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

ACCEPTED

03-14-00197-CV

3923343

THIRD COURT OF APPEALS

AUSTIN, TEXAS

1/27/2015 5:50:32 PM

JEFFREY D. KYLE

CLERK

No. 03-14-00197-CV

In the Court of Appeals 3rd COURT FILED IN

OF APPEALS

AUSTIN, TEXAS

for the Third Judicial District1/27/2015 5:50:32 PM

JEFFREY D. KYLE

Austin, Texas Clerk

GRAPHIC PACKAGING CORPORATION,

Appellant,

v.

GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS

OF THE STATE OF T EXAS , AND

K EN PAXTON, ATTORNEY GENERAL OF THE STATE OF TEXAS ,

Appellees.

On Appeal from the 353rd Judicial District Court

Travis County, Texas

BRIEF OF APPELLEES

K EN PAXTON SCOTT A. K ELLER

Attorney General of Texas Solicitor General

CHARLES E. R OY RANCE CRAFT

First Assistant Attorney Assistant Solicitor General

General State Bar No. 24035655

JAMES E. DAVIS CYNTHIA A. MORALES

Deputy Attorney General for Assistant Attorney General

Civil Litigation

OFFICE OF THE ATTORNEY GENERAL

P.O. Box 12548 (MC 059)

Austin, Texas 78711-2548

(512) 936-2872

(512) 474-2697 [fax]

rance.craft@texasattorneygeneral.gov

Oral Argument Requested

IDENTITY OF PARTIES AND C OUNSEL

Plaintiff/Appellant

Graphic Packaging Corporation

Appellate Counsel for Plaintiff/Appellant

Amy L. Silverstein (asilverstein@sptaxlaw.com)

admitted pro hac vice

SILVERSTEIN & POMERANTZ LLP

12 Gough Street, Second Floor

San Francisco, California 94103

(415) 593-3502

(415) 593-3501 [fax]

Trial and Appellate Counsel for Plaintiff/Appellant

James F. Martens (jmartens@textaxlaw.com)

State Bar No. 13050720

Amanda G. Taylor (ataylor@textaxlaw.com)

State Bar No. 24045921

Lacy L. Leonard (lleonard@textaxlaw.com)

State Bar No. 24040561

Danielle Ahlrich (dahlrich@textaxlaw.com)

State Bar No. 24059215

MARTENS , TODD, LEONARD & TAYLOR

301 Congress Avenue, Suite 1950

Austin, Texas 78701

(512) 542-9898

(512) 542-9899 [fax]

Defendants/Appellees

Glenn Hegar, Comptroller of Public Accounts of the State of Texas*

Ken Paxton, Attorney General of the State of Texas*

* This suit initially named Susan Combs, then Comptroller of Public Accounts, and Greg

Abbott, then Attorney General, as defendants. Glenn Hegar succeeded Combs on January

2, 2015, and Ken Paxton succeeded Abbott on January 5, 2015. See TEX. R. APP. P. 7.2(a).

Appellate Counsel for Defendants/Appellees

Rance Craft (rance.craft@texasattorneygeneral.gov)

Assistant Solicitor General

State Bar No. 24035655

OFFICE OF THE ATTORNEY GENERAL

P.O. Box 12548 (MC 059)

Austin, Texas 78711-2548

(512) 936-2872

(512) 474-2697 [fax]

Trial and Appellate Counsel for Defendants/Appellees

Cynthia A. Morales (cynthia.morales@texasattorneygeneral.gov)

Assistant Attorney General

State Bar No. 14417420

OFFICE OF THE ATTORNEY GENERAL

P.O. Box 12548 (MC 017)

Austin, Texas 78711-2548

(512) 475-4470

(512) 477-2348 [fax]

Trial Counsel for Defendants/Appellees

Kevin D. Van Oort* (kevin.vanoort@tpfa.state.tx.us)

General Counsel

State Bar No. 20449890

TEXAS PUBLIC FINANCE AUTHORITY

300 West 15th Street, Suite 411

Austin, Texas 78701

(512) 463-5544

(512) 463-5501 [fax]

* Mr. Van Oort was an Assistant Attorney General with the Office of the Attorney General

at the time that he represented the defendants in this case. He is no longer working on this

case. His current contact information is listed here.

ii

TABLE OF C ONTENTS

Identity of Parties and Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Index of Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

Statement of the Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xx

Issues Presented . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxi

Statement of Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

I. The Texas Franchise Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

A. The Tax Base For The Franchise Tax . . . . . . . . . . . . . . . . . 2

B. Apportionment Of The Tax Base For The Franchise

Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1. The gross-receipts apportionment method . . . . . . . . 4

2. Requests for alternative apportionment (1970-

1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

3. Narrow exceptions to the gross-receipts

method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

4. Current apportionment statute . . . . . . . . . . . . . . . . . 7

C. Current Calculation Of Franchise Tax Due . . . . . . . . . . . . 7

II. The Multistate Tax Compact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

A. Adoption Of The Compact . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

B. The Compact’s Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

iii

1. The Compact’s purposes . . . . . . . . . . . . . . . . . . . . . . . 9

2. The Multistate Tax Commission . . . . . . . . . . . . . . . . 9

3. The Compact’s income-tax articles . . . . . . . . . . . . . 10

4. Miscellaneous Compact provisions . . . . . . . . . . . . . 11

C. State Variations From The Compact’s Income-Tax

Articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

III. The Franchise Tax And The Compact . . . . . . . . . . . . . . . . . . . . . 13

IV. Graphic’s Tax-Refund/Tax-Protest Suit . . . . . . . . . . . . . . . . . . . 15

Summary of the Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

I. In Calculating Its Franchise Tax, Graphic Must Apportion

Its Margin To Texas Using The Gross-Receipts Method In

Section 171.106 Of The Tax Code. . . . . . . . . . . . . . . . . . . . . . . . . 18

A. Section 171.106 Requires Taxpayers To Apportion

Their Margin Using The Gross-Receipts Method,

Subject Only To Certain Exceptions Provided In That

Section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

B. The Compact’s Three-Factor Income-Apportionment

Method Does Not Apply To The Franchise Tax

Because It Is Not An Income Tax. . . . . . . . . . . . . . . . . . . 20

1. Article III.1’s “taxpayer option” and Article IV’s

apportionment method apply only to

apportionment of “income” for a state’s “income

tax.” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

iv

2. The Texas franchise tax is not an “income tax”

and does not involve the apportionment of

“income.” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

3. The Compact’s “income tax” definition does not

expand Articles III and IV to include the

franchise tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

a. Texas law establishes that the franchise

tax does not meet the Compact’s “income

tax” definition. . . . . . . . . . . . . . . . . . . . . . . . . . 24

b. The franchise tax does not meet the

Compact’s definition of an “income tax” on

its own terms. . . . . . . . . . . . . . . . . . . . . . . . . . . 25

4. Model Compact Regulation II.4 does not expand

the Compact’s “income tax” definition to cover

the franchise tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

C. Section 171.106’s Mandate To Use The Gross-Receipts

Method Prevails Over Any Conflicting Language In

The Compact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

1. As the later-enacted, more specific statute,

section 171.106(a) prevails over the Compact. . . . . 32

2. Section 171.106(a) and the Compact cannot be

harmonized so that both apply to the franchise

tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

3. The presumption against implied repeals does

not support Graphic’s reading of the Tax Code. . . 35

v

4. The rule that ambiguous tax statutes must be

construed in the taxpayer’s favor does not apply

here. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

5. The Comptroller’s reading of section 171.106

does not violate article III, section 36 of the

Texas Constitution. . . . . . . . . . . . . . . . . . . . . . . . . . . 39

II. Texas’s Membership In The Compact Does Not Preclude

The Legislature From Requiring A Taxpayer To Use The

Gross-Receipts Method To Apportion Margin. . . . . . . . . . . . . . 41

A. Articles III And IV Of The Compact Do Not Apply To

The Franchise Tax Because It Is Not An “Income

Tax.” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

B. The Legislature May Restrict The Compact’s

Application In Texas Law Because It Is Not A Binding

Regulatory Compact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

1. The term “compact” does not make this Compact

binding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

2. U.S. Steel did not address whether the Compact

is a binding contract. . . . . . . . . . . . . . . . . . . . . . . . . . 44

3. The Compact does not exhibit the indicia of a

binding regulatory compact. . . . . . . . . . . . . . . . . . . . 45

a. The Commission is not a joint regulatory

body. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

b. The Compact provisions do not require

reciprocal action to be effective. . . . . . . . . . . 47

c. The Compact does not prohibit unilateral

repeal or modification. . . . . . . . . . . . . . . . . . . 49

vi

4. The Compact is an advisory compact with

uniform laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

C. The Compact Does Not Preclude The Legislature

From Mandating Exclusive Use Of Section 171.106’s

Gross-Receipts Apportionment Method. . . . . . . . . . . . . . . 55

1. Article III.1 does not unambiguously bar the

Legislature from enforcing an exclusive

apportionment method. . . . . . . . . . . . . . . . . . . . . . . . 55

2. Article III.1 cannot constitutionally require

Texas to allow a taxpayer to remove part of its

tax base from Texas’s taxing authority. . . . . . . . . . 60

D. The Compact Does Not Supersede Section 171.106

Because Any Conflict Does Not Unconstitutionally

Impair Any Contractual Obligations. . . . . . . . . . . . . . . . . 62

1. Binding compacts that Congress has not

approved preempt state law only if the law

unconstitutionally impairs contractual

obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

2. Section 171.106 does not unconstitutionally

impair any obligations to Graphic under the

Compact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

3. Graphic waived the Contracts Clause issue. . . . . . . 67

Prayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Certificate of Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Certificate of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

vii

Appendix

viii

INDEX OF AUTHORITIES

Cases

Alabama v. North Carolina,

560 U.S. 330 (2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52, 57

Allied Stores of Ohio, Inc. v. Bowers,

358 U.S. 522 (1959) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Basic Capital Mgmt. v. Dynex Commercial, Inc.,

348 S.W.3d 894 (Tex. 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

City of Charleston v. Pub. Serv. Comm’n,

57 F.3d 385 (4th Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

City of Oak Cliff v. State,

97 Tex. 383, 79 S.W. 1 (1904) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Combs v. Chapal Zenray, Inc.,

357 S.W.3d 751 (Tex. App.—Austin 2011, pet. denied) . . . . . . 25, 38, 39

Cuyler v. Adams,

449 U.S. 433 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Employees Ret. Sys. v. Duenez,

288 S.W.3d 905 (Tex. 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Energy Reserves Grp., Inc. v. Kan. Power & Light Co.,

459 U.S. 400 (1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65-67

Escambia Cnty. v. McMillan,

466 U.S. 48 (1984) (per curiam) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Foster v. TDCJ,

344 S.W.3d 543 (Tex. App.—Austin 2011, pet. denied) . . . . . . . . . . . . 27

ix

Gaar, Scott & Co. v. Shannon,

115 S.W. 361 (Tex. Civ. App.—Austin 1908, writ denied),

aff’d, 223 U.S. 468 (1912) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Gen. Dynamics Corp. v. Sharp,

919 S.W.2d 861 (Tex. App.—Austin 1996, writ denied) . . . . . . . . . . 2, 67

Gen. Expressways, Inc. v. Iowa Reciprocity Bd.,

163 N.W.2d 413 (Iowa 1968) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Gordon v. Lake,

163 Tex. 392, 356 S.W.2d 138 (1962) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Green v. Biddle,

21 U.S. (8 Wheat.) 1 (1823) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63, 67

Hirsch v. State,

282 S.W.3d 196 (Tex. App.—Fort Worth 2009, no pet.) . . . . . . . . . . . . 40

IBM v. Dep’t of Treasury,

852 N.W.2d 865 (Mich. 2014) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52, 64

In re Nestle USA, Inc.,

387 S.W.3d 610 (Tex. 2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Ingram Micro, Inc. v. Dep’t of Treas.,

No. 11-000035-MT, slip op. (Mich. Ct. Cl. Dec. 19, 2014) . . . . . . . . . . . 52

INOVA Diagnostics, Inc. v. Strayhorn,

166 S.W.3d 394 (Tex. App.—Austin 2005, pet. denied) . . . . . . . . . . 3, 22

Jackson v. SOAH,

351 S.W.3d 290 (Tex. 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Liberty Mut. Ins. Co. v. Tex. Dep’t of Ins.,

187 S.W.3d 808 (Tex. App.—Austin 2006, pet. denied) . . . . . . . . . . . . 65

x

McComb v. Wambaugh,

934 F.2d 474 (3d Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Moorman Mfg. Co. v. Bair,

437 U.S. 267 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47, 67

Nat’l R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Ry.,

470 U.S. 451 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Ne. Bancorp, Inc. v. Bd. of Governors of Fed. Reserve Sys.,

472 U.S. 159 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 47, 49

Nw. Austin MUD No. 1 v. City of Austin,

274 S.W.3d 820 (Tex. App.—Austin 2008, pet. denied) . . . . . . . . . . . . 24

Seattle Master Builders Ass’n v.

Pac. Nw. Elec. Power & Conservation

Planning Council, 786 F.2d 1359 (9th Cir. 1986) . . . . . . . . 45, 47, 49-51

State Bd. of Ins. v. Adams,

316 S.W.2d 773 (Tex. Civ. App.—Houston 1958, writ ref’d n.r.e.) . . . 40

State v. $1,760.00 in U.S. Currency,

406 S.W.3d 177 (Tex. 2013) (per curiam) . . . . . . . . . . . . . . . . . . . . . . . . 26

State v. Sw. Gas & Elec. Co.,

145 Tex. 24, 193 S.W.2d 675 (1946) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Sunbeam Envtl. Servs. v. Tex. Workers’ Comp. Ins. Facility,

71 S.W.3d 846 (Tex. App.—Austin 2002, no pet.) . . . . . . . . . . . . . . . . . 68

Tarrant Reg’l Water Dist. v. Hermann,

133 S. Ct. 2120 (2013) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51, 56, 57, 62

U.S. Steel Corp. v. Multistate Tax Comm’n,

434 U.S. 452 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 9, 44-47, 54, 59, 64

xi

U.S. Trust Co. v. New Jersey,

431 U.S. 1 (1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66, 68

United States v. Price,

361 U.S. 304 (1960) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

W. Union Tel. Co. v. Kansas,

216 U.S. 1 (1910) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

W. Union Tel. Co. v. State,

103 Tex. 306, 126 S.W. 1197 (1910) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

West Virginia ex rel. Dyer v. Sims,

341 U.S. 22 (1951) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Constitutional Provisions, Statutes, and Rules

ALASKA CONST. art. IX, § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

ARK. CONST. art. 16, § 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

CAL. CONST. art. XIII, § 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

HAW. CONST. art. VII, § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

ILL. CONST. art. IX, § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

MICH. CONST. art. IX, § 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

MINN. CONST. art. X, § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

MO. CONST. art. X, § 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

MONT. CONST. art. VIII, § 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

xii

N.D. CONST. art. X, § 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

S.D. CONST. art. XI, § 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

TEX. CONST. art. I, § 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

TEX. CONST. art. III, § 36 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39, 40

TEX. CONST. art. VIII, § 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 61

U.S. CONST. art I, § 10, cl. 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

U.S. CONST. art. I, § 10, cl. 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

WASH. CONST. art. 7, § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

WYO. CONST. art. 15, § 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

ALA. CODE § 40-27-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

ARK. CODE § 26-5-101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

CAL. REV. & TAX CODE § 25128 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

COLO REV. STAT. § 24-60-1301 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

COLO REV. STAT. § 39-22-303.5(4)(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

