ACCEPTED
03-14-00197-CV
5199863
THIRD COURT OF APPEALS
AUSTIN, TEXAS
5/7/2015 4:25:28 PM
No. 03-14-00197-CV JEFFREY D. KYLE
CLERK
__________________________________________________________________
IN THE COURT OF APPEALS
THIRD JUDICIAL DISTRICT OF TEXAS AT AUSTIN RECEIVED IN
3rd COURT OF APPEALS
__________________________________________________________________
AUSTIN, TEXAS
5/7/2015 4:25:28 PM
GRAPHIC PACKAGING CORPORATION,
JEFFREY D. KYLE
Appellant Clerk
v.
GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF TEXAS,
AND KEN PAXTON, ATTORNEY GENERAL OF TEXAS,
Appellees
______________________________________________
On Appeal from the 353rd Judicial District Court,
Travis County, Texas
Honorable Darlene Byrne, Presiding Judge
______________________________________________
BRIEF OF COUNCIL ON STATE TAXATION
AS AMICUS CURIAE IN SUPPORT OF APPELLANT
______________________________________________
David E. Cowling Karl Frieden
State Bar No. 04932600 kfrieden@cost.org
decowling@jonesday.com Frederick J. Nicely
Kirk R. Lyda fnicely@cost.org
State Bar No. 24013072 COUNCIL ON STATE TAXATION
klyda@jonesday.com 122 C Street, NW, Suite 330
JONES DAY Washington DC 20001-2109
2727 North Harwood Street (202) 484-5220
Dallas, Texas 75201-1515 Fax: (202) 484-5229
(214) 220-3939
Fax: (214) 969-5100 COUNSEL FOR AMICUS CURIAE
Gregory A. Castanias
gcastanias@jonesday.com
JONES DAY
51 Louisiana Avenue, N.W.
Washington, D.C. 20001-2113
(202) 879-3939
Fax: (202) 626-1700
ADOPTION OF PORTIONS OF APPELLANT’S BRIEF
Pursuant to Rule 9.7 of the Texas Rules of Appellate Procedure, Amicus
Curiae adopts and incorporates by reference the identity of parties and counsel, the
statement of the case, and the statement of facts set forth in Appellant’s Brief.
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES ................................................................................... ii
STATEMENT OF INTEREST OF AMICUS CURIAE ..........................................1
INTRODUCTION ....................................................................................................3
ISSUES PRESENTED..............................................................................................5
SUMMARY OF THE ARGUMENT .......................................................................7
ARGUMENT ............................................................................................................9
I. THE COMPACT APPLIES TO THE FRANCHISE TAX............................9
A. The Compact defines “income tax” broadly ......................................10
B. The two apportionment provisions in the Texas statute can be
reconciled ...........................................................................................15
II. THE COMPACT IS BINDING AND SUPERSEDES
CONFLICTING STATE LAWS .................................................................18
A. Compacts are binding interstate agreements ......................................18
B. The Compact was considered binding when enacted ........................20
C. A binding compact was needed to forestall congressional
intervention .........................................................................................24
D. The election is the Compact’s uniformity glue ..................................29
CONCLUSION AND PRAYER ............................................................................31
CERTIFICATE OF COMPLIANCE ......................................................................34
CERTIFICATE OF SERVICE ...............................................................................35
i
TABLE OF AUTHORITIES
Page
CASES
Alcorn v. Wolfe, 827 F. Supp. 47 (D.D.C. 1993) .....................................................19
C.T. Hellmuth & Assocs., Inc. v. Washington Metro. Area Transit
Auth., 414 F. Supp. 408 (D. Md. 1976) .........................................................19,20
City of San Antonio v. City of Boerne,
111 S.W.3d 22 (Tex. 2003).................................................................................22
Conley v. Daughters of the Republic,
156 S.W. 197 (1913) ......................................................................................15,16
Doe v. Ward,
124 F. Supp. 2d 900 (W.D. Pa. 2000)............................................................18,19
Gillette Co. v. Franchise Tax Bd.,
147 Cal. Rptr. 3d 603 (Cal. Ct. App. 2012), review granted, 291
P.3d 327 (Cal. 2013) ...............................................................................2,4,21,24
Health Net, Inc. v. Oregon Dep’t of Revenue,
No. TC 5127 (Oregon Tax Court Argued July 14, 2014)..................................... 2
Hoechst Celanese Corp. v. Franchise Tax Bd.,
22 P.3d 324 (2001)..............................................................................................21
International Bus. Mach. Corp. (IBM) v. Dep't of Treasury,
852 N.W. 2d 865 (Mich. 2014)......................................................2,8,10,13,17,18
Lorenzo Textile Mills, Inc. v. Bullock,
566 S.W.2d 107 (Tex. Civ. App.—Austin 1978, no writ) .................................15
McComb v. Wambaugh,
934 F.2d 474 (Pa. 1991).................................................................................19,20
ii
Miller v. Calvert,
418 S.W.2d 869 (Tex. Civ. App.—Austin 1967, no writ) .................................15
Northwestern States Portland Cement Co. v. Minnesota,
358 U.S. 450 (1959) ....................................................................................3,26,27
Robbins v. Shelby Cnty. Taxing Dist.,
120 U.S. 489 (1887) ............................................................................................25
Tex. State Bd. of Chiropractic Exam’rs v. Abbott,
391 S.W.3d 343 (Tex. App.—Austin 2013, no pet.) ..........................................16
Texas v. New Mexico,
482 U.S. 124 (1987) ............................................................................................18
U.S. Steel v. Multistate Tax Commission,
434 U.S. 452 (1978) ....................................................................................2,20,23
Virginia v. Tennessee,
148 U.S. 503 (1983) ............................................................................................20
Western Live Stock v. Bureau of Revenue,
303 U.S. 250 (1938) ............................................................................................25
Wintermann v. McDonald,
102 S.W.2d 167 (Tex. 1937) ..............................................................................15
STATUTES
15 U.S.C. §§ 381 et seq............................................................................................27
26 U.S.C. § 265 ........................................................................................................12
60 D.C. Reg. 12583-84 (Sept. 6, 2013) ...................................................................23
64th Leg., Gen. Sess. (N.D. 2015) ...........................................................................23
1974 Cal. Stat. 208 ...................................................................................................22
2013 Utah Laws 462 ................................................................................................23
iii
Act of May 17, 1967, 60th Leg., R.S., ch. 566, §1, 1967 Tex. Gen.
Laws § 1254 ..........................................................................................................3
Act of May 2, 2006, 79th Leg., 3d. C.S., ch. 1, §§ 2-7, 2006 Tex. Gen.
Laws 1 ...................................................................................................................9
Act of May 2, 2006, 79th Leg., 3d. C.S., ch. 1, § 5, 2006 Tex. Gen.
