the State will subject interstate Page 358 U. S. 451 commerce to multiple taxation or require it to bear more than its fair share of the tax burden. Pp. 358 U. S. 462-463. (d) Since each of the taxes here involved is based only upon the net profits earned within the taxing State, the State has utilized a valid "constitutional channel" to "make interstate commerce pay its way." Spector Motor Service v. O'Connor, 340 U. S. 602, distinguished. Pp. 358 U. S. 463-464. (e) The taxes here involved do not violate the Due Process Clause, since they are levied only on that portion of the taxpayer's net income which arises from its activities within the taxing State and those activities form a sufficient "nexus" to satisfy due process requirements. Pp. 358 U. S. 464-465. Page 358 U. S. 452 250 Minn. 32, 84 N.W.2d 373, affirmed. 213 Ga. 713, 101 S.E.2d 197, reversed. NOTE: This case was before PL 86-272. PL 86-272 was enacted 7 months later.

types of nexus

4 types of income tax nexus Physical presence: office employees in the state Inventory in the state going to trade shows Everything other than what's protected in Public Law Agency nexus When there's 3rd party contractor that works in a state on behalf of corporation. Creates nexus. Affiliate nexus Related companies - parent/sub companies E.g. wrigley gum sub-Company that produces gum in wisconsin Brother-sister company sells the gum in every state These companies are affiliates of Wrigley Economic Nexus Companies could be liable for income tax when they're not physically present in the state Jeffrey case Jeffrey the giraffe / toys r us are intangibles that are physically present in the state. Lead to economic nexus

What must separate accounting show in order to be valid

?

Moorman v. bair

An Iowa statute prescribes a so-called single factor sales formula for apportioning an interstate corporation's income for state income tax purposes. Under this formula, the part of income from such a corporation's sale of tangible personal property attributable to business within the State, and hence subject to the state income tax, is deemed to be in that proportion which the corporation's gross sales made within the State bear to its total gross sales. Appellant, an Illinois corporation that sells animal feed it manufactures in Illinois to Iowa customers through Iowa salesmen and warehouses, brought an action in an Iowa court challenging the constitutionality of the single factor formula. The trial court held the formula invalid under the Due Process Clause of the Fourteenth Amendment and the Commerce Clause, but the Iowa Supreme Court reversed. Held: 1. Iowa's single factor formula is not invalid under the Due Process Clause. Pp. 437 U. S. 271-275. (a) Any assumption that at least some portion of appellant's income from Iowa sales was generated by Illinois activities is too speculative to support a claim that Iowa in fact taxed profits not attributable to activities within the State. P. 437 U. S. 272. (b) An apportionment formula, such as the single factor formula, that is necessarily employed as a rough approximation of a corporation's income reasonably related to the activities conducted within the taxing State will only be disturbed when the taxpayer has proved by "clear and cogent evidence" that the income attributed to the State is in fact "out of all reasonable proportion to the business transacted . . . in that State," Hans Rees' Sons v. North Carolina ex rel. Maxwell, 283 U. S. 123, 283 U. S. 135, or has "led to a grossly distorted result," Norfolk & Western R. Co. v. State Tax Comm'n, 390 U. S. 317, 390 U. S. 326. Here, the Iowa statute afforded appellant an opportunity to demonstrate that the single factor formula produced an arbitrary result in its case, but the record contains no such showing. Pp. 437 U. S. 272-275. 2. Nor is Iowa's single factor formula invalid under the Commerce Clause. Pp. 437 U. S. 276-281. Page 437 U. S. 268 (a) On this record, the existence of duplicative taxation as between Iowa and Illinois (which uses the so-called three factor -- property, payroll, and sales -- formula) is speculative, but even then assuming some overlap, appellant's argument that Iowa, rather than Illinois, was necessarily at fault in a constitutional sense cannot be accepted. Where the record does not reveal the sources of appellant's profits, its Commerce Clause claim cannot rest on the premise that profits earned in Illinois were included in its Iowa taxable income, and therefore the Iowa formula was at fault for whatever overlap may have existed. Pp. 437 U. S. 276-277. (b) The Commerce Clause itself, without implementing legislation by Congress, does not require, as appellant urges, that Iowa compute corporate net income under the Illinois three factor formula. If the Constitution were read to mandate a prohibition against any overlap in the computation of taxable income by the States, the consequences would extend far beyond this particular case, and would require extensive judicial lawmaking. Pp. 437 U. S. 277-281.

mobil oil v. vermont (if unitary, income such as dividends are no automatically allocated to commercial domicile)

