Exxon Corp. v. Department of Rev. of Wisconsin
447 U.S. 207 (1980)

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U.S. Supreme Court

Exxon Corp. v. Department of Rev. of Wisconsin, 447 U.S. 207 (1980)

Exxon Corp. v. Department of Rev. of Wisconsin

No. 79-509

Argued March 18, 1980

Decided June 10, 1980

447 U.S. 207



Appellant, a vertically integrated petroleum company doing business in several States, was organized, during the years in question in this case, into three levels of management, one of which was responsible for directing the operating activities of the company's functional departments. Transfers of products and supplies among the three major functional departments -- Exploration and Production, Refining, and Marketing -- were theoretically based on competitive wholesale prices. Appellant had no exploration and production or refining operations in Wisconsin and carried out only marketing in that State. During the years in question, appellant filed income tax returns in Wisconsin using a separate geographical system of accounting which reflected only the Wisconsin marketing operations and showed a loss for each year, thus resulting in no taxes being due, but appellee Wisconsin Department of Revenue, upon auditing the returns, assessed taxes, based on appellant's total income, pursuant to Wisconsin's tax apportionment statute. Ultimately, after appellant's application for abatement had proceeded through administrative and judicial review, the Wisconsin Supreme Court held that appellant's Wisconsin marketing operations were an integral part of one unitary business, and that therefore its total corporate income was subject to the statutory apportionment formula. The court further held that situs income derived from crude oil produced by appellant outside Wisconsin and transferred to its own refineries, and thus part of the unitary stream of income, was apportionable under the Wisconsin statute despite appellant's separate functional accounting system, and that taxation of such situs income did not impermissibly burden interstate commerce.


1. The Due Process Clause of the Fourteenth Amendment did not prevent Wisconsin from applying its statutory apportionment formula to appellant's total income. Pp. 447 U. S. 219-225.

(a) The Due Process Clause imposes two requirements for state taxation of the income of a corporation operating in interstate commerce: a "minimal connection" or "nexus" between the corporation's interstate activities and the taxing State, and "a rational relationship between the

Page 447 U. S. 208

income attributed to the State and the intrastate values of the enterprise." Mobil Oil Corp. v. Commissioner of Taxes,445 U. S. 425, 445 U. S. 436-437. Such a nexus is established if the corporation "avails itself of the substantial privilege of carrying on business' within the State." Id. at 445 U. S. 437. Here, appellant concededly avails itself of that privilege through its marketing operations within Wisconsin. Pp. 447 U. S. 219-220.

(b) Appellant's use of separate functional accounting by which it shows what portion of its income is derived from exploration and production and from refining -- functions occurring outside Wisconsin -- does not demonstrate that application of the Wisconsin apportionment statute violated the Due Process Clause. A company's internal accounting techniques are not binding on a State for tax purposes, and are not required to be accepted as a matter of constitutional law for such purposes. Pp. 447 U. S. 220-223.

(c) The "linchpin of apportionability" for state income taxation of an interstate enterprise is the "unitary business principle." Mobil Oil Corp. v. Commissioner of Taxes, supra at 445 U. S. 439. If a company is a unitary business, then a State may apply an apportionment formula to the taxpayer's total income in order to obtain a "rough approximation" of the corporate income that is "reasonably related to the activities conducted within the taxing State." Moorman Mfg. Co. v. Bair,437 U. S. 267, 437 U. S. 273. Here, the evidence fully supports the conclusion that appellant's marketing operations in Wisconsin were an integral part of such a unitary business. And appellant's use of separate functional accounting, and its decision for purposes of corporate accountability to assign wholesale market values to interdepartmental transfers of products and supplies, do not defeat the clear and sufficient nexus between appellant's interstate activities and the taxing State. Pp. 447 U. S. 223-225.

2. Similarly, the Due Process Clause did not preclude Wisconsin from subjecting to taxation under its statutory apportionment formula appellant's income derived from extraction of oil and gas located outside the State which was used by the Refining Department, and the State was not required to allocate such income to the situs State. There was a unitary stream of income, of which the income derived from internal transfers of raw materials from exploration and production to refining was a part. This was a sufficient nexus to satisfy the Due Process Clause, and there was also the necessary "rational relationship" between the income attributed to the State by the apportionment formula and the intrastate value of the business. Pp. 447 U. S. 225-227.

3. The Commerce Clause did not require Wisconsin to allocate all income derived from appellant's exploration and production function to the situs State, rather than include such income in the apportionment

Page 447 U. S. 209

formula. The Wisconsin taxing statute, as applied, did not subject interstate business to an unfair burden of multiple taxation. Mobil Oil Corp. v. Commissioner of Taxes, supra. The State sought to tax income, not property ownership, and it was the risk of multiple taxation that was being asserted, actual multiple taxation not having been shown. The Commerce Clause did not require that any income which appellant was able to separate through accounting methods and attribute to exploration and production of crude oil and gas be allocated to the States in which those production centers were located. The geographic location of such raw materials did not alter the fact that such income was part of the unitary business of appellant's interstate enterprise and was subject to fair apportionment among all States to which there was a sufficient nexus with the interstate activities. Pp. 447 U. S. 227-230.

90 Wis.2d 700, 281 N.W.2d 94, affirmed.

MARSHALL, J., delivered the opinion of the Court, in which all other Members joined except STEWART, J., who took no part in the consideration or decision of the case.

Page 447 U. S. 210

MR. JUSTICE MARSHALL delivered the opinion of the Court.