Laws 28 .................................................................................................................9
Act of Sept. 14, 1959, Pub. L. No. 86-272, §103, 73 Stat. 555 ..........................14,27
Assemb. No. 438, 61st Sess., 1981 Nev. Stat. 350 ..................................................23
H.B. 1018, 67th Leg., 1st Reg. Sess. (W. Va. 1985) ...............................................23
H.F. No. 677, 88th Leg., Reg. Sess. (Minn. 2013) ..................................................23
H.P. 1024-L.D. 1462, 122nd Leg., 1st Spec. Sess. (Me. 2005) ...............................23
H.R. 11798, 89th Cong., 1st Sess. (1965) ................................................................28
L.B. No. 344, 89th Leg., 1st Sess. (Neb. 1985) .......................................................23
Mich. Comp. Laws §§ 208.1101 et seq. ..................................................................13
Public Law No. 86-272 .......................................................................................14,27
S.B. No. 1015, 2012 Leg. Reg. Sess. (Ca. 2012) .....................................................23
S.B. No. 156, 97th Leg. Reg. Sess. (Mich. 2014)....................................................23
S.B. No. 239, 2013 Leg. Assemb., 88th Sess. (S.D. 2013) .....................................23
Tex. Gov’t Code § 311.026(a) .................................................................................16
Tex. Gov’t Code § 311.026(b) .................................................................................16
Tex. Tax Code § 141.001 ...........................................................................................4
Tex. Tax Code § 141.001, art. II(4) .................................................................7,10,11
iv
Tex. Tax Code § 141.001, art. III(1) .....................................................................5,10
Tex. Tax Code § 141.001, art. X(1) ....................................................................21,28
Tex. Tax Code § 141.001, art. X(2) ...............................................................17,21,23
Tex. Tax Code § 171.006 .........................................................................................16
Tex. Tax Code § 171.101 ......................................................................................7,12
Tex. Tax Code § 171.101(a) ....................................................................................11
Tex. Tax Code § 171.106 ....................................................................................17,18
Tex. Tax Code § 171.106(a) .................................................................................5,30
Tex. Tax Code § 171.112(g) ............................................................................9,13,16
Tex. Tax Code § 171.1011 ....................................................................................7,11
Tex. Tax Code § 171.1011(c)(2)(B) .....................................................................7,12
Tex. Tax Code § 171.1012 ....................................................................................7,11
Tex. Tax Code § 171.1013 ....................................................................................7,11
Tex. Tax Code § 171.1016(a) ..................................................................................12
Tex. Tax Code § 171.1016(c) ..................................................................................12
RULES
Tex. R. App. P. 9.4...................................................................................................34
Tex. R. App. P. 9.7......................................................................................................i
Tex. R. App. P. 11(c) .................................................................................................1
OTHER AUTHORITIES
1A Norman J. Singer & J.D. Shambie Singer, Sutherland, Statutes and
Statutory Construction § 32:5 (7th ed.) ..............................................................18
v
Council On State Taxation, COST Amicus Briefs ..................................................... 2
Council of State Governments, The Multistate Tax Compact,
Summary and Analysis (Jan. 20, 1967).......................................................3,21,31
Frank M. Keesling & John S. Warren, California 's Uniform Division
of Income for Tax Purposes Act, Part 1, UCLA L. Rev. 156 (1967) .................25
Jerome Hellerstein & Walter Hellerstein, State Taxation (3d ed. &
Supp. 2014) ...............................................................................................25,27,29
John Dane, Jr., A Solution to the Problem of State Taxation of
Interstate Commerce, 12 Vill. L. Rev. 507 (1967) ........................................26,27
John S. Warren, UDITPA—A Historical Perspective, 38 State Tax
Notes 133, (Oct. 3, 2005)....................................................................................25
Multistate Tax Commission, Allocation and Apportionment
Regulations, (April 19, 2015) .............................................................................11
Multistate Tax Commission, First Annual Report (1968) .......................................28
Multistate Tax Commission, Multistate Tax Commission 1968
Brochure on the Multistate Tax Compact, reprinted in 66 Tax
Notes 600, 600 (Nov. 19, 2012) .........................................................................28
Multistate Tax Commission, Third Annual Report (1970)......................................29
2 Richard D. Pomp, State and Local Taxation (7th ed. 2011) ................................27
Special Subcomm. on State Taxation of Interstate Commerce of the
House Comm. on the Judiciary, H.R. Rep. No. 89-565, vol. 3
(1965) ..................................................................................................................11
Willis Committee Report at 1135 (1965) .................................................................27
vi
STATEMENT OF INTEREST OF AMICUS CURIAE
The Council On State Taxation (“COST”) respectfully submits this Brief of
Amicus Curiae in support of Appellant, Graphic Packaging, Inc. Pursuant to
Rule 11(c) of the Texas Rules of Appellate Procedure, Amicus Curiae COST states
that no persons other than COST or its counsel made any monetary contribution to
the preparation or submission of this brief.
COST is a nonprofit trade association based in Washington, D.C. COST
was organized in 1969 as an advisory committee to the Council of State Chambers
of Commerce. COST’s existence and history has always been closely intertwined
with the Multistate Tax Compact (“Compact”), which was created two years prior
to COST in 1967.
Today, COST has an independent membership of almost 600 of the largest
multistate corporations engaged in interstate and international commerce, many of
which do business in Texas. COST members represent that part of the nation’s
business sector that is most directly affected by state taxation of interstate and
international business operations. Thus, COST is vitally interested in cases such as
this one, which present issues significantly affecting the uniformity, certainty, and
fair apportionment of state and local taxes.
COST’s objective is to preserve and promote equitable and
nondiscriminatory state and local taxation of multijurisdictional business entities, a
1
mission COST has steadfastly pursued since its creation. COST members employ
a substantial number of Texas citizens, own extensive property in Texas, and
conduct substantial business in Texas.
As Amicus Curiae, COST has participated in several significant United
States Supreme Court cases over the past 40 years, including U.S. Steel v.
Multistate Tax Commission, 434 U.S. 452 (1978). COST has also participated in
filing amicus curiae briefs in litigation in other states related to the issue here—
whether Compact member states’ taxpayers may use the Compact’s equally
weighted three-factor apportionment election. See Gillette Co. v. Franchise Tax
Bd., 147 Cal. Rptr. 3d 603 (Cal. Ct. App. 2012), review granted, 291 P.3d 327
(Cal. 2013); International Bus. Mach. Corp. (IBM) v. Dep’t of Treasury, 852
N.W. 2d 865 (Mich. 2014); and Health Net, Inc. v. Oregon Dep’t of Revenue, No.
TC 5127, (Oregon Tax Court Argued July 14, 2014). 1
Counsel for Amicus Curiae and COST have determined it is important for
Amicus Curiae to comment in this matter. Given COST’s unique relationship and
experience with the Compact, COST believes it brings an important perspective to
this dispute. This amicus curiae brief sets forth a critical analysis for this Court to
1
COST amicus curiae briefs are available online at:
http://www.cost.org/StateTaxLibrary.aspx?id=3386.
2
better understand the role of the Compact in providing its member states’ taxpayers
with uniform corporate income tax apportionment rules.
