An Iowa statute prescribes a so-called single factor sales
formula for apportioning an interstate corporation's income for
state income tax purposes. Under this formula, the part of income
from such a corporation's sale of tangible personal property
attributable to business within the State, and hence subject to the
state income tax, is deemed to be in that proportion which the
corporation's gross sales made within the State bear to its total
gross sales. Appellant, an Illinois corporation that sells animal
feed it manufactures in Illinois to Iowa customers through Iowa
salesmen and warehouses, brought an action in an Iowa court
challenging the constitutionality of the single factor formula. The
trial court held the formula invalid under the Due Process Clause
of the Fourteenth Amendment and the Commerce Clause, but the Iowa
Supreme Court reversed.
Held:
1. Iowa's single factor formula is not invalid under the Due
Process Clause. Pp.
437 U. S.
271-275.
(a) Any assumption that at least some portion of appellant's
income from Iowa sales was generated by Illinois activities is too
speculative to support a claim that Iowa in fact taxed profits not
attributable to activities within the State. P.
437 U. S.
272.
(b) An apportionment formula, such as the single factor formula,
that is necessarily employed as a rough approximation of a
corporation's income reasonably related to the activities conducted
within the taxing State will only be disturbed when the taxpayer
has proved by "clear and cogent evidence" that the income
attributed to the State is in fact "out of all reasonable
proportion to the business transacted . . . in that State,"
Hans Rees' Sons v. North Carolina ex rel. Maxwell,
283 U. S. 123,
283 U. S. 135,
or has "led to a grossly distorted result,"
Norfolk &
Western R. Co. v. State Tax Comm'n, 390 U.
S. 317,
390 U. S. 326.
Here, the Iowa statute afforded appellant an opportunity to
demonstrate that the single factor formula produced an arbitrary
result in its case, but the record contains no such showing. Pp.
437 U. S.
272-275.
2. Nor is Iowa's single factor formula invalid under the
Commerce Clause. Pp.
437 U. S.
276-281.
Page 437 U. S. 268
(a) On this record, the existence of duplicative taxation as
between Iowa and Illinois (which uses the so-called three factor --
property, payroll, and sales -- formula) is speculative, but even
then assuming some overlap, appellant's argument that Iowa, rather
than Illinois, was necessarily at fault in a constitutional sense
cannot be accepted. Where the record does not reveal the sources of
appellant's profits, its Commerce Clause claim cannot rest on the
premise that profits earned in Illinois were included in its Iowa
taxable income, and therefore the Iowa formula was at fault for
whatever overlap may have existed. Pp.
437 U. S.
276-277.
(b) The Commerce Clause itself, without implementing legislation
by Congress, does not require, as appellant urges, that Iowa
compute corporate net income under the Illinois three factor
formula. If the Constitution were read to mandate a prohibition
against any overlap in the computation of taxable income by the
States, the consequences would extend far beyond this particular
case, and would require extensive judicial lawmaking. Pp.
437 U. S.
277-281.
STEVENS, J., delivered the Opinion of the Court, in which
BURGER, C.G., and STEWART, WHITE, MARSHALL, and REHNQUIST, JJ.,
joined. BRENNAN, J.,
post, at
437 U. S. 281,
and BLACKMUN, J.,
post, p.
437 U. S. 282,
filed dissenting opinions. POWELL, J., filed a dissenting opinion,
in which BLACKMUN, J., joined,
post, p.
437 U. S.
283.
Page 437 U. S. 269
MR. JUSTICE STEVENS delivered the opinion of the Court.
The question in this case is whether the single factor sales
formula employed by Iowa to apportion the income of an interstate
business for income tax purposes is prohibited by the Federal
Constitution.
I
Appellant, Moorman Manufacturing Co., is an Illinois corporation
engaged in the manufacture and sale of animal feeds. Although the
products it sells to Iowa customers are manufactured in Illinois,
appellant has over 500 salesmen in Iowa and it owns six warehouses
in the State from which deliveries are made to Iowa customers. Iowa
sales account for about 20% of appellant's total sales.
Corporations, both foreign and domestic, doing business in Iowa
are subject to the State's income tax. The taxable income for
federal income tax purposes, with certain adjustments, is treated
as the corporation's "net income" under the Iowa statute. If a
corporation's business is not conducted entirely within Iowa, the
statute imposes a tax only on the portion of its income "reasonably
attributable" to the business within the State.
There are essentially two steps in computing the share of a
corporation's income "reasonably attributable" to Iowa. First,
certain income, "the geographical source of which is easily
identifiable," is attributed entirely to a particular State.
[
Footnote 1]
Page 437 U. S. 270
Second, if the remaining income is derived from the manufacture
or sale of tangible personal property,
"the part thereof attributable to business within the state
shall be in that proportion which the gross sales made within the
state bear to the total gross sales. [
Footnote 2]"
This is the single factor formula that appellant challenges in
this case.
If the taxpayer believes that application of this formula
subjects it to taxation on a greater portion of its net income than
is "reasonably attributable" to business within the State, it may
file a statement of objections and submit an alternative method of
apportionment. If the evidence submitted by the taxpayer persuades
the Director of Revenue that the statute is "inapplicable and
inequitable" as applied to it, he may recalculate the corporation's
taxable income.
During the fiscal years 1948 through 1960, the State Tax
Commission allowed appellant to compute its Iowa income on the
basis of a formula consisting of three, equally weighted factors --
property, payroll, and sales -- rather than the formula prescribed
by statute. [
Footnote 3] For
the fiscal years 1961 through 1964, appellant complied with a
directive of the State Tax Commission to compute its income in
accordance with the statutory formula. Since 1965, however,
appellant has resorted to the three factor formula without the
consent of the commission.
In 1974, the Iowa Director of Revenue revised appellant's tax
assessment for the fiscal years 1968 through 1972. This assessment
was based on the statutory formula, which produced
Page 437 U. S. 271
a higher percentage of taxable income than appellant, using the
three factor formula, had reported on its return in each of the
disputed years. [
Footnote 4]
The higher percentages, of course, produced a correspondingly
greater tax obligation for those years. [
Footnote 5]
After the Tax Commission had rejected Moorman's appeal from the
revised assessment, appellant challenged the constitutionality of
the single factor formula in the Iowa District Court for Polk
County. That court held the formula invalid under the Due Process
Clause of the Fourteenth Amendment and the Commerce Clause. The
Supreme Court of Iowa reversed, holding that an apportionment
formula that is necessarily only a rough approximation of the
income properly attributable to the taxing State is not subject to
constitutional attack unless the taxpayer proves that the formula
has produced an income attribution "out of all proportion to the
business transacted" within the State. The court concluded that
appellant had not made such a showing.
We noted probable jurisdiction of Moorman's appeal,
434 U.
S. 93, and now affirm.
II
Appellant contends that Iowa's single factor formula results in
extraterritorial taxation in violation of the Due Process
Page 437 U. S. 272
Clause. This argument rests on two premises: first, that
appellant's Illinois operations were responsible for some of the
profits generated by sales in Iowa; and, second, that a formula
that reaches any income not in fact earned within the borders of
the taxing State violates due process. The first premise is
speculative, and the second is foreclosed by prior decisions of
this Court.
