BARCLAYS BANK PLC v. FRANCHISE TAX BOARD OF CALIFORNIA
No. 92-1384
Supreme Court of the United States
Argued March 28, 1994—Decided June 20, 1994
512 U.S. 298
*Together with No. 92-1839, Colgate-Palmolive Co. v. Franchise Tax Board of California, also on certiorari to the same court.
Joanne M. Garvey argued the cause for petitioner in No. 92-1384. With her on the briefs were Joan K. Irion, Miles N. Ruthberg, and Teresa A. Maloney. James P. Kleier argued the cause for petitioner in No. 92-1839. With him on the briefs were Walter Hellerstein, Prentiss Willson, Jr., Clare M. Rathbone, and Franklin C. Latcham.
Timothy G. Laddish, Assistant Attorney General of California, argued the cause for respondent in both cases. With him on the brief for respondent in No. 92-1384 were Daniel E. Lungren, Attorney General of California, Robert D. Milam, Deputy Attorney General, and Benjamin F. Miller. Mr. Lungren, Lawrence K. Keethe, Supervising Deputy Attorney General of California, John D. Schell, Deputy Attorney General, and Claudia K. Land filed a brief for respondent in No. 92-1839.
Solicitor General Days argued the cause for the United States as amicus curiae urging affirmance in both cases. With him on the brief were Assistant Attorney General Argrett and Deputy Solicitor General Wallace.†
†Kendall L. Houghton and William D. Peltz filed a brief for the Committee on State Taxation as amicus curiae urging reversal in both cases.
Briefs of amici curiae urging reversal in No. 92-1384 were filed for the Governmеnt of the United Kingdom by Jerome B. Libin and William H. Morris; for the Member States of the European Communities et al. by Messrs. Libin and Morris; for Banque Nationale de Paris by Roy E. Crawford and Russell D. Uzes; for the Confederation of British Industry by Lee H. Spence; for the Council of Netherlands Industrial Federations by
Briefs of amici curiae urging reversal in No. 92-1839 were filed for the Chamber of Commerce of the United States by Timothy B. Dyk, Beth Heifetz, Robin S. Conrad, Mona C. Zeiberg, and Jan S. Amundson; and for the National Foreign Trade Council, Inc., et al. by Philip D. Morrison and Mary C. Bennett.
Briefs of amici curiae urging affirmance in both cases were filed for the State of Alaska et al. by Bruce M. Botelho, Attorney General of Alaska, and Lauri J. Adams, Assistant Attorney General, and by the Attorneys General for their respective States as follows: Joseph P. Mazurek of Montana, Jeffrey R. Howard of New Hampshire, and Theodore R. Kulongoski of Oregon; for the State of New Mexico et al. by Tom Udall, Attorney General of New Mexico, Daniel Yohalen, Assistant Attorney General, and Bruce J. Fort and Frank D. Katz, Special Assistant Attorneys General, and by the Attorneys General for their respective States as follows: Winston Bryant of Arkansas, Gale A. Norton of Colorado, Larry EchoHawk of Idaho, Michael E. Carpenter of Maine, and Jeffrey B. Pine of Rhode Island; for the State of North Dakota et al. by M. K. Heidi Heitkamp, Attorney General of North Dakota, and Donnita A. Wald, Assistant Attorney General, Robert A. Marks, Attorney General of Hawaii, and Kevin T. Wakayama, Supervising Deputy Attorney General, and Robert T. Stephan, Attorney General of Kansas; for the California Legislature by Bion M. Gregory, James A. Marsala, Baldev S. Heir, and Michael R. Kelly; for the California Tax Reform Association et al. by Jack A. Blum and Martin Lobel; for Citizens for Tax Justice by Jonathan P. Hiatt; for the Council of State Governments et al. by Richard Ruda and Lee Fennell; for the Multistate Tax Commission by Alan H. Friedman and Paull Mines; for Senator Dorgan et al. by Charles Rothwell Nesson; and for Congressman Edwards et al. by Martin Lobel, Jack A. Blum, and Dina R. Lassow.
Eric J. Miethke, John E. Mueller, and Sheridan M. Cranmer filed a brief for Litton Industries, Inc., et al. as amici curiae urging affirmance in No. 92-1839.
JUSTICE GINSBURG delivered the opinion of the Court.
Eleven years ago, in Container Corp. of America v. Franchise Tax Bd., 463 U. S. 159 (1983), this Court upheld Califor-
The petitioner in No. 92-1384, Barclays Bank PLC (Barclays), is a United Kingdom corporation in the Barclays Group, a multinational banking enterprise. The petitioner in No. 92-1839, Colgate-Palmolive Co. (Colgate), is the United States-based parent of a multinational manufacturing and sales enterprise. Each enterprise has operations in California. During the years here at issue, California determined the state corporate franchise tax due for these operations under a method known as “worldwide combined reporting.” California‘s scheme first looked to the worldwide income of the multinational enterprise, and then attributed a portion of that income (equal to the average of the proportions of worldwide payroll, property, and sales located in California) to the California operations. The State imposed its tax on the income thus attributed to Barclays’ and Colgate‘s California business.
