*1 BAIR, CO. MANUFACTURING MOORMAN IOWA REVENUE OF DIRECTOR OF June Argued 1978 Decided No. 77-454. March *2 J., opinion Court, Stevens, J., delivered the Burger, which C. and JJ., joined. and Stewart, White, Marshall, RehNQUist, BreNNAN, J., post, p. 281, and J., post, p. 282, dissenting opinions. filed BlackmuN, J., dissenting Powell, opinion, J., joined, filed in which BlackmuN, post, p. 283.
Donald K. Barnes for argued appellant. the cause With Brown, him on Donnelly, the briefs were Walter R. John V. Carl O. Schmiedeskamp, Robert W. Cook. and
Harry Griger, Attorney M. Assistant of Iowa, General argued the cause for him appellee. With on the brief was Turner, Richard C. Attorney General.* Christian, Jr., *Ernest S. and Allan Tuttle Abbot filed a for the brief Committee on State Taxation Council of State Chambers of Com- urging merce as curiae amicus reversal. Rogers, Phillips, Philip James L. John R. and B. Kurland filed a brief Assn,
for the Iowa Manufacturers et al. urging as amici curiae affirmance. Dexter, Redden, Attorney Wiliam D. Oregon, James A. General deLooze, General, Theodore Attorney W. Assistant filed a brief for the Multistate Tax Comm’n et al. as amici curiae.
Mr. Justice Stevens delivered opinion the Court. question in this case is whether the sales employed apportion by Iowa to income of an interstate business for tax purposes prohibited by Federal Constitution.
I Appellant, Moorman Manufacturing Co., is an Illinois corporation engaged in the manufacture sale of animal feeds. Although products it sells to customers are manufactured Illinois, appellant has over salesmen in Iowa and owns six warehouses in from the State which deliveries are made to Iowa customers. Iowa sales account of appellant's about total sales. 20% *3 both
Corporations, and foreign doing business in domestic, subject Iowa are to the income State’s tax. taxable for income federal income adjust- tax with certain purposes, as ments, corporation’s treated the “net income” under the If Iowa statute. a corporation’s is not business conducted entirely Iowa, imposes within the only statute tax on the portion income “reasonably of its to attributable” the business within the State. essentially
There in steps computing are two the share of corporation’s income “reasonably to First, attributable” Iowa. income, certain “the geographical easily source of which is entirely particular attributed identifiable,” to a State.1 provides: 1The statute
“Interest, dividends, rents, royalties (less expenses) and related received state, state, connection business in with the shall be allocated to the where connection state, received with business the shall be outside (1) (a) (1977). allocated of the state.” outside Iowa Code §422.33 describing In section, Supreme the Court that “certain stated income, geographical easily identifiable, the source of which is is allocated appropriate Thus, to the 737, example, state.” 254 W. 2d for N. 739. rental property income would be to the attributed State where was appellant’s case, this operated located. And in section to exclude its in- vestment income from the tax base. manufac- is derived from the if the
Second, remaining part “the thereof personal property, ture or of tangible sale business within the state shall to attributable bear within the state which the sales made proportion gross This is the gross the total sales.” to in this case. appellant challenges of this formula taxpayer application If believes that net income portion of its subjects greater it taxation on a to State, business within “reasonably than is attributable” to alternative objections file and submit an may a statement If the evidence submitted apportionment. method the statute is persuades Director of Revenue that taxpayer he recal- “inapplicable inequitable” applied it, as corporation’s income. culate the taxable Tax years the State During through the fiscal income on compute its Iowa appellant Commission allowed weighted consisting equally of three, basis a formula than the formula sales—rather property, payroll, and factors — prescribed years through 1964, For by statute.3 the fiscal appellant complied with directive of Commis- the State Tax statutory with the compute sion to its income accordance appellant has resorted to 1965, however, formula. Since consent the commission. three-factor formula without the appellant’s In Director of Revenue revised the Iowa years through fiscal 1972. This tax assessment *4 statutory pro- on the which formula, assessment was based (1) (6) (1977). Iowa Code §422.33 briefly operation The of the two formulas described. The yields gross single-factor percentage representing sales formula a ratio of a yields gross sales Iowa to total sales. The three-factor formula average percentage representing property an the three ratios: within payroll payroll, and property, State to total within the State to total sales the sales. within State to total percentages multiplied adjusted are net income to
These total figure then multi- arrive at Iowa taxable net income. net This income plied by obligation taxpayer. compute the tax rate to the actual tax of the appellant, of taxable than higher percentage
duced a income had on its return in formula, reported the three-factor using higher percentages, course, The disputed of the years.4 each for those produced greater obligation tax correspondingly years.5 appeal rejected had Moorman’s
After the Tax Commission the consti- appellant challenged assessment, from the revised District in the tutionality single-factor formula formula invalid County. Polk That court for held Court Amendment Due Fourteenth under the Process Clause of Iowa Court Supreme the Commerce Clause. formula that reversed, holding that an properly income necessarily only approximation a rough constitutional subject is not taxing attributable to has pro- proves taxpayer unless attack “out of to the proportion all duced an attribution concluded court transacted” the State. The business within appellant showing. had not made such appeal, 434 of Moorman’s probable jurisdiction noted We now 953, and affirm. II formula results Iowa’s contends Appellant Due violation of the Process taxation in extraterritorial following percentages: years the in the those two formulas resulted 4For 3, supra. n. computed, are see description percentages of how these For a computation example, Moorman’s Thus, three-factor single-factor computa $81,466, in a whereas Director’s tax resulted $121,363. in a tax of tion resulted
Clause. This argument premises: rests on two first, appellant’s operations Illinois responsible were for some of the profits generated by Iowa; sales and, second, that a formula any reaches income not in fact earned within the borders of taxing State violates process. due The premise first speculative and the second is by prior foreclosed decisions of this Court.
