In Re Nestle USA, Inc.
387 S.W.3d 610
| Tex. | 2012Background
- Texas’s franchise tax dates to 1893 and has evolved through many classifications, exemptions, and deductions that affect who pays what.
- The 2006 reform restructures the tax to base primarily on revenue (margin) with a 0.5% or 1% rate and many deductions and exemptions.
- Nestle USA, Inc. challenges the tax as applied to its group reporting and its out-of-state manufacturing affecting its Texas rate and deductions.
- Nestle argues the tax bears no reasonable relation to the privilege of doing business in Texas and violates equal/uniform, due process, and Commerce Clause.
- The court, citing Allcat, holds it has jurisdiction to hear Nestle’s claims and that material facts are established for review.
- The court analyzes Nestle’s claims under Equal and Uniform, Equal Protection, Due Process, and Dormant Commerce Clause challenges.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Equal and Uniform violation? | Nestle: tax lacks rational relation to privilege due to deductions/exemptions. | State: classifications support equality and reflect privilege value; exemptions allowed. | No violation; classifications reasonable and related to Texas privilege. |
| Equal Protection violation? | Nestle: facially or as-applied, unequal treatment of Nestle vs similar entities. | State: equal protection satisfied with a rational basis given tax’s object. | Not violated; Equal Protection predicated on Equal and Uniform finding. |
| Due Process violation? | Nestle: tax not fiscally related to the activity in Texas; rate unfairly punitive. | State: tax relates to privilege of doing business; nexus established by activity and presence. | Not violated; unitary enterprise relation supports nexus. |
| Dormant Commerce Clause violation? | Nestle: higher manufacturing rate discriminates against interstate commerce. | State: rate related to differences in business activity, not to location; fairly related to services. | Not violated; manufacturing outside Texas may increase value of Texas privilege; rate permissible. |
Key Cases Cited
- Bullock v. Sage Energy Co., 728 S.W.2d 465 (Tex.App.-Austin 1987) (invalid classification based on non-Texas-related accounting; uniformity requires relation to Texas activity)
- Jefferson Lines, Inc. v. Oklahoma Tax Comm'n, 514 U.S. 175 (Supreme Court 1995) (fair relation test; tax need not match value of services precisely)
- Exxon Corp. v. Governor of Md., 437 U.S. 117 (U.S. 1978) (no discrimination where activity differences—not location—drive tax)
- Quill Corp. v. North Dakota, 504 U.S. 298 (U.S. 1992) (sales tax nexus and interstate commerce guidance cited)
- In re Allcat Claims Serv., L.P., 356 S.W.3d 455 (Tex.2011) (jurisdiction to review facial challenges to franchise tax in original proceeding)
- Ford Motor Co. v. Beauchamp, 392 U.S. 339 (Supreme Court) (popular comparator for nexus and due process framing in franchise taxes)