MEADWESTVACO CORP., SUCCESSOR IN INTEREST TO MEAD CORP. v. ILLINOIS DEPARTMENT OF REVENUE ET AL.
No. 06-1413
Supreme Court of the United States
Argued January 16, 2008—Decided April 15, 2008
553 U.S. 16
Brian F. Barov, Assistant Attorney General of Illinois, argued the cause for respondents. With him on the brief were Lisa Madigan, Attorney General, Michael A. Scodro, Solicitor General, and Jane Elinor Notz, Deputy Solicitor General.*
*Briefs of amici curiae urging reversal were filed for the Council on State Taxation et al. by Todd A. Lard, Douglas L. Lindholm, Jan S. Amundson, and Quentin Riegel; for Gannett Co. by Scott D. Smith; for the Tax Executives Institute, Inc., by Eli J. Dicker, Shirley S. Grimmett, and Timothy J. McCormally; and for the Walt Disney Co. by Paul R. Q. Wolfson, Michael H. Salama, and Brandee A. Tilman.
Briefs of amici curiae urging affirmance were filed for the State of California et al. by Edmund G. Brown, Jr., Attorney General of California, Manuel M. Medeiros, State Solicitor General, David Chaney, Chief Assistant Attorney General, Paul Gifford, Senior Assistant Attorney General, Gordon Burns, Deputy Solicitor General, and Anne Michelle Burr and George Spanos, Deputy Attorneys General, by Roberto J. Sanchez-Ramos, Secretary of Justice of Puerto Rico, and by the Attorneys General for their respective States as follows: Dustin McDaniel of Arkansas, Richard Blumenthal of Connecticut, Bill McCollum of Florida, Lawrence G. Wasden of Idaho, Steve Carter of Indiana, Thomas J. Miller of Iowa, Paul J.
JUSTICE ALITO delivered the opinion of the Court.
The Due Process and Commerce Clauses forbid the States to tax “extraterritorial values.” Container Corp. of America v. Franchise Tax Bd., 463 U. S. 159, 164 (1983); see also Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U. S. 768, 777 (1992); Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 U. S. 425, 441-442 (1980). A State may, however, tax an apportioned share of the value generated by the intrastate and extrastate activities of a multistate enterprise if those activities form part of a “unitary business.” Hunt-Wesson, Inc. v. Franchise Tax Bd. of Cal., 528 U. S. 458, 460 (2000); Mobil Oil Corp., supra, at 438. We have been asked in this case to decide whether the State of Illinois constitutionally taxed an apportioned share of the capital gain realized by an out-of-state corporation on the sale of one of its business divisions. The Appellate Court of Illinois upheld the tax and affirmed a judgment in the State‘s favor. Because we conclude that the state courts misapprehended the principles that we have developed for determining whether a multistate business is unitary, we vacate the decision of the Appellate Court of Illinois.
I
A
Mead Corporation (Mead), an Ohio corporation, is the predecessor in interest and a wholly owned subsidiary of petitioner MeadWestvaco Corporation. From its founding
Mead did not report any of this gain as business income on its Illinois tax returns for 1994. It took the position that the gain qualified as nonbusiness income that should be allocated to Mead‘s domiciliary State, Ohio, under Illinois’ Income Tax Act (ITA). See
The case was tried to the bench. Although the court admitted expert testimony, reports, and other exhibits into evidence, see App. D to Pet. for Cert. 29a-34a, the parties’ stipulations supplied most of the evidence of record regarding Mead‘s relationship with Lexis, see App. 9-20. We summarize those stipulations here.
B
Lexis was launched in 1973. For the first few years it was in business, it lost money, and Mead had to keep it afloat with additional capital contributions. By the late 1970‘s, as more attorneys began to use Lexis, the service finally turned a profit. That profit quickly became substantial. Between 1988 and 1993, Lexis made more than $800 million of the $3.8 billion in Illinois income that Mead reported. Lexis also accounted for $680 million of the $4.5 billion in business expense deductions that Mead claimed from Illinois during that period.
Lexis was subject to Mead‘s oversight, but Mead did not manage its day-to-day affairs. Mead was headquartered in Ohio, while a separate management team ran Lexis out of its headquarters in Illinois. The two businesses maintained separate manufacturing, sales, and distribution facilities, as well as separate accounting, legal, human resources, credit and collections, purchasing, and marketing departments.
Neither business was required to purchase goods or services from the other. Lexis, for example, was not required to purchase its paper supply from Mead, and indeed Lexis purchased most of its paper from other suppliers. Neither received any discount on goods or services purchased from the other, and neither was a significant customer of the other.