Appellant is a corporation organized under the laws of New York, where it has its principal place of business and its "commercial domicile." It does business in many States, including Vermont, where it engages in the wholesale and retail marketing of petroleum products. Vermont imposed a corporate income tax, calculated by means of an apportionment formula, upon "foreign source" dividend income received by appellant from its subsidiaries and affiliates doing business abroad. Appellant challenged the tax on the grounds, inter alia, that it violated the Due Process Clause of the Fourteenth Amendment and the Commerce Clause, but the tax ultimately was upheld by the Vermont Supreme Court. Held: 1. The tax does not violate the Due Process Clause. There is a sufficient "nexus" between Vermont and appellant to justify the tax, and neither the "foreign source" of the income in question nor the fact that it was received in the form of dividends from subsidiaries and affiliates precludes its taxability. Appellant failed to establish that its subsidiaries and affiliates engage in business activities unrelated to its sale of petroleum products in Vermont, and accordingly it has failed to sustain its burden of proving that its "foreign source" dividends are exempt, as a matter of due process, from fairly apportioned income taxation by Vermont. Pp. 445 U. S. 436-442. 2. Nor does the tax violate the Commerce Clause. Pp. 445 U. S. 442-449. (a) The tax does not impose a burden on interstate commerce by virtue of its effect relative to appellant's income tax liability in other States. Assuming that New York, the State of "commercial domicile," has the authority to impose some tax on appellant's dividend income, there is no reason why that power should be exclusive when the dividends reflect income from a unitary business, part of which is conducted in other States. The income bears relation to benefits and privileges conferred by several States, and, in these circumstances, apportionment, rather than allocation, is ordinarily the accepted method of taxation. Vermont's interest in taxing a proportionate share of appellant's dividend Page 445 U. S. 426 income thus is not overridden by any interest of the State of "commercial domicile." Pp. 445 U. S. 443-446. (b) Nor does the tax impose a burden on foreign commerce. Appellant's argument that the risk of multiple taxation abroad requires allocation of "foreign source" income to a single situs at home, is without merit in the present context. That argument attempts to focus attention on the effect of foreign taxation when the effect of domestic taxation is the only real issue; its logic is not limited to dividend income, but would apply to any income arguably earned from foreign commerce, so that acceptance of the argument would make it difficult for state taxing authorities to determine whether income does or does not have a foreign source; the argument underestimates this Court's power to correct discriminatory taxation of foreign commerce that results from multiple state taxation; and its acceptance would not guarantee a lesser domestic tax burden on dividend income from foreign sources. Japan Line, Ltd. v. County of Los Angeles, 441 U. S. 434, which concerned property taxation of instrumentalities of foreign commerce, does not provide an analogy for this case. Pp. 445 U. S. 446-449. 136 Vt. 545, 394 A.2d 1147, affirmed. BLACKMUN, J., delivered the opinion of the Court, in which BURGER, C.J., and BRENNAN, WHITE, POWELL, and REHNQUIST, JJ., joined. STEVENS, J., filed a dissenting opinion, post, p. 445 U. S. 449. STEWART and MARSHALL, JJ., took no part in the consideration or decision of the case. Page 445 U. S. 427 Basically, the dividends were from subsidiaries that were part of the unitary business. The dividends were RELATED to petroleum activities and therefore not truly nonbusiness income unrelated to business activities within the state. Furthermore, because the dividends were related to activities, VT should have the right to apportion because Mobil is using resources from the state to generate some of that income. Simply put, the dividends were coming from foreign subsidiaries that were PART OF THE UNITARY BUSINESS AND THUS RELATED TO ACTIVITIES IN VT.

FW Woolworth v. New Mexico (mere potential not enough to treat as unitary)

Basically, NY chainstore has branches all over. They also have foreign subsidiaries in which they received dividend income. One branch is in New Mexico. New Mexico tried to say the dividend income from foreign subs was apportionable to New Mexico. Also, they never reported "Gross Up" income from foreign subs because they never actually received it but federal govt deemed it to have received for purposes of calculating foreign tax credit. Held that NM apportionment scheme does not meet due process standards. Court says although FW has majority stock ownership in subs and therefore the potential to control them and treat as integrated business, mere potential isn't enough to deem unitary. Here, the dividend income is from unrelated, distinct enterprise. For purposes of due process, the income attributable to the state must be rationally related to values connecting with the taxing state. This is not met just because a NONDOMICILIARY parent derives economic benefit from its ownership in stock of another corp All activities, advertising, warehousing, purchasing, etc were not FUNCTIONALLY INTEGRATED. And except for the type of occasional oversight -- with respect to capital structure, major debt, and dividends -- that any parent gives to an investment in a subsidiary, there was little or no integration of business activities or centralization of management. Thus, the subsidiaries were not a part of a "unitary business."