Appellant does not suggest signifi- has shown that a portion cant of the income attributed to Iowa fact was generated by its Illinois operations; the record does not contain any separate analysis accounting showing portion what appellant’s profits was sales, attributable to to manufacturing, or phase other company’s operations. But appellant contends that we proceed should on the assumption portion that at least some the income from Iowa was sales generated by Illinois activities.
Whatever assumption merit such an might from the have standpoint of economic theory legislative cannot policy, it support a claim litigation in this profits that Iowa in fact taxed not attributable to activities within during years the State through 1972. For all record reveals, appellant’s manufacturing operations in Illinois were only marginally profitable during years those high-volume and the sales to Iowa customers from Iowa warehouses responsible were lion’s share generated those Indeed, sales. separate accounting analysis might have revealed that losses operations prevented Illinois appellant from earning more exploitation income from highly favorable market. Yet even were we assume that the Illinois activities made some contribution to profitability sales, appel- of the Iowa claim lant’s that the invalidates an Constitution it may whenever result taxation of some income that did not its source in taxing have State is incorrect. places Due Process Clause two restrictions a State’s power to generated tax income by the activities of an interstate
business. no tax First, imposed is unless there some minimal connection between those activities taxing and the Hess, Revenue, State. Bellas Department National Inc. v. 753, U. S. 756. This requirement was satisfied plainly Second, here. the income attributed the State for tax purposes must be rationally related to connected with “values the taxing State.” & Western R. Co. v. State Tax Norfolk Comm’n, 390 U. S. 325.
Since 1934 has used computing the formula method of taxable This separate accounting, income. method, unlike does purport identify precise geographical source of corporation’s a profits; is rather, employed rough it as a approximation of corporation’s reasonably a income that is to the taxing related activities conducted within the State. The single-factor by generally formula Iowa, therefore, used produce figure will not a represents profits the actual earned within the State. But the Illinois same true three-factor Both occasionally formula. will over-reflect under-reflect taxing income attributable to the State. Yet despite this Court has imprecision, impose refused to strict constitutional particular restraints a State’s selection of a formula.6 repeatedly we have held that
Thus, a presumptively Typewriter In valid. Underwood Co. v. Chamberlain, 254 U. S. for example, taxpayer chal- lenged Connecticut’s use of such formula to apportion its net income. Underwood’s manufacturing operations were con- ducted within entirely office, however, Connecticut. Its main was in City many New York had branch officesin its typewriters repaired. Applying where were sold and single-factor property formula, Connecticut taxed 47% company’s income. Claiming profits net were its 97% See, 113; g., Typewriter Chamberlain, e. Co. Underwood v. 271; Ltd. v. Bass, Gretton, 266 U. S. Comm’n, & Ford State Tax Ratcliff S. 331. Co. Beauchamp, Motor personal property tangible transactions outside generated formula taxed Underwood contended that Connecticut, beyond from business conducted the bound- arising “income Id., aries of Due Process Clause. the State” violation 120. claim, the Court noted that Connecticut Rejecting “adopted apportionment which, method of all *7 appears only in to record, reach, and was meant reached, id., profits State,” 121, earned within the at and held that to that taxpayer carry proving had failed its burden adopted by the apportionment “the method of State was application corporation its to this inherently arbitrary, that Ibid, 7 produced (footnote omitted) unreasonable result.” an In it is cases, true, individual the Court has found that the application particular taxpayer formula to single-factor a a Rees’ Sons, See Hans Inc. v. North due process. violated Maxwell, ex rel. & R. Carolina Western 123; U. S. Norfolk Rees’, supra. Co. Tax Hans In Comm’n, v. State example, proof produced the Court concluded that that the formula a taxpayer’s only tax on income when of that 83% 17% actually had in its source the State would to suffice under invalidate assessement the Due Process Clause. neither Hans Rees’ & Western did the nor But Norfolk depart Court from the basic principles that the States have wide latitude the selection of formulas and a formula-produced only that will assessment be disturbed taxpayer proved when the has “clear cogent evidence” the income attributed to the is in fact “out of all appropriate proportions to the business transacted ... State,” 283 U. or has “led to a S., grossly distorted result,” S., at 326. Corp. Columbia,
General Motors District Bass, Gretton, Comm’n, supra; & Ltd. v. State Tax also See Ratcliff & Western R. Co. Maxwell, v. North ex Carolina rel. 297 U. S. Norfolk 682. contrary result. appellant relies, suggest
on which does not prescribing held regulation In that a that case Court by the District formula was not authorized single-factor sales violated Code. It concluded that the formula of Columbia corporation the net income statutory requirement must inside and outside the District doing business both outside “sources” both inside and deemed to arise from counterpart no statutory has requirement But that District. made and the in General Motors in the Court Constitution, on the any position mean consti- did “not take clear that it factor based the sales tutionality of a state income tax Id., at 561.8 alone.” opportunity to appellant an
The Iowa statute afforded arbi produced an demonstrate that contains no such But this record trary its case. result subject Director’s assessment and therefore the showing Due Clause.9 under the Process challenge true, expressed wisdom of the Court, doubts about *8 underlying challenged that its assumptions formula and noted the economic prevalent not formula would more three-factor use in the context the underlying But con Commerce Clause. these policies the advance the question legislative intent, not to relevant the siderations were deemed interpretation. constitutional Supreme the Iowa concurring opinion, In Justice McCormick of his point: this Court made attempt case, prove the amount of “In Moorman did not to present the Iowa, years involved. Therefore
its net income from activities the actual comparison income corporation’s of the Iowa presented was for no basis the In this era of apportioned to under formula. and the income Iowa impossible for a sophisticated accounting techniques, be it should not par- unitary prove activities in a corporation its actual income from to liability only would However, Moorman showed that tax ticular state. its substantially employed a less if Iowa three-factor three-factor formula basis to that the formula. have no assume We equivalent from Iowa corporation’s to the actual income produced a result comparison of actual Having establish a basis for its activities. failed to single-factor apportioned to the Iowa with the income Iowa under formula, Moorman did not demonstrate the Ill years Appellant during also contends that the relevant imposed portion and Illinois a tax on a of the income derived by from the Iowa was sales that also taxed other State violation of the Commerce Clause.10 Since most use three-factor adopted appellant formula that Illinois in 1970, that Iowa’s argues longstanding single-factor formula must be responsible duplication held for the alleged and declared unconstitutional. We cannot agree.