Barclays urges that California‘s tax system distinctively burdens foreign-based multinationals and results in double international taxation, in violation of the Commerce аnd Due Process Clauses. Both Barclays and Colgate contend that the scheme offends the Commerce Clause by frustrating the Federal Government‘s ability to “speak with one voice when
I
A
The Due Process and Commerce Clauses of the Constitution, this Court has held, prevent States that impose an income-based tax on nonresidents from “tax[ing] value earned outside [the taxing State‘s] borders.” ASARCO Inc. v. Idaho Tax Comm‘n, 458 U. S. 307, 315 (1982). But when a business enterprise operates in more than one taxing jurisdiction, arriving at “precise territorial allocations of ‘value’ is often an elusive goal, both in theory and in practice.” Container Corp., 463 U. S., at 164. Every method of allocation devised involves some degree of arbitrariness. See id., at 182.
One means of deriving locally taxable income, generally used by States that collect corporate income-based taxes, is the “unitary business” method. As explained in Container Corp., unitary taxation “rejects geographical or transactional accounting,” which is “subject to manipulation” and does not fully capture “the many subtle and largely unquantifiable transfers of value that take place among the components of a single enterprise.” Id., at 164-165. The “unitary business/formula apportionment” method
“calculates the local tax base by first defining the scope of the ‘unitаry business’ of which the taxed enterprise‘s activities in the taxing jurisdiction form one part, and then apportioning the total income of that ‘unitary business’ between the taxing jurisdiction and the rest of the world on the basis of a formula taking into account ob-
jective measures of the corporation‘s activities within and without the jurisdiction.” Id., at 165.1
During the income years at issue in these cases—1977 for Barclays, 1970-1973 for Colgate—California assessed its corporate franchise tax by employing a “worldwide combined reporting” method. California‘s scheme required the taxpayer to aggregate the income of all corporate entities composing the unitary business enterprise, including in the aggregation both affiliates operating abroad and those operating within the United States. Having defined the scope of the “unitary business” thus broadly, California used a long-accepted method of apportionment, commonly called the “three-factor” formula, to arrive at the amount of income attributable to the operations of the enterprise in California. Under the three-factor formula, California taxed a percentage of worldwide income equal to the arithmetic average of the proportions of worldwide payroll, property, and sales located inside the State.
B
The corporate income tax imposed by the United States employs a “separate accounting” method, a means of apportioning income among taxing sovereigns used by all major developed nations. In contrast to combined reporting, separate accounting treats each corporate entity discretely for the purpose of determining income tax liability.3
Separate accounting poses the risk that a conglomerate will manipulate transfers of value among its components to minimize its total tax liability. To guard against such manipulation, transactions between affiliated corporations must be scrutinized to ensure that they are reported on an “arm‘s-length” basis, i. e., at a price reflecting their true market value. See
At one time, a number of States used worldwide combined reporting, as California did during the years at issue. In recent years, such States, including California, have modified their systems at least to allow corporate election of some variant of an approach that confines combined reporting to the United States’ “water‘s edge.” See 1 Hellerstein & Hellerstein, supra n. 1, ¶ 8.16, at 8-185 to 8-187. California‘s 1986 modification of its corporate franchise tax, effective in 1988, 1986 Cal. Stats., ch. 660, § 6, made it nearly the last Statе to give way. 1 Hellerstein & Hellerstein, supra n. 1, ¶ 8.16, at 8-187.
California corporate taxpayers, under the State‘s water‘s edge alternative, may elect to limit their combined reporting group to corporations in the unitary business whose individual presence in the United States surpasses a certain threshold.
C
The first of these consolidated cases, No. 92-1384, is a tax refund suit brought by two members of the Barclays Group, a multinational banking enterprise. Based in the United Kingdom, the Barclays Group includes more than 220 corporations doing business in some 60 nations. The two refund-seeking members of the Barclays corporate family did business in California and were therefore subject to California‘s franchise tax. Barclays Bank of California (Barcal), one of the two taxpayers, was a California banking corporation wholly owned by Barclays Bank International Limited (BBI), the second taxpayer. BBI, a United Kingdom corporation, did business in the United Kingdom and in more than 33 other nations and territories.