D.C. CODE § 47-441 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

FLA. STAT. § 214.71 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

FLA. STAT. § 220.53 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

IDAHO CODE § 63-3027(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

MICH. COMP. LAWS § 208.1301 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

xiii

MINN. STAT. § 290.171 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

MINN. STAT. § 290.191 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

OR. REV. STAT § 314.606 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

OR. REV. STAT § 314.650 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

OR. REV. STAT. § 305.653 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

TEX. FAM. CODE § 162.102, art. IX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

TEX. FAM. CODE § 60.010, art. XII.A.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

TEX. GOV’T CODE § 311.005(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

TEX. GOV’T CODE § 311.025(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

TEX. GOV’T CODE § 311.026(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

TEX. GOV’T CODE § 510.017, art. I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

TEX. GOV’T CODE § 510.017, art. XI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

TEX. GOV’T CODE § 510.017, art. XIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

TEX. HEALTH & SAFETY CODE § 612.001, art. XIII . . . . . . . . . . . . . . . . . . . . 50

TEX. TAX CODE § 141.001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

TEX. TAX CODE § 171.002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 8, 19, 22

TEX. TAX CODE § 171.101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 22

TEX. TAX CODE § 171.101(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 26

TEX. TAX CODE § 171.101(a)(1)(B)(ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 27

xiv

TEX. TAX CODE § 171.101(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

TEX. TAX CODE § 171.101(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

TEX. TAX CODE § 171.101(B)(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 26

TEX. TAX CODE § 171.1011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 28

TEX. TAX CODE § 171.1011(e)-(x) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

TEX. TAX CODE § 171.1012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

TEX. TAX CODE § 171.1013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

TEX. TAX CODE § 171.1014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 24, 36, 38

TEX. TAX CODE § 171.1014(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 38

TEX. TAX CODE § 171.1016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 23

TEX. TAX CODE § 171.1016(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 8

TEX. TAX CODE § 171.1016(b)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

TEX. TAX CODE § 171.1016(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 27

TEX. TAX CODE § 171.103 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

TEX. TAX CODE § 171.105 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

TEX. TAX CODE § 171.106 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

TEX. TAX CODE § 171.106(a) . . . . . . . . . . . . . . . . . xx, 7, 18, 19, 32, 34, 35, 39, 56

TEX. TAX CODE § 171.106(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 19

TEX. TAX CODE § 171.106(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 19

xv

TEX. TAX CODE § 171.106(d)-(g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 19

TEX. TAX CODE § 171.112 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

TEX. TAX CODE § 171.112(g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 36, 37

TEX. TRANSP. CODE § 523.007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

15 U.S.C. § 383 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

UTAH CODE § 59-1-801 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

UTAH CODE § 59-1-801.5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

TEX. R. APP. P. 7.2(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Other Authorities

Act approved Apr. 30, 1897, 25th Leg., R.S., ch. 104,

1897 Tex. Gen. Laws 140 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3

Act approved Mar. 17, 1917, 35th Leg., R.S., ch. 84,

1917 Tex. Gen. Laws 168 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Act of Mar. 18, 1919, 36th Leg., R.S., ch. 60,

1919 Tex. Gen. Laws 100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Act of July 30, 1959, 56th Leg., 3d C.S., ch. 1,

1959 Tex. Gen. Laws 187 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 5

Act of May 17, 1967, 60th Leg., R.S., ch. 566,

1967 Tex. Gen. Laws 1254 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Act of Sept. 6, 1969, 61st Leg., 2d C.S., ch. 1,

1969 Tex. Gen. Laws 61 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 37

xvi

Act of May 31, 1981, 67th Leg., R.S., ch. 389,

1981 Tex. Gen. Laws 1490 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 5

Act of Mar. 19, 1987, 70th Leg., R.S., ch. 10,

1987 Tex. Gen. Laws 27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Act of Mar. 1, 1989, 71st Leg., R.S., ch. 3,

1989 Tex. Gen. Laws 200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 37

Act of Aug. 13, 1991, 72d Leg., 1st C.S., ch. 5,

1991 Tex. Gen. Laws 134 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 7, 14, 32, 36

Act of May 30, 1997, 75th Leg., R.S., ch. 1185,

1997 Tex. Gen. Laws 4569 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1,

2006 Tex. Gen. Laws 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 5, 14, 21, 24, 36

Act of Sept. 14, 1959, Pub. L. 86-272, 73 Stat. 555 . . . . . . . . . . . . . . . . . . . . . 25

BLACK’S LAW DICTIONARY (6th ed. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

BLACK’S LAW DICTIONARY (9th ed. 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

GEORGE D. BRADEN, ET AL.,

THE CONSTITUTION OF THE STATE OF TEXAS:

AN ANNOTATED AND COMPARATIVE ANALYSIS (1977) . . . . . . . . . . . . 40

CAROLINE N. BROUN, ET AL., THE EVOLVING USE

AND THE CHANGING ROLE OF INTERSTATE

COMPACTS: A PRACTITIONER’S GUIDE (2006) . . 43, 45, 46, 52, 54, 55, 63

COMPTROLLER’S DECISION NOS. 104,752 & 104,753 (2011) . . . . . . . . . . . . . 39

1971 Fla. Laws ch. 71-980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

xvii

WILLIAM FLETCHER,

FLETCHER CYCLOPEDIA OF THE LAW OF CORPORATIONS (2014) . . . 28

WALTER HELLERSTEIN, STATE TAXATION (3d ed. 2014) . . . . . . . . . . . . 28-29

2014 Mich. Pub. Acts 282 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

1987 Minn. Law ch. 268 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Annual Reports, MULTISTATE TAX COMM’N,

http://www.mtc.gov/The-Commission/Annual-Report . . . . . . . . . . . . . 13

Member States, MULTISTATE TAX COMM’N,

http://www.mtc.gov/The-Commission/Member-States . . . . . . . . . . . . . 8

MULTISTATE TAX COMM’N, Model Reg. II.4 (1968) . . . . . . . . . . . . . . . . . . . . 29

SELECT COMM. ON TAX EQUITY, RETHINKING TEXAS

TAXES (Jan. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 37

NORMAN J. SINGER & J.D. SHAMBIE SINGER,

SUTHERLAND STATUTES AND STATUTORY

CONSTRUCTION (7th ed. 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63, 64

Kearns B. Taylor, Texas’ Exciting Answer in the Battle With

Proponents of Federal Control Over State Taxation of

Interstate Commerce, 30 TEX. B.J. 773 (Oct. 1967) . . . . . . . . . . . . . . . 13

Texas Business Corporation Act, 54th Leg., R.S., ch. 64,

1955 Tex. Gen. Laws 239 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

TEX. JUR. 3d Statutes § 62 (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

UNIF. DIV. OF INCOME FOR TAX PURPOSES ACT,

7A U.L.A. 155 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

2010 Utah Laws ch. 155 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

xviii

David A. Vanderhider, Comment, A Marginal Tax: The New Franchise

Tax in Texas, 39 ST. MARY’S L.J. 615 (2008) . . . . . . . . . . . . . . . . . . . . . 22

xix

STATEMENT OF THE C ASE

Nature of the Case: Graphic Packaging Corporation filed this combined

tax-refund and tax-protest suit to recover franchise

taxes, penalties, and interest that it paid to the State

for report years 2008-2010. CR.4-51.1 Graphic

primarily claimed that it was entitled to reduce its

franchise-tax liability for those years by electing the

three-factor method for apportioning a multistate

taxpayer’s “business income” to a state under the

Multistate Tax Compact, TEX. TAX CODE § 141.001,

rather than using the single-factor gross-receipts

method for apportioning margin to Texas required

by the franchise-tax statutes, id. § 171.106(a).

CR.10-13.

Trial Court: 353rd Judicial District Court, Travis County

The Honorable Darlene Byrne (presiding)

The Honorable Stephen Yelenosky (presiding)

Course of Proceedings: The parties filed cross-motions for partial summary

judgment on Graphic’s claim that it could reduce its

franchise-tax liability by applying the Compact’s

three-factor method for apportioning business

income. CR.55-384, 431-604; SuppCR.16-177.

Trial Court The trial court granted the Comptroller’s summary-

Disposition: judgment motion and denied Graphic’s summary-

judgment motion. CR.607. After Graphic non-suited

its remaining claims, CR.608-17, the trial court

rendered final judgment for the Comptroller,

CR.618-19.

1. Citations of the appellate record will appear as follows: clerk’s record = “CR.[page

number]”; supplemental clerk’s record = “SuppCR.[page number].” Citations of the

appendix to this brief will appear as “App’x [tab letter].”

xx

ISSUES PRESENTED

Chapter 171 of the Texas Tax Code imposes a franchise tax on most

entities that do business in Texas. The tax due for a given year is a percentage

of the taxpayer’s taxable “margin,” a tax base unique to Texas. Generally, a

taxpayer’s margin is the smallest of four amounts: (1) 70% of its total revenue,

(2) its total revenue minus $ 1 million, (3) its total revenue minus its costs of

acquiring or producing goods for sale, or (4) its total revenue minus

compensation it paid to employees.

A taxpayer that does business in multiple states must “apportion” a part

of its total margin to Texas to reflect the share of the taxpayer’s business

activity that occurred in Texas, and the franchise tax is assessed only on that

Texas portion of its total margin. Subject to two exceptions not applicable to

this case, section 171.106 of the Tax Code requires that a multistate taxpayer

apportion its “Texas margin” using the following method: total margin

multiplied by a fraction—the taxpayer’s gross receipts from its business

conducted in Texas divided by its gross receipts from its entire business.

Chapter 141 of the Tax Code adopts the Multistate Tax Compact, which

contains an apportionment method for an “income tax.” Article III.1 of the

Compact provides that a multistate taxpayer subject to a state “income tax”

xxi

may elect to apportion its “income” to that state either “in the manner provided

by the laws of such state” or “in accordance with Article IV” of the Compact.

Under Article IV, a taxpayer apportions its “business income” to a state as

follows: total income multiplied by the average of three fractions—(1) the value

of the taxpayer’s property in the state divided by the value of all of its property,

(2) the amount of compensation the taxpayer paid in the state divided by the

amount of all compensation it paid, and (3) the taxpayer’s sales in the state

divided by its sales everywhere.

This appeal concerns whether a taxpayer may reduce its franchise-tax

liability by choosing to apportion its margin to Texas using the Compact’s three-

factor method for apportioning business income for a state income tax, rather

than using section 171.106’s gross-receipts method for apportioning margin for

the Texas franchise tax. That question presents the following issues:

1. Does the Compact’s three-factor method for apportioning

business income for a state income tax also apply to

apportioning margin for the franchise tax?

2. Does section 171.106 prohibit a taxpayer from electing the

Compact’s three-factor method to apportion its margin?

3. Does Texas’s membership in the Compact prevent the

Legislature from making section 171.106’s gross-receipts

method the exclusive method for apportioning margin?

xxii

No. 03-14-00197-CV

In the Court of Appeals

for the Third Judicial District

Austin, Texas

GRAPHIC PACKAGING CORPORATION,

Appellant,

v.

GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS

OF THE STATE OF T EXAS , AND

K EN PAXTON, ATTORNEY GENERAL OF THE STATE OF TEXAS ,

Appellees.

On Appeal from the 353rd Judicial District Court

Travis County, Texas

BRIEF OF APPELLEES

TO THE HONORABLE THIRD COURT OF APPEALS :

To accept Graphic’s view that it may compute its franchise tax using the

Compact’s three-factor income-apportionment method, the Court would have

to disregard (1) the Tax Code’s command that the only exceptions to the gross-

receipts apportionment method are provided in section 171.106, (2) the

Legislature’s directive that the franchise tax is not an income tax, and (3) the

Compact states’ contrary construction of their agreement over the past 42

years. The Court should reject Graphic’s position and affirm the judgment.

STATEMENT OF FACTS

I. THE TEXAS FRANCHISE TAX

Since 1893, Texas has imposed a franchise tax on certain business entities

that are organized under Texas law or that operate in Texas. See In re Nestle

USA, Inc., 387 S.W.3d 610, 612-14 (Tex. 2012). Those entities pay the franchise

tax for the privilege of doing business here. Id. at 622.

The franchise-tax calculation has frequently changed. See id. at 612-16.

Generally, though, it starts with the taxpayer’s “tax base,” which is some

measure of the value of the taxpayer’s entire business during the year. See Gen.

Dynamics Corp. v. Sharp, 919 S.W.2d 861, 863 (Tex. App.—Austin 1996, writ

denied). If the taxpayer transacted business both within and outside Texas, its

tax base must be “apportioned” to Texas to determine the share that may fairly

be attributed to its Texas business and thus taxed by Texas. See id. Finally,

the taxpayer multiplies that Texas portion of its tax base by the tax rate to

compute its tax due. See id. at 864. These components are discussed below.

A. The Tax Base For The Franchise Tax

From 1897 to 1991, the franchise tax base was exclusively some measure

of “capital.” At first, the tax was assessed on the value of a taxpayer’s

“authorized capital stock.” Act approved Apr. 30, 1897, 25th Leg., R.S., ch. 104,

2

§ 1, 1897 Tex. Gen. Laws 140, 141. In 1959, the tax base was renamed “taxable

capital,” defined as the sum of “stated capital, surplus and undivided profits,

and outstanding bonds, notes, and debentures.” Act of July 30, 1959, 56th Leg.,

3d C.S., ch. 1, § 1, 1959 Tex. Gen. Laws 187, 306.2 The 1981 enactment of the

Tax Code defined “taxable capital” as the sum of stated capital and surplus. Act

of May 31, 1981, 67th Leg., R.S., ch. 389, § 1, 1981 Tex. Gen. Laws 1490, 1697.

In 1991, the Legislature added “earned surplus” as an alternate tax base.

Act of Aug. 13, 1991, 72d Leg., 1st C.S., ch. 5, § 8.09, 1991 Tex. Gen. Laws 134,

159-60. Earned surplus was an adjusted version of “reportable federal taxable

income.” Id. Different tax rates applied to capital and earned surplus, and the

taxpayer used the tax base that yielded the higher tax. See id. § 8.03, 1991 Tex.

Gen. Laws 153; INOVA Diagnostics, Inc. v. Strayhorn, 166 S.W.3d 394, 398

(Tex. App.—Austin 2005, pet. denied).

In 2008, “margin” replaced both capital and earned surplus as the

franchise tax’s main tax base. Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, § 2,

2006 Tex. Gen. Laws 1, 6-7 (eff. Jan. 1, 2008) (codified at TEX. TAX CODE

§ 171.002). The margin calculation begins with “total revenue,” which is derived

2. “Surplus” meant net assets minus stated capital. Texas Business Corporation Act, 54th

Leg., R.S., ch. 64, Pt. 1, art. 1.02.A(12), 1955 Tex. Gen. Laws 239, 240.

3

by adding together certain income reportable on a federal tax return, then

subtracting bad debts and other items included on the federal return. TEX. TAX

CODE §§ 171.101, .1011. Also excluded are receipts associated with various

transactions. See id. § 171.1011(e)-(x). Based on the resulting total revenue, the

taxpayer’s margin is the smallest of four amounts: (1) 70% of total revenue;

(2) total revenue minus $ 1 million; (3) total revenue minus “costs of goods sold”;

or (4) total revenue minus a capped amount of wages and compensation paid

and costs of benefits provided. Id. §§ 171.101, .1012, .1013.

Also beginning in 2008, a taxpayer whose total revenue does not exceed

$10 million may use total revenue instead of margin as its tax base. Id.

§ 171.1016. Taxpayers using this option—named the “E-Z Computation”—pay

a different tax rate and forgo credits and deductions. Id.

B. Apportionment Of The Tax Base For The Franchise Tax

1. The gross-receipts apportionment method

In 1910, the Texas Supreme Court ruled that the franchise tax was

unconstitutional as applied to foreign corporations because it was based on a

corporation’s capital from its entire business, both within and outside Texas.

