ACCEPTED
03-14-00197-CV
5275952
THIRD COURT OF APPEALS
AUSTIN, TEXAS
5/13/2015 5:40:15 PM
JEFFREY D. KYLE
CLERK
NO. 03-14-00197-CV
_________________________________________
RECEIVED IN
IN THE COURT OF APPEALS 3rd COURT OF APPEALS
AUSTIN, TEXAS
FOR THE THIRD JUDICIAL DISTRICT5/13/2015 5:40:15 PM
AUSTIN, TEXAS JEFFREY D. KYLE
_____________________________ Clerk
GRAPHIC PACKAGING CORPORATION,
Appellant,
v.
GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF THE
STATE OF TEXAS, AND KEN PAXTON, ATTORNEY GENERAL OF THE
STATE OF TEXAS,
Appellees.
__________________________________________________________________
ON APPEAL FROM THE 353RD JUDICIAL DISTRICT COURT
TRAVIS COUNTY, TEXAS
_________________________________________________________________
BRIEF OF AMICI CURIAE STATES OF OREGON, ALASKA,
CALIFORNIA, COLORADO, HAWAII, MICHIGAN, MINNESOTA,
MONTANA, NEW MEXICO, AND WASHINGTON
IN SUPPORT OF TEXAS COMPTROLLER OF PUBLIC
ACCOUNTS AND TEXAS ATTORNEY GENERAL
________________________________________________________________
ELLEN F. ROSENBLUM
Oregon Attorney General
ANNA JOYCE
Oregon Solicitor General
DARREN WEIRNICK
Senior Assistant Attorney General
darren.weirnick@doj.state.or.us
Oregon Dept. of Justice
1162 Court Street NE
Salem, OR 97301
Tele: (503) 947-4530
Fax: (503) 378-3784
[additional attorneys on next page]
CRAIG W. RICHARDS LORI SWANSON
Attorney General of Alaska Attorney General of Minnesota
P.O. Box 110300 102 State Capitol
Juneau, Alaska 99811 75 Rev. Dr. Martin Luther King Jr. Blvd.
St. Paul, MN 55155-1609
KAMALA D. HARRIS
Attorney General of California TIM FOX
455 Golden Gate, Suite 11000 Montana Attorney General
San Francisco, CA 94102-7004 Office of the Attorney General
215 N Sanders, Third Floor
CYNTHIA COFFMAN P.O. Box 201401
Colorado Attorney General Helena, MT 59620-1401
Ralph L. Carr Colorado Judicial Ctr
1300 Broadway, 10th Floor HECTOR H. BALDERAS
Denver, Colorado 80203 Attorney General of New Mexico
DOUGLAS S. CHIN P. O. Drawer 1508
Attorney General of Hawaii Santa Fe, NM 87504-1508
425 Queen Street
Honolulu, Hawaii 96813 ROBERT W. FERGUSON
Attorney General of Washington
BILL SCHUETTE 1125 Washington Street SE
Michigan Attorney General P.O. Box 40100
P. O. Box 30212 Olympia, WA 98504-0100
Lansing, MI 48909
COUNSEL FOR AMICI CURIAE
TABLE OF CONTENTS
STATEMENT OF INTEREST OF AMICI CURIAE ...................................................... 1
INTRODUCTION ............................................................................................................ 1
ARGUMENT .................................................................................................................... 5
I. THE COURT SHOULD REJECT GRAPHIC’S UNCRITICAL RELIANCE
ON “COMPACT LAW” CASES. .................................................................................5
A. An agreement between sovereign states does not bind a future
legislature except under the Compact Clause or Contract Clause. ................6
B. Because the Compact Clause does not apply to the tax compact,
Graphic’s reliance on “compact law” cases decided under that clause
is misplaced...........................................................................................................7
C. Because the tax compact did not require or receive Congressional
consent, the compact trumps Texas Tax Code § 171.106 only if Texas
Tax Code § 171.106 unconstitutionally impairs the obligation of
contracts. ...............................................................................................................9
II. THE TAX COMPACT PERMITS MEMBER STATES TO ADOPT AN
EXCLUSIVE APPORTIONMENT FORMULA SUCH AS TEXAS TAX
CODE § 171.106 ...........................................................................................................11
A. The states did not unmistakably intend to suspend their power to
adopt an exclusive apportionment formula. ....................................................12
B. The states’ course of performance confirms that each state intended to
retain sovereign authority to adopt an exclusive apportionment
formula without first withdrawing from the compact under Article
X.2........................................................................................................................17
C. Construing the tax compact as the amici suggest does not require the
court to insert “absent terms,” but rather to discern the states’ intent
using constructional principles under the Contract Clause. ..........................21
D. The threat of Congressional action in 1967 does not show that the
states intended Article III.1 to contractually bind subsequent state
legislatures. .........................................................................................................24
III. TEXAS TAX CODE § 171.106 DOES NOT SUBSTANTIALLY IMPAIR
ANY CONTRACTUAL RELATIONSHIP...............................................................26
CONCLUSION ............................................................................................................... 29
i
TABLE OF AUTHORITIES
Cases
Alabama v. North Carolina,
560 U.S. 330, 352, 130 S.Ct. 2295 (2010) ................................................. 21, 22, 23
Allied Structural Steel Co. v. Spannaus,
438 U.S. 234, 246, 98 S.Ct. 2716 (1978) ............................................................... 27
Atlantic Coast Line R. Co. v. Phillips,
332 U.S. 168, 173, 67 S.Ct. 1584 (1947) ............................................................... 13
C.T. Hellmuth v. Washington Metro. Area Transit Auth.,
414 F.Supp. 408, 409 (D. Md. 1976)...................................................................... 14
Central Power & Light Co. v. Pub. Util. Comm’n.,
649 S.W.2d 287, 289 (Tex. 1983) ............................................................................ 6
Chandler v. Jorge A. Gutierrez, P.C.,
906 S.W.2d 195, 203 n.10 (Tex. App.—Austin 1995, writ denied) ........................ 6
Cuyler v. Adams,
449 U.S. 433, 440, 101 S.Ct. 703, 708 (1981) ......................................................... 7
Droemer v. Transit Mix Concrete of Gonzales, Inc.,
457 S.W.2d 332, 335 (Tex. App.—Corpus Christi 1970, no writ) ........................ 18
Energy Reserves Group, Inc. v. Kansas Power & Light Co.,
459 U.S. 400, 411, 103 S.Ct. 697 (1983) ......................................................... 26, 27
Firstar Corp. v. Comm’r,
575 N.W.2d 835, 838 (Minn. 1998) ....................................................................... 19
General Expressways, Inc. v. Iowa Reciprocity Board,
163 N.W.2d 413, 419-420 (Iowa 1968) ................................................................. 10
ii
TABLE OF AUTHORITIES
General Motors Corp. v. Romein,
503 U.S. 181, 189, 112 S.Ct. 1105 (1992) ........................................................ 27
Gillette Co. and Subsidiaries v. California Franchise Tax Board,
Cal. S. Ct. S206587 ................................................................................................ 19
HealthNet, Inc. and Subsidiaries v. Department of Revenue,
Or. Tax Court TC No. 5127 .................................................................................... 20
In re C.B., 188 Cal.App.4th 1024,
116 Cal.Rptr.3d 294 (2010) .................................................................................... 10
In re Alexis O., 959 A.2d 176, 180 (N.H. 2008) ........................................................... 9
In re D.B., 431 A.2d 498 (Vt. 1981).............................................................................. 9
In re O.M., 565 A.2d 573 (D.C. Ct. App. 1989) ................................................... 10, 11
Ingram Micro. Inc. v. Mich. Dep’t. of Treasury,
No. 11-000035-MT, slip op. (Mich. Ct. Cl. Dec. 19, 2014)................................... 20
International Business Machines Corp. v. Department of Treasury,
852 N.W.2d 865 (Mich. 2014) ............................................................................... 20
Jefferson Branch Bank v. Skelly,
66 U.S. (1 Black) 436, 446, 17 L.Ed. 173 (1862) ............................................ 12, 15
Kimberly-Clark Corp. and Subsidiaries v. Commissioner,
Minn. Tax Ct. No. 8670-R...................................................................................... 19
McComb v. Wambaugh, 934 F.2d 474, 479 (3d Cir. 1991) .................................... 9, 10
MJR Corp. v. B&B Vending Co.,
760 S.W.2d 4, 15 (Tex. App.—Dallas 1988, writ denied) ..................................... 13
iii
TABLE OF AUTHORITIES
Tarrant Reg’l Water Dist. v. Herrmann,
569 U.S. __, 133 S.Ct. 2120, 2130 n.8 (2013) .................................................... 8, 18
United States Steel Corp. v. Multistate Tax Commission,
434 U.S. 452, 473, 98 S.Ct. 799 (1978) ....................................................... 8, 14, 25
United States Trust Co. of New York v. New Jersey,
431 U.S. 1, 24 n.21, 97 S.Ct. 1505 (1977) ..................................... 13, 16, 22, 26, 27
United States v. Price,
361 U.S. 304, 310-311, 80 S.Ct. 326 (1960) .......................................................... 24
United States v. Winstar Corp.,