Appellant does not suggest that it has shown that a significant
portion of the income attributed to Iowa in fact was generated by
its Illinois operations; the record does not contain any separate
accounting analysis showing what portion of appellant's profits was
attributable to sales, to manufacturing, or to any other phase of
the company's operations. But appellant contends that we should
proceed on the assumption that at least some portion of the income
from Iowa sales was generated by Illinois activities.
Whatever merit such an assumption might have from the standpoint
of economic theory or legislative policy, it cannot support a claim
in this litigation that Iowa in fact taxed profits not attributable
to activities within the State during the years 1968 through 1972.
For all this record reveals, appellant's manufacturing operations
in Illinois were only marginally profitable during those years and
the high-volume sales to Iowa customers from Iowa warehouses were
responsible for the lion's share of the income generated by those
sales. Indeed, a separate accounting analysis might have revealed
that losses in Illinois operations prevented appellant from earning
more income from exploitation of a highly favorable Iowa market.
Yet even were we to assume that the Illinois activities made some
contribution to the profitability of the Iowa sales, appellant's
claim that the Constitution invalidates an apportionment formula
whenever it may result in taxation of some income that did not have
its source in the taxing State is incorrect.
The Due Process Clause places two restrictions on a State's
power to tax income generated by the activities of an
interstate
Page 437 U. S. 273
business. First, no tax may be imposed unless there is some
minimal connection between those activities and the taxing State.
National Bellas Hess, Inc. v. Department of Revenue,
386 U. S. 753,
386 U. S. 756.
This requirement was plainly satisfied here. Second, the income
attributed to the State for tax purposes must be rationally related
to "values connected with the taxing State."
Norfolk &
Western R. Co. v. State Tax Comm'n, 390 U.
S. 317,
390 U. S.
325.
Since 1934, Iowa has used the formula method of computing
taxable income. This method, unlike separate accounting, does not
purport to identify the precise geographical source of a
corporation's profits; rather, it is employed as a rough
approximation of a corporation's income that is reasonably related
to the activities conducted within the taxing State. The single
factor formula used by Iowa, therefore, generally will not produce
a figure that represents the actual profits earned within the
State. But the same is true of the Illinois three factor formula.
Both will occasionally over-reflect or under-reflect income
attributable to the taxing State. Yet despite this imprecision, the
Court has refused to impose strict constitutional restraints on a
State's selection of a particular formula. [
Footnote 6]
Thus, we have repeatedly held that a single factor formula is
presumptively valid. In
Underwood Typewriter Co. v.
Chamberlain, 254 U. S. 113, for
example, the taxpayer challenged Connecticut's use of such a
formula to apportion its net income. Underwood's manufacturing
operations were conducted entirely within Connecticut. Its main
office, however, was in New York City, and it had branch offices in
many States where its typewriters were sold and repaired. Applying
a single factor property formula, Connecticut taxed 47% of the
company's net income. Claiming that 97% of its profits were
Page 437 U. S. 274
generated by transactions in tangible personal property outside
Connecticut, Underwood contended that the formula taxed "income
arising from business conducted beyond the boundaries of the State"
in violation of the Due Process Clause.
Id. at
254 U. S.
120.
Rejecting this claim, the Court noted that Connecticut
"adopted a method of apportionment which, for all that appears
in this record, reached, and was meant to reach, only the profits
earned within the State,"
id. at
254 U. S. 121,
and held that the taxpayer had failed to carry its burden of
proving that
"the method of apportionment adopted by the State was inherently
arbitrary, or that its application to this corporation produced an
unreasonable result."
Ibid. (footnote omitted). [
Footnote 7]
In individual cases, it is true, the Court has found that the
application of a single factor formula to a particular
taxpayer violated due process.
See Hans Rees' Sons, Inc. v.
North Carolina ex rel. Maxwell, 283 U.
S. 123;
Norfolk & Western R. Co. v. State Tax
Comm'n, supra. In
Hans Rees', for example, the Court
concluded that proof that the formula produced a tax on 83% of the
taxpayer's income when only 17% of that income actually had its
source in the State would suffice to invalidate the assessment
under the Due Process Clause. But in neither
Hans Rees'
nor
Norfolk & Western did the Court depart from the
basic principles that the States have wide latitude in the
selection of apportionment formulas and that a formula-produced
assessment will only be disturbed when the taxpayer has proved by
"clear and cogent evidence" that the income attributed to the State
is, in fact, "out of all appropriate proportions to the business
transacted . . . in that State," 283 U.S. at
283 U. S. 135,
or has "led to a grossly distorted result," 390 U.S. at
390 U. S.
326.
General Motors Corp. v. District of Columbia,
380 U. S. 553,
Page 437 U. S. 275
on which appellant relies, does not suggest a contrary result.
In that case, the Court held that a regulation prescribing a single
factor sales formula was not authorized by the District of Columbia
Code. It concluded that the formula violated the statutory
requirement that the net income of a corporation doing business
both inside and outside the District must be deemed to arise from
"sources" both inside and outside the District. But that statutory
requirement has no counterpart in the Constitution, and the Court
in
General Motors made clear that it did "not mean to take
any position on the constitutionality of a state income tax based
on the sales factor alone."
Id. at
380 U. S. 561.
[
Footnote 8]
The Iowa statute afforded appellant an opportunity to
demonstrate that the single factor formula produced an arbitrary
result in its case. But this record contains no such showing, and
therefore the Director's assessment is not subject to challenge
under the Due Process Clause. [
Footnote 9]
Page 437 U. S. 276
III
Appellant also contends that, during the relevant years, Iowa
and Illinois imposed a tax on a portion of the income derived from
the Iowa sales that was also taxed by the other State in violation
of the Commerce Clause. [
Footnote 10] Since most States use the three factor
formula that Illinois adopted in 1970, appellant argues that Iowa's
longstanding single factor formula must be held responsible for the
alleged duplication and declared unconstitutional. We cannot
agree.
In the first place, this record does not establish the essential
factual predicate for a claim of duplicative taxation. Appellant's
net income during the years in question was approximately $9
million. Since appellant did not prove the portion derived from
sales to Iowa customers, rather than sales to customers in other
States, we do not know whether Illinois and Iowa together imposed a
tax on more than 10% of the relevant net income. The income figure
that appellant contends was subject to duplicative taxation was
computed by comparing gross sales in Iowa to total gross sales. As
already noted, however, this figure does not represent actual
profits earned from Iowa sales. Obviously, all sales are not
equally profitable. Sales in Iowa, although only 20% of gross
sales, may have yielded a much higher percentage of appellant's
profits. Thus, profits from Iowa sales may well have exceeded the
$2.5 million figure that appellant contends was taxed by the two
States. If so, there was no duplicative taxation of the net income
generated by Iowa sales. In any event, on this record its existence
is speculative. [
Footnote
11]
Page 437 U. S. 277
Even assuming some overlap, we could not accept appellant's
argument that Iowa, rather than Illinois, was necessarily at fault
in a constitutional sense. It is, of course, true that, if Iowa had
used Illinois' three factor formula, a risk of duplication in the
figures computed by the two States might have been avoided. But the
same would be true had Illinois used the Iowa formula. Since the
record does not reveal the sources of appellant's profits, its
Commerce Clause claim cannot rest on the premise that profits
earned in Illinois were included in its Iowa taxable income, and
therefore the Iowa formula was at fault for whatever overlap may
have existed. Rather, the claim must be that, even if the
presumptively valid Iowa formula yielded no profits other than
those properly attributable to appellant's activities within Iowa,
the importance of avoiding any risk of duplication in the taxable
income of an interstate concern justifies invalidation of the Iowa
statute.