When is the throwback rule triggered

If Corporation is not taxed in destination state. A corp is subject to taxation in destination state if: -it is subject to a net income tax, a franchise tax measured by income, franchise tax for privilege of doing business, or a corporate stock tax or the destination state has jurisdiction to subject the taxpayer to a net income tax, regardless of whether or not it is levied. IF any of thee conditions apply, there is no throwback rule.

Heavy weighted sales factor

Most states use a heavy weighted sales factor today. 2 most common are double weighted sales or to use only sales as a factor

asarco inc. v. idaho state tax commission

Syllabus Held: The State of Idaho may not constitutionally include within the taxable income of appellant nondomiciliary parent corporation doing some business (primarily silver mining) in the State a portion of intangible income (dividends, interest payments, and capital gains from the sale of stock) that appellant received from subsidiary corporations having no other connection with the State. Pp. 458 U. S. 315-330. (a) As a general principle, a State may not tax value earned outside its borders. "[T]he linchpin of apportionability in the field of state income taxation is the unitary business principle." Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U. S. 425, 445 U. S. 439; Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U. S. 207, 447 U. S. 223. Pp. 458 U. S. 315-320. (b) Here, based on the findings in the state trial court and the undisputed facts, appellant succeeded in proving that no unitary business relationship existed between appellant and its subsidiaries. Pp. 458 U. S. 320-324. (c) To have, as Idaho proposes, corporate purpose define unitary business -- i.e., to consider intangible income as part of a unitary business if the intangible property (shares of stock) is "acquired, managed or disposed of for purposes relating or contributing to the taxpayer's business" -- would destroy the concept of unitary business. Such a definition, which would permit nondomiciliary States to apportion and tax dividends "[w]here the business activities of the dividend payor have nothing to do with the activities of the recipient in the taxing State," Mobil Oil Corp., supra, at 445 U. S. 442, cannot be accepted consistently with recognized due process standards. While the dividend-paying subsidiaries in this case "ad[d] to the riches" of appellant, Wallace v. Hines, 253 U. S. 66, 253 U. S. 70 (1920), they are "discrete business enterprise[s]" that, in "any business or economic sense," have "nothing to do with the activities" of appellant in Idaho. Mobil Oil Corp., supra, at 445 U. S. 439-442. Therefore, there is no "rational relationship between [appellant's dividend] income attributed to the State and the intrastate values of the enterprise." Mobil Oil Corp., supra, at 445 U. S. 437. The Due Process Clause bars Idaho's effort to levy upon income that is not properly within the reach of its taxing power. Pp. 458 U. S. 325-329. (d) Under the same unitary business standard applied to the dividend income in question, Idaho's attempt to tax the interest and capital gains Page 458 U. S. 308 income derived from its subsidiaries also violates the Due Process Clause. Pp. 458 U. S. 329-330. 102 Idaho 38, 624 P.2d 946, reversed. Essentially, Idaho tried to do what VT did in the mobil case. However, there was a key difference: Idaho could not establish that ASARCO, parent company, and subsidiary companies were a unitary business. ASARCO held stock in these companies in which they received dividends and cap gains. However, there was no other real business relationship. The only questionable relationship was the fact that ASARCO and subs were both in business of precious metals and such and ASARCO purchased, at market rates, goods from its subs on occasion. ASK WHY IN REVIEW

Payroll Factor

UDIPTA defines compensation for purposes of payroll factor as wages, salaries, commissions, and any other form of remuneration paid to employees for personal services some states do not include officer compensation because it distorts %

Property Factor

UDIPTA provides that property factor is a fraction, numerator is the average value of tp real and tangible property owned or rented and used in the state during the tax period and the denominator is average value of all the tp real and tangible property owned or rented used during the tax period. -Property is valued at its original cost. Rented property is valued at 8 times the net annual rent rate.

More on Wrigley

Wisconsin believed that the presence of Wrigley in the state was enough to call for a franchise tax. The state believed that Wrigley was not afforded protection under Public Law 86-272, because it violated solicitation by the following practices: Recruitment, training, and evaluation of sales employees by regional manager Intervention in credit disputes by regional manager Use of hotel rooms and homes for sales meetings Replacement of stale gum at no cost to retailer "Agency stock checks" — billing of retailer for gum supplied from in-state inventory to fill display racks Storage of gum in sales representatives' homes or in rented space

Does tp have right to prove a state's apportionment formula has produced a distorted result?

Yes: Must prove with clear and cogent evidence that the formula produces a result out of all proportion to its activities in the state. Another way to prove distortion is to argue that the factors do not properly reflect the way the income was generated.

Operating more than one unitary business

a corporation may conduct more than 1 unitary business, each one independent of and unrelated to the other so state should only take into account for taxable base of apportionment the factors of each respective unitary business separately from each other.