In this record does not the essential place, first establish predicate duplicative factual a claim of Appel- taxation. during years lant’s net income in question approxi- was million. mately appellant portion $9 Since not prove did from sales to Iowa customers, derived rather than sales in other States, customers we do not know whether Illinois and imposed Iowa together a tax on more than 100% net relevant income. The income figure appellant con- subject duplicative tends was taxation computed by was comparing gross sales in Iowa to gross total sales. As already noted, however, figure represent does profits actual from Iowa sales. Obviously, earned all sales not equally are profitable. Iowa, only Sales although gross sales, 20%> may yielded higher have a much percentage appellant’s profits. Thus, profits from Iowa sales well have exceeded million figure appellant by $2.5 contends was taxed If so, States. there was no duplicative two taxation net income In generated Iowa sales. on this event, speculative.11 record its existence is produced grossly unconstitutionality unfair prove result. Thus it did not applied.” 2d, of the formula as 254 N. W. 757. *9 adopt 1970, Since did not Illinois its income tax until there was no any overlap possibility year. of alleged overlap until that in the three years following Illinois’ enactment of an income tax was 34.38% in 1972. 34.51% 37.01% regarding percentages Since there is no evidence in the record the of its total net income taxed in other during the States in which it business did
Even some assuming we overlap, accept appellant's could not argument that Iowa, rather than Illinois, necessarily was at fault sense. constitutional It of is, course, true that if Iowa had used Illinois’ three-factor risk of formula, duplica- tion in figures computed the the two by might have been avoided. But the same would Illinois be true had used the Iowa formula. Since the record does not the reveal sources appellant’s profits, its Commerce Clause claim cannot rest premise the profits earned in Illinois were included in its Iowa taxable income and therefore the Iowa formula was fault overlap whatever may have existed. Rather, claim must be if that even presumptively valid Iowa formula yielded profits no other than properly those attributa- ble appellant’s importance activities within Iowa, the avoiding any risk of duplication in the taxable income of an interstate justifies concern invalidation of the Iowa statute.
Appellant contends that, to the this overlap per- extent mitted, corporation that does business in more one than State shoulders a tax burden by not shared those operating entirely within a State.12 To appellant alleviate the burden, years, any appellant those claim that was taxed on more than of its 100% speculative. total net income would also be 12Appellant also contends that the Iowa formula discriminates Equal interstate commerce in violation of the Commerce Clause and the Clause, Protection corporation doing because an Illinois business in Iowa pay greater tax portion must on a company, of its income than a local Iowa company and an Iowa doing pay business Illinois will tax on its less of corporation doing income than an simple Illinois business in Iowa. The answer, however, disparity is that whatever have existed is not to the foreign attributable Iowa statute. It treats both local and concerns hand; alleged disparity only consequence with an even can be the the Iowa effect of combined statutes, Illinois and Iowa is not responsible for the latter. appellant’s
Thus, simply way “discrimination” claim describing potential consequences by of the use of different formulas two consequences, however, States. These adoption could be avoided rule; uniform the “discrimination” does not inhere in either State’s formula.
