Michigan's single business tax (SBT) is a value added tax (VAT)
levied against entities having "business activity" within the
State. As part of the SBT computation, a taxpayer doing business
both within and without the State must determine its apportioned
tax base by multiplying its total value added -- which consists of
its profit, as represented by its federal taxable income, plus
compensation paid to labor, depreciation on capital, and other
factors -- by the portion of its business activity attributable to
Michigan -- which consists of the average of three ratios: (1)
Michigan payroll to total payroll, (2) Michigan property to total
property, and (3) Michigan sales to total sales. During 1980, the
tax year in question, petitioner Trinova, an Ohio corporation,
maintained a 14-person sales office in Michigan. Under the SBT
formula, its 1980 payroll and property apportionment factors were
only .2328% and .0930% respectively, while its sales factor was
26.5892%, representing Michigan sales of over $100 million.
Although its 1980 federal taxable income showed a loss of almost
$42.5 million, Trinova's SBT computation resulted in a tax of over
$293,000. Trinova paid the tax, but subsequently filed an amended
return and refund claim, alleging that it was entitled to relief
under Michigan law because the SBT's apportionment provisions did
not fairly represent the extent of its business activity within the
State. The amended return proposed that Trinova's company-wide
compensation and depreciation be excluded from its
pre-apportionment value added, and that its actual Michigan
compensation and depreciation be added back into its apportioned
tax base, which would result in a negative value added apportioned
to Michigan and entitle the company to a refund for its entire 1980
SBT payment. When respondent Department of Treasury denied relief,
Trinova sued for a refund in the State Court of Claims, which ruled
in its favor. However, the State Court of Appeals held that Trinova
was not entitled to statutory relief, and the State Supreme Court
affirmed, holding, among other things, that the SBT's three- factor
apportionment formula did not violate either the Due Process Clause
or the Commerce Clause of the Federal Constitution.
Page 498 U. S. 359
Held: As applied to Trinova during the tax year at
issue, the SBT's three-factor apportionment formula does not
violate either the Due Process Clause or the Commerce Clause. Pp.
498 U. S.
372-387.
(a) Under the test stated in
Complete Auto Transit, Inc. v.
Brady, 430 U. S. 274,
430 U. S. 279,
a state tax levied upon multistate businesses is valid under the
Commerce Clause if, as relevant here, it is fairly apportioned and
does not discriminate against interstate commerce. Moreover, the
Complete Auto test encompasses the Due Process Clause
requirement that,
inter alia, a rational relationship
exist between the income attributed to the State and the intrastate
values of the enterprise.
See, e.g., Mobil Oil Corp. v.
Commissioner of Taxes of Vt., 445 U.
S. 425,
445 U. S.
436-437. Pp.
498 U. S.
372-373.
(b) Because the SBT attempts to tax a base that cannot be
assigned to one geographic location with any precision, the
decision to apportion the tax is not unconstitutional. Although
Trinova's compensation and depreciation may appear in isolation to
be susceptible of geographic designation, those elements cannot be
separated from income, which cannot be located in a single State.
The SBT is not a combination or series of several smaller taxes on
compensation, depreciation, and income, but is an indivisible tax
upon a different, bona fide measure of business activity, the value
added. This conclusion is no different than the one this Court has
reached in upholding the validity of state apportionment of income
taxes. The same factors that prevent determination of the
geographic location where income is generated -- such as functional
integration of the intrastate and extrastate activities of a
unitary business enterprise, centralization of management, and
economies of scale -- make it impossible to determine the location
of value added with exact precision.
See, e.g., Mobil Oil
Corp., supra, at
445 U. S. 438;
Amerada Hess Corp. v. Director, Div. of Taxation, New Jersey
Dept. of Treasury, 490 U. S. 66,
490 U. S. 74.
Thus, although Trinova had no federal income during 1980, it cannot
be relieved of tax upon its Michigan business. Such relief would be
incompatible with the rationale of a VAT, under which tax becomes
due even if the taxpayer was unprofitable, and is unsupported by
the record. Trinova's approach would require the conclusion that it
added value only at the factory through the consumption of capital
and labor, while the record would as easily support a finding that
its production operations added little value, and its sales offices
added significant value. Although Trinova's 14 Michigan sales
personnel need not be relied on as the sole, or even a substantial,
source of all the value added that can be apportioned fairly to
Michigan, it cannot be doubted that, without the company's $100
million in Michigan sales, its total value added would have
been
Page 498 U. S. 360
lower to a remarkable degree. It distorts the SBT both in
application and theory to confine value added consequences of the
Michigan market solely to the labor and capital expended by the
resident sales force. Pp.
498 U. S.
373-379.
(c) The SBT's three-factor apportionment formula cannot be ruled
unfair, since Trinova has failed to meet its burden of proving, by
clear and cogent evidence, that there is no rational relationship
between its tax base measure attributed to Michigan and the
contribution of its Michigan business activity to the entire value
added process.
Cf., e.g., Container Corp. of America v.
Franchise Tax Bd., 463 U. S. 159,
463 U. S. 169,
180-181; Moorman Mfg. Co. v. Bair, 437 U.
S. 267,
437 U. S. 274.
This Court has approved the same formula for apportionment of
income,
see, e.g., Butler Bros v. McColgan, 315 U.
S. 501, and the formula has gained wide acceptance in
that context "because payroll, property, and sales appear in
combination to reflect a very large share of the activities
by
which value is generated,"
Container Corp., supra,
463 U.S. at
463 U. S. 183
(emphasis added). Trinova's argument -- that the formula leads to a
distorted result, out of all proportion to the company's Michigan
business, because sales have no relationship to, and add nothing
to, the value that compensation and depreciable plant contribute to
the Michigan tax base -- is rejected, since sales (as a measure of
market demand) do have a profound impact upon the amount of an
enterprise's value added, and since there is no basis for
distinguishing similar arguments that were pressed, and rejected by
this Court, with regard to the apportionment of income. Because the
three-factor formula causes no distortion, the SBT does not tax
value earned outside Michigan. The argument that the value was
added in Ohio, by labor and capital, and that no value has been
added in Michigan, wrongly assumes that value added is subject to
geographic ascertainment and that a sales factor is inappropriate
in apportionment. Trinova gives no estimate of the value added that
would take account of both its Michigan sales activity and Michigan
market demand for its products, whereas the State has consistently
applied the three-factor formula and has enacted further provisions
giving relief to labor-intensive taxpayers like Trinova. Pp.
498 U. S.
379-384.
(d) The SBT does not discriminate against interstate commerce.
Trinova cannot point to any treatment of in-state and out-of-state
firms that is discriminatory on its face. Although
American
Trucking Assns. v. Scheiner, 483 U. S. 266,
483 U. S. 281,
states that the Commerce Clause has a "deeper meaning" that may be
implicated even absent facial discrimination, that meaning is
embodied in the requirement of fair apportionment, and does not
encompass Trinova's vague accusation of discrimination. Nor is that
accusation supported by a statement of Michigan's Governor that the
SBT was enacted to promote business
Page 498 U. S. 361
development and investment within the State. Such promotion is a
laudatory goal in the absence of evidence of an impermissible
motive to export tax burdens or import tax revenues. Pp.
498 U. S.
384-386.
433 Mich. 141,
445 N.W.2d
428, affirmed.
KENNEDY, J., delivered the opinion of the Court, in which
REHNQUIST, C.J., and WHITE, MARSHALL, and O'CONNOR, JJ., joined.
SCALIA, J., filed an opinion concurring in the judgment. STEVENS,
J., filed a dissenting opinion, in which BLACKMUN, J., joined.
SOUTER, J., took no part in the consideration or decision of the
case.
Justice KENNEDY delivered the opinion of the Court.
The principal question before us is whether the three-factor
apportionment formula of the Michigan single business tax (SBT),
Mich.Comp. Laws § 208.1
et seq. (1979), violates either
the Due Process Clause or the Commerce Clause of the Federal
Constitution. The applicability of a three-factor formula to a
state income tax is well settled, but we have not considered
whether a similar apportionment formula may be applied to a value
added tax (VAT). We granted certiorari to consider this question
and to determine whether the Michigan SBT discriminates against
out-of-state businesses.
Page 498 U. S. 362
I
Although in Europe and Latin America VAT's are common,
see Lindholm, The Origin of the Value-Added Tax, 6
J.Corp.L. 11 (1980); Due, Economics of the Value Added Tax, 6
J.Corp.L. 61 (1980), in the United States they are much studied but
little used. Michigan is the first and, the parties tell us, the
only State to have enacted a VAT as a tax on business activity. We
begin with a description of value added and VAT's in general, and
then discuss the Michigan SBT.