Unitary Business Principle

A. Functional Integration B. Centralization of Management C. Economies of Scale In order for a state to tax out of state income the state must prove that the activities that generated the out of state income are related to in state activities. Relationship is satisfied if activities are integrated, interdependent, or synergistic. Income from unitary business is apportionable income

Griffith v. ConAgra

CA foods wholly owned conagra. CA foods transfered trademarks and trade names to conagra and agreed, through a licensing deal, to pay conagra for the use. Conagra brand acquired additional trademarks and tradenames from unrelated entities. Conagra did not manufacture the foods, all it did was maintain ownership of trademarks and tradenames. Those who licensed the trademarks and tradenames from Conagra did sell to wholesalers based in WV upon whom conagra collected royalties. Furthermore, all licensees of conagra that sold to these wholesalers in WV, manufactured goods outside of the state of WV. Furthermore, they had no retail stores in WV. Tax commissioner tried to use mbna as precedent and also said complete auto prong of substantial nexus should be substantial economic nexus. MBNA is not a good comparison because MBNA there was solicitation whereas in this case there was no solicitation. In the hill decision, the foreign manufactuer had nexus because its american distributor was its wholly owned sub and as a result it was a shell company. Thus, the foreign manufacturer could halt distribution at any time. Conagra is not a shell company. Court held there was no purposeful direction in the due process clause or substantial economic nexus in the commerce clause where there was no physical presence.

Specific Allocation

Can allocate income fully to specific state. Nonbusiness income is allocable. Is business income? nonbusiness allocable to tp commercial domicile or for nonbusiness rents of real property allocable to state in which property located. General rule of thumb is income is allocable to state that is source of income. -Anything that can be specifically allocated is not part of the apoortionment tax base. -states vary in the way they apportion and specifically allocate -intangibles are hard to identify the source state. Some states say it is part of the person so it is in the state that the person resides. Others say where intangible initially produced.

Hunt-Wesson v. FTB of California

Facts of the case California's "unitary business" income-calculation system for determining the State's taxable share of a multistate corporation's business income authorizes a deduction for interest expense. The system, however, permits use of that deduction only to the extent that the amount exceeds certain out-of-state income arising from the unrelated business activity of a discrete business enterprise. Hunt-Wesson, Inc. is a successor in interest to a nondomiciliary corporation that incurred interest expense. California disallowed a deduction for the expense insofar as it had received nonunitary dividend and interest income. Hunt-Wesson challenged the validity of the disallowance. The California Court of Appeal found the disallowance constitutional. The California Supreme Court denied review. Question Does California's exception to its interest expense deduction, which it measures by the amount of nonunitary dividend and interest income that a nondomiciliary corporation has received, violate the Due Process and Commerce Clauses? Conclusion Sort: by seniority by ideology UNANIMOUS DECISION FOR HUNT-WESSON, Yes. In a unanimous opinion delivered by Justice Stephen G. Breyer, the Court held that the provision violates the Due Process and Commerce Clauses. "California's statute does not directly impose a tax on nonunitary income. Rather, it simply denies the taxpayer use of a portion of a deduction from unitary income..., income which does bear a 'rational relationship' or 'nexus' to California," wrote Justice Breyer. "Because California's offset provision is not a reasonable allocation of expense deductions to the income that the expense generates, it constitutes impermissible taxation of income outside its jurisdictional reach," concluded Justice Breyer.

MeadWestco v. Illinois (good flow of value test)

Facts of the case MeadWestvaco, an Ohio company, sold its lucrative Lexis/Nexis division for a $1 billion profit in 1994. Illinois attempted to claim a portion of that profit when collecting taxes from MeadWestvaco for doing business in the state. Illinois argued that Lexis/Nexis was an "operational" part of Mead's business and therefore subject to taxation outside Mead's home state. Mead countered that Lexis/Nexis was merely an "investment," whose sale was immune from taxation from outside jurisdictions. The trial court found that the division was key to Mead's operations, and therefore taxable, and the Illinois Appellate Court agreed. Question Under the governing Supreme Court precedent, Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768 (1992), may a parent company use a division as a non-taxable investment when the division is involved in a substantially different business segment but the parent provides cash infusions, investment advice and oversight? Conclusion unanimous decision The Court sent the case back to the state appellate court holding that the court had previously applied the wrong test in defining the relationship between Lexis/Nexis and Meadwestvaco. Writing for seven of his colleagues, Justice Samuel A. Alito said that the appellate court, rather than applying an "operational function" test, should have looked for the existence of "functional integration, centralized management and economies of scale" between the two companies to determine whether or not they were a unitary business for tax purposes. Justice Clarence Thomas wrote a concurring opinion arguing that the Court should refuse jurisdiction over such state tax cases.