In computing its California franchise tax based on 1977 income, Barcal reported only the income from its own operations. BBI reported income on the assumption that it participated in a unitary business composed of itself and its subsidiaries, but not its parent corporation and the parent‘s other subsidiaries. After auditing BBI‘s and Barcal‘s 1977 income year franchise tax returns, the Tax Board, respondent here, determined that both were part of a worldwide unitary business, the Barclays Group. Ultimately, the Tax Board assessed additional tax liability of $1,678 for BBI and $152,420 for Barcal.6
The petitioner in No. 92-1839, Colgate-Palmolive Co., is a Delaware corporation headquartered in New York. Colgate and its subsidiaries doing business in the United States engaged principally in the manufacture and distribution of household and personal hygiene products. In addition, Colgate owned some 75 corporations that operated entirely outside the United States; these foreign subsidiaries also engaged primarily in the manufacture and distribution of household and personal hygiene products. When Colgate
Colgate prevailed in the California Superior Court, which found that the Federal Government had condemned worldwide combined reporting as impermissibly intrusive upon the Nation‘s ability uniformly to regulate foreign commercial relations. No. 319715 (Super. Ct. Sacramento Cty., Apr. 19, 1989) (reprinted in App. to Pet. for Cert. in No. 92-1839, pp. 88a-102a). The Court of Appeal reversed, concluding
II
The Commerce Clause expressly gives Congress power “[t]o regulate Commerce with foreign Nations, and among the several States.”
The Clause does not shield interstate (or foreign) commerce from its “fair share of the state tax burden.” Department of Revenue of Wash. v. Association of Wash. Stevedoring Cos., 435 U. S. 734, 750 (1978). Absent congressional approval, however, a state tax on such commerce will not survive Commerce Clause scrutiny if the taxpayer demonstrates that the tax (1) applies to an activity lacking a substantial nexus to the taxing State; (2) is not fairly appor-
In “the unique context of foreign commerce,” a State‘s power is further constrained because of “the special need for federal uniformity.” Wardair Canada Inc. v. Florida Dept. of Revenue, 477 U. S. 1, 8 (1986). “‘In international relations and with respect to foreign intercourse and trade the people of the United States act through a single government with unified and adequate national power.‘” Japan Line, Ltd. v. County of Los Angeles, 441 U. S., at 448, quoting Board of Trustees of Univ. of Ill. v. United States, 289 U. S. 48, 59 (1933). A tax affecting foreign commerce therefore raises two concerns in addition to the four delineated in Complete Auto. The first is prompted by “the enhanced risk of multiple taxation.” Container Corp., 463 U. S., at 185. The second relates to the Federal Government‘s capacity to “‘speak with one voice when regulating commercial relations with foreign governments.‘” Japan Line, 441 U. S., at 449, quoting Michelin Tire Corp. v. Wages, 423 U. S. 276, 285 (1976).
California‘s worldwide combined reporting system easily meets three of the four Complete Auto criteria. The nexus requirement is met by the business all three taxpayers—Barcal, BBI, and Colgate—did in California during the years in question. See Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 U. S. 425, 436-437 (1980).10 The “fair apportion-
ment” standard is also satisfied. Neither Barclays nor Colgate has demonstrated the lack of a “rational relationship between the income attributed to the State and the intrastate values of the enterprise,” Container Corp., 463 U. S., at 180-181 (internal quotatiоn marks omitted); nor have the petitioners shown that the income attributed to California is “out of all appropriate proportion to the business transacted by the [taxpayers] in that State.” Id., at 181 (internal quotation marks omitted). We note in this regard that, “if applied by every jurisdiction,” California‘s method “would result in no more than all of the unitary business’ income being taxed.” Id., at 169. And surely California has afforded Colgate and the Barclays taxpayers “protection, opportunities and benefits” for which the State can exact a return. Wisconsin v. J. C. Penney Co., 311 U. S. 435, 444 (1940); see ASARCO Inc. v. Idaho Tax Comm‘n, 458 U. S., at 315.
Barclays (but not Colgate) vigorously contends, however, that California‘s worldwide combined reporting scheme violates the antidiscrimination component of the Complete Auto
Compliance burdens, if disproportionately imposed on out-of-jurisdiction enterprises, may indeed be inconsonant with the Commerce Clause. See, e. g., Hunt v. Washington State Apple Advertising Comm‘n, 432 U. S. 333, 350-351 (1977) (increased costs imposed by North Carolina statute on out-of-state apple producers “would tend to shield the local apple industry from the competition of Washington apple growers,” thereby discriminating against those growers). The factual predicate of Barclays’ discrimination claim, however, is infirm.
Barclays points to provisions of California‘s implementing regulations setting out three discrete means for a taxpayer to fulfill its franchise tax reporting requirements. Each of these modes of compliance would require Barclays to gather and present much information not maintained by the unitary
In sum, Barclays has not demonstrated that California‘s tax system in fact operates to impose inordinate compliance burdens on foreign enterprises. Barclays’ claim of unconstitutional discrimination against foreign commerce therefore fails.
