Appellant, a vertically integrated petroleum company doing
business in several States, was organized, during the years in
question in this case, into three levels of management, one of
which was responsible for directing the operating activities of the
company's functional departments. Transfers of products and
supplies among the three major functional departments --
Exploration and Production, Refining, and Marketing -- were
theoretically based on competitive wholesale prices. Appellant had
no exploration and production or refining operations in Wisconsin
and carried out only marketing in that State. During the years in
question, appellant filed income tax returns in Wisconsin using a
separate geographical system of accounting which reflected only the
Wisconsin marketing operations and showed a loss for each year,
thus resulting in no taxes being due, but appellee Wisconsin
Department of Revenue, upon auditing the returns, assessed taxes,
based on appellant's total income, pursuant to Wisconsin's tax
apportionment statute. Ultimately, after appellant's application
for abatement had proceeded through administrative and judicial
review, the Wisconsin Supreme Court held that appellant's Wisconsin
marketing operations were an integral part of one unitary business,
and that therefore its total corporate income was subject to the
statutory apportionment formula. The court further held that situs
income derived from crude oil produced by appellant outside
Wisconsin and transferred to its own refineries, and thus part of
the unitary stream of income, was apportionable under the Wisconsin
statute despite appellant's separate functional accounting system,
and that taxation of such situs income did not impermissibly burden
interstate commerce.
Held:
1. The Due Process Clause of the Fourteenth Amendment did not
prevent Wisconsin from applying its statutory apportionment formula
to appellant's total income. Pp.
447 U. S.
219-225.
(a) The Due Process Clause imposes two requirements for state
taxation of the income of a corporation operating in interstate
commerce: a "minimal connection" or "nexus" between the
corporation's interstate activities and the taxing State, and "a
rational relationship between the
Page 447 U. S. 208
income attributed to the State and the intrastate values of the
enterprise."
Mobil Oil Corp. v. Commissioner of Taxes,
445 U. S. 425,
445 U. S.
436-437. Such a nexus is established if the corporation
"avails itself of the
substantial privilege of carrying on
business' within the State." Id. at 445 U. S. 437.
Here, appellant concededly avails itself of that privilege through
its marketing operations within Wisconsin. Pp. 447 U. S.
219-220.
(b) Appellant's use of separate functional accounting by which
it shows what portion of its income is derived from exploration and
production and from refining -- functions occurring outside
Wisconsin -- does not demonstrate that application of the Wisconsin
apportionment statute violated the Due Process Clause. A company's
internal accounting techniques are not binding on a State for tax
purposes, and are not required to be accepted as a matter of
constitutional law for such purposes. Pp.
447 U. S.
220-223.
(c) The "linchpin of apportionability" for state income taxation
of an interstate enterprise is the "unitary business principle."
Mobil Oil Corp. v. Commissioner of Taxes, supra at
445 U. S. 439.
If a company is a unitary business, then a State may apply an
apportionment formula to the taxpayer's total income in order to
obtain a "rough approximation" of the corporate income that is
"reasonably related to the activities conducted within the taxing
State."
Moorman Mfg. Co. v. Bair, 437 U.
S. 267,
437 U. S. 273.
Here, the evidence fully supports the conclusion that appellant's
marketing operations in Wisconsin were an integral part of such a
unitary business. And appellant's use of separate functional
accounting, and its decision for purposes of corporate
accountability to assign wholesale market values to
interdepartmental transfers of products and supplies, do not defeat
the clear and sufficient nexus between appellant's interstate
activities and the taxing State. Pp.
447 U. S.
223-225.
2. Similarly, the Due Process Clause did not preclude Wisconsin
from subjecting to taxation under its statutory apportionment
formula appellant's income derived from extraction of oil and gas
located outside the State which was used by the Refining
Department, and the State was not required to allocate such income
to the situs State. There was a unitary stream of income, of which
the income derived from internal transfers of raw materials from
exploration and production to refining was a part. This was a
sufficient nexus to satisfy the Due Process Clause, and there was
also the necessary "rational relationship" between the income
attributed to the State by the apportionment formula and the
intrastate value of the business. Pp.
447 U. S.
225-227.
3. The Commerce Clause did not require Wisconsin to allocate all
income derived from appellant's exploration and production function
to the situs State, rather than include such income in the
apportionment
Page 447 U. S. 209
formula. The Wisconsin taxing statute, as applied, did not
subject interstate business to an unfair burden of multiple
taxation.
Mobil Oil Corp. v. Commissioner of Taxes, supra.
The State sought to tax income, not property ownership, and it was
the risk of multiple taxation that was being asserted, actual
multiple taxation not having been shown. The Commerce Clause did
not require that any income which appellant was able to separate
through accounting methods and attribute to exploration and
production of crude oil and gas be allocated to the States in which
those production centers were located. The geographic location of
such raw materials did not alter the fact that such income was part
of the unitary business of appellant's interstate enterprise and
was subject to fair apportionment among all States to which there
was a sufficient nexus with the interstate activities. Pp.
447 U. S.
227-230.
90 Wis.2d 700,
281 N.W.2d
94, affirmed.
MARSHALL, J., delivered the opinion of the Court, in which all
other Members joined except STEWART, J., who took no part in the
consideration or decision of the case.
