Tesoro Corp. v. State, Department of Revenue
312 P.3d 830
Alaska Ct. App.2013Background
- Tesoro challenged Alaska DOR's income tax assessments for 1994–1998, where Alaska used a three-factor apportionment formula to allocate Tesoro's worldwide income including non-Alaskan subsidiaries.
- Tesoro urged that only Alaska-based income be taxed and that Alaska's scheme violated Due Process and Interstate Commerce Clauses; it also disputed penalties.
- Tesoro's operations were organized into five segments (E&P, R&M, Marine, Corporate, Finance) with centralized management and shared administrative/financial services.
- Tesoro acquired the Kenai Pipeline in 1995, prompting Tesoro to argue KPL was not unitary with the rest of Tesoro; Tesoro also asserted its Finance segment was not unitary and thus not subject to Alaska tax.
- Alaska codified UDITPA/MTMC-inspired rules (UDITPA, MT Compact) and adopted apportionment formulas under AS 43.19.010 and AS 48.20.144; DOR issued an advisory (Nov. 19, 1999) authorizing a remedial three-factor formula under AS 48.19.010(18)(c); audits covered 1994–1998 with penalties; the superior court and this court upheld unitary status, remedy reasonableness, and penalties.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Tesoro's unitary status and the formula apportionment comply with constitutional limits | Tesoro contends the unitary status and three-factor formula misallocate non-Alaskan income | DOR maintained unitary status and that the formula fairly apportions income | Unitary finding upheld and formula-apportionment constitutional. |
| Whether Tesoro has standing to challenge the internal consistency of Alaska's tax scheme | Tesoro argues internal inconsistency risks double taxation | DOR argues Tesoro lacks injury and standing | Tesoro lacks standing; no demonstrated injury from internal inconsistency. |
| Whether DOR's section 18 remedial formula is reasonable under state law | Tesoro claims the remedial formula is unreasonable | DOR bears burden but shows reasonableness | Remedial three-factor formula deemed reasonable as applied. |
| Whether penalties on Tesoro were permissible given constitutional questions | Penalties should not apply if underlying apportionment is unconstitutional | Penalties valid for Tesoro's continued position that KPL was not unitary | Penalties upheld as permissible. |
Key Cases Cited
- Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (U.S. 1983) (internal consistency and unitary apportionment principles reflected in tax allocations)
- Gulf Oil Corp. v. State, Dep't of Revenue, 755 P.2d 372 (Alaska 1988) (external consistency and apportionment reasonableness in state taxes)
- Armco Inc. v. Hardesty, 467 U.S. 638 (U.S. 1984) (risk of double taxation under internal consistency test)
- Earth Res. Co. v. State, Dep't of Revenue, 665 P.2d 960 (Alaska 1983) (unitary business findings supported by centralized services and financing)
- Alaska Gold Co. v. State, Dep't of Revenue, 754 P.2d 247 (Alaska 1988) (unitary finding sustained with functional integration and shared services)
- Hans Rees' Sons, Inc. v. North Carolina, 283 U.S. 123 (U.S. 1931) (implications of allocating income across multiple jurisdictions)