Great Northern Nekoosa Corp. v. State Tax Assessor

WATHEN, Chief Justice.

This is a report pursuant to M.R.Civ.P. 72(c) of an interlocutory judgment entered in the Superior Court (Kennebec County, Alexander, J.) holding that the State Tax Assessor (“the Assessor”) erred in including certain sales of Great Northern Nekoosa Corporation (“GNN”) in the computation of its 1987-1990 Maine income tax. At issue is the construction of the “throwback rule” 36 M.R.S.A. § 5211(15)(B) (1990), which applies when a corporation sells products from Maine in a state that does not have sufficient contact to subject the corporation to taxation in that state. The throwback rule is designed to eliminate “nowhere” sales and assign them to the originating state, thereby reducing the possibility of income escaping taxation. We agree with the Assessor’s interpretation of the statute and vacate the judgment of the Superior Court.

GNN was engaged in business in Maine and elsewhere as one of more than ten affiliated corporations comprising a unitary business group. The federal taxable income, property, payroll, and sales of the members of GNN’s unitary group were included on a combined report required by 36 M.R.S.A, §§ 5220(5) and 5244 (1990). Of the members of that unitary group, however, only GNN and Great Northern Properties, Inc. (“GNP”) were taxpayers and filed tax returns in Maine. In addition to sales that are unquestionably attributed to Maine, GNN sold goods produced in Maine in a number of states in which GNN was not taxable individually, but in which an affiliated member of GNN’s unitary business was taxable. The Assessor concluded that those sales should be “thrown back” to Maine and included in the apportionment formula as Maine sales. After the Assessor issued and affirmed his assessment for the audit years 1987 through 1990, GNN and GNP brought this action challenging the assessment in the Superior Court. The court granted a judgment in GNN’s favor, holding that a sale made by GNN in a state in which an affiliate is subject to taxation is not “thrown back” to Maine by section 5211(15)(B).

Maine assesses corporate income tax pursuant to the Uniform Division of Income for Tax Purposes Act (UDITPA), 36 M.R.S.A. §§ 5210-5211 (1990 & Supp.1994).1 The uniform law is designed to permit states to fairly apportion the income of a multistate corporation in accordance with the distribution of a corporation’s property, payroll, and sales. This apportionment formula results in a percentage of multistate corporate income assignable to Maine. Because each state is free to tax and apportion income subject only to constitutional limits, UDITPA involves no consideration of the aggregate taxes imposed by the various states. Nonetheless in theory if every state adopted UDITPA and applied its apportionment scheme, gaps and overlaps would be eliminated and a multistate corporation would, in the aggregate, pay taxes on no more and no less than 100 percent of its income.

When-a multistate corporation has sales in one state but has no property or payroll there, a difficulty arises with the use of formula apportionment to determine taxable income. Federal law prevents a state from *965taxing a corporation that has no contact ■with the state other than the solicitation of sales.2 Pursuant to a provision commonly known as the “throwback rule” UDITPA reassigns those sales that occur in states in which “the taxpayer is not taxable” to the originating state. 36 M.R.S.A. § 5211(15)(B). A taxpayer is considered taxable in another state if that state has jurisdiction to subject the taxpayer to an income tax regardless of whether the state imposes such a tax. 36 M.R.S.A. § 5211(2). As originally enacted in Maine in 1964, UDITPA dealt only with single corporate taxpayers engaged in multi-state business.

In 1986 Maine adopted a requirement that affiliated corporations engaged in a unitary business3 file a combined report listing in aggregate and by corporation federal taxable income, property, payroll, and sales. 36 M.R.S.A. §§ 5220(5), 5244.4 The aggregate income on the combined report is apportioned in accordance with UDITPA and the corporate taxpayer includes the Maine share of income on its Maine tax return. Tambrands v. State Tax Assessor, 595 A.2d 1039, 1044 (Me.1991). Thus UDITPA, without amendment, became applicable to a taxpayer and its affiliates and therein lies the cause of the current controversy.

During the audit years in question Maine’s share of GNN’s income was determined by the following calculation:

[B]y multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is 3.

36 M.R.S A § 5211(8).5

The sales factor is defined as follows:

The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this State during the tax period, and the denominator of which is the total sales of the taxpayer everywhere during the tax period.

36 M.R.S.A. § 5211(14)

The property and payroll factors in section 5211(8) are similarly defined.6 The apportionment factor is then multiplied by the federal taxable income of the entire unitary business to yield the income taxable by Maine.

In determining the sales factor numerator, UDITPA’s “throwback rule” provides that a taxpayer’s sales are attributed to Maine if “[t]he property is shipped from an office, store, warehouse, factory or other place of storage in this State and ... the taxpayer is not taxable in the state of the purchaser.” *96636 M.R.S.A. § 5211(15)(B) (emphasis added). GNN argues and the Superior Court ruled that “taxpayer” as used in the “throwback rule” must, alter the adoption of combined reporting, refer to GNN or any of its affiliates. Thus certain sales could not be thrown back to Maine because affiliates in GNN’s unitary business are taxable in the destination states. Accordingly the court ordered the Assessor to deduct those sales from the Maine sales of GNN for purposes of apportioning federal taxable income. We conclude that the court erroneously rejected the Assessor’s interpretation of section 5211(15)(B).