A
Value added is an economic concept.
"Value added is defined as the increase in the value of goods
and services brought about by whatever a business does to them
between the time of purchase and the time of sale."
Haughey, The Economic Logic of the Single Business Tax, 22 Wayne
L.Rev. 1017, 1018 (1976) (hereinafter Haughey). The value a
business adds to a single product is
"the difference between the value of the product at sale and the
cost of goods purchased from other businesses that went into the
product."
Taxation and Economic Policy Office, Michigan Department of
Treasury, Analysis of the Michigan Single Business Tax 20-21 (1985)
(hereinafter SBT Analysis). It follows that the sale price of a
product is the total of all value added by each step of the
production process to that point.
"The value added of a loaf of bread is the sum of the value
contributed at each stage of the production and distribution
process. Among others, it includes the contribution of the farmer,
miller, baker, wholesaler and retailer."
Haughey 1019.
A business "adds value by handling or processing these [goods]
with its labor force, machinery, buildings and capital." R. Kleine,
Advisory Commission on Intergovernmental Relations, The Michigan
Single Business Tax: A Different Approach to State Business
Taxation 1 (1978) (hereinafter Kleine). In this litigation, value
added usually refers to the
Page 498 U. S. 363
activities of a single business enterprise. The term can,
however, be used with regard to a single product, or even an entire
economy.
"[Value added] is a means of consistently measuring the size of
business firms and other economic enterprises comprising the total
economy. . . . Gross National Product is virtually equivalent to
national value added."
Haughey 1017.
One of the acknowledged advantages of value added as a measure
of taxation is its neutrality. A VAT is neutral in the sense that
it taxes all business activity alike: under a pure VAT, all forms
of business organization (corporation, partnership,
proprietorship), all types of financing (debt, equity), and all
methods of production (capital intensive, labor intensive) bear the
same tax burden.
"[T]ax factors are minimized in business decisions; inherent
advantages and relative efficiencies are allowed to operate in the
market economy with minimum tax distortions."
"This neutrality of a value-added tax is in notable contrast to
the effects of both the corporation income tax and the payroll
taxes. The former, by definition, is applied only to corporations,
and varies with their reliance on equity rather than debt capital
and the efficiency with which they use equity capital -- that is,
their net profits."
Smith, Value-added tax: the case for, 48 Harv.Bus.Rev. 77, 79
(1970). Though neutral in theory, VAT's often depart in practice
from the pure value-added model because of special exemptions,
deductions, and other adjustments. These features can eliminate
much of the claim to neutrality.
See generally, The
Value-Added Tax: Lessons from Europe (H. Aaron ed.1981).
A VAT differs in important respects from a corporate income tax.
A corporate income tax is based on the philosophy of ability to
pay, as it consists of some portion of the profit remaining after a
company has provided for its workers,
Page 498 U. S. 364
suppliers, and other creditors. A VAT, on the other hand, is a
much broader measure of a firm's total business activity. Even if a
business entity is unprofitable, under normal circumstances it adds
value to its products and, as a consequence, will owe some VAT.
Because value added is a measure of actual business activity, a VAT
correlates more closely to the volume of governmental services
received by the taxpayer than does an income tax. Further, because
value added does not fluctuate as widely as net income, a VAT
provides a more stable source of revenue than the corporate income
tax.
See generally Kleine 3, figure 1.
"The logic or rationale of the [VAT] rests squarely on the
benefits received principle of taxation -- government services are
essential to the operation of any business enterprise . . . and a
part of these public service costs should properly be included in
the cost of doing business."
Id. at 4 (citation omitted).
The SBT Analysis 20-21, provides us the following simplified
example of how value added is determined. Assume a bakery's sole
revenue comes from the sale of bread. The bakery's costs consist of
materials (flour, sugar, spices, utilities), labor (baker, sales
clerk), capital (building, mixer, utensils, oven), and credit
(interest paid on loans). Any excess of revenues over costs
represents profit. Thus,
Revenue = Cost of Labor + Cost of Materials
+ Depreciation [
Footnote 1]
+ Interest + Profit
Because value added is defined as the difference between the
value of products sold (revenues), and the cost of materials going
into the products, we can represent value added (for the entire
firm) by a second simple equation:
Page 498 U. S. 365
Value added = Revenues - Cost of Materials.
The same result is reached by another common method. If we
subtract Cost of Materials from each side of the first equation
above, we have:
Revenues-Cost of Materials = Cost of Labor + Depreciation
+ Interest + Profit.
So in practice value added can be calculated as
either
Revenues-Cost of Materials
or Cost of Labor + Depreciation
+ Interest + Profit. Not surprisingly, these are referred to as the
"subtraction" and the "addition" methods. Each provides an
identical measurement of a taxpayer's value added. [
Footnote 2] Once value added is determined,
the VAT is assessed as a percentage of the value added for the
relevant fiscal period. [
Footnote
3]
Page 498 U. S. 366
B
The Michigan SBT went into effect on January 1, 1976. 1975
Mich.Pub. Acts 228. [
Footnote
4] The SBT replaced seven different business taxes. Kleine 22;
Brief for Respondent 8. Before 1976, a typical manufacturer with
business activity in
Page 498 U. S. 367
Michigan would have been subject to a franchise tax, an income
tax, an intangible property tax, and an
ad valorem
property tax upon inventories. Mitchell, Taxes Repealed and
Amended, 22 Wayne L.Rev. 1029 (1976); Brief for Respondent 8-9.
After enactment of the SBT, the same manufacturer would pay only
one tax.
The Michigan SBT is an addition method VAT, although it
inevitably permits various exclusions, exemptions, and adjustments
that depart from the simple value-added examples described above.
Subject to exemptions contained at Mich.Comp.Laws § 208.35,
Michigan SBT is levied against any person with "business activity"
within the State of Michigan. Mich.Comp.Laws § 208.31(1) (1979).
[
Footnote 5] In order to
calculate the amount of a taxpayer's SBT, the taxpayer must, first,
determine its total tax base. The total tax base consists of the
taxpayer's value added, calculated by the addition method: Cost of
Labor + Depreciation + Interest + Profit. Under Mich. Comp. Laws §
208.9 (1979), the taxpayer begins with federal taxable income
(representing profit), adds other elements that reflect consumption
of labor and capital including compensation, depreciation,
dividends, and interest paid by the taxpayer, and makes other
detailed adjustments.
Second, if a taxpayer does business both within and without
Michigan, it must determine the portion of its total value added
attributable to Michigan. That portion, the crux of this case, is
the average of three ratios: (1) Michigan payroll
Page 498 U. S. 368
to total payroll, (2) Michigan property to total property, and
(3) Michigan sales to total sales. Mich. Comp.Laws §§ 208.45,
208.46, 208.49, 208.51 (1979). The total tax base is multiplied by
the portion of business activity attributable to Michigan (under
the three-factor formula), and the result, subject to several
further adjustments, is the taxpayer's "adjusted tax base." §
208.31(2).
Two further adjustments are relevant here: § 208.23(a), which
permits a taxpayer to deduct a portion of its capital acquisitions,
and § 208.31(5), which permits a labor-intensive taxpayer to reduce
its adjusted tax base by a percentage equal to the percentage by
which compensation exceeds 63% of the total tax base, but with such
reduction not to exceed a maximum of 37%. Actual tax liability
equals the adjusted tax base multiplied by a tax rate of 2.35%.
[
Footnote 6]
II
Trinova, an Ohio corporation, manufactures automobile
components. Its principal office is located in Maumee, Ohio, a
suburb of Toledo located near the Michigan border. During 1980, the
tax year in question, Trinova maintained a fixed presence in
Michigan: a sales office of 14 employees who solicited orders,
maintained contact with Trinova's Michigan customers, and performed
clerical work. Michigan, with its automobile industry, was a major
market for Trinova's products. Indeed, Trinova made $103,981,354
worth of sales to Michigan during 1980, 26.5892% of its total sales
of $391,065,866. Trinova calculated its 1980 SBT adjusted tax base
as follows:
Page 498 U. S. 369
U. S. taxable income (loss) ($42,466,114)
Add:
Compensation $226,356,271
Depreciation $23,262,909
Dividends, interest and
royalties paid $22,908,950
Other $549,526
------------
Subtotal $230,611,542
Subtract:
Dividends, interest and
royalties received ($9,486,223)
------------
Total Tax Base $221,125,319
Apportionment:
Payroll Factor .2328%
Property Factor .0930%
Sales Factor 26.5892%
------------
Average Factor 8.9717%
Apportioned Tax Base:
$221,125,319
x 8.9717%
------------
= $19,838,700
See 433 Mich. 141, 150-152,
445 N.W.2d
428, 431-433 (1989). Trinova further adjusted its tax base by
subtracting a capital acquisition deduction ($9,063) and by taking
the maximum (37%) reduction for labor-intensive taxpayers. These
adjustments resulted in a 1980 adjusted tax base of $12,492,671.