Appellant contends that, to the extent this overlap is
permitted, the corporation that does business in more than one
State shoulders a tax burden not shared by those operating entirely
within a State. [
Footnote
12] To alleviate the burden, appellant
Page 437 U. S. 278
invites us to hold that the Commerce Clause itself, without
implementing legislation by Congress, requires Iowa to compute
corporate net income under the Illinois equally weighted, three
factor formula. For the reasons that follow, we hold that the
Constitution does not require such a result.
The only conceivable constitutional basis for invalidating the
Iowa statute would be that the Commerce Clause prohibits any
overlap in the computation of taxable income by the States. If the
Constitution were read to mandate such precision in interstate
taxation, the consequences would extend far beyond this particular
case. For some risk of duplicative taxation exists whenever the
States in which a corporation does business do not follow identical
rules for the division of income. Accepting appellant's view of the
Constitution, therefore, would require extensive judicial
lawmaking. Its logic is not limited to a prohibition on use of a
single factor apportionment formula. The asserted constitutional
flaw in that formula is that it is different from that presently
employed by a majority of States, and that difference creates a
risk of duplicative taxation. But a host of other "division of
income" problems create precisely the same risk, and would
similarly rise to constitutional proportions.
Thus, it would be necessary for this Court to prescribe a
uniform definition of each category in the three factor formula.
For if the States in which a corporation does business have
different rules regarding where a "sale" takes place, and each
includes the same sale in its three factor computation of the
corporation's income, there will be duplicative taxation despite
the apparent identity of the formulas employed. [
Footnote 13] A similar
Page 437 U. S. 279
risk of multiple taxation is created by the diversity among the
States in the attribution of "nonbusiness" income, generally
defined as that portion of a taxpayer's income that does not arise
from activities in the regular course of its business. [
Footnote 14] Some States do not
distinguish between business and nonbusiness income for
apportionment purposes. Other States, however, have adopted special
rules that attribute nonbusiness income to specific locations.
Moreover, even among the latter, there is diversity in the
definition of nonbusiness income and in the designation of the
locations to which it is deemed attributable. The potential for
attribution of the same income to more than one State is plain.
[
Footnote 15]
The prevention of duplicative taxation, therefore, would require
national uniform rules for the division of income. Although the
adoption of a uniform code would undeniably advance the policies
that underlie the Commerce Clause, it would require a policy
decision based on political and economic considerations that vary
from State to State. The Constitution, however, is neutral with
respect to the content of any uniform rule. If "division of income"
problems were to be constitutionalized, therefore, they would have
to be resolved in the manner suggested by appellant for resolution
of formula diversity -- the prevalent practice would be endorsed as
the constitutional rule. This rule would at best be an amalgam of
independent state decisions, based on considerations unique to each
State. Of most importance, it could not reflect the
Page 437 U. S. 280
national interest, because the interests of those States whose
policies are subordinated in the quest for uniformity would be
excluded from the calculation. [
Footnote 16]
While the freedom of the States to formulate independent policy
in this area may have to yield to an overriding national interest
in uniformity, the content of any uniform rules to which they must
subscribe should be determined only after due consideration is
given to the interests of all affected States. It is clear that the
legislative power granted to 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 of
income. It is to that body, and not this Court, that the
Constitution has committed such policy decisions.
Finally, it would be an exercise in formalism to declare
appellant's income tax assessment unconstitutional based on
speculative concerns with multiple taxation. For it is evident that
appellant would have had no basis for complaint if, instead of an
income tax, Iowa had imposed a more burdensome gross receipts tax
on the gross receipts from sales to Iowa customers. In
Standard
Pressed Steel Co. v. Washington Revenue Dept., 419 U.
S. 560, the Court sustained a tax on the entire gross
receipts from sales made by the taxpayer into Washington State.
Because receipts from sales made to States other than Washington
were not included in Standard Pressed Steel's taxable gross
receipts, the Court concluded that the tax was "
apportioned
exactly to the activities taxed.'" Id. at 419 U. S.
564.
In this case, appellant's actual income tax obligation was the
rough equivalent of a l% tax on the entire gross receipts from its
Iowa sales. Thus, the actual burden on interstate commerce would
have been the same had Iowa imposed a plainly
Page 437 U. S. 281
valid gross-receipts tax instead of the challenged income tax.
Of more significance, the gross receipts tax sustained in
Standard Pressed Steel and
General Motors Corp; v.
Washington, 377 U. S. 436, is
inherently more burdensome than the Iowa income tax. It applies
whether or not the interstate concern is profitable, and its
imposition may make the difference between profit and loss. In
contrast, the income tax is only imposed on enterprises showing a
profit, and the tax obligation is not heavy unless the profits are
high.
Accordingly, until Congress prescribes a different rule, Iowa is
not constitutionally prohibited from requiring taxpayers to prove
that application of the single factor formula has produced
arbitrary results in a particular case.
The judgment of the Iowa Supreme Court is affirmed.
So ordered.
[
Footnote 1]
The statute provides:
"Interest, dividends, rents, and royalties (less related
expenses) received in connection with business in the state, shall
be allocated to the state, and where received in connection with
business outside the state, shall be allocated outside of the
state."
Iowa Code § 422.33(1)(a) (1977). In describing this section, the
Iowa Supreme Court stated that "certain income, the geographical
source of which is easily identifiable, is allocated to the
appropriate state."
254 N.W.2d 737,
739. Thus, for example, rental income would be attributed to the
State where the property was located. And in appellant's case, this
section operated to exclude its investment income from the tax
base.
[
Footnote 2]
Iowa Code § 422.33(1)(b) (1977).
[
Footnote 3]
The operation of the two formulas may be briefly described. The
single factor sales formula yields a percentage representing a
ratio of gross sales in Iowa to total gross sales. The three factor
formula yields a percentage representing an average of three
ratios: property within the State to total property, payroll within
the State to total payroll, and sales within the State to total
sales.
These percentages are multiplied by the adjusted total net
income to arrive at Iowa taxable net income. This net income figure
is then multiplied by the tax rate to compute the actual tax
obligation of the taxpayer.
[
Footnote 4]
For those years, the two formulas resulted in the following
percentages:
Fiscal Year Sales Factor Three Factor
Ended Percentage Percentage
----------- ------------ ------------
3/31/68 21.8792% 14.1088%
3/31/69 21.2134% 14.3856%
3/31/70 19.9492% 14.0200%
3/31/71 18.9544% 13.2186%
3/31/72 18.6713% 12.2343%
For a description of how these percentages are computed,
see n 3,
supra.