III
Barclays additionally argues that California‘s “reasonable approximations” method of reducing the compliance burden
We note, initially, that “reasonableness” is a guide admitting effective judicial review in myriad settings, from encounters between the police and the citizenry, see Terry v. Ohio, 392 U. S. 1, 27 (1968) (Fourth Amendment permits police officer‘s limited searсh for weapons in circumstances where “reasonably prudent man ... would be warranted in the belief that his safety or that of others was in danger” based upon “reasonable inferences ... draw[n] from the facts in light of [officer‘s] experience“), to the more closely analogous federal income tax context. See, e. g.,
We next observe that California‘s judiciary has construed the California law to curtail the discretion of California tax officials. See 10 Cal. App. 4th, at 1762, 14 Cal. Rptr. 2d, at 549 (the Tax Board must consider “regularly-maintained or other readily-accessibly corporate documents” in deciding whether the “cost and effort of producing [worldwide combined reporting] information” justifies submission of “reasonable approximations“). We note, furthermore, that California has afforded Barclays the opportunity “to clarify the
Rules governing international multijurisdictional income allocation have an inescapable imprecision given the complexity of the subject matter. See Container Corp., 463 U. S., at 192 (allocation “bears some resemblance ... to slicing a shadow“).14 Mindful that rules against vagueness are not “mechanically applied” but depend, in their application, on “the nature of the enactment,” Hoffman Estates, 455 U. S., at 498, we hold that California‘s scheme does not transgress constitutional limitations in this regard, and that Barclays’ due process argument is no more weighty than its claim of discrimination first placed under a Commerce Clause heading.
IV
A
Satisfied that California‘s corporate franchise tax is “proper and fair” as tested under Complete Auto‘s guides,
In Container Corp., we upheld application of California‘s combined reporting obligation to “foreign subsidiaries of domestic corporations,” id., at 193 (emphasis added), against a charge that such application unconstitutionally exposed those subsidiaries to a risk of multiple international taxation.15 Barclays contends that its situation compels a different outcome, because application of the combined reporting obligation to foreign multinationals creates a “‘more aggravated’ risk ... of double taxation.” Brief for Petitioner in No. 92-1384, at 32, quoting Nos. 325059 and 325061 (Super. Ct. Sacramento Cty., Aug. 20, 1987) (rеprinted in App. to Pet. for Cert. in No. 92-1384, p. A-26). Barclays rests its argument on the observation that “foreign multinationals typically have more of their operations and entities outside of the United States [compared to] domestic multinationals, which typically have a smaller share of their operations and entities outside of the United States.” Brief for Petitioner in No. 92-1384, at 33.16 As a result, a higher proportion of the income of a foreign multinational is subject to taxation by foreign sovereigns. This reality, Barclays concludes, means that for the foreign multinational, which must include all its foreign operations in the California combined reporting group, “the breadth of double taxation and the degree of burden on foreign commerce are greater than in the case of domestic multinationals.” Ibid.
Container Corp.‘s holding on multiple taxation relied on two considerations: first, that multiple taxation was not the “inevitable result” of the California tax;17 and, second, that the “alternativ[e] reasonably available to the taxing State” (i. e., some version of the separate accounting/“arm‘s length”
These considerations are not dispositively diminished when California‘s tax is applied to the components of foreign, as opposed to domestic, multinationals. Multiple taxation of such entities because of California‘s scheme is not “inevitable“; the existence vel non of actual multiple taxation of income remains, as in Container Corp., dependent “on the facts of the individual case.” Id., at 188. And if, as we have held, adoption of a separate accounting system does not dispositively lessen the risk of multiple taxation of the income earned by foreign affiliates of domestic-owned corporations, we see no reason why it would do so in respect of the income earned by foreign affiliates of foreign-owned corporations. We refused in Container Corp. “to require California to give up one allocation method that sometimes results in double taxation in favor of another allocation method that also sometimes results in double taxation.” Id., at 193. The
Recognizing that multiple taxation of international enterprise may occur whatever taxing scheme the State adopts, JUSTICE O‘CONNOR, dissenting in No. 92-1384, finds impermissible under “the [dormant] Foreign Commerce Clause” only double taxation that (1) burdens a foreign corporation in need of protection for lack of access to the political process, and (2) occurs “because [the State] does not conform to international practice.” Post, at 336. But the image of a politically impotent foreign transactor is surely belied by the battalion of foreign governments that has marched to Barclays’ aid, deploring worldwide combined reporting in diplomatic notes, amicus briefs, and even retaliatory legislation. See infra, at 324, n. 22; post, at 337. Indeed, California responded to this impressive political activity when it eliminated mandatory worldwide combined reporting. See supra, at 306. In view of this activity, and the control rein Congress holds, see infra, at 329-331, we cannot agree that “international practice” has such force as to dictate this Court‘s Commerce Clause jurisprudence. We therefore adhere to the precedent set in Container Corp.