When multiplied by the tax rate of 2.35%, Trinova's tax liability
amounted to $293,578 ($12,492,671 x 2.35%). [
Footnote 7] Trinova timely filed its return and
paid its tax liability.
Page 498 U. S. 370
In 1985, a Michigan intermediate court of appeals ruled that
taxpayers similarly situated to Trinova were entitled to "relief"
under Mich.Comp.Laws § 208.69 (1979), a provision of the SBT.
Jones & Laughlin Steel Corp. v. Department of
Treasury, 145 Mich.App. 405, 377 N.W.2d 397 (1985),
leave
to appeal and reconsideration denied, 424 Mich. 895 (1986). At
the time, § 208.69 provided that, if the apportionment provisions
of the SBT did not "fairly represent the extent of the taxpayer's
business activity" in Michigan, the taxpayer could, among other
alternatives, petition for the employment of "any other method to
effectuate an equitable allocation and apportionment of the
taxpayer's tax base."
Soon after the decision in
Jones & Laughlin,
Trinova filed an amended return and refund claim for the 1980 tax
year. Based on the relief granted in
Jones & Laughlin,
Trinova proposed that, despite admitted company-wide value added of
$221 million and Michigan sales of over $100 million, for purposes
of the Michigan SBT it should be treated as if it had negative
total value added. Value-added apportioned to Michigan would also
have been negative, and Trinova would have been entitled to a
refund for its entire 1980 SBT payment. [
Footnote 8] Upon denial of relief by the Michigan
Department of
Page 498 U. S. 371
Treasury, Trinova sued for a refund in the Michigan Court of
Claims, which ruled in Trinova's favor on the authority of
Jones & Laughlin. No. 86-10430-CM (Mich.Ct.CI., May 5,
1987); App. to Pet. for Cert. 42a-51a.
While the Department of Treasury's appeal was pending in the
Michigan Court of Appeals, the legislature amended § 208.69. 1987
Mich.Pub.Acts 39. The amended § 208.69 creates a presumption that
the statutory apportionment formula fairly represents the
taxpayer's business activity in Michigan unless the adjusted tax
base meets one of two tests, neither of which Trinova could
satisfy, and which do not merit discussion here.
See
Mich.Comp. Laws Ann. § 208.69(3) (West Supp.1990). The Court of
Appeals referred to the legislature's statement that its act was
intended
"curative, expressing the original intent of the legislature
that the single business tax . . . is an indivisible value-added
type of tax and not a combination or series of several smaller
taxes and that relief from formulary apportionment should be
granted only under extraordinary circumstances."
1987 Mich.Pub.Acts 39, § 2. Relying upon this language, the
Court of Appeals determined that the amendment was to be given
retroactive effect as a "remedial and procedural" statute, and that
Trinova was not entitled to statutory relief. 166 Mich.App. 656,
666, 421 N.W.2d 258, 262 (1988).
The Michigan Supreme Court affirmed the Court of Appeals. 433
Mich. 141,
445 N.W.2d
428 (1989). Without addressing retroactive application of the
amendments to § 208.69, it construed § 208.69 as a "constitutional
circuit
Page 498 U. S.
372
breaker'" to be applied only if required in order to save
the SBT against unconstitutional application. Id. at 156,
445 N.W.2d at 434. The court then upheld the SBT against Trinova's
federal constitutional challenges. The Michigan Supreme Court noted
that formulary apportionment of income taxes is uncontroversial,
and that it did
"not believe that 'business activity' as defined under the [SBT]
is susceptible to accurate analysis when only one component of the
total business effort is examined."
Id. at 163, 445 N.W.2d at 438. The court concluded that
Trinova's averaged ratios of payroll, property and sales are a fair
representation of the extent of its business activity in Michigan,
making it ineligible for relief on statutory or constitutional
grounds.
Id. at 163-166, 445 N.W.2d at 438-439. We granted
Trinova's petition for a writ of certiorari. 494 U.S. 1015
(1990).
III
The principles which govern the validity of state taxes levied
upon multistate businesses seek to accommodate the necessary
abstractions of tax theory to the realities of the marketplace.
Under the test stated in
Complete Auto Transit, Inc. v.
Brady, 430 U. S. 274,
430 U. S. 279
(1977), we will sustain a tax against Commerce Clause challenge so
long as
"the tax is applied to an activity with a substantial nexus with
the taxing State, is fairly apportioned, does not discriminate
against interstate commerce, and is fairly related to the services
provided by the State."
We applied this four-part test in later cases addressing a wide
variety of taxes.
See Goldberg v. Sweet, 488 U.
S. 252,
488 U. S. 260,
n. 12 (1989) (citing applications in cases involving sales,
severance, use, corporate income, and business and occupation
taxes).
In
Complete Auto, we renounced the formalistic approach
of
Spector Motor Service, Inc. v. O'Connor, 340 U.
S. 602 (1951), which had prohibited a state from taxing
the privilege of doing business in the State, treating it as a tax
upon interstate commerce and so beyond the authority of the
Page 498 U. S. 373
State. We seek to avoid formalism and to rely upon a "consistent
and rational method of inquiry [focusing on] the practical effect
of a challenged tax."
Mobil Oil Corp. v. Commissioner of Taxes
of Vt., 445 U. S. 425,
445 U. S. 443
(1980). The
Complete Auto test, while responsive to
Commerce Clause dictates, encompasses as well the Due Process
requirement that there be
"a 'minimal connection' between the interstate activities and
the taxing State, and a rational relationship between the income
attributed to the State and the intrastate values of the
enterprise."
Mobil Oil Corp., supra, at
445 U. S.
436-437;
see also Amerada Hess Corp. v. Director,
Div. of Taxation, New Jersey Dept. of Treasury, 490 U. S.
66,
490 U. S. 80
(SCALIA, J., concurring) (1989).
In this Court, Trinova does not dispute that its business
activities have a substantial nexus with Michigan and subject it to
the State's taxing authority. Nor does Trinova argue that the
amount of tax it is required to pay bears no fair relation to the
services provided by the State.
Complete Auto, supra, 430
U.S. at
430 U. S. 279.
Trinova instead contends that Michigan's SBT fails the other two
prongs of the
Complete Auto test: that the SBT is not
fairly apportioned as applied to Trinova, and that the tax
discriminates against interstate commerce. We consider these
claims, and begin with the matter of apportionment.
A
Trinova's claim that apportionment of the tax is
unconstitutional concentrates on the elements of the apportionment
formula. The original rationale for apportionment of income was the
difficulty of identifying the geographic source of the income
earned by a multistate enterprise.
See Underwood Typewriter Co.
v. Chamberlain, 254 U. S. 113,
254 U. S.
120-121 (1920) (legislature "faced with the
impossibility of allocating specifically the profits earned by the
[taxpayer's] processes conducted within its borders"). As we stated
the problem in
Container Corp. of America v. Franchise Tax
Bd., 463 U. S. 159,
463 U. S. 192
(1983), "[a]llocating income among various taxing jurisdictions
Page 498 U. S. 374
bears some resemblance . . . to slicing a shadow." Trinova
argues that, because its SBT tax base is composed in large part of
compensation and depreciation, elements which can be assigned to a
geographic source, we must reject apportionment altogether.
We can accept the premise that apportionment is permitted only
when precise geographic measurement is not feasible, for to allow
apportionment where there is no practical or theoretical
justification could provide the opportunity for a state to export
tax burdens and import tax revenues. The Commerce Clause prohibits
this competitive mischief. The issue becomes whether, without an
apportionment formula, Michigan can assign the SBT tax base and its
principal components to separate geographic locations and to
separate accounts in each state. Michigan has decided it cannot do
so without serious theoretical and practical difficulty, and, upon
review of the case, we accept that determination.
We reject, at the outset, however, arguments by Michigan and
some
amici curiae that the Michigan SBT can be analyzed as
a tax upon "business activity." Brief for Council of State
Governments
et al. as
Amici Curiae 11. The
statute does not say that the SBT is a tax upon business activity,
but rather that it is a "tax of 2.35%
upon the adjusted tax
base of every person with business activity in this state which is
allocated or apportioned to this state." Mich.Comp.Laws §
208.31(1) (1979) (emphasis added). While Michigan business activity
is a threshold requirement for the tax, and value added is its
measure, labeling the SBT a tax on "business activity" does not
permit us to forgo examination of the actual tax base and
apportionment provisions. "A tax on sleeping measured by the number
of pairs of shoes you have in your closet is a tax on shoes."