518 U.S. 839, 874-75, 116 S.Ct. 2432 (1996) .................................................. 12, 13
Statutes
Ala. Code § 40-27-1 (2011) ......................................................................................... 20
Ark. Code Ann. § 26-5-101 (1995) ............................................................................. 20
Ark. Code Ann. § 26-51-709 ....................................................................................... 20
Cal. Rev. & Tax Code § 25128(a) (1993) ................................................................... 19
Colo. Rev. Stat. § 24-60-1301 ..................................................................................... 20
Colo. Rev. Stat. § 39-22-303.5(2) (2009) .................................................................... 20
D.C. Code § 47-411 (2013) ......................................................................................... 20
Fla. Stat. § 214.71 ........................................................................................................ 19
Fla. Stat. § 220.15(4) ................................................................................................... 19
Idaho Code § 63-3027(i)(1) ......................................................................................... 19
Mich. Comp. Laws § 208.1301 ................................................................................... 20
N.D. Cent. Code § 57-59-01, as amended by S.B. 2292 (2015) ................................. 20
Or. Rev. Stat. § 314.606 .............................................................................................. 20
Or. Rev. Stat. § 314.606 (1993) ................................................................................... 20
Or. Rev. Stat. § 314.650(1) (1993) .............................................................................. 20
Or. Rev. Stat. § 305.653 (2013) ............................................................................... 20
iv
TABLE OF AUTHORITIES
Texas Tax Code § 141.001 ............................................................................................ 1
Texas Tax Code § 171.106 .............................................. 1, 2, 3, 4, 9, 11, 12, 26, 27, 29
Other Authorities
1A Norman J. Singer & J.D. Shambie Singer, Sutherland Statutes and Statutory
Construction § 32:8 (7th ed. 2009)...................................................................... 7
J. Murray, Corbin on Contracts § 45.6 at 92 (rev. ed. 2007) ...................................... 14
Restatement (Second) of Contracts § 202, comment g (1981) .................................... 17
Laws
1971 Fla. Laws ch. 71-984 § 1 (eff. Jan. 1, 1972) ....................................................... 19
1987 Minn. Laws 1039, 1098-1120 ............................................................................ 19
1993 Cal. Stat. 946 (S.B. 1176) ................................................................................... 19
1993 Or. Laws 726, § 20 (H.B. 2058) ......................................................................... 20
1994 Idaho Sess. Laws 301 (H.B. 897) ....................................................................... 19
1995 Ark. Acts 682 ...................................................................................................... 20
2008 Colo. Sess. Laws 256 (H.B. 08-1380) ................................................................ 20
2010 Utah Sess. Laws 155, § 1 (S.B. 165) .................................................................. 20
2011 Ala. Acts 2011-616 (H.B. 434) .......................................................................... 20
2012 Cal. Stat. 37 (S.B. 1215) ..................................................................................... 19
2013 D.C. Stat. 20-61, § 7342 ..................................................................................... 20
2013 Minn. Laws 143 ............................................................................................... 19
2013 Or. Laws 407 (S.B. 307) ..................................................................................... 20
2014 Mich. Pub. Acts 282 ........................................................................................... 20
Constitutional Provisions
Alaska Const. art. IX, § 1 ............................................................................................ 15
Ark. Const. art. 16, § 7 ................................................................................................ 15
Cal. Const. art. XIII, § 31 ............................................................................................ 15
Haw. Const. art. VII, § 1.............................................................................................. 15
Ill. Const. art. IX, § 1 ................................................................................................... 15
v
TABLE OF AUTHORITIES
Mich. Const. art. IX, § 2 .............................................................................................. 15
Minn. Const. art. X, § 1 ............................................................................................... 15
Mo. Const. art. X, § 2 .................................................................................................. 15
Mont. Const. art. VIII, § 2 ........................................................................................... 15
N.D. Const. art. X, § 2 ................................................................................................. 15
S.D. Const. art. XI, § 3 ................................................................................................ 15
Tex. Const. art I, § 16 .................................................................................................... 6
Tex. Const. art VIII, § 4............................................................................................... 15
U.S. Constitution, Article I, § 10, clause 1 .................................................................... 6
U.S. Constitution, Article I, § 10, clause 3 .................................................................... 6
U.S. Constitution, Article VI, § 2 .................................................................................. 7
Wash. Const. art. VII, § 1 ............................................................................................ 15
Wyo. Const. art. 15, § 14 ............................................................................................. 15
Legislation
H. R. 11798, 89th Cong., 1st Sess. (1965) .................................................................. 25
H.R. 1538, 92d Cong., 1st Sess. (1971) ...................................................................... 25
H.R. 1538, 92d Cong., 2d Sess. (1972) ....................................................................... 25
H.R. 16491, 89th Cong., 2d Sess. (1966) .................................................................... 25
H.R. 2158, 90th Cong., 1st Sess. (1967) ..................................................................... 25
H.R. 2179, 91st Cong., 1st Sess. (1969) ...................................................................... 25
H.R. 7906, 91st Cong., 1st Sess. (1969) ...................................................................... 25
H.R. 9, 94th Cong., 1st Sess. (1975) ........................................................................... 25
H.R. 977, 93d Cong., 1st Sess. (1973) ........................................................................ 25
S. 1210, 92d Cong., 1st Sess. (1971) ........................................................................... 25
S. 1245, 93d Cong., 1st Sess. (1973) ........................................................................... 25
S. 1883, 92d Cong., 1st Sess. (1971) ........................................................................... 25
S. 2080, 94th Cong., 1st Sess. (1975) .......................................................................... 25
S. 2092, 93d Cong., 1st Sess. (1973) ........................................................................... 25
S. 282, 93d Cong., 1st Sess. (1973) ............................................................................. 25
S. 317, 92d Cong., 1st Sess. (1971) ............................................................................. 25
vi
TABLE OF AUTHORITIES
S. 3333, 92d Cong., 2d Sess. (1972) ........................................................................... 25
S. 4080, 92d Cong., 2d Sess. (1972) ........................................................................... 25
S. 916, 91st Cong., 1st Sess. (1969) ............................................................................ 25
vii
STATEMENT OF INTEREST OF AMICI CURIAE
This case concerns, in part, the proper interpretation of the Multistate Tax
Compact (the “tax compact”), which Texas joined by adopting Texas Tax Code
§ 141.001. The amici states include the following members and former members
of the tax compact: Oregon, Alaska, California, Colorado, Hawaii, Michigan,
Minnesota, Montana, New Mexico, and Washington.