[
Footnote 5]
Thus, in 1968, for example, Moorman's three factor computation
resulted in a tax of $81,466, whereas the Director's single factor
computation resulted in a tax of $121,363.
[
Footnote 6]
See, e.g., Underwood Typewriter Co. v. Chamberlain,
254 U. S. 113;
Bass, Ratcliff & Gretton., Ltd. v. State Tax Comm'n,
266 U. S. 271;
Ford Motor Co. v. Beauchamp, 308 U.
S. 331.
[
Footnote 7]
See also Bass, Ratcliff & Gretton, Ltd. v. State Tax
Comm'n, supra; Norfolk & Western R. Co. v. North Carolina ex
rel. Maxwell, 297 U. S. 682.
[
Footnote 8]
The Court, it is true, expressed doubts about the wisdom of the
economic assumptions underlying the challenged formula, and noted
that its use in the context of the more prevalent three factor
formula would not advance the policies underlying the Commerce
Clause. But these considerations were deemed relevant to the
question of legislative intent, not constitutional
interpretation.
[
Footnote 9]
In his concurring opinion, Justice McCormick of the Iowa Supreme
Court made this point
"In the present case, Moorman did not attempt to prove the
amount of its actual net income from Iowa activities in the years
involved. Therefore, no basis was presented for comparison of the
corporation's Iowa income and the income apportioned to Iowa under
the formula. In this era of sophisticated accounting techniques, it
should not be impossible for a unitary corporation to prove its
actual income from activities in a particular state. However,
Moorman showed only that its tax liability would be substantially
less if Iowa employed a three factor apportionment formula. We have
no basis to assume that the three factor formula produced a result
equivalent to the corporation's actual income from Iowa activities.
Having failed to establish a basis for comparison of its actual
income in Iowa with the income apportioned to Iowa under the single
factor formula, Moorman did not demonstrate that the single factor
formula produced a grossly unfair result. Thus, it did not prove
unconstitutionality of the formula as applied."
254 N.W.2d at 757.
[
Footnote 10]
Since Illinois did not adopt its income tax until 1970, there
was no possibility of any overlap until that year. The alleged
overlap in the three years following Illinois' enactment of an
income tax was 34.38% in 1970, 34.51% in 1971, and 37.01% in
1972.
[
Footnote 11]
Since there is no evidence in the record regarding the
percentages of its total net income taxed in the other States in
which it did business during those years, any claim that appellant
was taxed on more than 100% of its total net income would also be
speculative.
[
Footnote 12]
Appellant also contends that the Iowa formula discriminates
against interstate commerce in violation of the Commerce Clause and
the Equal Protection Clause, because an Illinois corporation doing
business in Iowa must pay tax on a greater portion of its income
than a local Iowa company, and an Iowa company doing business in
Illinois will pay tax on less of its income than an Illinois
corporation doing business in Iowa. The simple answer, however, is
that whatever disparity may have existed is not attributable to the
Iowa statute. It treats both local and foreign concerns with an
even hand; the alleged disparity can only be the consequence of the
combined effect of the Iowa
and Illinois statutes, and
Iowa is not responsible for the latter.
Thus, appellant's "discrimination" claim is simply a way of
describing the potential consequences of the use of different
formulas by the two States. These consequences, however, could be
avoided by the adoption of any uniform rule; the "discrimination"
does not inhere in either State's formula.
[
Footnote 13]
Thus, while some States such as Iowa assign sales by
destination,
"sales can be assigned to the state . . . of origin, the state
in which the sales office is located, the state where an employee
of the business making the sale carries on his activities or where
the order is first accepted, or the state in which an interstate
shipment is made."
Note, State Taxation of Interstate Businesses and the Multistate
Tax Compact: The Search for a Delicate Uniformity, 11 Colum.J.Law
& Soc.Prob. 231, 237 n. 20 (1975) (citation omitted).
[
Footnote 14]
See, e.g., Uniform Division of Income for Tax Purposes
Act § 1(a).
[
Footnote 15]
Thus, one State in which a corporation does business may
consider a particular type of income business income and simply
include it in its apportionment formula; a second State may deem
that same income nonbusiness income and attribute it to itself as
the "commercial domicile" of the company; and a third State, though
also considering it nonbusiness income, may attribute it to itself
as the "legal domicile" of the company.
See Note,
supra, n 13, at
239.
[
Footnote 16]
This process is especially unsettling if a longstanding tax
policy of one State, such as Iowa's, becomes the object of
constitutional attack simply because it is different from the
recently adopted practice of its neighbor.
MR. JUSTICE BRENNAN dissenting.
I agree with the Court that, for purposes of constitutional
review, there is no distinction between a corporate income tax and
a gross receipts tax. I do not agree, however, that Iowa's single
factor sales apportionment formula meets the Commerce Clause
requirement that a State's taxation of interstate business must be
"fairly apportioned to the commerce carried on within the taxing
state."
Western Live Stock v. Bureau of Revenue,
303 U. S. 250,
303 U. S. 256
(1938). As I have previously explained:
"[Where a sale] exhibits significant contacts with more than one
State . . . it is the commercial activity within the State, and not
the sales volume, which determines the State's power to tax, and by
which the tax must be apportioned. While the ratio of in-state to
out-of-state sales is often taken into account as one factor among
others in apportioning a firm's total net income,
see,
e.g., the description of the 'Massachusetts Formula' in Note,
75 Harv.L.Rev. 953, 1011 (1962), it nevertheless remains true
that,
Page 437 U. S. 282
if commercial activity in more than one State results in a sale
in one of them, that State may not claim as all its own the gross
receipts to which the activity within its borders has contributed
only a part. Such a tax must be apportioned to reflect the business
activity within the taxing State."
General Motors Corp. v. Washington, 377 U.
S. 436,
377 U. S.
450-451 (1964) (dissenting opinion).
I would therefore reverse.
MR. JUSTICE BLACKMUN, dissenting.
The unspoken, but obvious, premise of the majority opinion is
the fear that a Commerce Clause invalidation of Iowa's single
factor sales formula will lead the Court into problems and
difficulties in other cases yet to come. I reject that premise.
I agree generally with the content of MR. JUSTICE POWELL's
opinion in dissent. I join that opinion because I, too, feel that
the Court has a duty to resolve, not to avoid, these problems of
"delicate adjustment,"
Boston Stock Exchange v. State Tax
Comm'n, 429 U. S. 318,
429 U. S. 329
(1977), and because the opinion well demonstrates that Iowa's now
anachronistic single factor sales formula runs headlong into
overriding Commerce Clause considerations and demands.
Today's decision is bound to be regressive. [
Footnote 2/1] Single factor formulas are relics of
the early days of state income taxation. [
Footnote 2/2] The three factor formulas were inevitable
improvements and, while not perfect, reflect more accurately the
realities of the business and tax world. With their almost
universal adoption by the States, the Iowa system's adverse and
parochial impact on commerce comes vividly into focus. But with
its
Page 437 U. S. 283
single factor formula now upheld by the Court, there is little
reason why other States, perceiving or imagining a similar
advantage to local interests, may not go back to the old ways. The
end result, in any event, is to exacerbate what the Commerce
Clause, absent governing congressional action, was devised to
avoid.