INTRODUCTION
In Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450
(1959), the Supreme Court of the United States gave unprecedented latitude to the
states to tax the income of out-of-state corporations on the basis of apportionment
formulas that could vary state to state. Businesses quickly realized that if states
used the authority of Northwestern States Portland Cement Co. to enact different
apportionment formulas, businesses could face double taxation. Such differences
also created significant compliance burdens.
Feeling pressure from Congress and multistate businesses, and attempting to
avoid the straitjacket of congressionally imposed uniform rules for apportionment,
a number of states banded together. Through the auspices of the Council of State
Governments, those states drafted an interstate compact, the Multistate Tax
Compact. See The Council of State Governments, The Multistate Tax Compact,
Summary and Analysis (Jan. 20, 1967) (hereinafter “Compact Analysis”),
available at http://www.pwc.com/us/en/State-local-tax/multistate-tax-
compact/pdfs/csg_1967_Mtc_summary_and_analysis.pdf. Texas was one of the
original adopters of the Compact in 1967, see Act of May 17, 1967, 60th Leg.,
R.S., ch. 566, § 1, 1967 Tex. Gen. Laws § 1254, 1254-65; and, as of today,
3
15 states and the District of Columbia remain signatories to the Compact. The
Compact is codified in section 141.001 of the Texas Tax Code. The purpose of the
Compact was to: (1) preserve state tax sovereignty by staving off federal
legislation and (2) foster compatibility of state and local tax systems. See,
Compact Analysis; see also Gillette Co. v. Franchise Tax Bd., 147 Cal. Rptr. 3d
603 (Cal. Ct. App. 2012), review granted, 291 P.3d 327 (Cal. 2013). To
accomplish this, the Compact allows each member state to retain the right to
establish its own, default apportionment method; however multistate taxpayers
would also have the right to elect to utilize the equally-weighted three factor
Uniform Division of Income for Tax Purposes Act (“UDITPA”) apportionment
formula. Id. at 608-09. The states thus retain their sovereignty to adopt a default
method, but some measure of interstate consistency is achieved through the
alternative elective method.
At issue in this case is the provision of the Compact providing taxpayers
with the option to use either a state’s unique default apportionment formula or the
Compact’s uniform method of apportionment:
Any taxpayer subject to an income tax whose income is subject to
apportionment and allocation for tax purposes pursuant to the laws of
a party state or pursuant to the laws of subdivisions in two or more
party states may elect to apportion and allocate his income in the
manner provided by the laws of such state or by the laws of such
states and subdivisions without reference to this compact, or may elect
to apportion and allocate in accordance with Article IV.
4
Tex. Tax Code § 141.001, art. III(1) (emphasis added).
Based on this three-factor apportionment formula, Graphic Packaging filed
timely refund claims for report years 2008 to 2010. The Comptroller denied
Graphic Packaging’s use of the Compact election. Graphic Packaging challenged
this denial in district court, but the court ruled in favor of the Comptroller. In
doing so, the court failed to adequately address the fundamental question: whether
the State, having otherwise entered into a valid interstate compact, may
unilaterally alter any of the terms of the Compact. Texas law makes it clear that
the State has no such authority.
ISSUES PRESENTED
The Texas Tax Code provides two methods for a multijurisdictional business
to apportion income: (1) the default single-receipts factor method, contained in
Chapter 171, and (2) the election method under the Compact, contained in
Chapter 141.
Graphic Packaging followed the second method. This choice, and the
State’s response, gives rise to the following issues:
1. Does the Compact apply to the franchise tax under the Compact’s broad
terms of what constitutes an “income tax”?
2. By enacting Section 171.106(a), did the Texas Legislature implicitly
repeal the Compact election?
5
3. Is the Compact binding on Texas, or may the State unilaterally
withdraw from the Compact?
6
SUMMARY OF THE ARGUMENT
This is a case of statutory construction of the Texas Tax Code, which
provides two methods for a multijurisdictional business to apportion income: 1) the
default single-receipts factor method, contained in Chapter 171; and 2) the election
method under the Compact, contained in Chapter 141. For purposes of the
Compact, the Texas franchise tax is an income tax subject to the three-factor
apportionment election. As contained in Texas law, the Compact defines the term
“income tax” broadly to include a tax that recognizes deductions not “specifically
and directly related to particular transactions.” Tex. Tax Code § 141.001, art. II(4).
The franchise tax allows for such deductions, see id. §§ 171.101, 171.1011-.1013,
and exclusions, see id. § 171.1011(c)(2)(B)).
Revision of the Texas franchise tax (also currently known as the margins
tax) in 2006 did not repeal the Compact by implication. Texas courts strongly
disfavor finding statutory repeal by implication. Accordingly, courts will attempt
to harmonize allegedly conflicting statutes, and will find implied repeal only if
harmonization is impossible. While Appellees argue that the Compact election
under Chapter 141 cannot be squared with Chapter 171, these two apportionment
methods are independent and reconcilable, not mutually exclusive.
Subject to two narrow exceptions not relevant here, Chapter 171 establishes
the single-receipts factor as the default apportionment method for all Texas
7
franchise tax taxpayers. There are no alternative apportionment methods available
under Chapter 171. Chapter 141, however, gives multistate taxpayers the option to
elect out of the default method required by Chapter 171 and instead use the
three-factor method in Chapter 141. This is exactly the kind of option envisioned
by the Compact—the taxpayer may choose between the default method of
Chapter 171, or the Compact election method of Chapter 141. There is no
inconsistency, and, it plainly follows, no implied repeal of the Compact provisions.
In reaching this conclusion, the Court has a ready model in a recent opinion from
the Michigan Supreme Court. See IBM v. Dep’t of Treas., 852 N.W.2d 865 (2014).
The Michigan Supreme Court was grappling with whether the enactment of
single-sales factor apportionment under its Business Tax Act (“BTA”) repealed the
Compact’s election to utilize a three-factor apportionment method. Id. at 871. The
Court stated that repeal by implication should be used in rare circumstances; the
Michigan Legislature would have explicitly repealed the Compact if it no longer
wanted the Compact to apply. Id. at 876-77. Since both Michigan and Texas
require harmonization of potentially conflicting statutes, this Court should follow
the Michigan Supreme Court’s lead and find the Compact was not repealed by
implication.
Even if the two statutory provisions are in irreconcilable conflict, the
Compact itself is binding and supersedes any conflicting state laws. Interstate
8
compacts are both contracts and binding reciprocal state statutes among the
member states, and therefore cannot be unilaterally modified. The Legislature
allowed taxpayers to elect the certainty of the Compact’s apportionment method.
The subsequent enactment of a different default apportionment formula for
non-electing taxpayers did not eviscerate the Compact’s election. After adoption,
the Texas Legislature must either adhere to the terms of the Compact or explicitly
withdraw Texas from the Compact. Since the Legislature has yet to explicitly
withdraw Texas from the Compact, it is still binding on Texas. And because it is
still binding, taxpayers must be given the opportunity to elect to use the Compact’s
three-factor apportionment method for the State’s franchise tax.