As members and former members of the tax compact, the amici states are
interested in assisting the court in understanding the party states’ interpretation of
the compact. In amici’s view, correct construction of the tax compact will help
preserve each state’s sovereign authority over its tax policies, consistent with the
members’ intent.
No party or counsel for a party in this case authored this brief, in whole or in
part, or made a monetary contribution intended to fund the preparation or
submission of the brief. No person or entity, other than the State of Oregon, made
a monetary contribution intended to fund the preparation or submission of the
brief.
INTRODUCTION
Graphic Packaging, Inc. (“Graphic”) argues that Article III.1 of the tax
compact takes priority over an apportionment formula in Texas Tax Code
§ 171.106. Article III.1 provides that a taxpayer subject to a party state’s income
1
tax “may elect to apportion and allocate his income in the manner provided by the
laws of such state . . . without reference to this compact, or may elect to apportion
and allocate in accordance with Article IV.” Article IV.9 provides for
apportionment of net income based on a formula that gives equal weight to
property, payroll, and sales. By contrast, Texas Tax Code § 171.106(a) requires a
multistate taxpayer such as Graphic to apportion its taxable margin based solely on
gross receipts “[e]xcept as provided by this section.” Nothing in Texas Tax Code
§ 171.106 permits use of the tax compact’s three-factor formula.
The amici states agree with the Comptroller of Public Accounts and
Attorney General for the State of Texas that (1) the tax compact does not waive
any member state’s right to adopt an “exclusive” apportionment formula—that is, a
formula that automatically applies to multistate taxpayers and precludes those
taxpayers from invoking the formula in Article IV.9 of the tax compact—and that
(2) any ambiguity on that point must be resolved in favor of each state’s
reservation of its sovereign tax power. The amici stress the following points.
Graphic argues that the tax compact takes priority over Texas Tax Code
§ 171.106 based on a body of so-called “compact law” cases that span an
assortment of interstate agreements in diverse areas. But most of Graphic’s
“compact law” cases address compacts that were approved by Congress.
Compacts that Congress approves become federal law, to which inconsistent state
2
laws must yield. As Graphic admits, the tax compact neither received nor required
Congressional approval. Thus, the Compact Clause does not apply to the tax
compact, and the compact must be construed as state law.
Because the Compact Clause does not apply, the tax compact would have
precluded Texas from enacting a mandatory apportionment formula such as Texas
Tax Code § 171.106 only if (1) the legislature, in joining the compact,
unmistakably intended to bind future legislatures by contract and (2) Texas Tax
Code § 171.106 unconstitutionally impaired existing contractual obligations.
Neither conclusion applies.
First, the tax compact does not address, much less address in unmistakable
terms, what happens when another state law—such as Texas Tax Code
§ 171.106—mandates use of an exclusive apportionment formula. Moreover,
nothing in the tax compact purports to trump longstanding prohibitions in many
member states’ constitutions on suspension of their taxing power—prohibitions
that are part of the compact’s terms. The states’ intent should be construed in
harmony with their constitutions. Furthermore, nothing in the tax compact
unmistakably grants taxpayers a contractual right to enforce Article III.1 as a third-
party beneficiary.
Consistent with the intent of each state to preserve its sovereign tax power,
the member states’ longstanding course of performance further demonstrates that
3
the states have interpreted the tax compact to permit a member state to later adopt
an exclusive apportionment formula. Numerous member states have adopted laws
deleting or superseding Article III.1 or IV. No member state ever has objected.
Indeed, as early as 1972 the states’ representatives to the Multistate Tax
Commission unanimously ratified the Florida legislature’s elimination of Articles
III and IV.
In short, the states did not intend to preclude their legislatures from opting
out of Article III.1. Nor did they intend to grant any taxpayer a contractual right to
invoke Article III.1 when a state has adopted legislation superseding that provision.
But even if Graphic had a contractual right to the Article III.1 election,
Texas Tax Code § 171.106 would not unconstitutionally impair any contractual
obligation because no substantial impairment occurred. Here, Texas Tax Code
§ 171.106 did not substantially impair a contractual relationship because Graphic
had no legitimate expectation that any rights under Article III.1 would exist after
2008, when Texas’ revised franchise tax went into effect. As Graphic appears to
concede, each state could withdraw from the tax compact at any time without
notice. Moreover, the compact’s provisions were expressly severable. Thus,
Graphic could not legitimately have expected to invoke any right under Article
III.1 if Texas had formally withdrawn from the tax compact in 2008 and then
reenacted the compact without Articles III.1 and IV. Because Texas’ revised
4
franchise tax had the same effect, it did not substantially impair any contractual
obligation.
The amici states ask the court to reject Graphic’s reading of the tax compact.
Graphic’s interpretation is inconsistent with the party states’ longstanding
understanding of their own agreement. The states entered the tax compact to
preserve each state’s sovereign power to manage its own fiscal affairs, not to
suspend or surrender it.
ARGUMENT
I. THE COURT SHOULD REJECT GRAPHIC’S UNCRITICAL
RELIANCE ON “COMPACT LAW” CASES.
Graphic asserts that an interstate compact must prevail over subsequent state
law under a “body of case law referred to as compact law, because an interstate
compact represents both a contract and a binding reciprocal statute. . . .” Graphic
Br. at 32. But there is no common law of interstate compacts. Graphic’s “compact
law” cases do not hold that an interstate compact necessarily precludes later state
laws that conflict with compact provisions merely because the compact is an
agreement. What authority they provide for the priority of interstate compacts
derives solely from the Compact Clause or from federal and state constitutional
prohibitions on the impairment of the obligation of contracts.
As Graphic admits, however, the Compact Clause does not apply to the tax
compact. Thus, Graphic’s “compact law” cases matter only to the extent they
5
analyze whether a state law that is inconsistent with an earlier interstate agreement
unconstitutionally impairs the obligation of contracts.
A. An agreement between sovereign states does not bind a future
legislature except under the Compact Clause or Contract Clause.
The fact that sovereign governments enter into agreements with one another
by adopting statutes does not, by itself, curtail the sovereignty of future
legislatures. “A legislature cannot prevent future legislatures from amending or
repealing a statute.” Central Power & Light Co. v. Pub. Util. Comm’n., 649
S.W.2d 287, 289 (Tex. 1983). Only federal or state constitutional provisions or
federal law may limit a state legislature’s power to amend or repeal an earlier
statute.
By citing haphazardly from cases involving sundry interstate compacts,
Graphic glosses over the only sources of law that may require interstate compacts
to take priority over later enacted state laws: the Compact Clause1 or the federal
and state Contract Clauses.2 Ascertaining whether a state law represents an
interstate agreement is merely a predicate for determining whether there is a
1
Under the Compact Clause, U.S. Constitution, Article I, § 10, clause 3, “No State shall,
without the Consent of Congress . . . enter into any Agreement or Compact with another
State . . . .”