Lexis was incorporated as one of Mead‘s wholly owned subsidiaries until 1980, when it was merged into Mead and became one of Mead‘s divisions. Mead engineered the merger so that it could offset its income with Lexis’ net operating loss carryforwards. Lexis was separately reincorporated in 1985 before being merged back into Mead in 1993. Once again, tax considerations motivated each transaction. Mead also treated Lexis as a unitary business in its consolidated Illinois returns for the years 1988 through 1994, though it did so at the State‘s insistence and then only to avoid litigation.
Lexis was listed as one of Mead‘s “business segment[s]” in at least some of its annual reports and regulatory filings. Mead described itself in those reports and filings as “engaged in the electronic publishing business” and touted itself as the “developer of the world‘s leading electronic information retrieval services for law, patents, accounting, finance, news and business information.” Id., at 93, 59; App. D to Pet. for Cert. 38a.
Based on the stipulated facts and the other exhibits and expert testimony received into evidence, the Circuit Court of Cook County concluded that Lexis and Mead did not constitute a unitary business. The trial court reasoned that Lexis and Mead could not be unitary because they were not functionally integrated or centrally managed and enjoyed no economies of scale. Id., at 35a-36a, 39a. The court nevertheless concluded that the State could tax an apportioned share of Mead‘s capital gain because Lexis served an “operational purpose” in Mead‘s business:
“Lexis/Nexis was considered in the strategic planning of Mead, particularly in the allocation of resources. The operational purpose allowed Mead to limit the growth of Lexis/Nexis if only to limit its ability to expand or to contract through its control of its capital investment.” Id., at 38a-39a.
The Appellate Court of Illinois affirmed. Mead Corp. v. Department of Revenue, 371 Ill. App. 3d 108, 861 N. E. 2d 1131 (2007). The court cited several factors as evidence that Lexis served an operational function in Mead‘s business: (1) Lexis was wholly owned by Mead; (2) Mead had exercised its control over Lexis in various ways, such as manipulating its corporate form, approving significant capital expenditures, and retaining tax benefits and control over Lexis’ free cash; and (3) Mead had described itself in its annual reports and regulatory filings as engaged in electronic publishing and as the developer of the world‘s leading information retrieval service. See id., at 111-112, 861 N. E. 2d, at 1135-1136. Because the court found that Lexis served an operational function in Mead‘s business, it did not address the question whether Mead and Lexis formed a unitary business. See id., at 117-118, 861 N. E. 2d, at 1140.
The Supreme Court of Illinois denied review in January 2007. Mead Corp. v. Illinois Dept. of Revenue, 222 Ill. 2d 609, 862 N. E. 2d 235 (Table). We granted certiorari. 551 U. S. 1189 (2007).
II
Petitioner contends that the trial court properly found that Lexis and Mead were not unitary and that the Appellate Court of Illinois erred in concluding that Lexis served an operational function in Mead‘s business. According to petitioner, the exception for apportionment of income from nonunitary businesses serving an operational function is a narrow one that does not reach a purely passive investment such as Lexis. We perceive a more fundamental error in the state courts’ reasoning. In our view, the state courts erred in considering whether Lexis served an “operational purpose” in Mead‘s business after determining that Lexis and Mead were not unitary.
A
The Commerce Clause and the Due Process Clause impose distinct but parallel limitations on a State‘s power to tax out-of-state activities. See Quill Corp. v. North Dakota, 504 U. S. 298, 305-306 (1992); Mobil Oil Corp., 445 U. S., at 451, n. 4 (STEVENS, J., dissenting); Norfolk & Western R. Co. v. Missouri Tax Comm‘n, 390 U. S. 317, 325, n. 5 (1968). The Due Process Clause demands that there exist “some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax,” as well as a rational relationship between the tax and the “‘values connected with the taxing State.‘” Quill Corp., supra, at 306 (quoting Miller Brothers Co. v. Maryland, 347 U. S. 340, 344-345 (1954), and Moorman Mfg. Co. v. Bair, 437 U. S. 267, 273 (1978)). The Commerce Clause forbids the States to levy taxes that discriminate against interstate commerce or that burden it by subjecting activities to multiple or unfairly apportioned taxation. See Container Corp., 463 U. S., at 170-171; Armco Inc. v. Hardesty, 467 U. S. 638, 644 (1984). The “broad inquiry” subsumed in both constitutional require-
Where, as here, there is no dispute that the taxpayer has done some business in the taxing State, the inquiry shifts from whether the State may tax to what it may tax. Cf. Allied-Signal, 504 U. S., at 778 (distinguishing Quill Corp., supra). To answer that question, we have developed the unitary business principle. Under that principle, a State need not “isolate the intrastate income-producing activities from the rest of the business” but “may tax an apportioned sum of the corporation‘s multistate business if the business is unitary.” Allied-Signal, supra, at 772; accord, Hunt-Wesson, 528 U. S., at 460; Exxon Corp. v. Department of Revenue of Wis., 447 U. S. 207, 224 (1980); Mobil Oil Corp., supra, at 442; cf. 1 J. Hellerstein & W. Hellerstein, State Taxation ¶ 8.07[1], p. 8-61 (3d ed. 2001-2005) (hereinafter Hellerstein & Hellerstein). The court must determine whether “intrastate and extrastate activities formed part of a single unitary business,” Mobil Oil Corp., supra, at 438-439, or whether the out-of-state values that the State seeks to tax “‘derive[d] from “unrelated business activity” which constitutes a “discrete business enterprise,“‘” Allied-Signal, supra, at 773 (quoting Exxon Corp., supra, at 224, in turn quoting Mobil Oil Corp., supra, at 439, 442; alteration in original). We traced the history of this venerable principle in Allied-Signal, supra, at 778-783, and, because it figures prominently in this case, we retrace it briefly here.