ARGUMENT
I. THE COMPACT APPLIES TO THE FRANCHISE TAX
Appellees question whether the Compact election is applicable to the
franchise tax. Br. of Appellees at 20. But in May 2006, the Texas Legislature
made the Compact applicable to the franchise tax. Act of May 2, 2006, 79th Leg.,
3d C.S., ch. 1, §§ 2-7, 2006 Tex. Gen. Laws 1, 1-35. In doing so, the Texas
Legislature deleted former section 171.112(g), which provided that “Chapter 141
does not apply to this chapter.” See id. § 5, 2006 Tex. Gen. Laws 28. If this Court
can reconcile two potentially conflicting provisions in the law relating to the
Compact election and the State’s separately enacted single-receipts factor formula,
9
then it need not reach the second issue of whether the Compact is binding on its
member states (unless a state withdraws from the Compact itself). This was the
approach taken by the Supreme Court of Michigan in the analogous case, see IBM
v. Dep’t of Treas., 852 N.W.2d 865, 875-77 (Mich. 2014), holding that the rules of
statutory construction required it to construe the two apportionment statutes
together.
A. The Compact defines “income tax” broadly.
The State’s narrow reading of the term “income tax” is not supported by
Chapter 141. The Compact election is applicable to “[a]ny taxpayer subject to an
income tax whose income is subject to apportionment and allocation for tax
purposes.” Tex. Tax Code § 141.001, art. III(1) (emphasis added). The Compact
defines “income tax” very broadly:
[A] Tax imposed on or measured by net income including any tax
imposed on or measured by an amount arrived at by deducting
expenses from gross income, one or more forms of which expenses
are not specifically and directly related to particular transactions.
Id. § 141.001, art. II(4) (emphasis added). The Compact goes on to define “gross
receipts tax” more narrowly:
[A] tax, other than a sales tax, which is imposed on or measured by
the gross volume of business, in terms of gross receipts or in other
terms, and in the determination of which no deduction is allowed
which would constitute the tax an income tax.
10
Id. (emphasis added). 2
The franchise tax is generally calculated as “total revenue” as determined for
federal income tax purposes, less the deductible expenses allowed by the Texas
Legislature. Referring to “total revenue” rather than “gross income” does not
change the nature of the tax, as these types of terms were used interchangeably at
the time the Compact was drafted. See Special Subcomm. on State Taxation of
Interstate Commerce of the House Comm. on the Judiciary, H.R. Rep. No. 89-565,
vol. 3, at 1014 (1965) (hereinafter the “Willis Committee Report,” discussing the
variety of equivalent state taxes imposed on “gross intake” whether labeled “gross
proceeds,” “gross income,” or “gross receipts”). To be included within the
Compact’s definition of “income tax” therefore requires only that one or more
expenses unrelated to specific transactions be permitted.
The franchise tax allows such deductions. A taxpayer’s margin which is
subject to tax in Texas is the lesser of four amounts: (1) 70% of total revenue;
(2) total revenue less $1 million; (3) total revenue less cost of goods sold; or
(4) total revenue less wages and compensation paid and costs of benefits provided
(subject to a cap). Tex. Tax Code §§ 171.101(a), 171.1011-.1013. And taxpayers
with total revenue of $10 million or less may use an E-Z computation that offers
2
See also Multistate Tax Commission, Allocation and Apportionment Regulations,
(April 19, 2015), http://www.mtc.gov/uploadedFiles/Multistate_Tax_Commission/Uniformity/
Uniformity_Projects/A_-_Z/Art%20II%20Regs%20(1968).pdf.
11
them the benefit of a lower tax rate, if they forego other credits and deductions. Id.
§ 171.1016(a), (c). Additionally, the franchise tax provides several exclusions
from the determination of total revenue, among them, amounts deducted as bad
debts for federal income tax purposes and foreign royalties and dividends. Id.
§ 171.1011(c)(2)(B).
The franchise tax cannot be a gross receipts tax as defined by the Compact
because, while starting with total revenue, the franchise tax does not limit the
scope of deductions to those that are “specifically and directly related to particular
transactions.” See, Tex. Tax Code § 171.101. In other words, the franchise tax
deductions are not specifically and directly related to particular transactions. Thus,
by the express terms of the Compact, the franchise tax constitutes an “income tax”
for Compact purposes. Appellees’ argument that a tax is not an income tax unless
“all expenses and losses” (emphasis added) are allowed as deductions would
transmute the federal income tax into something other than an income tax. Not all
expenses and losses are deductible for federal income tax purposes. See e.g.,
26 U.S.C. § 265 (prohibiting a deduction for interest on a debt used to earn tax
exempt income). The same holds true for the Texas franchise tax. Appellee’s
position is an inappropriate construction of the term “income tax.”
12
This is also the same conclusion the Supreme Court of Michigan reached
when looking at the gross receipts portion of Michigan’s BTA. 3 The Michigan
court noted: “Not only is the gross receipts amount reduced by numerous
exclusions, it is also subject to a deduction for the ‘amount deducted as bad debt
for federal income tax purposes that corresponds to items of gross receipts
included in the modified gross receipts tax base.’” IBM, 852 N.W.2d at 664.
Accordingly, the Michigan Supreme Court held that the BTA was an income tax
and, therefore, a taxpayer could use the Compact election for both the net income
tax and modified gross receipts portions of Michigan’s BTA. Id. at 880-81.
Appellees’ brief offers several arguments to support their position that the
franchise tax is not an “income tax” within the meaning of the Compact. First,
Appellees note that when the Legislature removed section 171.112(g)’s provision
that the Compact does not apply to the franchise tax, the Legislature specified the
franchise tax imposed by Chapter 171 is not an income tax. See Br. of Appellees
at 14. In addition, Appellees note the Legislature expressly “signaled” the
franchise tax does not fit within the Compact’s “income tax” definition by stating
that a federal law, Public Law No. 86-272, which prevents the states from
imposing a tax on corporations in certain circumstances, does not apply to the
3
The Michigan BTA, Mich. Comp. Laws §§ 208.1101 et seq., imposed both a net
income tax and a modified gross receipts tax. The tax has since been replaced with just a net
income tax.
13
franchise tax. Br. of Appellees at 24; see also Act of Sept. 14, 1959, Pub. L.
No. 86-272, § 103, 73 Stat. 555 (codified at 15 U.S.C. §§ 381-84). Appellees
contend that the Legislature “could not have meant that the franchise tax
simultaneously falls outside the scope of Public Law No. 86-272 but within the
Compact’s ‘income tax’ definition.” Id. at 25.
Amicus addresses the Public Law No. 86-272 argument first. While the
Texas Legislature can opine on whether the franchise tax is subject to that federal
law, ultimately it is up to the courts to decide whether the franchise tax meets that
definition. Section 103 of Public Law No. 86-272 merely defines “the term ‘net
income tax’ [as] any tax imposed on, or measured by, net income.” Act of
Sept. 14, 1959, Pub. L. No. 86-272, § 103, 73 Stat. 555, 556 (codified at 15 U.S.C.