2
Under the Contract Clause, U.S. Constitution, Article I, § 10, clause 1, “No State
shall . . . pass any . . . Law impairing the Obligation of Contracts.” See also Tex. Const. art. I, § 16
(“No . . . law impairing the obligation of contracts, shall be made.”). Because the federal and
Texas constitutional provisions are “interpreted essentially identically,” we focus on the federal
clause. Chandler v. Jorge A. Gutierrez, P.C., 906 S.W.2d 195, 203 n.10 (Tex. App.—Austin 1995,
writ denied).
6
“Compact” under the Compact Clause or an unconstitutional impairment of the
“Obligation of Contracts” under federal and state Contract Clauses. If Congress
consents to an interstate compact under the Compact Clause, its consent transforms
the compact into federal law, and the compact thus trumps conflicting state law
under the Supremacy Clause. But in the case of the tax compact, or any other
non-Congressionally-approved compact, later state law may trump provisions in
the compact, so long as the later state law does not unconstitutionally impair the
obligation of contracts. See, e.g., 1A Norman J. Singer & J.D. Shambie Singer,
Sutherland Statutes and Statutory Construction § 32:8 (7th ed. 2009) (describing
state’s authority to abrogate non-Congressionally-approved compact as limited by
“the constitutional prohibition against impairing the obligation of contract”).
B. Because the Compact Clause does not apply to the tax compact,
Graphic’s reliance on “compact law” cases decided under that
clause is misplaced.
Compacts that receive Congressional consent under the Compact Clause
constitute federal law. As a result, a state law that conflicts with a
Congressionally-approved compact must yield to that compact under the
Supremacy Clause, U.S. Constitution, Article VI, § 2. See Cuyler v. Adams, 449
U.S. 433, 440, 101 S.Ct. 703, 708 (1981) (holding that “[t]he consent of Congress
transforms the States’ agreement into federal law under the Compact Clause”).
Graphic thus misstates the law when it claims that “Congressional consent plays no
7
role” in explaining why an interstate compact may trump a later state law that
conflicts with that compact. Graphic Br. at 34 (emphasis added). If Congress has
approved an interstate compact, the Supremacy Clause makes that
Congressionally-approved compact binding on the states, and does so regardless of
future state legislation—no “additional” reasons need be considered. Graphic Br.
at 34; see Tarrant Reg’l Water Dist. v. Herrmann, 569 U.S. __, 133 S.Ct. 2120,
2130 n.8 (2013) (“The Supremacy Clause…ensures that a congressionally
approved compact, as a federal law, preempts any state law that conflicts with the
Compact”).
Because the lion’s share of “compact law” cases that Graphic cites address
Congressionally-approved compacts, Graphic’s uncritical reliance on those
cases—for its assertion that the tax compact automatically takes precedence over
later state laws—is unwarranted: As Graphic acknowledges, the Compact Clause
does not apply to the tax compact because Congressional consent was neither
required nor given. See Graphic Br. at 38; United States Steel Corp. v. Multistate
Tax Commission, 434 U.S. 452, 473, 98 S.Ct. 799 (1978) (holding that tax compact
did not “enhance[] state power quoad the National Government” and therefore did
not require Congressional consent).
8
As a non-Congressionally-approved compact, the tax compact “must be
construed as state law,” not federal. McComb v. Wambaugh, 934 F.2d 474, 479
(3d Cir. 1991); In re Alexis O., 959 A.2d 176, 180 (N.H. 2008). While cases
construing compacts covered by the Compact Clause may be persuasive in other
respects, e.g., in applying principles of contractual interpretation, they do not
establish that the tax compact automatically overrides subsequent state law.
C. Because the tax compact did not require or receive Congressional
consent, the compact trumps Texas Tax Code § 171.106 only if
Texas Tax Code § 171.106 unconstitutionally impairs the
obligation of contracts.
A non-Congressionally-approved interstate compact may take precedence
over a subsequent state statute, but only if that statute unconstitutionally impairs
the obligation of contracts. Again, Graphic errs by viewing so-called “compact
law” cases as a distinct source of authority. See Graphic Br. at 45-6 (concluding
that “fundamental principles of compact law” require application of Article III.1
and only later arguing that Texas Tax Code § 171.106 “also” violates Contract
Clause).
Of the few “compact law” cases Graphic cites that involve
non-Congressionally-approved compacts, none holds that the compact at issue
overrode subsequent state law absent an unconstitutional impairment of contractual
obligations. The court in In re D.B., 431 A.2d 498 (Vt. 1981) merely held that the
Interstate Compact on Juveniles was valid notwithstanding lack of Congressional
9
consent. In General Expressways, Inc. v. Iowa Reciprocity Board, 163 N.W.2d
413, 419-420 (Iowa 1968), the court found that the compact at issue and a
subsequent statute were consistent. In each case, the court had no need to decide
whether a later statute substantially impaired contractual relationships.
In both McComb, 934 F.2d 474, and In re C.B., 188 Cal.App.4th 1024, 116
Cal.Rptr.3d 294 (2010), the courts struck down a state regulation that exceeded the
scope of the statutory compact it was meant to interpret—a familiar principle of
administrative law. The courts then held that the statutory compact did not apply
to the factual situation presented. The courts thus had no need to address whether
the compact took precedence over later state statutes, and broad statements to that
effect in McComb are dicta.
Finally, Graphic’s reliance on In re O.M., 565 A.2d 573 (D.C. Ct. App.
1989), which held that the District of Columbia properly ratified and participated
in the Interstate Compact on Juveniles following Congressional authorization, is
erroneous in two critical respects. First, the D.C. Court of Appeals observed that
Congress itself “expressly commanded” the D.C. courts “to enforce the Compact
according to its terms.” 565 A.2d at 579. No Congressional mandate to the Texas
Court of Appeals is at issue in Graphic’s appeal.
Second, as the court in In re O.M. noted,
[t]his case does not present . . . the issue of whether an interstate
compact which is not federal law may or must be enforced by the
10
courts. The District is not asserting, through an unequivocal,
unanimous, and consistent argument by its highest political
authorities, that the Compact should not be enforced in this case.
Id. By contrast, here the Comptroller maintains, and the amici states agree, that
Article III.1 and Article IV of the tax compact are not enforceable as binding
contractual terms; instead, they are provisions from which party states are free to
subsequently deviate without withdrawing from the entire compact.
In sum, Graphic’s snippets from a medley of “compact law” cases fail to
establish that Article III.1 of the tax compact takes priority over Texas Tax Code
§ 171.106. A non-Congressionally-approved compact—such as the tax compact—
does not automatically trump later-enacted state statutes. Instead, it does so only if
the subsequent state statute violates constitutional prohibitions on laws impairing
the obligation of contracts.
II. THE TAX COMPACT PERMITS MEMBER STATES TO ADOPT AN
EXCLUSIVE APPORTIONMENT FORMULA SUCH AS TEXAS
TAX CODE § 171.106
Framing Graphic’s primary contention solely within the boundaries of the
Contract Clause matters for two reasons. First, because of the severe consequences
that may ensue when an earlier legislature binds future legislatures under the
Contract Clause, a future legislature is constrained only when the earlier
legislature’s contractual intent to do so is unmistakable. Here, there is no
unmistakable intent that Texas and other party states intended either (1) to bargain
11
away their sovereign power to enact an exclusive apportionment formula or (2) to
grant taxpayers contractual rights under Article III.1 of the tax compact.
Second, even if the states unmistakably intended to vest taxpayers with
contractual rights under Article III.1, the Contract Clause would not automatically
be violated whenever a party state adopted a mandatory apportionment formula.