B
We turn, finally, to the question ultimately and most energetically presented: Did California‘s worldwide combined reporting requirement, as applied to Barcal, BBI, and Colgate, “impair federal uniformity in an area where federal uniformity is essential,” Japan Line, 441 U. S., at 448; in particular, did the State‘s taxing scheme “preven[t] the Federal Government from ‘speaking with one voice’ in international trade“? Id., at 453, quoting Michelin Tire Corp. v. Wages, 423 U. S. 276, 285 (1976).
1
Two decisions principally inform our judgment: first, this Court‘s 1983 determination in Container Corp.; and second, our decision three years later in Wardair Canada Inc. v. Florida Dept. of Revenue, 477 U. S. 1 (1986). Container Corp. held that California‘s worldwide combined reporting requirement, as applied to domestic corporations with foreign subsidiaries, did not violate the “one voice” standard. Container Corp. bears on Colgate‘s case, but not Barcal‘s or BBI‘s, to this extent: “[T]he tax [in Container Corp.] was imposed, not on a foreign entity . . . , but on a domestic corporation.” 463 U. S., at 195.19 Other factors emphasized in Container Corp., however, are relevant to the complaints of all three taxpayers in the consolidated cases now before us.20 Most significantly, the Court found no “specific indications of congressional intent” to preempt California‘s tax:
“First, there is no claim here that the federal tax statutes themselves provide the necessary pre-emptive force. Second, although the United States is a party to a great number of tax treaties that require the Federal Government to adopt some form of ‘arm‘s-length’ analysis in taxing the domestic income of multinational enterprises, that requirement is generally waived with respect to the taxes imposed by each of the contracting nations on its own domestic corporations. . . . Third, the tax treaties into which the United States has entered do not generally cover the taxing activities of subnational governmental units such as States, and in none of the
treaties does the restriction on ‘non-arm‘s-length’ methods of taxation apply to the States. Moreover, the Senate has on at least one occasion, in considering a proposed treaty, attached a reservation declining to give its consent to a provision in the treaty that would have extended that restriction to the States. Finally, . . . Congress has long debated, but has not enacted, legislation designed to regulate state taxation of income.” Id., at 196-197 (footnotes and internal quotation marks omitted).
The Court again confronted a “one voice” argument in Wardair Canada Inc. v. Florida Dept. of Revenue, 477 U. S. 1 (1986), and there rejected a Commerce Clause challenge to Florida‘s tax on the sale of fuel to common carriers, including airlines. Air carriers were taxed on all aviation fuel purchased in Florida, without regard to the amount the carrier consumed within the State or the amount of its in-state business. The carrier in Wardair, a Canadian airline that оperated charter flights to and from the United States, conceded that the challenged tax satisfied the Complete Auto criteria and entailed no threat of multiple international taxation. Joined by the United States as amicus curiae, however, the carrier urged that Florida‘s tax “threaten[ed] the ability of the Federal Government to ‘speak with one voice.‘” 477 U. S., at 9. There is “a federal policy,” the carrier asserted, “of reciprocal tax exemptions for aircraft, equipment, and supplies, including aviation fuel, that constitute the instrumentalities of international air traffic“; this policy, the carrier argued, “represents the statement that the ‘one voice’ of the Federal Government wishes to make,” a statement “threatened by [Florida‘s tax].” Ibid.
