Graphic Packaging Corp. v. Hegar
538 S.W.3d 89
| Tex. | 2017Background
- Graphic Packaging (multistate taxpayer) paid Texas franchise tax and sought to apportion its tax base using the Multistate Tax Compact’s (Compact) three‑factor formula for an "income tax" instead of Texas Tax Code §171.106’s single‑factor (gross‑receipts) fraction.
- Chapter 171 defines the franchise tax margin with alternative bases/deductions (e.g., cost of goods sold, 30% deduction, $1M, compensation cap), and §171.106 prescribes single‑factor apportionment "except as provided by this section."
- Graphic amended returns for tax years at issue to use chapter 141 (the Compact) and requested refunds; the Comptroller denied them and assessed a deficiency. Graphic sued for refunds; both sides moved for summary judgment.
- The court of appeals held the franchise tax is not an "income tax" under the Compact and that chapter 171 exclusively governs apportionment; this Court affirmed.
- The Supreme Court addressed three core questions: whether the franchise tax qualifies as an "income tax" under the Compact; whether §171.106 precludes using the Compact’s three‑factor formula; and whether Texas’s Compact membership contractually limits the Legislature from prescribing an exclusive apportionment method.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is the Texas franchise tax an "income tax" under the Compact? | Graphic: margin is effectively "net income" (deducting expenses from gross income), so the Compact applies. | Comptroller: margin and net income differ materially (multiple alternative bases, EZ computation), and Legislature declared the franchise tax "is not an income tax." | Held: The franchise tax is not an "income tax" under the Compact’s definition (court agreed with distinctions and legislative context). |
| Does §171.106 allow taxpayers to elect Compact three‑factor apportionment? | Graphic: Chapter 141 and §171.106 can be harmonized; Compact election should be available as an alternative. | Comptroller: §171.106’s "except as provided by this section" and later, specific statute preclude the Compact election for the franchise tax. | Held: §171.106, as later and more specific law, irreconcilably conflicts with the Compact election and thus controls; Compact election not available for franchise tax apportionment. |
| Does Texas’s Compact membership contractually bar the Legislature from overriding Articles III/IV? | Graphic: Compact is a contract among states; Article III.1 election binds member states until formal full withdrawal; Contract Clause prevents impairment. | Comptroller: The Compact is non‑binding/model in nature; states retained sovereign taxing power; Compact allows withdrawal and severability; no unmistakable waiver of taxing power. | Held: The Compact is not a binding regulatory interstate compact that relinquishes sovereign taxing power; Legislature validly enacted §171.106; no Contract Clause violation. |
| Effect of prior statutory language that once barred Compact application? | Graphic: Repeal of former §171.112(g) indicates intent to allow Compact provisions. | Comptroller: §171.112 was repealed as part of broader tax‑base restructuring; other 2006 disclaimers and §171.106 show intent to retain exclusive state formula. | Held: Repeal of former §171.112(g) did not indicate acceptance of the Compact election; historical and statutory context supports §171.106’s exclusivity. |
Key Cases Cited
- U.S. Steel Corp. v. Multistate Tax Comm'n, 434 U.S. 452 (1978) (Compact does not delegate sovereign power to Commission)
- Ne. Bancorp, Inc. v. Bd. of Governors of Fed. Reserve Sys., 472 U.S. 159 (1985) (indicia of binding regulatory compacts)
- United States v. Winstar Corp., 518 U.S. 839 (1996) (unmistakability doctrine for waiver of sovereign powers)
- Atl. Coast Line R. Co. v. Phillips, 332 U.S. 168 (1947) (presumption that legislature reserves taxing power; waiver must be narrow)
- In re Nestle USA, Inc., 387 S.W.3d 610 (Tex. 2012) (describing franchise tax and taxable entities)
- Gillette Co. v. Franchise Tax Bd., 62 Cal.4th 468 (2015) (state may limit Compact's apportionment provisions; Compact not binding contract)
- Int'l Bus. Mach. Corp. v. Dep't of Treasury, 496 Mich. 642 (2014) (plurality rejecting reconciliation of state mandatory apportionment with Compact election)
- Kimberly‑Clark Corp. v. Comm'r of Revenue, 880 N.W.2d 844 (Minn. 2016) (Compact not a contractual surrender of state's taxing power)