Rather, courts must apply a multistep analysis: they first must determine whether
any impairment is substantial. If an impairment is substantial, courts next must
assess whether that impairment is reasonable and necessary for an important public
purpose; if it is, no constitutional violation has occurred. Here, Texas Tax Code
§ 171.106 did not substantially impair any contractual relationship and therefore
could not violate the Contract Clause.
A. The states did not unmistakably intend to suspend their power to
adopt an exclusive apportionment formula.
Under the unmistakability doctrine, the state’s sovereign power may not “‘be
held . . . to be surrendered, unless such surrender has been expressed in terms too
plain to be mistaken.’” United States v. Winstar Corp., 518 U.S. 839, 874-75, 116
S.Ct. 2432 (1996) (quoting Jefferson Branch Bank v. Skelly, 66 U.S. (1 Black) 436,
446, 17 L.Ed. 173 (1862)). The unmistakability doctrine has “served the dual
purposes of limiting contractual incursions on a State’s sovereign powers and of
avoiding difficult constitutional questions about the extent of state authority to
limit the subsequent exercise of legislative power.” Winstar, 518 U.S. at 875. As
12
a result, contracts restricting a state’s future exercise of its taxing power “generally
have not received a sympathetic construction.” United States Trust Co. of New
York v. New Jersey, 431 U.S. 1, 24 n.21, 97 S.Ct. 1505 (1977). Instead, the
“legislature is not to be presumed to have relinquished its power of taxation
beyond the narrowest rational reading . . . .” Atlantic Coast Line R. Co. v. Phillips,
332 U.S. 168, 173, 67 S.Ct. 1584 (1947).
In the absence of express and unmistakable language waiving the exercise of
the sovereign tax power, each state must be presumed to have reserved that power.
See Winstar, 518 U.S. at 878 (“unmistakability [is] needed for waiver, not
reservation” of sovereign power). The tax compact contains no such unmistakable
language. Nothing in the tax compact expressly prohibits the states from adopting
an exclusive apportionment formula that overrides the formula in Article IV.9.
Nor does the tax compact expressly prevent states from limiting the conditions in
which Articles III.1 and IV may apply, from amending Articles III.1 and IV, or
from deleting them altogether.
Neither does the tax compact expressly and unmistakably make taxpayers
contractual, third-party beneficiaries of Article III.1. Even under general contract-
law principles, “all presumptions [are] invoked against liability to the third party.”
MJR Corp. v. B&B Vending Co., 760 S.W.2d 4, 15 (Tex. App.—Dallas 1988, writ
denied). In the case of contracts with governments, those presumptions are even
13
stronger. See, e.g., J. Murray, Corbin on Contracts § 45.6 at 92 (rev. ed. 2007)
(“The distinction between an intention to benefit a third party and an intention that
the third party should have the right to enforce that intention is emphasized where
the promisee is a governmental entity.”).
The historical background likewise permits no inference that the states
unmistakably considered Articles III.1 and IV as contractually binding terms, as
opposed to ordinary statutory provisions promoting uniform laws. The tax
compact’s history shows that the states entered into the compact to preserve each
state’s sovereign power to determine its own substantive tax policies, not to
suspend it by contract. That intent conflicts with Graphic’s assertion that “[u]pon
entering into an interstate compact, a state effectively surrenders a portion of its
sovereignty . . . .” Graphic Br. at 33 (quoting C.T. Hellmuth v. Washington Metro.
Area Transit Auth., 414 F.Supp. 408, 409 (D. Md. 1976)). The states did not
intend to protect their tax powers from federal interference only to permit
contractual interference by other states and taxpayers. Rather, they intended to
retain unfettered control over their own tax policies.3
3
As the State of Texas observes, Articles III and IV of the tax compact are merely
“advisory.” Brief of Appellees at 42-55. The Multistate Tax Commission long ago emphasized to
the United States Supreme Court in Multistate Tax Commission that the tax compact is an
“advisory mechanism,” with each member “retain[ing] exclusive control over any and all
legislation and administrative actions. . . .” See Brief of Multistate Tax Commission in Multistate
Tax Commission, United States Supreme Court No. 76-635, 1977 WL 189138 at 12; Brief of
Appellees at 54-55; see also Multistate Tax Comm’n, 434 U.S. at 457.
14
In fact, as the State of Texas observes, many members of the tax compact
were prohibited by their own state constitutions from contractually binding
themselves to substantive tax policies. Brief of Appellees at 61-62. The
constitutions of fourteen former and current member states, including Texas,
provide that the state may not suspend or surrender the power of taxation by
contract.4 A state’s sovereign power of taxation encompasses not merely whether
to tax, but also how to tax, including the method of computing taxes using an
apportionment formula.
Accordingly, any interpretation that views the states as collectively
promising that their legislatures would be powerless to modify or eliminate Article
III.1 or Article IV without repealing the compact altogether inserts into the tax
compact an obligation that would be illusory: any such promise would exceed the
state constitutional authority possessed by a significant number of compact
members. See Skelly, 66 U.S. at 448 (noting that “state legislatures, unless
prohibited in terms by state constitutions, may contract by legislation to release the
exercise of taxing” corporations) (emphasis added). Reading into the tax compact
a contractual obligation not to modify or eliminate Article III.1 or IV would ignore
4
Tex. Const. art VIII, § 4 (“The power to tax corporations . . . shall not be surrendered or
suspended by act of the Legislature, by any contract or grant to which the State shall be a party.”);
see also Alaska Const. art. IX, § 1; Ark. Const. art. 16, § 7; Cal. Const. art. XIII, § 31; Haw. Const.
art. VII, § 1; Ill. Const. art. IX, § 1; Mich. Const. art. IX, § 2; Minn. Const. art. X, § 1; Mo. Const.
art. X, § 2; Mont. Const. art. VIII, § 2; N.D. Const. art. X, § 2; S.D. Const. art. XI, § 3; Wash.
Const. art. VII, § 1; Wyo. Const. art. 15, § 14.
15
that “[t]he obligations of a contract long have been regarded as including not only
the express terms but also the contemporaneous state law pertaining to
interpretation and enforcement.” United States Trust Co. of New York v. New
Jersey, 431 U.S. 1, 19 n.17, 97 S.Ct. 1505 (1977) (internal citations and quotations
omitted); see also General Motors Corp. v. Romein, 503 U.S. 181, 189, 112 S.Ct.
1105 (1992) (“The obligation of a contract consists in its binding force on the party
who makes it. This depends on the laws in existence when it is made. . . .”)
(internal quotation and citation omitted).
Because the preexisting prohibitions in many party states’ constitutions must
be considered part of the tax compact “as if they were expressly referred to or
incorporated in its terms,” the states should be presumed to have enacted
Articles III.1 and IV of the tax compact merely as statutory law that subsequent
legislatures were free to revisit, not as binding contractual terms. United States
Trust, 431 U.S. at 19 n.17. Limiting a later legislature’s freedom to exercise the
tax power as long as the tax compact is in effect would suspend the legislature’s
tax power in violation of the constitutions of many party states.
Graphic notes that Article X.2 of the tax compact permits states to withdraw
from the tax compact at any time without notice. Graphic then argues that Article
X.2 shows that each state intended to contractually limit its future exercise of the
tax power unless and until it withdrew from the compact as a whole. Graphic is
16
mistaken. The withdrawal provision neither expressly nor implicitly prohibits the
states from otherwise deleting or amending Articles III.1 or IV, either upon
adoption or subsequently.
Moreover, Article XII of the tax compact provides that “[t]he provisions of
this compact shall be severable. . . .” Nothing in the tax compact provides that
Articles III.1 and IV are inseparable parts of the compact, nor does anything
prevent the compact members from omitting or eliminating one or more of those
provisions while continuing to participate in the tax compact in other respects.