§ 383). The federal law does not afford state legislatures the discretion to impose
their own limitations on how the federal law applies. Moreover, the applicability
of Public Law No. 86-272 to the franchise tax is not before this Court, nor does the
question of whether the Texas franchise tax qualifies as an “income tax” for
purposes of Public Law No. 86-272 bear on whether the Texas franchise tax is an
“income tax” within the meaning of the Compact.
Second, the Legislature’s statement that the franchise tax is not an income
tax does not impact what constitutes an “income tax” that term is used in
Chapter 141; that Chapter contains the Compact’s independent definition of what
14
constitutes an “income tax.” Because that Chapter of the Texas Tax Code has its
own, separate definition of an income tax, Appellees are making misguided
arguments by stating Chapter 171’s pronouncement that the franchise tax is not an
income tax trumps another Chapter in the State’s tax code. This case must be
decided using the definition of “income tax” contained in Chapter 141, not any
statements made in Chapter 171.
B. The two apportionment provisions in the Texas statute can be
reconciled.
Texas courts strongly disfavor repeal by implication. Conley v. Daughters
of the Republic, 156 S.W. 197, 201 (1913). Thus, where two statutes are purported
to be in conflict, Texas courts must reconcile them, if possible. Wintermann v.
McDonald, 102 S.W.2d 167, 171 (Tex. 1937) (“In the absence of an express repeal
by statute, where there is no positive repugnance between the provisions of the old
and new statutes, the old and new statutes will each be construed so as to give
effect, if possible, to both statutes.”) (citation omitted). As this Court has noted,
even if two statutes appear to be in conflict, the court has a “duty” to apply a
construction that “harmonizes them and leaves both in concurrent operation, rather
than destroy[ing] one of them.” Lorenzo Textile Mills, Inc. v. Bullock, 566 S.W.2d
107, 110 (Tex. Civ. App.—Austin 1978, no writ) (quoting Cole v. State, 170 S.W.
1036, 1037 (1914); see also Miller v. Calvert, 418 S.W.2d 869, 872 (Tex. Civ.
App.—Austin 1967, no writ).
15
This principle applies with particular force where, as here, the statutes are in
pari materia—i.e., they share a common purpose or object. Tex. State Bd. of
Chiropractic Exam’rs v. Abbott, 391 S.W.3d 343, 348-49 (Tex. App.—Austin
2013, no pet.). Codified as part of the Code Construction Act, the doctrine of in
pari materia provides that where two statutes have a common purpose, they will be
construed together. Tex. Gov’t Code § 311.026(a). And even where a conflict
between a general provision and a special provision is “irreconcilable,” the special
provision will be construed as an exception to the general provision, unless the
general provision was enacted later and the Legislature intended it to govern.
Id. § 311.026(b); Tex. State Bd. of Chiropractic Exam’rs, 391 S.W.3d at 348 &
n.2.
Here, the default apportionment method in Chapter 171 and the Compact
election method have the same objective: to provide methods for a
multijurisdictional business to apportion income. Because the Compact is an
election, it does not conflict with the single-receipts factor apportionment provided
for in Texas Tax Code section 171.006. And because the Compact has its own
definition of when it applies to an income tax and former section 171.112(g) no
longer applies, the Compact has not been repealed by implication (which is
disfavored). See Conley, 156 S.W. at 201 (noting that when “[t]here is no express
repeal of the former law . . . if repealed, it must be by implication, which is not
16
favored.”). Indeed, the main premise behind the Compact was that there would be
not only a default apportionment method under state law (like in Texas Tax Code
Chapter 171) but also the elective method under the Compact. The fact that
section 171.106 is the only apportionment method appearing in Chapter 171 does
not conflict with certain taxpayers having an alternative, elective method in
Chapter 141. Moreover, because the Compact is an interstate contract that
contains an express provision allowing states to withdraw from the Compact “by
enacting a statute repealing the same,” Tex. Tax Code § 141.001, art. X(2), this
Court should insist that only by the clearest, most unequivocal statutory action can
a state break its obligations to other states and taxpayers. See discussion infra
Part II.
The Supreme Court of Michigan faced a very similar issue in IBM v.
Department of Treasury, 852 N.W.2d 865 (Mich. 2014). In IBM, the Michigan
court had to interpret whether Michigan’s enactment of a single-sales factor
implicitly repealed the Compact’s election language in the law. Id. at 868. While
the Michigan Treasurer concluded that the two provisions could not be reconciled
because they were diametrically opposed to each other, the Supreme Court of
Michigan was able to harmonize the provisions. Id. at 877. The court held the
Treasurer failed to overcome the presumption against repeal by implication. Id.
The same analysis yields the same result here.
17
Based on Texas law and the consistent analysis in IBM, Tex. Tax Code
§ 171.106 did not impliedly repeal the Compact’s three-factor apportionment
election, and Appellant was entitled to use it to compute its Texas franchise tax
liability.
II. THE COMPACT IS BINDING AND SUPERSEDES CONFLICTING
STATE LAWS
A. Compacts are binding interstate agreements.
In this case, the taxpayer’s right to avail itself of the “election” in the
Compact is protected not only by a reconciliation of the relevant Texas statutes,
but also by the express terms of the Compact itself. States create interstate
compacts to address shared interests or problems occurring among or in multiple
states. The unique characteristic of interstate compacts is that they contractually
allocate collective state governing authority. They are at once contracts and
binding reciprocal state statutes among the parties to the agreement:
When adopted by a state, a compact is not only an agreement between
that state and the other states that have adopted it, but becomes the
law of those states as well, and must be interpreted as both contracts
between states and statutes within those states.
1A Norman J. Singer & J.D. Shambie Singer, Sutherland, Statutes and Statutory
Construction § 32:5 (7th ed.); see also Texas v. New Mexico, 482 U.S. 124, 128
(1987) (“There is nothing in the nature of compacts generally or of this Compact in
particular that counsels against rectifying a failure to perform in the past as well as
ordering future performance called for by the Compact.”); Doe v. Ward, 124 F.
18
Supp. 2d 900, 914-15 (W.D. Pa. 2000) (“[I]nterstate compacts are the highest form
of state statutory law, having precedence over conflicting state statutes. . . . Having
entered into a contract, a participant state may not unilaterally change its terms.”)
(citations and internal quotation marks omitted).
Upon entering into an interstate compact, a state effectively surrenders
a portion of its sovereignty; the compact governs the relations of the
parties with respect to the subject matter of the agreement and is
superior to both prior and subsequent law. Further, when enacted, a
compact constitutes not only law, but a contract which may not be
amended, modified, or otherwise altered without the consent of all
parties.
C.T. Hellmuth & Assocs., Inc. v. Washington Metro. Area Transit Auth., 414 F.
Supp. 408, 409 (D. Md. 1976).