This Court disagreed, observing that the proffered evidence disclosed no federal policy of the kind described and indeed demonstrated that the Federal Government intended to permit the States to impose sales taxes on aviation fuel. The international convention and resolution and more than 70 bilateral treaties on which the carrier relied to show a
In both Wardair and Container Corp., the Court considered the “one voice” argument only after determining that the challenged state action was otherwise constitutional. An important premise underlying both decisions21 is this: Congress may more passively indicate that certain state practices do not “impair federal uniformity in an area where federal uniformity is essential,” Japan Line, 441 U. S., at 448; it need not convey its intent with the unmistakable clarity required to permit state regulation that discriminates against interstate commerce or otherwise falls short under Complete Auto inspection. See, e. g., Maine v. Taylor, 477 U. S. 131, 139 (1986) (requiring an “unambiguous indication of congressional intent” to insulate “otherwise invalid state legislation” from judicial dormant Commerce Clause scru-
2
As in Container Corp. and Wardair, we discern no “specific indications of congressional intent” to bar the state action here challenged. Our decision upholding California‘s franchise tax in Container Corp. left the ball in Congress’ court; had Congress, the branch responsible for the regulation of foreign commerce, seе
In the past three decades—both before and after Container Corp.—Congress, aware that foreign governments were displeased with States’ worldwide combined reporting requirements,22 has on many occasions studied state taxation
The history of Senate action on a United States/United Kingdom tax treaty, to which we referred in Container Corp., see 463 U. S., at 196, reinforces our conclusion that Congress implicitly has permitted the States to use the worldwide combined reporting method. As originally negotiated by the President, this treaty—known as the Convention for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains—would have precluded States from requiring that United Kingdom-controlled corporate taxpayers use combined reporting to compute their state income. See Art. 9(4), 31 U. S. T. 5670, 5677, T. I. A. S. No. 9682.26 The Senate
Given these indicia of Congress’ willingness to tolerate States’ worldwide combined reporting mandates, even when those mandates are applied to foreign corporations and domestic corporations with foreign parents, we cannot conclude that “the foreign policy of the United States—whose nuances . . . are much more the province of the Executive Branch and Congress than of this Court—is [so] seriously threatened,” Container Corp., 463 U. S., at 196, by California‘s practice as to warrant our intervention.28 For this reason, Barclays’ and its amici‘s argument that California‘s worldwide combined reporting requirement is unconstitutional because it is
3
To support its argument that California‘s worldwide combined reporting method impermissibly interferes with the Federal Government‘s ability to “speak with one voice,” and to distinguish Container Corp., Colgate points to a series of Executive Branch actions, statements, and amicus filings, made both before and after our decision in Container Corp.30 Colgate contends that, taken together, these Executive pronouncements constitute a “clear federal directive” proscribing States’ use of worldwide combined reporting. Brief for Petitioner in No. 92-1839, p. 36, quoting Container Corp., 463 U. S., at 194.
The Executive statements to which Colgate refers, however, cannot perform the service for which Colgate would
Congress may “delegate very large grants of its power over foreign commerce to the President,” who “also possesses in his own right certain powers conferred by the Constitution оn him as Commander-in-Chief and as the Nation‘s organ in foreign affairs.” Chicago & Southern Air Lines, Inc. v. Waterman S. S. Corp., 333 U. S. 103, 109 (1948). We need not here consider the scope of the President‘s power to preempt state law pursuant to authority delegated by a statute or a ratified treaty; nor do we address whether the President may displace state law pursuant to legally binding executive agreements with foreign nations31 made “in the absence of either a congressional grant or denial of authority, [where] he can only rely upon his own independent powers.” Youngstown Sheet & Tube Co. v. Sawyer, 343 U. S. 579, 637 (1952) (Jackson, J., concurring). The Executive Branch ac-
* * *
The Constitution does “‘not make the judiciary the overseer of our government.‘” Dames & Moore v. Regan, 453 U. S. 654, 660 (1981), quoting Youngstown Sheet & Tube Co. v. Sawyer, 343 U. S., at 594 (Frankfurter, J., concurring). Having determined that the taxpayers before us had an adequate nexus with the State, that worldwide combined reporting led to taxation which was fairly apportioned, nondiscriminatory, fairly related to the services provided by the State, and that its imposition did not result inevitably in multiple taxation,
Affirmed.
JUSTICE BLACKMUN, concurring.
Last Term, in Itel Containers Int‘l Corp. v. Huddleston, 507 U. S. 60, 85 (1993) (BLACKMUN, J., dissenting), I expressed my disagreement with the Court‘s willingness, in аpplying the “one voice” test, to “infe[r] permission for [a] tax from Congress’ supposed failure to prohibit it.” See also Wardair Canada Inc. v. Florida Dept. of Revenue, 477 U. S. 1, 18 (1986) (BLACKMUN, J., dissenting). I accordingly would not rely in the present cases on congressional inaction to conclude that “Congress implicitly has permitted the States to use the worldwide combined reporting method.” Ante, at 326. Nevertheless, because today‘s holding largely is controlled by Container Corp. of America v. Franchise Tax Bd., 463 U. S. 159 (1983), and because California‘s corporate franchise tax does not directly burden the instrumentalities of foreign commerce, see Itel, supra; Wardair, supra; and Japan Line, Ltd. v. County of Los Angeles, 441 U. S. 434 (1979), I agree that the tax does not “impair federal uniformity in an area where federal uniformity is essential,” id., at 448. I therefore join the opinion of the Court.
JUSTICE SCALIA, concurring in part and concurring in the judgment.
I concur in the judgment of the Court and join all of its opinion except Part IV-B, which disposes of the petitioners’ “negative” Foreign Commerce Clause argument by applying the “speak with one voice” test of Japan Line, Ltd. v. County of Los Angeles, 441 U. S. 434 (1979).