invites us to hold that the Commerce Clause without itself, implementing legislation by Congress, requires Iowa to com- pute corporate net income under the Illinois equally weighted, three-factor formula. For follow, the reasons that we hold the require Constitution does not such a result. only conceivable constitutional basis for invalidating the Iowa statute would be Commerce prohibits that the Clause any overlap in the computation of taxable income by If States. the Constitution were read mandate such preci- sion in interstate taxation, consequences would extend far beyond particular duplicative case. For some risk of taxation exists corporation whenever the in which a States does business do not follow identical rules the division of income. Accepting appellant’s view of Constitution, therefore, would require judicial extensive lawmaking. logic Its is not prohibition limited to a on use of single-factor apportionment formula. The asserted constitutional flaw in that formula is it is presently employed different from that by a majority of States and that difference creates a risk of duplicative taxation. But a host other division-of-income problems precisely create the same risk similarly and would rise to proportions. constitutional
Thus, would necessary for this prescribe Court to uniform definition of each category the three-factor formula. For if the corporation which a does business have different rules regarding where a “sale” takes place, each includes the same sale in its computation three-factor corporation’s income, duplicative there will be despite taxation apparent identity employed.13 formulas A similar 13Thus, while by some States such as assign destination, sales “sales which, assigned can be to the origin, state ... of the state in the sales office located, is employee the state making where an business the sale car ries on his activities or where the accepted, order first or the state in shipment which an interstate Note, made.” Taxation Interstate Compact: Businesses and the Multistate Tax The Search for a Delicate diversity among multiple is created risk taxation *11 generally income, “nonbusiness” in the attribution of States does not portion taxpayer’s as that of a income that defined of its business.14 regular from in the course arise activities non- business and distinguish do not between Some States States, Other apportionment purposes. business income for nonbusiness adopted special rules that attribute however, have latter, the specific Moreover, among to locations. even income income and diversity in definition of nonbusiness there is the to it is deemed designation in the of the locations which income of same potential attributable. The for attribution the plain.15 to more than one is State would therefore, duplicative taxation, of prevention income. for of national uniform rules the division
require undeniably code would adoption the of a uniform Although it Clause, underlie the Commerce policies that advance economic political based require policy would decision to The Constitu- from State State. vary considerations of any to the content respect with tion, however, is neutral to be were problems If division-of-income uniform rule. to be resolved they would have constitutionalized, therefore, of by appellant for resolution suggested in the manner be endorsed as would prevalent practice diversity —the amalgam best be an This rule would at constitutional rule. unique decisions, based on considerations state independent could not reflect importance, Of most to each State. (citation (1975) Uniformity, 11 Colum. Law & Soc. Prob. n. J. omitted). (a). Purposes Act g., Income for Tax See, § e. Uniform Division may consider a business Thus, corporation one in which a does simply it in its include income and particular type of income business income may deem that same formula; a second State domicile” as “commercial and attribute it to itself nonbusiness though considering it nonbusiness State, also company; and a third company. “legal domicile” of the income, may itself as the attribute it to supra Note, n. at 239. See
national interest, because the interests of those whose policies quest uniformity are subordinated would be excluded from the calculation.16
While the freedom of independent the States to formulate policy in yield this area overriding have to to an national interest in uniformity, the content of uniform to rules which they must subscribe should be only determined after due consideration given to the interests all affected granted States. It clear that legislative power Congress by the Commerce Clause of the Constitution would amply justify the enactment of legislation requiring all States to adhere to uniform rules for the division income. It is body, Court, Constitution has *12 policy committed such decisions.
Finally, it would be an exercise in formalism to declare appellant’s income tax assessment unconstitutional on based speculative multiple concerns with taxation. For is evident appellant would have no complaint had basis for if, instead of an tax, income Iowa had imposed a burden- more some gross-receipts on tax the gross receipts from sales to Iowa In customers. Standard Pressed Steel Co. Washington v.
Revenue Dept., 419 U. S. the Court sustained a tax on the gross entire receipts from taxpayer sales made into Washington Because receipts State. from sales made to States other than Washington were not included Standard Pressed gross Steel’s taxable the Court receipts, concluded that the tax “ ” was 'apportioned exactly Id., to the activities taxed.’ at 564.
In appellant’s this case actual income tax obligation was the rough equivalent of 1a tax on gross receipts- the entire from % its Iowa sales. the actual on Thus, burden interstate com- merce would have been the same had Iowa imposed plainly a process especially This is unsettling longstanding policy if a tax of one State, Iowa’s, object such as simply becomes the of constitutional attack because it adopted is different from the recently practice neighbor. itsof gross-receipts valid tax of the challenged instead income tax. Of more significance, gross-receipts tax sustained Standard Washing- Pressed Steel Corp. and General Motors v. ton, inherently is more than burdensome Iowa income tax. It applies whether not the interstate profitable concern imposition and its the differ- may make ence profit between and loss. In contrast, the income tax is only imposed enterprises showing profit and the tax obligation heavy profits unless the high. are until Accordingly, Congress prescribes different Iowa rule, is not constitutionally prohibited taxpayers from requiring prove that application pro- of the formula has single-factor arbitrary duced results in particular case.
The judgment Supreme is affirmed. Court
So ordered. Justice dissenting. Mr. Brennan, I agree with the that, purposes Court of constitutional review, there is no distinction corporate between a tax I gross-receipts and a do not agree, however, tax. Iowa’s sales- meets the requirement Commerce Clause that a State’s taxation of inter- “fairly state apportioned business must to the commerce taxing carried on within Western Stock state.” Live *13 Revenue, I Bureau 303 256 As have 250, (1938). previously explained: significant contacts with more exhibits
“[Where sale] activity than one ... it is the commercial within State State, volume, and not the sales which determines power tax, appor- to which the tax must be State’s tioned. the ratio in-state to out-of-state sales While others in among often taken into account as one factor g., firm’s apportioning a total net de- income, see, e. Formula’ in 75 Harv. scription Note, of the ‘Massachusetts remains true that (1962), L. Rev. it nevertheless activity if commercial more than one State results them, sale in one of that State not claim as all its own gross receipts activity which to within its borders only part. has contributed appor a tax must be Such tioned activity to the business within taxing reflect Washington, State.” General Motors Corp. S.U. 436, 450-451 (1964) opinion). (dissenting I would therefore reverse.
Mr. Justice Blackmun, dissenting. but unspoken, obvious, premise majority opinion is the fear that a Commerce Clause invalidation of Iowa’s single-factor sales problems lead Court into will I yet difficulties other cases reject come. premise. agree
I generally with the content of Mr. Justice Powell’s opinion join dissent. I opinion feel I, too, because that the duty Court has a to resolve, not to- prob- these avoid, Boston Exchange Stock v. lems “delicate adjustment,” Comm’n, Tax 429 U. S. and because the (1977), opinion well demonstrates Iowa’s now anachronistic single-factor sales formula runs into headlong overriding Com- merce Clause considerations and demands.