Because compacts have this dual character — state statutes and reciprocal
agreements with other states — the subject matter of these agreements “is superior
to both prior and subsequent law.” Id.; see also McComb v. Wambaugh, 934 F.2d
474, 479 (Pa. 1991) (“A Compact also takes precedence over statutory law in
member states.”); Ward, 124 F. Supp. 2d at 914-15 (“[I]nterstate compacts are the
highest form of state statutory law, having precedence over conflicting state
statutes.”) (citation and internal quotation marks omitted); Alcorn v. Wolfe, 827 F.
Supp. 47, 52-53 (D.D.C. 1993) (“[T]he terms of the [ ] compact cannot be
modified unilaterally by state legislation to take precedence over conflicting state
law.”) (citations omitted). In other words, the decision of the Texas Legislature to
19
enter into the Compact effectively prohibits subsequent legislatures from enacting
laws that unilaterally impair or alter those obligations piecemeal. Hellmuth, 414 F.
Supp. at 409.
The Supreme Court of the United States has long maintained that not every
agreement among the states requires congressional consent to qualify as a compact,
be binding on member states, and obtain superior status to subsequently enacted
conflicting state laws. U.S. Steel, 434 U.S. at 468-72. Nevertheless, “[e]ven
without congressional consent, [h]aving entered into a contract, a participant state
may not unilaterally change its terms. A Compact also takes precedence over
statutory law in member states.” McComb, 934 F.2d at 479; see also Virginia v.
Tennessee, 148 U.S. 503, 519 (1983).
B. The Compact was considered binding when enacted.
The analysis of the Compact by the Council of State Governments (the
organization responsible for its drafting) makes clear the Compact’s election was
intended to be vested in taxpayers and required to be provided by the member
states:
The compact would permit any multistate taxpayer, at his option, to
employ the Uniform Act for allocations and apportionments involving
party states or their subdivisions. Each party state could retain its
existing division of income provisions but it would be required to
make the Uniform Act available to any taxpayer wishing to use it.
Consequently, any taxpayer could obtain the benefits of multi-
jurisdictional uniformity whenever he might want it.
20
Council of State Governments, Compact Analysis, at 1 (emphasis added).
The Compact’s express terms also illustrate the intent of the drafters that the
Compact would be a binding interstate agreement. By its terms, the Compact did
not take effect until enacted and entered into by seven states. See Tex. Tax Code
§ 141.001, art. X(1). The Compact’s specific provision for withdrawal requires
party states to remain liable for outstanding contractual obligations. Id. § 141.001,
art. X(2). If the Compact operated merely as a uniform state statute or model law,
it would not need to provide for a method of withdrawal.
California’s entry into the Compact is instructive. First, because California
had already enacted the UDITPA as a model law, enacting the Compact’s virtually
identical UDITPA as an “an advisory compact containing model laws” as the
Appellees argue, Br. of Appellees at 42, would have been a superfluous legislative
act. See Hoechst Celanese Corp. v. Franchise Tax Bd., 22 P.3d 324, 331 (2001)
(“California’s [UDITPA] mirrors the UDITPA.”). Second, the California
legislature took specific steps to shield the state from certain Compact
requirements that would not have been necessary if the state did not view the
Compact as binding. California entered the Compact in 1974, several years after
the Compact became effective. Gillette, 147 Cal. Rptr. 3d at 608 (citing 1974 Cal.
Stat. 193). The delay in California’s enactment of the Compact was partially
attributed to California objecting to two provisions of the Compact:
21
(1) Commission actions were approved by one vote per state, substantially diluting
California’s power in relation to its size; and (2) the Compact provided for the
settlement of apportionment disputes by arbitration. To address California’s
concerns regarding the voting procedures, the by-laws of the Commission were
amended to require, in addition to the one vote per state, a weighted vote by
population. However, the arbitration clause could not be struck from the Compact
without member states having to reenact the Compact, as the Compact includes no
express provisions for amendment.
The solution was the enactment of uncodified statutory language
automatically withdrawing California from the Compact should the arbitration
clause be put into effect or the weighted voting procedure violated. 1974 Cal. Stat.
208. Thus, if California did not consider the arbitration clause of the Compact to
be even potentially binding, the enacted automatic withdrawal provisions would
serve no purpose. Likewise, the Texas Legislature is presumed to not engage in
idle or superfluous acts. See City of San Antonio v. City of Boerne, 111 S.W.3d 22,
29 (Tex. 2003) (citing Spence v. Fenchler, 180 S.W. 597, 601 (Tex. 1915) (“It is
an elementary rule of construction that, when possible to do so, effect must be
given to every sentence, clause, and word of a statute so that no part thereof be
rendered superfluous or inoperative.”)).
22
As a binding agreement, the Compact has a very specific method for
withdrawal. If a state determines it is no longer in its best interest to be a member
of the Compact, the state must withdraw from the Compact “by enacting a statute
repealing the same.” Tex. Tax Code § 141.001, art. X(2). Several states have done
this. See U.S. Steel, 434 U.S. at 454 (noting Florida, Illinois, Indiana, and
Wyoming have withdrawn from the Compact). The following states have also
withdrawn: California (S.B. No. 1015, 2012 Leg. Reg. Sess. (Ca. 2012); Nevada
(Assemb. No. 438, 61st Sess., 1981 Nev. Stat. 350), Maine (H.P. 1024-L.D. 1462,
122nd Leg., 1st Spec. Sess. (Me. 2005)), Michigan (S.B. No. 156, 97th Leg. Reg.
Sess. (Mich. 2014)); Minnesota (H.F. No. 677, 88th Leg., Reg. Sess. (Minn. 2013),
Nebraska (L.B. No. 344, 89th Leg., 1st Sess. (Neb. 1985)), South Dakota (S.B. No.
239, 2013 Leg. Assemb., 88th Sess. (S.D. 2013)), and West Virginia (H.B. 1018,
67th Leg., 1st Reg. Sess. (W. Va. 1985)). Utah, North Dakota, and the District of
Columbia have repealed elements of the Compact and then reenacted the Compact
without the election. See 2013 Utah Laws 462; S.B. 2292, 64th Leg., Gen. Sess.
(N.D. 2015); and 60 D.C. Reg. 12583-84 (Sept. 6, 2013). Texas, on the other
hand, has not followed any of these approaches. It has ignored the very specific
requirement in the Compact for “withdrawal”; instead it has merely enacted
another apportionment provision different from the “election” provision in the
Compact. The action by Texas in no way satisfies the terms of the Compact, and
23
thus does not relieve the State from following the Compact (including its election
provision).
In a similar Compact case in California, Gillette Co. v. Franchise Tax
Board, the California Court of Appeal ruled in favor of the taxpayer based on this
line of reasoning. The Court held that California had not unilaterally withdrawn
from the Compact as required by the terms of the Compact, and therefore the
Compact, and its “election” provision were binding on the state. 147 Cal. Rptr. 3d
at 616-17.
C. A binding compact was needed to forestall congressional
intervention.