The unmistakability doctrine, the lack of express restrictions in the tax
compact on the states’ power to delete or amend Articles III.1 and IV, the
prohibition in many states’ constitutions on contractual suspensions of the tax
power, and the severability provision indicate that the states intended Articles III.1
and IV to be subject to revision by future legislatures, not as binding contractual
terms.
B. The states’ course of performance confirms that each state
intended to retain sovereign authority to adopt an exclusive
apportionment formula without first withdrawing from the
compact under Article X.2.
“The parties to an agreement know best what they meant, and their action
under it is often the strongest evidence of the meaning.” Restatement (Second) of
Contracts § 202, comment g (1981). At worst, the unmistakability doctrine, the
states’ constitutional prohibitions on contractual suspensions of the tax power, and
17
the tax compact’s silence regarding the states’ reserved powers to amend or
eliminate Articles III.1 and IV would reflect an ambiguity in the construction of
the compact. As a result, the parties’ “course of performance . . . is highly
significant evidence of [their] understanding of the compact’s terms . . . .”
Tarrant Regional Water Dist., 133 S.Ct. at 2135; see also Droemer v. Transit Mix
Concrete of Gonzales, Inc., 457 S.W.2d 332, 335 (Tex. App.—Corpus Christi
1970, no writ) (“If a contract is doubtful or ambiguous in its meaning, the acts of
the parties themselves, in the course of the performance of the contract, are entitled
to great weight to aid the court in its interpretation.”). Here, the member states’
course of performance demonstrates that Article III.1 was not intended as a binding
contractual term that would prevent future legislatures from overriding it.
To state the obvious, the parties to the tax compact are states whose
legislatures have adopted it. The states have long allowed each other to depart
from Articles III.1 and IV while continuing to participate as full compact members.
For example, when Florida amended the tax compact by eliminating Articles III
and IV in 1971, the party states unanimously ratified Florida’s continued
membership, declaring in 1972 that Florida was “adhering to the spirit of the
Compact” and resolving that “Florida be recognized as a member in good standing
18
of the Multistate Tax Compact and the Multistate Tax Commission.” CR.487.5
Between 1987 and 1995, five party states—Minnesota, California, Idaho,
Oregon, and Arkansas—similarly adopted laws that eliminated or superseded
Article III.1. Minnesota amended its tax compact statute by eliminating Articles
III and IV.6 California and Idaho each adopted statutes mandating use of a double-
weighted sales factor “[n]otwithstanding” the tax compact.7 Oregon adopted
legislation resolving any inconsistency between the tax compact and its separately
codified version of the Uniform Division of Income for Tax Purposes Act
5
Graphic mistakenly implies that in 1972 Florida retained an equally-weighted three-
factor formula for taxpayers who would have been subject to Article IV. See Reply Brief of
Appellant at 17 (“Fla. Stat. § 214.71 set forth the same formula as Compact Article IV.”). In
fact, Fla. Stat. § 220.15(4) provided: “In lieu of the equally weighted three-factor apportionment
fraction based on property, payroll, and sales which is described in s. 214.71, there shall be used
for purposes of the tax imposed by this Code an apportionment fraction composed of a sales
factor representing 50% of the fraction, a property factor representing 25% of this fraction, and a
payroll factor representing 25% of the fraction.” See 1971 Fla. Laws ch. 71-984 § 1 (eff. Jan. 1,
1972).
6
See 1987 Minn. Laws 1039, 1098-1120; Firstar Corp. v. Comm’r, 575 N.W.2d 835, 838
(Minn. 1998) (discussing history). The validity of Minnesota’s elimination of Articles III and IV
in 1987 currently is before the Minnesota Tax Court in Kimberly-Clark Corp. and Subsidiaries v.
Commissioner, No. 8670-R. In 2013, Minnesota repealed the tax compact. See 2013 Minn. Laws
143.
7
See Cal. Rev. & Tax Code § 25128(a) (1993) (prescribing use of double-weighted sales
factor formula “[n]otwithstanding § 38006 [the tax compact]”); 1993 Cal. Stat. 946 (S.B. 1176);
Idaho Code § 63-3027(i)(1) (requiring use of double-weighted sales factor formula
“[n]otwithstanding the election allowed in article III.1 of the multistate tax compact . . . .”); 1994
Idaho Sess. Laws 301 (H.B. 897). The validity of California’s 1993 legislation currently is before
the California Supreme Court in Gillette Co. and Subsidiaries v. California Franchise Tax Board,
S206587. Texas, on behalf of eighteen states and the District of Columbia, has filed a Brief of
Amici Curiae in support of the Franchise Tax Board. In 2012, California repealed the tax compact.
2012 Cal. Stat. 37 (S.B. 1215).
19
(“UDITPA”) in favor of the latter.8 Arkansas directly amended the apportionment
formula in both Article IV of the tax compact and its separately enacted version of
UDITPA.9 As the State of Texas observes, nothing in the records of the Multistate
Tax Commission indicates that the party states have objected to these legislative
acts amending or overriding Article III.1 or IV or to later similar actions taken by
other states.10 See Brief of Appellees at 13.
8
See Or. Rev. Stat. § 314.606 (1993) (“In any case in which the provisions of ORS
314.605 to 314.675 are inconsistent with the provisions of ORS 305.655 [the tax compact], the
provisions of ORS 314.605 to 314.675 shall control.”); 1993 Or. Laws 726, § 20 (H.B. 2058); Or.
Rev. Stat. § 314.650(1) (1993) (prescribing use of double-weighted sales factor). The validity of
Or. Rev. Stat. § 314.606 currently is before the Oregon Tax Court in HealthNet, Inc. and
Subsidiaries v. Department of Revenue, TC No. 5127. Texas, on behalf of 12 states, has filed a
Brief of Amici Curiae in support of the Oregon Department of Revenue. In 2013, Oregon formally
withdrew from the tax compact and readopted it without Articles III and IV. See 2013 Or. Laws
407 (S.B. 307); Or. Rev. Stat. § 305.653 (2013).
9
See Ark. Code Ann. § 26-5-101 (1995) (amending Article IV.9); Ark. Code Ann. § 26-
51-709 (amending UDITPA formula); 1995 Ark. Acts 682.
10
Other jurisdictions include Colorado, Utah, Alabama, the District of Columbia,
Michigan, and North Dakota. See Colo. Rev. Stat. § 24-60-1301 (Article III.1 deleted effective
January 1, 2009); Colo. Rev. Stat. § 39-22-303.5(2) (2009) (mandating apportionment using single
sales factor formula for tax years beginning on or after January 1, 2009); 2008 Colo. Sess. Laws
256 (H.B. 08-1380); 2010 Utah Sess. Laws 155, § 1 (S.B. 165) (directly amending apportionment
formula in Article IV); Ala. Code § 40-27-1 (2011) (amending Article IV); 2011 Ala. Acts 2011-
616 (H.B. 434); D.C. Code § 47-411 (2013); 2013 D.C. Stat. 20-61, § 7342 (repealing tax compact
and readopting compact without Articles III and IV); Mich. Comp. Laws § 208.1301; N.D. Cent.