Page 447 U. S. 210
MR. JUSTICE MARSHALL delivered the opinion of the Court.
This case raises three important questions regarding state
taxation of the income of a vertically integrated corporation doing
business in several States. The first issue is whether the Due
Process Clause of the Fourteenth Amendment prevents a State from
applying its statutory apportionment formula to the total corporate
income of the taxpayer when the taxpayer's functional accounting
separates its income into the three distinct categories of
marketing, exploration and production, and refining, and when the
taxpayer performs only marketing operations within the State. The
second issue is whether the Due Process Clause permits a State to
subject to taxation under its statutory apportionment formula
income derived from the extraction of oil and gas located outside
the State which is used by the refining department of the taxpayer,
or whether the State is required to allocate such income to the
situs State. The third issue is whether the Commerce Clause
requires such an allocation to the situs State.
I
A
Appellant Exxon Corp., [
Footnote
1] a vertically integrate petroleum company, is organized under
the laws of Delaware with its
Page 447 U. S. 211
general offices located in Houston, Tex. During the years in
question here, 1965 through 1968, appellant's corporate
organization structure consisted of three parts: Corporate
Management, Coordination and Services Management, and Operations
Management.
Corporate Management, which was the highest order of management
for the entire corporation, consisted of the board of directors,
the executive committee, the chairman of the board (who was also
the chief executive officer), the president, and various
directors-in-charge who were members of the board of directors.
Coordination and Services Management was composed of corporate
staff departments which provided specialized corporate services.
These services included long-range planning for the company,
maximization of overall company operations, development of
financial policy and procedures, financing of corporate activities,
maintenance of the accounting system, legal advice, public
relations, labor relations, purchase and sale of raw crude oil and
raw materials, and coordination between the refining and other
operating functions "so as to obtain an optimum short range
operating program." App. 189;
id. at 187-192. [
Footnote 2]
The third level of management within the corporation was
Page 447 U. S. 212
Operations Management, which was responsible for directing the
operating activities of the functional departments of the company.
These functional departments were Exploration and Production,
Refining, Marketing, Marine, Coal and Shale Oil, Minerals, and Land
Management. Each functional department was organized as a separate
unit operating independently of the other operating segments, and
each department had its own separate management responsible for the
proper conduct of the operation. These departments were treated as
separate investment centers by the company, and a profit was
determined for each functional department.
At all relevant times, each operating department was
independently responsible for its performance. This arrangement
permitted centralized management to evaluate each operation
separately. Each department was therefore required to compete with
the other departments for available investment funds, and with
other members of the industry performing the same function for the
company's raw materials and refined products. There was no
requirement that appellant's crude oil go to its own refineries or
that the refined products sold through marketing be produced from
appellant's crude oil.
Transfers of products and raw materials among the three major
functional departments -- Exploration and Production, Refining, and
Marketing -- were theoretically based on competitive wholesale
market prices. For purposes of separate functional accounting,
transfers of crude oil from Exploration and Production to Refining
were treated as sales at posted industry prices; transfers of
products from Refining to Marketing were also based on wholesale
market prices. If no readily available wholesale market value
existed for a product, then representatives of the two departments
involved would negotiate as to the appropriate internal transfer
value.
Appellant had no exploration and production operations or
refining operations in Wisconsin; the only activity carried out
Page 447 U. S. 213
in that State was marketing. The Wisconsin marketing district
reported administratively to the central region office in Chicago,
which in turn was responsible to the Marketing Department
headquarters in Houston. App. 217. The motor oils, greases, and
other packaged materials sold by appellant in Wisconsin during this
period were manufactured outside the State and then shipped into
that State from central warehouse facilities in Chicago. Tires,
batteries, and accessories were centrally purchased through the
Houston office and then shipped into Wisconsin for resale. The
gasoline sold in Wisconsin was not produced by Exxon, but rather
was obtained from Pure Oil Co. in Illinois under an exchange
agreement, permitting Exxon to reduce the cost of transporting the
gasoline from its source to the retail outlets. This exchange
agreement was negotiated by the Supply and Refining Departments.
Additives were put into the Pure Oil gasoline in order to make the
final product conform to uniform Exxon standards.
Exxon used a nationwide uniform credit card system, which was
administered out of the national headquarters in Houston. Uniform
packaging and brand names were used, and the overall plan for
distribution of products was developed in Houston. Promotional
display equipment was designed by the engineering staff at the
marketing headquarters.
B
Because appellant marketed its products in Wisconsin during the
calendar years 1965 through 1968, it was required to file corporate
income and franchise tax returns in that State for those years.
Exxon prepared the returns based on separate state accounting
methods, reflecting only the Wisconsin marketing operation. The
returns showed losses in the amounts of $821,320 for 1965,
$1,159,830 for 1966, $1,026,224 for 1967, and $919,575 for 1968.
Accordingly, no tax was shown as being due for any of those
years.