Today’s decision is bound be regressive.1 Single-factor formulas days are relics of the early of state income taxation.2 The three-factor improvements formulas were inevitable and, while not perfect, accurately reflect more the realities of the business and tax world. With their almost adoption universal by the States, system’s parochial Iowa adverse and im- pact on commerce vividly comes into focus. But with its 1Iowa is not a member of the Multistate Tax Commission. Tr. Oral Corp. Comm’n, See United States Steel Arg. 33. v. Multistate Tax U. S. 452 adopted income tax Iowa’s was first in 1934. 1933-1934 Acts, Sess., 82; Arg. Ex. Tr. ch. of Oral 29. Its sales formula was original embraced in 28 of that Act. § *14 is little
single-factor upheld by Court, formula now there why other a similar States, perceiving imagining reason ways. go to local back to the old advantage interests, the Com- result, event, The end to exacerbate what de- congressional action, merce absent was Clause, governing vised to avoid. Blackmun Powell,
Mr. Justice with whom Mr. Justice joins, dissenting. duty adjustment
It is delicate this Court “to make the and the open between the national interest in free and trade exercising their legitimate interest of the individual States in Comm’n, Exchange Boston Stock State Tax powers.” taxing v. with duty performed 429 U. This must be (1977). S. consid- settings particular careful attention to the cases and Transp., Raymond Motor special eration their facts. See Rice, Inc. (1978). v. n. 25 Consid- 429, 447-448, con- eration of all case leads me to the circumstances clude that Iowa’s sales formula single-factor use of a apportion corporations results the net income of multistate imposition of “a tax which discriminates interstate advantage commerce direct commercial by providing ... Co. Cement to local business.” Northwestern States Portland Minnesota, I dissent. therefore 358 U. S. I formula— sales-apportionment Iowa’s use of manu- goods a tariff though facially operates as neutral — manufacturers subsidy factured in to Iowa other and as a States 45 other 44 of the their Iowa. Because selling goods outside of Columbia) impose which District of (including the involving corporate income taxes use a three-factor out- practice insures property, sales,1 Iowa’s payroll, Arkansas, Alabama, Alaska, Arizona, Those 44 States are follows: as Columbia, Florida, Colorado, Connecticut, Delaware, California, District *15 selling total tax higher in Iowa will have businesses of-state from result follows than local This payments businesses. the income derived all of fact that Iowa attributes to itself using the three- in from while other Iowa, taxing sales States — of the same portion taxing also some factor formula —are in those payroll to through property attribution States. that a to the extent surcharge on Iowa sales increases
This can Iowa. It labor are located outside plant business’ and force payroll only all and locating property altogether be avoided will never only in Iowa Iowa; selling an Iowa manufacturer to other any portion have of its income attributed State. makes manufacturer its sales And to the extent that an Iowa liability tax other overall state will Iowa, than its liability to other comparable tax its Assuming rates, reduced. appor- only in which sales constitute one-third States, less the amount would formula, tionment will be far than comparable Iowa, with of sales in where have owed a volume income. apportioning sales are exclusive mode out-of-state penalize effect of then, Iowa’s formula, Iowa manu- selling manufacturers for in Iowa and to subsidize selling facturers other States.2 Louisiana, Indiana, Kentucky, Hawaii, Idaho, Kansas, Georgia, Illinois, Maine, Maryland, Mississippi, Mis- Massachusetts, Michigan, Minnesota, Nebraska, Mexico-,New souri, Montana, Hampshire, Jersey, New New New Pennsyl- York, Carolina, Dakota, Ohio, Oklahoma, Oregon, North North vania, Utah, Virginia, Carolina, Tennessee, Vermont, Island, Rhode South and Wisconsin. Virginia, 45th omits State,
West uses two-factor formula which component. property for- sales Colorado also has a and sales two-factor mula, formula, and Missouri one-factor sales which are available option taxpayers at their as alternatives formula. to the three-factor simplified example A Iowa demonstrates the economic effect corporations. formula on out-of-state Corp. Iowa, property payroll and its are domiciled total Corp. Illinois, property
located there. Illinois is domiciled in with all its payroll income, corporations $1 in that Both net State. have million in appeal This requires us to determine whether these economic effects apportionment the Iowa formula violate either the Due Process Clause or the I Commerce Clause. now turn to questions. those
and both make half their sales in Iowa and half in A Illinois. 5% corporate income tax is levied in both States.
If both States use formula, sales both *16 go through would following liability calculation determining the tax corporations: of both pattern payments receipts
The and would be as follows: If again levy both Iowa and Illinois the same income tax but use 5% formula, the three-factor which is: corporation’s payment then each to its state of domicile would be payment its foreign corporation the state in which it is a would pattern payments receipts of tax would be as follows: where Illinois
But Iowa uses a sales formula and uses II ante, agree given by 271-275,1 Court, For reasons not Due formula does violate the of Iowa's application it clear of this Court make Clause. The decisions Process expected apportion not from perfection is to be arithmetical Evatt, Co. Harvester v. International ment formulae. “apportionment It been said that (1947). U. has S. desire not to interfere a cross between theory mongrel one, is a utterly same time with taxation and desire at the state Airlines, Northwest Inc. crush out interstate commerce.” concurring). Minnesota, (1944) (Jackson, J., respect to a business fact that with It owes its existence to the with beginning through a series of transactions earning another, with a sale ending one manufacturing in State logical precise wholly even —determination —or earned is the income was portion which specific Chamberlain, 254 Typewriter Co. v. impossible. Underwood 113, 120-121 S. *17 at formula —like the one particular the that Hence, fact actually tax may permit issue a State to some here — basis for in of itself a “located” another is not State Corp.. state tax method, increase in its overall three-factor Illinois faces an by liability Corp.: not encountered depending upon tax larger, the actual
These differences will be smaller or involved, upon proportions rates the actual of the various States foreign sales, properties individual payrolls, domestic to and the factors, Only change corporations. magnitudes how- will with these ever, general principle will impact. and not the direction of apply in all cases.