See W. Union Tel. Co. v. State, 103 Tex. 306, 309-10, 126 S.W. 1197, 1197 (1910)

4

(citing W. Union Tel. Co. v. Kansas, 216 U.S. 1 (1910) (holding that a similar

privilege fee violated the Due Process and Commerce Clauses)).

In response, the Legislature amended the franchise tax to require both

Texas and foreign corporations to “apportion” their capital and to use only the

portion attributable to their Texas business in computing the tax. To do this,

a corporation multiplied its capital by a fraction: the “gross receipts” from its

Texas business divided by the gross receipts from its entire business. Act

approved Mar. 17, 1917, 35th Leg., R.S., ch. 84, § 1, 1917 Tex. Gen. Laws 168

(foreign corporations); Act of Mar. 18, 1919, 36th Leg., R.S., ch. 60, § 1, 1919

Tex. Gen. Laws 100 (Texas corporations).

Although the franchise tax’s tax base has changed several times, the

gross-receipts apportionment method has remained constant. The Legislature

retained the gross-receipts fraction as the required method in the 1959 revision,

the 1981 codification, and the 2006 restructuring of the franchise tax. Act of

July 30, 1959, 56th Leg., 3d C.S., ch. 1, § 1, 1959 Tex. Gen. Laws 187, 307-08; Act

of May 31, 1981, 67th Leg., R.S., ch. 389, § 1, 1981 Tex. Gen. Laws 1490, 1698;

Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 21

(codified at TEX. TAX CODE § 171.106).

5

2. Requests for alternative apportionment (1970-1989)

From 1970 to 1989, a taxpayer could ask the Comptroller to allow it to use

a different apportionment method that would more “fairly represent” its Texas

business. Act of Sept. 6, 1969, 61st Leg., 2d C.S., ch. 1, art. 7, § 1, 1969 Tex.

Gen. Laws 61, 96. Among the options, the taxpayer could request “inclusion of

one or more additional factors [with the gross-receipts fraction].” Id.

This provision was later analyzed by the Select Committee on Tax Equity,

a body created in 1987 to study the Texas tax system and its impact on the state

economy. Act of Mar. 19, 1987, 70th Leg., R.S., ch. 10, §§ 1-2, 1987 Tex. Gen.

Laws 27. The Committee recommended eliminating this option because it gave

foreign corporations a tax advantage over Texas businesses:

At the taxpayer’s request, additional factors such as property and

payroll can be included in the calculation. . . . [T]here is no incentive

to use additional factors unless they result in reduced tax liability.

. . . [B]usinesses that profit from the use of additional factors tend

to be out-of-state corporations with substantial sales into Texas but

more property and payroll in other states. The Committee

recommends that the use of additional factors be eliminated.

1 SELECT COMM. ON TAX EQUITY, RETHINKING TEXAS TAXES 49 (Jan. 1989).

In 1989, the Legislature adopted this proposal and repealed the provision,

leaving the gross-receipts fraction as the exclusive apportionment method. Act

of Mar. 1, 1989, 71st Leg., R.S., ch. 3, § 2, 1989 Tex. Gen. Laws 200.

6

3. Narrow exceptions to the gross-receipts method

Since 1989, the Legislature has carved out only two exceptions to the

gross-receipts fraction. A tax base derived from sales of services to or for a

regulated investment company is apportioned with a fraction based on company

shares. Act of Aug. 13, 1991, 72d Leg., 1st C.S., ch. 5, § 8.07, 1991 Tex. Gen.

Laws 134, 157-58. And a tax base derived from sales of services to an employee

retirement plan is apportioned with a fraction based on plan beneficiaries. Act

of May 30, 1997, 75th Leg., R.S., ch. 1185, § 7, 1997 Tex. Gen. Laws 4569, 4571.

4. Current apportionment statute

Since the tax base changed to margin in 2008, section 171.106 of the Tax

Code has continued to require use of the gross-receipts apportionment method.

TEX. TAX CODE § 171.106(a). The only exceptions are: (1) the different methods

related to investment companies and retirement plans discussed above, id.

§ 171.106(b), (c); and (2) adjustments to the gross-receipts figure for a few

specific entities and transactions, id. § 171.106(d)-(g). An “E-Z Computation”

filer also uses this section to apportion total revenue. Id. § 171.1016(b)(2).

C. Current Calculation Of Franchise Tax Due

To calculate its franchise tax, a taxpayer first multiplies its margin by the

gross-receipts fraction to determine “apportioned margin.” Id. § 171.101(a)(2).

7

From apportioned margin, the taxpayer subtracts any allowable deductions to

obtain “taxable margin.” Id. § 171.101(a)(3). Finally, taxable margin is

multiplied by the tax rate to compute the tax due. Id. § 171.002.

An “E-Z Computation” filer multiplies its total revenue by the gross-

receipts fraction to obtain its “apportioned total revenue.” Id. § 171.1016(b)(2).

That “apportioned total revenue” is multiplied by 0.575% to compute the tax

due. Id. § 171.1016(b)(3).

II. THE MULTISTATE TAX C OMPACT

A. Adoption Of The Compact

In 1967, Texas adopted the Multistate Tax Compact, an interstate

agreement concerning certain issues in the taxation of multistate taxpayers.

Act of May 17, 1967, 60th Leg., R.S., ch. 566, § 1, 1967 Tex. Gen. Laws 1254,

1254-65. The Compact is codified in section 141.001 of the Tax Code. App’x A.

By its terms, the Compact became effective in August 1967, after seven

states had enacted it in their state laws. TEX. TAX CODE § 141.001, art. X.1;

SuppCR.31. By 1972, a total of 21 states had joined. U.S. Steel Corp. v.

Multistate Tax Comm’n, 434 U.S. 452, 454 (1978). Currently, 15 states and the

District of Columbia are members. Member States, MULTISTATE TAX COMM’N,

http://www.mtc.gov/The-Commission/Member-States (last visited Jan. 26, 2015).

8

Congress never has consented to this Compact under the Constitution’s

Compact Clause. See U.S. Steel, 434 U.S. at 458 n.8.

B. The Compact’s Provisions

1. The Compact’s purposes

The Compact’s stated purposes are to: (1) “[f]acilitate proper

determination of state and local tax liability of multistate taxpayers, including

the equitable apportionment of tax bases and settlement of apportionment

disputes”; (2) “[p]romote uniformity or compatibility in significant components

of tax systems”; (3) “[f]acilitate taxpayer convenience and compliance in the

filing of tax returns and in other phases of tax administration”; and (4) “[a]void

duplicative taxation.” TEX. TAX CODE § 141.001, art. I.

2. The Multistate Tax Commission

The Compact creates the Multistate Tax Commission, which is composed

of the member states’ tax administrators. Id., art. VI.1. The Compact

authorizes the Commission to study state and local tax systems, to develop

proposals for increasing uniformity or compatibility of tax laws, and to publish

information to help states implement the Compact and to aid compliance with

tax laws. Id., art. VI.3. The Commission also may draft model tax regulations,

which have no force in a state unless the state adopts them. Id., art. VII. A

9

state may ask the Commission to audit a taxpayer on its behalf. Id., art. VIII.

Still, the Compact grants the Commission no regulatory authority over the

member states. See id., arts. I-XII.

3. The Compact’s income-tax articles

Article IV, titled “Division of Income,” reproduces nearly verbatim the

Uniform Division of Income for Tax Purposes Act (“UDITPA”), a model law

promulgated in 1957. Compare id., art. IV, with UNIF. DIV. OF INCOME FOR

TAX PURPOSES ACT, 7A U.L.A. 155 (2002). Article IV.2 states that, subject to

a few exceptions, a taxpayer “shall allocate and apportion his net income as

provided in this article.” TEX. TAX CODE § 141.001, art. IV.2. Article IV.9

provides that method, which uses the equally weighted average of three factors:

All business income shall be apportioned to this state by

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 three.

Id., art. IV.9. The three factors are fractions representing the proportion of

certain aspects of the taxpayer’s business located in the taxing state: (1) value

of in-state property divided by value of all property, (2) compensation paid in

the state divided by all compensation paid, and (3) gross receipts from in-state

sales divided by gross receipts from all sales. Id., art.IV.1(g), 10-17.

10

Article III, “Elements of Income Tax Laws,” sets forth two “Taxpayer

Option[s].” Id., art. III.1-2. Article III.1 states that a taxpayer subject to a

Compact state’s income tax may elect to apportion its “income” “in the manner

provided by the laws of such state” (other than the Compact) or using Article

IV’s three-factor apportionment method. Id., art. III.1. Article III.2 prescribes

an alternate income-tax computation for small taxpayers. Id., art. III.2. These

options do not apply to “any tax other than an income tax.” Id., art. III.3.

4. Miscellaneous Compact provisions

A state joins the Compact by enacting it into state law. Id., art. X. A

Compact provision held to violate a state constitution is severable. Id., art. XII.

A state withdraws from the Compact “by enacting a statute repealing the

same.” Id., art. X.2. Nothing in the Compact limits when a state may withdraw

or requires notice of the withdrawal. See id., art. X.

C. State Variations From The Compact’s Income-Tax Articles

In 1971, Florida repealed Articles III and IV of the Compact, 1971 Fla.

Laws ch. 71-980, § 1; CR.487, and enacted a mandatory three-factor

apportionment method placing double weight on the sales factor, FLA. STAT.

§§ 214.71, 220.53 (1971). At the following Commission meeting, Florida

expressed its view that the repeal was “fully consistent with the principles of the

11

Multistate Tax Compact.” CR.487. In response, the other 17 member states

unanimously approved a resolution recognizing Florida “as a regular member

in good standing” of the Compact. Id.

Many Compact members followed Florida’s example in some respect,

enacting apportionment laws that disallowed use of Article IV’s equally-

weighted three-factor method and Article III.1’s option to elect that method:

! In 1987, Minnesota repealed Articles III and IV and required

apportionment based on a three-factor method that placed

greater weight on the sales factor. 1987 Minn. Law ch. 268,

art. I, §§ 74-75 (codified at MINN. STAT. §§ 290.171, .191).

! In 1993, California and Oregon disallowed application of

Articles III and IV and required apportionment based on a

three-factor method that placed greater weight on the sales

factor. CAL. REV. & TAX CODE § 25128; OR. REV. STAT

§§ 314.606, .650. In 2013, Oregon re-enacted the Compact

without Articles III and IV. OR. REV. STAT. § 305.653.

! In 1995, Arkansas amended Article IV to double-weight the

sales factor. ARK. CODE § 26-5-101.

! In 1996, Idaho disallowed application of Article III.1 and

required apportionment based on a three-factor method that

double-weighted the sales factor. IDAHO CODE § 63-3027(i).

! In 2008, Michigan required apportionment based only on the

sales factor. MICH. COMP. LAWS § 208.1301.

! In 2009, Colorado repealed Article III.1, COLO REV. STAT.

§ 24-60-1301, and required apportionment based only on the

sales factor, id. § 39-22-303.5(4)(a).

12

! In 2010, Utah amended Article IV to increase the weight of

the sales factor for most taxpayers. 2010 Utah Laws ch. 155

(formerly codified at UTAH CODE § 59-1-801). In 2013, Utah

re-enacted the Compact without Articles III and IV. UTAH

CODE § 59-1-801.5.

! In 2011, Alabama amended Article IV to double-weight the

sales factor. ALA. CODE § 40-27-1.

! In 2013, the District of Columbia re-enacted the Compact

without Articles III and IV. D.C. CODE § 47-441.

Consistent with the Commission’s 1972 Florida resolution, there is no record of

any state ever objecting to these variations. See Annual Reports, MULTISTATE

TAX COMM’N, http://www.mtc.gov/The-Commission/Annual-Report.

III. THE FRANCHISE TAX AND THE C OMPACT

When Texas adopted the Compact in 1967, the franchise tax was assessed

only on capital. Thus, although the Compact’s income-tax articles (III and IV)

became part of Texas law, see TEX. TAX CODE § 141.001, they did not apply to

any Texas tax. See Kearns B. Taylor, Texas’ Exciting Answer in the Battle

With Proponents of Federal Control Over State Taxation of Interstate

Commerce, 30 TEX. B.J. 773, 821 (Oct. 1967) (“Texas, of course, not having an

income tax is not affected by the Compact allocation formula.”).

The introduction of the “earned surplus” tax base in 1991 might have

implicated Articles III and IV because it was an adjusted version of a taxpayer’s

13

federal taxable income. But in that same act, the Legislature enacted former

section 171.112(g), which stated: “Chapter 141 does not apply to this chapter.”

Act of Aug. 13, 1991, 72d Leg., 1st C.S., ch. 5, § 8.10, 1991 Tex. Gen. Laws 134,

162. That is, the Compact does not apply to the franchise tax. Id.

When the Legislature changed the tax base to “margin,” it removed the

obsolete references to capital and earned surplus. Act of May 2, 2006, 79th

Leg., 3d C.S., ch. 1, §§ 2-7, 2006 Tex. Gen. Laws 1, 1-35. Among those deletions

was the repeal of all of section 171.112 (“Gross Receipts for Taxable Capital”),

including subsection (g)’s proviso that “Chapter 141 does not apply to this

chapter.” Id. § 5, 2006 Tex. Gen. Laws 28. The same act specified, though, that

“[t]he franchise tax imposed by Chapter 171, Tax Code, as amended by this Act,

is not an income tax.” Id. § 21, 2006 Tex. Gen. Laws 38 (emphasis added).

The 2006 legislation also added a reference to the Compact. Under new

section 171.1014, taxpayers in an affiliated group must file a combined report.

TEX. TAX CODE § 171.1014(a). But a combined group may not include a taxable

entity that conducts business outside the United States “if 80 percent or more

of the taxable entity’s property and payroll, as determined by factoring under

Chapter 141, are assigned to locations outside the United States.” Id. Chapter

171 otherwise does not refer to the Compact.

14

IV. GRAPHIC’S TAX-REFUND/TAX-PROTEST SUIT

For 2008 and 2009, Graphic calculated its franchise tax using the gross-

receipts apportionment method required by section 171.106. CR.87, 102, 136.

Graphic later filed amended reports for 2008 and 2009 that re-apportioned its

margin using the Compact’s three-factor income-apportionment method.

CR.87, 91, 99-100, 113, 127-28. Based on those amended reports, Graphic filed

refund claims of $145,463 (2008) and $328,767 (2009). CR.87, 98, 126, 171, 173.

The Comptroller denied those claims, reasoning that section 171.106 required

Graphic to use the gross-receipts method to apportion its margin. CR.88, 357.

For 2010, Graphic computed its tax using the Compact’s three-factor

income-apportionment method. CR.88, 151-52. Based on that report, Graphic

sought a refund of $67,533 from a prior payment toward its 2010 tax. CR.88,

160, 171. The Comptroller rejected that report and assessed a deficiency using

the gross-receipts method, plus penalties and interest. CR.88, 341, 357.

Graphic appealed the Comptroller’s denial of its refund claims and sought

redetermination of its 2010 tax. CR.342-55. Following a SOAH hearing, the

Comptroller upheld the denial of the refund claims and the assessed deficiency.

CR.358-60. After the Comptroller denied Graphic’s motion for rehearing,

CR.364-84, Graphic paid the 2010 assessment under protest, CR.40-51.

15

Graphic then filed this combined tax-refund/tax-protest suit. CR.4-51.

Graphic sought to recover $821,961—the sum of its refund claims and protest

payment—on the ground that it was entitled to apportion its margin using the

Compact’s three-factor income-apportionment method. CR.10-13. Graphic also

asserted three other challenges to its franchise-tax bill. CR.13-17.

The parties filed cross-motions for summary judgment on Graphic’s claim

that it could use the Compact’s three-factor income-apportionment method.

CR.55-384, 431-604. The trial court granted the Comptroller’s motion and

denied Graphic’s motion, without assigning reasons. CR.607.

After Graphic non-suited its other claims, CR.608-17, the court rendered

final judgment for the Comptroller, CR.618-19. This appeal followed. CR.620.