Code § 57-59-01, as amended by S.B. 2292 (2015) (deleting Articles III and IV). In International
Business Machines Corp. v. Department of Treasury, 852 N.W.2d 865 (Mich. 2014), four justices
of the Michigan Supreme Court held that Article III.1 remained in effect for the tax years at issue
as a matter of Michigan statutory law, without addressing the constitutional issue here. Three
justices would have held that the Michigan legislature impliedly repealed Article III.1 without
violating any constitutional provisions. Subsequently, Michigan retroactively repealed the tax
compact. See 2014 Mich. Pub. Acts 282. The Michigan Court of Claims recently upheld that
retroactive repeal, finding that the tax compact was merely advisory and that the retroactive repeal
did not impair any contractual obligations. See Ingram Micro. Inc. v. Mich. Dep’t. of Treasury,
No. 11-000035-MT, slip op. (Mich. Ct. Cl. Dec. 19, 2014) (appeal pending).
20
C. Construing the tax compact as the amici suggest does not require
the court to insert “absent terms,” but rather to discern the states’
intent using constructional principles under the Contract Clause.
Here, the State maintains, and the amici states agree, that when Texas joined
the tax compact, it reserved the right to exercise its sovereign tax power by
eliminating the Article III.1 election without withdrawing from the tax compact
under Article X.2. Graphic, however, argues that the State thereby seeks to insert
what is omitted into the tax compact. In support, Graphic quotes the statement, in
Alabama v. North Carolina, 560 U.S. 330, 352, 130 S.Ct. 2295 (2010), that the
Court is “especially reluctant to read absent terms into an interstate compact . . . .”
Graphic Br. at 41. Graphic errs.
Graphic’s reliance on Alabama v. North Carolina highlights the errors of
selectively quoting from “compact law” cases involving Congressionally-approved
compacts and of overlooking the constructional principles that apply under the
Contract Clause. Alabama v. North Carolina involved the construction of a
Congressionally-approved compact for the creation of regional radioactive waste
facilities in the southeastern United States. Because Congress approved the
compact at issue in Alabama v. North Carolina, that compact became federal law.
The radioactive waste compact’s status as federal law is critical in
explaining the Court’s refusal to read “absent terms”—there, an implied duty of
good faith—into that compact. The Court’s reluctance stemmed expressly from
21
“federalism and separation-of-powers concerns”—concerns that arose because
Congress had transmuted the compact into federal law. 560 U.S. at 352. In the
sentences immediately preceding Graphic’s quote, the Court explained that “an
interstate compact is not just a contract; it is a federal statute enacted by
Congress . . . . We do not—we cannot—add provisions to a federal statute. And
in that regard a statute which is a valid interstate compact is no different.” Id. at
351-52 (emphases added). The Court noted that Congress had approved similar
interstate compacts by other states authorizing regional radioactive waste facilities
and that those compacts included an explicit duty of good faith. The Court
therefore would not insert what had been omitted in a federal statute when other
Congressionally-approved compacts on a similar subject included “express good-
faith limitations upon a State’s exercise of its rights.” Id. at 353.
More generally, the Court in Alabama v. North Carolina did not consider the
constructional principles that must be applied under the Contract Clause here. The
Court had no need to consider whether a state unmistakably waived its sovereign
tax power or unmistakably conferred contractual rights on nonparty taxpayers.
Nor did the Court have occasion to apply the rule that “the laws which subsist at
the time and place of the making of a contract . . . enter into and form a part of it,
as if they were expressly referred to or incorporated in its terms.” United States
Trust, 431 U.S. at 19 n.17 (internal citations and quotations omitted). Here the
22
member states’ constitutional prohibitions on suspension of the tax power are
incorporated terms of the tax compact, not “absent” terms.
Furthermore, as the case caption in Alabama v. North Carolina
demonstrates, the states disagreed regarding that compact’s interpretation. By
contrast, the members of the tax compact have no disagreement with Texas here,
but rather a longstanding and consistent course of conduct. The member states
expressly consented to Florida’s elimination of Articles III and IV, and no state has
objected to the actions of other legislatures that eliminated or amended
Articles III.1 and IV.
Since Graphic acknowledges that Congress never has consented to the tax
compact, the Court’s federalism concerns in Alabama v. North Carolina that made
it reluctant to read absent terms into the compact there are irrelevant to this case.
The party states adopted the tax compact as a statute, knowing that many states’
constitutions prohibited contractual suspensions of the tax power and that the
compact’s provisions were severable. The states, individually and collectively,
could not unmistakably have intended Articles III.1 and IV as mutually binding
contractual terms that suspended each state’s power to adopt an exclusive tax
apportionment formula, given that many of their constitutions prohibited such
contractual suspensions.
23
D. The threat of Congressional action in 1967 does not show that the
states intended Article III.1 to contractually bind subsequent state
legislatures.
Graphic notes that the states drafted the tax compact in 1966 and 1967 in
response to the threat of federal legislation. According to Graphic, Article III.1
“guarantee[d] enough uniformity” to help the tax compact “gain[] the support of
enough party states . . . to convince Congress it no longer needed to act” and “was
at the heart of the deal that was struck . . . to stave off Congressional preemption.”
Graphic Br. at 45. Graphic thus asks this court to infer, based on a history of
Congressional inaction, that the states intended Article III.1 as a contractual term
binding future legislatures. This court should decline the invitation.
First, Congress was not a party to the tax compact. Its consent was neither
required nor received. In emphasizing the concerns of a nonparty, Graphic ignores
the party states’ overarching motivation for the tax compact—the preservation of
each state’s sovereign authority to adopt its own tax laws.
Second, even assuming Congressional intent were pertinent to the tax
compact’s construction, it is impossible to divine that intent from a history of
Congressional inaction. Bills may fail in Congress for a multitude of reasons. See
United States v. Price, 361 U.S. 304, 310-311, 80 S.Ct. 326 (1960) (“Whether
Congress thought the proposal unwise . . . or unnecessary, we cannot tell;
accordingly, no inference can properly be drawn from the failure of the Congress
24
to act”). In fact, there is no indication that the tax compact or any particular
provision within it was directly responsible for Congressional inaction. Federal
proposals to regulate state taxation of multistate corporations failed many times
before and after the tax compact’s adoption in 1967.11 Federal legislation would
have regulated taxation in all 50 states, whereas the tax compact’s membership,
which did not include large states like New York or Pennsylvania, has hovered at
approximately 20 members since the early 1970s. See Multistate Tax Commission,
434 U.S. at 454 n.1.
Nor did Congressional inaction reflect a “deal” to induce taxpayers to forgo
lobbying for federal legislation. Graphic Br. at 45. There was no “deal” with
Congress or taxpayers. Indeed, large multistate taxpayers subsequently challenged
the tax compact’s validity. See Multistate Tax Commission, 434 U.S. at 458.
Taxpayers are not parties to the tax compact, nor are they third-party beneficiaries.
Accordingly, the historical context in which the states adopted the tax
compact does not indicate an unmistakable intent to adopt Article III.1 as a binding
11
Unsuccessful federal legislation to regulate state taxation of multistate corporations
included H. R. 11798, 89th Cong., 1st Sess. (1965); H.R. 16491, 89th Cong., 2d Sess. (1966); H.R.
2158, 90th Cong., 1st Sess. (1967); H.R. 2179, 91st Cong., 1st Sess. (1969); H.R. 7906, 91st
Cong., 1st Sess. (1969); S. 916, 91st Cong., 1st Sess. (1969); H.R. 1538, 92d Cong., 1st Sess.
(1971); S. 317, 92d Cong., 1st Sess. (1971); S. 1210, 92d Cong., 1st Sess. (1971); S. 1883, 92d
Cong., 1st Sess. (1971); H.R. 1538, 92d Cong., 2d Sess. (1972); S. 3333, 92d Cong., 2d Sess.