Page 447 U. S. 214
Appellee Wisconsin Department of Revenue audited Exxon for the
years in question, and on June 25, 1971, the Department sent the
taxpayer a notice of assessment of additional income and franchise
tax. The Department concluded that, pursuant to Wis.Stat. §
71.07(2) (1967), [
Footnote 3]
the Wisconsin marketing operation was "an integral part of a
unitary business," and therefore Exxon's taxable income in
Wisconsin must be determined by application of the State's
apportionment formula to the taxpayer's total income. The
Department's calculation revealed an additional taxable income of
$4,532,155 for the period 1965 through 1968. Additional
Page 447 U. S. 215
taxes in the amount of $316,470.85 were assessed against
appellant. [
Footnote 4]
Exxon filed an application for abatement in July, 1971, which
the Department denied on November 30, 1971. Appellant then filed a
petition for review with the Wisconsin Tax Appeals Commission. The
Commission agreed with the Department that Exxon's separate
geographical accounting did not accurately reflect its Wisconsin
income for tax purposes. CCH Wis.Tax Rep. � 201-223, p. 10,410
(1976). However, the Commission concluded that appellant's three
main functional operating departments -- Exploration and
Production, Refining, and Marketing -- were separate unitary
businesses.
Id. at 10,409. According to the Commission,
Exxon's marketing operation in Wisconsin was an integral part of
its overall marketing function, but was not an integral part of its
exploration and production function nor its refining function.
Id. at 10,411. The Commission found that the statutory
apportionment formula as applied by the Department
"had the effect of imposing a tax on the [appellant's]
exploration and on its refining net income, all of which was
derived solely from operations outside the State of Wisconsin and
which had no integral relationship to the [appellant's] marketing
operations within Wisconsin."
Id. at 10,410. The Commission also found that taxation
by Wisconsin of Exxon's net income from its exploration and
production function and its refining function would subject
Page 447 U. S. 216
appellant "to multiple-state taxation as to such income."
Ibid. The Commission therefore concluded that the
Department had erred in its application of the apportionment
formula since it had included "extraterritorial income," but that
"apportioning income earned by the [appellant] from its marketing
function within and without the State of Wisconsin would be proper.
. . ."
Id. at 10,411.
The Circuit Court for Dane County set aside some of the factual
findings and conclusions of law of the Tax Appeals Commission. CCH
Wis.Tax Rep. � 201-373, pp. 10,501-10,504 (1977). In particular,
the Circuit Court held that the Commission's finding that Exxon's
three main functional operating departments were separate unitary
businesses was an erroneous conclusion of law.
Id. at
10,502. Similarly, the court set aside the findings that there was
no economic dependence between the Wisconsin marketing operations
and Exxon's exploration and production function or its refining
function.
Ibid. Instead, the court held that
"[t]he Wisconsin operation contributed sales to [Exxon's]
business of producing, refining and marketing petroleum products.
This contribution was sufficient alone, in the opinion of this
Court, to make [Exxon's] business a unitary one."
Ibid. Accordingly, appellant's business during the
relevant years, "considered as a whole, both within and without
Wisconsin, constituted a unitary business" within the meaning of
the apportionment statute.
Ibid.
The Circuit Court concluded, however, that another statute,
Wis.Stat. § 71.07(1) (1967), [
Footnote 5] excluded from income subject to the
apportionment formula all situs income derived
Page 447 U. S. 217
from appellant's oil and gas wells. CCH Wis.Tax Rep. � 201-373,
at 10,502-10,504. The Department had used a so-called "barrel
formula" to separate two sets of income figures: income derived
from the sale of crude oil to third parties, and income derived
from crude oil produced by Exxon and transferred to its own
refineries. The former was allocated to the situs State and
excluded from Wisconsin taxable income, and the latter was included
in the apportionment formula. A similar division was made of the
income derived from appellant's gas production. The Circuit Court
held that both sets of income were derived from the oil and gas
wells, and should be allocated to the situs State under the
statute. The court noted that
"there is no question but that the department's inclusion of
[Exxon's] income derived from crude oil and gas produced and not
sold to third parties by [Exxon's] production department resulted
in double taxation of such income. [
Footnote 6]"
Id. at 10,503.
The Wisconsin Supreme Court affirmed in part and reversed in
part. 90 Wis.2d 700,
281 N.W.2d
94 (1979). That court concluded that the test for what
constituted a unitary business was
"'whether or not the operation of the portion of the business
within the state is dependent upon or contributory to the operation
of the business outside the state. If there is such a relationship,
the business is unitary.'"
Id. at 711, 281 N.W.2d at 100, quoting G. Altman
Page 447 U. S. 218
& F. Keesling, Allocation of Income in State Taxation 101
(2d ed.1950). Reviewing the organizational structure and business
operations of Exxon, the court reasoned that Exxon's production and
refining functions were dependent on its marketing operation to
provide an outlet for its products, and Wisconsin was a part of
that marketing system. In a high capital investment industry such
as the petroleum industry, the court found, the existence of a
stable marketing system was important for the full utilization of
refining capacity. 90 Wis.2d at 718, 281 N.W.2d at 104.
Accordingly, the court concluded that Exxon's Wisconsin marketing
operations were an integral part of one unitary business, and
therefore its total corporate income was subject to the statutory
apportionment formula.
Id. at 721-722, 281 N.W.2d at
105-106.