Jenkins, State Taxation of Interstate Commerce, 27 Tenn.L.Rev. 239,
242 (1960).
Trinova errs in the opposite direction. It would dissect the tax
base as if the SBT were three separate and independent taxes: a tax
on compensation, a tax on depreciation, and a
Page 498 U. S. 375
tax on income, each apportioned. Trinova insists that
compensation and depreciation can be located, and can be separated
from the total value-added calculation. As a result, Trinova would
be taxed upon its Michigan compensation and Michigan depreciation.
It would owe no additional tax upon income apportionable to
Michigan, because it had no income during the relevant tax
year.
This characterization, and with it Trinova's constitutional
argument, fails. Doubtless Trinova can identify the location of its
plant and equipment, and much of its compensation. The Michigan
SBT, however, is not three separate and independent taxes, and
Trinova cannot purport to identify the geographic source of value
added by assuming that two elements can be located in a single
state while the third cannot. Trinova's proposed apportionment for
the 1980 tax year, n. 8,
supra, provides a good example of
the problems that accompany its argument.
In 1980, Trinova's company-wide value added amounted to much
less than its compensation plus depreciation. In short, Trinova was
unprofitable. Under a VAT, however, tax becomes due in any event.
Trinova's approach would require us to conclude that Trinova added
value at the factory through the consumption of capital and labor,
but that its products somehow lost value outside of this process,
perhaps between the time they left the factory and the time they
were delivered to customers in Michigan. This approach is
incompatible with the rationale of a VAT, and is unsupported in the
record.
For all this record shows, Trinova's production operations might
have added little value and its sales offices might have added
significant value, through superior marketing skill, liaison
between the company and its customers, or mere fortuity.
See
Moorman Mfg. Co. v. Bair, 437 U. S. 267,
437 U. S. 272
(1978) (record lacked analysis of what portion of profits was
apportionable to sales, to manufacturing or to other phase of
company's operations).
Page 498 U. S. 376
But we need not rely upon Trinova's 14 Michigan sales personnel
as the source of all the value added that can be apportioned fairly
to Michigan. In a unitary enterprise, compensation, depreciation
and profit are not independent variables to be adjusted without
reference to each other. If Trinova had paid an additional $100
million in compensation during 1980, there is no way of knowing
whether, or to what extent, value added would have increased. In
fact, value added would not have increased, so long as revenues did
not increase. These elements of value added are inextricable,
codependent variables.
Without Trinova's $100 million in 1980 Michigan sales, the
company's value added would have been lower to a remarkable degree.
The market demand that sustained those sales did not arise solely,
perhaps not even substantially, from the activities of Trinova's 14
Michigan sales personnel. But there can be little doubt that
requirements of the Michigan market determined the direction of
Trinova's design, production and distribution process. By serving
that market and meeting its demands, Trinova generated value added
in the sums that it did. We can and must assume that Michigan sales
were a part of the company's essential economic strategies, and
were an integral part of company-wide value added. It distorts the
tax both in application and theory to confine value-added
consequences of the Michigan market solely to the labor and capital
expended by the resident sales force.
Trinova's attempted characterization is arguable only because
Michigan calculates value added by the addition method. The
addition and subtraction methods of calculating value, however, are
but two different paths to the same result.
See n. 2,
supra. Had Michigan calculated the SBT tax base by the
subtraction method, reporting total revenues minus total cost of
materials, Trinova's characterization would collapse of its own
weight. Trinova could geographically locate its revenues, and even
determine where it purchased its materials. The Michigan
apportionment formula
Page 498 U. S. 377
assumes as much. But were Trinova to calculate value added based
upon the location of its revenues, it would apportion a much
greater share of its value added to Michigan (26.5892%) than was
apportioned under Michigan's three-factor formula (8.9717%). An
apportionment of value added based solely on the source of revenues
is no less justifiable than an apportionment based solely upon the
location of compensation or depreciation.
The difference between the addition and subtraction methods is
one of form, and lacks constitutional significance. Michigan chose
the addition method of calculating value added as a convenience to
taxpayers, for whom federal taxable income provided an easy
starting point. Kleine 6-7 (discussing advantages of addition
method); SBT Analysis 21 (same). The Constitution does not require
a formalistic analysis resulting in a penalty for Michigan's
selection of an easier calculation method for its taxpayers.
Both methods of calculation, moreover, illustrate the
justification for the State's adoption of an apportionment formula.
Under either method, value added includes a remainder or residual
that cannot be located with economic precision. Under the addition
method, value added contains the element of income, one calculated
by and dependent upon factors (revenues minus total costs) not
included in the addition method equation; under the subtraction
method, value added is itself a remainder, no more assignable than
income. It would be impractical to locate value added by a
geographic test. We thus agree with the Michigan Legislature's
statement that the SBT is not, for apportionment purposes, "a
combination or series of several smaller taxes," 1987 Mich.Pub.Acts
39, § 2, but an "indivisible,"
ibid., tax upon a
different, bona fide measure of business activity, the value
added.
This conclusion is no different than the one we have reached in
upholding the validity of state apportionment of income taxes. As
with a VAT, the discrete components of a state income tax may
appear in isolation susceptible of geographic
Page 498 U. S. 378
designation. Nevertheless, since
Underwood Typewriter Co. v.
Chamberlain, 254 U. S. 113
(1920), we have recognized the impracticability of assuming that
all income can be assigned to a single source. In this respect,
Trinova's argument becomes a familiar and often-rejected genre of
taxpayer challenge:
"[A]pportionability often has been challenged by the contention
that . . . the source of [particular] income may be ascertained by
separate geographical accounting. The Court has rejected that
contention so long as the intrastate and extrastate activities
formed part of a single unitary business.
Butler Bros. v.
McColgan, 315 U. S. 501,
315 U. S.
506-508 (1942);
Ford Motor Co. v. Beauchamp,
308 U. S.
331,
308 U. S. 336 (1939);
cf. Moorman Mfg. Co. v. Bair, 437 U.S. at
437 U. S.
272. In these circumstances, the Court has noted that
separate accounting, while it purports to isolate portions of
income received in various States, may fail to account for
contributions to income resulting from functional integration,
centralization of management, and economies of scale.
Butler
Bros. v. McColgan, 315 U.S. at
315 U. S.
508-509. Because these factors of profitability arise
from the operation of the business as a whole, it becomes
misleading to characterize the income of the business as having a
single identifiable 'source.' Although separate geographical
accounting may be useful for internal auditing, for purposes of
state taxation it is not constitutionally required."
Mobil Oil Corp., 445 U.S. at
445 U. S.
438.
In a recent challenge to this unitary business principle, we
rejected the argument that particular assignable costs of a
business should be excluded from a broader tax base.
Amerada
Hess Corp. v. Director, Div. of Taxation, New Jersey Dept. of
Treasury, 490 U. S. 66
(1989). We considered the New Jersey corporate income tax, which
used federal taxable income as a benchmark and required certain
adjustments (as does the Michigan SBT). New Jersey required oil
companies to
Page 498 U. S. 379
add back into income any deduction taken for taxes paid under
the federal windfall profits tax. The taxpayers objected that the
windfall profit tax is "an exclusively out-of-state expense,
because it is associated with the production of oil outside New
Jersey."
Id. at
490 U. S.
74.
In like manner, Trinova objects to the SBT's requirement that it
add compensation and depreciation to federal taxable income on the
grounds that these are, with limited exception, out-of-state
expenses. In
Amerada Hess Corp., we rejected outright the
idea that geographically assignable costs of production must be
excluded from an apportionment of income:
"[J]ust as each [taxpayer's] oil-producing revenue -- as part of
a unitary business -- is not confined to a single State,
Exxon
Corp. [v. Wisconsin Dept. of Revenue], 447 U.S. at
447 U. S. 226, . . . so too
the costs of producing this revenue are unitary in nature.
See
Container Corp., 463 U.S. at
463 U. S.
182 (the costs of a unitary business cannot be deemed
confined to the locality in which they are incurred)."
Ibid.
The reasoning of
Amerada Hess Corp. applies with equal
force to the case here. The same factors that prevent determination
of the geographic location where income is generated, factors such
as functional integration, centralization of management, and
economies of scale, make it impossible to determine the location of
value added with exact precision. In concluding that Michigan can
apportion the SBT, we merely reaffirm what we have written
before:
"In the case of a more-or-less integrated business enterprise
operating in more than one State, . . . arriving at precise
territorial allocations of 'value' is often an elusive goal, both
in theory and in practice."
Container Corp., 463 U.S. at
463 U. S.
164.