SUMMARY OF THE ARGUMENT

As a matter of Texas law, Graphic may not compute its franchise tax by

invoking the “taxpayer option” in Article III.1 of the Compact and applying

Article IV’s income-apportionment method. Section 171.106 of the Tax Code

compels Graphic to apportion its margin to Texas using that statute’s gross-

receipts method. But even if Graphic could venture outside of section 171.106

for an apportionment method, the Compact would not be an option because, as

the Legislature has explicitly stated, the franchise tax is not an income tax. And

16

to the extent that section 171.106 conflicts with the Compact’s application, the

former provision prevails as the later-enacted, more specific statute.

The Compact’s status as an interstate compact does not mean that it

trumps section 171.106 here. The Compact’s structure and terms show that it

is only an advisory agreement that contains uniform laws, not a regulatory

compact that binds its member states. Indeed, those states have expressly and

consistently treated the Compact as a non-binding instrument. At least 12

(including Texas) have enacted laws that disable Article III.1’s taxpayer option.

Even if the Compact were binding, Article III.1 would not preclude the

Legislature from requiring taxpayers to use the gross-receipts apportionment

method. That article purports to incorporate state law as an apportionment

option, but it does not account for a law like section 171.106 that by its very

terms is not optional. Nor can Article III.1 surmount the Texas Constitution’s

prohibition against contractual suspensions of the state’s taxing authority.

Finally, any conflict with the Compact would not automatically render

section 171.106 invalid. That statute would yield only to the extent that it

qualified as an unconstitutional impairment of contractual obligations under the

Compact—a standard that Graphic cannot meet here. The Court should affirm

the trial court’s judgment.

17

ARGUMENT

I. IN C ALCULATING ITS FRANCHISE TAX , GRAPHIC MUST APPORTION

ITS MARGIN TO TEXAS U SING THE GROSS-RECEIPTS METHOD IN

SECTION 171.106 O F THE TAX C ODE.

Graphic claims that, in computing its franchise tax, it may apportion its

margin to Texas pursuant to the Compact, as codified in section 141.001 of the

Tax Code. Graphic Br. 21-24. Specifically, Graphic contends it may exercise the

“option” in Article III.1 of the Compact to use Article IV’s three-factor method

for apportioning “income.” Id. As a matter of Texas law, that argument fails

because (1) section 171.106 of the Tax Code requires taxpayers to apportion

margin using the gross-receipts method, subject only to a limited set of

exceptions that does not include the Compact; (2) Articles III and IV of the

Compact do not apply to the franchise tax because it is not an income tax; and

(3) section 171.106’s mandatory language prevails over any conflicting provision

outside of the franchise-tax statutes.

A. Section 171.106 Requires Taxpayers To Apportion Their Margin

Using The Gross-Receipts Method, Subject Only To Certain

Exceptions Provided In That Section.

Section 171.106(a) of the Tax Code requires taxpayers to apportion their

margin to Texas using the gross-receipts method, unless one of the exceptions

in section 171.106 applies:

18

Except as provided by this section, a taxable entity’s margin is

apportioned to this state to determine the amount of tax imposed

under Section 171.002 by multiplying the margin by a fraction, the

numerator of which is the taxable entity’s gross receipts from

business done in this state, as determined under Section 171.103,

and the denominator of which is the taxable entity’s gross receipts

from its entire business, as determined under Section 171.105.

TEX. TAX CODE § 171.106(a) (emphasis added). The only “[e]xcept[ions]”

“provided by this section” are: (1) different apportionment fractions related to

investment companies and retirement plans, id. § 171.106(b), (c); and

(2) changes to the gross-receipts figure for banks, defense readjustment

projects, sellers of loans or securities, and internet hosts, id. § 171.106(d)-(g).

This statute—which Graphic concedes is “unambiguous,” Graphic Br.

23—prohibits taxpayers from using the Compact’s income-apportionment

method to apportion their margin for the franchise tax. It permits exceptions

to the gross-receipts method only as “provided by this section,” TEX. TAX CODE

§ 171.106(a) (emphasis added), whereas the Compact is located in another

section of the Tax Code, id. § 141.001. And nothing in section 171.106 refers to

or incorporates section 141.001 as one of the allowed exceptions. Id. § 171.106.

Thus, section 171.106(a) forecloses Graphic’s attempt to use the Compact’s

income-apportionment method.

19

B. The Compact’s Three-Factor Income-Apportionment Method

Does Not Apply To The Franchise Tax Because It Is Not An

Income Tax.

Graphic may not use the Compact’s three-factor apportionment method

for a second reason. That method applies only to the apportionment of

“income” for an “income tax,” id. § 141.001, arts. III, IV, not the apportionment

of margin for the franchise tax.

1. Article III.1’s “taxpayer option” and Article IV’s

apportionment method apply only to apportionment of

“income” for a state’s “income tax.”

Articles III and IV of the Compact apply only to a member state’s

“income tax.” The Compact provides that those articles “shall apply only to the

taxes specifically designated therein.” Id., art. II.9. Article III, captioned

“Elements of Income Tax Laws,” states that “[n]othing in this article relates to

the reporting or payment of any tax other than an income tax.” Id., art. III.3.

Article III.1’s “taxpayer option” thus extends only to a “taxpayer subject to an

income tax.” Id., art. III.1. Similarly, Article IV, titled “Division of Income,”

covers only a “taxpayer having income from business activity which is taxable

both within and without this state.” Id., art. IV.2 (emphases added).

Predictably, then, the apportionment methods in Articles III and IV

address only the apportionment of “income.” The Article III.1 option pertains

20

only to taxpayers “whose income is subject to apportionment and allocation for

tax purposes pursuant to the laws of a party state.” Id., art. III.1. And the

option itself states that a taxpayer “may elect to apportion and allocate his

income in the manner provided by the laws of such state” or “in accordance with

Article IV.” Id. Article IV directs that a taxpayer “shall allocate and apportion

his net income as provided in this article.” Id., art. IV.2. The Article IV method

provides that “business income shall be apportioned to this state by multiplying

the income by a fraction”—the equally weighted average of the property,

payroll, and sales factors. Id., art. IV.9.

2. The Texas franchise tax is not an “income tax” and does

not involve the apportionment of “income.”

Article III.1’s “taxpayer option” and Article IV’s apportionment method

do not apply to the franchise tax because it does not impose an “income tax” or

involve apportioning a tax base of “income,” “net income,” or “business income.”

The Legislature made this distinction clear when it revised the franchise

tax to its current form: “The franchise tax imposed by Chapter 171, Tax Code,

as amended by this Act, is not an income tax.” Act of May 2, 2006, 79th Leg.,

3d C.S., ch. 1, § 21, 2006 Tex. Gen. Laws 1, 38 (emphasis added). Given that

plain statement, the Legislature could not possibly have intended that the

21

franchise tax would be subject to the Compact articles in section 141.001 of the

Tax Code that relate exclusively to an “income tax.”

Moreover, the franchise tax is assessed on and requires apportionment

of “margin,” which differs from the “net income” covered by Article IV’s

apportionment method. Compare TEX. TAX CODE §§ 171.002, .101, .106, with

id. § 141.001, art. IV.2. This Court has defined “net income” as the “‘excess of

all revenues and gains for a period over all expenses and losses of the period.’”

INOVA Diagnostics, 166 S.W.3d at 401 n.7 (quoting BLACK’S LAW DICTIONARY

1040 (6th ed. 1990)). By contrast, “margin” never involves deducting “all

expenses and losses.” Some taxpayers do not deduct their expenses to compute

margin; they calculate margin as 70% of total revenue or subtract $1 million

from total revenue, regardless of their expenses. TEX. TAX CODE

§ 171.101(a)(1)(A), (B)(i). And those taxpayers that deduct some expenses to

compute margin still do not deduct “all” expenses; they deduct only select

expenses—“costs of goods sold” or “compensation.” Id. § 171.101(a)(1)(B)(ii).

For that reason, a taxpayer may have a positive margin, and thus owe franchise

tax, even though it has no net income. See David A. Vanderhider, Comment, A

Marginal Tax: The New Franchise Tax in Texas, 39 ST. MARY’S L.J. 615, 646-

47 (2008) (observing that “[t]he fact that the margin tax could apply to a

22

company without profits, therefore, undermines the argument that it is an

income tax in disguise”).

Similarly, the “total revenue” tax base used for the alternate “E-Z

Computation” also differs from the “net income” covered by Article IV.

Compare TEX. TAX CODE § 171.1016, with id. § 141.001, art. IV.2. In contrast

to a net-income calculation, an E-Z filer may not make deductions from total

revenue. Id. § 171.1016(c).

3. The Compact’s “income tax” definition does not expand

Articles III and IV to include the franchise tax.

Graphic counters that the Compact defines “income tax” broadly enough

to cover the franchise tax. Graphic Br. 48-57. That definition states:

“Income tax” means 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.

TEX. TAX CODE § 141.001, art. II.4. Based on this definition alone, Graphic

urges, Articles III and IV apply to the franchise tax, Graphic Br. 48, and

(presumably) we should read those articles’ references to apportionment of

“income,” “net income,” and “business income” to mean “margin” or “total

revenue” to make them fit. Graphic is wrong.

23

a. Texas law establishes that the franchise tax does

not meet the Compact’s “income tax” definition.

The Legislature already has determined that the franchise tax falls

outside the Compact’s “income tax” definition by decreeing that “[t]he franchise

tax . . . is not an income tax.” Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, § 21,

2006 Tex. Gen. Laws 1, 38. In enacting that law, the Legislature is presumed

to have been aware of the Compact’s definitions. Nw. Austin MUD No. 1 v.

City of Austin, 274 S.W.3d 820, 828 (Tex. App.—Austin 2008, pet. denied). That

presumption cannot be rebutted because the Legislature referred to the

Compact in the same act, adapting two of Article IV’s “factors” to classify

taxpayers for combined-reporting purposes. Act of May 2, 2006, 79th Leg., 3d

C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 17 (codified at TEX. TAX CODE

§ 171.1014). By legislating that the franchise tax “is not an income tax,” without

qualification, the Legislature foreclosed the possibility that a Tax Code

provision could define that tax as an “income tax.”

The Legislature also signaled that the Compact’s “income tax” definition

does not cover the franchise tax by providing that “Pub. L. No. 86-272 does not

apply to the [franchise] tax.” Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, § 21,

2006 Tex. Gen. Laws 1, 38. Public Law No. 86-272 governs a “net income tax,”

24

which it defines in the same terms as the main clause of the Compact’s “income

tax” definition. Act of Sept. 14, 1959, Pub. L. 86-272, § 103, 73 Stat. 555, 556

(codified at 15 U.S.C. § 383) (“[T]he term ‘net income tax’ means any tax

imposed on, or measured by, net income.”). The Legislature thus 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.

Graphic overlooks the Legislature’s definitive statements, relying instead

on remarks by then-Comptroller Strayhorn that the restructured franchise tax

would qualify as an “income tax” under the Compact. Graphic Br. 56. The

relative weight due these competing assessments is clear. The Legislature’s

conclusion that the franchise tax is not an income tax is Texas law. By contrast,

Comptroller Strayhorn’s comments appeared in a letter requesting an Attorney

General Opinion, a communication that receives no deference. See Combs v.

Chapal Zenray, Inc., 357 S.W.3d 751, 756 (Tex. App.—Austin 2011, pet. denied).

b. The franchise tax does not meet the Compact’s

definition of an “income tax” on its own terms.

Even apart from the Legislature’s conclusive statement, the franchise tax

does not satisfy the Compact’s “income tax” definition on its own terms. The

Compact defines “income tax” principally as “a tax imposed on or measured by

25

net income.” TEX. TAX CODE § 141.001, art. II.4. Because the Compact does

not define “net income,” that phrase takes its ordinary meaning. State v.

$1,760.00 in U.S. Currency, 406 S.W.3d 177, 180 (Tex. 2013) (per curiam). As

discussed above, the franchise tax is not imposed on or measured by “net

income,” as that phrase is commonly understood. See supra Part I.B.2.

Graphic apparently concedes that point and instead argues that the

definition’s “including” clause captures the franchise tax. Graphic Br. 51.

Under that clause, an “income tax” includes “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.” TEX. TAX CODE § 141.001, art. II.4. That language does not help

Graphic.

Again, some taxpayers do not deduct any expenses to arrive at margin:

those that compute margin as (1) 70% of total revenue or (2) total revenue

minus $1 million. Id. § 171.101(a)(1)(A), (B)(i). Graphic tries to dodge that

problem by reframing the first calculation as a “deduction” of 30% of total

revenue, which is “an amount unrelated to any particular transaction,” and the

second as “a flat one million dollar deduction.” Graphic Br. 56 (emphasis

26

added). But the Compact’s “income tax” definition requires deduction of

“expenses,” not “amounts” or “dollars.” TEX. TAX CODE § 141.001, art. II.4.

The other taxpayers who use margin do not arrive at that figure “by

deducting expenses from gross income.” They calculate margin by deducting

one type of expense from total revenue: either “costs of goods sold” or

“compensation.” Id. § 171.101(a)(1)(B)(ii). The Compact’s “income tax”

definition would cover those taxpayers only if it could be rewritten to include

“an amount arrived at by deducting [any] expense[] from gross income.” See

Foster v. TDCJ, 344 S.W.3d 543, 548 (Tex. App.—Austin 2011, pet. denied) (“We

are not free to rewrite the statute in the guise of construing it.”). That rewrite

also would warp the definition’s main clause that defines an “income tax” as one

imposed on “net income.” The definition’s “including” clause may “enlarge” the

meaning of “net income,” not transmogrify it. See TEX. GOV’T CODE

§ 311.005(13) (noting that “including” is a “term[] of enlargement”).

Finally, an “E-Z” taxpayer computes its franchise tax based on “total

revenue,” from which no deductions of expenses are permitted. TEX. TAX CODE

§ 171.1016(c). If anything, this calculation fits the Compact’s definition of a

“gross receipts tax,” which is not subject to Articles III and IV. Id. § 141.001,

art. II.6 (defining “[g]ross receipts tax” as a tax “measured by the gross volume

27

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”). Graphic tries to shoehorn this computation into the Compact’s

“income tax” definition by arguing that the exclusion of certain items from

“total revenue” should count as “deductions [that] are not specifically and

directly related to any particular transaction.” Graphic Br. 56 n.16. But many

of those exclusions are receipts, not “expenses.” See generally TEX. TAX CODE

§ 171.1011. And the expense exclusions tend to be industry-specific items for

which taxpayers are not generally eligible, as Graphic implies, or flow-through

funds that count as another taxpayer’s total revenue. See generally id.

Respected treatises agree that the Compact’s “income tax” definition does

not include the franchise tax. One adopts the Compact definition and notes that,

although “[t]he majority of states have statutes imposing an income tax on

corporations,” “[t]he states without a corporate income tax are Nevada, Texas,

and Washington.” 14A WILLIAM FLETCHER, FLETCHER CYCLOPEDIA OF THE

LAW OF CORPORATIONS § 6904.50 & nn.1-2 (2014) (emphases added). Another

observes that “there is considerable doubt as to whether the Texas margins tax

constitutes a tax on ‘income’ under the Compact.” WALTER HELLERSTEIN,

28

STATE TAXATION ¶ 9.01 (3d ed. 2014). In sum, the franchise tax is a unique tax

that does not qualify as an “income tax,” even as defined by the Compact.

4. Model Compact Regulation II.4 does not expand the

Compact’s “income tax” definition to cover the franchise

tax.

Graphic leans heavily on Model Compact Regulation II.4 to expand the

Compact’s “income tax” definition beyond its text to reach the franchise tax.