Butler Bros v McColgan

In Butler Bros. v. McColgan (1942) 315 U.S. 501, the taxpayer based its constitutional argument upon the premise that California was taxing extraterritorial values. In upholding the California law the court made these pertinent comments: "We read the statute as calling for a method of allocation which is 'fairly calculated' to assign to California that portion of the net income 'reasonably attributable' to the business done there. The test, not here challenged, which has been reflected in prior decisions of this Court, is certainly not more exacting. Hence, if the formula which was employed meets those standards, any constitutional question arising under the Fourteenth Amendment is at an end . . . . para. We cannot say that property, pay roll, and sales are inappropriate ingredients of an apportionment formula. We agree with the Supreme Court of California that these factors may properly be deemed to reflect 'the relative contribution of the activities in the various states to the production of the total unitary income,' so as to allocate to California its just proportion of the profits earned by appellant from this unitary business." (315 U.S. at pp. 506-507, 509.) Basically says 3 factors in 3 factor formula are okay for California to use.

west virgina v. mbna (physical presence not necessary for corporate income tax)

In the case of Tax Commissioner v. MBNA America Bank, the West Virginia Supreme Court of Appeals ruled that the state could force MBNA to pay corporate tax even though MBNA was a Delaware-based corporation with no property or employees in West Virginia. MBNA did have numerous customers in West Virginia who held MBNA credit cards and it drew over $10 million in gross receipts per year from its West Virginia customers. MBNA challenged the tax assessment, claiming that the Commerce Clause required a physical presence (which it did not have) before a state could require it to pay tax. The MBNA case is the latest in a long list of cases where state courts have decided what types of presence are required for a state to assert nexus to tax under the Commerce Clause. There are two competing views of nexus: • Physical presence: a state can assert nexus if a company has a real, tangible investment in a state (such as a plant, office, equipment, or employees) • Economic presence: a state can assert nexus if a company has customers in a state from which the company derives income What is most troubling about the MBNA case is the court's reasoning. At one point, the court defends its adoption of economic presence by noting that: "we believe that the...physical-presence test, articulated in 1967, makes little sense in today's world. In the previous almost forty years, business practices have changed dramatically. When Bellas Hess was decided, it was generally necessary that an entity have a physical presence of some sort, such as a warehouse, office, or salesperson, in a state in order to generate substantial business in that state. This is no longer true. The development and proliferation of communication technology exhibited, for example, by the growth of electronic commerce now makes it possible for an entity to have a significant economic presence in a state absent any physical presence there. For this reason, we believe that the mechanical application of a physical-presence standard to franchise and income taxes is a poor measuring stick of an entity's true nexus with a state." To summarize: the West Virginia Supreme Court of Appeals thinks that the physical presence test is defective because it was articulated at a time when goods were produced and sold more locally, and since our modern economy features truly global production and sales the test is now an inappropriate way to measure business activity. The big takeaway from this case is that due process was met by mere solicitation, and commerce clause was met because this court said physical presence is not necessary today. Back in the day when there was no electricity it made sense. Today with all the innovation, economic nexus is just fine to satisfy commerce clause. There was solicitation in the state. For an intangible, no protection under pl 86-272

allied signal v. division (good case on nondomiciliary income states can tax)

RULE: Among the limitations the Constitution sets on the power of a single state to tax the multistate income of a nondomiciliary corporation are these: There must be a minimal connection between the interstate activities and the taxing state, and there must be a rational relation between the income attributed to the taxing state and the intrastate value of the corporate business. A state need not attempt to isolate the intrastate income-producing activities from the rest of the business; it may tax an apportioned sum of the corporation's multistate business if the business is unitary. A state may not tax a nondomiciliary corporation's income, however, if it is derived from unrelated business activity which constitutes a discrete business enterprise. FACTS: Petitioner, a corporate taxpayer, incorporated in Delaware and having headquarters in Michigan, sold some stock in a mining company headquartered in New York and realized a gain of $211.5 million. The state of New Jersey, where the taxpayer built aerospace products, collected income tax on an apportioned share of that amount. The corporate taxpayer sued the state of New Jersey seeking a refund of state corporate income tax that it had paid. The trial court found that New Jersey could apportion for tax purposes the gain the taxpayer realized on a sale of stock in another company, which the Supreme Court of New Jersey upheld the judgment in favor of Respondent taxation director. Petitioner sought certiorari review. ISSUE: Was the State correct when it taxed the nondomiciliary corporation's income even if it is derived from unrelated business activity that constituted a discrete business enterprise? ANSWER: No CONCLUSION: The United States Supreme Court found that, under the agreed-upon facts, New Jersey was not permitted to include the gain realized on the sale of the stock in the taxpayer's apportionable tax base because the two companies were not part of one unitary business. The Court found that the taxpayer and the mining company had no functional integration, no centralization of management, and no economies of scale; instead, the purchase and sale of the stock represented only an investment function, not an operational function, and there was no connection between the activity and the taxing state.