B
Having determined that Michigan's SBT attempts to tax a base
that cannot be assigned to one location with any precision, and
that apportionment is proper, we must next
Page 498 U. S. 380
consider whether Michigan's apportionment formula for Trinova's
value added is fair.
Container Corp. states our test for fair income
apportionment:
"The first, and again obvious, component of fairness in an
apportionment formula is what might be called internal consistency
-- that is, the formula must be such that, if applied by every
jurisdiction, it would result in no more than all of the unitary
business' income being taxed. The second and more difficult
requirement is what might be called external consistency -- the
factor or factors used in the apportionment formula must actually
reflect a reasonable sense of how income is generated."
463 U.S. at
463 U. S. 169.
Trinova does not contest the internal consistency of the SBT's
apportionment formula, and we need not consider that question.
Instead, Trinova argues that the SBT apportionment formula fails
the external consistency test. In order to prevail on such a
challenge, an income taxpayer must prove
"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,' [
Hans Rees' Sons,
Inc. v. State of North Carolina,] 283 U.S. at
283 U. S.
135, or has 'led to a grossly distorted result,'
[
Norfolk & Western R. Co. v. Missouri State Tax
Comm'n,] 390 U.S. at
390 U. S. 326.
Moorman
Mfg. Co., 437 U.S. at
437 U. S.
274. We conclude that the same test applies to
apportionment of a VAT. Trinova must demonstrate that, in the
context of a VAT, there is no rational relationship between the tax
base measure attributed to the state and the contribution of
Michigan business activity to the entire value-added process.
See Container Corp., supra, 463 U.S. at
463 U. S.
180-181."
The Michigan SBT uses the same three-factor apportionment
formula we first approved for apportionment of income in
Butler
Bros. v. McColgan, 315 U. S. 501
(1942). This standard has become "something of a benchmark
against
Page 498 U. S. 381
which other apportionment formulas are judged."
Container
Corp., supra, 463 U.S. at
463 U. S. 170;
see also Moorman Mfg. Co., supra, 437 U.S. at
437 U. S. 282
(BLACKMUN, J., dissenting);
id. at
437 U. S.
283-284 (Powell, J., dissenting). Although the one-third
weight given to each of the three factors -- payroll, property, and
sales -- is not a precise apportionment for every case, the
formula
"has gained wide approval precisely because payroll, property,
and sales appear in combination to reflect a very large share of
the activities
by which value is generated."
Container Corp., supra, 463 U.S. at
463 U. S. 183
(emphasis added). The three-factor formula is widely used, and is
included in the Uniform Division of Income for Tax Purposes Act, 7A
U.L.A. 331 (1990 Cum.Supp.) (approved in 1957 by the National
Conference of Commissioners on Uniform State Laws and the American
Bar Association).
Trinova argues that, on the facts of this case, the three-factor
formula leads to a distorted result, out of all proportion to the
business done by Trinova in Michigan. Trinova's Michigan payroll
constituted .2328% of total payroll, its Michigan property
constituted .0930% of total property, and its Michigan sales
constituted 26.5892% of total sales. The three-factor formula
averages these ratios, with the result that 8.9717% of Trinova's
value added, or $19,838,700, is assigned to Michigan. Because
Trinova is a labor-intensive taxpayer, and can deduct capital
acquisitions, the tax base is further reduced to $12,492,671.
In this Court, Trinova proposes an alternative two-factor
apportionment, excluding the sales factor. Under the two-factor
formula, only .1629% of Trinova's value added, or $360,213, would
be assigned to Michigan. Brief for Petitioner 33-34. [
Footnote 9]
Page 498 U. S. 382
Although the three-factor formula
"can be justified as a rough, practical approximation of the
distribution of either a corporation's sources of income or the
social costs which it generates,"
General Motors Corp. v. District of Columbia,
380 U. S. 553,
380 U. S. 561
(1965), Trinova argues that the formula does not reflect how the
value-added tax base is generated. The principal flaw, it contends,
is that the formula includes a sales factor.
"Sales have no relationship to, and add nothing to, the value
that [compensation and depreciable plant] contribute to the tax
base in Michigan."
Brief for Petitioner 31. Trinova's position finds some support
among economists.
See Barlow & Connell, The Single
Business Tax, in Michigan's Fiscal and Economic Structure 673, 704
(H. Brazer ed.1982); Kleine 7, 14, n. 5.
We have,
supra, at
498 U. S. ,
already concluded that sales (as a measure of market demand) do
have a profound impact upon the amount of an enterprise's value
added, and therefore reject the complete exclusion of sales as
somehow resulting in more accurate apportionment. We further reject
this critique because it cannot distinguish application of the
three-factor formula to a VAT from application to an income tax. In
fact, nearly identical criticisms were levied against the
three-factor formula as a method for apportioning income by
economists who theorize that income (like value added) is the
product of labor and capital, and that the marketplace contributes
nothing to production of income.
See Studenski, The Need
for Federal Curbs on State Taxes on Interstate Commerce: An
Economist's Viewpoint, 46 Va.L.Rev. 1121, 1131-1132 (1960);
Harriss, Economic Aspects of Interstate Apportionment of Business
Income, 37 Taxes 327, 362-363 (1959); Harriss, Interstate
Apportionment of Business Income, 49 Am.Econ.Rev. 398, 400 (1959).
If it were not for their age, these criticisms could have been
taken almost verbatim from Trinova's brief:
Page 498 U. S. 383
"[S]ales-by-destination are not a proper allocation factor. . .
. Taken by themselves, they do not necessarily represent the
location of the company's productive income-creating effort. Only
the location of the company's capital and labor, which may be
wholly different from the destination of the sales, identifies the
location of that effort and hence the situs for the imposition of a
state income tax upon it."
Studenski,
supra, at 1131-1132.
Despite such criticism, the Uniform Division of Income for Tax
Purposes Act decided upon an income apportionment formula that
included sales, and the importance of sales in generating value has
been acknowledged by this Court.
Container Corp., 463 U.S.
at
463 U. S. 183.
Thus, as we responded to a similar argument in
Moorman Mfg.
Co., whatever the merit of Trinova's argument that sales do
not contribute to value added,
"from the standpoint of economic theory or legislative policy,
it cannot support a claim in this litigation that [the State] in
fact taxed profits not attributable to activities within the State
during the yea[r 1980]."
437 U.S. at
437 U. S. 272.
Trinova gives no basis for distinguishing the same arguments that
were pressed, and rejected, with regard to the apportionment of
income. We could not accept Trinova's argument that the sales
factor distorts Michigan's apportionment formula without rejecting
our precedents which approve the use of the same formula to
apportion income.
As we find no distortion caused by the three-factor formula, it
follows that the Michigan SBT does not tax "value earned outside
[Michigan's] borders."
ASARCO Inc. v. Idaho Tax Comm'n,
458 U. S. 307,
458 U. S. 315
(1982). The argument that the value was added in Ohio, by labor and
capital, and that no value has been added in Michigan, assumes that
value added is subject to geographic ascertainment, and assumes
further the inappropriateness of a sales factor in apportionment.
For the reasons we have given, we reject both arguments.
Page 498 U. S. 384
We need not say for certain which method -- unadjusted
apportionment by the three-factor formula ($19,838,700),
apportionment by Trinova's alternative two-factor formula
($360,213), Trinova's
Jones & Laughlin apportionment
urged in state court ( - $2,042,458), or the adjusted tax base as
calculated in Trinova's original 1980 return ($12,492,671) -- gives
the most accurate calculation of Trinova's value added in Michigan.
Trinova has not convincingly demonstrated which figure is most
accurate. Trinova gives no estimate of the value added that would
take account of both its Michigan sales activity and Michigan
market demand for its products. Michigan, on the other hand, has
consistently applied a formula, the elements of which appear to
reflect a very large share of the activities by which value is
generated, with further relief for labor intensive taxpayers such
as Trinova. Trinova has failed to meet its burden of proving "by
clear and cogent evidence,'" Moorman Mfg. Co., 437
U.S. at 437 U. S. 274,
that the State of Michigan's apportionment provides a distorted
result. [Footnote
10]
C
Trinova also urges that the Michigan SBT should be struck down
because it discriminates against out-of-state businesses in
violation of the Commerce Clause. Trinova cannot point to any
treatment of in-state and out-of-state firms that is discriminatory
on its face, as in the cases it cites.
See, e.g.,
Page 498 U. S. 385
Westinghouse Electric Corp. v. Tully, 466 U.