The Wisconsin Supreme Court disagreed with the Circuit Court on
the issue of situs income. While the extraction and production of
oil and gas constituted "mining" within the meaning of Wis.Stat. §
71.07(1) (1967), 90 Wis.2d at 723, 281 N.W.2d at 106, the court
agreed with the Department that situs income which is part of the
unitary stream of income is nonetheless apportionable under the
statute, while situs income which does not enter the unitary stream
of income is nonapportionable, and must be excluded from the
formula.
Id. at 723-724, 281 N.W.2d at 106-107. The
Wisconsin Supreme Court rejected appellant's contention that its
separate functional accounting proved that its exploration and
production income was earned totally outside Wisconsin, noting
that
"the idea of separate functional accounting seems to be
incompatible with the 'very essence of formulary apportionment,
namely, that where there are integrated interdependent steps in the
economic process carried on by a business enterprise, there is no
logical or viable method for accurately separating out the profit
attributable to one step in the economic process from other
steps.'"
Id. at 726, 281 N.W.2d at 109, quoting J. Hellerstein,
State and Local Taxation 400 (3d ed.1969). The court concluded that
the
Page 447 U. S. 219
State was acting within constitutional limitations despite
appellant's evidence based on separate functional accounting.
The court also rejected Exxon's argument that the sources of
income derived from exploration and production were all outside of
Wisconsin, and therefore could not be taxed in that State without
impermissibly burdening interstate commerce. According to the
court, Wisconsin was taxing only its "fair share" of appellant's
income, there was a substantial nexus between appellant and the
State, the tax was not claimed to discriminate between interstate
and intrastate commerce, and the tax was fairly related to services
provided by Wisconsin. 90 Wis.2d at 729-731, 281 N.W.2d at
110-111.
Because of the importance of the issues raised, we noted
probable jurisdiction, 444 U.S. 961 (1979). We now affirm.
II
We recently set forth at some length the basic principles for
state taxation of the income of a business operating in interstate
commerce,
see Mobil Oil Corp. v. Commissioner of Taxes,
445 U. S. 425,
445 U. S.
436-442 (1980), and need not repeat them here in great
detail. It has long been settled that
"the entire net income of a corporation, generated by interstate
as well as intrastate activities, may be fairly apportioned among
the States for tax purposes by formulas utilizing in-state aspects
of interstate affairs."
Northwestern States Portland Cement Co. v. Minnesota,
358 U. S. 450,
358 U. S. 460
(1959);
Mobil Oil Corp. v. Commissioner of Taxes, supra at
445 U. S. 436.
See generally Underwood Typewriter Co. v. Chamberlain,
254 U. S. 113
(1920);
Hans Rees' Sons v. North Carolina ex rel. Maxwell,
283 U. S. 123
(1931);
Butler Bros. v. McColgan, 315 U.
S. 501 (1942);
Moorman Mfg. Co. v. Bair,
437 U. S. 267
(1978).
See also Bass, Ratcli & Gretton, Ltd. v. State Tax
Comm'n, 266 U. S. 271
(1924). The Due Process Clause of the Fourteenth Amendment imposes
two requirements for such state taxation: a "minimal connection" or
"nexus" between the interstate activities and the taxing State, and
"a
Page 447 U. S. 220
rational relationship between the income attributed to the State
and the intrastate values of the enterprise."
Mobil Oil Corp.
v. Commissioner of Taxes, supra, at
445 U. S. 436,
445 U. S. 437.
See Moorman Mfg. Co. v. Bair, supra at
437 U. S.
272-273;
National Bellas Hess, Inc. v. Department of
Revenue, 386 U. S. 753,
386 U. S. 756
(1967);
Norfolk & Western R. Co. v. State Tax Comm'n,
390 U. S. 317,
390 U. S. 325
(1968). The tax cannot be "out of all appropriate proportion to the
business transacted by the appellant in that State."
Hans Rees'
Sons v. North Carolina ex rel. Maxwell, supra at
283 U. S.
135.
The nexus is established if the corporation "avails itself of
the
substantial privilege of carrying on business' within the
State." Mobil Oil Corp. v. Commissioner of Taxes, supra at
445 U. S. 437,
quoting Wisconsin v. J. C. Penney Co., 311 U.
S. 435, 311 U. S.
444-445 (1940). In the present case, Exxon does not
dispute that it avails itself of that privilege through its
marketing operations within Wisconsin. Appellant contends, however,
that this nexus is insufficient to permit inclusion of all of
Exxon's corporate income within the apportionment formula. While
appellant appears to concede that Wisconsin may properly apply its
apportionment statute to Exxon's Marketing Department income as
established by its separate functional accounting, see
Brief for Appellant 18, 29, 33; Reply Brief for Appellant 2-3, it
argues that it has demonstrated through its accounting method what
portion of its income is derived from exploration and production
and from refining -- functions which do not occur in Wisconsin and
of which the marketing operation in that State is not an integral
part.
Appellant relies heavily on
Moorman Mfg. Co. v. Bair,
supra. The principal issue in that case was whether the
single-factor sales formula used by Iowa to apportion for income
tax purposes the income of an interstate business was prohibited by
either the Due Process Clause or the Commerce Clause. In the course
of that decision, we noted that
"[a]ppellant does not suggest that it has shown that a
significant portion of the income attributed to Iowa in fact was
generated
Page 447 U. S. 221
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."