As I stated last Term in Itel Containers Int‘l Corp. v. Huddleston, 507 U. S. 60, 78 (1993) (opinion concurring in part
I am not sure that the Court‘s opinion today, which requires no more than legislative inaction to establish that “Congress implicitly has permitted” the States to impose a particular restriction on foreign commerce, ante, at 326, will prove much different from my approach in its consequences. It is, moreover, an unquestionable improvement over Itel: whereas the “speak with one voice” analysis of that opinion gave the power to determine the constitutionality of a state law to the Executive Branch, see 507 U. S., at 80 (SCALIA, J., concurring in part and concurring in judgment), today‘s opinion restores the power to Congress—albeit in a form that strangely permits it to be exercised by silence.
JUSTICE O‘CONNOR, with whom JUSTICE THOMAS joins, concurring in the judgment in part and dissenting in part.
I joined Justice Powell in dissent in Container Corp. of America v. Franchise Tax Bd., 463 U. S. 159 (1983), and I continue to think the Court erred in upholding California‘s use of worldwide combined reporting in taxing the income of a domestic-based corporate group. But because the State and private parties have justifiably relied on the constitutionality of taxing such corporations, and Congress has not seen fit to override our decision, I agree with the Court that Container Corp. should not be overruled, cf. Quill Corp. v. North Dakota, 504 U. S. 298, 318-319 (1992), and that it
A state tax on interstate commerce must meet four requirements under our negative Commerce Clause precedents: the tax must be on an activity with a substantial nexus to the taxing State, it must be fairly apportioned, it must not discriminate against interstate commerce, and it must be fairly related to the services provided by the State. Complete Auto Transit, Inc. v. Brady, 430 U. S. 274, 279 (1977). Substantially for the reasons explained by the Court, see ante, at 311-314, I agree that imposition of the California tax complies with the four Complete Auto factors. (I also agree that California‘s practice of accepting “reasonable approximations” of the statutorily required financial data does not violate due process. See ante, at 314-316.) A state tax on foreign commerce, however, must satisfy two additional inquiries: “first, whether the tax, notwithstanding apportionment, creates a substantial risk of international multiple taxation, and, second, whether the tax prevents the Federal Government from ‘speaking with one voice when regulating commercial relations with foreign governments.’ If a state tax contravenes either of these precepts, it is unconstitutional under the Commerce Clause.” Japan Line, Ltd. v. County of Los Angeles, 441 U. S. 434, 451 (1979) (emphasis added).
I am in general agreement with the Court, see ante, at 320-329, that the second Japan Line factor—the purported need for federal uniformity—does not prevent the use of worldwide combined reporting in taxing foreign corpora-
But I cannot agree with the Court‘s resolution of the other Japan Line factor—the need to avoid international multiple taxation. See ante, at 316-320. Barclays does 98% of its business in countries other than the United States. California, through application of worldwide combined reporting, taxes some of that income. The trial court found as a fact that “[t]here is a definite risk of, as well as actual double taxation here.” App. to Pet. for Cert. in No. 92-1384, p. A-25. This double taxation occurs because California has adopted a taxing system that is inconsistent with the taxing method used by foreign taxing authorities. California‘s formula assigns a higher proportion of income to jurisdictions where wage rates, property values, and sales prices are
In Container Corp., we recognized that the California tax “ha[d] resulted in actual double taxation . . . stem[ming] from a serious divergence in the taxing schemes adopted by California and the foreign taxing authorities,” and that “the taxing method adopted by those foreign taxing authorities is consistent with accepted international practice.” 463 U. S., at 187. We nevertheless held that the tax did not violate the Japan Line principle. Two of the factors on which we relied—that the tax was on income rather than property, and that the multiple taxation was not “inevitable“—carry no more force today than they did 11 Terms ago, see 463 U. S., at 198-201 (Powell, J., dissenting), but they are present here as well.
We also relied on a third ground to distinguish the tax upheld in Container Corp. from the tax invalidated in Japan Line: “[T]he tax here falls, not on the foreign owners of an instrumentality of foreign commerce, but on a corporation domiciled and headquartered in the United States. We specifically left open in Japan Line the application of that case to ‘domestically owned instrumentalities engaged in foreign commerce,’ and . . . this case falls clearly within that reservation.” 463 U. S., at 188-189, quoting Japan Line, supra, at 444, n. 7 (citation omitted). In a footnote, we continued: “We have no need to address in this opinion the constitutionality of [the California tax] with respect to state taxation of domestic corporations with foreign parents or foreign corporations with either foreign parents or foreign subsidiaries.” 463 U. S., at 189, n. 26; see also id., at 195, and n. 32. As the Court recognizes, ante, at 317, and n. 15, Barclays’ challenge to the California tax therefore presents the question we ex-
Japan Line teaches that where the instrumentality of commerce—and analogously, the corporate domicile—is foreign, the multiple taxation resulting from a state taxing scheme may violate the Commerce Clause even though the same tax would be constitutional as applied to a domestic corporation. 441 U. S., at 447-448. When worldwide combined reporting is applied to American corporate groups with foreign affiliates, as in Container Corp., income attributable to those foreign companies will be taxed by California, even though they are also subject to tax in foreign countries. But in such cases the incidence of the tax falls on the domestic parent corporation—a corporation subject to full taxation in the United States notwithstanding the source of its income. When the California tax is applied to a foreign corporate group with both domestic and foreign affiliates, some of the income of the foreign companies will also be taxed by California. The incidence of the tax in such cases falls on a foreign corporation, even though the United Stаtes (and its subnational governments) is entitled to tax only the income earned domestically.