S. 388,
466 U. S. 393
(1984) (tax credit was limited to gross receipts from export
products shipped from a regular place of business of the taxpayer
within New York);
Boston Stock Exchange v. State Tax
Comm'n, 429 U. S. 318,
429 U. S.
324-328 (1977) (tax facially discriminated against
transactions on securities exchanges located outside of New York,
and had been enacted in an effort to discourage growth of such
exchanges);
Halliburton Oil Well Cementing Co. v. Reily,
373 U. S. 64 (1963)
(sales tax exempted isolated sales within state, but use tax lacked
a similar exemption for similar isolated sales outside of the
state).
In the absence of any facial discrimination, Trinova recalls our
statement in
American Trucking Ass'ns v. Scheiner,
483 U. S. 266,
483 U. S. 281
(1987), that
"the Commerce Clause has a deeper meaning that may be implicated
even though state provisions . . . do not allocate tax burdens
between insiders and outsiders in a manner that is facially
discriminatory."
The Commerce Clause requires more than mere facial neutrality.
The content of that requirement is fair apportionment. The "deeper
meaning" to which American Trucking refers is embodied in the
requirement of fair apportionment, as expressed in the tests of
internal and external consistency. Other than the vague accusation
of discrimination, Trinova presents no other standard by which we
might consider the constitutionality of the Michigan SBT.
In further support of its discrimination argument, Trinova
relies upon the 1987 statement of Michigan's Governor that the SBT
was enacted "
to promote the development and investment of
business within Michigan.'" Executive Message of Michigan Governor
James J. Blanchard to the Michigan Supreme Court, Nov. 6, 1987,
App. to Pet. for Cert. 73a. This statement helps Trinova not at
all. It is a laudatory goal in the design of a tax system to
promote investment that will provide jobs and prosperity to the
citizens of the taxing state. States are free to "structur[e] their
tax systems to
Page 498 U. S.
386
encourage the growth and development of intrastate commerce
and industry." Boston Stock Exchange, supra, 429 U.S. at
429 U. S.
336-337. Although Trinova repeats the Governor's
statement in an attempt to demonstrate an impermissible motive on
the part of the State, all the contemporaneous evidence concerning
passage of the SBT suggests a benign motivation, combined with a
practical need to increase revenues. [Footnote 11] Neither Trinova nor the secondary sources it
relies upon present any evidence that the SBT was inspired as a way
to export tax burdens or import tax revenues.
IV
In reviewing State taxation schemes under the Commerce Clause,
we attempt "to ensure that each State taxes only its fair share of
an interstate transaction."
Goldberg v. Sweet,
488 U. S. 252,
488 U. S.
260-261 (1989). We act as a defense against state taxes
which, whether by design or inadvertence, either give rise to
serious concerns of double taxation, or attempt to capture tax
revenues that, under the theory of the tax, belong of right to
other jurisdictions. We have always "declined to undertake the
essentially legislative task of establishing
Page 498 U. S. 387
a
single constitutionally mandated method of taxation.'"
Id. at 488 U. S. 261,
quoting Container Corp., 463 U.S. at 463 U. S. 171.
We do not say today whether other states should adopt a value-added
tax, or whether Michigan's three-factor formula is the only
acceptable method of apportionment. We do hold that, as applied to
Trinova during the tax year at issue, the Michigan SBT does not
violate the Due Process or Commerce Clauses of the
Constitution.
The judgment of the Supreme Court of Michigan is
Affirmed.
Justice SOUTER took no part in the consideration or decision of
this case.
[
Footnote 1]
In calculating value added, a firm's use of capital is
represented by depreciation. Depreciation is the reduction in value
of a firm's assets through wear and tear, obsolescence, or other
factors, and thus roughly measures consumption of capital.
See McGraw-Hill Dictionary of Modern Economics 130 (3rd
ed.1983); P. Samuelson & W. Nordhaus, Economics 902 (12th
ed.1985).
[
Footnote 2]
See, e.g., Aaron, Introduction and Summary, in The
Value-Added Tax: Lessons from Europe 1, 2 (H. Aaron ed.1981)
(hereinafter Aaron); Haughey 1018; Special Committee on the
Value-Added Tax of the Section of Taxation, American Bar
Association, The Choice Between Value-Added and Sales Taxation at
Federal and State Levels in the United States, 29 Tax Lawyer 457,
459 (1976) (addition and subtraction methods "reac[h] the same
result by the opposite means"); SBT Analysis 20 (addition and
subtraction are "two
alternative, but
equivalent
ways of calculating value added. . . . The important point is that,
conceptually, these two calculations are
equal").
[
Footnote 3]
The nations of the European Economic Community (EEC) each levy a
value added tax under yet a third method, as a multi-stage sales
tax.
See generally, Aaron. Under the EEC system, the
bakery in our example would be taxed on each sale of bread, and
would receive a credit for each purchase of materials going into
production of the bread. Similarly, at each other link in the chain
of production and distribution, tax is assessed on sales, but
credit is provided on purchases. This multi-stage sales tax system
places the burden on the taxpayer to demonstrate that it did, in
fact, purchase goods for which it requests a credit. The
multi-stage sales tax version of the VAT has been advocated as
promoting tax compliance, though the evidence does not necessarily
support this view.
See Oldman & Woods, Would a
Value-Added Tax System Relieve Tax Compliance Problems, in Income
Tax Compliance: A Report of the ABA Section of Taxation
Invitational Conference on Income Tax Compliance 317 (1983)
(multistage consumption tax VAT has traditionally been regarded as
self-enforcing because the tax credit mechanism is said to induce
firms to report transactions accurately).
The requirement of "fiscal frontiers" to record and tax
interstate transactions makes the multistage sales tax approach
impracticable for an individual state. McLure, State and Federal
Relations in the Taxation of Value Added, 6 J.Corp.L. 127, 130-131
(1980);
see also Haughey 1025 ("invoice credit method is
not workable in a subeconomy without the legal authority and means
to control the flow of imports and exports").
On international transactions, the EEC's VATs are assessed in
the jurisdiction of destination. As a result, no tax is applied on
exports, while full tax is applied to imports.
See id. at
1024-1025; Aaron 4. The destination principle does not, however,
purport to determine whether value was added in the jurisdiction of
destination or the jurisdiction of origin.
[
Footnote 4]
The SBT was not Michigan's first experiment with a value-added
tax. Between 1953 and 1967, Michigan had utilized a Business
Activities Tax (BAT) similar to the Michigan SBT. Although the BAT
was a subtraction method VAT and permitted different adjustments
than the SBT, the BAT tax base included "a company's payroll,
profits, and capital outlay less depreciation allowed," Lock, Rau,
& Hamilton, The Michigan Value-Added Tax, 8 Nat.Tax J. 357, 363
(1955), and was apportioned among states by the same three-factor
formula that is challenged here.
See Mich.Stat.Ann. §§
7.557(1) - 7.557(24) (Supp.1955),
repealed, 1967
Mich.Pub.Acts 281. The Michigan Supreme Court upheld the BAT
against a challenge on facts remarkably similar to those presented
here by Trinova.
Armco Steel Corp. v. State, 359 Mich.
430,
102 N.W.2d
552, 555-556 (1960) (Ohio corporation had nominal Michigan
property and payroll, but substantial Michigan sales). We dismissed
an appeal of the judgment in
Armco for want of a
substantial federal question.
Armco Steel Corp. v.
Michigan, 364 U. S. 337
(1960). The arguments in that case focused on whether the BAT was
best characterized as a tax on income or a tax on gross receipts,
with the concern that, under our jurisprudence of the time, a
"direct" tax on gross receipts from interstate commerce would be
unconstitutional.
[
Footnote 5]
"Business activity" is broadly defined as
"a transfer of legal or equitable title to or rental of
property, whether real, personal, or mixed, tangible or intangible,
or the performance of services, or a combination thereof, made or
engaged in, or caused to be made or engaged in, within this state,
whether in intrastate, interstate, or foreign commerce, with the
object of gain, benefit, or advantage, whether direct or indirect,
to the taxpayer or to others, but shall not include the services
rendered by an employee to his employer, services as a director of
a corporation, or a casual transaction. . . ."
Mich. Comp.Laws § 208.3 (1979).
[
Footnote 6]
Any taxpayer can, in the alternative, calculate its adjusted tax
base as total gross receipts multiplied by the apportionment figure
(derived using the three-factor formula) divided by 2. This figure
is then multiplied by the 2.35% tax rate to give actual tax
liability. Mich.Comp.Laws § 208.31(2) (1979). Under this
alternative calculation, no firm's Michigan SBT liability will ever
exceed 1.175% of apportioned gross receipts.
[
Footnote 7]
Trinova could have calculated its tax liability under the
alternative gross receipts method, Mich.Comp.Laws § 208.31(2)
(1979), as follows: Total gross receipts ($391,065,866) multiplied
by Michigan apportionment factor (8.9717%) divided by two (equals
$17,542,628) multiplied by 2.35% equals tax liability of $412,251.