437 U.S. at
437 U. S. 272.
See also id. at
437 U. S. 275,
n. 9. Exxon contends that
Moorman sanctions the use of
separate functional accounting in order to prove the
extraterritorial reach of a state tax statute, and that its
accounting in this case demonstrates that the Wisconsin Supreme
Court's application of the state apportionment statute violates the
Due Process Clause.
We cannot agree. As this Court has on several occasions
recognized, a company's internal accounting techniques are not
binding on a State for tax purposes. For example, in
Butler
Bros. v. McColgan, supra, an interstate business challenged
the application of the California apportionment statute. The
company was engaged in the wholesale dry goods and general
merchandise business as a middleman, and it had distributing houses
in seven States, including one in California. Each house maintained
stocks of goods, had a cognizable territory, had its own sales
force, did its own solicitation of sales, made its own credit and
collection arrangements, and kept its own books. There was,
however, a central buying division that was able to purchase goods
for resale at a lower price. The company used "recognized
accounting principles," 315 U.S. at
315 U. S. 505,
to allocate all costs and charges to each house, with certain
centralized expenses allocated among the houses. Based on that
"separate accounting system,"
id. at
315 U. S. 507,
the business asserted there was no net income in California.
We concluded that California could constitutionally apply its
apportionment formula to the company's total net income to
establish taxable income, rather than being limited to the income
shown by the taxpayer's accounting methods to be attributable to
the one house in that State. The company had the "distinct burden
of showing by
clear and cogent evidence' that it results in
extraterritorial values being taxed,"
Page 447 U. S.
222
ibid., quoting Norfolk & Western R. Co. v.
North Carolina ex rel. Maxwell, 297 U.
S. 682, 297 U. S. 688
(1936), and the taxpayer's accounting evidence was insufficient to
meet that burden.
"[W]e need not impeach the integrity of that accounting system
to say that it does not prove appellant's assertion that
extraterritorial values are being taxed. Accounting practices for
income statements may vary considerably according to the problem at
hand. . . . A particular accounting system, though useful or
necessary as a business aid, may not fit the different requirements
when a State seeks to tax values created by business within its
borders. . . That may be due to the fact, as stated by Mr. Justice
Brandeis in
Underwood Typewriter Co. v. Chamberlain,
254 U. S.
113,
254 U. S. 121, that a State
in attempting to place upon a business extending into several
States 'its fair share of the burden of taxation' is 'faced with
the impossibility of allocating specifically the profits earned by
the processes conducted within its borders.' Furthermore, the
particular system used may not reveal the facts basic to the
State's determination.
Bass, Ratcli Gretton, Ltd. v. Tax
Commission, supra, p.
266 U. S.
283. In either aspect of the matter, the results of the
accounting system employed by appellant do not impeach the validity
or propriety of the formula which California has applied here."
315 U.S. at
315 U. S.
507-508.
Similarly, in
Mobil Oil Corp. v. Commissioner of Taxes,
we 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."
445 U.S. at
445 U. S. 438.
Since such factors 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
Page 447 U. S. 223
accounting may be useful for internal auditing, for purposes of
state taxation, it is not constitutionally required."
Ibid. [
Footnote
7]
The dicta in
Moorman upon which appellant relies are
not incompatible with these principles. In
Moorman, we
simply noted that the taxpayer had made no showing that its
Illinois operations were responsible for profits from sales in
Iowa. This hardly leads to the conclusion, urged by Exxon here,
that a taxpayer's separate functional accounting, if it purports to
separate out income from various aspects of the business, must be
accepted as a matter of constitutional law for state tax purposes.
Such evidence may be helpful, but
Moorman in no sense
renders such accounting conclusive. [
Footnote 8]
The "linchpin of apportionability" for state income taxation of
an interstate enterprise is the "unitary business principle."
Mobil Oil Corp. v. Commissioner of Taxes, supra at
445 U. S. 439.
If a company is a unitary business, then a State may apply an
apportionment formula to the taxpayer's total income in order to
obtain a "rough approximation" of the corporate income that is
"reasonably related to the activities conducted within the taxing
State."
Moorman Mfg. Co. v. Bair, 437 U.S. at
437 U. S. 273.
See also Underwood Typewriter Co. v. Chamberlain, 254 U.S.
at
254 U. S. 120.
In order to exclude certain income from the apportionment formula,
the company must prove that "the income was earned in the course of
activities unrelated to the sale of petroleum products in that
State."
Mobil Oil Corp. v. Commissioner of Taxes, supra at
445 U. S. 439.
The court looks to the "underlying economic realities of a
Page 447 U. S. 224
unitary business," and the income must derive from "unrelated
business activity" which constitutes a "discrete business
enterprise," 445 U.S. at
445 U. S. 441,
445 U. S. 442,
445 U. S.
439.
We agree with the Wisconsin Supreme Court that Exxon is such a
unitary business, and that Exxon has not carried its burden of
showing that its functional departments are "discrete business
enterprises" whose income is beyond the apportionment statute of
the State. While Exxon may treat its operational departments as
independent profit centers, it is nonetheless true that this case
involves a highly integrated business which benefits from an
umbrella of centralized management and controlled interaction
As has already been noted, Exxon's Coordination and Services
Management provided many essential corporate services for the
entire company, including the coordination of the refining and
other operational functions "to obtain an optimum short range
operating program." App. 189. Many of the items sold by appellant
in Wisconsin were obtained through a centralized purchasing office
in Houston whose obvious purpose was to increase overall corporate
profits through bulk purchases and efficient allocation of supplies
among retailers.
