Hunt-Wesson, Inc. v. Franchise Tax Bd.

Hunt-Wesson, Inc. v. Franchise Tax Bd.

Opinion

 [*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.

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