The historical events leading up to the creation of the Compact confirm that
a binding Compact was both contemplated by the participating states and necessary
to effectuate the goals of the parties involved. The historical backdrop also
underlines the critical importance of the Compact’s election as the “glue” that held
the Compact together.
The rapid growth of interstate and international commerce has presented a
difficult problem for both the states and multistate taxpayers: how to devise an
equitable and constitutional method for taxing corporations that do business in
multiple states and countries.4 While a consensus was building for the need for
4
During the early years of our Nation’s existence, the Supreme Court’s view of the
Commerce Clause of the U.S. Constitution was one which severely restricted state taxation of
24
uniformity among the states to avoid double taxation, the states were doing little to
achieve that uniformity. As one commentator noted:
Before 1957, the need for uniformity in state income taxation of
multistate businesses was something like the weather—everybody
talked about it, but nobody did anything about it. Then in that year,
the Uniform Division of Income for Tax Purposes Act (UDITPA) was
born.
John S. Warren, UDITPA—A Historical Perspective, 38 State Tax Notes 133
(Oct. 3, 2005).
Through the auspices of the National Conference of Commissioners on
Uniform State Laws (“NCCUSL”), a model statute was drafted: UDITPA.
UDITPA had two main objectives: “(1) to promote uniformity in allocation
practices among the 38 states which impose taxes on or measured by the income of
corporations, and (2) to relieve the pressure for congressional legislation in this
field.” Frank M. Keesling & John S. Warren, California’s Uniform Division of
Income for Tax Purposes Act, Part 1, 15 UCLA L. Rev. 156, 156 (1967).
UDITPA provided what was then the “gold standard” of apportionment
formulas: the “three-factor” formula of equally weighting property, payroll and
interstate commerce. See generally Jerome Hellerstein & Walter Hellerstein, State Taxation ¶ 4
(3d ed. & Supp. 2014); see also Robbins v. Shelby Cnty. Taxing Dist., 120 U.S. 489, 497 (1887)
(“Interstate commerce cannot be taxed at all, even though the same amount of tax should be laid
on domestic commerce, or that which is carried on solely within the state.”). As the twentieth
century unfolded, the Court began to waver from its steadfast prohibition. See, e.g., Western
Live Stock v. Bureau of Revenue, 303 U.S. 250, 253-54 (1938). At the same time, the country
began to experience a rapid expansion of multistate business enterprises, which coincided with
the growing need for state revenues to finance public services and infrastructure.
25
sales. The policy rationale behind the three-factor apportionment formula is that
equitable division of multistate business activity among states should be based on
the three factors of production: property representing capital, payroll representing
labor, and sales representing market.
Over the next decade, eleven states enacted corporate income tax statutes
based on the UDITPA model statute—but most did so with substantial variations in
the uniform terms. 5 The holding in Northwestern Portland Cement Co., 358 U.S.
450 (1959), caused concern in the business community over possible double
taxation of multijurisdictional businesses income. 6 In the wake of Northwestern
5
While the states touted the uniformity provided by UDITPA, they were nevertheless
free to enact whatever parts they thought beneficial or change them entirely. UDITPA,
therefore, was “uniform in name only.” John Dane, Jr., A Solution to the Problem of State
Taxation of Interstate Commerce, 12 Vill. L. Rev. 507, 510 (1967).
Eleven States have adopted what I, perhaps, technically erroneously described in
my testimony as the “Uniform Division of Net Income for Tax Purposes Act. “ I
used the term “erroneously” advisedly, because 10 of the States which I had in
mind have so substantially varied or changed the provisions in the uniform act
that uniformity has been diluted, if not destroyed…Only one state, namely North
Dakota, has really adopted the uniform act.
Id. at 511 (quoting a letter from Judge Morgan of the District of Columbia Tax Court to a
member of the Special Subcommittee on State Taxation of Interstate Commerce of the
Committee on the Judiciary, see Hearings Before the Special Subcomm. On State Taxation of
Interstate Commerce of the House Comm. on the Judiciary, 89th Cong., 2d Sess. ser. 14 (1966)).
6
Just after NCCUSL released the UDITPA model law, the Supreme Court, in
Northwestern Portland Cement, 358 U.S. 450 (1959), for the first time explicitly held there was
no Commerce Clause barrier to the imposition of a nondiscriminatory, fairly apportioned direct
net income tax on an out-of-state corporation carrying on an exclusively interstate business
within a taxing state. The case produced widespread alarm among businesses.
There were predictions of the most dire consequences to business and, indeed, the
entire nation. Two Senate Committees promptly held hearings, and there was
vociferous demand for immediate congressional action. Congress reacted with
26
Portland Cement Co., Congress enacted Public Law No. 86-272, which imposed
some limits on how states could tax multistate businesses. Despite the enactment
of Public Law No. 86-272, states feared that more federal legislation limiting
states’ taxing sovereignty would be forthcoming.
The states’ fears were not unfounded, Congress formed the Willis
Committee and gave that group a mandate to study state taxation of interstate
commerce and make recommendations to promote uniformity. Among the
conclusions of the Willis Committee was that the existing system of state taxation
of interstate business was characterized by substantial inequities for interstate
businesses. This was due to inconsistencies in state apportionment formulas and
the different definitions of specific factors such a payroll, property, and sales. See
John Dane, Jr., A Solution to the Problem of State Taxation of Interstate
Commerce, 12 Vill. L. Rev. 507, 510-11 (1967). To solve this problem, the Willis
Committee issued a report in 1965 calling for sweeping federal legislation that
would have severely limited state authority to tax interstate business operations and
imposed on the states a series of mandates, including a uniform apportionment
regime. See Willis Committee Report at 1135 (1965); see also 2 Richard D. Pomp,
State and Local Taxation 11-14 (7th ed. 2011). The Willis Committee’s
astonishing speed and, for the first time in its history, adopted an act restricting
the states’ power to tax interstate businesses.
Hellerstein & Hellerstein, State Taxation ¶ 6.17 (emphasis added). Congress immediately
enacted Pub. L. 86-272 (codified at 15 U.S.C. §§ 381 et seq.)
27
recommendations were incorporated into H.R. 11798, entitled the Interstate
Taxation Act, which was introduced in October 1965. H.R. 11798, 89th Cong., 1st
Sess. (1965).7
[A]fter examining the bill’s provisions, state tax administrators had
real cause for alarm. An immediate reaction was the calling of an
unprecedented special meeting of the National Association of Tax
Administrators for January 13 and 14, 1966, in Chicago. As stated by
Mr. Bernard F. Nossel, then Secretary of NATA, [“]The task faced by
the state representatives on January 13th was not merely to express
opposition to H.R. 11798, but to oppose it in a constructive manner
and to suggest workable alternatives which would eliminate the need
for the kind of congressional action embodied in this bill.[“] It was at
this meeting that the idea of a multistate tax compact was envisioned.