Cf. Butler Bros v. McColgan, 315 U.S. at
315 U. S. 508
("the operation of the central buying division alone demonstrates
that functionally the various branches are closely integrated").
Even the gasoline sold in Wisconsin was available only because of
an exchange agreement with another company arranged by the Supply
Department, part of Coordination and Services Management, and the
Refining Department. Similarly, sales were facilitated through the
use of a uniform credit card system, uniform packaging, brand
names, and promotional displays, all run from the national
headquarters.
The important link among the three main operating departments of
appellant was stated most clearly in the
Page 447 U. S. 225
testimony of an Exxon senior vice-president. This official
testified:
"[I]n any industry which is highly capital intensive, such as
the petroleum industry, the fixed operating costs are highly
relative to total operating costs, and for this reason the
profitability of such an industry is very sensitive and directly
related to the full utilization of the capacity of the
facilities."
"So, in the case of the petroleum industry it is -- where you
have high capital investments in refineries, the existence of an
assured supply of raw materials and crude is important and the
assured and stable outlet for products is important, and therefore
when there are -- when these segments are under a single corporate
entity, it provides for some assurance that the risk of disruptions
in refining operations are minimized due to supply and demand
imbalances that may occur from time to time."
"
* * * *"
"[T]he placing individual segments under one corporate entity
does provide greater profits stability for the reason that . . .
nonparallel and nonmutual economic factors which may affect one
department may be offset by the factors existing in another
department."
App. 224-225.
The evidence fully supports the conclusion of the court below
that appellant's marketing operation in Wisconsin is an integral
part of a unitary business. Exxon's use of separate functional
accounting, and its decision for purposes of corporate
accountability to assign wholesale market values to
interdepartmental transfers of products and supplies, does not
defeat the clear and sufficient nexus between appellant's
interstate activities and the taxing State.
The same analysis disposes of the other prong of Exxon's Due
Process Clause attack on the Wisconsin statute. Appellant contends
that at least the income derived from exploration
Page 447 U. S. 226
and production must be treated as situs income and allocated to
the situs State, rather than included in the apportionment statute.
[
Footnote 9] Appellee did, in
fact, exclude. that income derived from the sale of crude oil and
gas at the wellhead to third parties. However, the Department of
Revenue concluded that the income characterized through appellant's
separate functional accounting as income derived from
intracorporate transfer of crude oil and gas for refining was part
of the "unitary stream" of Exxon's income, and apportionable.
We agree with appellee. As previously noted, appellant's
internal accounting system is not binding on the State for tax
purposes. The decision to assign wholesale market values to
internal transfers of raw materials for corporate accountability
does not change the unitary nature of appellant's business. An
effective marketing operation is important to assure full or nearly
full use of the refining capacities. Obviously, the quality of the
refined product affects the marketing operation. And the success of
the Exploration and Production Department helps to keep the
refineries operating at a capacity which is cost-efficient. There
is indeed a unitary stream of income, of which the income derived
from internal transfers of raw materials from exploration and
production to refining is a part. [
Footnote 10] There is a sufficient nexus to satisfy the
Due Process Clause.
There is also the necessary "rational relationship" between the
income attributed to the State by the apportionment formula
Page 447 U. S. 227
and the intrastate value of the business. Exxon had a total of
$60,073,293 in sales income from its Wisconsin operation in the
years 1965 through 1968. App. 799. The Wisconsin assessed taxable
income for the four years in question represented 0.22 percent of
total company net income adjusted to the Wisconsin basis, and
Exxon's Wisconsin sales for those years represented 0.41 percent of
total company sales. 90 Wis.2d at 729, 281 N.W.2d at 110. This is
hardly a case where the State has used its formula to attribute
income "out of all appropriate proportion to the business
transacted . . . in that State,"
Hans Rees' Sons v. North
Carolina ex rel. Maxwell, 283 U.S. at
283 U. S. 135,
and application of the formula has not "led to a grossly distorted
result,"
Norfolk & Western R. Co. v. State Tax Comm'n,
390 U.S. at
390 U. S. 326.
See also Moorman Mfg. Co. v. Bair, 437 U.S. at
437 U. S. 274.
That Exxon's Wisconsin marketing operation, through the use of
separate geographic accounting, failed to show a net profit for the
years in question does not change this rational relationship.
Butler Bros. v. McColgan, 315 U.S. at
315 U. S.
507-508;
Bass, Ratcliff & Gretton, Ltd. v. State
Tax Comm'n, 266 U.S. at
266 U. S. 284.
Cf. Underwood Typewriter Co. v. Chamberlain, 254 U.S. at
254 U. S. 120.
The Wisconsin Supreme Court's application of Wis.Stat. §§ 71.07(1)
and(2) (1967) in this case does not violate the Due Process Clause
of the Fourteenth Amendment.