geoferry v. south carolina

RULE: The taxpayer need not have a tangible, physical presence in a state for income to be taxable there. The presence of intangible property alone is sufficient to establish nexus. FACTS: Geoffrey, Inc. (Geoffrey) received royalty payments based upon sales made in South Carolina from a licensee that did business in South Carolina. South Carolina required appellant to pay income tax on the royalty income, and a corporate license fee. Geoffrey paid the taxes under protest and filed an action for a refund. The trial court upheld the assessment of taxes. Geoffrey sought review and maintained that the Due Process Clause, U.S. Const. amend. XIV, § 1, and the Commerce Clause, U.S. Const. art. I, § 8, cl. 3, prohibited the taxation of its royalty income. ISSUE: Did the trial court err in ordering Geoffrey to pay South Carolina income tax and business license fees? ANSWER: No CONCLUSION: The court found that Geoffrey had the minimum connection with the state that was required by due process because it licensed intangibles for use in the state and received income in exchange for their use, and had intangible property in the state. Further, South Carolina had conferred benefits upon Geoffrey to which the challenged tax was rationally related. The Due Process Clause therefore did not prohibit South Carolina's taxation of appellant's royalty income. Also, the court found that the challenged taxation was permitted under the Commerce Clause. The judgment of the trial court was thus affirmed.

Sales Factor

Receipts from sale of tangible property are included in numerator of s state's sales factor if the property is delivered or shipped to a purchaser, other than the united states, in the state, regardless of fob point or other conditions of the sale. -nearly every state employs the destination principle: receipts from sale of goods shipped or delivered to customers in taxing state will be included in the numerator. On the sale to a distributor or wholesaler, this rule would assign all receipts to here the goods were delivered, and not where goods are ultimately used. So if company in State A sells goods to citizen of State B, state B includes the receipts of the sale in their sales factor?

Wisconsin v. Wrigley (1992)

SCOTUS addressed what solicitation is 1. Any form of advertising 2. Carrying samples and promotional materials for display or distribution without charge 3. Passing inquiries or complaints to the home office 4. Checking customer's inventory for reorder 5. Maintaining a sample room for 2 weeks or less (trade show rule) 6. Recruiting, training, and evaluating salespeople using homes or hotels 7. Owning or furnishing personal property and autos used in sales activities In Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992), the Court determined that activities such as replacing stale chewing gum at no cost to retailers, completing "agency stock checks," and storing gum in gum racks in the state were not covered under P.L. 86-272 because they served an independent business purpose and were, therefore, not completely ancillary to the solicitation of orders. Wrigley, 505 U.S. at 233. The Court determined that replacing stale gum with fresh gum was an activity Wrigley would complete whether or not it employed a sales force, and therefore, had an independent business purpose for those actions. The agency stock checks, where sales representatives helped retailers display Wrigley gum and refilled retailers' gum inventory with gum on hand, was not within the scope of the solicitation of orders because the retailers were billed for the gum. If the sales representatives had merely helped the retailers display the gum, the activity might not have had an independent business purpose. Finally, the Court concluded that the majority of gum stored in the state was used to replace stale gum or fulfill agency stock checks and was therefore not ancillary to soliciting orders. The Court also determined that these activities, taken together, were not de minimis because "they constituted a nontrivial additional connection with the state." It concluded that Wrigley could be taxed by the state of Wisconsin as its activities were not protected by P.L. 86-272.In Wrigley, the Supreme Court adopted an earlier New York decision, holding that for purposes of Subsection (a)(2) of P.L. 86-272, "advice to retailers on the art of displaying goods to the public can hardly be more thoroughly solicitation ...".

Scioto Ins. v. Oklahoma

Scioto is insurance company based in VT. Oklahoma states the amount of money Scioto receives for use of intell. prop. is based on a percentage of the gross sales of Wendy's restaurants in Oklahoma. -Scioto states it is not a restaurant business and has no say where wendys has locations, including Oklahoma. Furthermore, Scioto does not provide insurance to anyone in Oklahoma. Scioto admits it does derive income from licensing out intell. property but points out the licensing agreement is with wendy's international, not individual wendys of Oklahoma. Wendys then licenses individual wendys of oklahoma who pay 4% to wendys international. Wendys international then pays Scioto 3%. Wendys paying Scioto 3% is not dependent on wendys getting paid by Individual wendys of OK. Wendys has to pay Scioto regardless. Wendys deducts these payments made to Scioto. As a result, OK tried to chase down the payments across state lines by taxing Scioto, who had no connection with the state because the licensing agreement beween wendys international and scioto was not made in OK an Scioto did no business in OK. The only connection they had was an oklahoma tp, wendys international, made payments to Scioto. Court ruled this was not grounds to tax Scioto and violated due process. Dissent: basically states that Scioto was responsible for insurance to wendys and affiliates. Scioto is also a sub of wendys. Scioto is essentially responsible for maintaining ownership intell. prop. of wendys. By licensing out the property to wendys, wendys was able to use it for a profit. As a result, there was a direct economic impact between the intellectual property used and every hamburger sold. This had a direct economic impact on Scioto. The intellectual property was placed in OK market, and generated economic value from such activities. This dissent is basically forshadowing of economic nexus in state corporate income tax