[
Footnote 2/1]
Iowa is not a member of the Multistate Tax Commission. Tr. of
Oral Arg. 33.
See United States Steel Corp. v. Multistate Tax
Comm'n, 434 U. S. 452
(1978).
[
Footnote 2/2]
Iowa's income tax was first adopted in 1934. 1933-1934 Iowa
Acts, Ex.Sess., ch. 82; Tr. of Oral Arg. 29. Its single factor
sales formula was embraced in § 28 of that original Act.
MR. JUSTICE POWELL, with whom MR. JUSTICE BLACKMUN joins,
dissenting.
It is the duty of this Court
"to make the delicate adjustment between the national interest
in free and open trade and the legitimate interest of the
individual States in exercising their taxing powers."
Boston Stock Exchange v. State Tax Comm'n, 429 U.
S. 318,
429 U. S. 329
(1977). This duty must be performed with careful attention to the
settings of particular cases and consideration of their special
facts.
See Raymond Motor Transp., Inc. v. Rice,
434 U. S. 429,
434 U. S. 447
118, n. 25 (1978). Consideration of all the circumstances of this
case leads me to conclude that Iowa's use of a single factor sales
formula to apportion the net income of multistate corporations
results in the imposition of "a tax which discriminates against
interstate commerce . . . by providing a direct commercial
advantage to local business."
Northwestern States Portland
Cement Co. v. Minnesota, 358 U. S. 450,
358 U. S. 458
(1959). I therefore dissent.
I
Iowa's use of single factor sales-apportionment formula --
though facially neutral -- operates as a tariff on goods
manufactured in other States and as a subsidy to Iowa manufacturers
selling their goods outside of Iowa. Because 44 of the 45 other
States (including the District of Columbia) which impose corporate
income taxes use a three factor formula involving property,
payroll, and sales, [
Footnote 3/1]
Iowa's practice insures that out-of-state
Page 437 U. S. 284
businesses selling in Iowa will have higher total tax payments
than local businesses. This result follows from the fact that Iowa
attributes to itself all of the income derived from sales in Iowa,
while other taxing States -- using the three factor formula -- are
also taxing some portion of the same income through attribution to
property or payroll in those States.
This surcharge on Iowa sales increases to the extent that a
business' plant and labor force are located outside Iowa. It can be
avoided altogether only by locating all property and payroll in
Iowa; an Iowa manufacturer selling only in Iowa will never have any
portion of its income attributed to any other State. And to the
extent that an Iowa manufacturer makes its sales in States other
than Iowa, its overall state tax liability will be reduced.
Assuming comparable tax rates, its liability to other States, in
which sales constitute only one-third of the apportionment formula,
will be far less than the amount it would have owed with a
comparable volume of sales in Iowa, where sales are the exclusive
mode of apportioning income. The effect of Iowa's formula, then, is
to penalize out-of-state manufacturers for selling in Iowa, and to
subsidize Iowa manufacturers for selling in other States. [
Footnote 3/2]
Page 437 U. S. 285
This appeal requires us to determine whether these economic
effects of the Iowa apportionment formula violate either the Due
Process Clause or the Commerce Clause. I now turn to those
questions.
Page 437 U. S. 286
For the reasons given by the Court,
ante at
437 U. S.
271-275, I agree that application of Iowa's formula does
not violate the Due Process Clause. The decisions of this Court
make it clear that arithmetical perfection is not to be expected
from apportionment formulae.
International Harvester Co. v.
Evatt, 329 U. S. 416
(1947). It has been said that the
"apportionment theory is a mongrel one, a cross between desire
not to interfere with state taxation and desire at the same time
not utterly to crush out interstate commerce."
Northwest Airlines, Inc. v. Minnesota, 322 U.
S. 292,
322 U. S. 306
(1944) (Jackson, J., concurring). It owes its existence to the fact
that with respect to a business earning income through a series of
transactions beginning with manufacturing in one State and ending
with a sale in another, a precise -- or even wholly logical --
determination of the State in which any specific portion of the
income was earned is impossible.
Underwood Typewriter Co. v.
Chamberlain, 254 U. S. 113,
254 U. S.
120-121 (1920).
Hence, the fact that a particular formula -- like the one at
issue here may permit a State to tax some income actually "located"
in another State is not, in and of itself, a basis for
Page 437 U. S. 287
finding a due process violation. [
Footnote 3/3] Were it otherwise, any formula deviating
in the smallest detail from that used in other States would be
invalid. Because there is no ideal means of "locating" any State's
rightful share, such uniformity cannot be dictated by this Court.
Hence, the decisions of this Court properly require the taxpayer
claiming a due process violation to show that the apportionment is
"out of all appropriate proportion to the business transacted."
Hans Rees' Sons, Inc. v. North Carolina ex rel. Maxwell,
283 U. S. 123,
283 U. S. 135
(1931). As appellant has failed to make any such showing, I agree
with the Court that no due process violation has been made out
here.
This conclusion does not,
ipso fact, mean that Commerce
Clause strictures are satisfied as well. This Court's decisions
dealing with state levies that discriminate against out-of-state
business, as Iowa's formula does, compel a more detailed
inquiry.
III
A
It is a basic principle of Commerce Clause jurisprudence
that
"[n]either the power to tax nor the police power may be
Page 437 U. S. 288
used by the state of destination with the aim and effect of
establishing an economic barrier against competition with the
products of another state or the labor of the residents."
Baldwin v. G.A.F. Seelig, Inc., 294 U.
S. 511,
294 U. S. 527
(1935);
accord, H. P. Hood Sons v. Du Mond, 336 U.
S. 525,
336 U. S. 532
(1949);
Boston Stock Exchange, 429 U.S. at
429 U. S.
335-336, and n. 14. Those barriers would constitute "an
unreasonable clog upon the mobility of commerce."
Baldwin,
supra at
294 U. S.
527.
One form of such unreasonable restrictions is "discriminating
State legislation."
Welton v. Missouri, 91 U. S.
275,
91 U. S. 280
(1876). This Court consistently has struck down state and local
taxes which unjustifiably benefit local businesses at the expense
of out-of-state businesses.
Ibid.; accord, Boston Stock
Exchange; Halliburton Oil Well Co. v. Reily, 373 U. S.
64 (1963);
Nippert v. Richmond, 327 U.
S. 416 (19);
Hale v. Bimco Trading, Inc.,
306 U. S. 375
(1939);
I. M. Darnell & Son v. Memphis, 208 U.
S. 113 (1908);
Guy v. Baltimore, 100 U.
S. 434 (1880).
This ban applies not only to state levies that, by their terms,
are limited to products of out-of-state business, or which
explicitly tax out-of-state sellers at higher rates than local
sellers. It also reaches those taxes that,
"in their practical operation, [work] discriminatorily against
interstate commerce to impose upon it a burden, either in fact or
by the very threat of its incidence."
Nippert v. Richmond, supra at
327 U. S. 425.
For example, this Court has invalidated a facially neutral
fixed-fee license tax collected from all local and out-of-state
"drummers," where it appeared the tax fell far more heavily upon
out-of-state businesses, since local businesses had little or no
occasion to solicit sales in that manner.