Graphic Br. 49-50. That model regulation states that the Compact’s definitions

of “income tax” and “gross receipts tax” must be read together, and that any

doubt about a tax’s classification should be resolved in favor of construing it as

an income tax. MULTISTATE TAX COMM’N, Model Reg. II.4 (1968). In Graphic’s

view, that means any business tax constitutes an “income tax” under the

Compact unless the tax strictly meets the Compact’s “gross receipts tax”

definition. See Graphic Br. 50. Graphic is mistaken.

Model Regulation II.4 does not inform the Compact’s meaning in Texas

law because, as Graphic concedes, id. at 10, Texas never has adopted it. See

TEX. TAX CODE § 141.001, art. VII.3 (stating that each member must consider

model regulations for adoption “in accordance with its own laws”). Also, the

Commission drafted the regulation decades before Texas enacted a franchise

tax based on “margin,” and thus did not account for that unique tax base.

29

More importantly, the Compact itself does not demand that a tax be

classified as either a “gross receipts tax” or an “income tax,” with a presumption

favoring the latter. The Compact defines “tax” as “an income tax, capital stock

tax, gross receipts tax, sales tax, use tax, and any other tax which has a

multistate impact.” Id., art. II.9 (emphasis added). The franchise tax falls into

this last, catch-all category because generally it does not satisfy the Compact’s

definitions of “income tax” or “gross receipts tax,” but instead is a hybrid of

both (except the E-Z computation, which resembles a gross-receipts tax).

The Compact’s drafters thus anticipated that some taxes would not fit

within a defined category. And they knew how to craft provisions that would

sweep in those taxes where desired, as Article IV shows. Again, Article IV’s

apportionment method applies only to apportioning a taxpayer’s “net income”

to a member state for that state’s income tax. Id., art. IV.2. But the Compact’s

drafters wanted to ensure that method was available regardless of how other

states taxed the taxpayer’s business. To that end, the Compact broadly defines

a taxpayer as “taxable in another state” if:

(1) in that state he is subject to a net income tax, a franchise tax

measured by net income, a franchise tax for the privilege of doing

business, or a corporate stock tax, or (2) that state has jurisdiction

to subject the taxpayer to a net income tax regardless of whether,

in fact, the state does or does not.

30

Id., art. IV.3 (emphasis added). Under this provision, a taxpayer that does

business only in Texas and New Mexico (a Compact state) and is subject to New

Mexico’s income tax would be eligible to apportion its “net income” to New

Mexico under Article IV. That is so because in Texas that taxpayer “is subject

to . . . a franchise tax for the privilege of doing business,” see id., even though

the Texas franchise tax is not itself an income tax.

The Compact does not similarly extend the scope of Articles III.1 and IV

within a member state; there, those articles apply only to apportionment of

“income” for an “income tax.” Because Texas’s franchise tax is not an “income

tax,” under either the Compact or other Texas law, Graphic could not apportion

its margin to Texas using the Compact’s income-apportionment method.

C. Section 171.106’s Mandate To Use The Gross-Receipts Method

Prevails Over Any Conflicting Language In The Compact.

Graphic’s arguments that the Compact’s “taxpayer option” and income-

apportionment method apply to the franchise tax do not help its cause in any

event. Under Texas law, section 171.106’s specific mandate to use the gross-

receipts method prevails over any conflicting text in the Compact.

31

1. As the later-enacted, more specific statute, section

171.106(a) prevails over the Compact.

Reading Articles III and IV of the Compact to provide another method

of apportioning margin creates an irreconcilable conflict with section 171.106(a)

of the Tax Code. If a taxpayer may elect under Article III.1 to apportion its

margin using Article IV’s three-factor income-apportionment method, as

Graphic urges, that would negate section 171.106(a)’s directive to apportion

margin using the gross-receipts method “[e]xcept as provided by this section.”

See TEX. TAX CODE § 171.106(a) (emphasis added).

The Code Construction Act resolves this conflict in favor of section

171.106(a), in two respects. First, “if statutes enacted at the same or different

sessions of the legislature are irreconcilable, the statute latest in date of

enactment prevails.” TEX. GOV’T CODE § 311.025(a). The Legislature adopted

the Compact in 1967, but added the “except as provided” clause to section

171.106 in 1991.3 Second, if a general provision irreconcilably conflicts with a

special provision, “the special or local provision prevails as an exception to the

general provision.” TEX. GOV’T CODE § 311.026(b); see also Jackson v. SOAH,

351 S.W.3d 290, 297 (Tex. 2011). Section 171.106 specifically concerns the

3. Act of Aug. 13, 1991, 72d Leg., 1st C.S., ch. 5, § 8.07, 1991 Tex. Gen. Laws 134, 157-58

(codified at TEX. TAX CODE § 171.106(a)).

32

apportionment of margin for the franchise tax. TEX. TAX CODE § 171.106. By

contrast, Articles III and IV of the Compact concern a category of taxes that

qualify as “income taxes.” Id. § 141.001, arts. III-IV.

2. Section 171.106(a) and the Compact cannot be

harmonized so that both apply to the franchise tax.

Graphic counters that the Court need not reach the construction rules just

discussed because section 171.106(a) and the Compact do not irreconcilably

conflict and “can be readily harmonized so that neither is rendered

meaningless.” Graphic Br. 23. Of course, the Legislature already has

harmonized the statutes by declaring that the franchise tax is not an income tax.

See supra Part I.B.2. But even assuming that Article III.1’s “taxpayer option”

and Article IV’s income-apportionment method could apply to the franchise tax,

those provisions cannot be reconciled with section 171.106(a).

Graphic’s harmonizing argument hinges on semantic games. First,

Graphic heralds that “[n]othing in Section 171.106(a) . . . mandates that the

Texas Formula is the sole apportionment formula available to Texas

taxpayers.” Graphic Br. 23. That is true only in the sense that section

171.106(a) requires all taxpayers to use the gross-receipts method “[e]xcept as

provided by this section”—but the Compact is not one of the provided

33

exceptions. TEX. TAX CODE § 171.106(a). Graphic then offers that using the

Compact’s method would not constitute an “exception” to section 171.106(a)’s

gross-receipts method, but an “equally enforceable alternative[].” Graphic Br.

24. That is no distinction at all. If a taxpayer can apportion its margin using the

Compact’s three-factor income-apportionment method, then its “margin is [not]

apportioned to this state . . . by multiplying the margin by [the gross-receipts]

fraction,” TEX. TAX CODE § 171.106(a), creating an unrecognized “exception” to

that section’s general rule.

Graphic further claims that Article III.1’s “taxpayer option” “harmonizes

these different formulas” by incorporating section 171.106’s gross-receipts

fraction as an “alternate path.” Graphic Br. 23-24. But the issue is not

harmonizing the “formulas”; it is harmonizing the statutes, and Article III.1

does not do the job. Article III.1 presumes that a state’s tax laws (outside the

Compact) merely “provide[]” a different “manner” of apportioning income.

TEX. TAX CODE § 141.001, art. III.1. Article III.1 does not address the situation

in which a state’s tax law expressly makes an apportionment method exclusive,

as section 171.106(a) does. And neither Article III.1 nor any other Compact

provision contains language that resolves that conflict. There is no way to read

the Tax Code as allowing taxpayers to elect to apportion margin using the

34

Compact’s income-apportionment method and still give full meaning to the

words “[e]xcept as provided in this section” in section 171.106(a).

3. The presumption against implied repeals does not

support Graphic’s reading of the Tax Code.

Graphic next asserts that “the only way” the Court can agree with the

Comptroller is to hold that section 171.106(a) impliedly repealed section 141.001

of the Tax Code, at least as applied to the franchise tax, and that the

presumption against implied repeals should discourage the Court from doing

so. Graphic Br. 24-25. That argument fails on several fronts.

As an initial matter, the Court also can agree with the Comptroller by

concluding that the franchise tax is not an income tax. See supra Part I.B. That

holding would render Compact Articles III and IV in section 141.001

inapplicable to the franchise tax, not impliedly repealed.

Regardless, Graphic admits that implied repeals are merely “disfavored,”

not forbidden. Graphic Br. 25. “Where a later enactment is intended to

embrace all the law upon the subject with which it deals, it repeals all former

laws relating to the same subject.” Gordon v. Lake, 163 Tex. 392, 394, 356

S.W.2d 138, 139 (1962). To the extent Articles III and IV of the Compact ever

applied to the franchise tax, section 171.106’s later-enacted “except as provided”

35

clause embraces all apportionment options for the franchise tax, and thus

necessarily repeals those articles’ application.

More importantly, whether an implied repeal occurred ultimately “is a

matter of legislative intent.” TEX. JUR. 3d Statutes § 62 (2015). The Legislature

never has intended to apply Article III.1’s “taxpayer option” or Article IV’s

income-apportionment method to the franchise tax. When Texas adopted the

Compact, Articles III and IV did not apply to the franchise tax because it was

then imposed on capital, not income. When the Legislature added a tax base

resembling income—“earned surplus”—it simultaneously enacted former

section 171.112(g), which provided that “Chapter 141 [the Compact] does not

apply to this chapter.” Act of Aug. 13, 1991, 72d Leg., 1st C.S., ch. 5, §§ 8.09,

.10, 1991 Tex. Gen. Laws 134, 159-60, 162. And when the Legislature replaced

“earned surplus” with a tax base (margin) that rendered the tax “not an income

tax,” it sensibly repealed former section 171.112(g). Act of May 2, 2006, 79th

Leg., 3d C.S., ch. 1, §§ 5, 21, 2006 Tex. Gen. Laws 1, 28, 38. After all, if the

franchise tax no longer taxed income, Articles III and IV did not apply by their

own terms. Also, removing the bar against chapter 141’s application paved the

way for the same legislation to borrow two of Article IV’s factors to classify a

taxpayer for combined-reporting purposes. See TEX. TAX CODE § 171.1014.

36

When the Legislature wanted to provide a generally available alternative

to the gross-receipts method, it did so expressly in the franchise-tax statutes.

From 1970 to 1989, the Legislature allowed taxpayers to ask the Comptroller

to include factors other than gross receipts in the apportionment fraction. Act

of Sept. 6, 1969, 61st Leg., 2d C.S., ch. 1, art. 7, § 1, 1969 Tex. Gen. Laws 61, 96,

repealed by Act of Mar. 1, 1989, 71st Leg., R.S., ch. 3, § 2, 1989 Tex. Gen. Laws

200, 200. The Legislature revoked that option at the urging of the Select

Committee on Tax Equity, which recommended that taxpayers not be allowed

to reduce their tax by requesting the addition of property and payroll factors

to the apportionment method. 1 SELECT COMM. ON TAX EQUITY, RETHINKING

TEXAS TAXES 49 (Jan. 1989). Nothing in the franchise-tax statutes suggests

that the Legislature has since reversed that policy and once again permits

taxpayers to use a method with property and payroll factors, such as the

Compact’s, and now at their option without Comptroller approval.

Graphic implausibly reads this same history as evincing legislative intent

to allow the use of Articles III and IV of the Compact to apportion margin.

Graphic Br. 27. For example, Graphic touts the 2006 repeal of former section

171.112(g) as proof that the Legislature “must not have intended to override”

application of Articles III and IV to the revised franchise tax. Id. That

37

conclusion wholly ignores the provision in the same act that the franchise tax

“is not an income tax”—the only kind of tax to which Articles III and IV apply.

Graphic also wrongly asserts that section 171.1014 “cross-referenced and

thereby incorporated the Compact Formula into Chapter 171.” Graphic Br. 27.

Again, that section adapts two of the formula’s three components for a purpose

unrelated to apportionment—determining taxpayer eligibility for combined

reporting. TEX. TAX CODE § 171.1014(a). It does not incorporate the formula

itself into Chapter 171. Id.

4. The rule that ambiguous tax statutes must be construed

in the taxpayer’s favor does not apply here.

Graphic next argues that, to the extent section 171.106’s effect on the

Compact’s application is ambiguous, the Court must resolve that ambiguity in

Graphic’s favor by applying the rule that tax statutes “must be strictly

construed in favor of the taxpayer.” Graphic Br. 27. That is incorrect.

The rule Graphic invokes comes into play “only when doubt about a

statute’s application remains after the dominant rules of construction have been

applied.” Chapal Zenray, 357 S.W.3d at 756. One such “dominant rule”

requires deference to the Comptroller’s construction of an ambiguous tax

statute if that construction appears in a “formal opinion[] adopted after formal

38

proceedings,” is “reasonable,” and does not contradict the statute’s plain

language. Id. (internal quotation marks and citation omitted).

The conditions for agency deference are all met here. The Comptroller

resolved this specific issue in a formal decision issued after a formal hearing,

concluding that a taxpayer “may not elect the MTC three-factor apportionment

formula and is required to use the single-factor method” in section 171.106.

COMPTROLLER’S DECISION NOS. 104,752 & 104,753 (2011) (App’x B). That

conclusion is reasonable—it comports with the Legislature’s express

understanding that the franchise tax is not an income tax and the longstanding

policy against allowing taxpayers to use an alternate apportionment method.

See supra Parts I.B.2, C.3. And the Comptroller’s position does not contradict

the Tax Code’s plain text. To the contrary, his reading enforces section

171.106’s directive that any exceptions to the gross-receipts apportionment

method must be provided by that section. TEX. TAX CODE § 171.106(a).

5. The Comptroller’s reading of section 171.106 does not

violate article III, section 36 of the Texas Constitution.

Finally, Graphic urges that the Comptroller’s reading of section 171.106

would “amend” section 141.001 in violation of article III, section 36 of the Texas

Constitution. Graphic Br. 28-29. That constitutional provision forbids the

39

Legislature to amend a law “by reference to its title” and requires instead that

amended laws be “re-enacted and published at length.” TEX. CONST. art. III,

§ 36. Graphic misunderstands that mandate.

Article III, section 36 prohibits “the practice of amending a statute by

referring to its title and then providing that it should be amended by striking

out or deleting certain words and phrases and then inserting new words and

phrases.” Hirsch v. State, 282 S.W.3d 196, 204 (Tex. App.—Fort Worth 2009,

no pet.) (internal quotation marks and citation omitted); accord 1 GEORGE D.

BRADEN, ET AL., THE CONSTITUTION OF THE STATE OF TEXAS: AN ANNOTATED

AND COMPARATIVE ANALYSIS 174 (1977). But this provision “does not apply to

legislative enactments which are complete within themselves, even though their

effect may be to amend some other law.” State v. Sw. Gas & Elec. Co., 145 Tex.

24, 30, 193 S.W.2d 675, 679 (1946). Nor does it apply to the implied repeal of a

“conflicting” statute, State Bd. of Ins. v. Adams, 316 S.W.2d 773, 778 (Tex. Civ.

App.—Houston 1958, writ ref’d n.r.e.), or a law that “restricts the operation of

the former statutes upon the same subject,” City of Oak Cliff v. State, 97 Tex.

383, 390, 79 S.W. 1, 3 (1904).

To the extent the Compact’s income-apportionment provisions ever

applied to the franchise tax, section 171.106 is a complete legislative enactment

40

that at most impliedly repeals those provisions or restricts their operation. See

supra Part I.C.3. That construction does not violate the Texas Constitution.

II. TEXAS’S MEMBERSHIP IN THE C OMPACT D OES NOT PRECLUDE THE

LEGISLATURE FROM REQUIRING A TAXPAYER TO U SE THE GROSS-

RECEIPTS METHOD TO APPORTION MARGIN.

In the alternative, Graphic urges that any Texas law that forbids it to

invoke Article III.1’s “taxpayer option” and use Article IV’s income-

apportionment method is invalid under “compact law” and the Contracts

Clauses of the United States and Texas Constitutions. Graphic Br. 29-48.