This case raises three important questions regarding state taxation of the income of a vertically integrated corporation doing business in several States. The first issue is whether the Due Process Clause of the Fourteenth Amendment prevents a State from applying its statutory apportionment formula to the total corporate income of the taxpayer when the taxpayer's functional accounting separates its income into the three distinct categories of marketing, exploration and production, and refining, and when the taxpayer performs only marketing operations within the State. The second issue is whether the Due Process Clause permits a State to subject to taxation under its statutory apportionment formula income derived from the extraction of oil and gas located outside the State which is used by the refining department of the taxpayer, or whether the State is required to allocate such income to the situs State. The third issue is whether the Commerce Clause requires such an allocation to the situs State.



Appellant Exxon Corp., [Footnote 1] a vertically integrate petroleum company, is organized under the laws of Delaware with its

Page 447 U. S. 211

general offices located in Houston, Tex. During the years in question here, 1965 through 1968, appellant's corporate organization structure consisted of three parts: Corporate Management, Coordination and Services Management, and Operations Management.

Corporate Management, which was the highest order of management for the entire corporation, consisted of the board of directors, the executive committee, the chairman of the board (who was also the chief executive officer), the president, and various directors-in-charge who were members of the board of directors. Coordination and Services Management was composed of corporate staff departments which provided specialized corporate services. These services included long-range planning for the company, maximization of overall company operations, development of financial policy and procedures, financing of corporate activities, maintenance of the accounting system, legal advice, public relations, labor relations, purchase and sale of raw crude oil and raw materials, and coordination between the refining and other operating functions "so as to obtain an optimum short range operating program." App. 189; id. at 187-192. [Footnote 2]

The third level of management within the corporation was

Page 447 U. S. 212

Operations Management, which was responsible for directing the operating activities of the functional departments of the company. These functional departments were Exploration and Production, Refining, Marketing, Marine, Coal and Shale Oil, Minerals, and Land Management. Each functional department was organized as a separate unit operating independently of the other operating segments, and each department had its own separate management responsible for the proper conduct of the operation. These departments were treated as separate investment centers by the company, and a profit was determined for each functional department.

At all relevant times, each operating department was independently responsible for its performance. This arrangement permitted centralized management to evaluate each operation separately. Each department was therefore required to compete with the other departments for available investment funds, and with other members of the industry performing the same function for the company's raw materials and refined products. There was no requirement that appellant's crude oil go to its own refineries or that the refined products sold through marketing be produced from appellant's crude oil.

Transfers of products and raw materials among the three major functional departments -- Exploration and Production, Refining, and Marketing -- were theoretically based on competitive wholesale market prices. For purposes of separate functional accounting, transfers of crude oil from Exploration and Production to Refining were treated as sales at posted industry prices; transfers of products from Refining to Marketing were also based on wholesale market prices. If no readily available wholesale market value existed for a product, then representatives of the two departments involved would negotiate as to the appropriate internal transfer value.

Appellant had no exploration and production operations or refining operations in Wisconsin; the only activity carried out

Page 447 U. S. 213

in that State was marketing. The Wisconsin marketing district reported administratively to the central region office in Chicago, which in turn was responsible to the Marketing Department headquarters in Houston. App. 217. The motor oils, greases, and other packaged materials sold by appellant in Wisconsin during this period were manufactured outside the State and then shipped into that State from central warehouse facilities in Chicago. Tires, batteries, and accessories were centrally purchased through the Houston office and then shipped into Wisconsin for resale. The gasoline sold in Wisconsin was not produced by Exxon, but rather was obtained from Pure Oil Co. in Illinois under an exchange agreement, permitting Exxon to reduce the cost of transporting the gasoline from its source to the retail outlets. This exchange agreement was negotiated by the Supply and Refining Departments. Additives were put into the Pure Oil gasoline in order to make the final product conform to uniform Exxon standards.

Exxon used a nationwide uniform credit card system, which was administered out of the national headquarters in Houston. Uniform packaging and brand names were used, and the overall plan for distribution of products was developed in Houston. Promotional display equipment was designed by the engineering staff at the marketing headquarters.


Because appellant marketed its products in Wisconsin during the calendar years 1965 through 1968, it was required to file corporate income and franchise tax returns in that State for those years. Exxon prepared the returns based on separate state accounting methods, reflecting only the Wisconsin marketing operation. The returns showed losses in the amounts of $821,320 for 1965, $1,159,830 for 1966, $1,026,224 for 1967, and $919,575 for 1968. Accordingly, no tax was shown as being due for any of those years.

Page 447 U. S. 214

Appellee Wisconsin Department of Revenue audited Exxon for the years in question, and on June 25, 1971, the Department sent the taxpayer a notice of assessment of additional income and franchise tax. The Department concluded that, pursuant to Wis.Stat. § 71.07(2) (1967), [Footnote 3] the Wisconsin marketing operation was "an integral part of a unitary business," and therefore Exxon's taxable income in Wisconsin must be determined by application of the State's apportionment formula to the taxpayer's total income. The Department's calculation revealed an additional taxable income of $4,532,155 for the period 1965 through 1968. Additional

Page 447 U. S. 215

taxes in the amount of $316,470.85 were assessed against appellant. [Footnote 4]

Exxon filed an application for abatement in July, 1971, which the Department denied on November 30, 1971. Appellant then filed a petition for review with the Wisconsin Tax Appeals Commission. The Commission agreed with the Department that Exxon's separate geographical accounting did not accurately reflect its Wisconsin income for tax purposes. CCH Wis.Tax Rep.

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