Robbins v. Shelby
County Taxing Dist., 120 U. S. 489
(1887).
See also West Point Wholesale Grocery Co. v.
Opelika, 354 U. S. 390
(1957);
Memphis Steam Laundry Cleaner, Inc. v. Stone,
342 U. S. 389
(1952);
Best Co. v. Maxwell, 311 U.
S. 454 (1940);
Real
Page 437 U. S. 289
Silk Hosiery Mills v. Portland, 268 U.
S. 325 (1925);
Corson v. Maryland, 120 U.
S. 502 (1887). Thus, the constitutional inquiry relates
not simply to the form of the particular tax, but to its effect on
competition in the several States.
As indicated in
437 U. S.
application of Iowa's single factor sales apportionment formula, in
the context of general use of three factor formulae, inevitably
handicaps out-of-state businesses competing for sales in Iowa. The
handicap will diminish to the extent that the corporation locates
its plant and labor force in Iowa, but some competitive
disadvantage will remain unless all of the corporate property and
payroll are relocated in Iowa. [
Footnote 3/4] In the absence of congressional action,
the Commerce Clause constrains us to view the State's interest in
retaining this particular levy as against the constitutional
preference for an open economy.
See, e.g., Raymond Motor
Transp., Inc. v. Rice, 434 U.S. at
434 U. S.
440-442;
Pike v. Bruce Church, Inc.,
397 U. S. 137,
397 U. S. 142
(1970);
DiSanto v. Pennsylvania, 273 U. S.
34,
273 U. S. 44
(1927) (Stone, J., dissenting); Dowling, Interstate Commerce and
State Power, 27 Va.L.Rev. 1, 14-15, and n. 20 (1940).
Page 437 U. S. 290
B
Iowa's interest in any particular level of tax revenues is not
affected by the use of the single factor sales formula. It cannot
be predicted with certainty that its application will result in
higher revenues than any other formula. [
Footnote 3/5] If Iowa needs more revenue, it can adjust
its tax rates. That adjustment would not have the discriminatory
impact necessarily flowing from the choice of the single factor
sales formula. [
Footnote 3/6]
Hence, if Iowa's choice is to be sustained, it cannot be by virtue
of the State's interest in protecting its fisc or its power to tax.
No other justification is offered. If we are to uphold Iowa's
apportionment formula, it must be because no consistent principle
can be developed that could account for the invalidation of the
Iowa formula, yet support application of other States' imprecise
formulae.
Page 437 U. S. 291
C
It is argued that, since this Court on several occasions has
upheld the use of single factor formulae, Iowa's scheme cannot be
regarded as suspect simply because it does not embody the prevalent
three factor theory. Consideration of the decisions dealing with
single factor formulae, however, reveals that each is
distinguishable.
In
Underwood Typewriter Co. v. Chamberlain,
254 U. S. 113
(1920), this Court upheld Connecticut's use of a single factor
property formula to apportion the net profits of a foreign
corporation. Such a formula is not clearly discriminatory in
Commerce Clause terms. The only competitive disadvantage inevitably
resulting from it would attend a decision to locate a plant or
office in the taxing State. The Commerce Clause does not concern
itself with a State's decision to place local business at a
disadvantage.
Cf. Allied Stores of Ohio, Inc. v. Bowers,
358 U. S. 522,
358 U. S. 528
(1959).
Bass, Ratcliff ,& Gretton, Ltd. v. State Tax
Comm'n, 266 U. S. 271
(1924), is similarly distinguishable. In
Bass, New York
apportioned the net income of foreign corporations using a single
factor property formula that comprised real and tangible personal
property, bills and accounts receivable, and stock in other
corporations. This Court upheld that formula, observing that
plaintiff in error had not shown that "application of the statutory
method of apportionment has produced an unreasonable result."
Id. at
266 U. S. 283.
As in
Underwood Typewriter, however, the single factor
property formula did not necessarily discriminate against
businesses carried on out of State; indeed, its impact would tend
to increase to the extent that corporate business was carried on
within the State.
Cf. National Leather Co. v.
Massachusetts, 277 U. S. 413
(1928);
accord, e.g., International Shoe Co. v. Shartel,
279 U. S. 429
(1929);
New York v. Latrobe, 279 U.
S. 421 (1929);
Hump Hairpin Co. v. Emmerson,
258 U. S. 290
(1922);
United States Glue Co. v. Oak Creek, 247 U.
S. 321 (1918).
Page 437 U. S. 292
Somewhat more troublesome is
Ford Motor Co. v.
Beauchamp, 308 U. S. 331
(1939). In that case, the Court sustained Texas' use of a single
factor sales formula to apportion the outstanding capital stock,
surplus, undivided profits, and long-term obligations of
corporations subject to the state franchise tax. While this case
may be seen as standing for the proposition that single factor
sales formulae are not
per se illegal, it is not
controlling in the present case. [
Footnote 3/7] In
Ford Motor Co., as in
Underwood Typewriter and
Bass, there was no
showing of virtually universal use of a conflicting type of formula
for determining the same tax. Thus, it could not be said that the
Texas formula inevitably imposed a competitive disadvantage on
out-of-state corporations. Discrimination not being shown, there
was no basis for invalidating the Texas scheme under the Commerce
Clause.
The opposite is true here. In the context of virtually universal
use of the basic three factor formula, Iowa's use of the single
factor sales formula necessarily discriminates against out-of-state
manufacturers. The only remaining question, then, is whether Iowa's
scheme may be saved by the fact that its discriminatory nature
depends on context: if other States were not virtually unanimous in
their use of an opposing
Page 437 U. S. 293
formula, past decisions would make it difficult to single out
Iowa's scheme as more offensive than any other.
D
On several occasions, this Court has compared a state statutory
requirement against the practice in other States in determining the
statute's validity under the Commerce Clause. In
Southern
Pacific Co. v. Arizona ex rel. Sullivan, 325 U.
S. 761 (1945), the Court struck down a state statute
limiting passenger trains to 14 cars and freight trains to 70 cars.
Noting that only one State other than Arizona enforced a
restriction on train lengths, [
Footnote
3/8] the
Southern Pacific Court specifically
considered the Arizona law against the background of the activities
in other States:
"Enforcement of the law in Arizona,
while train lengths
remain unregulated or are regulated by varying standards in other
states, must inevitably result in an impairment of uniformity
of efficient railroad operation because the railroads are subjected
to regulation which is not uniform in its application. Compliance
with a state statute limiting train lengths requires interstate
trains
of a length lawful in other states to be broken up
and reconstituted as they enter each state according as it may
impose varying limitations upon train lengths. The alternative is
for the carrier to conform to the lowest train limit restriction of
any of the states through which its trains pass, whose laws thus
control the carriers' operations both within and without the
regulating state."
Id. at
325 U. S. 773.
(Emphasis added.) The clear implication is that the Court's view of
the Arizona length limit might have been different if practices in
other States had been other than as the Court found them. Had
Page 437 U. S. 294
other States adopted the Arizona rule, there might have been no
basis for holding it unconstitutional.