Specifically, Graphic contends that the Compact is a contract that bars the

Legislature from altering its terms or application until Texas withdraws from

the Compact, and that any alteration unconstitutionally impairs the obligations

of that contract. Id. The Court should reject that argument, for several

reasons: (1) regardless of the Compact’s legal status, Articles III and IV do not

apply to the franchise tax because it is not an “income tax” under the Compact;

(2) the Compact is an advisory agreement, not a binding regulatory compact;

(3) Article III.1 does not clearly and validly preclude the Legislature from

mandating exclusive use of the gross-receipts apportionment method; and

(4) any conflict between Texas law and Articles III and IV would not satisfy the

standard for an unconstitutional impairment of contracts.

41

A. Articles III And IV Of The Compact Do Not Apply To The

Franchise Tax Because It Is Not An “Income Tax.”

As an initial matter, this appeal does not hinge on whether Texas’s

enactment of the Compact in 1967 contractually bound all future Legislatures

to maintain Articles III and IV as Texas law, because those articles do not apply

to the franchise tax in any event. As discussed above, the franchise tax does not

involve the apportionment of “income,” nor does it meet the Compact’s “income

tax” definition. See supra Part I.B. Regardless of the Compact’s legal force,

then, Articles III and IV do not apply to the franchise tax by their own terms.

For that reason alone, Graphic’s compact-related arguments fail.

B. The Legislature May Restrict The Compact’s Application In

Texas Law Because It Is Not A Binding Regulatory Compact.

Even if Articles III and IV somehow could be construed to apply to the

franchise tax, the Compact does not contractually bar Texas from restricting

those articles’ operation elsewhere in Texas law. This Compact is an advisory

compact containing model laws, not a binding regulatory compact that carries

the preemptive force that Graphic assigns to it.

1. The term “compact” does not make this Compact binding.

Contrary to Graphic’s assertions, Graphic Br. 38-39, the label “compact”

does not resolve whether the Compact contractually obligates Texas to maintain

42

the application of Articles III and IV in state law. Only “in some contexts” is a

compact “a contract between the participating states” McComb v. Wambaugh,

934 F.2d 474, 479 (3d Cir. 1991) (emphasis added).

Of the three types of interstate compacts—“boundary,” “regulatory,” and

“advisory”—only the first two potentially create a binding contract. CAROLINE

N. BROUN, ET AL., THE EVOLVING USE AND THE CHANGING ROLE OF

INTERSTATE COMPACTS: A PRACTITIONER’S GUIDE 12-15 (2006). Boundary

compacts “establish official borders between states” “with a high degree of

finality.” Id. at 12, 13. And in many “regulatory” compacts, “the member states

have collectively and contractually agreed to reallocate governing authority

away from individual states to a multilateral relationship.” Id. at 21-22.

By contrast, “nonbinding” “advisory” compacts “are more akin to

administrative agreements between states,” which “lack formal enforcement

mechanisms.” Id. at 13, 14. “[A]dvisory compacts cede no state sovereignty nor

delegate any governing power to a compact-created agency.” Id. at 14. And

they “generally do not require congressional consent.” Id. As discussed below

the Compact fits this advisory-compact category.

43

2. U.S. Steel did not address whether the Compact is a

binding contract.

Graphic repeatedly asserts that the Supreme Court already “recognized”

or “determined” the Compact’s “binding” nature in U.S. Steel. Graphic Br. 36,

38, 41. Not so. Neither the word “binding” nor “contract,” nor any variation

thereof, appears in the majority opinion. See 434 U.S. at 454-79. That is

unsurprising because whether the Compact constitutes a binding contract was

not at issue in that case.

In U.S. Steel, corporations facing audits by the Commission filed suit to

declare the Compact unconstitutional on the ground that the Compact’s lack of

congressional consent violated the Compact Clause. Id. at 458 & n.7; see U.S.

CONST. art. I, § 10, cl. 3 (“No State shall, without the Consent of Congress . . .

enter into any Agreement or Compact with another State . . . .”). The Court

rejected that challenge, holding that the Compact Clause does not apply to this

Compact because it does not “enhance the political power of the member States

in a way that encroaches upon the supremacy of the United States.” 434 U.S.

at 472. The Court also rejected claims that the Compact violated the Commerce

Clause and the Fourteenth Amendment. Id. at 478-79. Thus, while the Court

decided that the Compact was “valid” (at least under the provisions at issue), see

44

id. at 454, it did not address or resolve what type of compact the Compact is or

whether it contractually binds its member states.

3. The Compact does not exhibit the indicia of a binding

regulatory compact.

Since U.S. Steel, the Supreme Court has identified three “classic indicia”

of a binding regulatory compact: (1) the establishment of a joint regulatory

body; (2) state enactments that require reciprocal action to be effective; and

(3) the prohibition of unilateral repeal or modification of its terms. See Ne.

Bancorp, Inc. v. Bd. of Governors of Fed. Reserve Sys., 472 U.S. 159, 175 (1985);

see also Seattle Master Builders Ass’n v. Pac. Nw. Elec. Power & Conservation

Planning Council, 786 F.2d 1359, 1363 (9th Cir. 1986). The Compact does not

exhibit any of these characteristics.

a. The Commission is not a joint regulatory body.

The first trait of a binding regulatory compact is creation of a “joint

organization for regulatory purposes,” Seattle Master Builders, 786 F.2d at

1363 (emphasis added); see also Ne. Bancorp, 472 U.S. at 175. By contrast, an

advisory compact “cede[s] no state sovereignty nor delegate[s] any governing

power to a compact-created agency.” BROUN, supra, at 14 (emphases added).

45

The Compact does not create a joint regulatory body. It forms the

Multistate Tax Commission, TEX. TAX CODE § 141.001, art. VI, but that agency

does not qualify. As the Court noted in U.S. Steel: “Nor is there any delegation

of sovereign power to the Commission; each State retains complete freedom to

adopt or reject the rules and regulations of the Commission.” 434 U.S. at 473;

see also TEX. TAX CODE § 141.001, art. VII.3. Aside from drafting non-binding

rules, the Commission’s other powers also evince an advisory compact.

Compare TEX. TAX CODE § 141.001, art. VI.3 (granting the Commission power

to “[s]tudy state and local tax systems,” “[d]evelop and recommend proposals,”

and “[c]ompile and publish information”), with BROUN, supra, at 13 (explaining

that advisory compacts “are designed not to actually resolve an interstate

matter, but simply to study such matters”). The Commission conducts audits

only upon request. TEX. TAX CODE § 141.001, art. VIII.2. And its arbitration

functions are inoperative. U.S. Steel, 434 U.S. at 493 (White, J., dissenting).

Graphic counters with only the cursory statement that the Compact’s

creation of a “joint Compact agency . . . with delineated powers” suffices here.

Graphic Br. 41. For the reasons discussed, it does not.

46

b. The Compact provisions do not require reciprocal

action to be effective.

The second feature of a binding regulatory compact is the inclusion of

“state enactments which require reciprocal action for their effectiveness.”

Seattle Master Builders, 786 F.2d at 1363; see also Ne. Bancorp, 472 U.S. at

175. For example, the Interstate Compact for Adult Offender Supervision

provides a mechanism for Texas parolees to serve their parole in other compact

states, and vice-versa. See TEX. GOV’T CODE § 510.017, art. I. That agreement

requires reciprocal action to be effective because, among other things, a

“sending” state “transfer[s] supervision authority” over a parolee to a

“receiving” state, which in turn must allow a sending state’s officials to enter the

receiving state to “retake” an offender for a parole violation. See id.

The Multistate Tax Compact does not similarly require reciprocal action

to effect its substantive terms. The Compact “does not purport to authorize the

member States to exercise any powers they could not exercise in its absence.”

U.S. Steel, 434 U.S. at 473. Without the Compact, each state administers its tax

laws, including the apportionment of its business tax base, without reference to

or consideration of other states’ laws. See Moorman Mfg. Co. v. Bair, 437 U.S.

267, 278-79 (1978) (noting that states enact differing apportionment formulas

47

“based on political and economic considerations that vary from State to State”).

The Compact does nothing to change that. A Compact state can allow a

taxpayer to exercise Article III.1’s option and use Article IV to apportion its

business income regardless of how other states tax or apportion that income or

whether those states are even Compact members. TEX. TAX CODE § 141.001,

art. IV.2-3 (noting that the only condition on Article IV’s application is that the

taxpayer’s income be “taxable” in another state).4

Graphic fails to rebut this point by arguing that the Compact required

enactment by seven states to become effective. Graphic Br. 39. Because Texas

adopted the Compact as a statute, its substantive provisions became effective

as state law then—at least insofar as they were applicable—regardless of

whether other states ever followed suit. Enactment by seven states allowed the

Compact to “enter into force,” TEX. TAX CODE § 141.001, art. X.1, which, for

example, authorized the Commission’s creation and funding, id., art. VI. But

the Supreme Court could not have meant that the joint action necessary to

establish an advisory body with no regulatory power is evidence of a binding

regulatory compact. For the same reason, Graphic’s reliance on the recital that

4. Likewise, Article V’s “tax credit” and “exemption certificate” provisions do not depend on

whether the other state imposing a sales or use tax or authorizing an exemption has similar

provisions in its laws or is a Compact

48

states “entered into” the Compact proves nothing. Graphic Br. 39. Even

advisory compacts must be “entered into” by their members.

c. The Compact does not prohibit unilateral repeal or

modification.

The third characteristic of a binding regulatory compact is “conditional

consent” that prohibits a member state from unilaterally repealing or modifying

its participation. Seattle Master Builders, 786 F.2d at 1363; see also Ne.

Bancorp, 472 U.S. at 175. This Compact contains neither condition.

The Compact expressly provides that a state “may withdraw from this

compact by enacting a statute repealing the same.” TEX. TAX CODE § 141.001,

art. X.2. Withdrawal does not affect any previously incurred liability—e.g.,

dues, payments for audits, id., art. VI.4, VIII.2—but even the existence or non-

payment of those liabilities does not prevent or delay withdrawal. Id, art. X.2.

Graphic tries to side-step this provision in two ways. First, it misstates

the Seattle Master Builders test as merely requiring “terms for withdrawal.”

Graphic Br. 41. The relevant inquiry is whether a state “is not free” to “repeal

its participation unilaterally,” 786 F.2d at 1363, something this Compact

explicitly allows. Second, Graphic observes that “[o]ther Texas compacts also

have similar withdrawal provisions.” Graphic Br. 40 n.6. But those provisions

49

are neither so similar nor so unilateral. They all require a state to provide

significant advance notice to other states before it may withdraw, and to

perform obligations to other states that extend beyond the date of withdrawal.5

The Compact also does not prohibit a state from unilaterally modifying

its participation. While no provision explicitly allows a state to unilaterally

modify its participation, that silence favors a construction that states may do so.

The “well-established” presumption is that, “absent some clear indication that

the legislature intends to bind itself contractually,” an enacted law does not

create contractual rights. Nat’l R.R. Passenger Corp. v. Atchison, Topeka &

Santa Fe Ry., 470 U.S. 451, 465-66 (1985). That presumption surely informs

Seattle Master Builders’ framing of this inquiry: the issue is whether a compact

renders a state “not free to modify . . . its participation unilaterally,” not

5. TEX. GOV’T CODE § 510.017, art. XI (Interstate Compact for Adult Offender Supervision)

(requiring, upon introduction of repealing legislation, immediate notice to compact agency,

which notifies all compact states within 60 days; and requiring performance of all obligations

that extend beyond withdrawal); TEX. FAM. CODE § 162.102, art. IX (Interstate Compact on

the Placement of Children) (conditioning withdrawal on notifying all party states’ governors,

delaying withdrawal’s effective date for two years, and requiring continuing performance of

obligations related to a placement made before withdrawal); TEX. HEALTH & SAFETY CODE

§ 612.001, art. XIII (Interstate Compact on Mental Health) (conditioning withdrawal on

notifying all party states’ governors and compact administrators, delaying withdrawal’s

effective date for one year, and providing that withdrawal does not affect status of patients

transferred to or from the state under the compact).

50

whether a compact affirmatively allows modification. 786 F.2d at 1363

(emphasis added).

And because the Compact concerns taxation, its silence on modification

weighs even more strongly against construing it as a binding contract. States

“have the attribute of sovereign powers in devising their fiscal systems to

ensure revenue.” Allied Stores of Ohio, Inc. v. Bowers, 358 U.S. 522, 526 (1959).

Since “States rarely relinquish their sovereign powers,” such as taxation, “when

they do we would expect a clear indication of such devolution, not inscrutable

silence.” Tarrant Reg’l Water Dist. v. Hermann, 133 S. Ct. 2120, 2133 (2013).

The Compact’s silence on modification thus indicates that its members did not

intend to contract away their sovereign right to amend their state tax laws in

a way that varies from the Compact’s substantive provisions.

To the contrary, the Compact states consistently have construed that

silence to mean that members may unilaterally change or restrict the

Compact’s terms in their own laws. In 1972, the Compact states unanimously

ratified Florida’s decision to repeal Articles III and IV of the Compact in its law

and to mandate a different apportionment method, recognizing that it remained

a “regular” Compact member “in good standing.” CR.487. And, as discussed

above, 11 more former and current Compact members (including Texas) have

51

since taken similar steps to remove or limit the operation of Articles III and IV

in their jurisdictions, all without objection from other states. See supra

Statement of Facts, Parts II.C, III.6 Because “the parties’ course of

performance under the Compact is highly significant” in interpreting its

meaning, see Alabama v. North Carolina, 560 U.S. 330, 346 (2010), the Court

should not construe the Compact to be a binding regulatory compact.

Graphic invites the Court to read the term “compact” itself to prohibit

unilateral modification, but that begs the question. See Graphic Br. 39. “Once

entered, the terms of the compact and any rules and regulations authorized by

the compact can, to the extent provided in the agreement, supersede any

substantive state laws that may be in conflict . . . .” BROUN, supra, at 22

6. Taxpayers, on the other hand, have challenged some of those departures from Articles III

and IV in suits like this one. The Michigan Supreme Court recently held, in a 4-3 decision,

that its legislature did not restrict application of Articles III.1 and IV as a matter of Michigan

statutory law. IBM v. Dep’t of Treasury, 852 N.W.2d 865, 871-77 (Mich. 2014) (plurality op.)

(holding no implied repeal); id. at 881-82 (Zahra, J., concurring) (finding that the Compact

was re-enacted). The Comptroller submits that the dissenting justices had the better view,

reasoning that Article III.1’s taxpayer option could not be reconciled with the mandatory

language of Michigan’s apportionment statute and that the Compact is not a binding contract.

Id. at 882-89 (McCormack, J., dissenting). Michigan has since retroactively repealed the

Compact, 2014 Mich. Pub. Acts 282, an enactment recently upheld by the Michigan Court of

Claims in part on the ground that the Compact is not a binding contract. Ingram Micro, Inc.

v. Dep’t of Treas., No. 11-000035-MT, slip op. at 7-13 (Mich. Ct. Cl. Dec. 19, 2014) (App’x C).

Similar challenges are pending in California, Gillette Co. v. Calif. Franchise Tax Bd., No.

S206587 (Cal.) (fully briefed; argument date pending); Minnesota, Kimberly-Clark Corp. v.

Comm’r of Revenue, No. 8670-R (Minn. Tax Ct.) (to be argued Mar. 19, 2015); and Oregon,

Health Net, Inc. v. Dep’t of Revenue, No. 5127 (Or. Tax Ct.) (argued July 23, 2014).

52

(emphasis added). Unlike other compacts, this Compact does not provide that

it supersedes conflicting state law,7 nor does it expressly prohibit changes to the

Compact’s text or application in a member state’s law.

