Court rules on two tax cases
UPDATED 10:55 a.m.
The Supreme Court opened its session on tax-filing day with Chief Justice John G. Roberts, Jr., saying two rulings in tax cases would be announced. The decisions came in MeadWestvaco Corp. v. Illinois Department of Revenue (06-1413), limiting the power of states to tax a share of the money that a company based in another state earns when it sells off an investment in a division involved in a separate line of business, and in U.S. v. Clintwood Elkhorn Mining Co. (07-308), deciding that a taxpayer seeking a refund for an invalid tax under the Export Clause of the Constitution must first seek a refund from the government before bringing a lawsuit.
The ruling in the MeadWestvaco case brought a strong separate statement by Justice Clarence Thomas, saying that at some point the Court “should reconsider its constitutional authority” to pass upon state taxing power to reach the out-of-state income of multistate businesses.
In MeadWestvaco, the Court by a unanimous vote overturned a ruling by the Illinois Appellate Court in a case in which the state had taxed a share of the more than $1 billion in capital gains that the company made when it sold off its interest in the Lexis/Nexis electronic publishing business in 1994. “We conclude,” Justice Samuel A. Alito, Jr., wrote for the Court, “that the state courts misapprehended the principles that we have developed for determining whether a multistate business is unitary.” The state court ruling thus was vacated.
The Illinois apppellate court had ruled that the state could reach a portion of those capital gains on the theory that Mead Corp. (predecessor of MeadWestvaco), an Ohio company, had made Lexis/Nexis an “operational” part of its business subject to tax on the Illiniois share of Mead’s gains. “The state courts erred,” Justice Alito wrote, “in considering whether Lexis served an ‘operational purpose’ in Mead’s business after determining that Lexi and Mead were not unitary….Our decisions in Container Corp. [v. Franchise Tax Board, 1983] and Allied-Signal [v. Director, Division of Taxation, 1992] did not announce a new ground for the constitutional apportionment of extrastate values in the absence of a unitary business. Because the Appellate Court of Illinois interpreted those decisions to the contrary, it erred.”
The Court declined the state’s suggestion to affirm the state court tax decision on the alternative theory that Lexis/Nexis had done enough business inside Illinois to justify taxing a portion of Mead’s capital gain. Instead, the Court vacated the ruling and returned it to the state appeals court.
Justice Alito wrote: “Where, as here, the asset in question is another business, we have described the ‘hallmarks’ of a unitary relationship as functional integration, centralized management and economies of scale…The trial court [in Illinois] found each of these hallmarks lacking and concluded that Lexis was not a unitary part of Mead’s business. The appellate court, however, made no such determination. Relying on its operational function test, it reserved judgment on whether Mead and Lexis formed a unitary business. The appellate court may take up that question on remand, and we express no opinion on it now.”
Justice Thomas, while joining with his colleagues in Alito’s opinion, wrote a concurring opinion “to express my serious doubt that the Constitution permits us to adjudicate cases in this area. Despite the Court’s repeated holdings that ‘the Due Process and Commerce Clauses forbid the states to tax “extraterritorial values,” ‘..I am not fully convinced of that proposition. To the extent our decisions addressing state taxation of multistate enterprises rely on the negative Commece Clause, I would overrule them….The Court’s cases in this area have not, however, rested solely on the Commerce Clause. The Court has long recognized that the Due Process Clause of the Fourteenth Amendment may also limit states’ authority to tax multistate businesses.” He went on to express his concern that courts using that alternative ground for limiting state taxing power may read into the Due Process Clause “yet another, unenumerated, substantive right.”
Chief Justice Roberts’ opinion in the Clintwood Elkhorn Mining case was unanimous. The ruling reversed a decision of the Court of Appeals-Federal Circuit that coal companies that had paid taxes on coal exports — a tax later struck down under the Export Clause — could pursue their refund claim in the Court of Federal Claims.
The dispute involves $1,065,936 in coal export taxes paid in the years 1994, 1995 and 1996 by Clintwood Elkhorn Mining Co., Gatliff Coal Co. and Premier Elkhorn Coal Co. While those companies had asked the Internal Revenue Service for refunds, and obtained them, for the years 1997, 1998 and 1999, they did not make a similar administrative claim for the earlier years.