287 finding process it otherwise, any a due violation.3 Were for deviating mula detail from used other smallest that States would be means of invalid. Because there is no ideal "locating” uniformity such cannot any rightful share, State’s be Hence, dictated this Court. of this Court decisions properly require the due violation taxpayer claiming process to show the apportionment appropriate is “out of all proportion Sons, business Hans Bees’ Inc. transacted.” Maxwell, v. North Carolina ex (1931). rel. 135 U. S. I appellant As has failed any showing, agree to make such with the Court that process no due violation has been made out here.
This conclusion does not ipso mean Commerce facto Clause strictures are well. satisfied as This Court’s decisions dealing with state levies against that discriminate out-of-state business, compel as Iowa’s more does, formula detailed inquiry.
Ill A principle It is a basic jurisprudence Clause Commerce either the nor power police power may to tax “[n] mean, suggests, ante, 277-280, This does not as the Court that this determining apportion Court is particular disabled from ever whether a imposes upon ment multiple burdens or discriminates Corp. interstate commerce. See Motors General v. District Columbia, (1965); Bass, 380 U. S. Gretton, & Ltd. State Tax Ratcliff Comm’n, Typewriter (1924); S. 271 Co. Underwood v. Chamber lain, Regardless of which accurately formula more segment particular locates which is earned, of income is a mathematical fact that the use different formulae result in *18 corporation’s taxation on more than under the State’s 100% definitions, 2, supra. own as well tax as skewed effects. See n. When predictably discriminatory this result effect, has a burdensome or Com scrutiny triggered. merce Clause See Part III, The effects infra. challenged upon particular corporation’s strictly income is only inquiry related under Clause, the Due Process since Commerce analysis impact upon general. Clause focuses on the commerce in 288 and effect by the of destination with aim state
used competition with an economic barrier establishing or the labor of the residents.” products another state Inc., (1935); Seelig, F. 527 511, v. G. 294 U. S. Baldwin A. 532 Mond, Du 336 U. H. P. Hood & Sons v. S. accord, Exchange, 335-336, Boston Stock 429 (1949); S.,U. at clog 14. Those barriers constitute “an unreasonable n. would Baldwin, supra, at 527. upon mobility of commerce.” “discriminating form of such unreasonable restrictions One Missouri, 280 91 U. legislation.” Welton v. S. state and consistently This Court has struck down (1876). unjustifiably benefit local businesses local taxes which Ibid.; Boston accord, of out-of-state businesses. expense Reily, Exchange; Co. 373 Halliburton Oil Well v. Stock Richmond, (1946); 327 U. 416 (1963); Nippert 64 v. S. S. M. Inc., I. Trading, Bimco 306 U. 375 (1939); Hale v. S. Guy v. (1908); 113 Memphis, & Son 208 U. Darnell v. S. Baltimore, (1880). 100 U. S. terms by their applies only
This ban to state levies or which products business, are limited to of out-of-state than local rates explicitly higher tax out-of-state sellers at practical “in It their sellers. also reaches those taxes interstate commerce operation discriminatorily against [work] very threat impose upon either fact burden, For Richmond, supra, at 425. Nippert its incidence.” v. fixed-fee facially neutral example, this Court has invalidated a “drum from out-of-state license tax collected all local and heavily upon more appeared where it the tax fell far mers,” no little or had businesses, out-of-state since local businesses Shelby Robbins v. to solicit sales that manner. occasion Dist., West Taxing See also County 120 U. S. (1957) ; Grocery Opelika, Co. Point Wholesale v. Stone, Cleaner, Laundry Inc. 342 U. S. Memphis Steam Maxwell, Real 311 U. (1940); Best & Co. v. S. (1952);
2.89 Portland, Silk Hosiery Mills v. S. 325 (1925); 268 U. Corson Maryland, v. 120 (1887). Thus, U. S. 502 the constitutional inquiry simply relates not to the particular form the tax, but on competition to its effect in the several States.
As indicated in I above, application Part single- Iowa’s sales-apportionment factor formula, general in the context use of three-factor formulae, inevitably handicaps out-of-state businesses competing for sales in handicap Iowa. The will diminish to plant the extent its corporation locates and labor force in Iowa, competitive but some disadvantage will remain unless corporate property payroll all of the are relocated In Iowa.4 of congressional action, absence the Commerce Clause constrains view us to the State’s interest particular this retaining levy against as constitutional preference open for an economy. See, g., e. Motor Raymond Transp., Rice, Inc. v. 434 Pike S.,U. v. Bruce 440-442; Inc., Church, 397 Di 137, Pennsyl U. 142 v. (1970); S. Santo vania, 273 34, J., U. S. 44 (1927) (Stone, Dowling, dissenting); Interstate Commerce 27 L. Power, 1, and State Va. Rev. 15, and n. 20 (1940). 14— 4 clog present on commerce im here is similar risk of to the
posing “multiple
against
burdens”
interstate
commerce
which the
g.,
e.
Live Stock
See,
Court has warned in
Western
various decisions.
v.
Revenue,
Mfg.
Bureau
J.
Adams
250,
(1938);
303 U. S.
255-256
D.
Storm,
Prince,
Co.
(1938); Gwin,
304
&
Inc.
307,
v.
White
311-312
v.
Henneford,
States Portland
(1939);
305 U. S.
Northwestern
Cement
Minnesota,
(1959). Compare Evco
Co. v.