B
With the coming of the Industrial Revolution in the 19th century, the United States witnessed the emergence of its first truly multistate business enterprises. These railroad,
The unitary business principle addressed this problem by shifting the constitutional inquiry from the niceties of geographic accounting to the determination of the taxpayer‘s business unit. If the value the State wished to tax derived from a “unitary business” operated within and without the State, the State could tax an apportioned share of the value of that business instead of isolating the value attributable to the operation of the business within the State. E. g., Exxon Corp., supra, at 223 (citing Moorman Mfg. Co., supra, at 273). Conversely, if the value the State wished to tax derived from a “discrete business enterprise,” Mobil Oil Corp., supra, at 439, then the State could not tax even an apportioned share of that value. E. g., Container Corp., supra, at 165-166.
We recognized as early as 1876 that the Due Process Clause did not require the States to assess trackage “in each county where it lies according to its value there.” State Railroad Tax Cases, 92 U. S., at 608. We went so far as to opine that “[i]t may well be doubted whether any better mode of determining the value of that portion of the track within any one county has been devised than to ascertain the value of the whole road, and apportion the value within the county by its relative length to the whole.” Ibid. We generalized the rule of the State Railroad Tax Cases in Adams Express Co. v. Ohio State Auditor, 165 U.S. 194 (1897). There we held that apportionment could permissibly be ap-
As the unitary business principle has evolved in step with American enterprise, courts have sometimes found it difficult to identify exactly when a business is unitary. We confronted this problem most recently in Allied-Signal. The taxpayer there, a multistate enterprise, had realized capital gain on the disposition of its minority investment in another business. The parties’ stipulation left little doubt that the taxpayer and its investee were not unitary. See 504 U. S., at 774 (observing that “the question whether the business can be called ‘unitary’ . . . is all but controlled by the terms of a stipulation“). The record revealed, however, that the taxpayer had used the proceeds from the liquidated investment in an ultimately unsuccessful bid to purchase a new asset that would have been used in its unitary business. See id., at 776-777. From that wrinkle in the record, the New Jersey Supreme Court concluded that the taxpayer‘s minority interest had represented nothing more than a temporary investment of working capital awaiting deployment in the taxpayer‘s unitary business. See Bendix Corp. v. Director, Div. of Taxation, 125 N. J. 20, 37, 592 A. 2d 536, 545 (1991). The State went even further. It argued that, because there could be “no logical distinction between short-term investment of working capital, which all concede is apportionable, . . . and all other investments,” the unitary business principle was outdated and should be jettisoned. 504 U. S., at 784.
We rejected both contentions. We concluded that “the unitary business principle is not so inflexible that as new methods of finance and new forms of business evolve it cannot be modified or supplemented where appropriate.” Id., at 786; see also id., at 785 (“If lower courts have reached divergent results in applying the unitary business principle to different factual circumstances, that is because, as we have said, any number of variations on the unitary business theme ‘are logically consistent with the underlying principles motivating the approach‘” (quoting Container Corp., 463 U. S., at 167)).3 We explained that situations could occur in which apportionment might be constitutional even though “the payee and the payor [were] not . . . engaged in the same unitary business.” 504 U. S., at 787. It was in that context that we observed that an asset could form part of a taxpayer‘s unitary business if it served an “operational rather than an investment function” in that business. Ibid. “Hence, for example, a State may include within the apportionable income of a nondomiciliary corporation the interest earned on short-term deposits in a bank located in another State if that income forms part of the working capital of the corporation‘s unitary business, notwithstanding the absence of a unitary relationship between the corporation and the bank.”