Graphic also tries to conjure a general prohibition against modification

from the Compact’s audit article. Graphic Br. 40. Because that article is “in

force only in those party states that specifically provide therefor by statute,”

TEX. TAX CODE § 141.001, art. VIII.1, Graphic infers that every other article is

not optional. Graphic Br. 40. No such inference is due. Requiring member

states to “opt in” to the Commission’s audit program through an additional

affirmative enactment says nothing about whether those states may “opt out”

of other Compact provisions by changing their own laws.8

7. Cf. TEX. FAM. CODE § 60.010, art. XII.A.2 (Uniform Interstate Compact on Juveniles) (“All

compacting states’ laws other than state constitutions and other interstate compacts

conflicting with this compact are superseded to the extent of the conflict.”); TEX. GOV’T CODE

§ 510.017, art. XIII (Interstate Compact for Adult Offender Supervision) (“Nothing in this

compact prevents the enforcement of any other law of a compacting state that is not

inconsistent with this compact.”); TEX. TRANSP. CODE § 523.007 (Driver’s License Compact

of 1993) (“Except as expressly required by provisions of this compact, nothing contained

herein shall be construed to affect the right of any state to apply any of its other laws relating

to licenses to drive to any person or circumstance . . . .”).

8. Graphic tellingly does not cite the only Compact provision that might be construed to

prohibit a modification. Article XI states that “Nothing in this compact shall be construed

to . . . [a]ffect the power of any state or subdivision thereof to fix rates of taxation, except that

a party state shall be obligated to implement Article III.2 of this compact.” TEX. TAX CODE

§ 141.001, art. XI(a). No similar provision obligates a state to implement the articles that

Graphic relies on here (III.1 and IV).

53

4. The Compact is an advisory compact with uniform laws.

Because the Compact lacks the indicia of a binding regulatory compact,

it must be an advisory compact. The usual traits of advisory compacts are all

present: it “lack[s] formal enforcement mechanisms”; it aims to “study” state

tax systems, not “resolve” conflicts among them; it “cede[s] no state sovereignty

nor delegate[s] any governing power to a compact-created agency”; and it

“do[es] not require congressional consent.” BROUN, supra, at 13-14.

The Compact’s structure and terms show that Article II through V’s tax-

law “elements” constitute uniform laws contained within that advisory compact.

The Compact simply inserts those articles into its text, without any prefatory

language requiring members to maintain those provisions unchanged in their

laws or any means of compelling them to do so. See TEX. TAX CODE § 141.001,

arts. II-V. What prefaces those provisions instead is the “Purposes” article,

which describes the Compact as “[f]acilitat[ing]” the determination of multistate

taxpayers’ tax liability and “[p]romot[ing]” uniformity in tax systems—words

that are hortatory, not mandatory. Id., art. I. Indeed, the Compact’s sole

method of implementing those tax-law elements is through the Commission’s

draft regulations, which are “advisory only.” U.S Steel, 434 U.S. at 457.

Moreover, Article IV’s text is a uniform law—UDITPA. See supra Statement

54

of Facts, Part II.B.3. And the Commission’s first annual report recounted that

the Compact had “been enacted as a uniform law” by 15 states. SuppCR.31.

Because “[u]niform acts do not constitute a contract between the states,” the

Compact members “may make changes to fit individual state needs.” BROUN,

supra, at 16. Accordingly, Texas was free to restrict the operation of Articles

III.1 and IV in Texas law to the extent they would otherwise apply.

C. The Compact Does Not Preclude The Legislature From

Mandating Exclusive Use Of Section 171.106’s Gross-Receipts

Apportionment Method.

Regardless of whether the Compact as a whole is a binding contract, the

provisions that Graphic relies on—Articles III.1 and IV—still do not compel its

desired outcome, for two reasons. First, applying Article III.1 to the franchise

tax creates a latent ambiguity that must be resolved in favor of section 171.106’s

exclusive apportionment method. And second, under the Texas Constitution,

Article III.1 may not suspend Texas’s authority to tax the part of a taxpayer’s

margin that would elude taxation under Article IV’s apportionment method.

1. Article III.1 does not unambiguously bar the Legislature

from enforcing an exclusive apportionment method.

Article III.1 states that a taxpayer “may elect to apportion and allocate

his income in the manner provided by the laws of [a Compact] State . . . without

55

reference to this compact, or may elect to apportion and allocate in accordance

with [the three-factor income-apportionment method in] Article IV.” TEX. TAX

CODE § 141.001, art. III.1. Again, this language presumes that a state’s laws do

no more than “provide[]” a “manner” of apportioning income; it does not

address the circumstance in which that state-law manner mandates exclusive

use of one apportionment method, as section 171.106(a) does. See supra Part

I.C.2. Nor does the Compact preclude a state from adding that sort of exclusive

condition to the laws that Article III.1 incorporates by reference. For all that

Article III.1 reveals, the taxpayer takes the state laws as it finds them. So what

happens when the state law that Article III.1 incorporates as an option is by its

very terms not optional? The Compact doesn’t say.

Applying Article III.1 to section 171.106’s exclusive apportionment

method thus creates a latent ambiguity. See BLACK’S LAW DICTIONARY 93 (9th

ed. 2009) (defining “latent ambiguity” as an “ambiguity that does not readily

appear in the language of a document, but instead arises from a collateral

matter when the document’s terms are applied”). That ambiguity warrants

recourse to “other interpretive tools” to discern the Compact’s meaning in this

scenario. See Tarrant Reg’l Water Dist., 133 S. Ct. at 2132.

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Three construction aids already discussed support the Comptroller’s view

that the Compact does not prevent member states from enforcing exclusive

apportionment provisions such as section 171.106. First, courts will not

construe a compact to cede a sovereign power like tax apportionment without

a “clear indication” of that purpose. Id. at 2133. Again, Article III.1 does not

address the conflict that arises when it purports to incorporate a non-optional

state law as an option, much less clearly indicate an intent to allow taxpayers to

override a legislative command. See supra Part II.B.3.c. Second, “[t]he parties’

conduct under the Compact” provides “‘highly significant’ evidence of [their]

understanding of the [C]ompact’s terms.” Tarrant Reg’l Water Dist., 133 S. Ct.

at 2135 (quoting Alabama, 560 U.S. at 346). Both the 1972 Florida resolution

and the unopposed disabling of Article III.1’s taxpayer option by 12 Compact

members reflect the parties’ common, long-held view that the Compact does not

preclude them from imposing an exclusive apportionment method. See supra

Part II.B.3.c. And third, comparisons to other compacts’ text can shed light on

the parties’ intent here. Tarrant Reg’l Water Dist., 133 S. Ct. at 2133. Unlike

this Compact, other compacts to which Texas belongs explicitly state that the

compact supersedes any conflicting state statute. See supra p. 53, n.7.

57

Graphic elides the latent ambiguity in Article III.1 by rewriting it.

According to Graphic, Article III.1 “require[s] that all party states must provide

taxpayers with the Compact Election.” Graphic Br. 43. But that is not what it

says. As noted above, the Compact inserts Article III.1 in its text without any

prefatory directive to states whatsoever. See supra Part II.B.4. Article III.1

is directed at “taxpayer[s],” not states, and incorrectly presumes that state law

always may be incorporated as optional. TEX. TAX CODE § 141.001, art. III.1.

Graphic also ignores the Compact states’ course of performance in favor

of comments by the Council of State Governments (CSG) distributed with the

Compact in 1967. Graphic Br. 43-44. Regardless of how CSG understood

Article III.1, though, it failed to draft language that unambiguously required

members to keep that article in their laws without modification or restriction.

Moreover, Graphic’s focus on what CSG said in 1967 overlooks the fact that an

interstate compact is unlike an ordinary contract in that multiple parties enter

into and withdraw from the agreement throughout its existence. The states

that joined the Compact after the 1972 Florida resolution necessarily did not

intend to agree that Article III.1 requires them to allow taxpayers to choose an

apportionment method. That intent must be deemed shared by all members,

regardless of when they joined; otherwise, the Compact is no agreement at all.

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Finally, Graphic surmises that the Compact must have “guarantee[d]”

availability of Article III.1’s option because that level of state commitment was

needed to stave off Congress’s efforts to impose a uniform apportionment

method through federal law. Graphic Br. 44-45. But the neat narrative Graphic

constructs does not withstand scrutiny.

No one disputes that the Compact was developed in response to proposed

federal legislation that threatened to encroach upon states’ traditional sovereign

authority over taxation, including apportionment of business income. See

SuppCR.20-21. But Graphic makes an unsupported leap in asserting that

Congress’s failure to act in this area after the Compact’s effective date meant

that “the federal government was satisfied that a baseline level of uniformity

had been achieved” in state income-tax apportionment. Graphic Br. 14. Setting

aside the fallacy of ascribing intent to “the federal government,” Graphic cites

no authority or evidence for this proposition and does not mention, much less

explain, the consistent introduction of bills on this topic in Congress both before

and after the Compact’s effective date. See U.S. Steel, 434 U.S. at 456 n.4.

Likewise, Graphic does not account for Congress’s inaction in the face of the

Compact’s failure to attract even a majority of states as members or the

Compact members’ enactments that treat the Compact as non-binding. In any

59

case, because “non-action by Congress affords the most dubious foundation for

drawing positive inferences,” United States v. Price, 361 U.S. 304, 310-11 (1960),

the Court should not credit Graphic’s effort to divine the Compact’s meaning

through speculation about congressional motives.

2. Article III.1 cannot constitutionally require Texas to

allow a taxpayer to remove part of its tax base from

Texas’s taxing authority.

Construing Article III.1 to preclude Texas from enacting an exclusive

apportionment method also would impermissibly conflict with the Texas

Constitution’s prohibition against contractual suspensions of the sovereign

power of taxation—a conflict that the Compact itself aims to avoid.

By its terms, the Compact operates within a member state only to the

extent that the state enacts the Compact as a statute. TEX. TAX CODE

§ 141.001, art. X.1. Thus, the Compact’s drafters understood that its provisions

could not conflict with any Compact state’s constitution. To address that

constraint, the Compact decrees that if any provision or part thereof is declared

to be contrary to a state constitution, it is severable, and the Compact otherwise

remains in effect. Id., art. XII.

Article VIII, section 4 of the Texas Constitution provides that the

Legislature may not surrender or suspend the power to tax corporations “by

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any contract or grant to which the State shall be a party.” TEX. CONST. art.

VIII, § 4. Thirteen other former and current Compact states’ constitutions

contain similar prohibitions.9 Yet Graphic construes Article III.1 to effect such

a contractual suspension. Under Graphic’s reasoning, Texas contracted away

the power to tax that portion of a taxpayer’s tax base that the taxpayer removes

from Texas’s taxing authority by electing Article IV’s income-apportionment

method over section 171.106’s exclusive apportionment method. Here, for

example, Graphic claims a contractual right to withdraw part of its margin from

Texas’s taxing power to the tune of over $540,000 in forgone revenue. CR.5.

That is precisely the sort of claim that Texas courts have rejected in light of the

constitutional prohibition against contractual suspensions of the taxing power.

See, e.g., Gaar, Scott & Co. v. Shannon, 115 S.W. 361, 362 (Tex. Civ.

App.—Austin 1908, writ denied) (holding that business permit under which

taxpayer paid franchise tax for 10-year term could not foreclose state from

amending franchise tax to impose additional tax burdens during that term),

aff’d, 223 U.S. 468 (1912).

9. 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. 7, § 1; WYO. CONST. art. 15, § 14.

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Because Graphic’s reading of Article III.1 cannot be squared with the

constitutions of most Compact states (including Texas), it is not one that the

Compact states could have intended or that the Court should embrace.

Employees Ret. Sys. v. Duenez, 288 S.W.3d 905, 910 (Tex. 2009) (noting that

courts “must avoid constitutionally suspect constructions” of statutes).

D. The Compact Does Not Supersede Section 171.106 Because Any

Conflict Does Not Unconstitutionally Impair Any Contractual

Obligations.

A holding that the Compact obligates its members to provide Article

III.1’s “taxpayer option” still would not win this appeal for Graphic. Section

171.106’s mandate to use the gross-receipts method would yield only to the

extent that disabling Article III.1 would violate the Contracts Clauses of the

United States and Texas Constitutions. Graphic has not shown a violation here.

1. Binding compacts that Congress has not approved

preempt state law only if the law unconstitutionally

impairs contractual obligations.

When Congress approves an interstate compact, it “transforms” the

compact into federal law. Cuyler v. Adams, 449 U.S. 433, 440 (1981). Under the

Supremacy Clause, then, an approved compact “pre-empts any state law that

conflicts with the Compact.” Tarrant Reg’l Water Dist., 133 S. Ct. at 2130 n.8.

62

By contrast, a non-approved compact operates only as a state statute and,

in some cases, a binding contract among states. See 1A NORMAN J. SINGER &

J.D. S HAMBIE SINGER, SUTHERLAND STATUTES AND S TATUTORY

CONSTRUCTION § 32:5, at 723 (7th ed. 2009). As a statute, the compact may be

trumped by other state law under “the doctrine of implied repeal” or rules that

“give effect to the latest in time.” Id. § 32:6, at 727. But when the compact also

creates a binding contract, it may supersede a conflicting statute if the statute’s

effect on the compact violates the Contracts Clauses, U.S. CONST. art I, § 10, cl.

1; TEX. CONST. art. I, § 16, which prohibit laws impairing contractual

obligations. Green v. Biddle, 21 U.S. (8 Wheat.) 1, 92 (1823) (holding that a

statute abrogating a compact violated Contracts Clause); Gen. Expressways,

Inc. v. Iowa Reciprocity Bd., 163 N.W.2d 413, 419-21 (Iowa 1968) (evaluating

conflicts between a statute and a compact under contracts-clause principles);

SINGER, supra, § 32:3, at 719 (describing compacts as “deriv[ing] binding force”

from the Contracts Clause); BROUN, supra, at 22 (explaining that “[a] compact

controls over a state’s application of its own law through the Supremacy Clause

[in the case of approved compacts] and the Contracts Clause”).

Graphic agrees that a non-approved compact’s preeminence over other

state law arises from its status as a contract. See Graphic Br. 32-36. But in lieu

63

of explaining why that status elevates a compact over state law, Graphic

assembles various cases (most involving congressionally approved compacts),

mines them for statements that states may not unilaterally amend compacts,

and pronounces that a tenet of “compact law.” Id. Graphic touts that “compact

law” as a common-law rule that provides grounds for preempting section

171.106 independent of the Contracts Clauses. Id.

Graphic is wrong. Neither Graphic nor its cases articulate any principled

reason why a state law could not abrogate a non-approved compact absent the

Contracts Clauses’ “binding force.” See SINGER, supra, § 32:3, at 719; see also

IBM, 852 N.W.2d at 885-87 (McCormack, J., dissenting) (rejecting this

“compact law” argument).10 Indeed, if compacts always supersede state

statutes under “compact law,” one wonders why a court or commentator ever

would mention or reach the controlling effect of the Contracts Clause and

Supremacy Clause. Cf. Escambia Cnty. v. McMillan, 466 U.S. 48, 51 (1984)

(per curiam) (noting that “normally” courts “will not decide a constitutional

question if there is some other ground upon which to dispose of the case”).

10. In particular, West Virginia ex rel. Dyer v. Sims held that a state’s courts may not nullify

compacts adopted by its legislature. 341 U.S. 22, 28 (1951). Dyer has since been cabined to

compacts requiring congressional approval. U.S. Steel, 434 U.S. at 471 n.23.

64

2. Section 171.106 does not unconstitutionally impair any

obligations to Graphic under the Compact.

Whether a state law violates the federal Contracts Clause involves a

three-part inquiry: (1) whether the state law substantially impairs a contractual

relationship; (2) whether a significant, legitimate public purpose motivated the

state law; and (3) whether the adjustment to the contracting parties’ rights is

based on reasonable conditions and appropriate to the law’s purpose. Energy

Reserves Grp., Inc. v. Kan. Power & Light Co., 459 U.S. 400, 411-13 (1983). The

Texas Constitution’s Contracts Clause requires “[a] similar analysis.” Liberty

Mut. Ins. Co. v. Tex. Dep’t of Ins., 187 S.W.3d 808, 825 (Tex. App.—Austin 2006,

pet. denied). Under this test, section 171.106 validly overrides any possible

application of Article III.1 ’s “taxpayer option” to the franchise tax.