This ease involves only the construction of the throwback rule and neither party argues that the interpretation it offers is constitutionally compelled. The court concluded that UDITPA was amended implicitly when combined reporting was adopted. The court reasoned that if, as both parties agree, “taxpayer” includes corporate affiliates in defining the denominator of the sales factor pursuant to section 5211(14), then the same word as used in the throwback rule must also include affiliates. Although such parallel construction is logical, it rests on a faulty premise and finds no support in the statute, explicit or implicit.

The sales of the affiliates are included in the denominator not because the affiliates are a “taxpayer,” (in fact they are not) but rather because their inclusion is constitutionally compelled. If the aggregate federal taxable income of the unitaiy business was apportioned without reference to the sales, property, and payroll of the affiliates, Maine would inevitably and unconstitutionally tax the entire income of the multistate unitary business. The application of the “throwback rule,” however, raises no constitutional issue. Thus we must construe the words of the statute.

Other jurisdictions have considered the relationship between the “throwback rule” and combined reporting. The authority is divided. Those tribunals adopting the Assessor’s position have premised their rulings on legislative intent in adopting UDITPA to apportion income so that there is neither an overlap nor a gap in taxation. Dover Corp. v. Department of Revenue, 271 Ill.App.3d 700, 208 Ill.Dec. 167, 648 N.E.2d 1089 (1995) and GTE Automatic Electric, Inc. v. Allphin, 68 Ill.2d 326, 12 Ill.Dec. 134, 369 N.E.2d 841 (1977). Those tribunals adopting GNN’s position have focused on the consistency of that result with a unitary theory of corporate income taxation. Airborne Navigation Corp. v. Department of Revenue, 1987 WL 50031, No. 395-85-1 (Ariz.Bd.Tax.App. Feb. 5, 1987) and Appeal of Finnigan, 1988 WL 52336, 88-SBE-022 (Cal.St.Bd.Eq. Aug., 25, 1988) (affirmed on rehearing in Appeal of Finnigan, 1990 WL 15164, 88-SBE-022A (Cal.St.Bd. Eq. Jan. 24, 1990)).

We conclude that the “throwback rule” as written achieves a fair result. GNN has not persuaded us that consistency with a unitary theory of corporate taxation compels a different result. GNN correctly theorizes that sales removed from the Maine numerator could be included in the income of the affiliates taxable in the destination states. Likewise, Maine sales of the affiliates could be included in GNN’s sales numerator. There is no evidence, however, that the former event has in fact occurred.7 The court’s decision deviates from the language of the “throwback rule” and significantly reduces GNN’s tax burden in Maine in the absence of any demonstration that the income has been taxed or is subject to tax in another state.8 The Assessor’s construction of the “throwback rule” is not only defensible in theory and fair in reality, but also, and more important, it is required by the language of the statute. Sales by a Maine taxpayer in a destination state where the taxpayer is not taxable are thrown back to Maine by section 5211(15)(B) even though an affiliate of the taxpayer is taxable in that state.

The entry is:

*967Judgment vacated. Remanded to the Superior Court with instructions to enter an order affirming the decision of the State Tax Assessor.

ROBERTS, GLASSMAN, RUDMAN, DANA, and LIPEZ, JJ., concurring.

. The Due Process Clause of the Fourteenth Amendment imposes two requirements on states to tax income generated in interstate commerce. First there must be a minimal connection or nexus between the interstate activities and the taxing state, and second there must be a rational relationship between the income attributed to the state and the intrastate values of the enterprise. Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 U.S. 425, 436-37, 100 S.Ct. 1223, 1231-32, 63 L.Ed.2d 510 (1980).

. 15 U.S.C. § 381(a) provides, in pertinent part:

No State ... shall have power to impose, for any taxable year ... a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during such taxable year are either, or both, of the following:
(1) the solicitation of orders by such person or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State; and
(2) the solicitation of orders by such person, or his representative, in such State in the name of or for the benefit of a prospective customer of such person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in paragraph (1).

. A unitary business is defined as "a business activity which is characterized by unity of ownership, functional integration, centralization of management and economies of scale.” 36 M.R.S.A. § 5102(10-A).

. 36 M.R.S.A. § 5244 provides:

The combined report required by section 5220, subsection 5, shall include, both in the aggregate and by corporation, a fist of the federal taxable income, the modifications provided by section 5200-A, the property, payroll and sales in Maine and everywhere as defined in chapter 821 and the Maine net income of the unitary business. Neither the income nor the property, payroll and sales of a corporation which is not required to file a federal income tax return or of an 80-20 corporation may be included in the combined report.

. This provision has been amended by P.L.1991, c. 502, § 1, which requires that the sales factor be double-weighted in determining the apportionment formula.

.The UDITPA apportionment formula is thus calculated in the following way:

Maine property + Maine Sales + Maine Payroll
property everywhere sales everywhere payroll everywhere = apportionment factor 3

. Consistent with its position, GNN has amended its tax returns to include the Maine sales of its affiliates in its numerator. The Assessor rejected the amendment.

. UDITPA authorizes the Assessor to deviate from the apportionment formula if it fails to fairly represent the extent of the taxpayer’s business activity in Maine. See 36 M.R.S.A. § 5211(17) (1990).