B *20 not revenues is any particular in level tax Iowa’s interest It can- sales formula. by single-factor the use of the affected result application that its will certainty be with predicted not If needs any other formula.5 higher revenues than adjustment adjust it can its tax rates. That revenue, more impact necessarily flowing discriminatory would not have the if single-factor Hence, sales formula.6 from the choice of the by of the to be cannot be virtue sustained, Iowa’s choice is it power or its to tax. No protecting its fisc State’s interest Iowa’s If we are to justification other is offered. uphold no consistent must be because formula, it apportionment invalida- developed can be that could account principle of other support application formula, yet tion of the Iowa imprecise formulae. States’
5 and retained example, if to a three-factor formula For Iowa switched decrease, corporations rates, would revenues from out-of-state the same attributing longer itself earned no be to all since Iowa would corporations by corporations. from located Iowa sales of such Revenues attributing to Iowa, however, increase, since Iowa would now be would portion corporations’ earned those out-of-state itself some of the income 2, supra. also n. sales. See variety nearly taxes, rates, infinite Given to formulae, might possible it be for Iowa alter its tax structure to entire way discrimination, perhaps it effect similar to do in a that avoids scrutiny. “Form” in the Barrett, vs. Commerce Clause See “Substance” Taxation, 101 U. Rev. Application of the Commerce to State Pa. L. Clause striking (1953). possibility speculative cannot deter us from That down an interstate commerce when one obvious discrimination duty past. To presented. The Court has shrunk from that never Clause applying do so would be to abandon effort of Commerce principles to tax state measures. say always tax incentives
This is not are forbidden to offer to See, g., encourage industry goals. local state e. achieve other valid Hughes Scrap programs, Corp., v. Alexandria Such being served, case-by-case and the interests on a basis. must be considered
c It argued since this Court has several occasions upheld the use single-factor formulae, cannot Iowa’s scheme regarded suspect as because does not simply embody prevalent three-factor theory. Consideration the decisions dealing with formulae, reveals that each however, is distinguishable.
In Underwood Typewriter
Chamberlain,
Co. v.
S.
113 (1920),
upheld
this Court
single-
Connecticut’s use of a
property
factor
formula to
net
apportion
profits
of a
foreign corporation. Such a formula is
clearly
discrimi-
natory in Commerce Clause
only competitive
terms. The
*21
disadvantage
inevitably
from
would
resulting
it
attend a
decision to locate
plant
in
office
the taxing State. The
Commerce Clause does not concern itself
deci-
with a State’s
place
sion to
local business at a
Allied
disadvantage. Cf.
Ohio,
Bowers,
Stores
Inc. v.
358 U.
(1959).
S.
528
of
Bass,
Gretton,
Comm’n,
&
Ltd. v. State Tax
266
Ratcliff
271 (1924),
Bass,
is similarly distinguishable.
In
New
apportioned
York
foreign corporations
the net income of
using
a single-factor property
comprised
formula that
real and
personal
tangible
property,
receivable,
bills and accounts
stock
corporations.
other
upheld
This Court
that formula,
observing
plaintiff
“applica-
in error had not shown that
tion
statutory
method of apportionment
produced
has
Id.,
an unreasonable result.”
Type-
at 283. As in Underwood
writer, however,
single-factor property
did not
formula
necessarily
against
discriminate
businesses carried on out of
its impact would
indeed,
tend to increase to the extent
State;
corporate
business was carried on within
State.
Massachusetts,
Cf. National Leather Co. v.
S. 413
U.
(1928); accord,
g.,
Shartel,
e.
International Shoe Co. v.
Latrobe,
(1929);
U.
New York
S.
v.
U.
421 (1929);
S.
Hump
Co.
Hairpin
Emmerson,
The is true formula, Iowa’s use use of the basic three-factor universal discriminates necessarily sales formula question, only remaining out-of-state manufacturers. may by the fact that Iowa’s scheme be saved then, whether If discriminatory depends its on context: other States nature opposing of an virtually were not unanimous their use necessary Co. overruling Ford Motor Although not be would g., Hellerstein, e. ripe See, its J. case, the time reconsideration. *22 suggested in General (3d 1969). and Local Taxation 324 ed. As State Corp. Columbia, 380 (1965), Motors v. District S. a sales- U. methods, illogical only probably the most of all formula is is, by itself, of corporation’s sales geographic “the distribution of a since indicating corporation’s significance in the locus of either” a dubious generates. the it sources of income or social costs Ford Motor sales-only willingness uphold the formula in The Court’s solely dealing with the Co. may it have been the result of its view that was S., “subject.” 336. the than 308 U. at “measure” of tax rather its See labels, looking longer formalistic no adheres to the use of those This Court constitutionality state in determining instead to “economic realities” Brady, Complete Transit, Auto Inc. taxing S. schemes.
2&3 formula, past single decisions it difficult to out would make any Iowa’s scheme as more offensive than other.