See also Morgan v.
Virginia, 328 U. S. 373
(1946);
Hall v. DeCuir, 95 U. S. 485
(1878).
The Court also looked to the practices of other States in
holding unconstitutional Illinois' mudguard requirement in
Bibb
v. Navajo Freight Lines, Inc., 359 U.
S. 520 (1959). The type of mudguard banned on trucks
operating in Illinois was required in Arkansas and permitted in 45
other States. The Court pointed out the conflict between the
Illinois and Arkansas regulations, and went on to consider the
relevance of other States' rules:
"A State which insists on a design out of line with the
requirements of almost all the other States may sometimes place a
great burden of delay and inconvenience on those interstate motor
carriers entering or crossing its territory. Such a new safety
device -- out of line with the requirements of the other States --
may be so compelling that the innovating State need not be the one
to give way. But the present showing -- balanced against the clear
burden on commerce -- is far too inconclusive to make this mudguard
meet that test."
Id. at
359 U. S.
529-530. It seems clear from the
Bibb Court's
discussion that the conflict between the Illinois regulation and
that of Arkansas would not have led to the latter's invalidation
had it been the one before the Court. The Arkansas regulation
merely required what was permitted in nearly all the other States.
After looking to that virtually uniform practice opposed to that of
Illinois, the conclusion that the Illinois requirement was "out of
line" was a relatively simple one. Since it was not justified by
any interest in increased safety, it was held unconstitutional.
See also Raymond Motor Transp., Inc. v. Rice, 434 U.S. at
434 U. S.
444-446.
Most nearly in point is
General Motors Corp. v. District of
Columbia, 380 U. S. 553
(1965). In that case, this Court held
Page 437 U. S. 295
unlawful the District's use of a single factor sales
apportionment formula under the District of Columbia Income and
Franchise Tax Act of 1947. Although the decision turned on a
question of statutory interpretation, the Court's analysis is
equally applicable to a Commerce Clause inquiry:
"The great majority of States imposing corporate income taxes
apportion the total income of a corporation by application of a
three factor formula which gives equal weight to the geographical
distribution of plant, payroll, and sales. The use of an
apportionment formula based wholly on the sales factor, in the
context of general use of the three factor approach, will
ordinarily result in multiple taxation of corporate net income. . .
. In any case, the sheer inconsistency of the District formula with
that generally prevailing may tend to result in the unhealthy
fragmentation of enterprise and an uneconomic pattern of plant
location, and so presents an added reason why this Court must give
proper meaning to the relevant provisions of the District
Code."
Id. at
380 U. S.
559-560 (footnote omitted). The
General Motors
Court, then, expressly evaluated the single factor sales
formula in the context of general use of the three factor method,
and concluded that the former created dangers for interstate
commerce.
These cases lead me to believe that it is not only proper but
essential to determine the validity of the Iowa formula against the
background of practices in the other States. If one State's
regulatory or taxing statute is significantly "out of line" with
other States' rules,
Bibb, supra at
359 U. S. 530,
and if, by virtue of that departure from the general practice, it
burdens or discriminates against interstate commerce, Commerce
Clause scrutiny is triggered, and this Court must invalidate it
unless it is justified by a legitimate local purpose outweighing
the harm to interstate commerce,
Pike v. Bruce Church,
Inc., 397 U.S. at
397 U. S. 142;
accord, Hughes v. Alexandria Scrap Corp., 426 U.
S. 794,
426 U. S. 804
(1976). There probably can be no fixed rule
Page 437 U. S. 296
as to how really uniform the countervailing state policies must
be; that is, there can be no rule of 26 States, of 35, or of 45.
Commerce Clause inquiries generally do not run in such precise
channels. The degree of conflict and its resulting impact on
commerce must be weighed in the circumstances of each case. But the
difficulty of engaging in that weighing process does not permit
this Court to avoid its constitutional duty and allow an individual
State to erect "an unreasonable clog upon the mobility of
commerce,"
Baldwin v. G.A.F. Seelig, Inc., 294 U.S. at
294 U. S. 527,
by taking advantage of the other States' commendable trend toward
uniformity.
Such is the case before us. Forty-four of the forty-five States
(including the District of Columbia), other than Iowa, that impose
a corporate income tax utilize a similar three factor apportionment
formula. [
Footnote 3/9] The 45th
State, West Virginia, uses a two factor formula based on property
and payroll.
See 437
U.S. 267fn3/1|>n. 1,
supra. Those formulae
individually may be no more rational as means of apportioning the
income of a multistate business than Iowa's single factor sales
formula.
But see General Motors Corp. v. District of Columbia,
supra at
380 U. S. 561.
Past decisions upheld differing formulae because of this inability
to determine that any of the various methods of apportionment in
use was the best; so long as a State's choice was not shown to be
grossly unfair, it would be upheld.
Compare
Page 437 U. S. 297
Underwood Typewriter with Hans Rees' Sons. The more
recent trend toward uniformity, however, permits identification of
Iowa's formula, like the mudguard requirement in
Bibb, as
"out of line," if not
per se irrational. Since Iowa's
formula inevitably discriminates against out-of-state sellers, and
since it has not been justified on any fiscal or administrative
basis, I would hold it invalid under the Commerce Clause.
[
Footnote 3/1]
Those 44 States are as follows: Alabama, Alaska, Arizona,
Arkansas, California, Colorado, Connecticut, Delaware, District of
Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana,
Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts,
Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New
Hampshire, New Jersey, New Mexico, New York, North Carolina, North
Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South
Carolina, Tennessee, Utah, Vermont, Virginia, and Wisconsin.
West Virginia, the 45th State, uses a two factor formula which
omits the sales component. Colorado also has a two factor property
and sales formula, and Missouri a one factor sales formula, which
are available to taxpayers at their option as alternatives to the
three factor formula.
[
Footnote 3/2]
A simplified example demonstrates the economic effect of the
Iowa formula on out-of-state corporations.
Iowa Corp. is domiciled in Iowa, and its total property and
payroll are located there. Illinois Corp. is domiciled in Illinois,
with all its property and payroll in that State. Both corporations
have $1 million in net income, and both make half their sales in
Iowa and half in Illinois. A 5% corporate income tax is levied in
both States.