In my view, the States are prohibited (absent express congressional authorization) by the Foreign Commerce Clause from adopting a system of taxation that, because it does not conform to international practice, results in multiple taxation of foreign corporations. It may be that such a rule “leave[s] California free to discriminate against a Delaware corporation in favor of an overseas corporation,” Container Corp., 463 U. S., at 203 (Powell, J., dissenting), but the reason for this differential treatment is obvious. Domestic taxpayers have access to the political process, at both the state and national levels, that foreign taxpayers simply do not enjoy.
Most of the United States’ trading partners have objected to California‘s use of worldwide combined reporting. See Démarche from Danish Embassy, on behalf of Governments of European Community (Mar. 26, 1993) (“The views of the EC Member States on worldwide unitary taxation are well known to the United States Government. All Member States have expressed their strong opposition to [the California] tax in a number of diplomatic communiques to the United States Government from 1980 to the present date“); Démarche from Belgian Embassy, on behalf of Governments of Member States of European Community and of Australia, Austria, Canada, Finland, Japan, Norway, Sweden, and Switzerland (Sept. 23, 1993). At least one country has already enacted retaliatory legislation. See Brief for Government of United Kingdom as Amicus Curiae 19-23. Moreover, the possibility of multiple taxation undoubtedly deters foreign investment in this country. See Brief for Member States of European Communities et al. as Amici Curiae 14-16. These adverse consequences, which affect the Nation as a whole, result solely from California‘s refusal to conform its taxing practices to the internationally accepted standard.
Unlike the Court, see ante, at 319, I would not dismiss these difficulties solely by relying on our observation in Container Corp. that “it would be perverse, simply for the sake of avoiding double taxation, to require California to give up one allocation method that sometimes results in double taxation in favor of another allocation method that also sometimes results in double taxation.” 463 U. S., at 193. In addition to being factually incorrect, see id., at 199, n. 1 (Powell, J.,
But in Japan Line we squarely rejected the argument that the same рrinciple applies to taxes imposed on foreign-owned instrumentalities:
“[N]either this Court nor this Nation can ensure full apportionment when one of the taxing entities is a foreign sovereign. If an instrumentality of commerce is domiciled abroad, the country of domicile may have the right, consistently with the custom of nations, to impose a tax on its full value. If a State should seek to tax the same instrumentality on an apportioned basis, multiple taxation inevitably results. . . . Due to the absence of an authoritative tribunal capable of ensuring that the aggregation of taxes is computed on no more than one full value, a state tax, even though ‘fairly apportioned’ to reflect an instrumentality‘s presence within the State, may subject foreign commerce to the risk of a double tax burden to which [domestic] commerce is not exposed, and which the commerce clause forbids.” 441 U. S., at 447-448 (footnote and internal quotation marks omitted).
In my view, the risk of multiple taxation created by California‘s use of worldwide combined reporting—a risk that has materialized with respect to Barclays—is sufficient to render the California tax constitutionally infirm. I therefore respectfully dissent from the Court‘s conclusion to the contrary.
Notes
| Taxpayer | Worldwide Taxable Income | California Formula Percentage | Business Income | Franchise Tax |
|---|---|---|---|---|
| Barcal | $401,566,973 | .0139032% | $5,583,066 | $693,696 |
| BBI | 401,566,973 | .0003232% | 129,786 | 16,126 |
| Income Year | Water‘s edge Taxable Income | California Formula Percentage | California Business Income | Franchise Tax |
|---|---|---|---|---|
| 1970 | $25,652,055 | 9.31920% | $2,390,566 | $167,340 |
| 1971 | 27,520,141 | 9.01730% | 2,481,574 | 173,710 |
| 1972 | 32,440,358 | 9.21640% | 2,989,833 | 227,227 |
| 1973 | 36,554,060 | 8.88730% | 3,248,669 | 269,640 |
| Income Year | Worldwide Taxable Income | California Formula Percentage | California Business Income | Franchise Tax |
|---|---|---|---|---|
| 1970 | $ 91,566,729 | 4.42075% | $4,047,936 | $283,356 |
| 1971 | 108,177,612 | 4.12017% | 4,457,101 | 311,997 |
| 1972 | 123,779,352 | 4.03444% | 4,993,803 | 379,529 |
| 1973 | 151,585,860 | 3.71812% | 5,636,144 | 467,800 |