Multistate Tax Commission, First Annual Report 1 (1968). 8
The Compact was drafted by the states in 1966, presented to legislatures
beginning in January 1967, and became effective under its terms, on August 4,
1967, when it was enacted into law by seven states. See Tex. Tax Code § 141.001,
art. X(1) (“This compact shall enter into force when enacted into law by any seven
states.”). “The Compact is the state’s answer to Federal control of state taxing
policies and programs.” Multistate Tax Commission, Multistate Tax Commission
7
The bill utilized a uniform two factor formula (property and payroll) for the
apportionment of income, leaving out the sales factor included in the UDITPA and most existing
state apportionment formulae. The consequences for market states (those without large scale
industry and manufacturing–payroll and property intensive activities) would have been
financially devastating.
8
This extensive analysis is available at
http://www.mtc.gov/uploadedFiles/Multistate_Tax_Commission/Resources/Archives/Annual_Re
ports/FY67-68.pdf.
28
1968 Brochure on the Multistate Tax Compact, reprinted in 66 Tax Notes 600, 600
(Nov. 19, 2012).
D. The election is the Compact’s uniformity glue.
One of the major criticisms of state tax regimes by the Willis Committee
Report was the lack of a uniform apportionment formula. The Compact was in
large part a reaction to that criticism. Jerome Hellerstein & Walter Hellerstein,
State Taxation ¶ 9.05, n.93 (3d ed. & Supp. 2014).
Lack of uniformity among the business income tax statutes of the
various states was the basis of a major business complaint to
Congress. The enactment of the Multistate Tax Compact has
substantially increased that uniformity in that bodily incorporated into
the Compact is the Uniform Division of Income for Tax Purposes Act
(UDITPA).
Multistate Tax Commission, Third Annual Report, at 2 (1970), available at
http://www.mtc.gov/uploadedFiles/Multistate_Tax_Commission/Resources/Archiv
es/Annual_Reports/FY69-70.pdf.
The Compact’s election for UDITPA’s three-factor apportionment formula
was the uniformity glue that bound the states to a uniform apportionment rule. The
Commission’s own words illustrate the intent:
The Multistate Tax Compact makes UDITPA available to each
taxpayer on an optional basis, thereby preserving for him the
substantial advantages with which lack of uniformity provides him in
some states. Thus a corporation which is selling into a state in which
it has little property or payroll will want to insist upon the use of the
three-factor formula (sales, property, and payroll) which is included in
UDITPA because that will substantially reduce his tax liability to that
29
state below what it would be if a single sales factor formula were
applied to him; on the other hand, he will look with favor upon the
application of the single sales factor formula to him by a state from
which he is selling into other states, since that will reduce his tax
liability to the state. The Multistate Tax Compact thus preserves the
right of the states to make such alternative formulas available to
taxpayers even though it makes uniformity available to taxpayers
where and when desired.
Id. at 3 (emphasis added).
Consistent with the Compact’s intent to preserve the right of states to make
alternative formulas available to taxpayers, Texas adopted a single-receipts factor
apportionment formula for apportioning income entirely on the proportion of
receipts within Texas in relation to a company’s receipts everywhere. Tex. Tax
Code § 171.106(a).
The purpose of the Compact’s vesting in taxpayers the option to elect
UDITPA’s “gold-standard” three-factor apportionment formula is thus brought
into focus. Under the Compact, Texas is free to exercise its sovereignty and alter
its apportionment formula in any manner it chooses (however inconsistent or
incompatible it may be with those of other states)—a freedom that would not have
existed under the proposed federal legislation the Compact was intended to stave
off. However, the Compact requires taxpayers be vested with the option to choose
UDITPA’s reasonable, uniform three-factor apportionment formula, thus serving
as a floor against the inconsistent apportionment formulas that were Congress’
30
raison d’être for threatening intervention into the state taxation of corporate
income.
The analysis of the Compact submitted by the Council on State
Governments promoting the adoption of the Compact further explains the role of
the election and why the Compact was not merely “an advisory compact
containing model laws,” as the Appellees assert:
Uniformity in State laws is generally considered to be a desirable
objective, but a balance must be struck between a required uniformity
and State and local independence. . . . States can achieve uniformity
by individual and unilateral actions, provided that they enact the same
statutes as all other States, keep them uniform after enactment, and
administer them in the same ways. An attempt to achieve uniformity
by such unilateral action is the [UDITPA]. . . . The Multistate Tax
Compact provides that the Uniform Act will be available in all party
States to any multistate taxpayer wishing to use it.
Council of State Governments, Compact Analysis, at 6.
The drafters of the Compact clearly intended its terms to be binding on the
states entering into it. The Compact simply could not have achieved its primary
purpose of forestalling congressional action but for it being binding, and but for
taxpayers being given the option to choose the “gold standard” of uniform, fair
apportionment, UDITPA.
CONCLUSION AND PRAYER
The trial court erred when it granted the Comptroller’s motion for summary
judgment and denied Graphic Packaging’s claim for refunds based on the
31
Compact’s three-factor apportionment method. The Compact is still incorporated
into Texas’ tax law and can be reconciled with the State’s franchise tax.
Additionally, the Compact is a valid interstate compact, creating a binding
agreement among the states party to it. Unless a state withdraws from the
Compact, its terms take precedence over conflicting state statutes. Because Texas
has not withdrawn from the Compact, it must adhere to its terms, including
providing Graphic Packaging the election afforded taxpayers pursuant to Article III
of the Compact.
For these reasons, Amicus Curiae COST respectfully prays that this Court
reverse the judgment of the trial court and permit Appellant to elect to apportion
the franchise tax according to the terms of the Compact.
Respectfully submitted,
JONES DAY
2727 North Harwood Street
Dallas, Texas 75201-1515
(214) 220-3939
Fax: (214) 969-5100
By /s/ David E. Cowling
David E. Cowling
State Bar No. 04932600
decowling@jonesday.com
32
Karl Frieden
kfrieden@cost.org
Frederick J. Nicely
fnicely@cost.org
COUNCIL ON STATE TAXATION
Gregory A. Castanias
gcastanias@jonesday.com
Kirk R. Lyda
klyda@jonesday.com
JONES DAY
COUNSEL FOR AMICUS CURIAE
COUNCIL ON STATE TAXATION
33
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 limitations of Texas Rule of Appellate Procedure
9.4(e)(2)(B) because it contains 7,525rds, excluding the parts of the brief exempted
by Rule 9.4(i)(1).
/s/ David E. Cowling
David E. Cowling
34
CERTIFICATE OF SERVICE
I certify that the foregoing Brief of Amicus Curiae 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 May7, 2015.
Amy L. Silverstein Rance Craft
asilverstein@sptaxlaw.com Assistant Solicitor General
SILVERSTEIN & POMERANTZ LLP rance.craft@texasattorneygeneral.gov
12 Gough Street, Second Floor Cynthia A. Morales,
San Francisco, California 94103 Assistant Attorney General
Tele: (415) 593-3502 cynthia.morales@texasattorneygeneral.
Fax: (415) 593-3501 gov
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/ David E. Cowling
David E. Cowling
35