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Supreme Court of the United States
January 12, 2000, Argued ; February 22, 2000, Decided
[*460] [**1024] [***978] JUSTICE BREYER delivered the opinion of the Court.
[***HR2A] ] A State may tax a proportionate share of the income of a nondomiciliary corporation that carries out a particular business both inside and outside that State. Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768, 772, 119 L. Ed. 2d 533, 112 S. Ct. 2251 (1992). The State, however, may not tax income received by a corporation from an "'"unrelated business activity"' which constitutes a '"discrete business enterprise."'" Id. at 773 (quoting Exxon Corp. v. Department of Revenue of Wis., 447 U.S. 207, 224, 100 S. Ct. 2109, 65 L. Ed. 2d 66 (1980), in turn quoting Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 U.S. 425, 442, 439, 63 L. Ed. 2d 510, 100 S. Ct. 1223 (1980)).California's rules for taxing its share of a multistate corporation's income authorize a deduction for interest expense. But they permit (with one adjustment) use of that deduction only to the extent that the amount exceeds certain out-of-state income arising from the unrelated [****6] business activity of a discrete business enterprise, i.e., income that the State could not otherwise tax. We must decide whether those rules violate [***979] the Constitution's Due Process and Commerce Clauses. We conclude that they do.
The legal issue is less complicated than may first appear, as examples will help to show. California, like many other States, uses what is called a "unitary business" income-calculation system for determining its taxable share of a multistate corporation's business income. In effect, that system first determines the corporation's total income from its nationwide business. During the years at issue, it then averaged three ratios -- those of the firm's California property, payroll, and sales to total property, payroll, and sales -- to make a combined ratio. Cal. Rev. & Tax Code Ann. [*461] §§ 25128, 25129, 25132, 25134 (West 1979). Finally, it multiplies total income by the combined ratio. The result is "California's share," to which California then applies its corporate income tax. If, for example, an Illinois tin can manufacturer, doing business in California and elsewhere, earns $ 10 million from its total nationwide tin can sales, and if California's formula [****7] determines that the manufacturer does 10% of its business in California, then California will impose its income tax upon 10% of the corporation's tin can income, $ 1 million.
The income of which California taxes a percentage is constitutionally limited to a corporation's "unitary" income. ] Unitary income normally includes all income from a corporation's business activities, but excludes income that "derives from unrelated business activity which constitutes a discrete business enterprise," Allied-Signal, 504 U.S. at 773 (internal [**1025] quotation marks omitted). As we have said, this latter "nonunitary" income normally is not taxable by any State except the corporation's State of domicile (and the states in which the "discrete enterprise" carries out its business). Ibid.
Full case includes Shepard's, Headnotes, Legal Analytics from Lex Machina, and more.
528 U.S. 458 *; 120 S. Ct. 1022 **; 145 L. Ed. 2d 974 ***; 2000 U.S. LEXIS 1010 ****; 68 U.S.L.W. 4127; 2000 Cal. Daily Op. Service 1299; 2000 Daily Journal DAR 1821; 2000 Colo. J. C.A.R. 943; 13 Fla. L. Weekly Fed. S 119
HUNT-WESSON, INC., PETITIONER v. FRANCHISE TAX BOARD OF CALIFORNIA
Prior History: [****1] ON WRIT OF CERTIORARI TO THE COURT OF APPEAL OF CALIFORNIA, FIRST APPELLATE DISTRICT.
Disposition: Reversed and remanded.
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Tax Law, Income Taxes, Corporations & Unincorporated Associations, General Overview, State & Local Taxes, Constitutional Law, Fundamental Rights, Procedural Due Process, International Trade Law, Congressional Duties & Powers, Commerce Clause, Administration & Procedure, Federal Income Tax Computation, Business Expenses, Interest Incurred & Paid