This figure amounts to less than 0.4% of Trinova's Michigan sales.
Of course, Trinova did not use this method, as it was required to
pay only $293,578 (or 0.28% of Michigan sales) under the
apportionment method challenged here.
[
Footnote 8]
The amended return proposed that Trinova's company-wide
compensation and depreciation be excluded from the
pre-apportionment tax base, and actual Michigan compensation and
depreciation be added back into the apportioned tax base, as
follows:
Total Tax Base -- statutory formula: $221,125,319
Deduct Compensation ($226,356.271)
Deduct Depreciation ($23,262,909)
-------------
Trinova's Proposed Total Tax Base: ($28,493,861)
Apportionment (8.9717%) ($2,556,384)
Add Michigan Compensation $511,774
Add Michigan Depreciation 52,152
-------------
Apportioned Tax Base: ($2,042,458)
433 Mich. 141, 147, n. 4,
445 N.W.2d
428, 431, n. 4 (1989).
[
Footnote 9]
Trinova's proposed two-factor apportionment differs drastically
from the apportionment Trinova requested in the Michigan state
courts. Under the approach Trinova took in state court, following
Jones & Laughlin, 145 Mich.App. 405, 377 N.W.2d 397,
Trinova's apportioned tax base would be -$2,042,458.
See
n. 8,
supra. Under the two-factor formula that Trinova now
urges upon us, it is $360,213.
[
Footnote 10]
As an alternative ground for upholding the tax, Michigan reminds
us that, instead of taxing value added, it could have taxed gross
receipts of sales into Michigan. We have repeatedly upheld such
taxes.
Standard Pressed Steel Co. v. Washington Revenue
Dept., 419 U. S. 560,
419 U. S. 564
(1975);
General Motors Corp. v. Washington, 377 U.
S. 436,
377 U. S. 448
(1964);
McGoldrick v. Berwind-White Coal Mining Co.
309 U. S. 33,
309 U. S. 58
(1940). While we accept the analogy Michigan has drawn between a
VAT and an income tax, we recognize that the SBT also bears some
similarities to a gross receipts tax. Further, the SBT's
alternative method of taxation (based upon gross receipts) might
provide an additional limit on any distortion or possibility that
out-of-state values might be taxed.
See n.
6 supra. In light of our
disposition, we need not address these arguments.
[
Footnote 11]
According to Kleine, proponents of the SBT argued as follows:
(1) because of Michigan's volatile economy, the State's corporate
income tax had proven unpredictably cyclical, and therefore a poor
source of revenue. The SBT would provide a much broader tax base,
and thus prove a more stable revenue source; (2) the SBT would
lessen the tax burden on capital, thereby encouraging new
investment; (3) the SBT would replace numerous taxes, resulting in
less paperwork for both the taxpayer and the tax collector; (4) the
SBT would not discriminate against businesses on the basis of their
forms of organization; and (5) the SBT would tax inefficient and
efficient firms equally for their use of government services,
whereas an income tax would burden more heavily efficient, highly
profitable firms. In addition, at the time of the SBT's enactment,
Michigan faced a fiscal crisis. The legislature provided that the
new SBT would overlap with the old corporate franchise tax,
resulting in additional cash flow of $180 million. Kleine 20-23.
The argument that a VAT would permit "exporting" the tax to
taxpayers outside the state "was not used to any great extent by
the proponents of the Michigan [SBT]."
Id. at 23.
Justice SCALIA, concurring in the judgment.
As the Court notes,
ante at
498 U. S. 384,
the Michigan single business tax is not facially discriminatory.
Since I am of the view that this suffices to comply with the
requirements of the Commerce Clause,
see Amerada Hess Corp. v.
Director, Div. of Taxation, N.J. Dept. of Treasury,
490 U. S. 66,
490 U. S. 80
(1989) (SCALIA, J., concurring in judgment);
Tyler Pipe
Industries Inc. v. Washington State Dept. of Revenue,
483 U. S. 232,
483 U. S. 265
(1987) (SCALIA, J., concurring in part and dissenting in part), I
would forgo the additional Commerce Clause analysis articulated in
Complete Auto Transit, Inc. v. Brady, 430 U.
S. 274,
430 U. S. 279
(1977). Some elements of that analysis, however, are relevant to
the quite separate question whether the tax complies with the
requirements of the Due Process Clause,
see Mobil Oil Corp. v.
Commissioner of Taxes of Vt., 445 U.
S. 425,
445 U. S.
436-437 (1980);
Amerada Hess Corp., supra, 490
U.S. at
490 U. S. 80-81
(SCALIA, J., concurring in judgment).
Trinova concedes that there is a minimal connection between its
interstate activities and the taxing State,
see Mobil, supra;
ante at
498 U. S. 373.
The only issue, then, is whether the tax violates the Due Process
Clause by taxing extraterritorial values. For the reasons stated in
Parts III-A and III-B of the Court's opinion, I agree that it does
not.
Page 498 U. S. 388
Justice STEVENS, with whom Justice BLACKMUN joins,
dissenting.
Although the parties refer to Michigan's "Single Business Tax"
(SBT) as a "Value Added Tax" (VAT), that term does not appear in
the text of the statute. The text of the relevant Act describes the
SBT as a tax on "certain commercial, business, and financial
activities." [
Footnote 2/1] As a
practical matter, Michigan's SBT is nothing more than an amalgam of
three separate taxes: a tax on payroll, a tax on depreciable fixed
assets, and a tax on income. Payroll and depreciation represent
over 90 percent of the SBT tax base, and the productive activities
that are measured by payroll and depreciation take place at
geographic locations that are readily identifiable. Because
Michigan's SBT uses an apportionment formula to tax a portion of
those activities occurring outside Michigan, I depart from the
Court's analysis and conclude that the state taxation scheme
violates established principles of due process.
I
Petitioner Trinova's executive offices and manufacturing
facilities are located in Ohio. Most of its employees live and work
in Ohio. In fact, significantly less than one percent of
Page 498 U. S. 389
Trinova's capital assets and labor were employed in Michigan in
1980. [
Footnote 2/2] The company
operated at a substantial loss in that year. The question presented
is whether the fact that 26 percent of Trinova's unprofitable sales
were made to Michigan customers provides a constitutionally
sufficient justification for the State to attribute to Michigan
(and thus to tax) approximately nine percent of Trinova's
productive activities, almost all of which actually occurred in
Ohio.
In upholding the constitutionality of the SBT against a Due
Process Clause challenge, the Court today concludes that, even
though the bulk of Trinova's property and payroll are located
outside Michigan, it does not follow that the bulk of its
value-adding activities are located outside Michigan, and thus are
not attributable to or taxable by Michigan. Rather, the Court
assumes that the value added to a product is largely contingent
upon the revenue that the product generates when it is sold in the
marketplace. Because the value added by Trinova's use of labor and
capital in Ohio is not realized until Trinova's product is sold in
Michigan and the product is given market value by consumers, the
Court concludes that Michigan's sales contribute greatly to the
value of Trinova's product, and thus that allowing a portion of the
value added by Trinova's business activities in Ohio to be
attributed to Michigan through use of an apportionment formula is
justified.
The Court's assumption that value added from labor and capital
is not realized until the product is sold, however, is simply
wrong. Finished goods, even though stored in a warehouse and not
yet sold, are more valuable than raw materials. Moreover, under the
Michigan statute, the revenues generated by the sales of the
finished product are reflected in the net income component of the
tax base. Thus,
Page 498 U. S. 390
in this case, because Trinova operated at a loss, the value
added by labor and capital is reduced, rather than enhanced, by the
ultimate sales made in Michigan. It necessarily follows that
allowing Michigan to apportion out-of-state expenses incurred for
fixed assets and labor on the basis of Michigan sales in effect
allows Michigan to tax extraterritorial business activity.
Under this Court's due process jurisprudence, a State may
constitutionally tax only those interstate business activities or
income to which it has a rational nexus.
See Container Corp. of
America v. Franchise Tax Bd., 463 U.
S. 159,
463 U. S.
165-166 (1983). However, in the context of state income
taxes on "unitary" interstate businesses, our cases allow States to
deviate from the fixed rule of geographic accounting in favor of a
more flexible system of formulary apportionment. In so doing, we
have cautioned that
"[t]he functional meaning of this requirement [of a rational
nexus between the taxing State and the taxed activities] is that
there be some sharing or exchange of value not capable of precise
[geographic] identification or measurement . . . which renders
formula apportionment a reasonable method of taxation."
Id. at
463 U. S.
166.
