State of Alaska, Department of Revenue v. Nabors International Finance, Inc. & Subsidiaries, Nabors International Finance, Inc. & Subsidiaries v. State of Alaska, Department of Revenue, 514 P.3d 893

Background

Nabors International Finance, a nonresident corporate parent doing oil-field services (including in Alaska), was audited for tax years 2007–2010; the Alaska Department of Revenue applied AS 43.20.145(a)(5) to include certain foreign affiliates in Nabors’ Alaska combined return, producing a deficiency assessment.
AS 43.20.145(a)(5) requires including unitary foreign corporations incorporated in or doing business in low-/no-tax countries when they meet statutory criteria in subparts (A) and (B) (the statutory text omits an explicit conjunction between (A) and (B)).
Nabors exhausted administrative remedies, sought a formal hearing (ALJ made factual findings but did not decide constitutionality), then sued in superior court claiming the statute (1) violates the Commerce Clause as discriminatory, (2) is arbitrary/irrational under Due Process, and (3) is void for vagueness because of the missing conjunction and the undefined phrase “does not conduct significant economic activity.”
The superior court rejected the Commerce Clause and rational-basis due-process challenges but held the statute unconstitutionally vague for lack of a clear conjunction between (A) and (B) and ambiguities in subpart (B).
The Alaska Supreme Court reversed the vagueness holding, affirmed that the statute does not violate the Commerce Clause, and held it is not arbitrary or irrational; it remanded for further proceedings consistent with that disposition.

Issues

Issue	Nabors' Argument	Department's Argument	Held
Vagueness: whether the missing conjunction between (A) and (B) and the phrase “does not conduct significant economic activity” render AS 43.20.145(a)(5) void for vagueness	Statute is ambiguous (missing “and/or”) so taxpayers cannot know which affiliates must be included; subpart (B) is undefined and standardless	Statute is a civil/economic regulation subject to a lenient vagueness test; plain text, regulatory definition, legislative history, and adjudication process supply meaning	Not unconstitutionally vague; statute can be given meaning through adjudication and regulatory definitions (reversed superior court)
Commerce Clause (foreign commerce discrimination): whether the statute facially discriminates or otherwise unduly burdens foreign commerce	Treats foreign countries differently based solely on tax rates (a geographic classification) and thus is facially discriminatory; similarly situated foreign vs domestic affiliates are treated differently	The statute is facially neutral in effect (only imposes a filing obligation and triggers apportionment rules); purpose is protecting Alaska’s tax base, not economic protectionism; any burden is minimal and incidental	Does not violate the Commerce Clause; not facially discriminatory and survives Pike balancing (affirmed)
Substantive Due Process (arbitrary/irrational): whether the 90% nominal-tax threshold and other elements are arbitrary	The 90% nominal-rate test is arbitrary/overbroad (uses nominal not effective rates), sweeping many countries into ‘‘tax-haven’’ category	Legislature rationally selected an objective, administrable bright-line (nominal) test to prevent exporting Alaska value; reasonable policy choice	Not arbitrary or irrational under rational-basis review (affirmed)

Key Cases Cited

Village of Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S. 489 (establishes lenient vagueness standard for economic/civil regulation)
Williams v. State, Dep’t of Revenue, 895 P.2d 99 (Alaska 1995) (Alaska application of lenient vagueness inquiry in tax/regulatory context)
Premera Blue Cross v. State, Dep’t of Commerce, Cmty. & Econ. Dev., Div. of Ins., 171 P.3d 1110 (Alaska 2007) (statutory interpretation and preference for construing statutes to avoid constitutional infirmity)
Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (sets four-part test for state taxation under the Commerce Clause)
Pike v. Bruce Church, Inc., 397 U.S. 137 (Pike balancing test for nondiscriminatory statutes that incidentally burden interstate commerce)
Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573 (distinguishing facial discrimination and focusing on statute’s practical effect)
Barclays Bank PLC v. Franchise Tax Bd. of California, 512 U.S. 298 (analysis of compliance burdens in worldwide reporting and foreign-commerce concerns)
Kraft Gen. Foods, Inc. v. Iowa Dept. of Revenue & Finance, 505 U.S. 71 (requires comparison of most similarly situated taxpayers when evaluating discriminatory tax treatment)
Boston Stock Exchange v. State Tax Comm’n, 429 U.S. 318 (invalidated tax scheme that made non-tax-neutral commercial choices)