III
Appellant also contends that the Commerce Clause requires
allocation of all income derived from its exploration and
production function to the situs State, rather than inclusion of
such income in the apportionment formula. [
Footnote 11] The Court must therefore examine
the "practical effect" of the tax to
Page 447 U. S. 228
determine whether it
"'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.'"
Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. at
445 U. S. 443,
quoting
Complete Auto Transit, Inc. v. Brady, 430 U.
S. 274,
430 U. S. 279
(1977).
See also Japan Line, Ltd. v. County of Los
Angeles, 441 U. S. 434,
441 U. S. 145
(1979);
Washington Revenue Dept. v. Association of Wash.
Stevedoring Cos., 435 U. S. 734,
435 U. S. 750
(1978). It has already been demonstrated that the necessary nexus
is present and that the tax is fairly apportioned. Similarly,
appellant does not contest the conclusion that the tax is fairly
related to the services rendered by Wisconsin, which include police
and fire protection, the benefit of a trained workforce, and "the
advantages of a civilized society."
Japan Line, Ltd. v. County
of Los Angeles, supra, at
441 U. S. 445.
Exxon asserts, however, that Wisconsin's taxing statute, as
applied, subjects interstate business to an unfair burden of
multiple taxation. We were faced with a very similar argument in
Mobil Oil Corp. v. Commissioner of Taxes, supra, and we
reject it now for the same reasons we rejected it in that case.
Here, as in that prior case, the State seeks to tax income, not
property ownership. Similarly, it is the
risk of multiple
taxation that is being asserted; actual multiple taxation has not
been shown. [
Footnote 12]
While, of course, "the constitutionality of a [Wisconsin]
Page 447 U. S. 229
tax should not depend on the vagaries of [another State's] tax
policy," nonetheless "the absence of any existing duplicative tax
does alter the nature of appellant's claim."
Id. at
441 U. S. 444.
Exxon asserts, in essence, that the Commerce Clause requires
allocation of exploration and production income to the situs State,
rather than apportionment among the States, regardless of the situs
State's actual tax policy.
Cf. ibid. (dividend
income).
We do not agree. As was the case with income from intangibles,
there is nothing "talismanic" about the concept of situs for income
from exploration and production of crude oil and gas.
Id.
at
441 U. S. 445.
Presumably, the States in which appellant's crude oil and gas
production is located are permitted to tax in some manner the
income derived from that production, there being an obvious nexus
between the taxpayer and those States. However,
"there is no reason in theory why that power should be exclusive
when the [exploration and production income as distinguished
through separate functional accounting] reflect[s] income from a
unitary business, part of which is conducted in other States. In
that situation, the income bears relation to benefits and
privileges conferred by several States. These are the circumstances
in which apportionment is ordinarily the accepted method."
Id. at
441 U. S.
445-446.
In short, the Commerce Clause does not require that any income
which a taxpayer is able to separate through accounting
Page 447 U. S. 230
methods and attribute to exploration and production of crude oil
and gas be allocated to the States in which those production
centers are located. The geographic location of such raw materials
does not alter the fact that such income is part of the unitary
business of the interstate enterprise, and is subject to fair
apportionment among all States to which there is a sufficient nexus
with the interstate activities of the business.
The judgment of the Supreme Court of Wisconsin is
Affirmed.
MR JUSTICE STEWART took no part in the consideration or decision
of this case.
[
Footnote 1]
The original taxpayer during the years in question was Humble
Oil and Refining Co., a wholly owned subsidiary of Standard Oil Co.
of New Jersey. In 1956, Standard Oil Co. of New Jersey organized as
a wholly owned subsidiary Pate Oil Co., a Delaware corporation.
Pate acquired all of the assets and liabilities of Saxon Corp., a
Wisconsin company which marketed petroleum products and accessory
products in that State. Pate continued those marketing operations.
In 1960, Pate was merged into Humble Oil and Refining Co., and the
Wisconsin marketing operations were continued by that company under
the brand name "Enco." In early 1973, Humble was merged into
Standard Oil Co. of New Jersey, and the corporate name was changed
to Exxon Corp. Exxon is the legal successor to Humble Oil and
Refining Co. The taxpayer will be referred to throughout this
opinion by its present name, Exxon.
[
Footnote 2]
The corporate staff departments which were part of Coordination
and Services Management, and which were not considered profit
centers for accounting purposes by appellant, included: Corporate
Planning Department, Secretary's Department, Supply Department,
Treasury Department, Comptroller's Department, Tax Department, Law
Department, Public Relations Department, Government Relations
Department, Employee Relations Department, General Services
Department, Medical Department, and Aviation Department. App.
189-192.
[
Footnote 3]
Wisconsin Stat. § 71.07(2) (1967) during this period provided in
relevant part:
"Persons engaged in business within and without the state shall
be taxed only on such income as is derived from business transacted
and property located within the state. The amount of such income
attributable to Wisconsin may be determined by an allocation and
separate accounting thereof, when the business of such person
within the state is not an integral part of a unitary business,
provided, however, that the department of taxation may permit an
allocation and separate accounting in any case in which it is
satisfied that the use of such method will properly reflect the
income taxable by this state. In all cases in which allocation and
separate accounting is not permissible, the determination shall be
made in the following manner: there shall first be deducted from
the total net income of the taxpayer such part thereof (less
related expenses, if any) as follows the situs of the property. . .