D compared On several this Court has a state occasions, statutory requirement against practice in other States determining validity statute’s under the Commerce Clause. Sullivan, In Southern Co. ex rel. v. Arizona 325 U. S. Pacific (1945), limiting struck Court down a state statute passenger trains to 14 freight cars and trains to cars. Noting only one other than Arizona enforced a restriction on train lengths,8 specif- the Southern Court Pacific ically considered the Arizona law background activities other States: lengths
“Enforcement of the law in while train Arizona, unregulated regulated remain by varying are standards states, inevitably impairment other must result in an of uniformity operation of efficient railroad because the subjected regulation railroads are which is not uniform its application. Compliance limiting with state statute length train lengths requires interstate trains lawful in other up they states to broken as reconstituted impose enter each state limi- according varying as upon tations is for the lengths. train alternative carrier to conform to the lowest train limit restriction of through pass, states which its trains whose operations laws thus control the carriers’ both within and Id., (Emphasis without at regulating state.” 773. added.) implication
The clear is that Court’s view of the Arizona practices limit have been different if in other length might had been other the Court found them. than as Had Southern Co. ex v. Arizona rel. That State was Oklahoma. Pacific Sullivan, 773-774, S., 325 U. n. 3. *23 might been adopted other the Arizona there have rule, States Morgan v. no basis for it unconstitutional. See also holding DeCuir, Virginia, (1946); 328 U. Hall v. 95 U. S. S. (1878). in practices
The Court also looked to the of other States holding mudguard requirement unconstitutional Illinois’ Navajo Freight Lines, Inc., Bibb The (1959). 359 U. S. type mudguard banned on trucks in Illinois was operating in Arkansas other required permitted and States. pointed Court out the conflict between the Illinois and Arkansas went on to consider the relevance regulations and of other States’ rules:
“A which insists on a out of line with the design may requirements of almost all the other sometimes -place great burden of inconvenience on those delay territory. interstate motor entering crossing carriers its safety require- Such a new device—out line with ments of the other be so that the compelling States — way. But innovating give State need not be the one to present the clear burden showing- —balanced on commerce —is far too to make this mud- inconclusive Id., guard that meet test.” at 529-530.
It seems from clear the Bibb Court’s discussion that conflict between the Illinois of Arkansas regulation would not have led to the invalidation had it been the latter’s merely one before the Court. The Arkansas regulation required what permitted nearly was all the other States. practice After to that uniform looking virtually opposed to of Illinois, requirement the conclusion that the Illinois relatively was “out of was simple line” one. Since it was justified by any interest in increased held safety, was Raymond unconstitutional. Transp., See also Motor Inc. v. Rice, 434 U. atS., 444-446. nearly point
Most Corp. is General Motors v. District of Columbia, 380 In case, S. Court held
unlawful District’s apportion- the use of a sales ment formula under the District of Columbia Income and Tax Act of Although Franchise 1947. decision the turned question statutory of interpretation, analysis Court’s equally applicable to a Commerce Clause inquiry: majority
"The great corporate of income imposing taxes apportion corporation by the total of application of gives a three-factor which equal weight to the geographical distribution of plant, payroll, and sales. The use of an formula based wholly on the factor, general sales of of the context use the three-factor ordinarily will approach, result multi- ple of In corporate case, taxation net income .... of sheer inconsistency District formula with that generally prevailing unhealthy tend to in the result of fragmentation enterprise and of pattern an uneconomic plant location, presents why and so an added reason Court must give proper provisions meaning the relevant Id., of the District Code.” omitted). at 559-560 (footnote The General Motors Court, then-, expressly evaluated the single-factor sales general formula in context of use three-factor method and concluded that the former created dangers interstate commerce.
These cases lead me only proper to believe that it is not but essential to validity determine against the Iowa formula the background practices If in the other one States. State’s regulatory taxing or significantly “out of statute line” with Bibb, supra, other rules, States’ and if 530, at virtue departure from practice it burdens general or dis- criminates commerce, interstate Commerce Clause scrutiny is triggered, and this Court must invalidate it unless justified by it is legitimate purpose outweighing local Inc., Church, harm to interstate commerce, Pike Bruce S., 142; Hughes accord, Scrap Corp., v. Alexandria 426 U. S. be probably There can no fixed rule policies countervailing state nearly uniform the to how as States, of 26 be no rule can there be; is, must run do inquiries generally Clause of 45. Commerce and its result- of conflict degree channels. precise in such circumstances weighed must impact on commerce ing weighing in that engaging the-difficulty But of each case. *25 its constitutional this Court avoid permit not process does “an unreasonable to erect State an individual duty and allow F. G. A. Baldwin v. mobility commerce,” clog upon of the other by taking advantage Inc., S., 527, Seelig, 294 U. uniformity. toward trend commendable States' forty-five Forty-four case before us. is the Such other than Iowa, of Columbia), District (including a similar three- utilize corporate income tax impose that Vir- State, 45th West formula.’9 The factor payroll. property on based uses two-factor ginia, individually may no more formulae be supra. Those See n. income of a multistate apportioning the rational as means of formula. But see single-factor sales than Iowa’s business Columbia, supra, District at 561. Corp. Motors General in- differing because of this upheld formulae Past decisions ap- any of the various methods of ability to determine long as a in use was the so State's choice portionment best; grossly upheld. shown to be would Com- unfair, was not among differences in factors There are definitions three the States See, g., Hellerstein, e. a three-factor formula. Local use J. (3d 309-310, 1969); Note, ed. Taxation and n. State Taxation of Interstate Compact: Businesses and the Multistate Tax The Search for a Delicate Uniformity, 11 Colum. J. of Law & Prob. 235-238 Such Soc. may impose differences tend in dramatic fashion to less burdens entirely presented out-of-state not dissimilar to the one businesses here. may inevitably direction, It be that such effects do not work in one as they here, imposed the burden be minimis in Commerce does de they any event, presently In are not It Clause terms. before us. suffices nearly case all dispose of this the other States use basic three- clings sales-only formula, factor while Iowa to its method.
pare Underwood with Hans Typewriter Bees’ Sons. The more recent trend toward uniformity, permits identifica- however, tion of like the formula, mudguard Iowa’s requirement Bibb, if line,” per as “out of se irrational. Iowa’s Since formula inevitably discriminates sellers, out-of-state justified and since not been on any it has fiscal or administra- I tive would hold it invalid basis, under the Commerce Clause.