Hans Rees' Sons, Incorporated v. North Carolina (internal/external consistency problems)

TP said tax levied was unreasonable, arbitrary, and violated commerce clause. Case got kicked up to Supreme court. Petitioner showed in state income for years in questions was 17%. Assessments for years in question hovered around 66-85%. NC said TP tried to individualize its business. NC saw them as a unitary business, one that buys leather hides, tans them (manufactures them), distributes them to NY where they are sold to customers. As such, all parts were taken into account. Buying selling and manufacturing components were all part of a single unit and the taxpayer payer tried to individualize each to put some of the income out of NC jurisdictional reach to tax. Supreme court looked to underwood and bass. They said in those cases, the full income wasn't apportioned to the state just because they were unitary. Rather, those states used a fair apportionment formula. The point of the apportionment formula is to reach or was meant to reach the income WITHIN the state. Furthermore, in these cases, TP failed to offer evidence that apportionment wasn't fair. Court says viewing unitary business as one business completely within state in order to tax the entire net income is erroneous. The correct way to view it is to capture the portion of each part of the unitary business attributable to that state's borders. TP also said buying raw materials is incident to manufacturing. TP wins

Kraft General Foods v. Iowa

The Iowa statute that imposes a business tax on corporations uses the federal tax code's definition of "net income" with certain adjustments. Like the federal scheme, Iowa allows corporations to take a deduction for dividends received from domestic, but not foreign, subsidiaries. However, unlike the federal scheme, Iowa does not allow a credit for taxes paid to foreign countries. Petitioner Kraft General Foods, Inc., a unitary business with operations in the United States and several foreign countries, deducted its foreign subsidiary dividends from its taxable income on its 1981 Iowa return, notwithstanding the contrary provisions of Iowa law. Respondent Iowa Department of Revenue and Finance (Iowa) assessed a deficiency, which Kraft challenged in administrative proceedings and subsequently in Iowa courts. The Iowa Supreme Court rejected Kraft's argument that the disparate treatment of domestic and foreign subsidiary dividends violated the Commerce Clause of the Federal Constitution, holding that Kraft failed to demonstrate that the taxing scheme gave Iowa businesses a commercial advantage over foreign commerce. Held: The Iowa statute facially discriminates against foreign commerce in violation of the Foreign Commerce Clause. It is indisputable that the statute treats dividends received from foreign subsidiaries less favorably than those received from domestic subsidiaries by including the former, but not the latter, in taxable income. None of the several arguments made by Iowa and its amici-that, since a corporation's domicile does not necessarily establish that it is engaged in either foreign or domestic commerce, the disparate treatment is not discrimination based on the business activity's location or nature; that a taxpayer can avoid the discrimination by changing a subsidiary's domicile from a foreign to a domestic location; that the statute does not treat Iowa subsidiaries more favorably than those located elsewhere; that the benefit to domestic subsidiaries might be offset by the taxes imposed on them by other States and the Federal Government; and that the statute is intended to promote administrative convenience rather than economic protectionism-justifies Iowa's differential treatment of foreign commerce. Pp.75-82. 465 N. W. 2d 664, reversed and remanded.