The Court today extends its analysis upholding the
constitutionality of income apportionment as an exception to the
general rule of geographic accounting to situations in which the
original justification for the use of an imprecise apportionment
formula no longer holds. Unlike the income of a unitary business,
which we before have recognized may not be precisely allocated, the
two principal elements of Michigan's SBT -- property and payroll --
are subject to precise geographic identification, and thus do not
warrant being subject to an apportionment formula.
The Court concedes, as it must, that far less than one percent
of Trinova's capital assets and labor were employed in Michigan in
1980, but rejects the logical result of such analysis by concluding
that it does not necessarily follow that far less than one percent
of Trinova's "value added" can be precisely
Page 498 U. S. 391
identified as having been realized outside Michigan. Instead,
the Court concludes that the value added by Trinova's factors of
production located outside of Michigan cannot be precisely
determined until the ultimate product is sold and the market value
or revenue that the product commands is considered. As the Court
states,
"[t]he Michigan SBT . . . is not three separate and independent
taxes, and Trinova cannot purport to identify the geographic source
of value added by assuming that two elements can be located in a
single state, while the third cannot."
Ante at
498 U. S. 375.
Rather,
"[i]n a unitary enterprise, compensation, depreciation and
profit are not independent variables to be adjusted without
reference to each other. If Trinova had paid an additional $100
million in compensation during 1980, there is no way of knowing
whether, or to what extent, value added would have increased.
In fact, value added would not have increased so long as
revenues did not increase."
Ante at
498 U. S. 376
(emphasis added).
Driving the Court's analysis is the recognition that Trinova in
1980 netted a loss of over $42 million. This, the Court concludes,
means that the ultimate value added by Trinova's use of labor and
capital resources was not equivalent to its actual payroll and
capital expenses. Resisting the perceived awkwardness of
finding
"that Trinova added value at the factory through the consumption
of capital and labor, but that its products somehow lost value
outside of this process,"
ante at
498 U. S. 375,
the Court holds that the value added by capital and labor should
not be deemed to be realized and should not be geographically
assigned until Trinova's product is sold, and that the measure of
value added by payroll and capital expenses should be adjusted by
the ultimate revenue the product generates.
II
The Court's assumption that value added by property and payroll
is not realized and cannot be determined until the product is sold
is belied by the rationale underlying the VAT.
Page 498 U. S. 392
The
"concept of value added . . . is derived from the most basic of
economic facts -- the scarcity of resources -- and hence
consistently measures the amount of scarce labor and capital
resources used up (and not available for use elsewhere) in every
economic activity."
See Haughey, The Economic Logic of the Single Business
Tax, 22 Wayne L.Rev. 1017, 1018 (1976). That a product is
ultimately unprofitable does not diminish the amount of resources a
company utilized in manufacturing the product. Nor does the value
added to the economy or gross national product by the company's
purchase of labor and utilization of capital diminish when the
product is not sold or is sold for a net loss.
Rather, value added is fully realized at each stage of the
production process -- at the stages where labor services are sold
and paid for by the company in the form of payroll expenses and
where capital is consumed. The amount of value added at these
intermediate stages of production is the price paid for the labor
services and for the capital expended.
See ibid. (value
added may be determined by "add[ing] up all of the payments paid
internally to the owners of the labor and capital used").
Regardless of the profitability (or unprofitability) of the
ultimate product, value added by labor and capital is not
eliminated or diminished if the ultimate product is unable to
command equivalent value or revenue in the marketplace. [
Footnote 2/3] As the Court itself concedes
early in its opinion,
Page 498 U. S. 393
"[e]ven if a business entity is unprofitable, under normal
circumstances it adds value to its products and, as a consequence,
will owe some VAT."
Ante at
498 U. S. 364.
This immunity of the VAT base from the vagaries of the marketplace
is the basic justification for the SBT:
"[B]ecause value added does not fluctuate as widely as net
income, a VAT provides a more stable source of revenue than the
corporate income tax."
Ibid.
Concededly, under the Michigan statute, the task of calculating
precisely Trinova's value added by its capital and labor resources
without looking to its ultimate sales or profit is complicated by
the unprofitability of Trinova's business during the years in
question. Under Michigan's method for calculating the SBT tax base,
the corporation's profit is added to the sum of labor costs and
capital expenditures (consisting of depreciation and interest
expenses) and represents the value added by the corporation's skill
and entrepreneurial effort. Insofar as Trinova in 1980 netted a
loss of over $42 million, Trinova's value added tax base was
actually reduced by "addition" of its profit to its labor and
capital costs.
It is nevertheless clear that value added under the additive
method is realized at each stage of the production process, and is
undiminished if the product suffers a net loss. That Michigan
chooses to allow a company's value added tax base to be reduced by
the extent of its unprofitability does not in any way lead to the
Court's conclusion that the value added by labor and capital is not
realized when (and where) those resources are purchased, and that
the amount of that value added to the economy is not equivalent to
the price paid by the company for those resources.
Because the value added by the two principal components of
Michigan's SBT -- labor and capital -- are fully realized, and thus
can be precisely quantified and geographically assigned, when the
actual purchase of labor services and use of capital occur,
Michigan's apportionment of a company's entire payroll and capital
expenses results in the unconstitutional taxation
Page 498 U. S. 394
by Michigan of a portion of the taxpayer's extraterritorial
activities. [
Footnote 2/4] In fact,
in Trinova's case, although less than one percent of Trinova's
property and payroll expenses are incurred within its borders,
Michigan, by applying the apportionment formula to payroll and
capital, treats nine to ten percent of Trinova's labor and capital
costs as if they were in-state expenses. [
Footnote 2/5] Because such extraterritorial taxation
violates basic principles of due process, I respectfully
dissent.
[
Footnote 2/1]
The preamble to the statute states, in part:
"AN ACT to provide for the imposition, levy, computation,
collection, assessment and enforcement, by lien or otherwise, of
taxes on certain commercial, business, and financial activities. .
. ."
See Mich.Comp.Laws § 208.1, p. 4 (1986).
The Michigan Supreme Court's explanation of the significance of
the label "value added tax" describes it as a tax upon business
activity. In its opinion below, the Michigan court explained.
"In short, a value added tax is a tax upon business activity.
The act employs a value added measure of business activity, but its
intended effect is to impose a tax upon the privilege of conducting
business activity within Michigan. It is not a tax upon income. MCL
208.31(4); MSA 7.558(31)(4)."
App. to Pet. for Cert. 10a..
This Court today also states that "value added is a measure of
actual business activity."
Ante at
498 U. S.
364.
[
Footnote 2/2]
The Company's total payroll was $226,356,271.00; its Michigan
payroll was only $511.774.00, or less than one-fourth of one
percent. Its Michigan depreciation was only $2,152.00, representing
less than one-tenth of one percent of its entire depreciation.
[
Footnote 2/3]
Unlike the tax bases under the value-added tax schemes that are
found in European and South American countries,
see ante
at
498 U. S.
365-366, n. 3, the tax base under Michigan's SBT is
affected by the revenues that the product brings in only insofar as
such revenues are reflected in the company's net income, which is a
component of the tax base under the additive method. In the foreign
jurisdictions utilizing the VAT, however, the starting point for
computing the tax base is the revenue received by the taxpayer from
sales made in the taxing jurisdiction, with certain amounts
exempted or subtracted from the instate revenues. Although
measuring value added with reference to revenues might therefore be
warranted in traditional European models of the VAT, it is
unjustified under Michigan's SBT, because the income component of
the value-added tax base in Michigan already accounts for
revenues.
[
Footnote 2/4]
"The taxation of property not located in the taxing State is
constitutionally invalid, both because it imposes an illegitimate
restraint on interstate commerce and because it denies to the
taxpayer the process that is his due. A State will not be
permitted, under the shelter of an imprecise allocation formula or
by ignoring the peculiarities of a given enterprise, to 'project
the taxing power of the state plainly beyond its borders. . . .'
Any formula used must bear a rational relationship, both on its
face and in its application, to property values connected with the
taxing State."
Norfolk & Western R Co. v. Missouri State Tax
Comm'n, 390 U. S. 317,
390 U. S. 325
(1968) (footnote omitted).
[
Footnote 2/5]
The Court implies that it would be unjust to apportion Trinova's
net income without also apportioning its company-wide labor and
appreciation.
Ante at
498 U. S.
381-382, n. 9. My reaction to the facts of this case is
just the opposite. Because the apportioned share of the taxpayer's
net loss far exceeds the actual use of labor and capital in
Michigan, there is no more justification for imposing the SBT on
Trinova than there would be to collect an income tax from a
taxpayer whose company-wide operations, as well as its Michigan
operations, produced a substantial net loss.