(1972); S. 4080, 92d Cong., 2d Sess. (1972); H.R. 977, 93d Cong., 1st Sess. (1973); S. 282, 93d
Cong., 1st Sess. (1973); S. 1245, 93d Cong., 1st Sess. (1973); S. 2092, 93d Cong., 1st Sess.
(1973); H.R. 9, 94th Cong., 1st Sess. (1975); S. 2080, 94th Cong., 1st Sess. (1975). Nor did
Congress adopt any of numerous bills that sought its consent to the tax compact. See Multistate
Tax Commission, 434 U.S. at 458 n.8.
25
contractual term. The historical context shows that each state intended to preserve
its sovereign tax power, not to contractually limit it in violation of many of their
constitutions.
III. TEXAS TAX CODE § 171.106 DOES NOT SUBSTANTIALLY
IMPAIR ANY CONTRACTUAL RELATIONSHIP
Graphic has no contractual rights under the tax compact. But even if Article
III.1 were a binding contractual term that gave Graphic contractual rights as a
third-party beneficiary, Texas Tax Code § 171.106 would be constitutionally valid.
“The threshold inquiry [under the federal Contract Clause] is whether the state law
has, in fact, operated as a substantial impairment of a contractual relationship.”
Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411, 103
S.Ct. 697 (1983) (internal quotations and citations omitted). If a state law
substantially impairs a contractual relationship, the inquiry turns to whether that
impairment “is reasonable and necessary to serve an important public purpose.”
United States Trust, 431 U.S. at 25. Here, however, no substantial impairment
occurred.12
12
The amici states focus here on issues common to the construction of the tax compact.
Amici also agree with the State of Texas that, even if there were a substantial impairment of a
purported contractual obligation to a third-party taxpayer, the Contract Clause still would not be
violated. First, Texas Tax Code § 171.106 serves an important public purpose. Second, any
impairment of contractual obligations under the tax compact would be reasonable and necessary in
serving that purpose. See Brief of Appellees at 66-67.
26
A substantial impairment occurs only if there is a contractual relationship, a
change in law impairs that contractual relationship, and the impairment is
substantial. See General Motors, 503 U.S. at 186. Graphic argues that it had a
contractual right under Article III.1 to employ the apportionment formula in
Article IV.9 of the tax compact and that Texas Tax Code § 171.106 eliminated, and
thereby impaired, that right. As argued above, the amici states do not believe
Graphic had a contractual right. But even assuming Graphic were correct, Texas
Tax Code § 171.106 did not result in a substantial impairment.
In evaluating the severity of an impairment, one considers “the legitimate
expectations of the contracting parties,” including reasonable reliance. United
States Trust, 431 U.S. at 19 n.17. In Allied Structural Steel Co. v. Spannaus, 438
U.S. 234, 246, 98 S.Ct. 2716 (1978), for example, the Court held that a law that
retroactively modified the amount required to be contributed to a pension plan
substantially impaired contractual obligations when the company had “relied
heavily, and reasonably, on [its] legitimate contractual expectation in calculating
its annual contributions to the pension fund.” But a state law that “restricts a party
to gains it reasonably expected from the contract does not necessarily constitute a
substantial impairment.” Energy Reserves, 459 U.S. at 411.
If Graphic had any contractual right to employ Article III.1 before Texas
revised its franchise tax in 2006 effective in 2008, Texas Tax Code § 171.106 still
27
left Graphic with the “gains it reasonably expected” under the tax compact after
2006. Id. Graphic concedes that Texas would not have impaired any contractual
rights Graphic may have had if, in 2006, Texas had withdrawn from the tax
compact altogether, as permitted by Article X.2. Graphic Br. at 40. But Graphic’s
insistence that the State’s only constitutional recourse was to withdraw under
Article X.2—as opposed to simply adopting legislation opting out of Articles III.1
and IV—is an insistence on procedural formality over substance. Suppose, for
example, that a party state repealed the tax compact, readopted the compact later
the same year without Articles III and IV, and simultaneously adopted a mandatory
apportionment formula. Suppose, further, that the other states had no objection to
the state’s continued membership in the compact. Under those circumstances,
Graphic could not reasonably expect to continue to benefit from anything in
Articles III.1 or IV.
Likewise, the fact that a state, instead of formally withdrawing and
readopting the tax compact without Articles III.1 and IV, either simply deleted or
restricted the operation of those two provisions would not change the end result.
No taxpayer would have had a legitimate expectation that the state continued to
bind itself to allow the Article III.1 election.
Accordingly, if the Texas legislature impliedly eliminated Article III.1 when
it revised its franchise tax in 2006 effective in 2008, it left the party states and
28
taxpayers in the same position as if Texas had withdrawn from the tax compact and
readopted it without Article III.1. Assuming Graphic ever had contractual rights to
make an election under Article III.1 before 2008, it could have no reasonable
expectation that Article III.1 applied for tax years 2008 to 2010. Because Texas
Tax Code § 171.106 does not substantially impair any contractual relationship, it
cannot violate the Contract Clause.
CONCLUSION
The court should affirm the trial court’s judgment sustaining the
Comptroller’s denial of Graphic’s refund claims for tax years 2008 to 2010 and the
Comptroller’s assessment for 2010.
DATED this 13th day of May 2015.
Respectfully submitted,
ELLEN F. ROSENBLUM
Attorney General of Oregon
ANNA JOYCE
Solicitor General
/s/ Darren Weirnick________
DARREN WEIRNICK
Senior Assistant Attorney General
Of Attorneys for Amici Curiae States of
Oregon, et al.
29
CERTIFICATE OF COMPLIANCE
This brief complies with the typeface requirements Texas Rule of Appellate
Procedure 9.4(e) because it has been prepared in a conventional typeface no
smaller than 14-point for text and 12-point for footnotes. This document also
complies with the word-count limitation of Texas Rule of Appellate Procedure
9.4(i)(2)(B) because it contains 7,363 words, excluding the parts of the brief
exempted by Rule 9.4(i)(1).
/s/ Darren Weirnick________
Darren Weirnick
30
CERTIFICATE OF SERVICE
I certify that the foregoing Brief of Amici Curiae States of Oregon et al. was
electronically filed with the Clerk of the Court using the electronic case filing
system of the Court. I also certify that a true and correct copy of the foregoing was
served via e-service or e-mail on the following counsel of record on May 13, 2015.
Amy L. Silverstein Rance Craft
asilverstein@sptaxlaw.com Assistant Solicitor General
SILVERSTEIN & POMERANTZ Rance.craft@texasttorneygeneral.gov
LLP Cynthia A. Morales,
12 Gough Street, Second Floor Assistant Attorney General
San Francisco, California 94103
Cynthia.morales@texasattorneygeneral.gov
Tele: (415) 593-3502
Fax: (415) 593-3501
OFFICE OF THE ATTORNEY
GENERAL
James F. Martens P.O. Box 12548 (MC 059)
jmartens@textaxlaw.com Austin, Texas 78711-2548
Amanda G. Taylor Tele: (512) 936-2872
ataylor@textaxlaw.com Fax: (512) 474-2697
Lacy L. Leonard
lleonard@textaxlaw.com COUNSEL FOR APPELLEES
Danielle Ahlrich
dahlrich@textaxlaw.com
MARTENS, TODD, LEONARD &
TAYLOR
301 Congress Avenue, Suite 1950
Austin, Texas 78701
Tele: (512) 542-9898
Fax: (512) 542-9899
COUNSEL FOR APPELLANT
/s/Darren Weirnick______
Darren Weirnick
31
Graphic Packaging Corporation v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas
Combined Opinion