KFC v. Iowa

The KFC case involved an assertion by the Iowa Department of Revenue that KFC was responsible for paying corporate income tax in the state based only on its receipt of royalties from franchisees in the state. In June 2009, an Iowa District Court supported the state's imposition of tax, and KFC appealed the decision to the Iowa Supreme Court. On 12/30/2010, the Iowa Supreme Court asserted that out-of-state franchisors with franchisees in the state ARE subject to Iowa corporate income tax even though the franchisors do not have a physical presence in the state. The court held that the State of Iowa has the authority to impose its corporate income tax on franchisors based solely on the use of their intangibles by franchisees located in the state. KFC argued to the Iowa Supreme Court that the department's assessment of tax violated the Commerce Clause of the U.S. Constitution. KFC pointed out that the Commerce Clause required that a taxpayer have a physical presence in a state before the state could require the taxpayer to collect and remit the state's sales and use taxes. The department of revenue disagreed with KFC's position, arguing that the state could impose its corporate income tax on KFC regardless of KFC's physical presence in the state. The department of revenue argued that the physical presence test should not be applicable to the state's corporate income tax. Based on its review of the applicable authority, the Iowa Supreme court came to two important conclusions. First, the court held that the U.S. Supreme Court would likely find that the intangibles that KFC licensed to its Iowa franchisees would be regarded as having a sufficient connection to Iowa to amount to the functional equivalent of 'physical presence. Second, the court held that the physical-presence standard does not apply to Iowa's corporate income tax. The court noted that physical presence is not required under the dormant Commerce Clause of the United States Constitution in order for the Iowa legislature to impose an income tax on revenue earned by an out-of-state corporation arising from the use of its intangibles by franchisees located with the State of Iowa. The court therefore affirmed the district court's decision, noting that by licensing franchises within Iowa, KFC has received the benefit of an orderly society within the state and, as a result, is subject to the payment of income taxes that otherwise meet the requirements of the dormant Commerce Clause.

Throwout Rule

a tp that is not subject to tax in another state excludes sales in that state from the apportionment formula in both the numerator and denominator. mostly applied to sales factor but can be applied to payroll or propery

Geofferry

Wholly owned sub of toys-r-us incorporated in DE. No offices, EE, or tangible property in SC. Geofferrry owned tradenames, trademarks, merchandising skills, techniques, and "know-how" in connection with marketing, promotion, advertising, and sale of products. It licensed all this to toys-r-us in exchange for 1% of net sales of toys-r-us or any affiliates, associated, or sub companies. Royalty made annually. When toys-r-us started doing business in SC, they deducted this royalty payment on their return. SC dissallowed, then later allowed with the position that they can tax the royalty income of Geoferry and also Geo was to pay a corporate license fee to SC. SC says they are allowed to tax foreign companies engaging in business, transacting, conducting business, or having income within the state. GEO says under commerce and due process, SC isn't allowed to tax their royalty income. Nexus can be established if there is no physical presence if the company PURPOSEFULLY directs its activities to the state's economic forum. GEO argue they did not PURPOSEFULLY direct their activities to SC economic forum. Geo elaborates and says, upon initial agreement they had no stores in SC and the subsequent building of SC locations was a unilateral decision by toys-r-us and therefore can't draw a minimum link between Geo and SC. SC argues they did purposefully direct activities into SC because they had to approve the licensing to stores in SC. Furthermore, the minimum connection of due process is satisfied by the mere fact Geo's intangibles are in the state of SC. They try to say Intangibles are only in domiciled or incorporated state. However, SC brings up mobil oil and says there is no single situs. SC says all 4 prongs of complete auto transit are met and physical presence is outdated. TP loses.

Summary of apportionment and specific allocation

corporations bifurcate income into business and nonbusiness. business uses apportionment in states where nexus exists and nonbusiness is specifically allocated.

Tests that apportionment formula is required to satisfy

must be fair. can't be inherently or intrinsically arbitrary. -internally consistent: if applied in every jurisdiction, it would result in no more than all of the unitary business' income being taxed -externally consistent: factors or factors in formula must actually reflect a reasonable sense of how income is generated.

Summary of throback v. throwout

pg 10-93: if a corporation in State A ships goods to state B where pl 86-272 immunizes corporation from tax, the throwback rule would make those sales taxable to state A, the throwout rule would take the sales out of both the numerator and denominator in state A.

P.L. 86-272

prohibits states from imposing income taxes if only activity is solicitation of orders for sales of tangible personal property which are approved and filled outside the state. de minimus rule: if you establish a trivial connection with the state, pl 86-272 might still apply but there can't be any sort of pattern. see examples pg 12-13 handout unprotected acvtivities: handout pg 4-6 Protected activities: handout pg 6-7 Independent contractors: can provide some activities beyond solicitation that if the company did would not be protected under pl 86-272 but since ind. cont. it is protect: -soliciting sale -making sales -maintaining office destination: sale occurs at destination which is where customer actually receives property. Joyce/Finnegan: basically, ,when you determine whether or not activities within state violated protection of pl 86-272, some states use joyce rule, some use finnegan. Joyce rule only looks at specific company's activities, so only activities by company or on behalf of company are looked at. Finnegan is the mirror opposite. Finnegan looks at company and all affiliations and treats it like a unitary business. So if one affiliate breaches, the entire "company" breaches. More popular because state can earn more money this way. Soliciation defined: see wrigley case below. In general, must be completely ancillary to solicitation. If it can be proven that the activity had another business purpose (basically if didn't employ salesforce this activity would still occur) than it most likely isn't protected