If both States use a single factor sales apportionment formula,
both would go through the following calculation in determining the
tax liability of both corporations:
Sales in States
--------------- = 1/2; 1/2 x $1,000,000 x 0.05 = $25,000
Total Sales
The pattern of payments and receipts would be as follows:
Total taxes
Taxes Paid Taxes Paid Paid by each
to Iowa to Illinois Corporation
-------------------------------------------------------------
Illinois Corp. $25,000 $25,000 $50,000
Iowa Corp. 25,000 25,000 50,000
-------------------------------------------------------------
TOTAL 50,000 50,000
If both Iowa and Illinois again levy the same 5% income tax but
use the three factor formula, which is:
Sales in Property in Payroll in
State State State
------------ + --------------- + --------------
Total Sales Total Property Total Payroll
-----------------------------------------------,
3
then each corporation's payment to its state of domicile would
be
0.5 + 1 + 1
----------- x $1,000,000 x 0.05 = $41,667, and
3
its payment to the state in which it is a foreign corporation
would be
0.5 + 0 + 0
----------- x $1,000,000 x 0.05 = $8,333
3
The pattern of tax payments and receipts would be as
follows:
Total taxes
Taxes Paid Taxes Paid Paid by each
to Iowa to Illinois Corporation
-------------------------------------------------------------
Illinois Corp. $41,667 $8,333 $50,000
Iowa Corp. 8,333 41,667 50,000
-------------------------------------------------------------
TOTAL 50,000 50,000
But where Iowa uses a single factor sales formula and Illinois
uses three factor method, Illinois Corp. faces an increase in its
overall state tax liability not encountered by Iowa Corp.:
Total taxes
Taxes Paid Taxes Paid Paid by each
to Iowa to Illinois Corporation
-------------------------------------------------------------
Illinois Corp. $25,000 $8,333 $33,333
Iowa Corp. 25,000 41,667 66,667
-------------------------------------------------------------
TOTAL 50,000 50,000
These differences will be smaller or larger, depending upon the
actual tax rates of the various States involved, and upon the
actual proportions of domestic to foreign sales, the payrolls, and
the properties of individual corporations. Only the magnitudes will
change with these factors, however, and not the direction of the
impact. The general principle will apply in all cases.
[
Footnote 3/3]
This does not mean, as the Court suggests,
ante at
437 U. S.
277-280, that this Court is disabled from ever
determining whether a particular apportionment formula imposes
multiple burdens upon or discriminates against interstate commerce.
See General Motors Corp. v. District of Columbia,
30 U. S. 553
(1965);
Bass, Ratcliff & Gretton, Ltd. v. State Tax
Comm'n, 266 U. S. 271
(1924);
Underwood Typewriter Co. v. Chamberlain,
254 U. S. 113
(1920). Regardless of which formula more accurately locates the
State in which any particular segment of income is earned, it is a
mathematical fact that the use of different formulae may result in
taxation on more than 100% of the corporation's income under the
State's own definitions, as well as in skewed tax effects.
See 437
U.S. 267fn3/2|>n. 2,
supra. When this result has a
predictably burdensome or discriminatory effect, Commerce Clause
scrutiny is triggered.
See 437 U. S.
infra. The effects of the challenged formula upon the
particular corporation's income is strictly related only to inquiry
under the Due Process Clause, since Commerce Clause analysis
focuses on the impact upon commerce in general.
[
Footnote 3/4]
The clog on commerce present here is similar to the risk of
imposing "multiple burdens" on interstate commerce against which
the Court has warned in various decisions.
See, e.g., Western
Live Stock v. Bureau of Revenue, 303 U.
S. 250,
303 U. S.
255-256 (1938);
J. D. Adams Mfg. Co. v. Storen,
304 U. S. 307,
304 U. S.
311-312 (1938);
Gwin, White & Prince, Inc. v.
Henneford, 305 U. S. 434,
305 U. S. 439
(1939);
Northwestern States Portland Cement Co. v.
Minnesota, 358 U. S. 450,
358 U. S. 458
(1959).
Compare Evco v. Jones, 409 U. S.
91 (1972),
with General Motors Corp. v.
Washington, 377 U. S. 436
(1964). In this case, Iowa corporations will not risk additional
burdens when the make out-of-state sales.
Cf. Hunt v.
Washington Apple Advertising Comm'n, 432 U.
S. 333,
432 U. S. 351
(1977). Indeed, to the extent that the shift sales out of Iowa,
their overall state tax liability will decrease. Out-of-state
corporations selling in Iowa, however, do face the prospect of
multiple burdens. Hence, there is clear discrimination against
out-of-state corporations, which is the consequence of the
particular multiple burden imposed.
[
Footnote 3/5]
For example, if Iowa switched to a three factor formula and
retained the same rates, revenues from out-of-state corporations
would decrease, since Iowa would no longer be attributing to itself
all of the income earned by Iowa sales of such corporations.
Revenues from corporations located in Iowa, however, would
increase, since Iowa would now be attributing to itself some
portion of the income earned by those corporations' out-of-state
sales.
See also 437
U.S. 267fn3/2|>n. 2,
supra.
[
Footnote 3/6]
Given the nearly infinite variety of taxes, rates, and
apportionment formulae, it might be possible for Iowa to alter its
entire tax structure to effect a similar discrimination, and
perhaps to do it in a way that avoids Commerce Clause scrutiny.
See Barrett, "Substance" vs. "Form" in the Application of
the Commerce Clause to State Taxation, 101 U.Pa.L.Rev. 740, 748
(1953). That speculative possibility cannot deter us from striking
down an obvious discrimination against interstate commerce when one
is presented. The Court has never shrunk from that duty in the
past. To do so would be to abandon any effort of applying Commerce
Clause principles to state tax measures.
This is not to say that States are always forbidden to offer tax
incentives to encourage local industry or to achieve other valid
state goals.
See, e.g., Hughes v. Alexandria Scrap Corp.,
426 U. S. 794
(1976). Such programs, and the interests being served, must be
considered on a case-by-case basis.
[
Footnote 3/7]
Although overruling
Ford Motor Co. would not be
necessary in this case, the time may be ripe for its
reconsideration.
See, e.g., J. Hellerstein, State and
Local Taxation 324 (3d ed.1969). As suggested in
General Motors
Corp. v. District of Columbia, 380 U.
S. 553,
380 U. S. 561
(1965), a sales-only formula is probably the most illogical of all
apportionment methods, since "the geographic distribution of a
corporation's sales is, by itself, of dubious significance in
indicating the locus of either" a corporation's sources of income
or the social costs it generates.
The Court's willingness to uphold the sales-only formula in
Ford Motor Co. may have been the result of its view that
it was dealing solely with the "measure" of the tax, rather than
its "subject."
See 308 U.S. at
308 U. S. 336.
This Court no longer adheres to the use of those formalistic
labels, looking instead to "economic realities" in determining the
constitutionality of state taxing schemes.
Complete Auto
Transit, Inc. v. Brady, 430 U. S. 274,
430 U. S. 279
(1977).
[
Footnote 3/8]
That State was Oklahoma.
Southern Pacific Co. v. Arizona ex
rel. Sullivan, 325 U.S. at
325 U. S.
773-774, n. 3.
[
Footnote 3/9]
There are differences in definitions of the three factors among
the States that use a three factor formula.
See, e.g., J.
Hellerstein, State and Local Taxation 309-310, and n. 7 (3d
ed.1969); Note, State Taxation of Interstate Businesses and the
Multistate Tax Compact: The Search for a Delicate Uniformity, 11
Colum.J.of Law & Soc.Prob. 231, 235-238 (1975). Such
differences may tend in less dramatic fashion to impose burdens on
out-of-state businesses not entirely dissimilar to the one
presented here. It may be that any such effects do not work
inevitably in one direction, as does the burden imposed here, or
they may be
de minimis in Commerce Clause terms. In any
event, they are not presently before us. It suffices to dispose of
this case that nearly all the other States use a basic three factor
formula, while Iowa clings to its sales-only method.