. The remaining net income shall be apportioned to Wisconsin on the
basis of the ratio obtained by taking the arithmetical average of
the following 3 ratios:"
"(a) The ratio of the tangible property, real, personal and
mixed, owned and used by the taxpayer in Wisconsin in connection
with his trade or business during the income year to the total of
such property of the taxpayer owned and used by him in connection
with his trade or business everywhere. . . ."
"(b) . . . the ratio of the total cost of manufacturing,
collecting, assembling or processing within this state to the total
cost of manufacturing, or assembling or processing everywhere. . .
."
"(c) . . . the ratio of the total sales made through or by
offices, agencies or branches located in Wisconsin during the
income year to the total net sales made everywhere during said
income year."
[
Footnote 4]
The additional net income was determined to be:
1965. . . . . . . . . . . $ 759,371
1966. . . . . . . . . . . $1,043,395
1967. . . . . . . . . . . $1,264,946
1968. . . . . . . . . . . $1,464,443
The additional taxes owed were determined to be:
1965. . . . . . . . . . . $ 52,960.97
1966. . . . . . . . . . . $ 72,842.65
1967. . . . . . . . . . . $ 88,351.22
1968. . . . . . . . . . . $102,316.01
[
Footnote 5]
Wisconsin Stat. § 71.07(1) (1967) during this period provided in
relevant part:
"For the purposes of taxation income or loss from business, not
requiring apportionment under sub.(2), . . . shall follow the situs
of the business from which derived. Income or loss derived from . .
. the operation of any . . . mine . . . shall follow the situs of
the property from which derived."
[
Footnote 6]
The Circuit Court also held that, on remand, the Tax Appeals
Commission should determine whether the Department had properly
weighted the apportionment formula. The apportionment formula uses
three factors: sales, property, and manufacturing costs.
See n 3,
supra. The Department adjusted the formula as to
manufacturing costs because not all of the products sold through
Exxon's Marketing Department were manufactured by Exxon; the
Department divided by 2.6, rather than the statutory 3. The
Wisconsin Supreme Court agreed that it was an issue for the Tax
Appeals Commission on remand. 90 Wis.2d 700, 731-735,
281 N.W.2d
94, 111-113 (1979). That particular question is not before this
Court.
[
Footnote 7]
The fact that Exxon in the present case relies on its own
separate
functional accounting, rather than separate
geographic accounting, which it had used initially in
preparing its Wisconsin income tax returns, does not make the
principles expressed in
Mobil Oil Corp. v. Commissioner of
Taxes any less applicable.
[
Footnote 8]
In reaching this conclusion, we need not challenge the integrity
of Exxon's separate functional accounting for its own internal
purposes.
See Butler Bros v. McColgan, 315 U.
S. 501,
315 U. S. 507
(1942).
[
Footnote 9]
Exxon also appears to suggest that the state statute requires
allocation to the situs State of such income, rather than
apportionment.
See Brief for Appellant 31-32, 441. That,
of course, is a matter of state statutory construction which the
Wisconsin Supreme Court, as the final arbiter of that State's law,
has decided against appellant.
[
Footnote 10]
Since appellee determined that income derived from the sale of
crude oil and gas at the wellhead to third parties must, under the
state statute, be allocated to the situs State and excluded from
the reach of the apportionment statute, we need not address the
issue of whether the Due Process Clause would require such
allocation, rather than apportionment.
[
Footnote 11]
Because of appellee's construction of the state statute
involved, we do not here address the issue of whether the Commerce
Clause requires allocation of income derived from the sale of crude
oil and gas at the wellhead to third parties to the situs State,
rather than apportionment.
[
Footnote 12]
Appellant presses the argument here that the risk of multiple
taxation of income violates the Commerce Clause. Brief for
Appellant 448; Reply Brief for Appellant 15-18; Supplemental Brief
for Appellant 8. There was testimony by one witness before the Tax
Appeals Commission that some States imposed "severance taxes" on
oil and gas production. App. 432. Based on this brief testimony,
the Tax Appeals Commission concluded that application of the state
apportionment formula to Exxon's net income from its exploration,
production, and refining functions subjected that income to
multiple taxation, CCH Wis. Tax Rep. � 201-223, p. 10,410 (1976),
and the Circuit Court for Dane County reached a similar result
solely as to the exploration and production income, CCH Wis.Tax
Rep. � 201-373, p. 10,503 (1977). Severance taxes, however, are
directed at the gross value of the mineral extracted or the
quantity of production, rather than the net income derived from the
production activities.
See R. Sullivan, Handbook of Oil
and Gas Law § 238, p. 490 (1955); 4 W. Summers The Law of Oil and
Gas § 801 (1938).
See, e.g., La.Rev.Stat.Ann. §§ 47:633(7)
and (9) (West Supp. 1980). The Wisconsin Supreme Court therefore
properly concluded that
"[t]he fact that the producing states may impose . . . severance
taxes which have been held to be occupation taxes or property taxes
does not render unfair or unconstitutional Wisconsin's efforts to
reach a proportionate share of the taxpayer's income."
90 Wis.2d at 731, 281 N.W.2d at 110-111 (footnotes omitted).