Graphic cannot establish the first requirement because it is not a party

to the Compact. Nor is Graphic a third-party beneficiary. See Basic Capital

Mgmt. v. Dynex Commercial, Inc., 348 S.W.3d 894, 900 (Tex. 2011) (holding

that a third party may not recover on a contract unless the contracting parties

intended to secure benefits to that third party and entered into the contract

directly for the third party’s benefit).

65

But even if Graphic were an intended Compact beneficiary, disabling

Article III.1’s option would not constitute a “substantial” impairment. “In

determining whether an impairment is substantial and so not ‘permitted under

the Constitution,’ of greatest concern appears to be the contracting parties’

actual reliance on the abridged contractual term.” City of Charleston v. Pub.

Serv. Comm’n, 57 F.3d 385, 392 (4th Cir. 1995) (quoting U.S. Trust Co. v. New

Jersey, 431 U.S. 1, 21 (1977)). Graphic patently did not rely on Article III.1

because it calculated its franchise tax using the gross-receipts method until

March 2011. Nor could Graphic have reasonably relied on that option because

the Compact permits states to withdraw at will. See id. at 392-93 (noting that

the reliance analysis turns in part on whether the contract “indicated that the

abridged term was subject to impairment by the legislature”). By contrast,

since at least 1991 Texas has significantly relied on the Compact states’ shared

interpretation that Article III.1 does not preclude them from adopting exclusive

apportionment methods.

And even if Graphic could demonstrate the threshold substantial

impairment, that still would not establish a constitutional violation because

section 171.106 serves a significant and legitimate purpose. See Energy

Reserves, 459 U.S. at 411-12. States enjoy “wide latitude in the selection of

66

apportionment formulas.” Moorman, 437 U.S. at 274. Texas once allowed

taxpayers to request a multi-factor apportionment method, but later changed

that policy because it disproportionately favored foreign corporations. See

supra Statement of Facts, Part I.B.2. In imposing a single-factor method, and

disallowing any option under the Compact, section 171.106 “treats both local

and foreign concerns with an even hand.” Moorman, 437 U.S. at 277 n.12.

Finally, to the extent section 171.106 adjusts any taxpayer rights under

the Compact, it does so under reasonable and appropriate conditions. The

Supreme Court has repeatedly held that single-factor apportionment methods

are “presumptively valid.” Id. at 273. Indeed, this Court has specifically

upheld Texas’s gross-receipts method as constitutional. Gen. Dynamics, 919

S.W.2d at 867-69.

3. Graphic waived the Contracts Clause issue.

Graphic makes no effort to apply the Energy Reserves analysis. Graphic

Br. 46-48. Instead, Graphic relies principally on an 1823 case to suggest that

any conflict between a statute and a compact violates the Contracts Clause. Id.

at 46-47 (discussing Green, 21 U.S. (8 Wheat) at 91-93). Green applied the

then-applicable rule that “any deviation” from a contract, “however minute, or

apparently immaterial,” violated the Contracts Clause. 21 U.S. (8 Wheat) at 84.

67

But since then, the Court has adopted the more relaxed standard described

above, and confirmed that “[t]he Contract[s] Clause is not an absolute bar to

subsequent modification of a State’s own financial obligations” under a compact,

U.S. Trust, 431 U.S. at 25. Having failed to brief the proper test, Graphic has

waived its Contracts Clause issue. See Sunbeam Envtl. Servs. v. Tex. Workers’

Comp. Ins. Facility, 71 S.W.3d 846, 851 (Tex. App.—Austin 2002, no pet.).

PRAYER

The district court’s judgment should be affirmed.

Respectfully submitted.

K EN PAXTON SCOTT A. K ELLER

Attorney General of Texas Solicitor General

CHARLES E. R OY /s/ Rance Craft

First Assistant Attorney RANCE CRAFT

General Assistant Solicitor General

State Bar No. 24035655

JAMES E. DAVIS

Deputy Attorney General for CYNTHIA A. MORALES

Civil Litigation Assistant Attorney General

State Bar No. 14417420

OFFICE OF THE ATTORNEY GENERAL

P.O. Box 12548 (MC 059)

Austin, Texas 78711-2548

(512) 936-2872

(512) 474-2697 [fax]

rance.craft@texasattorneygeneral.gov

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C ERTIFICATE OF C OMPLIANCE

According to WordPerfect 12, this brief contains 14,993 words, excluding

the portions of the brief exempted by Texas Rule of Appellate Procedure

9.4(i)(1).

/s/ Rance Craft

Rance Craft

C ERTIFICATE OF SERVICE

On January 27, 2015, this Brief of Appellees was served by File & Serve

Xpress on:

James F. Martens Amy L. Silverstein

jmartens@textaxlaw.com asilverstein@sptaxlaw.com

Amanda G. Taylor SILVERSTEIN & POMERANTZ LLP

ataylor@textaxlaw.com 12 Gough Street, Second Floor

Lacy L. Leonard San Francisco, California 94103

lleonard@textaxlaw.com

Danielle Ahlrich Counsel for Appellant

dahlrich@textaxlaw.com

MARTENS , TODD, LEONARD &

TAYLOR

301 Congress Avenue, Suite 1950

Austin, Texas 78701

Counsel for Appellant

/s/ Rance Craft

Rance Craft

69

APPENDIX

APPENDIX TABLE OF C ONTENTS

A. TEX. TAX CODE § 141.001

B. COMPTROLLER’S DECISION NOS. 104,752 & 104,753 (2011)

C. Ingram Micro, Inc. v. Dep’t of Treas., No. 11-000035-MT, slip op. (Mich.

Ct. Cl. Dec. 19, 2014)

A

V.T.C.A., Tax Code § 141.001 Page 1

Effective:[See Text Amendments]

Vernon's Texas Statutes and Codes Annotated Currentness

Tax Code (Refs & Annos)

Title 2. State Taxation (Refs & Annos)

Subtitle D. Compacts and Uniform Laws

Chapter 141. Multistate Tax Compact (Refs & Annos)

§ 141.001. Adoption of Multistate Tax Compact

The Multistate Tax Compact is adopted and entered into with all jurisdictions legally adopting it to read as

follows:

MULTISTATE TAX COMPACT

ARTICLE I. PURPOSES

The purposes of this compact are to:

1. Facilitate proper determination of state and local tax liability of multistate taxpayers, including the

equitable apportionment of tax bases and settlement of apportionment disputes.

2. Promote uniformity or compatibility in significant components of tax systems.

3. Facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax

administration.

4. Avoid duplicative taxation.

ARTICLE II. DEFINITIONS

As used in this compact:

1. “State” means a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico,

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V.T.C.A., Tax Code § 141.001 Page 2

or any territory or possession of the United States.

2. “Subdivision” means any governmental unit or special district of a state.

3. “Taxpayer” means any corporation, partnership, firm, association, governmental unit or agency or

person acting as a business entity in more than one state.

4. “Income tax” means 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.

5. “Capital stock tax” means a tax measured in any way by the capital of a corporation considered in its

entirety.

6. “Gross receipts tax” means 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.

7. “Sales tax” means a tax imposed with respect to the transfer for a consideration of ownership, posses-

sion or custody of tangible personal property or the rendering of services measured by the price of the

tangible personal property transferred or services rendered and which is required by state or local law to be

separately stated from the sales price by the seller, or which is customarily separately stated from the sales

price, but does not include a tax imposed exclusively on the sale of a specifically identified commodity or

article or class of commodities or articles.

8. “Use tax” means a nonrecurring tax, other than a sales tax, which (a) is imposed on or with respect to the

exercise or enjoyment of any right or power over tangible personal property incident to the ownership,

possession or custody of that property or the leasing of that property from another including any con-

sumption, keeping, retention, or other use of tangible personal property and (b) is complementary to a

sales tax.

9. “Tax” means an income tax, capital stock tax, gross receipts tax, sales tax, use tax, and any other tax

which has a multistate impact, except that the provisions of Articles III, IV and V of this compact shall

apply only to the taxes specifically designated therein and the provisions of Article IX of this compact

shall apply only in respect to determinations pursuant to Article IV.

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V.T.C.A., Tax Code § 141.001 Page 3

ARTICLE III. ELEMENTS OF INCOME TAX LAWS

Taxpayer Option, State and Local Taxes

1. 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. This election for any tax year may be made in all party states or

subdivisions thereof or in any one or more of the party states or subdivisions thereof without reference to

the election made in the others. For the purposes of this paragraph, taxes imposed by subdivisions shall be

considered separately from state taxes and the apportionment and allocation also may be applied to the

entire tax base. In no instance wherein Article IV is employed for all subdivisions of a state may the sum

of all apportionments and allocations to subdivisions within a state be greater than the apportionment and

allocation that would be assignable to that state if the apportionment or allocation were being made with

respect to a state income tax.

Taxpayer Option, Short Form

2. Each party state or any subdivision thereof which imposes an income tax shall provide by law that any

taxpayer required to file a return, whose only activities within the taxing jurisdiction consist of sales and

do not include owning or renting real estate or tangible personal property, and whose dollar volume of

gross sales made during the tax year within the state or subdivision, as the case may be, is not in excess of

$100,000 may elect to report and pay any tax due on the basis of a percentage of such volume, and shall

adopt rates which shall produce a tax which reasonably approximates the tax otherwise due. The Multi-

state Tax Commission, not more than once in five years, may adjust the $100,000 figure in order to reflect

such changes as may occur in the real value of the dollar, and such adjusted figure, upon adoption by the

commission, shall replace the $100,000 figure specifically provided herein. Each party state and subdi-

vision thereof may make the same election available to taxpayers additional to those specified in this

paragraph.

Coverage

3. Nothing in this article relates to the reporting or payment of any tax other than an income tax.

ARTICLE IV. DIVISION OF INCOME

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V.T.C.A., Tax Code § 141.001 Page 4

1. As used in this article, unless the context otherwise requires:

(a) “Business income” means income arising from transactions and activity in the regular course of the

taxpayer's trade or business and includes income from tangible and intangible property if the acquisition,

management, and disposition of the property constitute integral parts of the taxpayer's regular trade or

business operations.

(b) “Commercial domicile” means the principal place from which the trade or business of the taxpayer is

directed or managed.

(c) “Compensation” means wages, salaries, commissions and any other form of remuneration paid to

employees for personal services.

(d) “Financial organization” means any bank, trust company, savings bank, industrial bank, land bank,

safe deposit company, private banker, savings and loan association, credit union, cooperative bank,

small loan company, sales finance company, investment company, or any type of insurance company.

(e) “Nonbusiness income” means all income other than business income.

(f) “Public utility” means any business entity (1) which owns or operates any plant, equipment, property,

franchise, or license for the transmission of communications, transportation of goods or persons, except

by pipe line, or the production, transmission, sale, delivery, or furnishing of electricity, water or steam;

and (2) whose rates of charges for goods or services have been established or approved by a federal, state

or local government or governmental agency.

(g) “Sales” means all gross receipts of the taxpayer not allocated under paragraphs of this article.

(h) “State” means any state of the United States, the District of Columbia, the Commonwealth of Puerto

Rico, any territory or possession of the United States, and any foreign country or political subdivision

thereof.

(i) “This state” means the state in which the relevant tax return is filed or, in the case of application of

this article to the apportionment and allocation of income for local tax purposes, the subdivision or local

taxing district in which the relevant tax return is filed.

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V.T.C.A., Tax Code § 141.001 Page 5

2. Any taxpayer having income from business activity which is taxable both within and without this state,

other than activity as a financial organization or public utility or the rendering of purely personal services

by an individual, shall allocate and apportion his net income as provided in this article. If a taxpayer has

income from business activity as a public utility but derives the greater percentage of his income from

activities subject to this article, the taxpayer may elect to allocate and apportion his entire net income as

provided in this article.

3. For purposes of allocation and apportionment of income under this article, a taxpayer is taxable in an-

other state if (1) in that state he is subject to a net income tax, a franchise tax measured by net income, a

franchise tax for the privilege of doing business, or a corporate stock tax, or (2) that state has jurisdiction

to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not.

4. Rents and royalties from real or tangible personal property, capital gains, interest, dividends or patent or

copyright royalties, to the extent that they constitute nonbusiness income, shall be allocated as provided in

paragraphs 5 through 8 of this article.

5. (a) Net rents and royalties from real property located in this state are allocable to this state.

(b) Net rents and royalties from tangible personal property are allocable to this state: (1) if and to the

extent that the property is utilized in this state, or (2) in their entirety if the taxpayer's commercial

domicile is in this state and the taxpayer is not organized under the laws of or taxable in the state in

which the property is utilized.

(c) The extent of utilization of tangible personal property in a state is determined by multiplying the

rents and royalties by a fraction, the numerator of which is the number of days of physical location of the

property in the state during the rental or royalty period in the taxable year and the denominator of which

is the number of days of physical location of the property everywhere during all rental or royalty periods

in the taxable year. If the physical location of the property during the rental or royalty period is unknown

or unascertainable by the taxpayer, tangible personal property is utilized in the state in which the

property was located at the time the rental or royalty payer obtained possession.

6. (a) Capital gains and losses from sales of real property located in this state are allocable to this state.

(b) Capital gains and losses from sales of tangible personal property are allocable to this state if (1) the

property had a situs in this state at the time of the sale, or (2) the taxpayer's commercial domicile is in

this state and the taxpayer is not taxable in the state in which the property had a situs.

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V.T.C.A., Tax Code § 141.001 Page 6

(c) Capital gains and losses from sales of intangible personal property are allocable to this state if the

taxpayer's commercial domicile is in this state.

7. Interest and dividends are allocable to this state if the taxpayer's commercial domicile is in this state.

8. (a) Patent and copyright royalties are allocable to this state: (1) if and to the extent that the patent or

copyright is utilized by the payer in this state, or (2) if and to the extent that the patent or copyright is

utilized by the payer in a state in which the taxpayer is not taxable and the taxpayer's commercial domicile

is in this state.

(b) A patent is utilized in a state to the extent that it is employed in production, fabrication, manufac-

turing, or other processing in the state or to the extent that a patented product is produced in the state. If

the basis of receipts from patent royalties does not permit allocation to states or if the accounting pro-

cedures do not reflect states of utilization, the patent is utilized in the state in which the taxpayer's

commercial domicile is located.

(c) A copyright is utilized in a state to the extent that printing or other publication originates in the state.

If the basis of receipts from copyright royalties does not permit allocation to states or if the accounting

procedures do not reflect states of utilization, the copyright is utilized in the state in which the taxpayer's

commercial domicile is located.

9. All business income shall be apportioned to this state by 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 three.

10. The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and

tangible personal property owned or rented and used in this state during the tax period and the denomi-

nator of which is the average value of all the taxpayer's real and tangible personal property owned or

rented and used during the tax period.

11. Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued

at eight times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer

less any annual rental rate received by the taxpayer from subrentals.

12. The average value of property shall be determined by averaging the values at the beginning and ending

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V.T.C.A., Tax Code § 141.001 Page 7

of the tax period but the tax administrator may require the averaging of monthly values during the tax

period if reasonably required to reflect properly the average value of the taxpayer's property.

13. The payroll factor is a fraction, the numerator of which is the total amount paid in this state during the

tax period by the taxpayer for compensation and the denominator of which is the total compensation paid

everywhere during the tax period.

14. Compensation is paid in this state if:

(a) the individual's service is performed entirely within the state;

(b) the individual's service is performed both within and without the state, but the service performed

without the state is incidental to the individual's service

This text is long and has been trimmed here. Open the source document for the complete record.