C
As the foregoing history confirms, our references to “operational function” in Container Corp. and Allied-Signal were not intended to modify the unitary business principle by adding a new ground for apportionment. The concept of operational function simply recognizes that an asset can be a part of a taxpayer‘s unitary business even if what we may term a “unitary relationship” does not exist between the “payor and payee.” See Allied-Signal, supra, at 791-792 (O‘Connor, J., dissenting); Hellerstein, State Taxation of Corporate Income From Intangibles: Allied-Signal and Beyond, 48 Tax L. Rev. 739, 790 (1993) (hereinafter Hellerstein). In the example given in Allied-Signal, the taxpayer was not unitary with its banker, but the taxpayer‘s deposits (which represented working capital and thus operational assets) were clearly unitary with the taxpayer‘s business. In Corn Products, the taxpayer was not unitary with the counterparty to its hedge, but the taxpayer‘s futures contracts (which served to hedge against the risk of an increase in the price of a key cost input) were likewise clearly unitary with the taxpayer‘s business. In each case, the “payor” was not a unitary part of the taxpayer‘s business, but the relevant asset was. The conclusion that the asset served an operational function was merely instrumental to the constitutionally relevant conclusion that the asset was a unitary part of the business being conducted in the taxing State rather than a discrete asset to
Where, as here, the asset in question is another business, we have described the “hallmarks” of a unitary relationship as functional integration, centralized management, and economies of scale. See Mobil Oil Corp., 445 U. S., at 438 (citing Butler Brothers v. McColgan, 315 U. S. 501, 506-508 (1942)); see also Allied-Signal, supra, at 783 (same); Container Corp., supra, at 179 (same); F. W. Woolworth Co. v. Taxation and Revenue Dept. of N. M., 458 U. S. 354, 364 (1982) (same). The trial court found each of these hallmarks lacking and concluded that Lexis was not a unitary part of Mead‘s business. The appellate court, however, made no such determination. Relying on its operational function test, it reserved judgment on whether Mead and Lexis formed a unitary business. The appellate court may take up that question on remand, and we express no opinion on it now.
III
The State and its amici argue that vacatur is not required because the judgment of the Appellate Court of Illinois may be affirmed on an alternative ground. They contend that the record amply demonstrates that Lexis did substantial business in Illinois and that Lexis’ own contacts with the State suffice to justify the apportionment of Mead‘s capital gain. See Brief for Respondents 18-25, 46-49; Brief for Multistate Tax Commission as Amicus Curiae 19-29. The State and its amici invite us to recognize a new ground for the constitutional apportionment of intangibles based on the taxing State‘s contacts with the capital asset rather than the taxpayer.
The case for restraint is particularly compelling here, since the question may impact the law of other jurisdictions. The States of Ohio and New York, for example, have both adopted the rationale for apportionment that respondents urge us to recognize today. See
The judgment of the Appellate Court of Illinois is vacated, and this case is remanded for further proceedings not inconsistent with this opinion.
It is so ordered.
JUSTICE THOMAS, concurring.
Although I join the Court‘s opinion, I write separately to express my serious doubt that the Constitution permits us to adjudicate cases in this area. Despite the Court‘s repeated holdings that “[t]he Due Process and Commerce Clauses forbid the States to tax ‘extraterritorial values,‘” ante, at 19 (quoting Container Corp. of America v. Franchise Tax Bd., 463 U. S. 159, 164 (1983)), I am not fully convinced of that proposition.
To the extent that our decisions addressing state taxation of multistate enterprises rely on the negative Commerce
The Court‘s cases in this area have not, however, rested solely on the Commerce Clause. The Court has long recognized that the Due Process Clause of the Fourteenth Amendment may also limit States’ authority to tax multistate businesses. See Adams Express Co. v. Ohio State Auditor, 165 U. S. 194, 226 (1897) (concluding that because “[t]he property taxed has its actual situs in the State and is, therefore, subject to the jurisdiction, and . . . regulation by the state legislature,” the tax at issue did not “amoun[t] to a taking of property without due process of law“). I agree that the Due Process Clause requires a jurisdictional nexus or, as this Court has stated, “some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.” Miller Brothers Co. v. Maryland, 347 U. S. 340, 344-345 (1954); see ante, at 24. But apart from that requirement, I am concerned that further constraints—particularly those limiting the degree to which a State may tax a multistate enterprise—require us to read into the Due Process Clause yet another unenumerated, substantive right. Cf. Troxel v. Granville, 530 U. S. 57, 80 (2000) (THOMAS, J., concurring in judgment) (leaving open the question whether “our substantive due process cases were wrongly decided and . . . the original understanding of the Due Process Clause precludes judicial enforcement of unenumerated rights“).
Today the Court applies the additional requirement that there exist “a rational relationship between the tax and the values connected with the taxing State.” Ante, at 24 (internal quotation marks omitted); see also Moorman Mfg. Co. v. Bair, 437 U. S. 267, 273 (1978) (requiring that “the income attributed to the State for tax purposes . . . be rationally
Although I believe that the Court should reconsider its constitutional authority to adjudicate these kinds of cases, neither party has asked us to do so here, and the Court‘s decision today faithfully applies our precedents. I therefore concur.